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05/18/95 HERMITAGE CORPORATION ET AL. v.

May 18, 1995

HERMITAGE CORPORATION ET AL., APPELLANTS,
v.
CONTRACTORS ADJUSTMENT COMPANY ET AL., APPELLEES.



The Honorable Justice Nickels delivered the opinion of the court: Justice Freeman, dissenting: Chief Justice Bilandic joins in this dissent.

The opinion of the court was delivered by: Nickels

JUSTICE NICKELS delivered the opinion of the court:

In this appeal, we are asked to decide whether several statutes of limitations should be tolled by application of the discovery rule. On January 9, 1991, plaintiffs, Hermitage Corporation and Robert Racky, filed a four-count complaint in the circuit court of Cook County against defendants, Contractors Adjustment Company and George Strickland. In the complaint, plaintiffs alleged negligence (count I), negligent and unauthorized practice of law (count II), consumer fraud (count III), and breach of warranty (count IV), arising from defendants' preparation of a mechanics lien. Defendants filed a motion to dismiss all four counts pursuant to section 2-619(a)(5) of the Code of Civil Procedure (Ill. Rev. Stat. 1991, ch. 110, par. 2-619(a)(5)), arguing that all four counts were barred by the pertinent statutes of limitations. The circuit court denied the motion but certified the questions for interlocutory appeal. (134 Ill. 2d R. 308.) The appellate court granted leave to appeal and reversed, finding that all counts in the complaint were barred. The appellate court issued a certificate of importance, pursuant to Supreme Court Rule 316 (134 Ill. 2d R. 316).

BACKGROUND

This action arises from the allegedly improper preparation of a mechanics lien. Plaintiffs in this action are Hermitage Corporation, a plumbing contractor, and Robert Racky, its principal stockholder. Defendants are Contractors Adjustment Company, which is in the business of recording liens and protecting lien rights, and George Strickland, the company's owner. According to the complaint, plaintiffs performed plumbing construction work on a multiple-unit condominium building. Plaintiffs then allegedly asked defendants, who are not attorneys, to prepare and record a mechanics lien against the property on plaintiffs' behalf. Defendants recorded a lien against the property on January 29, 1985.

Subsequently, plaintiffs sought to enforce this mechanics lien in a foreclosure suit, seeking a total of $93,427.18. On July 16, 1987, however, the circuit court entered an order reducing the lien to $17,332. Plaintiffs filed a motion to reconsider the reduction of the mechanics lien, but this motion was denied on March 16, 1989.

On January 9, 1991, plaintiffs filed the complaint in this case. In the complaint, plaintiffs allege that they received only $17,332 in the earlier foreclosure suit because defendants improperly prepared the lien. Specifically, as alleged in the complaint, plaintiffs performed plumbing work on each individual unit in a 72-unit condominium building. In preparing the mechanics lien, defendants were required to allocate the lien amount among the individual units in the condominium but failed to do so. Defendants failed to indicate the amount of work performed on each unit and the time period during which the work was performed. Because of this failure to allocate, plaintiffs did not receive the face value of the lien, which represented the value of the work actually performed. Plaintiffs also allege in the complaint that the negligence, negligent and unauthorized practice of law, and breach of warranty counts accrued on March 16, 1989, when the motion for reconsideration in the earlier foreclosure suit was denied. In response, defendants filed a motion to dismiss each count based on the applicable statutes of limitations. In the motion to dismiss, defendants contend that all counts accrued on January 29, 1985, the date the mechanics lien was recorded.

The parties agree as to the pertinent statute of limitations for each count. Counts I, II, and IV, alleging negligence, negligent and unauthorized practice of law, and breach of warranty, arise from an oral contract for services, and a five-year statute of limitations applies to these counts. (See Ill. Rev. Stat. 1989, ch. 110, par. 13-205.) Count III alleges consumer fraud and a three-year statute of limitations applies to this count. (See Ill. Rev. Stat. 1989, ch. 121 1/2, par. 270a(e).) Although the parties agree as to the pertinent statutes of limitations, they do not agree as to when these limitations periods commence.

