Legal Case Studies: March 2022

Writen by Lisa Harms Hartzler |

Published: February 22, 2022 |

Reading Time: 15 min

Decline of rental income insufficient to prove damages in breach of contract allegation

In Lauren Leonforte Co. v. Meisenhelter, 2022 IL App (4th) 210253U, Plaintiff purchased from Defendant an apartment building rented to students near Millikin University in Decatur, Illinois. The purchase contract contained two clauses prohibiting Defendant from purchasing other student housing in certain geographic areas in Decatur and from targeting plaintiff’s tenants in an effort to have them move to Defendant’s other properties.

Defendant purchased a building within the restricted area and posted “For Rent” signs on the property. Plaintiff sued for breach of contract. To establish a breach of contract claim, Plaintiff had to establish the existence of a valid and enforceable contract, Plaintiff’s performance of the contract, Defendant’s breach of that contract, and resulting injury (damages) to Plaintiff.

To establish damages, a plaintiff must show an actual loss or measurable damages resulting from the breach of contract. The breach must proximately cause the damages.

In this case, Plaintiff was unable to connect its decline in revenue and number of renters to Defendant’s actions. Testimony was introduced at a bench trial that Millikin University restricted the number of students who were eligible to live off-campus. The number of those eligible students had declined significantly each year from 2015 to 2020. Further, Plaintiff could only point to a decline in revenue each year but not to any actual loss or measurable damages directly resulting from Defendant’s buying a rental building in a prohibited geographic area and posting advertising signs. There was also no evidence that students who rented from Defendant would have rented from Plaintiff but for Defendant’s breach. In sum, no causal link could be found to connect Defendant’s breach of contract to Plaintiff’s loss.

The appellate court affirmed judgment in favor of Defendant.

Buyer’s broker had no duty to tell seller purchase price was below FMV

In Greif v. Sanin, –Cal.Rptr.3d—(Cal. Ct. App, January 26, 2022), an 87-year-old California man suffered a serious case of seller’s remorse after he signed a contract to sell about 10 acres of vacant land for $330,000. Seller had purchased the property a few years earlier for about $ 2.3 million. At the time he agreed to sell, it was valued at $4 million.

A few days after he signed the purchase agreement, Seller concluded that he had sold the property for less than its fair market value and attempted to back out of the sale. Buyer sued to enforce the purchase agreement. Seller filed a cross-claim against Buyer for rescission and Buyer’s real estate broker for negligence, asserting that Broker had a duty to be honest and truthful during the transaction. Seller claimed that Broker breached that duty because he did not raise the discrepancy between the FMV of the property and the offering amount. The trial court granted Broker’s motion a “judgment on the pleadings.” Buyer appealed.

Seller alleged that he suffered from a variety of illnesses and disorders, including a heart attack in 2004 and several strokes. By 2012, he had limited ability to walk, see, and hear. He suffered from a speech impediment and impaired cognitive abilities. In December of that year, Broker called Seller and stated that Buyer was interested in buying the property. At that time Seller’s disabilities “should have been readily apparent.” Nevertheless, they met at the property and negotiated the purchase price, which Seller thought was $3,300,000 and Buyer and Broker thought was $330,000.

Seller asked Broker to draft a contract and they met again at Seller’s home that same evening. Broker pointed out the purchase price of $330,000, which was clearly stated on the first page. He did not review or explain other key terms and asked Seller in a cursory fashion to initial and sign.

To succeed in his negligence claim against Broker, Seller had to prove the elements of negligence: that Broker had a duty to Seller, that Broker breached that duty, and that the breach proximately caused injury to Seller. Seller contended that even though Broker did not represent him during the sale of the property, Broker owed Seller a duty of fairness and good faith, which Broker breached when he did not tell Seller that Buyer’s offering price was below FMV.

The appellate court explained that “a duty of care may arise in various ways, but the concept of duty is simply a shorthand way of expressing whether the plaintiff’s interests are entitled to protection against the defendant’s conduct.” In California, real estate brokers are subject to two sets of duties: those imposed by regulatory statutes and those arising from the general laws of agency.

The court noted that a California statute in existence at the time of the transaction imposed heightened duties by a real estate broker to Seller, including informing Seller that the price was excessively low and that Seller had the right to review the purchase agreement with an independent advisor. However, in 2012, those statutory duties applied only to residential real property transactions, not to the sale of vacant land. Consequently, Broker had no statutory duty to Seller. (The statute was amended in 2015.)

Under common law, however, “generally any person who performs professional services owes a duty of care to all persons within the area of foreseeable risk.” The professional status of a real estate broker imposes a higher standard of care on a broker than a lay person. “The broker is subject to a duty of skill, care and diligence commensurate with the professional standards that the real estate industry has held out to the public and that the public reasonably can expect.” The trust and confidence placed on brokers requires them to use their greater knowledge to guard against the endless opportunities to extract illicit gains from the inexperienced. Although a broker has an obligation of absolute fidelity to the client, the broker also has an obligation to treat all persons to the transaction fairly.

