Legal Case Studies July 2014

Legal Case Studies

Research and analysis by Lisa Hartzler, Sorling Northrup Attorneys

Bill amends Residential Real Property Disclosure Act to include defects in doors and windows. Senate Bill 2597 passed both houses and was sent to the Governor for signature on June 6, 2014. The Governor has 60 days to sign. The bill amends Section 35 of the Residential Real Property Disclosure Act (765 ILCS 77/35) by adding two words—“windows” and “doors”—to item number 6 on the disclosure form. The item, for which a seller checks “yes,” “no,” or “N/A” now reads:  “I am aware of material defects in the walls, windows, doors, or floors.”  Although many people probably assumed that defects in windows and doors were already included in the required disclosures, the court did not reach that conclusion in Kalkman v. Nedved, 2013 IL App (3d) 120800, appeal denied, 996 N.E.2d 14, 374 Ill.Dec. 567 (2013). In that case, reported in Legal Case Studies for September, 2013, the court held that proper statutory interpretation is that, “when certain things are enumerated in a statute, that enumeration implies the exclusion of all other things even if there are no negative words of prohibition.”
One of the three justices presiding over the appeal wrote a special concurring opinion directed to the Illinois Legislature, stating, “I write separate to question whether the legislature intended to include windows and/or doors in the Act. Since the language of the Act is narrow, our narrow interpretation of the statute is the correct one. If, however, the intent was to avoid situations like the one in this case, where a Seller is aware of material defects in the windows and doors, and does not disclose them, the issue should be called to the attention of the legislature for its review. If the law is amended, I believe that the original intent of the Act will be more fully realized.”  The Legislature apparently heard the justice and responded. The amendment, however, still leaves the basic rule that what the Disclosure Form requires must be narrowly interpreted. 

Tenant suing Landlord for loss of personal property must prove fair market value. In Benford v. Everett Commons, LLC, 2014 IL App (1st) 130314, a tenant brought an action against her landlord for damages resulting from the loss of personal property and medical bills. The tenant claimed that rust-colored water began pouring into her apartment through her bedroom ceiling and walls, soaking and causing rust stains on most of her clothing and other items stored in her closet and bedroom. At trial, the tenant introduced photographs of the damage to the apartment but had no photos of the clothing that was allegedly destroyed. She presented a spreadsheet listing the items that were ruined by the rusty water and the prices she allegedly paid for them, but she did not present any evidence or testimony as to the fair market value of the items prior the damage. She stated she did not know how to produce or deduce the fair market value. The jury found the landlord liable for damages in this case, but awarded the tenant $0.

The Illinois appellate court said that “when personal property is destroyed or rendered useless, the ordinary measure of damages for the property is the fair market value at the time of the loss, the time immediately prior to its destruction.”  Although the plaintiff must prove damages to a “reasonable degree of certainty,” she need not prove the exact amount of her loss. However, “she must present some evidence providing a basis for assessing damages with a fair degree of probability.”  Lack of any testimony in that regard is fatal to any action to recover. In this case, the tenant’s evidence of the original cost of the ruined items was not equal to evidence of fair market value. It invited “the jury to impermissibly speculate regarding the fair market value of plaintiff’s personal property at the time of loss,” which could not be allowed. The court affirmed the jury’s decision.

Internet provider can be required to release name of anonymous commenter who posts defamatory remarks. “Legal Case Studies” has in past issues discussed online sites like zillow.com that allow users to post comments or reviews of real estate licensees. Such comments are frequently anonymous. In Hadley v. Doe, a/k/a Fuboy, Whose Legal Name is Unknown, 2014 IL App (2d) 130489, the plaintiff, a candidate for public office in Stephenson County, sued a person using the name “Fuboy” for allegedly defamatory comments posted to an online article about the county elections. To state a claim for defamation, a plaintiff must allege facts demonstrating that the defendant made a false statement about the plaintiff, that the defendant made an unprivileged publication of the statement to a third party, and that the publication caused damages to the plaintiff. A statement is defamatory if it harms an individual’s reputation by lowering the individual in the eyes of the community or deters the community from associating with him.