After a hearing on the motion to dismiss, the circuit court denied the motion but certified three questions for interlocutory appeal. The appellate court was asked to determine whether the statute of limitations for each count commenced on: (1) January 29, 1985, when the mechanics lien was recorded; (2) July 16, 1987, when the mechanics lien was reduced as a part of the foreclosure action; or (3) March 16, 1989, when the motion to reconsider in the earlier foreclosure suit was denied. The appellate court found that each statute of limitations began to run on January 29, 1985, when the mechanics lien was recorded. Because plaintiffs did not file the complaint until 1991, the appellate court held that each count was barred.

I. The Discovery Rule

On appeal, plaintiffs argue that they were unaware the mechanics lien was defective in 1985, when the lien was recorded. Plaintiffs contend that they did not become aware of a defect in the lien until they tried to enforce the lien in court. Plaintiffs therefore argue that this court should apply the discovery rule to delay the commencement date of the statutes of limitations.

In contrast, defendants argue that counts I and II (negligence and unauthorized practice of law) involve torts arising from contract, and such actions ordinarily accrue when the contract is breached. According to defendants, the contract in this case was allegedly breached in January 1985, when the lien was prepared and recorded. Defendants also contend that the acts and alleged breach of contract supporting counts III and IV (consumer fraud and breach of warranty) occurred in January 1985, again when the lien was prepared and recorded, and the statute of limitations should start to run from that time. Defendants argue that the discovery rule should not be applied to these type actions.

We note that the limitations periods for tort and contract actions traditionally have been treated differently. For most torts, the cause of action usually accrues when the plaintiff suffers injury. ( West American Insurance Co. v. Sal E. Lobianco & Son Co. (1977), 69 Ill. 2d 126, 129-30, 12 Ill. Dec. 893, 370 N.E.2d 804; see Cassidy v. Derek Bryant Insurance Brokers, Ltd. (1993), 244 Ill. App. 3d 1054, 1064, 184 Ill. Dec. 609, 613 N.E.2d 1201.) For contract actions and torts arising out of contractual relationships, though, the cause of action ordinarily accrues at the time of the breach of contract, not when a party sustains damages. ( Lobianco, 69 Ill. 2d at 132.) The reason for this distinction is the concern that plaintiffs will delay bringing suit after a contract is breached in order to increase damages. Lobianco, 69 Ill. 2d at 132.

Literal application of the statute of limitations, however, sometimes produced harsh results, and in response, the discovery rule was developed. When the discovery rule is applied, it "delays the commencement of the relevant statute of limitations until the plaintiff knows or reasonably should know that he has been injured and that his injury was wrongfully caused." ( Jackson Jordan, Inc. v. Leydig, Voit & Mayer (1994), 158 Ill. 2d 240, 249, 198 Ill. Dec. 786, 633 N.E.2d 627.) This rule developed to avoid mechanical application of a statute of limitations in situations where an individual would be barred from suit before he was aware that he was injured. This court first applied the rule in Rozny v. Marnul (1969), 43 Ill. 2d 54, 250 N.E.2d 656, and discussed the circumstances in which the rule should be applied:

"The basic problem is one of balancing the increase in difficulty of proof which accompanies the passage of time against the hardship to the plaintiff who neither knows nor should have known of the existence of his right to sue. There are some actions in which the passage of time, from the instant when the facts giving rise to liability occurred, so greatly increases the problems of proof that it has been deemed necessary to bar plaintiffs who had not become aware of their rights of action within the statutory period as measured from the time such facts occurred. [Citations.] But where the passage of time does little to increase the problems of proof, the ends of justice are served by permitting plaintiff to sue within the statutory period computed from the time at which he knew or should have known of the existence of the right to sue. [Citations.]" Rozny, 43 Ill. 2d at 70.

Courts have applied the discovery rule on a case-by-case basis, weighing the relative hardships of applying the rule to both plaintiffs and defendants. The discovery rule has also been incorporated in several statutes of limitations (see, e.g., Ill. Rev. Stat. 1991, ch. 110, par. 13-212 (medical malpractice); par. 13-213 (product liability)) and is generally treated the same whether created by common law or by statute. The common law discovery rule, however, will not be applied where there is a contrary indication of legislative intent ( Lipsey v. Michael Reese Hospital (1970), 46 Ill. 2d 32, 38-40, 262 N.E.2d 450), such as a statute of repose, which places an absolute outer time limit on when an action can be brought. The pertinent statutes of limitations in this case do not contain such an outside limit.

