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Henderson Square Condominium Association v. Lab Townhomes, L.L.C.

Court of Appeals of Illinois, First District, Fifth Division

March 21, 2014

HENDERSON SQUARE CONDOMINIUM ASSOCIATION, an Illinois Not-For-Profit Corporation, and THE BOARD OF MANAGERS OF THE HENDERSON SQUARE CONDOMINIUM ASSOCIATION, as Representative and on Behalf of the Henderson Square Condominium Association, Plaintiffs-Appellants,
v.
LAB TOWNHOMES, L.L.C.; LAB LOFTS, L.L.C.; LINCOLN ASHLAND AND BELMONT, L.L.C.; ENTERPRISE DEVELOPMENT COMPANY, INC.; RONALD SHIPKA, SR.; RONALD SHIPKA, JR.; and JOHN SHIPKA, Defendants-Appellees

Modified opinion filed upon denial of rehearing July 18, 2014

Page 198

[Copyrighted Material Omitted]

Page 199

As Corrected.

Appeal from the Circuit Court of Cook County, No. 11-L-011320. The Honorable Ronald F. Bartkowicz, Judge, presiding.

SYLLABUS

In an action alleging the breach of the warranty of habitability, fraud, negligence, the breach of the Chicago Municipal Code's prohibition against misrepresenting material facts in the course of marketing real estate, and the breach of fiduciary duty in connection with the sale of condominiums developed by defendants, the trial court's dismissal of plaintiffs' complaint as time-barred and failing to state a cause of action as to the last two counts was reversed and the cause was remanded for further proceedings, since the fraud exception to the statute of limitations set forth in section 13-214(e) of the Code of Civil Procedure was triggered by defendants' action with regard to the defects discovered in the construction of the condominiums and causes of action were adequately pled in the last two counts with respect to defendants' failure to provide adequate reserve funds for the repairs necessary to correct the defective construction.

Geoffrey A. Bryce and Tina M. Paries, both of Bryce Downey & Lenkov, LLC, of Chicago, for appellants.

Shorge Sato, of Brown Udell Pomerantz Delrahim, Ltd., of Chicago, for appellees.

PRESIDING JUSTICE GORDON delivered the judgment of the court, with opinion. Justice Taylor concurred in the judgment and opinion. Justice Palmer specially concurred, with opinion.

OPINION

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GORDON, J.

[¶1] Plaintiffs Henderson Square Condominium Association (Henderson) and Henderson's board of managers (the Board) filed a five-count complaint, arising from the sale of condominium units to plaintiffs by defendant developers. Plaintiffs allege the following causes of action: (1) breach of the implied warranty of habitability; (2) fraud; (3) negligence; (4) breach of the Chicago Municipal Code's prohibition against misrepresenting material facts in the course of marketing and selling real estate (Chicago Municipal Code § 13-72-030)[1]; and (5) breach of a fiduciary duty.

[¶2] Defendants' first motion to dismiss was pursuant to section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619 (West 2010)), and addressed only the causes of action for breach of implied warranty of habitability, fraud, and negligence, which were counts I, II, and III of plaintiffs' complaint. Defendants argued that these causes of action were time-barred pursuant to section 13-214 of the Code of Civil Procedure (735 ILCS 5/13-214 (West 1996)[2] (providing a 4-year statute of limitations for construction-based claims and a 10-year statute of repose for construction-based claims)). The trial court granted defendants' motion and dismissed the first three counts with prejudice, but also granted plaintiffs leave to replead only counts IV and V,[3] which were for breach of the Chicago Municipal Code and breach of a fiduciary duty.

[¶3] Plaintiffs filed an amended complaint, which included all five of the original counts, but noted that they were repleading the first three counts solely to preserve them for appeal. Defendants then filed a second motion to dismiss pursuant to both sections 2-615 and 2-619 of the Code of Civil Procedure (735 ILCS 5/2-615, 2-619 (West 2010)), arguing that count IV failed to plead a cause of action for breach of the Chicago Municipal Code and that all of plaintiffs' causes of action were time-barred pursuant to section 13-214 of the Code of Civil Procedure (735 ILCS 5/13-214 (West 1996)). On October 31, 2011, when plaintiffs filed the lawsuit, the Chicago Municipal Code had recently been amended, and the parties disagree as to which version of the Chicago Municipal Code applies. The parties also disagree about when construction was completed, with defendants arguing that it was complete in 1996 and plaintiffs arguing that the date occurred much later.

