Plaintiffs Lose Coverage Case Based Upon Limitations Period In Insurance Policy

Hoover v. Country Mutual Insurance Co., Ill: Appellate Court, 1st Dist., 3rd Div. 2012 - Google Scholar:

This case has a harsh result.  Plaintiffs home burned down, together with their homeowners insurance policy. They filed a lawsuit two years after the fire.  Their case was dismissed based upon the one-year limitation period in the insurance policy.  The court reasoned as follows:

"¶ 35 The suit limitation provision in the Hoovers' insurance policy provided that all suits against Country Mutual must be brought within one year of the date of the occurrence. In Cramer v. Insurance Exchange Agency, 174 Ill. 2d 513 (1996), our supreme court held that compliance with a suit limitation provision within a policy is a condition precedent to recovery under the policy. Cramer, 174 Ill. 2d at 530 (citing Schoonover v. American Family Insurance Co., 214 Ill. App. 3d 33, 44 (1991)). In Cramer, the insurance policy at issue had a one year suit limitation provision similar to the one in this case. The policy provision provided that a suit on the policy must be brought within one year of the loss. The court found that the plaintiff's suit was untimely because the plaintiff filed the complaint more than one year after the loss. Cramer, 174 Ill. 2d at 530. Here, the Hoovers' home was destroyed on January 12, 2008. The Hoovers filed their initial complaint against Country Mutual on March 3, 2010, more than two years after the explosion. Therefore, based on the one-year suit limitation provision in the policy, the Hoovers' breach of contract claim was untimely. Cramer, 174 Ill. 2d at 530."

Comment:  While this result is technically correct, this situation cries out for reform of insurance policies in Illinois.

Edward X. Clinton, Jr.

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Duty to Defend - Long Delay Before Insurer Is Notified Of Claim

Farmers Auto. Ins. Ass'n v. Burton, 967 NE 2d 329 - Ill: Appellate Court, 4th Dist. 2012 - Google Scholar:

In this case, Farmers was notified of an automobile accident two years after it occurred and only after the insured was convicted of leaving the scene of an accident. The accident (a hit and run accident allegedly) occurred on May 11, 2008. The policyholder did not notify the insurance company until July 8, 2010. That long delay was sufficient to absolve the insurance company of any duty to defend or indemnify.

The court explains:

"¶ 16 In its declaratory judgment action, Farmers alleged it had neither a duty to defend nor a duty to indemnify Burton as a result of the accident because Burton did not provide the company with prompt notice. The insurance policy in question contained a provision requiring the insured to provide prompt notice of any accident or loss. Our supreme court has stated: "A provision in an insurance liability policy requiring an insured to give the insurer notice of an accident is a reasonable policy requirement, one which affords the insurer an opportunity to make a timely and thorough investigation and to gather and preserve possible evidence." Barrington Consolidated High School v. American Insurance Co., 58 Ill.2d 278, 281, 319 N.E.2d 25, 27 (1974)."

The policyholder denied that he was involved in the accident. However, his arrest on charges (in September 2008) that he left the scene of an accident was sufficient to give him notice that he was involved in the accident. The court explains:

"While being arrested does not equate to an "accident or loss," Burton's arrest for the hit and run death of Timothy placed him on notice of both his potential criminal and civil liability for the accident which resulted in Timothy's death. Regardless of his claim he was not involved in this accident, he should have known he could be found legally responsible for Timothy's death. As a result, his insurance policy required him to provide prompt notice of the accident and loss. Burton's policy clearly stated: "We will pay damages for `bodily injury' or `property damage' for which any `insured' becomes legally responsible because of an auto accident." (Emphasis added.)"

Comment: failure to give prompt notice to an insurance company is an easy way to lose coverage. It can be a terrible mistake.

Edward X. Clinton, Jr.


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Illinois Supreme Court Rejects Account Stated Theory Where Invoices Were Disputed

PATRICK ENGINEERING, INC. v. City of Naperville, Ill: Supreme Court 2012 - Google Scholar:

An account stated can be an easy way to collect a bill.  To recover the creditor must show that the debtor and the creditor agreed that the invoices were correct.  The Illinois Supreme Court defined it in these terms:

"¶ 56 "An account stated has been defined as an agreement between parties who have had previous transactions that the account representing those transactions is true and that the balance stated is correct, together with a promise, express or implied, for the payment of such balance." W.E. Erickson Construction, Inc. v. Congress-Kenilworth Corp., 132 Ill. App. 3d 260, 267 (1985). Further, "an account stated cannot be created merely by furnishing an account unless the creditor or debtor specifically intends to establish a balance due or to agree upon a final settlement to date between the parties."Toth v. Mansell, 207 Ill. App. 3d 665, 672 (1990). That is, an account stated is "merely a final determination of the amount of an existing debt," and an action for an account stated is founded upon a promise to pay that debt, not the original promise to pay under the contract. Motive Parts Co. of America, Inc. v. Robinson, 53 Ill. App. 3d 935, 941 (1977)."

Here the plaintiff, an engineering firm, sued the City of Naperville under an account stated theory.  The Supreme Court held that the account stated count did not state a claim because the amount was disputed.  The discussion lists all of the flaws that can doom an account stated claim to failure.

"¶ 57 Because of the discrepancy between the amounts allegedly billed and the amounts actually billed, count IV does not present a true and correct statement of the account between the parties. Additionally, because the fifth and final invoice never provided to the City a final statement of account, indicating the total amount owed by the City, count IV does not, and cannot, allege that the City promised to pay that amount. Although count IV contains an allegation that the City never objected to the five invoices, and consequently the City acknowledged their correctness, count I contains allegations that the City "failed to approve the invoices" and "failed and refused to pay" for Patrick Engineering's services. The City never acquiesced to the invoices; there was simply no meeting of the minds. We affirm the trial court's decision to dismiss count IV."

Comment: an account stated is a great legal theory because the plaintiff avoids litigation about the performance of the plaintiff.  Where the account is disputed, the account stated theory will not work.  The account stated theory might have worked in this case if there was a final invoice listing the total amount and if the city did not object to the invoice.

Edward X. Clinton, Jr.

