CASABLANCA LOFTS, LLC, Plaintiff, v. MOSHE BLAUVISE; DWG, INC.; RICHARD ABRHAM; CLAY P; ANE CORP.; DESIGN 21 CO. INC.; JOSEPH MATIELLO; NISSIM NESHER; VAN TOMARAS; ATLAS 21 CONSTRUCTION CO., INC.; S & S GENERAL CONTRACTORS, INC. and STANLEY FERON, Defendants, ANE CORP. and NISSIM NESHER, Petitioners-Appellants, v. CASABLANCA LOFTS, LLC, MIKE WIER, and DOUGLAS LOHMAR, Respondents-Appellees.
No. 1-13-2236
APPELLATE COURT OF ILLINOIS FIRST JUDICIAL DISTRICT
June 26, 2014
2014 IL App (1st) 132236-U
PRESIDING JUSTICE HOWSE delivered the judgment of the court. Justices Fitzgerald Smith and Lavin concurred in the judgment.
FOURTH DIVISION. Appeal from the Circuit Court of Cook County. No. 05 CH 2701. Honorable Jeffrey Lawrence, Judge Presiding. NOTICE: This order was filed under Supreme Court Rule 23 and may not be cited as precedent by any party except in the limited circumstances allowed under Rule 23(e)(1).
¶ 1 Held: The trial court‘s finding that Casablanca had a reasonable basis for filing fraud claims against ANE and Nesher and order denying Rule 137 sanctions is affirmed.
¶ 2 Rule 137 Petitioners ANE Corp. (ANE) and Nissim Nesher (hereinafter collectively referred to as petitioners) filed a joint petition for Illinois Supreme Court Rule 137 (eff. Aug. 1, 1989) sanctions against Casablanca Lofts, LLC, Mike Wier and Douglas Lohmar. The petition alleged that the fraud claims made against ANE and Nesher in complaints filed by respondents were not well grounded in fact and law. The trial court denied petitioners’ request for Rule 137 sanctions. Petitioners now appeal the trial court‘s denial of Rule 137 sanctions. For the reasons that follow, we affirm the trial court‘s ruling.
¶ 3 BACKGROUND
¶ 4 Casablanca hired a general contractor as well as several subcontractors to develop a warehouse located in Chicago into condominiums (the project). ANE was the initial electrical subcontractor on the project, and Nesher was the President of ANE. In 2005, Casablanca filed a complaint against numerous defendants involved in the project, alleging claims of fraud and breach of contract arising out of design and construction defects. Wier was the owner and managing member of Casablanca and signed the complaint. Attorney Lohmar, one of the Rule 137 respondents in this case, was the attorney of record for Casablanca. ANE and Nesher were not named as parties in this initial lawsuit.
¶ 5 On July 12, 2007, that matter went to arbitration. The record shows that Lohmar represented Casablanca in the arbitration hearing. Following the hearing, an arbitration panel entered an arbitration award of approximately $1.5 million in Casablanca‘s favor and against the project‘s general contractor, DWG Construction, and architect, Richard Abrham.
¶ 6 In its decision, the arbitration panel made a finding of fact that Casablanca paid ANE $135,000 for electrical labor and materials. However, the panel found the value of the labor and materials provided by ANE was only worth $19,000.
¶ 7 Casablanca then filed second, third and fourth verified amended complaints, which named ANE and Nesher as defendants. The complaints alleged that ANE and Nesher fraudulently misrepresented the amount ANE was owed for labor and materials on the project; that these misrepresentations were made in the form of three waivers of lien; that Casablanca relied to its detriment on ANE‘s waivers of lien; and that as a result Casablanca paid more to ANE and Nesher than was owed.
¶ 8 ANE and Nesher filed a joint motion to dismiss the verified second amended complaint arguing in part that the fraud claims should be dismissed for a lack of specificity. The trial court denied the joint motion to dismiss.
¶ 9 ANE and Nesher then filed a joint motion for summary judgment. In this motion, ANE and Nesher argued that Wier approved the amounts to be paid to ANE before the allegedly fraudulent waivers of lien were created and that the numbers that Wier approved had been calculated by the architect, Richard Abrham, and not ANE or Nesher. Accordingly, ANE and Nesher argued that Casablanca could not prove that it relied on ANE‘s waivers of lien as alleged in the complaint because the alleged overpayments had been approved by Wier prior to preparation of the waivers of lien, which was fatal to the reliance element of its fraud claims.