[¶4] The trial court granted defendants' second motion to dismiss with prejudice, finding that plaintiffs failed to plead counts

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IV and V adequately and that these counts were time-barred. Although defendants moved to dismiss only count IV as failing to allege a cause of action, the trial court also found that count V failed to allege a cause of action. In their amended notice of appeal, plaintiffs appeal both the trial court's order on May 10, 2012, dismissing counts I, II, and III, and its order of February 8, 2012, dismissing counts IV and V. However, in its brief before this court, plaintiff is only appealing the dismissal of counts IV and V. For the following reasons, we reverse.

[¶5] BACKGROUND

[¶6] I. Original Complaint

[¶7] A. Factual Allegations

[¶8] Plaintiffs Henderson and Henderson's Board filed their initial complaint on October 31, 2011, in which they allege the following. Henderson is an Illinois not-for-profit corporation with its principal place of business located in Chicago. Henderson is the governing body of a property of townhomes located in Chicago, and Henderson is controlled by its Board, which is comprised of elected managers.

[¶9] Defendants can be divided into three groups that we refer to as (1) the development companies, (2) Enterprise, and (3) the Shipkas. The development companies are defendants LAB Townhomes, LAB Lofts, and Lincoln, Ashland, & Belmont, which are limited liability companies incorporated in Delaware. Defendant Enterprise Development Company (Enterprise) is an Illinois corporation with its principal place of business in Chicago. The Shipkas are defendants Ronald Shipka, Sr., Ronald Shipka, Jr., and John Shipka, who are individuals residing in Cook County.

[¶10] Plaintiffs' original complaint alleges that the Shipkas are in the business of developing residential property, and they own, manage, and operate Enterprise. Plaintiffs further allege that Enterprise represented on its website that it is the " largest and most respected developer" in the Chicago area due to, among other things, its " commitment to rigid quality standards." The Shipkas were chosen by the City of Chicago to be the developers for a project known as the " Lincoln-Belmont-Ashland Redevelopment Project Area." " On information and belief," the Shipkas then formed the development companies. The development companies entered into a contract with the City of Chicago to construct a mixed use project,[4] which included retail space, a parking structure, loft condominiums, and townhouses for $7.5 million. " On information and belief," the development companies entered into an agreement with Enterprise, under which Enterprise would " perform general contracting services to construct the Project or perform other services to assist with the development of the Project."

[¶11] Prior to the completion of the project, Henderson was established as a condominium association pursuant to the Condominium Property Act (765 ILCS 605/1 et seq. (West 1996)) and its creation was recorded with the Cook County recorder of deeds. On June 20, 1996, Henderson was incorporated with the Illinois Secretary of State. The Shipkas designated themselves as Henderson's first board of managers, and during their time as managers, the Shipkas controlled all of Henderson's funds. The Shipkas turned over control to the first elected Board sometime in 1996.

[¶12] Plaintiffs allege that defendants began to market and sell individual units of

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the project in 1996, and, in doing so, they " represented and impliedly warranted that the Property and the Units would be habitable and free from defects." Plaintiffs further allege that the development companies sold the units with a form sales contract, which included a provision stating that the common elements of the project and the units would be " constructed substantially in accordance with the plans and specifications." After the project was completed and owners began to occupy the units, certain units began to experience water seepage and resulting damage.

[¶13] The Board retained Warton, Inc. (Warton), an exterior restoration consultant and engineer, to investigate the water problem.[5] Warton prepared a report of its findings in which it concluded that " significant" amounts of water were entering into certain units at various locations, including various exterior wall components. Warton further concluded that the " overall quality of construction detailing and workmanship at the specific areas that were investigated was very poor" and that the water penetration problems would be " very difficult, if not impossible," to mitigate unless there was substantial reconstruction of the units.

[¶14] After the Board reviewed the Warton report, it retained a contractor to solve the problem.[6] In the course of his work, the contractor confirmed that there were " a significant number of deficiencies with the original construction." The contractor reported that the coping[7] leaked, the masonry lacked mortar, there was no flashing or drainage system, the lintels[8] and sills were not sealed, and the roofing systems were defective. Plaintiffs allege that the defects identified by Warton and the contractor could not have been discovered without performing extensive testing of the units or opening up the walls of the common areas and units; " [t]he defects were concealed and, as such, they were not reasonably discoverable to the Unit owners who did not possess special knowledge or skill in the field of construction."

[¶15] Plaintiffs allege that defendants did not construct the units in a " workmanlike manner or in accordance with the plans and specifications as required." Plaintiffs allege that, " on information and belief," the development companies and Enterprise " knowingly failed" to comply with the plans and specifications, cutting costs for the purpose of realizing greater profits from the city contract.