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The Account Stated - A Useful Legal Tool for Creditors

American Express Centurion Bank v. Gabay, 94 AD 3d 795 - NY: Appellate Div., 2nd Dept. 2012 - Google Scholar:


A creditor can often pursue payment on many theories. One of the most useful is the account stated. An account stated requires the creditor to show that there was a history of transactions and that the conduct of the debtor demonstrates that the debtor did not dispute the balance due. The advantage of account stated is that it avoids the defense to a breach of contract action that the goods or services were inferior. The other advantage is that a lawsuit based on an account stated can rely on the debtor's failure to challenge invoices as proof that the invoices stated the correct amounts.


This is some language from a New York case that sets out the requirements for an account stated:


"An account stated is an agreement between parties to an account based upon prior transactions between them with respect to the correctness of the account items and balance due" (Fleetwood Agency, Inc. v Verde Elec. Corp., 85 AD3d 850, 851 [2011][internal quotation marks omitted]). "An agreement may be implied where a defendant retains bills without objecting to them within a reasonable period of time, or makes partial payment on the account" (American Express Centurion Bank v Cutler, 81 AD3d 761, 762 [2011])."


Comment: if you have series of uncontested invoices and no real defense to payment the account stated is often the legal theory of choice. However, if the debtor complained promptly or contested the invoices, the account stated theory will not work. The best alternative is a breach of contract claim.
Edward X. Clinton, Jr.

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Appellate Court Upholds Personal Guarantee

YELLOW BOOK SALES AND DISTRIBUTION COMPANY, INC. v. Feldman, Ill: Appellate Court, 1st Dist., 4th Div. 2012 - Google Scholar:


This case, which is a dispute over $13,178.01, contains a lengthy discussion of the contract principles relevant to the enforcement of personal guarantees. The key question was whether the contract's terms were clear enough to the reader.


The contract is quoted by the court as follows:


"THIS IS AN ADVERTISING CONTRACT BETWEEN YELLOW BOOKS SALES AND DISTRIBUTION COMPANY, INC. OR YP TEL. AND _________________________ and Print Customer Name X______________________________ Authorized Signature individually and for the Customer. (Read Paragraph 14G on the reverse hereof).





¶ 4 Each of the four contracts contain "Glassworks, Inc." above the "Print Customer Name" line. Feldman's signature appears on the second line of each contract and his name is followed by either "Pres." or "President." Feldman's name is printed on the following line.


¶ 5 Paragraph 14G of the form contracts, referred to in the signature block and found on the back side, is written in fine print and states:


"The signer agrees that he/she has the authority and is signing this agreement (1) in his/her individual capacity, (2) as a representative of the Customer, and (3) as a representative of the entity identified in the advertisement or for whose benefit the advertisement is being purchased (if the entity identified in the advertisement is not the same as the Customer or the signer). By his/her execution of this agreement, the signer personally and individually undertakes and assumes, jointly and severally with the Customer, the full performance of this agreement, including payment of amounts due hereunder."

The trial court found this language ambiguous and ordered a trial to determine the parties' intent. After hearing evidence the court found that Feldman was sophisticated (he was a lawyer) and must have understood what he was signing. Paragraph 39.


The appellate court found that the verdict was not against the manifest weight of the evidence. It noted that Feldman had signed four similar such contracts, and must have understood what the language meant.


One issue the case does not discuss is whether the trial court was correct to deny Yellow Book's motion for summary judgment and order a trial. The language seems clear. The word "individually" is easy to understand. In sum, I believe the case can be resolved on the plain meaning of the contract. Someone who signs individually knows he is agreeing to pay the balance if the company cannot pay it. The word "individually" signals a personal guarantee to the signer.


Edward X. Clinton, Jr.


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Law Firm Wins Fee Case Against Former Clients

STAES AND SCALLAN, PC v. Orlich, Ill: Appellate Court, 1st Dist., 2nd Div. 2012 - Google Scholar:

This is a legal fee collection case in which the law firm prevailed and obtained a judgment against the former client.  The law firm's position was strengthened by the engagement letter, which set forth the agreement between the law firm and the client.  The law firm also did not charge the plaintiff for an attempt to remove the underlying case to federal court, an effort that failed when the federal court remanded the case to the state court.

Edward X. Clinton, Jr.

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Plaintiff Loses Contract Claim Due To Quirks of Uniform Commercial Code

KJAER v. Village of Bensenville, Ill: Appellate Court, 2nd Dist. 2012 - Google Scholar:

The Uniform Commercial Code contains many statute of limitations provisions.  If the underlying transaction involved a sale of goods, the plaintiff has four years to sue.  If the transaction was one for "services," the plaintiff has 10 years to sue.

The UCC provisions are different than the Illinois statute of limitations which gives a plaintiff five years to sue on an oral contract and 10 to sue on a written contract.

Here the plaintiff sold radar and noise monitoring systems to the defendant and was not paid for six years. The trial court and the appellate court agreed that it was primarily a sale of goods not services and the claim was barred.

The court explains the inquiry as follows:

"16 This appeal concerns whether section 2-725 of the UCC or section 13-206 of theCode should apply to the subject matter of the agreement between the parties. Article 2 of the UCC applies only to transactions in "goods" (Nitrin, Inc. v. Bethlehem Steel Corp.,35 Ill. App. 3d 577, 592 (1976)), and "goods" are defined as "all things, including specially manufactured goods, which are movable at the time of identification to the contract for sale" (810 ILCS 5/2-105(1) (West 2010)). A contract for services is not a transaction in goods and is not covered by Article 2 of the UCC. Boddie v. Litton Unit Handling Systems, 118 Ill. App. 3d 520, 531 (1983). Where a contract mixes the sale of goods and the provision of services, the applicability of Article 2 of the UCC is determined by the "`predominant purpose'" test. Brandt v. Boston Scientific Corp., 204 Ill. 2d 640, 645 (2003). Under this test, if the contract is predominantly for goods and only incidentally for services, Article 2 of the UCC will apply. Brandt, 204 Ill. 2d at 645. If the contract is predominantly for services and only incidentally for goods, Article 2 of the UCC will not apply. Zielinski v. Miller, 277 Ill. App. 3d 735, 741 (1995). Further, the determination of the predominant purpose of a contract is usually a question of fact.Heuerman v. B&M Construction, Inc., 358 Ill. App. 3d 1157, 1165 (2005). Nevertheless, the predominant purpose of a contract is also susceptible to determination as a matter of law. Brandt, 204 Ill. 2d at 647-48."

