Horbach v. KaczmarekHorbach v. Kaczmarek
Patrick M. Loftus (argued), Addison, IL, for Defendants-Appellees.
Before BAUER, ROVNER, and DIANE P. WOOD, Circuit Judges.
ILANA DIAMOND ROVNER, Circuit Judge.
In 1989, TyrRee Corporation agreed to purchase a tire pyrolysis system (a series of machines that shred, heat, and convert old tires into commercially viable by-products) from Shred Pax Corporation. TyrRee allegedly paid Shred Pax more than $1.7 million for the assembly and storage of the machinery but ultimately did not accept delivery, concluding that it had not gotten what it had paid for. In 1995, following TyrRee‘s dissolution, Eugene Horbach, TyrRee‘s majority shareholder and assignee, filed suit against Shred Pax (which by then had changed its name to One Three Six, Inc., but for the sake of convenience we will ignore the name change), and its majority shareholder and president, Alvis Kaczmarek.1 In pertinent part, Horbach‘s complaint sought relief on theories of contractual breach, fraud, rescission, constructive trust/ unjust enrichment, and conversion. The district court dismissed these claims, finding that the allegations did not support a claim for conversion and that the other claims were untimely. We affirm.
I.
Because the district court dismissed this case at the pleading stage, we accept the allegations in Horbach‘s complaint as true. E.g., Johnson v. Rivera, 272 F.3d 519, 520 (7th Cir.2001).
Horbach and Aaron Gellman formed TyrRee, an Illinois corporation, in August of 1989 with the goal of owning and operating tire pyrolysis plants. Horbach, a citizen of the State of Washington, subscribed to 71 percent of TyrRee‘s stock. Gellman later assigned to Horbach his 21 percent interest in TyrRee, making Horbach the owner of approximately 92 percent of TyrRee‘s outstanding shares.
On September 5, 1989, TyrRee entered into a preliminary letter agreement with Shred Pax for the purchase of a tire pyrolysis system. That agreement contemplated the subsequent execution of a formal purchase order for the equipment, which the parties completed and signed on September 26, 1989. The purchase order provided that Shred Pax would design and manufacture the equipment in accordance with specifications attached to the order and have it ready for delivery and testing on or before February 1, 1990. The order gave TyrRee the right to inspect, test, and approve the equipment before it accepted delivery. The testing envisioned by the purchase order involved “full and continuous operation” of the equipment over a period of seven days. R. 20 Ex. 4 ¶ 7.
At a meeting which took place on or about February 9, 1990, Shred Pax informed TyrRee that the equipment was ready for testing and installation. TyrRee had not yet located a suitable site at which it could engage in full-scale testing of the system, however, so the parties agreed that Shred Pax would continue to hold the equipment in exchange for a monthly storage fee until TyrRee was able to locate such a site. TyrRee also wanted Shred Pax to make certain modifications to the pyrolysis system that would take additional time to complete.
On April 6, 1990, Shred Pax sent a letter to TyrRee confirming that the pyrolysis system, as modified, was ready for testing. This letter purported to constitute the formal “Equipment Notice” contemplated by the purchase agreement, entitling Shred Pax to a specified installment payment from TyrRee. TyrRee subsequently advised Shred Pax that it would not be able to conduct acceptance testing of the equipment prior to July and suggested that Shred Pax should conduct the testing itself at a place and time of its own choosing. Apparently, however, Shred Pax opted to wait for TyrRee and continue collecting a storage fee while it did so. Further modifications to the equipment were ordered in September 1990.
TyrRee dissolved on September 9, 1990. All of the company‘s rights under the initial letter agreement and purchase order were assigned to Horbach.
On April 18, 1991, Horbach‘s attorney notified Shred Pax that the purchase order was cancelled because Shred Pax had failed to manufacture and deliver the equipment in accordance with the terms of the order. By this time, Horbach had already paid more than $1.76 million toward the purchase and storage of the equipment and related items. Horbach demanded the return of his money, but Shred Pax refused.
