Illinois Association of Defense Trial Counsel Springfield, Illinois IDC Quarterly Volume 24, Number 3 (24.3.

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1 Illinois Association of Defense Trial Counsel Springfield, Illinois IDC Quarterly Volume 24, Number 3 ( ) Property Insurance Catherine A. Cooke Robbins, Salomon & Patt, Ltd., Chicago Condominium Association Can Bring Claims for Breach of Fiduciary Duty and Misleading Marketing Materials Nearly 15 Years after Construction Was Completed As lawyers representing condominium associations and property insurance companies, or perhaps as condominium owners ourselves, it is important to be aware of the rights and obligations associated with condominium properties, particularly those built in the last five-to-ten years. What recourse does a condominium association have for building defects and how long might those rights be protected? In a case demonstrating the significance of the fraud exception to the statute of limitations and statute of repose of construction-related claims, the Illinois Appellate Court First District held that a condominium association could proceed on its claims against a developer nearly 15 years after construction was completed. Henderson Square Condo. Ass n v. LAB Townhomes, LLC, et al, 2014 IL App (1st) The facts of the case are relatively straightforward, and unfortunately, are not terribly uncommon in construction litigation involving condominiums. The plaintiff condominium association and its Board of Managers alleged that the defendants the development companies and its owners began to market and sell individual condominium units in the project and, in doing so, represented and impliedly warranted that the property and the units would be habitable and free from defects. Henderson Square Condo. Ass n, 2014 IL App (1st) , 12. Long after the defendants turned over control of the condominium association to the first owner-elected board in 1996, certain units began to experience water seepage no later than the winter of Id. 36. Sometime in 2009, the condominium association retained an exterior restoration consultant and engineer to investigate the water problems. Id. 13. The association then retained a contractor to undertake repairs, during which the contractor discovered significant deficiencies in the original construction. Id. 14. The plaintiffs alleged that the defects could not have been discovered without performing extensive testing or opening up of walls, and [t]he defects were concealed and, as such, they were not reasonably discoverable to the Unit owners who did not possess special knowledge or skill in the field of construction. Id. Is there now arguably an exception to caveat emptor for condominium owners? The Original Complaint The plaintiffs filed their original complaint on October 31, 2011 alleging five causes of action: (1) breach of the implied warranty of habitability; (2) fraud; (3) negligence; (4) breach of the Chicago Municipal Code provision prohibiting misrepresentation of facts during the marketing and sale of real estate (Chicago Page 1 of 5

2 Municipal Code ); and (5) breach of fiduciary duty. Id. 1. The crux of all of the underlying allegations was that the defendants failed to construct the units free of defects and in accordance with the advertised plans and specifications. Id The plaintiffs further alleged that the developer-controlled board members inadequately funded the association s reserve account. Id. 24. The defendants moved to dismiss the first three counts on the basis that they were time-barred, having been filed more than 14 years after the defendants turned over control of the association to the owner-elected board in Id. 28. The relevant construction-related statute of limitations and statute of repose are found in 735 ILCS 5/ Section (a) sets forth the statute of limitations, in part, as follows: Actions based upon tort, contract or otherwise against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property shall be commenced within 4 years from the time the person bringing an action or his or her privity knew or should reasonably have known of such act or omission. 735 ILCS 5/13-214(a). Section (b) is the statute of repose, which states that actions set forth in the preceding subsection may not be brought after 10 years have elapsed from the time of such act or omission, however any person who discovers an act or omission prior to 10 years from the time of the act or omission shall in no event have less than 4 years to bring a cause of action. 735 ILCS 5/13-214(b). For both the statutes of limitations and repose, [t]he limitations of this Section shall not apply to causes of action arising out of fraudulent misrepresentations or to fraudulent concealment of causes of action. 735 ILCS 5/13-214(e). The trial court granted the defendants section motion to dismiss the first three counts, with prejudice, but granted the plaintiffs leave to file an amended complaint as to the fourth and fifth counts. Henderson Square Condo. Ass n, 2014 IL App (1st) , 30. The Amended Complaint and New Factual Allegations On July 2, 2012, the plaintiffs filed an amended complaint, which re-alleged counts I through III for purposes of preserving the issues on appeal. Id. 39. The amended complaint included certain additional facts not contained in the original complaint. Specifically, the plaintiffs alleged that while marketing the units, the defendants provided prospective purchasers with an information packet, which included building specifications with the type and location of the insulation to be used. Id. 34. The plaintiffs also alleged that the project contemplated ongoing construction and add-on units and that further construction was to be undertaken in Id. 35. Next, the plaintiffs alleged that it was not until after employing the contractors that the association discovered the full extent of the latent deficiencies in the original construction. Among other problems, the masonry lacked mortar, the exterior walls surrounding masonry openings and above the top floor ceilings lacked adequate insulation or insulation entirely, and the walls above the top floor lacked a proper vapor barrier. Id. 36. As to count IV for breach of the Chicago Municipal Code, the plaintiffs alleged certain misrepresentations in the marketing materials, such as that the units reflected solid construction skills, that the development companies were committed to quality and detail, and regarding the specifications of the insulation to be used. Id. 41. In count V, the plaintiffs alleged that the individual developer-run board members breached their fiduciary duties by failing to sufficiently fund the reserves, particularly because they knew or should have known that the project contained extensive defects and the reserve funding during their tenure on the board was insufficient to address those defects. Id. 44. Page 2 of 5