Comment: the lesson is to check the Uniform Commercial Code before filing suit.  If there is doubt, file the case.

Edward X. Clinton, Jr.

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UCC Statute Of Limitations is Not Subject To Discovery Rule

Hawkins v. NALICK, Ill: Appellate Court, 5th Dist. 2012 - Google Scholar:

The Uniform Commercial Code (enacted in every state, including Illinois) has a three-year statute of limitations.

This case is a bad check case.  The plaintiff sued her former lawyer and a bank when the lawyer allegedly forged her signature on a check and converted her money.  The defendant bank argued that the case was filed after the three-year period and thus should be dismissed.  The trial court agreed and dismissed the case.

On appeal, Hawkins argued that the claim did not accrue until she discovered it and, therefore, her lawsuit was timely.

First, the legal standard for holding the bank liable for wrongfully cashing a check:

"Section 3-420(a) of the UCC provides in relevant part: "An instrument is *** converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment." 810 ILCS 5/3-420(a) (West 2010). "To establish that a financial institution is liable for conversion under Illinois law, the plaintiff must establish (1) that she owned, held an interest in, or had the right to possess a negotiable instrument; (2) that someone forged or without authority placed the plaintiff's endorsement on the instrument; and (3) that the defendant financial institution negotiated the check without her authorization." Rodrigue v. Olin Employees Credit Union, 406 F.3d 434, 439 (7th Cir. 2005)."

Second, the appellate court concluded that the result, while it was harsh, was in accordance with the majority of jurisdictions that have ruled on this issue. The court explained:

"As noted above, almost every jurisdiction that has addressed this issue has held that the discovery rule does not apply to the UCC's three-year statute of limitations on claims for the conversion of negotiable instruments. See Estate of Hollywood v. First National Bank of Palmerton, 2004 PA Super 321, ¶ 20 (and cases cited therein). Accordingly, we are compelled to adopt the majority view and hold that the discovery rule does not toll the running of the three-year statute of limitations set forth in section 3-118(g) of the UCC.

¶ 26 In the present case, there is no evidence that the plaintiff could have known that Nalick converted her inheritance check from her mother's estate. Unlike the plaintiffs in Haddad's of Illinois and Kidney Cancer Ass'n, there is no indication that the plaintiff in the present case was in the best position to easily and quickly detect the loss and take appropriate action or that she could have detected the conversion sooner with adequate bookkeeping. Nonetheless, we believe that we must apply the three-year statute of limitations on claims for the conversion of negotiable instruments.

¶ 27 "The rationale most often cited in support of the majority perspective is that application of the discovery rule would be inimical to the underlying purposes of the UCC, including the goals of certainty of liability, finality, predictability, uniformity, and efficiency in commercial transactions." Rodrigue, 406 F.3d at 445-46. Application of the discovery rule to a cause of action for the conversion of a negotiable instrument undermines the underlying goals of the UCC. Id. Although the mechanical application of the statute of limitations in the present case leads to a harsh result, courts addressing this issue have noted that greater good is served by the strict application of the limitations period. Menichini v. Grant, 995 F.2d 1224, 1230 (3d Cir. 1993); Husker News Co. v. Mahaska State Bank, 460 N.W.2d 476, 479 (Iowa 1990) ("Strict application of the limitation period, while predictably harsh in some cases, best serves the twin goals of swift resolution of controversies and `certainty of liability' advanced by the U.C.C.")."

The problem with the discovery rule is that the rule leaves the statute of limitations open ended.  Plaintiff can sue whenever the conversion is discovered.  This is bad for banks and increases transaction costs because the bank may have to evaluate a transaction years after the fact.  The other rationale against using the discovery rule is that the plaintiff is usually in the best position to know that there was a conversion.  Most people would, in theory, notice that a large check was missing and take some action.  Here, the missing check was not discovered because the lawyer lied to the client.

Comment: this is a thoughtful well-researched opinion that lays out both sides of the issue and explains why the court chose the path that it chose.  The court checked the law of other jurisdictions and reviewed the policy reasons in favor of a hard and fast three-year statute of limitations.

Edward X. Clinton, Jr.

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What Is a Security Under the Federal Securities Laws?

One of the most challenging questions in the securities laws is whether a particular interest or contract is a security. If the contract is not a security, the federal Securities Laws do not apply and the promoter does not have to register the investment. If it is a security, the investment must be registered. Thus, whether something is a security is litigated often. There is no definitive answer to the question. The main issue is whether the investor is relying on the efforts of others to earn a return or profit. An investor in a blue chip company purchases a share of stock and hopes to earn a return based on the work of the company and its employees. The question in analyzing an investment contract is whether the holder of the contract is trying to profit from the work of other people or not.

The term "Security" means:

"any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing." 15 U.S.C. §77b(a)(1).

The importance of the definition of security becomes apparent in the area of private actions for securities fraud because the standard for establishing securities fraud is much lower than that for common law fraud.

The Supreme Court has adopted a flexible and liberal approach in determining what constitutes a security. In its famous decision of SEC v. W.J. Howey Co., 328 U.S. 293, 90 L.Ed. 1244, 66 S.Ct. 1100 (1946), the Court held that land sales contracts for citrus groves in Florida, coupled with warranty deeds for the land and a contract to service the land, were investment contracts and thus securities. The Court stated that:

[a]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. 66 S.Ct. at 1103.

According to the Court, it is immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise. 66 S.Ct. at 1104. The Howey investment contract analysis has been the starting point in determining the status of transactions in the securities area. In applying this analysis, courts have traditionally looked to the substance of the transaction to decide whether a security is involved and have made the determination regardless of the label placed on the interest by the parties to the transaction. Courts have found that countless schemes designed to produce profits for the participants, such as the sale of franchises, fur-bearing animals, and shares in fishing boats and cemetery lots, were covered by the 1933 Act. See 2 Louis Loss and Joel Seligman, SECURITIES REGULATION, pp. 948 – 956 (3d ed. 1989); Carl W. Schneider, The Elusive Definition of a Security — An Examination of the Investment Contract Concept and the Propriety of a Risk Capital Analysis Under Federal Law, 12 Tex.Tech.L.Rev. 911 (1981).

