Category: Uncategorized

Originally published in The Docket, March 2009
By Mark A. Van Donselaar

A long-time business client calls you with a question about a contract that he is about to enter into on behalf of his business. The party with whom he is contracting is demanding that the contract include either your client’s personal guaranty, or that your client act as a surety for any debt owed under the contract. Being a layman, your client does not know the difference between a personal guaranty and a surety, so he wants you to explain the difference. This article will do just that, while focusing on the recent Second District Appellate Court case, JP Morgan Chase Bank, N.A. v. Earth Foods, Inc.,¹ which blurs the line between the two. (The Illinois Supreme Court granted leave to appeal on January 28, 2009.)

“There is substantial distinction between the liability of a surety and that of a guarantor. A surety’s undertaking is an original one, by which he becomes primarily liable with the principle debtor, while a guarantor is not a party to the principal obligation and bears only a secondary liability.”² Stated somewhat differently, the distinction between a suretyship and guaranty is that “a surety is in the first instance answerable for the debt for which he makes himself responsible, while a guarantor is only liable where default is made by the party whose undertaking is guaranteed.”³ A contract is “one of suretyship when one obligates himself to pay the obligee, absolutely and wholly, without the necessity that the obligee exhaust his remedies against the principal before proceeding against the surety.”⁴ A guaranty is “an undertaking to be responsible for the performance of an obligation of a third person upon his failure to perform it.” ⁵

Whether the obligation assumed by a party is that of a guarantor or a surety “is to be determined by the intent of the parties as collected from the language of the instrument and the circumstances attending its execution.”⁶ Where the express terms of the instrument are ambiguous, “the parties’ intentions can be determined from their declarations and conduct andfrom the surrounding circumstances.”⁷ Where the terms of the instrument are unclear and there are questions of the parties’ intent, parole evidence may be used to determine whether the contract at issue is a surety or a guaranty.⁸

The word “guarantee” is frequently used interchangeably with the word “surety.”⁹ “The  terms ‘suretyship’ and ‘guaranty’ are often confounded from the fact that the guarantor is in common acceptation a surety for another.”¹⁰ Thus, the determination of whether a contract is a surety or a guaranty does not depend upon technical language, such as security, surety, guaranty, or guarantee, which may be used in the contract.¹¹ To ignore the circumstances in which such terms are used attaches too much importance to them.¹² It is the nature of the obligation, whether primary, which would indicate a surety, or secondary, which would indicate a guaranty that is the determinative factor for distinguishing between a surety and a guaranty.¹³

Perhaps the most significant distinction between a guaranty and a surety is that a surety may avail himself of the protections afforded by the Sureties Act.¹⁴ The Sureties Act was first passed in 1874.¹⁵ Section 1 of the Act provides:

When any person is bound, in writing, as surety for another for the payment of money, or the performance of any other contract, apprehends that his principal is likely to become insolvent or to remove himself from the state, without discharging the contract, if a right of action has accrued on the contract, he may, in writing, require the creditor to sue forthwith upon the same; and unless such creditor, within a reasonable time and with due diligence, commences an action thereon, and prosecutes the same to final judgment and proceeds with the enforcement thereof, the surety shall be discharged; but such discharge shall not in any case affect the rights of the creditor against the principal debtor.¹⁶

In Wurster et.al. v. Albrecht¹⁷ the Appellate Court for the Second District examined the section of the Sureties Act quoted above and found that if not for the statutory provision, the holder of the note would not be required to comply with the surety’s demand to sue. However, the “statute was undoubtedly enacted for the purpose of compelling diligence by a creditor to the end that a surety may be protected against loss.”¹⁸ Thus, if demand is made by the surety under the provisions of the Section 1 of the Sureties Act and a lawsuit is not diligently brought by the creditor, then the surety may be protected from liability to the creditor.

It was not until the Second District Appellate Court’s decision in JP Morgan Chase Bank, N.A. that the protections of the Sureties Act have been extended to apply to a guarantor. The facts of JP Morgan Chase Bank, N.A. are stated fairly simply: the plaintiff in the case extended a line of credit to the primary defendant, Earth Foods, Inc. (Earth Foods), which was “personally guaranteed” by three co-owners of Earth Foods.¹⁹ The defendants sent the plaintiff a  letter in which they warned that Earth Foods was depleting its inventory and demanded that the plaintiff take action. When the plaintiff filed suit against Earth Foods and the co-guarantors, the co-guarantors responded by asserting an affirmative defense based on the protections found in Section 1 of the Sureties Act.

The circuit court granted the plaintiff’s motion for summary judgment on the ground that defendants were guarantors, not sureties, and, therefore, the Sureties Act did not apply. On appeal, the defendants argued, in part, that the circuit court erred when it found that the provisions of the Sureties Act did not apply. The Plaintiff countered with its successful argument in the circuit court that the Sureties Act did not apply because the defendants were guarantors, not sureties.

