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LLC v. Lakeside Bank

Court of Appeals of Illinois, First District, Third Division

June 28, 2017

231 W. SCOTT, LLC; DAVID E. RANSBURG; and MARK RANSBURG, Plaintiffs-Appellees,

         Appeal from the Circuit Court of Cook County. No. 11 L 6136 The Honorable Thomas J. Lipscomb, Judge Presiding.

          JUSTICE PUCINSKI delivered the judgment of the court, with opinion. Presiding Justice Fitzgerald Smith and Justice Lavin concurred in the judgment and opinion.



         ¶ 1 Following a bench trial in Cook County circuit court, the trial court entered judgment against defendant Greater Illinois Title Company (GIT) and in favor of plaintiff 231 W. Scott, LLC (LLC), concluding that GIT had breached its fiduciary duty as construction escrowee to the LLC. According to the trial court, given the number of problems in the construction process, GIT owed a duty to the LLC to, at a minimum, inquire into the problems and, if warranted, investigate further, including conducting an "informal viewing" of the construction project. On appeal, GIT argues (1) that the trial court erred in concluding that GIT's fiduciary responsibilities to the LLC included the duty to investigate construction problems before disbursing payments and (2) even if GIT did breach its fiduciary duties to the LLC, that breach was not the proximate cause of the LLC's damages. For the reasons that follow, we reverse the judgment against GIT.

         ¶ 2 BACKGROUND

         ¶ 3 On March 24, 2015, the plaintiffs, David E. Ransburg (David), Mark Ransburg (Mark), and the LLC filed their second amended complaint against the defendants, Lakeside Bank (Lakeside), JLL Construction Services, Inc. (JLL), Jerry L. Lewis, Lieggi Law Offices, LLC (Lieggi Law), Crystal Caison, Mayer Jeffers Gillespie (MJG), and GIT. In the Complaint, the plaintiffs brought a number of claims against the various defendants, all of which arose out of the attempted, but failed, renovation of a three-flat home at 231 W. Scott Street, Chicago.

         ¶ 4 Although the Complaint raised numerous claims against each of the defendants, only two were leveled against GIT. In Count XX of the Complaint, the plaintiffs alleged that GIT breached the escrow agreement between the LLC, GIT, and Lakeside by disbursing funds to JLL without a sworn statement from the plaintiffs. In Count XXIII of the Complaint, the plaintiffs alleged that GIT breached its fiduciary duty to the LLC by failing to conduct independent inspections of the renovation work (to insure its completion and quality) prior to disbursing escrow funds.

         ¶ 5 Ultimately, the plaintiffs proceeded to trial on three claims against JLL (breach of contract, common-law fraud, and violation of the Illinois Consumer Fraud Act), one claim against MJG (breach of contract), and the LLC's claim of breach of fiduciary duty against GIT. The breach of contract and common-law fraud claims against JLL, along with the breach of contract claim against MJG, were heard by a jury. The claims for violation of the Illinois Consumer Fraud Act against JLL and breach of fiduciary duty against GIT were heard in a bench trial.

         ¶ 6 Because all of the claims that went to trial were tried together, the trial record is voluminous, and not all of the evidence presented at trial was relevant to the breach-of-fiduciary-duty claim against GIT. Accordingly, in an effort to conserve resources, we recount only that evidence that has some bearing on the resolution of the LLC's claim for breach of fiduciary duty.

         ¶ 7 At trial, the evidence tended to establish the following. The home at issue had been in David and Mark's family since the 1920s. In 2006, brothers David and Mark decided to renovate the building and together formed the LLC for that purpose. All of the defendants played a role in the attempted renovation. Lakeside was the lender who extended the construction loan to the LLC, while Lewis and his company, JLL, served as the general contractor retained to perform the renovation work. Caison, who was an attorney with Lieggi Law, acted as counsel for the plaintiffs during the renovation process. MJG was the architectural firm retained by Lakeside to inspect the project as it progressed. Finally, GIT was the escrow agent, charged with disbursing the loan proceeds to JLL and Lewis as work progressed.