Horbach filed suit against Shred Pax and Kaczmarek in 1995. As we noted at the outset, the district court subsequently dismissed each of the claims that arose from the purchase order. Horbach v. Kaczmarek, 915 F.Supp. 18 (N.D.Ill.1996); Horbach v. Kaczmarek, 934 F.Supp. 981 (N.D.Ill.1996).2
The court found the breach of contract claim untimely. 915 F.Supp. at 22-23. The court noted at the outset that the Illinois Commercial Code specifies a four-year limitations period for such a claim. See
The court dismissed the equitable claims for rescission and constructive trust pursuant to the doctrine of laches. Id. at 23. That doctrine applies when the plaintiff has waited for an unreasonable length of time to assert his claim and the defendant has been prejudiced by the delay. People v. Wells, 182 Ill.2d 471, 231 Ill.Dec. 311, 696 N.E.2d 303, 312 (1998); Van Milligan v. Board of Fire & Police Commissioners of Village of Glenview, 158 Ill.2d 85, 196 Ill.Dec. 665, 630 N.E.2d 830, 833 (1994). “The doctrine is grounded in the equitable notion that courts are reluctant to come to the aid of a party who has knowingly slept on his rights to the detriment of the opposing party.” Tully v. State, 143 Ill.2d 425, 158 Ill.Dec. 546, 574 N.E.2d 659, 662 (1991). Illinois courts follow the general rule that where the limitations period governing claims at law has expired, laches will bar the equitable claims, even if the defendant has not shown prejudice. See Meyers v. Kissner, 149 Ill.2d 1, 171 Ill.Dec. 484, 594 N.E.2d 336, 340-41 (1992); see also, e.g., Golden v. McDermott, Will & Emery, 299 Ill.App.3d 982, 234 Ill.Dec. 241, 702 N.E.2d 581, 589 (1998). Thus, because Horbach had waited to file suit until the statute of limitations on his breach of contract claim had already run, laches demanded the dismissal of the accompanying equitable claims. 915 F.Supp. at 23.
Following the dismissal of these claims, Horbach obtained the court‘s permission to file a second amended complaint which set forth additional allegations that Horbach believed would resuscitate the fraud claim and which also asserted a new claim for conversion.3 In the district court‘s eyes, however, the second amended complaint fared no better than the first.
With respect to the fraud claim, the court found the new allegations insufficient to justify Horbach‘s delay in discovering the alleged fraud. 934 F.Supp. at 985-86. Horbach alleged that the pyrolysis equipment was highly complex and that he lacked the technical knowledge and skill to assess the quality of that equipment himself. The only way to determine whether the system met the requirements of the purchase order, Horbach asserted, was to test it, which he could not reasonably have done before September of 1990. But the court noted that when Horbach‘s agent finally inspected the equipment in February 1991, its shortcomings (and thus Shred Pax‘s alleged fraud) were readily apparent. In fact, the complaint revealed that there was no integrated “system” at all, but only scattered components. This was something that any qualified inspector — if not a lay person like Horbach himself — would have readily determined upon examining the equipment. The court again found no plausible basis for inferring that the injury could not have been discovered prior to September of 1990. Id. at 985. Horbach also suggested that it was not unreasonable for him to postpone inspection of the system until February of 1991 because he had requested modifications to the system after February 1990. However, the court pointed out that Shred Pax had completed these modifications by the time it announced in April 1990 that the equipment was ready for testing and delivery, and TyrRee did not request additional changes until late September 1990. For that five-month period, then, TyrRee believed the equipment was ready for testing. Horbach offered no reasonable excuse for not having inspected the equipment during that time. Id. Finally, Horbach asserted that his inspection of the equipment was delayed by his ongoing search for a site where the equipment could not only be tested but permanently installed. However, as the district court pointed out, the complaint indicated that on April 6, 1990, in its letter announcing the readiness of the equipment, Shred Pax informed TyrRee that it would proceed with testing of the equipment at a site of its own choosing in the event TyrRee was unable to locate a site within fourteen days. The parties understood, then, that inspection and testing of the equipment was not to be postponed any longer based on Horbach‘s search for a permanent installation site. In fact, as we noted earlier, Shred Pax did not test the equipment — a fact, the district court added, that might have tipped off TyrRee that something was amiss. Even so, Horbach postponed his inspection for ten months — a delay that the court believed was not justifiable. Id. at 986. Accordingly, the court dismissed the fraud claim for a second time.
The court found no basis in the allegations of the complaint for a conversion claim. Id. The theory underlying this claim was that Shred Pax and Kaczmarek had improperly converted Horbach‘s money to their own use by accepting his periodic payments for the completion and storage of the pyrolysis system all the while knowing that they were not entitled to those payments due to the inadequate state of the equipment. The court found this rationale defective for two reasons. First, because the purchase order entitled the defendants to periodic advance payments, Horbach could not show that the money he had paid belonged at all times to him. Horbach‘s remedy, upon discovery that the equipment had not been completed, was to sue for breach of contract rather than conversion. Id. Second, in order to establish the conversion of money under Illinois law, a plaintiff must show that he had “a ‘right to a specific fund or specific money in coin or bills.‘” Sutherland v. O‘Malley, 882 F.2d 1196, 1200 (7th Cir.1989), quoting Mid-America Fire & Marine Ins. Co. v. Middleton, 127 Ill. App.3d 887, 82 Ill.Dec. 555, 468 N.E.2d 1335, 1339 (1984). Horbach, however, was not claiming entitlement to a specific fund or account (let alone specific coins or bills), but rather a particular amount of money. His claim thus did not meet this particular criterion of a conversion claim. 934 F.Supp. at 986.