For its analysis, the appellate court turned to Black’s Law Dictionary for the definition of “surety,” which it found to be “[a] person who is primarily liable for the payment of another’s debt or the performance of another’s obligation.”²⁰ The court quoted further from Black’s, noting that “[a] surety differs from a guarantor, who is liable to the creditor only if the debtor does not meet the duties owed to the creditor; the surety is directly liable.”²¹ The appellate court reasoned that the definitions found in Black’s Law Dictionary supported the plaintiff’s argument that sureties are distinct from guarantors.²²

However, that did not end the court’s examination of the relationship between sureties and guarantors, though it did seemingly end any chance the plaintiff had of prevailing. The court went on to state that “the dictionary definition [of the term surety] does not in this case provide the ‘popularly understood’ meaning of the term.”²³ After alluding to the fact that it did not agree with the definition of the word “surety” found in Black’s Law Dictionary, the court set out on an extended analysis of the use of the words surety and guaranty.

As part of its analysis, the court found that “[t]he terms suretyship and guaranty are often confounded from the fact that the guarantor is in common acceptation a surety for another, and thus the word guarantee is frequently used interchangeably with the word surety.”²⁴ The court continued its analysis and found Illinois cases that have used the term surety in a general sense and those that have used the term in a specific sense.²⁵ Used in its general sense, the term surety has been used to describe “a relationship in which a person undertakes an obligation of another who is also under an obligation or duty to the creditor/obligee.”²⁶ Used more specifically, surety has been used to describe a contract in which the surety is in the first instance answerable for the debt for which he makes himself responsible, as opposed to a guarantor, who is only liable where default is made by the party whose undertaking is guaranteed.²⁷ Accordingly, the court concluded that the term surety “has more than one popularly understood meaning.”²⁸ The term surety could refer to any situation in which a person agreed to be held liable for the debt of another, whether the liability was primary or secondary.²⁹ It could also be used to refer strictly to a surety, who is primarily liable.³⁰

The court continued its examination to focus on when liability attaches to either a surety or a guaranty. A surety is primarily liable as though there is joint and several liabilities with the principal.³¹ The exact moment that a guarantor becomes liable for the debt of the principal is less certain.³² Some cases stand for the proposition that a guarantor’s liability is only triggered after the creditor has proceeded against the principal and failed to receive full satisfaction.³³ Other authority holds that a guarantor’s liability is triggered by the principal’s default, regardless of attempts by the creditor to recover from the principal.³⁴ The court found the position that imposes liability regardless of the creditor’s collection efforts to be the more persuasive position.³⁵ In light of its determination that liability is imposed against a guarantor upon the principal’s default, regardless of attempts against the guarantor’s principal, the Court reasoned that any differences between primary liability of a surety and secondary liability of a guarantor appear to be only academic.³⁶

After the analysis described above, the Court circled back to the issue of whether the legislature intended to distinguish between a surety and a guaranty or whether the legislature meant to use the term surety in its general sense to describe both surety and guaranty scenarios. The court concluded that based upon the intertwined use of the terms guaranty and surety and the confusion surrounding the use of the term surety, the “legislature did not mean to draw the type of precise distinctions we discussed above, but instead used the word in its general sense.”³⁷ That court offered no authority for its determination of what the legislature intended.

It would seem that the very essence of the legislature is to make precise distinctions between divergent positions in the statutes that it enacts. Certainly, some statutes allow for more than one reasonable interpretation. However, where the legislature has specifically used a single, precisely defined term and left out another related, yet distinctly different, term, it would seem  that the statute should be read to include only the term that has been used to the exclusion of the unused term.

An example of the fine distinctions made by the legislature and enforced by the appellate court is demonstrated in Micro Switch Employees’ Credit Union v. Collier.³⁸ In that case, the plaintiff loaned $7,300 to the defendant for him to purchase a car from a car dealer. The defendant fell into arrears, so the plaintiff repossessed the car and filed suit for certification of title and judgment in the amount owed on the loan. The circuit court granted judgment in the plaintiff’s favor, and the defendant appealed arguing that the Motor Vehicle Retail Installment Sales Act (“MVRISA”) applied to the transaction and that the plaintiff violated the provisions of the MVRISA with respect to the notice required to be provided to the defendant.