Since Rozny, Illinois courts have applied the discovery rule in a wide variety of actions to postpone the running of the statute of limitations. ( Knox College v. Celotex Corp. (1981), 88 Ill. 2d 407, 414, 58 Ill. Dec. 725, 430 N.E.2d 976; Witherell v. Weimer (1981), 85 Ill. 2d 146, 154-55, 52 Ill. Dec. 6, 421 N.E.2d 869.) This court has applied the discovery rule to several actions, involving the five-year limitations period of section 13-205, that could be characterized as torts arising from contract. ( Knox, 88 Ill. 2d 407, 58 Ill. Dec. 725, 430 N.E.2d 976 (tortious misrepresentation and fraud arising from a roofing contract); Jackson Jordan, 158 Ill. 2d 240, 198 Ill. Dec. 786, 633 N.E.2d 627 (legal malpractice arising from an attorney-client contract); Superior Bank FSB v. Golding (1992), 152 Ill. 2d 480, 178 Ill. Dec. 720, 605 N.E.2d 514 (misrepresentation and negligence arising in connection with a commercial mortgage loan).) We also note that the appellate court has applied the discovery rule to consumer fraud actions. See Bradley v. Alpine Construction Co. (1991), 224 Ill. App. 3d 432, 166 Ill. Dec. 695, 586 N.E.2d 653; Sommer v. United Savings Life Insurance Co. (1984), 128 Ill. App. 3d 808, 84 Ill. Dec. 77, 471 N.E.2d 606.

In these cases, the courts have been more concerned with whether the underlying facts support application of the discovery rule than how the action was characterized. An injured party may be unaware of an injury and its wrongful cause whether the action is deemed to involve tort, tort arising from contract, or other breach of contractual duty. (See Cassidy, 244 Ill. App. 3d at 1064; Commonwealth Edison Co. v. Encompas, Inc. (1987), 158 Ill. App. 3d 852, 856-58, 110 Ill. Dec. 811, 511 N.E.2d 988.) The reasons behind the discovery rule may support application regardless of how an action is characterized.

In this case, both parties agree that plaintiffs were, in fact, unaware of the alleged defect in the mechanics lien in 1985, when the lien was prepared and recorded. Plaintiffs' failure to be aware of an alleged defect is understandable given the technical and complex nature of Illinois law regarding mechanics liens. (See Ill. Rev. Stat. 1989, ch. 82, par. 1 et seq.) Plaintiffs, as laymen, could not be expected to identity defects in a mechanics lien that would lead to a substantial reduction in the lien. Plaintiffs would have no reason to know that the lien was improperly prepared until they actually sought to enforce the lien. Plaintiffs would have no reason to know that they were injured or that this injury was wrongfully caused until they attempted to enforce the mechanics lien. Defendants have not suggested that problems of proof have increased significantly because of the passage of time.

Defendants argue that, even if the discovery rule may be applied generally to these types of actions, the rule should not be applied in this instance. Defendants argue that plaintiffs' injury was known to plaintiffs in 1987, when the circuit court reduced the mechanics lien. According to defendants, if the statutes of limitations had commenced when the lien was recorded in 1985, the statutes would have run in 1990 on counts I, II, and IV, and in 1988 on count III. Thus, defendants argue, when plaintiffs became aware of their injury in 1987, plaintiffs still had 2 1/2 years remaining in which to file three of the counts and one-half of a year remaining on the consumer fraud count. Defendants argue that the discovery rule does not apply when an injured party has a reasonable period of time remaining in the limitations period, as measured from the time of the breach or act causing injury, within which to file a complaint (the "reasonable time" rule).

We note that a split exists in the appellate court on this issue. Several panels have agreed with defendants' "reasonable time" rule and held that the discovery rule applies only when discovery occurs after the statute of limitations has run or has nearly run, as measured from the time of breach or act causing injury. (See, e.g., Van Gessel v. Folds (1991), 210 Ill. App. 3d 403, 407-08, 155 Ill. Dec. 141, 569 N.E.2d 141; Dolce v. Gamberdino (1978), 60 Ill. App. 3d 124, 127-29, 17 Ill. Dec. 274, 376 N.E.2d 273.) In Dolce, 60 Ill. App. 3d at 128, the appellate court stated:

"The discovery rule is the exception to the traditional rules, to be applied only when the discovery occurs after the statute of limitations has run or when discovery occurs at a time so near the running that the action, for all practical ...


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