One significant question is whether an interest in a limited liability company is a security. In Robinson v. Glynn, 349 F.3d 166 (4th Cir. 2003), the Fourth Circuit held that an interest in an LLC is not a security. The Fourth Circuit held that the plaintiff investor was not seeking to profit ―solely from the efforts of others. The court claimed that he had significant control over the company, including the right to appoint two board members. However, in SEC v. Merchant Capital, 483 F.3d 747 (11th Cir. 2007), the Court held that interests in limited liability partnerships were investment contracts‖ under Howey. Also, see United States v. Leonard, 529 F.3d 83 (2d Cir. 2008) (affirming criminal convictions for violating the securities laws and holding that interests in an LLC sold by Defendants were securities under the Howey investment contract test.).

As the Leonard court noted, an LLC requires a case by case analysis to determine whether the purchaser had significant control over the operations of the company. 529 F.3d. at 89.
In SEC v. Edwards, 540 U.S. 389, 157 L.Ed.2d 813, 124 S.Ct. 892 (2004), the Supreme Court reaffirmed the validity of Howey, supra. In Edwards, the defendant controlled ETS Payphones, Inc., which sold payphones to the public. The payphones were sold under a sale and leaseback agreement, under which the investor would ―purchase the payphone and then lease it back to ETS in exchange for a payment of $82 each month. For each investor, the $82 payment represented a 14-percent return on the investment. After ETS filed for bankruptcy protection, the SEC filed a civil enforcement action against Edwards, alleging that he had violated the registration requirements of 15 U.S.C. §§77e(a) and 77e(c). The Eleventh Circuit in SEC v. ETS Payphones, Inc., 300 F.3d 1281 (11th Cir. 2002), held that the sale and leaseback scheme was not a ―security because it offered a fixed rate of return. The Eleventh Circuit also held that the Howey test ―that the return on the investment be derived solely from the efforts of others‘ did not apply because the investor had a contractual right to the $82 payment each month. 124 S.Ct. at 896, quoting ETS Payphones, supra, 300 F.3d at 1285. Thus, in the Edwards case, the Supreme Court reaffirmed Howey and held that an investment scheme promising a fixed rate of return can be an 'investment contract‘ and thus a 'security‘ subject to the federal securities laws. 124 S.Ct. at 898 – 899.

Some items that give their holders a right of use do not constitute securities. In United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 44 L.Ed.2d 621, 95 S.Ct. 2051 (1975), the Supreme Court found that ―stock‖ entitling its holder to purchase an apartment from a cooperative was not a security because the purchasers were acquiring a right to purchase an apartment. The purchasers were not seeking the benefits accruing to investors. Rather, they were seeking the use of an apartment.

Ordinary commercial paper, even when described as a ―note, is not a security. In C.N.S. Enterprises, Inc. v. G. and G. Enterprises, Inc., 508 F.2d 1354 (7th Cir.), cert. denied, 96 S.Ct. 38 (1975), the court held that certain notes were not securities because the notes were ordinary commercial paper. The bank holding the notes was not acting as an investor or business partner. See also American Fletcher Mortgage Co. v. U.S. Steel Credit Corp., 635 F.2d 1247 (7th Cir. 1980), cert. denied, 101 S.Ct. 1982 (1981).

Bank certificates of deposit are not securities. Marine Bank v. Weaver, 455 U.S. 551, 71 L.Ed.2d 409, 102 S.Ct. 1220 (1982). In the Court‘s view, because the banking laws amply protect investors in bank CDs, it is unnecessary to subject the issuer banks to liability under the antifraud provisions of the securities laws.

The sale of 100 percent of the outstanding stock of a company involves the sale of a security. Landreth Timber Co. v. Landreth, 471 U.S. 681, 85 L.Ed.2d 692, 105 S.Ct. 2297 (1985). In so holding, the Supreme Court expressed its view that the instrument involved was stock under the plain language of the statute.

A real estate contract may also be a security. In Adams v. Cavanagh Communities Corp., 847 F.Supp. 1390 (N.D.Ill. 1994), investors who had purchased Florida real estate interests on land sales contracts sued the developers for securities fraud. The court held that the land sales agreements were investment contracts. Moreover, since the installment contracts called for a repeated series of decisions to invest, each term payment was a separate offer and sale for determining the statute of limitations. Other courts have held that mortgage participations (Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808 (2d Cir. 1994)) and joint venture interests purchased in reliance on the expertise of the venture‘s managers to generate profits (Stone v. Kirk, 8 F.3d 1079 (6th Cir. 1993)) are securities.

Comment:

This is a short summary of some of the cases discussing the investment contract test. It is meant to give the reader a basic idea of how the test operates.

Whether a contract or other economic right is a security essentially depends on whether the holder of the contract is acting as an investor who seeks financial benefits based on the work of a promoter or a third party.

The practicing lawyer should remember that the statute makes it clear that a promissory note or share of stock in a small closely held corporation is a security. 15 U.S.C. §77b(a)(1).

Edward X. Clinton, Jr.

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District Court Holds That Moorman Doctrine Bars A Conversion Claim

Lansing v. Carroll, Dist. Court, ND Illinois 2012 - Google Scholar:

The economic loss or Moorman doctrine bars tort claims where the damages are purely economic.    Moorman Mfg. Co. v. Nat'l Tank Co., 435 N.E.2d 443, 453, 91 Ill. 2d 69, 61 Ill. Dec. 746 (Ill. 1982); Fireman's Fund Ins. Co. v. SEC Donohue, Inc., 679 N.E.2d 1197, 1199, 176 Ill. 2d 160, 223 Ill. Dec. 424 (Ill. 1997).

In this case a dispute arose concerning the provisions of a buy-sell agreement.  The plaintiff brought a conversion claim.  Because the conversion claim sought contract damages, it was barred by the Moorman doctrine. The court concluded that the plaintiff's conversion claim was really a breach of contract claim accompanied by the words "willful" and "wanton."

Moorman often swallows up tort claims in business litigation where the parties also have a contract.  The purpose of Moorman is to prevent clever lawyers from turning every breach of contract into a tort.  Interpreting Moorman is one of the main issues facing business litigators today.

Edward X. Clinton, Jr.

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Corporate Law - Piercing the Corporate Veil - Fontana v. TLD Builders, Inc., 362 Ill. App. 3d 491 (Ill. App. 2nd Dist. 2005)

Fontana v. TLD Builders 362 Ill. App. 3d 491 (Ill. App. 2d Dist 2005).