On review, the appellate court found that the MVRISA did not apply to the transaction because it only applied to purchasers of automobiles who buy from a dealer under a retail installment transaction.³⁹ The court ruled that the plaintiff was not a retail seller under the definitions of the MVRISA because it was not engaged in the business of selling motor vehicles.⁴⁰ Additionally, the defendant paid the automobile dealer the total amount of the purchase in a single payment, so the transaction at issue did not fit the definition of a retail installment transaction.⁴¹

Despite the fact that the definitions found in MVRISA clearly did not support its applicability to the scenario at hand, the defendant in Micro Switch Employees’ Credit Union continued to argue that the statute should apply to his situation because the purpose of the MVRISA was “to protect the buyer from the myriad of oppressive practices which, under the best of circumstances, seems to characterize installment selling.”⁴² But the court remained firm in its holding that the statute did not apply. “While the purpose of [MVRISA] may seem to warrant including agencies like Micro Switch which make installment loans for car purchases, it is clear that the legislature has chosen to include only retail sellers and sales finance agencies. The language of the statute is clear and precise. Had the legislature intended to include lenders such as the plaintiff, it would have done so. Where the language of the Act is certain and unambiguous, the only legitimate function of the courts is to enforce the law as enacted by the legislature.”⁴³

Though the language of the statute at issue in Micro Switch Employees’ Credit Union may not have the history of double use that the term surety has, it is difficult to determine how the language of the Sureties Act is any less certain than that of the MVRISA that would prompt the court to step outside of the clear language of the statute and apply it to guarantors as well as sureties.

As support for its decision, the court notes that the Sureties Act was created “to compel diligence by a creditor to make certain a surety is protected against loss” and that such purposes would be better served by extending such protections to guarantors and sureties.⁴⁴ The court continued, “Given the [Sureties] Act’s purpose, which applies to sureties and guarantors alike, and given the exceptionally close relationship between those two terms, we agree with defendant’s position that the legislature must have intended the word ‘surety’ in the [Sureties] Act to encompass a guarantor.”⁴⁵ The court did not make reference to any Illinois authority for its determination that the Sureties Act should apply to guarantors as well as sureties. However, it did refer to a decision from the First Circuit of the United States Court of Appeals that interpreted the Sureties Act and found that is applied to guarantors and sureties alike.

When asked by a client for advice regarding surety and guaranty agreements, the Illinois practitioner would be wise to advise his clients as to the differences between sureties and guarantees as they relate to the applicability of the Sureties Act. Additionally, as long as JP Morgan Chase Bank, N.A. remains authority, clients should also be counseled that a court may determine that the Sureties Act applies to both surety and guaranty agreements.

Originally published in The Docket, November 2007
by Mark A. Van Donselaar

In cases involving stolen checks, the appellate districts split on the application of the “continuing violation rule”.

Beware, plaintiffs’ attorneys: the statute of limitations for filing an action for the conversion of several negotiable instruments may, in effect, be shortening.  The reduction will not be the result of an amendment to the actual statute of limitations itself.  Rather, the source stems from court rulings on the applicability of the continuing violation rule to cases involving the conversion of multiple negotiable instruments over a protracted period of time.

Since 1993, persons who have had a series of negotiable instruments stolen from them have been permitted to rely on the application of continuing violation rule to, in effect, extend the statute of limitations for filing an action based on the converted checks. However, the First Appellate District’s recent decision in Kidney Cancer Ass’n v. North Shore Community Bank & Trust Company¹ has created a split between the appellate districts as to whether the continuing violation rule applies to cases where multiple negotiable instruments have been converted in what a plaintiff alleges to be a common plan or scheme by a single defendant.  This article will review Illinois and Seventh Circuit cases pertaining to the continuing violation rule, and discuss whether the rule applies to situations where a series of negotiable instruments have been converted.

Generally, a cause of action for conversion of personal property must be brought within five years of the cause of action accruing.² However, section 3-118(g) of the Uniform Commercial Code – Negotiable Instruments³ provides that actions for conversion of a negotiable instrument must be commenced within three years of the action accruing.⁴ When faced with two statutes of limitations that arguably both apply to the same cause of action, the statute of limitation that more specifically relates to the action must be applied.⁵ Therefore, the limitations period for actions for conversion of negotiable instruments is three years, as set out by 810 ILCS 5/3-118(g).⁶

Usually, the statute of limitations begins to run when facts exist that would authorize one party to maintain an action against another.⁷ But, under the “continuing violation” or “continuing tort” rule, the statute of limitations is put on hold, so to speak, until the last injury has been suffered and the tortious acts have ceased.⁸

Field v. First Nat’l Bank of Harrisburg⁹ was the first Illinois case to face the issue of whether the continuing violation rule applies to the conversion of a series of checks.¹⁰ In Field, the administrator of the estate of Raymond Ewell Field brought suit against Field’s sister and the bank where she deposited checks into her own account that were payable to their father and restrictively endorsed, “for deposit only.”  The plaintiff alleged that over the course of four years, numerous checks payable to Raymond and restrictively endorsed were deposited into his daughter’s accounts and then put to her own use.

