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Illinois App. Court (1st Dist) Holds Claims Against Bank and Bank Officer for Fraud, Breach of Fiduciary Duty Were Time Barred

bankingThe Illinois Court of Appeals, First District, recently affirmed a trial court’s ruling dismissing claims for fraud, breach of fiduciary duty, conversion, and tortious interference as untimely and further affirmed the dismissal of claims for respondeat superior liability, prejudgment interest and attorney’s fees on the basis that the substantive claims were untimely.

A copy of the opinion in Shrock v. Union National Bank is available at:  Link to Opinion.

The appeal arises out of a November 2016 lawsuit filed by an individual (“minority owner”) and an LLC (“retailer”), against a bank and a vice president of the bank for allegedly aiding the majority owner of the retailer in misappropriating millions of dollars from the retailer.

The minority owner had instituted a prior lawsuit against the majority owner in 2009, alleging essentially the same facts as alleged in this underlying 2016 lawsuit. In 2010, the trial court granted the minority owner’s motion to enjoin the majority owner and his family against taking payments from the retailer under the “profit-sharing” plans that the majority had created.

In 2011, the minority owner filed another motion for injunction prohibiting the majority owner from using the retailer’s funds to pay for his personal expenses. In the majority owner’s response, filed in March 2011, he acknowledged the payments alleged had occurred, but contended that they occurred prior to the 2010 inunction and were proper under the “profit-sharing” agreements.

The majority owner further asserted that he spoke with the bank, and it was determined that the best way to finance his purchase of a personal residence was for the majority owner to borrow the purchase funds from the retailer and repay the loan at a higher interest rate than the retailer paid on its line of credit with the bank.

After a jury trial, an amount for compensatory and punitive damages was awarded to the minority owner.

In 2018, the trial court entered a partial satisfaction and release of judgment, drafted by the minority owner’s attorney, stating that while the judgment had only been partially satisfied, the employee released the majority owner of the judgment entered on Feb. 9, 2016.

Approximately 16 months prior to the release, the minority owner and retailer filed the underlying lawsuit against the bank and bank VP, alleging that the bank and bank VP allowed the majority owner to use the retailer as his “personal piggy bank” resulting in the retailer’s insolvency and sale of the majority of its assets to pay creditors.

The bank and bank VP moved to dismiss alleging (1) that the claims were barred by the five-year statute of limitations, (2) the minority owner and retailer had failed to state claims for intentional interference and respondeat superior liability, and (3) the request for prejudgment interest and attorney’s fees was not supported by Illinois law.

The trial court denied the motion to the extent that it asserted that the claims were untimely but dismissed the claim for intentional interference with contract.

The bank and bank VP then filed a motion for judgment on the pleadings arguing that the minority owner and retailer’s claims for fraud and breach of fiduciary duty were barred by the five-year statute of limitations and that the release barred the claims because both the 2009 case and the underlying 2016 case sought to recover the same damages.

The trial court granted the defendants’ motion finding that the minority owner and retailer were seeking to recover for the same loss at issue in the 2009 lawsuit. The trial court relied on Cherney v. Soldinger, 299 Ill. App. 3d 1066 (1998) in finding that the plaintiff’s release of the majority owner was “absolute and unconditional” and “released the judgment in its entirety,” including “any other parties which might be responsible for the injury.”

The minority owner and retailer appealed the order and filed a motion to reconsider the judgment arguing that the intent of the parties controlled whether the minority owner had released the bank and bank VP and the minority owner had not contemplated releasing any other parties not named in the settlement agreement. The motion to reconsider was denied.

The minority owner and retailer appealed the denial, and that appeal was consolidated with the appeal of the order granting judgment on the pleadings.

On appeal, the plaintiff contended that the trial court erred in granting judgment on the pleadings, in denying their motion to reconsider judgment on the pleadings, and in dismissing their claims for conversion, tortious interference with contract, and respondeat superior liability. 

The Appellate Court addressed each issue in turn.

As to the granting of judgment on the pleadings, the Appellate Court agreed that the applicable statute of limitations for the claims at issue was five years. Relying on the discovery rule, the Appellate Court found that the minority owner must have known of the alleged wrongdoing as early as Feb. 9, 2009, when the employee initiated his lawsuit against the majority owner.