¶ 10 On February 10, 2012, the trial court entered a written order denying ANE and Nesher‘s joint motion for summary judgment. In its order, the trial court judge stated: “Defendants submitted three lien waivers, in the name of ANE, and signed by Mr. Nesher, stating that Defendants had received $10,000, $75,000, and $50,000 from Plaintiff. Conversely, Plaintiff‘s pleadings allege facts that show that ANE performed, in total, $4,000 worth of work and left approximately $15,000 worth of uninstalled equipment on the site. This alone establishes a genuine issue of material fact rendering summary judgment improper.”
¶ 11 The matter then proceeded to trial. On the first day of trial, ANE and Nesher filed a motion in limine to bar evidence of anything other than direct evidence of ANE‘s waivers of lien to show how payments were dispersed to ANE. The trial court judge denied the motion in limine after Casablanca‘s attorney made representations to the court that Casablanca relied on an escrow agent who relied on ANE‘s waiver of lien when making the payments to ANE.
¶ 12 Following Casablanca‘s case in chief, ANE and Nesher moved for a directed finding pursuant to
“So I‘m really just answering the question did the plaintiff present sufficient evidence to prove the fraud case, and he has to prove that defendant made a false statement with knowledge it was false by clear and convincing evidence, and I just don‘t think that the plaintiff met this burden with respect to any of the defendants. *** I mean, he would know something about it, but I just didn‘t feel that there was clear and convincing evidence that ANE hadn‘t
earned the 135,000. But even if plaintiff had proved that, there was still no statement by ANE that was false. Because the mechanics liens waivers don‘t say anything about the amount of work done; and even if they did as Mr. Jaskula pointed out, those lien waivers that ANE signed were signed after Mr. Wier had certified with his owner‘s sworn statement the payments of those amounts. So he couldn‘t have relied on the lien waivers. You know, I know that I indicated in pretrial that the escrow agent‘s reliance could service the plaintiff‘s reliance, but after considering that further, I don‘t think that‘s the case. I couldn‘t find any law that addressed that specifically and the plaintiff didn‘t provide me with any, but fraud is a personal tort, I couldn‘t find any cases where the misrepresentation was made to someone else. *** But, in any event, I think the representation would have to have been made to Mr. Wier as the sole representative of Casablanca Loft. So I don‘t think the claim was proved against ANE.”
¶ 13 After trial, the judge who presided over the trial proceedings retired. ANE and Nesher filed a joint petition for Rule 137 sanctions, as did several other defendants. The case was assigned to a new judge (hereinafter the hearing judge) to conduct the proceedings on the Rule 137 petitions. In their Rule 137 petition, ANE and Nesher argued that Rule 137 sanctions were warranted because Casablanca‘s fraud claims were not well grounded in fact and law. Specifically, ANE and Nesher argued that Casablanca knew prior to filing any of the complaints that it could not prove the element of reliance, which was fatal to its fraud claims. On October
“It is undisputed, however, that lien waivers were executed by ANE and that they were a condition precedent to payment. [] It is undisputed that ANE received $135,000. Although Judge McDonald was skeptical about whether ANE actually preformed $135,000 worth of electrical work, she held that Casablanca failed to prove fraud by clear and convincing evidence, because the lien waivers were silent about the percentage of work completed []. If the procedure described in the arbitration award was followed, the lien waivers would have been given directly to Wier, along with the contractor‘s sworn statement, by Abrham, and he would have relied upon both the lien waivers and the contractor‘s statement in approving payments. However, there was a failure of proof in this regard, and Judge McDonald ruled that reliance had not been shown.
A failure of proof is not the same thing as failure to conduct a reasonable inquiry before a complaint is filed, especially where the standard is clear and convincing evidence. Memories fade. Documents are lost. Witnesses become unavailable. In this court‘s
view, the arbitrator‘s description of the payment system and the escrow agreement itself created a reasonable factual basis for concluding that Wier relied at least partially on the owner‘s sworn statement to the escrow agent. Judge McDonald did not buy Casablanca‘s argument that the escrow agent was its agent for the purpose of reviewing the lien waivers. However, this does not mean that it is totally without legal basis. *** This court finds that there was an adequate factual basis to support Casablanca‘s claim that it relied upon the lien waivers and that its agency theory was warranted by existing law.”