The primary issue in Field was whether the alleged course of conduct was one transaction or numerous separate transactions for purposes of the calculating when the statute of limitations began.¹¹ The trial court granted partial summary judgment, finding that the statute of limitations barred any action based on conduct that occurred more than five years prior to the lawsuit being filed.¹² (Why the trial court used the more general five-year statute of limitations which applies to most actions for conversion of personal property, rather than the three-year statute of limitations set out in the provisions of the Uniform Commercial Code – Negotiable Instruments is not explained in the appellate court’s opinion.)

The appellate court reversed, agreeing with the plaintiff that the alleged course of conduct was one continuous transaction or scheme for determining the commencement of the statute of limitations.¹³ The appellate court based its finding on the fact that the checks were cashed by the sister, continuously over a four-year period, despite each check being payable to Raymond and each being restrictively endorsed “For Deposit Only.”¹⁴ Thus, Field established the precedent that when several checks are stolen as part of a single plan or scheme, the continuous tort rule applies and the statute of limitations for actions based on the checks does not run until the last check has been stolen.

Subsequent to Field, the Illinois Supreme Court analyzed the continuing tort rule in Feltmeier v. Feltmeier,¹⁵ in which the Supreme Court of Illinois ruled on the applicability of the continuing violation rule with respect to the tort of intentional infliction of emotional distress (IIED).  In Feltmeier, a woman sued her ex-husband for IIED. The complaint alleged that from October 1986 until after December 1998, the ex-husband had intentionally caused emotional distress to the woman or acted with reckless disregard as to whether his conduct would cause emotional distress to her.  The ex-husband filed a §2-619 motion to dismiss, claiming that a majority of the facts alleged were not actionable because the statute of limitations had run.  The woman responded by arguing that the ex-husband’s actions constituted a “continuing tort” for purposes of the statute of limitations, and that her complaint was filed within the two years of the last tortious act committed by her ex-husband.

The Supreme Court began by explaining that under the continuing violation or continuing tort rule, the limitations period does not begin to run until the date of the last injury or the date that the tortious acts cease.¹⁶ The Court clarified that a continuing violation or tort is found when there are continuing unlawful acts or conduct, not simply continued ill effects from a single unlawful act.¹⁷ Therefore, the Court found that if the alleged actions of a defendant are each a separate violation rather than one continuous, unbroken violation, then the continuing violation rule is not applicable.¹⁸ Furthermore, the Court explained that the continuing tort rule does not involve tolling the statute of limitations as a result of delayed or continuing injuries. Instead, the court viewed the alleged wrong as a continuous whole.¹⁹ As to whether a particular set of actions will be considered a continuous tort rather than a number of individual, actionable torts, the Court seemed to reason that an action for IIED is often a claim that arises out of the accumulation of several distinct acts.²⁰ The Court explained that it would be inconsistent to find that the cumulative effect of several acts gives rise to a claim for IIED, but that the statute of limitations for IIED runs from the date of each separate act.²¹

The same rationale would not seem to apply to a situation involving the conversion of several negotiable instruments. Arguably, the disparity between the facts in Feltmeier and those in most cases involving converted negotiable instruments makes Feltmeier distinguishable.  However, Feltmeier is still relevant to a case brought for conversion of negotiable instruments because the Court in Feltmeier cited Field and noted its holding.²² It seems highly unlikely that the Illinois Supreme Court would cite to an appellate court case as authority for a particular proposition and make note of the lower court’s opinion if it did not agree with the opinion rendered by the appellate court.  Therefore, Feltmeier is relevant to the situation where several negotiable instruments have been converted as part of a common plan or scheme.

In Rodrigue v. Olin Employees Credit Union,²³ the Seventh Circuit addressed the issue of whether the continuing tort rule should apply to a case where 269 checks were stolen over the course of more than seven years.  Though Rodrigue is not binding authority in Illinois state courts,²⁴ the Seventh Circuit stated that it was required to apply the law as it believed the Illinois Supreme Court would if it were deciding the same case.²⁵ The district court judge had followed Field and applied the continuing tort rule, awarding damages based on all 269 checks, even though more than three years had passed between the time that many of the checks were converted and the lawsuit was filed.  The Seventh Circuit began by examining Field and found that the case clearly supported the district court’s ruling.²⁶ However, the court was not convinced that the Illinois Supreme Court would also agree with Field.²⁷

Instead, the Seventh Circuit compared Feltmeier, where the continuing tort rule was applied, with the Illinois Supreme Court Case Belleville Toyota, Inc. v. Toyota Motor Sales, U.S.A., Inc.²⁸ where the continuing tort rule was not applied, and reasoned that the Illinois Supreme Court would not apply the continuing tort rule to a cause of action for conversion of several negotiable instruments.²⁹ The key factor in the court’s determination was that the plaintiff’s claim did not depend upon the cumulative nature of the defendant’s actions.³⁰ Rather, the conversion of each check was an independent, actionable wrong.³¹ In fact, the court went so far as to say that the fact that over 200 checks were converted during an 85-month period was irrelevant as far as the plaintiff’s right to sue for conversion.³² In the court’s opinion, whether one check or 100 had been converted, nothing about the repeated, ongoing conversions changed the plaintiff’s claim for conversion apart from increasing her damages.^33/sup>