         ¶ 8 Under the construction loan escrow agreement (Escrow Agreement) signed by the LLC (by David), Lakeside, GIT, and JLL, before GIT would disburse any funds, the LLC was to "give or cause others to give GIT" the following documents: a current sworn owner's statement, a current sworn general contractor's statement, enough funds to cover the amount of the current disbursement request, a written statement[1] approving the current disbursement, a report by an inspector or architect certifying that the reported work had been completed and materials were in place, and any necessary waivers or releases of liens or affidavits. In addition, after the initial disbursement, Lakeside was to provide GIT with any loan funds that were to be used to pay the current request.

         ¶ 9 The Escrow Agreement also provided: "GIT-Escrowee and GIT has the right to verify all information contained in any STATEMENTS provided to them. If GIT-Escrowee or GIT discovers any inaccuracies in these statements, GIT-Escrowee may stop disbursing until the inaccuracies are corrected." In addition, the Escrow Agreement contained the following disclaimers:

"GIT-Escrowee does not at any time insure: A. That there will be enough funds available to completed [sic] the project; B. That the project will be completed; or C. If the project is completed that it will be completed according to plans and specifications approved by OWNER and LENDER.
GIT-Escrowee does not assume any liability for loss caused by errors in certifications provided by others as to work in place."

         ¶ 10 Needless to say, the renovation of the home at 231 W. Scott Street did not go as planned. Although intended to be an eight-month project starting in June 2006, the project was never completed after JLL failed to return to the job. Not only was the project not completed, but the plaintiffs also presented evidence that much of the work that was performed, was performed incorrectly, some of which then led to flooding and water damage. In 2009, Lakeside filed foreclosure proceedings against the property. As a result of the failed renovation, the plaintiffs claimed that they suffered extensive financial damages.

         ¶ 11 With respect to the breach-of-fiduciary-duty claim against GIT, the plaintiffs presented the expert testimony of Stephen A. James (James), a licensed general contractor, construction engineer, and construction consultant. According to James, at the time of the renovation project, when a construction loan escrowee knew or should have known of potential or actual inaccuracies in a contractor's statement, it was the industry custom and practice for the escrowee to verify the contractor's statements, including by way of on-site inspections of the contractor's work. In this particular case, it was James's opinion that there existed five "red flags" to put GIT on such notice: (1) GIT's files for the 10 pay requests made on the project did not contain the inspecting architect's approval for 5 of the requests, (2) GIT's files did not contain the owner's approval on 2 of the requests, (3) GIT was aware that the plaintiffs did not have their own inspecting architect, (4) there were gaps of four to six months between some of the disbursements, and (5) GIT's files indicated that multiple pay requests were not approved and had to be resubmitted, suggesting there had been errors in the contractor's original requests. Based on these factors, James opined that GIT should have stopped disbursing loan funds until it verified the accuracy of the contractor's statement, including through on-site inspections of the property to ascertain that the claimed work had been completed in a workmanlike manner.

         ¶ 12 James testified on cross-examination, however, that he reviewed the files of Lakeside and MJG and both of those entities possessed all 10 signed approvals from the inspecting architect. James did not, at any time, compare the work and materials claimed in each draw request to the work and materials approved by David. Finally, James acknowledged that neither David nor Mark informed him of possible delays in the construction process, namely, that the basement had to be dug out by hand, that the construction loan had to be renewed on multiple occasions, and that there were outstanding tax liabilities on the property that had to be resolved before disbursement.

         ¶ 13 David testified that during the course of the renovation, he was presented with only eight pay requests, all of which he signed. David signed off on each of those requests because he believed that the statements constituted representations by JLL that the listed work had been completed and because he believed MJG was hired for his protection and had inspected JLL's work upon every pay request. If he had known that the listed work was not complete or that MJG had not inspected the work, he would not have signed the pay requests. David acknowledged that he ...

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