This is probably the most famous piercing the veil case in Illinois because it pierced the corporate veil and held liable a non-shareholder of the corporation. The result is counter-intuitive, but, is understandable when one considers the underlying facts of the case.

The Fontanas alleged that they entered into a contract with TLD under which TLD agreed to construct a single family home in Clarendon Hills for the sum of $1,475,800.

The Fontanas alleged that TLD breached the contract by failing to construct the home as specified in the contract and "by abandoning all work on the home in February 2001, leaving the home incomplete and uninhabitable."

After a bench trial, the court held that TLD breached the contract and failed to cure the breach. As to damages the court held that it would be too costly to complete the home, so the unfinished home should be demolished. The court held that the Fontanas had been damaged in the amount of $1,271,816.10. The trial court entered judgement against TLD and DiCosloa jointly and severally.

The only relevant appeal from the judgment was that of DiCosola. Plaintiffs alleged that DiCosola was the alter ego of TLD and that, after the lawsuit was filed, he caused TLD to cease its business operations so that it had no funds with which to compensate plaintiffs. DiCosola was not a shareholder of TLD.

Theresa DiCosoloa was called as a witness by the Plaintiffs. Mrs. DiCosola admitted that she was the incorporater of TLD. She could provide no evidence that the corporation had any start-up capital. There was no evidence that she or DiCosola ever paid for the stock issued by the corporation. The purported owner of the corporation, Theresa DiCosola, knew nothing about the corporation, did not sign checks, kept no records and did not know whether the corporation had ever earned a profit or a loss.

Theresa "said that she has never received a dividend from TLD and did not know if TLD had profits or losses in the years, 1998,1999, 2000, 2001 and 2002. However, Theresa did sign TLD's income tax returns for those years." She also admitted that she had no idea where the company's assets of $1.8 million went after the lawsuit was filed.

The company had almost no financial records, and almost no records of payments that it made to vendors and subcontractors.

As a result, the trial court found that "Mr. DiCosola is the dominant force behind this corporation" and that the corporation "was little more than a shell which was established to shield him from liability."

In Illinois a party seeking to pierce the corporate veil has the burden of making a substantial showing that the corporation is really a dummy or sham for another person or corporation. In re Estate of Wallen, 262 Ill. App. 3d 61, 68 (1994). The doctrine "imposes liability on the individual or entity that uses a corporation merely as an instrumentality to conduct that person's or entity's business."

The court first rejected the argument that DiCosola could not be held liable because he was not a shareholder. There is authority in Illinois and other states that a non-shareholder can be held liable if the other elements of the test are met.

Illinois uses a two-step test to determine whether the veil should be pierced:

"(1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and (2) circumstances must exist such that adherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or promote inequitable consequences."

To determine whether the "unity of interest" test has been met courts examine many factors, including (1) inadequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the debtor corporation; (6) nonfunctioning of the other officers or directors; (7) absence of corporate records; (7) commingling of funds; (9) diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors; (10) failure to maintain arm's length relationships amont related entities; and (11) whether, in fact the corporation is a mere facade fro the operation of the dominant stockholders." Jacobson v. Buffalo Rock Shooters Supply, Inc., 278 Ill. App. 3d 1084, 1088 (1996).

Obviously, the factors when analyzed strongly favored plaintiffs:

(1) no evidence of adequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; ... (5) insolvency; (6) no evidence that Theresa functioned as a real officer or director; (7) almost total absence of corporate records.

The Appellate Court affirmed the finding of piercing the veil.

Comment: this case involves a corporation and a shareholder who did almost everything wrong - no capital; no records; no consistent use of the corporate name; no effort to follow corporate formalities and evidence of commingling. The result - personal liability in excess of $1.2 million logically follows when one considers the underlying facts and the underlying transaction and the apparent effort to stiff the plaintiffs and deny them their legitimate recovery.

This case is a lesson to all entrepreneurs that it is not enough to form a corporation - you must use the corporation and treat it as a separate and independent person. You must use the corporate checking account or credit card and keep records of corporate expenses. You must keep your own affairs and accounts separate from those of the corporation. Finally, it is wrong to transfer funds to yourself or others to avoid paying your creditors.

A corporation should not be forgotten once established, but carefully maintained over time.

Edward X. Clinton, Jr.
Copyright 2010

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Mortgage Foreclosure - Bank Fails to Make Diligent Efforts To Serve Defendant - Default Judgment Reversed

CITIMORTGAGE, INC. v. Cotton, Ill: Appellate Court, 1st Dist., 2nd Div. 2012 - Google Scholar:

This is a mortgage foreclosure case in which Citimortgage was unable to serve the defendant and obtained service by publication.  On appeal, the court held that the bank failed to make diligent efforts to serve the defendant and the default judgment was reversed.

There are two standards that govern service - diligent inquiry and due inquiry.  The court explains the difference: "The plaintiff must conduct both "diligent inquiry" in ascertaining the defendant's residence and "due inquiry" in ascertaining the defendant's whereabouts before the plaintiff can properly execute an affidavit stating that the defendant cannot be found. Bell Federal Savings & Loan Ass'n v. Horton, 59 Ill. App. 3d 923, 927-28, 376 N.E.2d 1029, 1033 (1978)."

Here, the bank failed to contact Cotton's attorney or attempt to reach Cotton at his job.  Thus, the bank may have failed to make "due inquiry."

After the judgment was entered, Cotton filed a motion for reconsideration, and a supporting affidavit, arguing that the bank's efforts to find him were lacking.

The case was remanded to the circuit court so that the court could conduct a hearing on what efforts the bank made.

Comment; the lesson here is that service by publication may be challenged.  Personal service is always the best idea.

Edward X. Clinton, Jr.

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Fraudulent Transfer - Appellate Court Upholds Judgment In Favor Of Creditor Against Wife Of Debtor

HARRIS NA v. Harris, Ill: Appellate Court, 1st Dist., 1st Div. 2012 - Google Scholar:

This is an appeal from a grant of summary judgment in favor of Harris Bank against Sheri Harris, the ex-wife of Stuart Levine.

The bank alleged that in 2002 Levine allegedly defaulted on a $3.3 million dollar note due to the Bank and to avoid collection had transferred assets to his wife for no consideration.  The asset transfers rendered Levine insolvent, so he was unable to pay Harris bank.