The Seventh Circuit noted that the Illinois Supreme Court cited Field in its Feltmeier opinion, but found the citation to be for “illustrative purposes only.”³⁴ Therefore, the court did not find Feltmeier to be an endorsement of the holding reached in Field, or an indication of how the Illinois Supreme Court would decide the question of whether to apply the continuing tort rule to the conversion of several negotiable instruments.³⁵

Finally, the appellate court noted that the plaintiff did not argue that her claim was timely based on the discovery rule.³⁶ The court found that, similar to the discovery rule, the continuing tort rule is based, at least partially, on the idea that where a cause of action arises from the cumulative nature or impact of a series of acts over time, it can be difficult to discern the wrongfulness of the defendant’s acts while they are still occurring.³⁷ Because of similarities between the continuous tort rule and the discovery rule, the court examined whether the discovery rule had been applied to a situation involving the conversion of negotiable instruments and found that Illinois and a majority of other jurisdictions have not applied the discovery rule in that context.³⁸

Finally, the Seventh Circuit thoroughly examined whether the application of either the discovery rule or the continuing tort rule would be contrary to the underlying purposes and goals of the Uniform Commercial Code (U.C.C.).  The court stated that the goals of the U.C.C. were to create a system of certainty of liability, finality, predictability, uniformity, and efficiency in commercial transactions³⁹ In keeping with those goals, negotiable instruments are intended to facilitate the rapid flow of commerce and to foster efficiency.⁴⁰ The court found that application of the continuing tort rule to the conversion of negotiable instruments would not further the goals of the U.C.C. because the result would be that plaintiffs would have a longer period to sue on a claim, thereby undermining the finality of transactions involving such negotiable instruments.^41/sup>

Even though the court in Rodrigue postulated that the Illinois Supreme Court would not apply the continuing tort rule to the conversion of several negotiable instruments, its ruling did not create a split of authority for Illinois courts, because state courts are not bound by federal court decisions.⁴² Therefore, it was not until the First District Appellate Court’s decision in Kidney Cancer Association that there was a split of authority for Illinois courts with respect to the application of the continuing violation rule to the conversion of several negotiable instruments.

Kidney Cancer Ass’n was another case in which an employee – in this case, the executive director of Kidney Cancer Association – stole funds belonging to his employer.  Counts for negligence and conversion were filed against the bank involved in the transactions.  The bank brought a motion to dismiss pursuant to § 2-615 of the Code of Civil Procedure.⁴³ The trial court granted the motion and dismissed the negligence count without prejudice, and dismissed the conversion count with prejudice, finding that it was barred by the statute of limitations.

The appellate court began its examination of the continuing violation issue by reviewing the relevant case law, including the cases discussed above. The court stated that while the complaint alleged several conversions of negotiable instruments, each unauthorized deposit by the plaintiff’s employee gave the plaintiff a viable right to file an action for conversion.⁴⁴ The court found the fact that the conversions spanned a five-year timeframe to be irrelevant because the repetitious nature of the violations did not affect the nature or validity of the plaintiff’s action.⁴⁵ Moreover, the court stated that, at least in its view, the Illinois Supreme Court has made clear that the continuing violation rule only applies when the pattern, course, or accumulation of the defendant’s actions are relevant to the cause of action.⁴⁶ Ultimately, the appellate court found the reasoning of Rodrigue more persuasive than that of Field.⁴⁷

Illinois judges and practitioners are left with a split of authority in the appellate court districts.  Those in the first and fifth district are bound to follow the ruling of the respective appellate districts.  However, those from each of the other districts in Illinois are left with the difficult decision of choosing between two equally authoritative precedents.  Of course, the entire issue could be settled by an Illinois Supreme Court ruling on the issue, but until then, or until more districts rule in favor of one side or the other, practitioners will argue and judges will struggle with which rule to apply.

Originally published in The Docket, April 2007
By Mark A. Van Donselaar

Despite the Illinois Supreme Court’s admonition that not every cause of action for breach of contract gives rise to a corresponding cause of action under the Consumer Fraud and Deceptive Business Practices Act (the Act)¹, there is no shortage of breach of contract cases including claims for relief based on the provisions of the Act. The motivation for the prevalence of attorneys bringing claims for consumer fraud is speculative at best. Perhaps the skillful attorneys bringing such claims are consistently able to find facts supporting a cause of action based on the Act. Maybe the relatively low pleading requirements for an action based on the Act² are appealing to attorneys who feel as though their client’s situation neatly fits within the statute’s framework. Or, quite possibly, the allure of an award of attorney’s fees as part of a judgment is simply too compelling to a plaintiff’s attorney with a complaint on the drafting table.