The court held that the reach of a broker’s heightened duty was determined by examining whether a reasonable person would have foreseen an unreasonable risk of harm to a third party and whether, in view of such risk, the broker exercised ordinary care under the circumstances. Broker had a duty of care to Seller, but the issue was whether this duty extended to requiring him to tell Seller that the purchase price was less than FMV. In other words, did not telling Seller the offer was too low fall within the area of foreseeable risk?

The court reached an answer by weighing six factors.

  1. The extent that the transaction was intended to affect the third party. It was undisputed that the sale was intended to directly affect Seller.
  2. The foreseeability of harm. It was foreseeable that Seller would receive less than the FMV for the property, although it was not foreseeable that he did not know the FMV of it.
  3. The degree of certainty that the third party suffered injury. Seller certainly suffered injury by selling his property at less than FMV.
  4. The closeness of the connection between the broker’s conduct and the injury suffered. Broker pointed out the purchase price on the first page of the agreement. Had Broker mentioned that the purchase price was below FMV, Seller might have noticed that the purchase price was $330,000, not $3,300,000. However, the court concluded that Broker’s conduct was not closely connected to Seller’s injury.
  5. The moral blame attached to the broker’s conduct. Seller argued that his advanced age, his obvious physical and cognitive impairments, the rush to consummate the transaction, the Broker’s five percent commission, the fact that Broker drafted the contract, and the extremely low price all placed moral blame on Broker for Seller’s injury. The court disagreed. Broker showed the purchase to Seller and did not hide it. Further, there was no allegation of dishonesty, concealment, misrepresentation, or fraud committed by the Broker, or that Broker knew that $330,000 was not the price orally agreed to in negotiations.
  6. The policy of preventing future harm. The court decided that holding Broker liable for not telling Seller the purchase price was below FMV was “not an appropriate, necessary means of preventing a seller, even one such as [Seller] from selling property for less than the FMV. Other more appropriate measures are available to protect a seller.” Those measures could include the seller diligently investigating the value of his property, obtaining an appraisal, retaining his own exclusive or dual real estate agent, and considering all the facts known to the seller.

Ultimately, it appears that the court found the final factor to be most important. It found no policy justification for placing a burden on a buyer’s exclusive broker to inform the seller that the purchase price was below FMV. It reasoned:

The purpose of a seller and buyer having the option of being represented by separate real estate agents is to protect the buyer and seller’s unique and antagonistic interests—that of the buyer seeking to purchase the property for as low a price possible, and the seller attempting to sell the property for as high a price possible. For this reason, each party benefits from retaining his/her own agent.

In this case, the Seller had information relevant to the FMV of his property that he recently purchased. He could have, but chose not to, retain his own broker, who would have had the burden of advising him as to the sales price in the contract. Even under the facts of this case involving an elderly and physically infirm seller, placing the responsibilities of a seller’s broker on Buyer’s Broker “would wreak havoc on real estate transactions” and the dueling duties of client/agent relationships.

The court concluded that as a matter of law, Seller did not allege facts establishing that Broker owed a duty to advise Seller that the purchase price was less than the FMV. It affirmed judgment on the pleadings in favor of Broker.

Illinois county immune from liability for issuing special use permit or failing to enforce ordinances

In Sutton v. Next Level Strategies, LLC, 2022 IL App (5th) 210209U, the Sutton family owned residential property in Randolph County. Next Level Strategies moved into a commercially zoned space directly adjacent to the Suttons’ property in 2018. It commenced paint application and stripping, sandblasting, and metal fabrication processes. It used in these processes “dangerous chemicals, including pyrenes, silica, coal slag, heavy metal alloys, toluene, and xylener.” The Suttons alleged that Next Level haphazardly dumped, stored, and allowed these chemicals to run off near their residence. Next Level also operated heavy equipment that did not follow standard business hours and ran late into the night, sometimes as late as 1 a.m., and at least monthly, until 3 a.m.

The Suttons claimed Next Level’s actions violated Randolph County ordinances. The County Sheriff’s office had responded to the Suttons’ complaints and attempted without success to abate Next Level’s behavior with calls, warnings, and negotiations. Despite these problems and the County’s awareness of them, the County in January of 2020 granted Next Level a special use permit to conduct industrial activities on the property, which was a violation of County ordinances.

The Suttons sued Next Level for nuisance and other torts. They also sued Randolph County for negligently granting the special use permit and negligently failing to enforce County ordinances. The trial court dismissed some of the counts against Next Level. It dismissed both counts of negligence against the County. The Suttons appealed. For procedural reasons, the court would not consider the claims against Next Level. It did consider the negligence counts against the County by applying the Illinois Local Governmental and Governmental Employees Tort Immunity Act.

Section 2104 of the Tort Immunity Act provides that a local public entity is not liable for an injury caused by the issuance of any permit when the entity is authorized by statute to determine whether such permit should be issued. The Counties Code gives the County authority to grant special use permits. Consequently, the County was immune from the claim that it negligently issued a special use permit to Next Level.