3 The Defendants Motion to Dismiss the Amended Complaint The defendants filed a 735 ILCS 5/ motion to dismiss on the basis that the causes of action were barred, relying on the 10-year statute of repose in the construction claim statute. The defendants alleged that the construction was completed in 1996, and any subsequent construction was unrelated to the plaintiffs property. Id. 52. In response, the plaintiffs argued that the construction claims statute of limitations did not apply because their causes of action were based on marketing and fraud, not construction, or alternatively, the exception for fraudulent misrepresentation applied and their claims were thus still timely under the statute of limitations or statute of repose. Id. 54. The defendants combined motion also contained a section motion to dismiss the cause of action based on the Chicago Municipal Code because they alleged it did not provide a private cause of action for damages. Id. 57. The trial court granted the defendants motion and dismissed counts IV and V of the amended complaint with prejudice. In doing so, it found that the causes of action were time-barred and that the plaintiffs failed to plead sufficient facts to state a cause of action in both counts. Id. 60. The trial court found that the plaintiffs causes of action were based in construction and found that the fraud-based exception to the statute of limitations or repose did not apply because the plaintiffs failed to plead fraud with the necessary particularity. Id. 63. In addition to finding the causes of action were time-barred, the trial court dismissed counts IV and V because it concluded both counts failed to state a cause of action (though the defendants motion was only directed at count V). The court found that the misrepresentations in count IV were not actionable because the Chicago Municipal Code provision applied to pre-existing facts and not promises to perform in the future. Id The trial court also found that the individual defendants only controlled the board for a short period in 1996, and they had no fiduciary duty to maintain funds on behalf of the condominium association in Id. 72. Appellate Court Reverses on All Counts On appeal, the plaintiffs first argued that the trial court should not have applied the construction-related section statute of limitations and repose to counts IV and V because they did not arise from construction-related activities. Instead, they argued that, the 5-year statute of limitations, found within 735 ILCS 5/ for actions to recover damages for injury to property or all civil actions not otherwise provided for, applied. Id. 81, 85. Alternatively, the plaintiffs argued that if the section periods applied, all counts were timely filed, or if untimely, they were excepted from the limitations period by the fraud exception contained within section (e). Id. 81. The appellate court found that the fraud exception applied, and reversed. The appellate court concluded that it need not determine when the actual acts or omissions occurred because it found the fraud exception had been triggered. Id. 94. Fraudulent concealment stops the running of the statute of limitations period until the cause of action is discovered. Id. 95; Eickmeyer v. Blietz Org., Inc., 284 Ill. App. 3d 134, 140 (1st Dist. 1996); Gillespie Cmty. Unit Sch. Dist. No. 7 v. Wight & Co., 2014 IL , 41. Though the purpose of the statute of repose is to terminate liability after a certain time, it would be unjust to allow the defendant to benefit from concealment of the plaintiffs cause of action, and thus the appellate court determined that it must examine whether the defendants actions amounted to fraudulent concealment. Henderson Square Condo. Ass n, 2014 IL App (1st) , 96. Page 3 of 5