The plaintiff argued that the running should have started when he learned of the bank and bank VP’s involvement, but the Appellate Court rejected this argument, holding that the identity of the party who caused the injury is not a prerequisite to the running of the statute of limitations. Guarantee Trust Life Ins. Co. v. Kribbs, 2016 IL App (1st) 160672, ¶ 30.

The minority owner and retailer next argued that even if the five-year statute of limitations applied, the statute was tolled for numerous reasons, all of which the Appellate Court rejected.

First, the minority owner and retailer argued fraudulent concealment tolled the statute of limitations. However, the Appellate Court held that this section applies only to the concealment of causes of action and not to concealment of the identity of the tortfeasors. Levine v. EBI, LLC, 2013 IL App (1st) 121049, ¶ 21. As the minority owner and retailer alleged only that the identities of the bank and bank VP were hidden, this section did not apply.

The minority owner and retailer next argued that the statute of limitations was tolled by equitable estoppel which was also quickly rejected by the Appellate Court, which found that the bank and bank VP had done nothing to prevent the minority owner and retailer from filing suit against them in 2011 when filings in the earlier lawsuit made clear the bank and bank VP were involved.

The plaintiffs next asserted the continuing violation rule meant that the statute of limitations ran from the last continuing tort. The Appellate Court found that this rule did not apply as each distinct transaction by the bank was a distinct instance of misconduct. The Court relied on prior rulings in holding that “the continuing violation rule does not apply to a series of discrete acts, each of which is independently actionable, even if those acts form an overall pattern of wrongdoing.” Kidney Cancer Ass’n v. North Shore Bank and Trust Co., 373 Ill. App. 3d 396, 398 (2007).

Finally, the minority owner and retailer argued the statute was tolled by the adverse domination doctrine which tolls the statute of limitations for claims by a corporation against its officers during the time the corporation is controlled by those officers. Lease Resolution Corp. v. Larney, 308 Ill. App. 3d 80, 86 (1999). The presumption created by the doctrine that a corporation does not “know” of its own injuries when it is controlled by an officer causing those injuries may be rebutted by evidence that someone else knew of the wrongdoing and had motivation and ability to bring suit. Id. at 90.

The Appellate Court found the minority owner had knowledge of the retailer’s claims against the bank and bank VP as early as 2009 and no later than March 2011 and had motivation to bring suit against them at that time and that the minority owner had the ability to bring suit on behalf of the retailer at the relevant time relying on Section 40-1 of the Illinois Limited Liability Company Act, which governed the retailer.

The Illinois Limited Liability Company Act provides that “[n]o action shall be brought by a member *** in the right of a limited liability company to recover a judgment in its favor unless members or managers with authority to do so have refused to bring the action or unless an effort to cause those members or managers to bring the action is not likely to succeed.” 805 ILCS 180/40-1 (West 2008).

The Appellate Court found it clear that the majority owner, had he been asked, would not have initiated a suit on behalf of the retailer alleging that the bank and bank VP helped the majority owner expropriate millions from the retailer’s bank accounts and thus, the minority owner was entitled to bring suit on behalf of the retailer at that time.

Next, the Appellate Court reviewed the challenge of the trial court’s dismissal of the claims for conversion, intentional interference with contract, respondeat superior liability and the requests for attorney’s fees and prejudgment interest.

As to the claims for conversion and tortious interference, the Appellate Court found that the claims were barred by the applicable five-year statute of limitations for the same reasons that the fraud claims were barred.

The Appellate Court further found no basis to reverse the dismissal of the claims brought under the doctrine of respondeat superior and the requests for prejudgment interest and attorney’s fees as the substantive claims were untimely and thus the minority owner and retailer could not obtain any money judgment to which prejudgment interest could apply and could not be successful litigants, and therefore, could not be entitled to attorney’s fees.

Having found the minority owner and retailer’s claims were barred by the statute of limitations, the Appellate Court did not address the grant of judgment on the pleadings regarding the release of judgment.

The Appellate Court thus affirmed the judgment of the trial court.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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