Similarly, Section 2103 of the Tort Immunity Act clearly establishes that a local public entity is not liable for any injury caused by failing to enforce any law. Accordingly, the County was also immune from the claim that its Sheriff’s office negligently failed to enforce the zoning ordinances.

The appellate court affirmed the trial court’s dismissal of both negligence counts against the County based on its statutory immunity.

Statute of Limitations on legal malpractice begins to run when plaintiff incurs damages

In Suburban Real Estate Services, Inc. v. Carlson, 2022 IL 126935, Plaintiff was a commercial real estate management company. In 2006 it formed a new company with another company, ROC, in which each owned a 50% interest. The new company, ROC/Suburban, supplied management services to Plaintiff.

In 2010, Plaintiff wanted to unwind its relationship with ROC/Suburban and hired Defendant, an attorney, for advice. Based on that advice, Plaintiff sent ROC a “break-up” letter with the steps Plaintiff intended to take to terminate its relationship. Some of these steps were described as “self-help” by the court, such as Plaintiff’s transferring to itself 50% ROC/Suburban’s assets. ROC then sued Plaintiff alleging that Plaintiff’s actions constituted a breach of fiduciary duty owed to ROC/Suburban. Plaintiff hired another law firm to defend it in the ROC litigation.

A bench trial was held. In June, 2015, the trial court found that Plaintiff had breached its fiduciary duties and ordered Plaintiff to repay ROC 50% of the fair value of the assets that Plaintiff had improperly transferred out of ROC/Suburban and awarded ROC damages of over $336,000.

A year later Plaintiff filed a legal malpractice action against Defendant, asserting that Defendant failed to advise plaintiffs of the proper steps to obtain a judicial dissolution of ROC/Suburban, recommended and/or approved the self-help actions that resulted in Plaintiff’s breaching of fiduciary duties it owed to ROC/Suburban, and failed to advise Plaintiff of the consequences of these actions. Plaintiff alleged damages in excess of $600,000.

Defendant moved for summary judgment, asserting that the legal malpractice claim was barred by the two-year statute of limitations. He argued that Plaintiff’s injury occurred six years earlier, in 2010, when ROC sued Plaintiff and it began paying legal fees to its new attorneys. Alternatively, Defendant argued that Plaintiff knew or should have known that it sustained an injury from Defendant’s alleged malpractice in 2013 at the latest, when the trial judge told Plaintiff’s new counsel at a pretrial settlement conference that Defendant “one hundred percent committed malpractice.” Either way, Defendant asserted the action brought against him was brought more than two years after the statute of limitations began to run.

The trial court agreed and granted summary judgment in favor of Defendant. The Plaintiff appealed. The appellate court reversed, reasoning that Plaintiff did not suffer a realized injury until the trial court found a breach of fiduciary duty and entered a judgment against it in 2015. The Illinois Supreme Court subsequently allowed Defendant’s petition to appeal.

The Illinois Code of Civil Procedure provides that a claim for legal malpractice accrues when the client “knew or reasonably should have known of the injury for which damages are sought.” To determine when a claim has accrued, a court must first “identify the injury and then determine when the injury was discovered or should been discovered.” The court indicated that the parties’ differing views in this case stemmed from a misunderstanding of the nature of the injury in this case.

An injury in a legal malpractice claim is not the attorney’s negligent act. It is “a pecuniary injury to an intangible property interest caused by the lawyer’s negligent act or omission.” Consequently, a client is not injured until he has suffered a loss caused by the attorney and for which monetary damages may be sought.

The existence of actual damages, therefore, is essential to a viable cause of action for legal malpractice. Those damages must be more than supposition or conjecture. When damages are speculative, no cause of action exists.

In this case, the alleged negligence related to legal advice given by Defendant regarding a business transaction. After following Defendant’s advice, Plaintiff was subsequently sued by a party to that transaction. The court found that in such a case, damages would be speculative until a judgment was entered against Plaintiff or it was forced to settle. “It is the realized injury to the client, not the attorney’s misapplication of expertise, which marks the point in time for measuring compliance with a statute of limitations period.”

Applying this rule, the Court held that Plaintiff’s malpractice claim began to accrue in June 2015 when the trial court in the case between Plaintiff and ROC entered judgment against Plaintiff. It affirmed the appellate court’s decision and reversed the trial court’s summary judgment in favor of Plaintiff.

Although the rule of law applied in this case appears clear, the Supreme Court had to distinguish several appellate court cases raised by Defendant that appeared to represent decisions inconsistent with the Court’s explanation. Whether the Court succeeded is debatable. Nevertheless, it brought some much-needed clarity to statute of limitations questions involving legal malpractice claims.

About the writer: Lisa Harms Hartzler is Of Counsel at Sorling Northrup Attorneys in Springfield. She graduated from the American University Washington College of Law in 1978 and began her legal career in Chicago. She has provided legal support for the Illinois REALTORS’ local governmental affairs program since she joined Sorling in 2006 and focuses her practice on municipal law, general corporate issues, not-for-profit health care law, and litigation support.

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