[¶16] B. Count I--Breach of Implied Warranty of Habitability

[¶17] Plaintiffs first allege a cause of action for breach of implied warranty of habitability against Enterprise and the development companies, but not against the Shipkas. Plaintiffs allege that, in selling

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the project and the units, defendants impliedly warranted that the units and common areas were " suitable for the use and purpose for which they were intended, namely, as a residence." Defendants breached the implied warranty by " knowingly developing, constructing, and selling the Property with defects in design, workmanship, and materials." These defects caused the units to be unfit and not reasonably suitable for their intended residential use. Plaintiffs allege that these defects were latent defects at the time of sale and were not reasonably discoverable by the unit owners. Plaintiffs were required to make substantial repair work and would continue to be required to make further substantial repairs.

[¶18] C. Count II--Fraud

[¶19] Plaintiffs next allege fraud against all defendants. Plaintiffs allege that the Shipkas, through Enterprise and the development companies, were aware that the project was being developed and constructed as a residential property and that it would eventually be sold to unit owners as residences. Defendants represented that the project would be constructed in accordance with plans and specifications, and the common areas and units would be free from defects. However, the project was not constructed in accordance with the plans and specifications, and the common areas and units contained " multiple and significant" defects. Defendants made their representations knowing them to be false, or with a complete disregard for their truth or falsity. Defendants made these representations for the purpose of inducing prospective purchasers to purchase units.

[¶20] D. Count III--Negligence

[¶21] Plaintiffs next allege negligence against defendants Enterprise and the development companies, but not the Shipkas. Plaintiffs allege that Enterprise and the development companies owed a duty to Henderson and the unit owners to develop and construct the project and units in accordance with the plans and specifications, and to construct the project and units to be free from defects. Plaintiffs further alleged that Enterprise and the development companies breached their duty " by constructing the [project] and Units with defects in design, workmanship, and materials."

[¶22] E. Count IV--Breach of Chicago Municipal Code

[¶23] Plaintiffs next allege that defendants Enterprise and the development companies, but not the Shipkas, breached section 13-72-030 of the Chicago Municipal Code (the Municipal Code), which states: " No person shall with the intent that a prospective purchaser rely on such act or omission, advertise, sell or offer for sale any condominium unit by (a) employing any statement or pictorial representation which is false or (b) omitting any material statement or pictorial representation." Chicago Municipal Code § 13-72-030 (amended Jan. 26, 1993). In the course of selling the units, Enterprise and the development companies represented that the project and the units would be constructed in accordance with the plans and specifications, and would be free from defects. Section 13-72-100 of the Municipal Code states that " any prospective purchaser, purchaser or owner of a unit" may bring an action to enforce section 13-72-030. Chicago Municipal Code § 13-72-100 (amended Jan. 26, 1993).

[¶24] F. Count V--Breach of a Fiduciary Duty

[¶25] Plaintiffs next allege that all defendants breached their fiduciary duties to the unit owners to pay their share of common expenses and sufficiently fund reserves. Plaintiffs allege that " [the development companies], Enterprise and/or the

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Shipkas controlled the Board from the time they formed [Henderson]" until it was turned over to an elected Board in 1996. During their time on the Board, defendants owed a fiduciary duty to the unit owners. Section 9(a) of the Illinois Condominium Property Act (765 ILCS 605/9(a) (West 1996)) states:

" All common expenses incurred and accrued or accrued prior to the first conveyance of a unit shall be paid by the developer, and during this period no common expense assessment shall be payable to the association. It shall be the duty of each unit owner including the developer to pay his proportionate share of the common expenses commencing with the first conveyance. The proportionate share shall be in the same ratio as his percentage of ownership in the common elements set forth in the declaration."

Furthermore, the Condominium Property Act requires that budgets adopted by a condo board " provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of common elements." 765 ILCS 605/9(c)(2) (West 1996).

[¶26] Plaintiffs allege that defendants failed to fund the common expenses and maintain reserves sufficient to repair the common elements of the project. Failure to do so amounted to a breach of defendants' fiduciary duties to pay their share of common expenses and sufficiently fund reserves.

[¶27] II. Defendants' Section 2-619 Motion to Dismiss

[¶28] As noted, on January 3, 2012, defendants filed their first motion to dismiss, pursuant to section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619 (West 2010)). In this motion, defendants addressed counts I, II, and III of the complaint, but did not address counts IV and V. Defendants argued that, pursuant to sections 13-214(a) and (b) of the Illinois Code of Civil Procedure (735 ILCS 5/13-214(a), (b) (West 1996)), plaintiffs' causes of action were time-barred, having been filed more than 14 years after defendants turned over control of Henderson to the Board in 1996.