4 Were the Latent Construction Defects Concealed? The plaintiffs alleged that the problems with the property were latent defects, which by themselves, are not sufficient to circumvent the statute of repose under the section (e) fraud exception. Id. 99. To assert fraudulent concealment, the plaintiff must show an affirmative misrepresentation, or in the absence of one, deceptive conduct, which results in an act of concealment. Id. 100; Heider v. Leewards Creative Crafts, Inc., 245 Ill. App. 3d 258, 270 (2d Dist. 1993). The court noted that while silence alone in not disclosing defects does not give rise to a misrepresentation claim, if the silence is coupled with deceptive conduct or the suppression of material facts results in active concealment, the seller has a duty to speak. Henderson Square Condo. Ass n, 2014 IL App (1st) , 100. Marketing Brochure Contained Potential Misrepresentations The plaintiffs argued that the information packet distributed by the defendants to prospective buyers included specifications regarding insulation to be used, while the engineer s report noted that portions of the exterior walls and ceiling either lacked insulation entirely, or lacked adequate insulation. Id Because the representations regarding the specific grades of insulation would encourage potential purchasers not to make additional inquiries, the appellate court concluded that the plaintiffs had pleaded adequate facts to raise a question of fact as to whether the defendants owed a duty to reveal that the property, contrary to what was represented, lacked insulation completely or lacked adequate insulation in the exterior walls and third floor ceiling. Id. Inadequate Funding of Reserves May Amount to Concealment The board of managers of a condominium association is responsible to adopt a budget, which provides for reasonable reserves, taking into account the repair and replacement cost, and estimated useful life of the property it is obligated to maintain. 765 ILCS 605/9(c)(2). The plaintiffs argued that the defendants knew extensive repairs would be required to fix the latent construction defects. Thus, when they budgeted reserves as board members, their conduct amounted to a false statement about the estimated useful life and condition of the property. Henderson Square Condo. Ass n, 2014 IL App (1st) , 106. A board member s fiduciary duty requires them to ensure that reserve funds are adequate to fund foreseeable repairs at the time they turned over the property. Id Whether the defendant board members provided reasonable reserves in light of the known latent defects was a question of fact and accordingly, dismissal on a motion pursuant to sections or was improper. Id. 106, 129. Chicago Municipal Code Creates a Private Cause of Action for Damages Lastly, the appellate court concluded that regardless of the version of the Chicago Municipal Code in effect at the time the lawsuit was filed, it permitted a private cause of action for damages in addition to attorneys fees even if the word damages was not expressly stated in the Code section. Id Though the defendants allegedly false statements were not misrepresentations of pre-existing facts, as is required for common law fraud claims, the appellate court concluded that Section of the Chicago Municipal Code concerned the marketing and sale of condominiums, which may occur prior to construction is complete. Id It therefore concluded that the law was intended to provide a remedy separate and in addition to common law fraud claims. Id. Analogizing the Chicago Municipal Code section to disclosures under the Residential Page 4 of 5

5 Real Property Disclosure Act, 735 ILCS 77/1 et seq., the appellate court also found that a cause of action need not be pleaded with the particularity required for fraud. Id If the defendants concealed the falseness of their representations in marketing the property, the statute of repose was tolled, and accordingly, dismissal on a section motion to dismiss was improper. Id Lessons from Henderson Square Condominium Association Condominium associations will likely rejoice in this recent, detailed ruling, though developers and members of the first developer-run board will not. The case demonstrates the necessity of adequate funding of an association s reserve accounts, particularly when the developer or its members are on the board and subject to individual liability for breach of fiduciary duty. To the extent defects in the construction may not become apparent until well after the developer turnover, in this case, some 10-plus years later, a condominium association may still be able to successfully allege fraudulent concealment of defects and toll the statute of limitations and statute of repose or at least the claims may survive a motion to dismiss. Henderson Square also highlights the additional cause of action to be aware of pursuant to Section and of the Chicago Municipal Code against a developer or seller in the marketing of real property. These Code sections permit recovery of damages and attorneys fees, in addition to any other common law fraud claims, and do not require misrepresentations of existing facts or the same pleading specificity required for fraud. This case may cause condominium associations to consider or reconsider its insurance liability coverage prior to and after taking possession and control of the property from the developer. Additionally, it serves as a reminder that associations and their attorneys should timely submit any claims relating to construction defects to their insurers when they first realize such defects exist even if the scope of the problems is unknown and the defects arise many years after developer turnover. About the Author Catherine A. Cooke is an associate at Robbins, Salomon & Patt, Ltd. and concentrates her practice in the area of commercial litigation and creditors rights. She earned her undergraduate degree from Indiana University Bloomington in 2003, and law degree from The John Marshall Law School in 2006, where she served as Administrative Editor of The John Marshall Law Review. She is licensed to practice law in both Illinois and Indiana. About the IDC The Illinois Association Defense Trial Counsel (IDC) is the premier association of attorneys in Illinois who devote a substantial portion their practice to the representation of business, corporate, insurance, professional and other individual defendants in civil litigation. For more information on the IDC, visit us on the web at Statements or expression of opinions in this publication are those of the authors and not necessarily those of the association. IDC Quarterly, Volume 24, Number Illinois Association of Defense Trial Counsel. All Rights Reserved. Reproduction in whole or in part without permission is prohibited. Illinois Association of Defense Trial Counsel, PO Box 588, Rochester, IL , , , idc@iadtc.org Page 5 of 5