Ms. Harris argued that the bank's case was barred by a 2008 federal forfeiture judgment.  The trial court and the appellate court disagreed, holding instead that the forfeiture judgment only applied to two of Levine's assets, not the rest of the disputed property.

The court found that Ms. Harris forfeited two arguments (a) that there was adequate consideration for the transfers; and (b) that the property was marital property in which she had a 50% interest, because Ms. Harris failed to raise these issues before the trial court.  The court states: "Because neither this argument nor any evidence supporting it was presented to the circuit court, we deem the argument forfeited on appeal. See Cooney v. Magnabosco,407 Ill. App. 3d 264, 268, 943 N.E.2d 290 (2011) (stating that an appellant that fails to raise an issue in the circuit court waives that issue for purposes of appeal)."

In sum, a classic fraudulent transfer case.

Edward X. Clinton, Jr.

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Contract Law - Personal Guarantee Enforced Because of Admissions By Defendant

NISSAN MOTOR ACCEPTANCE CORPORATION v. ABBAS HOLDING I, INC., Ill: Appellate Court, 1st Dist., 2nd Div. 2012 - Google Scholar:


The main issue in this case was whether the trial court properly ruled that an individual defendant, Joseph Abbas, was liable on a personal guaranty. The original document with Mr. Abbas' signature was lost. The court initially ruled in his favor. Upon reconsideration, the court ruled that the personal guaranty was binding on Abbas because he admitted in a verified answer that he signed it.

The admission in a verified answer was a binding judicial admission and was fatal to the defense of the personal guaranty claim. The analysis is worthy of quotation:

"¶ 19 Section 2-610 of the Code provides that every answer and subsequent pleading "shall contain an explicit admission or denial of each allegation of the pleading to which it relates," and that "[e]very allegation, except allegations of damages, not explicitly denied is admitted, unless the party states in his or her pleading that he or she has no knowledge thereof sufficient to form a belief, and attaches an affidavit of the truth of the statement of want of knowledge." (Emphasis added.) 735 ILCS 5/2-610(a), (b) (West 2010). "Any admission contained in the original verified pleading, which is not the product of mistake or inadvertence, is a binding judicial admission." Arpac Corp. v. Murray, 226 Ill. App. 3d 65, 80, 589 N.E.2d 640, 652 (1992). Such an admission "has the effect of withdrawing a fact from issue and dispensing wholly with the need for proof of the fact." Id. at 80-81, 589 N.E.2d at 652; Beverly Bank v. Coleman Air Transport, 134 Ill. App. 3d 699, 703, 481 N.E.2d 54, 57 (1985). A judicial admission in a verified pleading "makes it unnecessary for the opposing party to introduce evidence in support thereof." L.D.S., LLC v. Southern Cross Food, Ltd., 2011 IL App (1st) 102379, ¶ 35.

¶ 20 Paragraphs 22 and 23 of Nissan's first amended complaint pertained to its claim that Joseph breached the guaranty agreement (count III). As discussed, paragraph 22 alleged that "[o]n or about February 26, 2007, [Joseph] made, signed, and delivered to [Nissan] a certain Continuing Guaranty Agreement (`Guaranty') in writing, whereby he promised and agreed promptly to pay any and all liabilities of [Abbas Holding] to [Nissan] then existing or due or to be incurred or become due." In Abbas Holding and Joseph's verified answer, Joseph "denies the allegations contained within [p]aragraph 22 of [Nissan's] First Amended Complaint, except the allegation that on or about February 26, 2007, he made, signed, and delivered to [Nissan] a certain Continuing GuarantyAgreement (`Guaranty') in writing, subject to the production and examination of the original document." (Emphasis added.) Paragraph 23 of Nissan's first amended complaint alleged that the guaranty agreement "was continuing, absolute, and unconditional, including all costs and expenses in enforcing the Guaranty. (A copy of the Guaranty is attached hereto as Exhibit D.)" In Abbas Holding and Joseph's verified answer, Joseph "denies the allegations contained within [p]aragraph 23 of [Nissan's] First Amended Complaint, except the allegation that [Nissan] has attached a copy of theGuaranty as Exhibit D." (Emphasis added.)

¶ 21 We find that the italicized and "excepted" portions of Joseph's answers were not explicit denials of the allegations under section 2-610 of the Code and, thus, constituted admissions that Joseph had signed and delivered the guaranty agreement to Nissan and that a copy of the guaranty agreement was attached to Nissan's first amended complaint as an exhibit. Because Abbas Holding and Joseph do not argue that these admissions in the verified answer were the product of mistake or inadvertence, we find them to be binding judicial admissions which had "the effect of discharging the need for any further proof" to prove the existence of the guaranty agreement, as the trial court correctly noted in its April 12, 2011 ruling which granted Nissan's motion to reconsider. Accordingly, Nissan was not required to produce the original guaranty agreement at trial under the best evidence rule, and Joseph's answer to the allegations under paragraph 22 that his admission was made "subject to the production and examination of the original document" had absolutely no legal effect upon Nissan. See Beverly Bank,134 Ill. App. 3d at 704, 481 N.E.2d at 57 (holding that personal guarantor's verified answer admitting plaintiff's allegations that a guaranty had been signed and delivered constituted a binding admission against personal guarantor); see generally In re Estate of Weiland, 338 Ill. App. 3d 585, 604, 788 N.E.2d 811, 827 (2003) (best evidence rule requires the existence of a contract or other writing to be proven by the original writing unless it is shown that the original was lost, destroyed, or otherwise unavailable)."


Comment: it is important to carefully consider any answer to any pleading. An answer that admits a paragraph of a verified complaint should usually be binding on the person making the admission, especially here where sophisticated people borrowed money from a finance company. This is a good decision.


Edward X. Clinton, Jr.

www.clintonlaw.net

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For What It's Worth: Two articles in today's Law Bulletin suggest struc...

For What It's Worth: Two articles in today's Law Bulletin suggest struc...: Today's Chicago Daily Law Bulletin carries two articles that expose what may be a structural flaw in the legal profession itself. Too big...

Jack Leyhane points out today that (a) more lawyers are being created every year and (b) the demand for legal services is shrinking.  Worse still, lots of people who could pay for lawyers are now opting to litigate pro se.