In this case, Fuboy wrote that the plaintiff was “a Sandusky waiting to be exposed. Check out the view he has of Empire from his front door.”  Empire was a known elementary school in the county. Because the plaintiff did not know the identity of Fuboy, he filed a Rule 224 petition with the court to compel the Internet server to reveal Fuboy’s name. The trial court granted the petition and Fuboy appealed. In a lengthy opinion, the Illinois appellate court discussed the mechanism for obtaining the name of an anonymous poster and the elements that a plaintiff must show to succeed in obtaining disclosure.

The court first noted that anonymous speech is a protected right of citizenship. It enables individuals to speak constructively regarding important public matters without the fear of reprisal that might deter even peaceful discussions. This First Amendment principle is applicable to speech on the Internet. Although “an author is generally free to decide whether he wishes to disclose his true identity, and his decision not to do so is an aspect of the freedom of speech provided in the First Amendment…there is no constitutional right to defame, and the right of anonymity in public discourse does not apply to defamatory speech.”  Thus, when deciding a Rule 224 request to disclose the identity of an anonymous commenter, a court has to balance the plaintiff’s potential right to redress for unprotected defamatory language against the danger of setting a standard so low that the right to speak anonymously is chilled. It is the plaintiff’s burden to plead facts to show that the allegedly defamatory statements are not constitutionally protected. Because Fuboy’s comments were made during a time when allegations of sexual abuse by Jerry Sandusky had been in the news for weeks, the court concluded that there was no innocent interpretation of the comments. The statements asserted that the plaintiff engaged in criminal conduct based on undisclosed facts known to the commenter. Even in the context of the typical hyperbolic incivility of Internet discussions, the statements could not be said to be merely opinions, which are not actionable. The court affirmed the trial court’s decision and ordered Fuboys’s real name to be disclosed to the plaintiff.  Although it is not easy to win a Rule 224 petition, this case demonstrates that a person defamed by anonymous authors on the Internet still has some legal remedies.

Corporations and other entities must be represented by licensed attorney in administrative hearings. In Stone Street Partners, LLC v. City of Chicago, 2014 IL App (1st) 123654, a limited liability company that owned an apartment building challenged a lien recorded against the property for an unpaid fine imposed 11 years prior by a city administrative hearing officer. The company claimed it never received notice of the alleged building code violation and wanted the lien removed. Although the Chicago Municipal Code required notice of a violation and a summons for the administrative hearing to be mailed to an owner’s registered agent or its business address, the city posted the summons on the front door of the property, a method allowed only if notice by mail failed. A person named Johnson, however, appeared at the hearing on behalf of the company. Johnson was the caretaker of a manager of the company who had been gravely incapacitated the year before the hearing and was no longer involved in the management of the company. Nevertheless, Johnson filed an appearance and presented some evidence, which apparently was not persuasive. The hearing officer held the company liable for the violations and fined it $1,050; when the fine went unpaid, the city recorded a lien against the property. Upon discovering the lien many years later, the company filed a complaint in circuit court, which the court dismissed.

The appellate court found that the administrative hearing and resulting decision was null and void because (1) notice was faulty and (2) Johnson was not an attorney. The court noted that the State statute establishing in-house administrative adjudication raised such judgments to the dignity of court judgments. Even though the rules of evidence may be relaxed in an administrative hearing, defendants were still entitled to due process, and that required notice reasonably calculated to apprise them of the action and give them an opportunity to be heard. There are many ways to satisfy that notice requirement, but in this case the city imposed a procedure for giving notice that it did not follow. Lack of proper notice divested the administrative court of jurisdiction. The question, therefore, became whether the company waived its objection to notice by Johnson’s participation at the hearing.