Until the Supreme Court’s decision in Krautsack v. Anderson, ³ the provisions of the Consumer Fraud Act regarding the availability of attorney fees to the prevailing party remained somewhat of a mystery. Section 10a(c) of the Act provides that a court may award “reasonable attorney’s fees and costs to the prevailing party.”⁴ The issue of when a prevailing consumer fraud plaintiff may be awarded attorney fees has been well-settled for some time.⁵ However, the same cannot be said about a prevailing consumer fraud defendant. To be sure, there have been appellate court rulings on the availability of attorney fees to prevailing consumer fraud defendants.⁶ However, the Illinois appellate circuits have been split as to what must be shown before such fees may be awarded.⁷ This article reviews a sampling of Illinois appellate court cases in which the award of attorney fees to a prevailing consumer fraud defendant was at issue, and examines the ruling in Krautsack v. Anderson.

Haskell v. Blumthal⁸ was the first reported case in which a defendant who prevailed in an action for consumer fraud sought to be reimbursed for its attorney’s fees.⁹ The court initially examined whether a defendant who defeated a claim brought for consumer fraud could be considered a “prevailing party.” Without case law to guide it, the court referred to an Illinois Bar Journal article that supported the theory that a defendant who successfully defeats a claim brought against him under the Act should be eligible to receive fees.¹⁰ The court also examined federal civil rights legislation, which allows reasonable attorney’s fees to the prevailing party, and found that a defendant who wins such a case is deemed a “prevailing party.”¹¹ Based on federal precedent and the “commonsense interpretation of the phrase ‘prevailing party,’” the court found that a defendant who defeats a charge brought against him for consumer fraud is a “prevailing party” for the purposes of determining eligibility for reimbursement of attorney fees.¹²

Having determined that the defendant was eligible for reimbursement of its attorney fees, the court noted that the amount, if any, is within the court’s discretion.¹³ Accordingly, the court then discussed the criteria for whether to award attorney fees to a prevailing consumer fraud defendant.¹⁴ Without case law directly on point, the court looked to the guidelines followed by courts when determining whether to award attorney fees to a party in an ERISA lawsuit, including: “‘(1) the degree of the opposing parties’ culpability or bad faith; (2) the ability of the opposing parties to satisfy an award of fees (3) whether an award of fees against the opposing parties would deter others from acting under similar circumstances (4) whether the parties requesting fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA; and (5) the relative merits of the parties’ position.’”¹⁵

The court found that no one guideline was decisive and that a showing of bad faith was not required to justify an award of attorney fees.¹⁶ However, the court also stated that it had difficulty envisioning a situation where it would award attorney fees to a prevailing consumer fraud defendant in the absence of bad faith on the part of the plaintiff.¹⁷ It noted federal case law supporting the proposition that, while successful plaintiffs should usually be awarded their attorney fees, successful defendants should be awarded their attorney fees only when the suit brought against them is frivolous.¹⁸

The court found the use of different standards for plaintiffs and defendants to be logical.¹⁹ The court justified its support for using different standards for plaintiffs and defendants by contending that defrauded plaintiffs would be discouraged from bringing lawsuits to recover their damages if the majority of any damages would be used to pay their attorney’s fees.²⁰ Haskell spawned several other cases that purport to follow Haskell, but upon closer examination extended the ruling in that case. Two of these cases include Graunke v. Elmhurst Chrysler Plymouth Volv²¹ and Casey v. Jerry Yusim Nissan, Inc.²²

The dispute in Graunke arose from the plaintiff’s purchase of an automobile from the defendant. The plaintiff alleged that the defendant led him to believe that the automobile he was purchasing was a “brand new” 1987 Chrysler New Yorker. Later, the plaintiff discovered that the automobile was actually a used 1986 New Yorker. After weighing the evidence, including the plaintiff’s own testimony and a letter written by the plaintiff referring to his “1986” New Yorker, the trial court ruled in favor of the defendant. Subsequently, the defendant filed a petition for attorney’s fees. After a hearing, the trial court denied the request for attorney fees and awarded costs of $291.90. The defendant appealed the denial of attorney fees.