[¶29] Section 13-214 applies only to real estate construction claims, and it sets forth specifically for real estate construction claims both (a) a statute of limitations and (b) a statute of repose. Subsection (a) of section 13-214, which sets forth the statute of limitations, states, in relevant part:

" Actions based upon tort, contract or otherwise against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property shall be commenced within 4 years from the time the person bringing an action, or his or her privity, knew or should reasonably have known of such act or omission." 735 ILCS 5/13-214(a) (West 1996).

Subsection (b) of section 13-214, which sets forth the statute of repose, states, in relevant part:

" No action based upon tort, contract or otherwise may be brought against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property after 10 years have elapsed from the time of such act or omission. However, any person who discovers such act or omission prior to expiration of 10 years from the time of such act or omission shall in no event have less than 4 years to bring an action as provided in subsection (a) of this Section." 735 ILCS 5/13-214(b) (West 1996).

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For both the statute of limitations and the statute of repose, the section provides an exception for fraud: " The limitations of this Section shall not apply to causes of action arising out of fraudulent misrepresentations or to fraudulent concealment of causes of action." 735 ILCS 5/13-214(e) (West 1996).

[¶30] On May 10, 2012, the trial court granted defendants' section 2-619 motion to dismiss with prejudice counts I, II, and III, and granted plaintiffs leave to file an amended complaint concerning counts IV and V.

[¶31] III. Amended Complaint

[¶32] A. Factual Allegations

[¶33] On July 2, 2012, plaintiffs filed an amended complaint. Plaintiffs allege the following facts in addition to those in the original complaint, as described above.

[¶34] When defendants began marketing the units for sale, they provided prospective purchasers with an information packet (the information packet) which included details about the project, such as building specifications. The packet, which plaintiffs attached to the amended complaint, stated that " [a]ll insulation shall be soundbatt fiberglass with the following R values: Exterior walls--R11; Third floor ceiling--R30 with integral vapor barrier."

[¶35] On July 27, 1995, prior to completion of the project, Henderson " was established by the Declaration of Condominium Pursuant to the Condominium Property Act for Henderson Square Condominium [(the Declaration)] which was recorded with the Cook County Recorder of Deeds." The Declaration, which plaintiffs attached to the amended complaint, specifically contemplated ongoing construction and " 'add on' units." The Declaration stated that " [the development companies] reserve the right to add additional property ('Additional Property') to the Property, and then submit the Additional Property to the Act by amendment to this Condominium Declaration. *** The right of [the development companies] to add all or any part of the Additional Property shall terminate on the fifth anniversary of the date of the recording of this Declaration [executed July 21, 1995]. Plaintiffs allege that, " [a]ccording to other public filings of [the development companies]," the project remains to be completed, with further construction intended to be undertaken in 2012, or as soon as approved by the City of Chicago. Plaintiffs attached as an exhibit to the amended complaint a notice of a public hearing before the Chicago plan commission, scheduled for July 19, 2012. Defendant Lincoln, Ashland, & Belmont was the applicant listed on the notice.

[¶36] After defendants turned over control of Henderson to the first elected Board sometime in 1996, certain units began to experience water seepage " no later than the winter of 2007/2008." In 2009, plaintiffs retained Warton. After Warton submitted its report, Henderson hired a contractor to begin repair work. It was not until the contractor began repairs, which included opening walls and performing invasive testing on the project, that Henderson discovered a " significant number of latent deficiencies existed with the original construction." Specifically, among other problems,

" the coping leaked, the masonry lacked mortar, there was no flashing or drainage system, the lintels and sills were not sealed, the exterior walls surrounding masonry openings lacked insulation entirely or lacked adequate insulation, the walls above the top floor ceilings surrounding openings in the roof lacked insulation entirely or lacked adequate insulation, and the walls above the top floor ceilings lacked a proper and integral vapor barrier."

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In addition, " the roofing systems were found to be severely defective and required much more work than the original repairs the Board initially undertook and reasonably believed at the time were sufficient to address the water infiltration." In the course of making repairs, plaintiffs discovered that the units lack adequate top-floor ceiling insulation and proper vapor barriers. Plaintiffs would not and could not have discovered these latent defects without extensive testing of and opening the walls of the units.

[¶37] During their tenure in 1996 as members of the Board, in which they controlled Henderson's funds, defendants failed to maintain adequate reserves to fund repairs. Plaintiffs did not discover this failure until 2009, when the extent of the repair work became evident.

[¶38] B. Counts I Through III

[¶39] Plaintiffs' amended complaint states that it realleges counts I through III for the sole purpose of preserving the matters for appeal. Specifically, in the amended complaint, plaintiffs included a parenthetical after the headings for counts I, II, and III which stated that each count had been " dismissed without prejudice on May 10, 2012 and [was] ...


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