Contract Law - Discovery Rules Applies to Breach of Contract Claim

Newell v. Newell, Ill: Appellate Court, 3rd Dist. 2011 - Google Scholar

This case holds that the discovery rule applies to a breach of contract claim.

Jared Newell filed a lawsuit against his mother Ruth Newell and First Midwest Bancorp alleging conversion and breach of contract alleging that Ruth had improperly withdrawn funds from a savings account in his name.

In 1993, while a minor, Jared received a settlement from a lawsuit involving a motor vehicle accident. A court order entered in the lawsuit provided that: "No funds shall be withdrawn from the minor's account without prior court order."

In 1994, Ruth opened a guardianship account in Jared's name. The signature account contained the following statement: "Minor account. No minor withdraw until 18 years old on 5-18-00 per court order — See Louise McLaren." Ruth's attorney, Thomas Cowgill, gave bank personnel a copy of the court order when Ruth opened the account.

Unfortunately Ruth removed the balance of the account without a court order.

In 2005 or 2006, after graduating from college Jared learned that his mother had drained the account. He filed suit against his mother and the bank in 2007. The bank moved for summary judgment on the ground that the lawsuit was barred by the three-year statute of limitations set forth in the Uniform Commercial Code. (810 ILCS 5/4-111). The trial court agreed and granted the motion for summary judgment.

The Appellate Court reversed and reinstated the case. The court reasoned that the discovery rule applied to the case: "

An action for breach of contract accrues when the breach of the contractual duty or obligation occurs. ABF Capital Corp. v. McLauchlan, 167 F. Supp. 2d 1011 (N.D. Ill. 2001). The discovery rule is an equitable exception that tolls the statute of limitations period until the plaintiff discovers, or has reason to discover, the cause of action. Knox College v. Celotex Corp., 88 Ill. 2d 407 (1981). The rule was created to alleviate the harsh consequences that result from a strict application of a limitations period. Continental Casualty, 329 Ill. App. 3d at 701. It typically applies in cases where the relationship between the injury and the alleged wrongful conduct is obscure. Rodrigue v. Olin Employees Credit Union, 406 F.3d 434 (7th Cir. 2005). Thus, under the discovery rule, the statute of limitations does not begin to run until the plaintiff knew, or in the exercise of reasonable diligence should have known, that he was injured, the cause of his injury, and that there was some indication of wrongdoing. Belleville Toyota, Inc. v. Toyota Motor Sales, U.S.A., Inc., 199 Ill. 2d 325 (2002)."

Jared argued that before 2005 or 2006 he could not have discovered the unauthorized withdrawal because his mother was in a position of trust.

The Court then distinguished several cases where Illinois courts have held that the discovery rule did not apply to UCC or breach of contract claims. The Newell Court noted that other Illinois cases have applied the discovery rule where there were circumstances of fraudulent concealment.

The court reasoned that Jared's mother concealed the unauthorized withdrawals from him and the Bank was in the best position to block the unauthorized withdrawals. "[F]raudulent concealment by a third party tolls the statute of limitations where the person fraudulently concealing the cause of action is in privity or has an agency relationship with the defendant. Serafin v. Seith, 284 Ill. App. 3d 577 (1996). This case involves allegations of fraud committed by Jarred's mother, someone in a position of trust and the guardian of the FMB account. Because Ruth was the guardian of the savings account and Jarred resided with her, account statements were mailed to Ruth. Thus, while the victim of a conversion of negotiable instruments case is typically in the best position to easily and quickly detect the loss and take action (see Haddad's of Illinois, 286 Ill. App. 3d at 1073), it would have been difficult for Jarred to uncover any wrongdoing that may have been apparent in the account records (see Continental Casualty, 329 Ill. App. 3d at 702). In this case, the bank was in a better position than Jarred to enforce the depository agreement and monitor any unauthorized withdrawal of funds."

Comment: this is an area of some debate and uncertainty in the law and one that this blog will attempt to cover in the future.

Edward X. Clinton, Jr.