The appellate court examined the Act and remanded the case to the trial court,²³ holding that, in certain circumstances, a prevailing defendant is entitled to reasonable attorney fees.²⁴ The court noted that there was nothing in the language of the Consumer Fraud Act that would limit a defendant’s recovery of fees to those cases in which the plaintiff acted in bad faith.²⁵ The court referenced the Haskell court’s statement that it would have difficulty envisioning a circumstance in which “fees should be awarded [to] a defendant absent bad faith on part of the plaintiff.”²⁶ The court interpreted that statement to be a “general commentary on the policy underlying attorney fee awards, rather than a pronouncement limiting fee awards to cases in which there is bad faith on the part of the plaintiff.”²⁷

The court stated that, in its opinion, the policy considerations for awarding attorney fees to prevailing plaintiffs may not mirror those for awarding attorney fees to prevailing defendants.²⁸ The court instructed that the legislative purpose behind permitting attorney fees to prevailing parties under the Consumer Fraud Act should be considered by trial courts.²⁹ It found that by awarding attorney fees to prevailing parties under the Consumer Fraud Act, the court sought to further its goal of eradicating all forms of deceptive and unfair business practices.³⁰ The award of attorney fees was necessary to further this goal because, without the possibility of being awarded reimbursement of their attorney fees, plaintiffs may be reluctant to bring an action for fear that any recovery would be consumed by attorney fees.³¹

In conclusion, the court restated the factors presented in Haskell as pertinent for the consideration of whether to award attorney fees and wrote that “the existence of bad faith . . . is not the only consideration, but it is an important factor, in some cases the controlling one, which should be considered by a court deciding whether to award attorney fees.”³²

The importance of the bad faith factor was furthered by Casey v. Jerry Yusim Nissan, Inc.,³³ which also arose out of the sale of a used car. The defendants requested more than $41,000 in attorney fees but were awarded $30,000 in fees. They appealed from that ruling.

On appeal, the court emphasized the importance of a bad-faith finding and the significance of the policy interests discussed in Graunke and Haskell.³⁴ In fact, the court went so far as to say that “[i]n Haskell, the court found that an award of fees to a prevailing defendant depended on a finding of bad faith by the plaintiff.”³⁵ The court then reasoned that “[c]learly, bad faith is the pivotal factor in awarding attorney fees to prevailing defendants under the Act.”³⁶ It concluded: “Thus, trial court must first determine whether the plaintiff acted in bad faith.”³⁷

Tracking the evolution of the bad faith factor from Haskell to Casey is quite startling. In Haskell, the court merely indicated that it had a hard time envisioning a situation where a defendant would be awarded attorney fees in the absence of a bad-faith finding on the part of the plaintiff.³⁸ Though Haskell supported different standards for determining whether to award fees to defendants and plaintiffs,³⁹ the court never stated that a defendant may only be awarded fees if the plaintiff acted in bad faith. Moreover, the fact that the Haskell court was unable to envision a situation where fees may be awarded to a defendant absent bad faith cannot be reasonable interpreted as an absolute bar to such an award.

In Graunke, the appellate court remanded the case because it felt that the court might have inappropriately based its ruling exclusively on whether the defendant had shown bad faith by the plaintiff.⁴⁰ However, Casey incorrectly referenced Haskell and Graunke for the proposition that the award of fees to a defendant depended on a finding of bad faith by the plaintiff.⁴¹ Furthermore, Casey states that “a trial court must first determine whether the plaintiff acted in bad faith.”⁴² Thus, Casey at least implies that a court must find bad faith by the plaintiff before it may even examine the other factors used to determine whether to award attorney fees to a prevailing defendant.

An appellate court case that did not follow the developing trend of requiring a showing of bad faith before awarding fees to the defendant is Boeckenhauer.⁴³ Boeckenhauer also arose from the sale of a used car. One of the defendants, the Ford Motor Co., successfully defeated the consumer fraud claim and filed a petition for attorney fees. The court denied Ford’s request for fees, relying on the Casey decision for the appropriate test for whether to award fees. On appeal, Ford argued that bad faith is not a prerequisite to an award of attorney fees to a prevailing defendant, and that different standards do not apply for prevailing plaintiffs and defendants.

The court began with an examination of the precedent established by Graunke and Casey. The court found nothing in Graunke that supported the proposition that bad faith by the plaintiff must be shown to award fees to a prevailing defendant, and it declared Casey’s reliance on Graunke for that proposition to be erroneous.⁴⁴ The court also found that, in Graunke, it had rejected the notion that Haskell placed a bar on awarding attorney fees to prevailing defendants absent bad faith by the plaintiff.⁴⁵ As it did in Graunke, the appellate court remanded the case to the court because it was unclear whether the court was acting under the belief that it was required to find bad faith by the plaintiff before awarding fees to the defendant.⁴⁶

During the pendency of Ford’s second appeal in Boeckenhauer,⁴⁷ the Illinois Supreme Court decided Krautsack,⁴⁸ which established a new precedent for awarding attorney fees to prevailing consumer fraud defendants. The allegations in Krautsack arose out of a contract for a two-week safari to East Africa. In support of his claim for consumer fraud, the plaintiff alleged that the defendant knowingly misrepresented to him that existing weather conditions in Africa would not interfere with the planned safari.

