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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