¶ 14 Several other defendants also filed Rule 137 petitions for sanctions. The final pending petition for sanctions was disposed of on June 19, 2013. On July 16, 2013, ANE and Nesher timely filed a notice of appeal from the order denying their petition for Rule 137 sanctions. For the reasons that follow, we affirm the trial court‘s denial of sanctions.
¶ 15 ANALYSIS
¶ 16 Standard of Review
¶ 17 Prior to addressing the merits of this appeal, we must first determine what standard of review to apply as the parties disagree on this issue. ANE and Nesher argue that we should apply the de novo standard of review because the hearing judge that ruled on its petition for Rule 137 sanctions did not hear live testimony and, therefore, his rulings were solely based on the pleadings, depositions, transcript, or evidence otherwise documentary. Appellees argue that we should apply the abuse of discretion standard because this is the standard of review that Illinois
¶ 18 Here, the hearing judge did not preside over any proceedings prior to the petitions for Rule 137. The hearing judge also did not hold an evidentiary hearing on ANE and Nesher‘s Rule 137 petition. As such, because the hearing judge‘s ruling was based entirely on the same documentary record now before us, we find that a deferential standard of review is not warranted, and apply the de novo standard of review here. See Mohica v. Cvejin, 2013 IL App (1st) 111695, ¶ 50; Alderson v. Southern Co., 321 Ill. App. 3d 832, 846 (2001) (“When the trial court hears no courtroom testimony and determines jurisdiction solely on the basis of documentary evidence, the trial court is not in a better position than the reviewing court to assess credibility or weigh the evidence. Therefore, in this situation, the standard of review is de novo.“).
¶ 19 In Mohica, the court noted that the “deferential standard is applied because generally the conduct at issue occurred before the judge issuing the sanctions, who, therefore, is in the best position to determine whether the challenged conduct warranted penal sanctions or because the trial court heard testimony from individuals involved in the challenged conduct.” Mohica, 2013 IL App (1st) 111695. However, in Mohica, like in this case, “the second judge neither observed the conduct underlying the sanctions ***, nor heard live testimony related to the challenged filing.” As a result, the court in Mohica, although ultimately reversing the trial court‘s issuance of sanctions under either the abuse of discretion or de novo standard, questioned the applicability of the abuse of discretion standard in that case. For the same reasons that were emphasized in Mohica, we now find that the abuse of discretion standard is not appropriate in this case and apply the de novo standard of review.
¶ 20 Denial of Rule 137 Sanctions
¶ 21 ANE and Nesher argue that Rule 137 sanctions were warranted here because they claim that Casablanca knew prior to filing its complaints that it could not prove the element of reliance, which made it impossible for Casablanca to succeed on its fraud claims. The trial court disagreed and found that there was a reasonable basis in fact and law for Casablanca to allege fraud claims against ANE and Nesher. Like the trial court, we now find that there was a sufficient basis in fact and law for Casablanca to file its fraud claims against ANE and Nesher.
¶ 22 Rule 137 provides in pertinent part the following:
“Every pleading, motion and other paper of a party represented by an attorney shall be signed by at least one attorney of record in his individual name * * *. The signature of an attorney or party constitutes a certificate by him that he has read the pleading, motion or other paper; that to the best of his knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good-faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.”
Ill. S. Ct. R. 137 (eff. Aug. 1, 1989) .