He is, of course, correct about these long-term trends in the profession.  I graduated in 1991 and joined Mayer Brown in 1992.  From the first day I was there, it became obvious that there were extra people at the firm, people who were billing time to clients but who were not doing any real work.  The recession in 2008  obviously caused the corporations to notice that they were paying for extra people - lots of extra people.  The corporations became smart - they learned how to cut outside lawyers and bring the work in house or to handle the work very efficiently.  Lawyers who were used to attending team meetings were laid off never to return to the corridors of the large law firms.

The new problem is outsourcing - lots of work can be done competently by outsourcing firms in India and elsewhere.  The routine legal work that employed lots of people is slowly drying up - at least at the corporate level.

This all spells trouble for the law students who have graduated in the past 10 years.  While we produced too many lawyers in 1991, we now produce 2X as many lawyers as there are jobs to fill.  This means misery and unpaid debt for lots of young people.

It also suggests that the law schools have been graduating students who were not qualified to practice law and that this process (social promotion) has caused great harm to the profession.  It is difficult to quantify the number of people who graduate each year and do not have the skills necessary to practice.  What is beyond dispute is that this number is growing, even with an increase in law school tuition and more and more clinical programs.

Edward X. Clinton, Jr.

www.Clintonlaw.net

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Insurance Coverage - State Farm Prevails Because Policyholders No Longer Live In Residence

SCHUCHMAN v. STATE AUTO PROPERTY AND CASUALTY INSURANCE COMPANY, Dist. Court, SD Illinois 2012 - Google Scholar:

State Farm has won summary judgment in a coverage case.  The plaintiffs purchased homeowners insurance and then made the mistake of moving out to a mobile home.  The residence sustained fire damage and they submitted a claim to State Farm, which denied coverage.

The District Court agreed with State Farm and granted summary judgment.  Because the insurance contract limited State Farm's obligation to insure a "residence," plaintiff's had no claim.

This type of result occurs all the time in the world of insurance coverage - plaintiff buys insurance only to realize that when there is a claim, he has no insurance.

Edward X. Clinton, Jr.


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Insured Prevails In Coverage Fight With Progressive Insurance

PROGRESSIVE DIRECT INSURANCE COMPANY v. JUNGKANS, Ill: Appellate Court, 2nd Dist. 2012 - Google Scholar:

This case was recently decided by the Illinois Appellate Court, Second District.

The defendant, Kyle Jungkans, was seriously injured in a motor vehicle accident, while he was riding in a car driven by Billy Watts.

Jungkans settled with State Farm, Watts' insurer, for the policy limits, then sought underinsured motorist coverage under his policy with Progressive Direct.  Progressive denied coverage on the basis that Jungkans' failure to give notice to Progressive before the settlement violated the cooperation clause.  The trial court granted Progressive summary judgment, but the Appellate Court reversed.

Jungkans conceded that he violated the Progressive policy by failing to give notice to Progressive.  However, Progressive was not prejudiced by the settlement because Watts was judgment proof at the time of the accident.  Moreover, Progressive was aware of its subrogation rights before Jungkans entered into the settlement with State Farm.

The Court explains:

As to the knowledge issue:

"¶ 19 We agree with defendant that there is no genuine dispute that State Farm knew in advance of the settlement that plaintiff had a subrogation right against Watts and that this was sufficient to defeat the invocation of the cooperation clause. Bell said plainly that she knew in advance of plaintiff's subrogation right. Although this statement was a conclusion, it hardly required elaboration; Bell would have known whether she had been aware of plaintiff's subrogation right, a routine fact of insurance litigation. Under the case law, that was sufficient. Thus, there is no genuine issue of fact as to whether plaintiff retained its subrogation right, especially as, per Richter, it was ultimately plaintiff's burden to prove that defendant's settlement cut off that right."


As to the prejudice issue, there was no prejudice because the defendant in the underlying case was judgment proof.


"¶ 25 Numerous jurisdictions have held that an insurer may not rely on a technical violation of a cooperation clause to deny coverage if the tortfeasor with whom the insured settled was judgment-proof."


The opinion cites the many cases siding with the insured.


Edward X. Clinton, Jr.


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Contract Law - Personal Guaranty Enforced in Illinois

The case is a routine collection case for $5,000.  The legal issue is important: the enforceability of a personal guaranty.

TH Davidson and Company v. Eidola Concrete, LLC and Thomas E. Kilbride, 2012 Il App (3d) 110641.

The case originated in small claims court.  Plaintiff sought to recover on a line of credit for $5,600.80.  The trial court entered judgement in that amount against Plaintiff, and against Kilbride, who signed a personal guaranty.

Kilbride appealed on the ground that his guaranty was limited to $1,000.  He based this argument on the original credit application, which he signed as a personal guarantor.  The original credit application was for $1,000.  Later, the parties, through a course of dealing, increased the credit limit to $5,600.

The trial court and the appellate court found that the guaranty was a continuing guaranty.  The opinion at Paragraph 11 quotes the Restatement (Third) of Suretyship and Guaranty § 16: "A continuing guaranty is a contract pursuant to which a person agrees to be a secondary obligor for all future obligations fo the principal obligor to the obligee."  Because the parties contemplated a "future course of dealing" the guaranty was for the maximum amount of credit extended.

Kilbride could have also limited the guaranty by inserting express language into the credit application.  He did not.  Therefore, the guaranty was unlimited.

Comment: clients should never sign a continuing guaranty.  Limiting language should always be inserted.  That being said, my experience is that clients sign these documents all the time and do not consider the consequences until it is too late.

Edward X. Clinton, Jr.

www.clintonlaw.net

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Illinois Court Rejects Challenge To Written Settlement Agreement

Schrager v. Bailey, Ill: Appellate Court, 1st Dist., 1st Div. 2012 - Google Scholar:

This is an odd case in which the plaintiff settled with the defendant, signed a written settlement agreement and release, and then sued again.

The court dismissed the claims in the second case.

The court described the settlement in case No. 1 as follows:

"¶ 5 In 2002, plaintiff Schrager filed a legal malpractice suit against the defendants and attorney James T. Hynes.^[1] The suit alleged that the defendants committed legalmalpractice when they took a voluntary dismissal of a federal suit they had filed on plaintiff Schrager's behalf. The suit was refiled in the circuit court of Cook County only to be dismissed with prejudice based on the single-refiling rule.