The city argued that it specifically permitted non-attorneys to represent corporations at its administrative hearings. The court noted, however, that a corporation must be represented by counsel in a legal proceeding and that no judge sitting in a circuit court would allow a corporation to appear as a party through a non-attorney employee or officer. “Administrative agencies vested with the power of government to punish, fine, and transfer property should, and must, follow the same principle.”  Only the Illinois Supreme Court can regulate the practice of law in the State and that court has allowed non-attorney officers or managers to represent their companies only against small claims. Small claims are defined as including civil actions based on tort or contract for money not in excess of $10,000. Ordinance enforcement and the imposition of fines are not based in tort or contract and clearly fall outside of that definition. Johnson, therefore, was not authorized to represent the company at the administrative hearing. A defendant cannot waive objection to jurisdiction if it participated through someone who was unauthorized to do so. Consequently, the city hearing officer lacked jurisdiction and his order was void. The plaintiff company was entitled to equitable relief from the fine and the lien.

Escrow Agent’s duty in a closing is only to follow the escrow instructions. In this federal diversity case, Edelman v. Belco Title & Escrow, LLC., --- F.3d --- (7th Cir. 2014), 2014 WL 1646952, the plaintiffs were individuals who lost a lot of money lending to a real estate development. Caseyville Sport Choice, LLC had promised the lenders a first mortgage on a project called Forest Lakes in exchange for a loan of several million dollars. In fact, the development was already encumbered by a first mortgage to Meridian Bank. Calling the facts of the case “unusual,” the Seventh Circuit Court of Appeals explained that Caseyville’s attorneys created the defendant title company, Belco, to do title work on Caseyville’s various transactions—including the first mortgage to Meridian Bank. In this case, however, the plaintiffs and Caseyville’s owners communicated directly only with each other. The plaintiffs transferred the loan proceeds directly to Caseyville and had no communication with the defendant Belco. The record was unclear whether Caseyville’s owners or their attorneys drafted the loan agreement, but there appeared to be no one representing the interests of the plaintiffs. Belco ordered a title commitment, which showed Meridian Bank’s first mortgage, but it was not reflected in the loan agreement.

When Meridian Bank foreclosed on its first mortgage, the plaintiffs lost everything and filed suit against Belco. The plaintiffs claimed that Belco breached its fiduciary duties to them by failing to notify them that they were not receiving a first mortgage on the Forest Lakes property. To succeed on that claim, the court said that they must show that Belco owed them a fiduciary duty, that Belco breached that duty, and that Belco’s breach proximately caused the plaintiffs’ injury. The magistrate judge for the Southern District of Illinois ruled that the defendant had not owed the plaintiffs any duty to communicate with them before the closing, to ask for instructions, or to disclose any material information that might cause them to reevaluate the deal. The Seventh Circuit affirmed that decision.

First, the court found that Belco was not the plaintiffs’ agent for purposes of the loan transaction. The standard buyer-seller escrow agreement form used at the closing did state that Belco “is acting only as an agent of the lending institution, and does not represent either the Seller or the Buyer/Borrower as an attorney or in any other way.”  Despite that statement, however, the court held that the escrow agreement could not have created an agency relationship between the plaintiffs and Belco because the plaintiffs not only did not sign the agreement but they never saw it. Further, plaintiffs did not speak to Belco at any time before, during, or after the transaction’s closing. Thus, they could not have expressed their agreement to Belco’s acting as their agent, a necessary element of establishing a principal-agent relationship.

Finally, the court noted that escrowees under Illinois law “owe a fiduciary duty both to the party making the deposit and the party for whose benefit it is made.”  But the plaintiffs made no deposits—they transferred the loan proceeds directly to Caseyville. More importantly, an escrow agent, like a trustee, owes a fiduciary duty to act only according to the terms of the escrow instructions. No one argued that Belco failed to follow the instructions. 