Rule 137 was adopted to discourage false and frivolous pleadings and to punish those who file groundless lawsuits. Gershak v. Feign, 317 Ill. App. 3d 14, 23 (2000); see also Olsen v. Staniak, 260 Ill. App. 3d 856, 864 (1994) (the purpose of imposing the sanction is to prevent abuse of the judicial process and punish a party who brings vexatious litigation predicated upon false
¶ 23 There Was A Reasonable Basis for Filing Fraud Claims Against ANE and Nesher
¶ 24 Based upon our review of the record, we find that there was a reasonable basis for filing fraud claims against ANE and Nesher such that Rule 137 sanctions are not warranted here. Courts should use an objective standard in determining what was reasonable under the circumstances as they existed at the time of filing. Sanchez, 352 Ill. App. 3d at 1020; Whitmer, 335 Ill. App. 3d at 514. At the time of filing the claims against ANE and Nesher, it is undisputed
¶ 25 Although ANE and Nesher argue that it was improper for the trial court to consider the arbitration findings when determining whether there was a reasonable basis for Casablanca to file fraud claims against them, we find no case law that stands for this proposition, and the cases
¶ 26 Moreover, as noted by Appellees, the arbitration findings were attached to the complaints as support for Casablanca‘s fraud claims. ANE and Nesher never objected to this attachment, which made the findings a part of the record. Further, throughout the course of this litigation, both parties referred to the arbitration findings in their motions, responses, replies etc. Accordingly, we do not agree with petitioners’ argument that it was improper for the hearing judge to consider the arbitration findings when determining whether there was a reasonable basis for Casablanca to file its fraud claims.
¶ 27 It should also be noted that Casablanca defeated ANE and Nesher‘s motion to dismiss the fraud claims and motion for summary judgment on the fraud claims. Neither of these rulings
¶ 28 Notwithstanding our finding above that Rule 137 sanctions are not warranted here, we note that ANE and Nesher made several additional arguments that we address below. First, a large part of ANE and Nesher‘s argument is based upon their allegations that the hearing judge‘s ruling on Rule 137 sanctions improperly made findings that differed from the trial court‘s findings that were made when ruling on the directed verdict motions. We disagree with this argument. When the trial court judge made findings in her ruling on ANE and Nesher‘s motion for a directed finding pursuant to
¶ 29 Proving fraud by clear and convincing evidence carries a significantly higher evidentiary burden than merely showing that there was a reasonable basis for filing a fraud claim in the first place, and one can certainly have a reasonable basis for pleading fraud, but then fail to prove it by clear and convincing evidence at trial.1 If we were to adopt ANE and Nesher‘s argument here—that findings of fact and law made during a directed verdict ruling and subject to the clear and convincing evidentiary standard must dictate whether there was a reasonable basis for filing the claim when ruling on a Rule 137 petition—then every party that fails to meet its burden at trial would be sanctioned under Rule 137. Not only would this be an absurd result, but it would erode the very purpose of Rule 137 altogether as “[t]he rule is not intended to penalize litigants and their attorneys because they were zealous but unsuccessful in pursuing an action.” Nelson, 408 Ill. App. 3d at 67-68.
¶ 30 Moreover, the trial court judge‘s directed verdict findings, which were made after plaintiff‘s case at trial, were made well after the complaints were filed. Therefore, because a petition for Rule 137 sanctions is to be decided based on the “circumstances as they existed at the time of filing,” (Whitmer, 335 Ill. App. 3d at 514), and the trial court judge‘s directed verdict findings were made in hindsight, such hindsight findings should not be considered when
¶ 31 ANE and Nesher also argue that the hearing judge erred in considering Casablanca‘s agency theory of reliance—that its escrow agent relied on ANE‘s lien waivers to make payments to ANE—because: (1) the trial court judge found no law to support that theory and (2) because the theory was never plead in any of the complaints. First, while the trial court found that no case law existed to support Casablanca‘s agency theory of reliance, this finding holds little weight when ruling on a Rule 137 petition. Rule 137 clearly disallows sanctions where a party makes a good faith effort “for the extension, modification, or reversal of existing law.”
¶ 32 With respect to ANE and Nesher‘s argument that Casablanca‘s agency based theory of reliance needed to be plead within the complaint in order for it to argue the theory, we find that this argument holds little weight as well given that: (1) ANE and Nesher never properly challenged the failure to plead the theory in a motion to dismiss, and (2) the theory had been discussed at various times throughout the litigation. Further, Rule 137 does not limit what facts can establish a reasonable basis for filing a claim to only those allegations contained within the
¶ 33 CONCLUSION
¶ 34 For the reasons stated above, we affirm the trial court‘s denial of petitioners’ request for Rule 137 sanctions against Casablanca, Wier and Lohmar.
¶ 35 Affirmed.