¶ 6 In June 2006, plaintiff Schrager agreed to dismiss the malpractice suit and settle his claim against the defendants based on their representation that they had relied on advice from attorney Hynes in deciding to dismiss the federal suit. As part of the settlement negotiations, plaintiff Schrager requested affidavits from the defendants to support their representation. The Agreement provided in pertinent part as follows:

"13. NO CONDITIONS PRECEDENT: Each of the parties to this Agreement acknowledges that no conditions precedent and no promise, inducement, or agreement not stated herein has been made to them in connection with this Agreement except that it is expressly agreed and understood that this Agreement is contingent upon the entry of an order granting Defendants' motion for Good Faith Finding in the Lawsuit.

14. INTEGRATION AND NO RELIANCE CLAUSE//AMENDMENT: This Agreement and the exhibits attached hereto constitute the entire understanding and agreement of the parties hereto and supercede any and all other written or oral agreements, representations or understandings. No representations, inducements, promises or agreements, oral or written have been made by SCHRAGER or Releasees or anyone acting on behalf of Releasees which are not contained herein, and any prior letters of intent, agreement, promises, negotiations, statements or representations not expressly set forth in this Agreement have not been relied upon in any respect and shall be of no force or effect. SCHRAGER agrees and warrants that in entering into this Agreement, SCHRAGER is solely relying upon the information contained in this Agreement and not in reliance upon any other information. No modification, amendment or alteration to this Agreement shall be effective unless in a writing signed by the Parties hereto."

The Agreement also contained an acknowledgment by the parties that they received independent legal advice as to the "effect and import" of its provisions. By June 30, 2006, the Agreement had been signed by all parties.

¶ 7 On July 6, 2006, the circuit court found the Agreement had been made in good faith and dismissed plaintiff Schrager's claims against the defendants."

...

The court holds: "¶ 34 We conclude that the integration/nonreliance clause in the Agreement precluded plaintiff Schrager from proving justifiable reliance, which was fatal to his cause of action for fraud."

I have printed the clauses in the well-drafted settlement agreement to show how good lawyers can draft such clauses to avoid future claims.

Edward X. Clinton, Jr.

www.clintonlaw.net

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Insurance Company Has No Duty To Defend Stranger Operating Insured's Car

MERCURY INSURANCE COMPANY OF ILLINOIS v. SMOROVSKY, Dist. Court, ND Illinois 2012 - Google Scholar:

The court granted summary judgment to the insurance company on the ground that the driver of the car, Smorovsky, did not have permission to use the vehicle.  The opinion does not explain how Smorovsky managed to get the car started, whether he had a key or whether the car had been stolen.  There is a hint that Smorovsky was a garage attendant where the car was garaged.

In any event, because he was not an insured under the policy, Smorovsky had no coverage and the insurance company had no duty to defend.

Edward X. Clinton, Jr.

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Insurance Coverage - Ohio Court Holds That Trial Court Should Not Have Considered Mediation Proceedings

Kuhn v. 21st Century Ins. Co., 2012 Ohio 2598 - Ohio: Court of Appeals, 5th Appellate Dist. 2012 - Google Scholar:


This is an insurance coverage case arising out of an auto accident.  The parties went to mediation.  The mediation was unsuccessful.  The trial court then granted the defendant's motion to dismiss the complaint.


Mediation is confidential and non-binding.  The trial court apparently relied on facts that it learned during the mediation and dismissed the complaint.  The Ohio Appellate court reversed: "We hold, under the circumstances presented in this case, the trial court committed reversible error in utilizing the mediation process as a means of considering matters outside of the pleadings in order to rule on appellee's motion to dismiss under Civ.R. 12(B)(6)."


Edward X. Clinton, Jr.

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Insurance Coverage - No Coverage Where Policy Lapses

This case is captioned Edward v. State Farm Insurance Company, 2012 Ill. App (1st) 112176.

Plaintiff brought suit against State Farm for breach of contract and specifically for failing to pay damages arising from an auto accident that occurred after the insurance policy lapsed and was cancelled for nonpayment.  State Farm brought a declaratory judgment counterclaim alleging that there was no duty to cover an accident that occurred when the policy was not in force.

While this would appear to be an obvious defense to a payment, the Circuit Court of Cook county found that State Farm had "waived" its defense to coverage by reinstating the policy when the premium was eventually paid.  The Circuit Court, Judge Pamela E. Hill Veal,  also found that State Farm acted in bad faith and awarded $50,000 in punitive damages.

State Farm refunded her the premium for the period when the policy was not in force.  State Farm reinstated the policy but refused to provide retroactive coverage.

The Appellate Court reversed on the ground that (a) plaintiff breached the contract by failing to pay the premium on time; (b) State Farm declined to offer retroactive coverage and did not waive its rights.  State Farm also provided a clear and unequivocal cancellation notice.

Comment: State Farm should not have had to go to the Appellate Court to have this decision reversed.

Edward X. Clinton, Jr.

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Third Circuit Rules Against Allstate In Coverage Dispute

ALLSTATE PROPERTY AND CAS. INS. CO. v. Squires, 667 F. 3d 388 - Court of Appeals, 3rd Circuit 2012 - Google Scholar:

Squires was injured in an accident and sought insurance coverage under the uninsured motorist clause of his automobile insurance policy.  The case was governed by Pennsylvania law.  The trial court ruled in favor of Allstate, but the Third Circuit reversed.  Squires was injured by a box dropped from another vehicle which caused him to have a car accident.

The court summarized the issue as follows: "Accordingly, the sole issue that the Court decided was "whether an accident caused by a box which fell from an uninsured motor vehicle can be attributed, as a matter of law, to the `ownership, maintenance or use' of an automobile." App. at 5. The Court answered this question in the negative, concluding that there is UM coverage for policies containing the "arising out of" language only when a vehicle—and not some other object such as the box—was "the instrumentality causing . . . the [a]ccident." App. at 11. Accordingly, on March 2, 2011, the Court granted Allstate's motion for judgment on the pleadings, denied its motion to dismiss the counterclaims as moot, and dismissed Squires's counterclaims as moot."


The third circuit disagreed on the ground that because the box was dropped from another vehicle, the accident was attributed to the "ownership, maintenance or use" of an automobile.  Because Allstate conceded that the accident was caused by a box dropped from another vehicle, the accident was caused by the "ownership, maintenance or use" of an automobile.


Edward X. Clinton, Jr.




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