The court granted the defendants’ motion for summary judgment on the consumer fraud count. Defendants then filed a petition for attorney fees under section 10a(c) of the Consumer Fraud Act. The plaintiff appealed the grant of summary judgment on the consumer fraud count, and the appellate court reversed. Because the summary judgment entered for defendants was overturned, they were no longer a prevailing party, so they could no longer maintain a petition for their fees. On remand, the case went to a bench trial, and judgment was entered for the defendants on all counts, including the count for consumer fraud. Defendants, again, sought reimbursement for their fees. The court entered an order striking the defendants’ petition for fees, and the defendant subsequently appealed that order. The appellate court upheld the trial court’s decision, and the Illinois Supreme Court granted the defendants’ appeal.

The defendants’ contention on appeal was that “an award of attorney’s fees to a prevailing defendant under section 10a(c) of the [Consumer Fraud] Act should not be conditioned upon a finding that the plaintiff acted in bad faith.”⁴⁹ The court began by reviewing the well-known principles that guide the interpretation of any statute.⁵⁰ The court then quoted the language of the Consumer Fraud Act allowing for attorney fees to the prevailing party and found that a prevailing defendant is a prevailing party for purposes of the Consumer Fraud Act.⁵¹

The court explained that it agreed with the defendants’ argument that nothing in section 10a(c) conditioned awarding fees to a prevailing defendant on the existence of bad faith by the plaintiff, and that it also agreed with the plaintiff’s argument that section 10a(c) does not expressly restrict or limit the court’s discretion on whether to award fees.⁵² Therefore, the court found that it must look beyond the language of the statute and examine its provisions in light of the entire statute, while keeping in mind the legislature’s intent and the evils it sought to remedy.⁵³

The court reiterated its own findings from Cruz v. Northwestern Chrysler Plymouth Sales, Inc.⁵⁴ that in consumer fraud cases the amount incurred by plaintiffs for attorney fees can easily out weight the amount recovered for actual damages.⁵⁵ The court reasoned that plaintiffs would be reluctant to bring claims for consumer fraud violations because any potential recovery for damages could easily be consumed by attorney fees.⁵⁶ Thus, the court noted that the allowance of attorney fees to prevailing plaintiffs is necessary to encourage plaintiffs who have causes of action to sue and thereby discourage unfair or fraudulent methods of business.⁵⁷

The court explained that the reasons for allowing attorney fees to a prevailing defendant are different than the reasons for allowing attorney fees to a prevailing plaintiff.⁵⁸ The court referenced Haskell for the proposition that the award of attorney fees to prevailing defendants was meant to deter bad-faith conduct by plaintiffs and to reimburse defendants when such bad-faith conduct did occur.⁵⁹ Therefore, the court found that allowing fees to defendants only in situations where bad faith by the plaintiff is shown is consistent with the purposes of the Consumer Fraud Act.⁶⁰ The court opined that without this stricter standard for the award of defendant’s attorney fees, a plaintiff with a legitimate claim could be forced to pay a defendant’s attorney fees simply because the plaintiff “lost at trial on the proofs.”⁶¹ The court stated that such a potential penalty would be deterrent to filing a consumer fraud action and would defeat the purpose of the Act.⁶²

The court also took time to respond to an argument presented by the defendant that to only allow fees to a defendant when bad faith by the plaintiff is shown unfairly shifts the balance of fairness in consumer fraud cases to favor the plaintiff.⁶³ The court countered that although the award of fees to plaintiffs is discretionary, not mandatory, the award of fees to a prevailing plaintiff is more likely than to a prevailing defendant.⁶⁴ However, the court explained that such was the result of the remedial function of the Consumer Fraud Act, not a distortion of the statute.⁶⁵ The court also noted that a prevailing plaintiff is a more worthy candidate to receive reimbursement for fees because he or she has proven the defendant’s guilt, while a successful defendant may have not proven anything more than that the plaintiff’s efforts were unsuccessful.⁶⁶

Having determined that fees should be awarded to the defendants only when bad faith by the plaintiff is shown, the court went on to examine the standard that governs a bad-faith finding.⁶⁷ Previous appellate court cases had ruled that Supreme Court Rule 137 provided theappropriate standard upon which to judge bad faith.⁶⁸ On this issue, however, the court agreed with the defendant and held that a defendant should not be limited by Rule 137 in proving a plaintiff’s bad faith.⁶⁹ Though the court found Rule 137 and its case law to be instructive, it ruled that the failure to prove bad faith under Rule 137 is not fatal to a defendant’s claim for attorney fees.

The conclusion stemming from these cases is that a plaintiff’s counsel need not worry too much about the scenario in which his or her client may be held liable for the defendant’s attorney’s fees. While the award of attorney fees to defendants is still discretionary, it seems unlikely that circuit courts will be willing to assess fees against a plaintiff who has survived the initial round of dispositive motions.