Horbach challenges four aspects of the district court‘s judgment. First, he contends that the longer limitations period for fraudulent concealment should apply to his breach of contract claim. Second, assuming that his breach of contract claim is timely, Horbach contends that his equitable claims are timely as well, and that the court erred in invoking laches to dispose of them. Third, Horbach maintains that one cannot say as a matter of law that he should have known of the defendants’ alleged fraud earlier, and that, consequently, the district court should not have dismissed his fraud claim as untimely. Finally, Horbach asserts that his complaint states a valid claim for conversion. As this case was dismissed at the pleading stage, our review is of course de novo. E.g., Vorhees v. Naper Aero Club, Inc., 272 F.3d 398, 401 (7th Cir.2001).
A. Timeliness of the Breach of Contract Claim
Horbach contends that the district court erred in applying the four-year limitations period to his claim for breach of contract rather than the longer five-year period that the Illinois legislature has specified for cases in which the defendant has fraudulently concealed a cause of action from the person to whom that cause belongs. See
We discern no basis for ignoring the Illinois Supreme Court‘s opinion in Anderson, however. Sitting in diversity, this court must look to state law on matters of substance, Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), including the relevant statute of limitations, e.g., Doe v. Roe No. 1, 52 F.3d 151, 154 (7th Cir.1995). The parties agree that in this case, the law of Illinois governs. Anderson embodies the Illinois Supreme Court‘s interpretation of the fraudulent concealment statute and leaves no doubt that the statute does not apply where, as here, the plaintiff discovers his injury in plenty of time to file suit within the limitations period that would otherwise apply.
Horbach suggests that the Illinois Supreme Court‘s subsequent opinion in Hermitage Corp. v. Contractors Adjustment Co., supra, signals a retreat from Anderson, but we disagree. In Hermitage, the court was concerned with the discovery rule, which, as we noted earlier, delays the commencement of the statute of limitations in certain cases until such time as the plaintiff knew or should have known that he had been injured. See id. at 1135. The defendant urged the Illinois Supreme Court to hold, as some lower courts had done, that the discovery rule would not postpone the start of the limitations period past the date of injury so long as the plaintiff still had a reasonable amount of time to bring suit once he became aware (or should have become aware) that he had been injured. The defendant cited the court‘s holding in Anderson in support of this argument. But the court noted that it had already covered this ground in Sharpe v. Jackson Park Hosp., 92 Ill.2d 232, 65 Ill.Dec. 510, 441 N.E.2d 645 (1982), where it had rejected the notion that Anderson‘s construction of the fraudulent concealment statute created any exception to or limitation upon the discovery rule. Id. at 646-47; see Hermitage, 209 Ill.Dec. 684, 651 N.E.2d at 1137-38. The discovery rule, the court re-emphasized in Hermitage, delays the start of the limitations period, whereas the fraudulent concealment statute extends the limitations period. Id. at 1137. Anderson‘s “reasonable time” rule applies only in the latter situation. See id. “[B]ecause this case does not involve a fraudulent concealment issue that might extend the statute of limitations,” Hermitage concluded, “we do not address Anderson.” Id. at 1138.
In short, Hermitage does not signal a retreat from Anderson. The court merely recognized that the discovery rule and the fraudulent concealment statute operate in two different ways, and that consequently it would be inappropriate to engraft Anderson‘s “reasonable time” limitation onto the discovery rule. See also Highsmith v. Chrysler Credit Corp., 18 F.3d 434, 442 n. 7 (7th Cir.1994). Any notion that the court is on the verge of abandoning Anderson is put to rest by the court‘s decision just last year in Morris v. Margulis, supra, in which it applied the “reasonable time” rule without reservation. 754 N.E.2d at 319.
B. Timeliness of the Equitable Claims
Relying on the fact that the statute of limitations had run on Horbach‘s claim for breach of contract, the district court found that his equitable claims ought to be dismissed on the basis of laches. Horbach does not quarrel with the court‘s application of the laches doctrine, but rather reiterates his contention that his breach of contract claim was timely. But we have rejected that argument, and so have no need to further consider the dismissal of his equitable claims.
C. Timeliness of the Fraud Claim
Horbach had five years from the date he knew or reasonably should have known that the defendants had perpetrated a fraud upon him in which to file suit.
D. The Conversion Claim
Horbach alleges in his second amended complaint that between April 1 and September 10, 1990, he deposited some $56,800 with the defendants in reliance upon their representation that the pyrolysis equipment was complete and in consideration for defendants’ agreement to hold the equipment. In fact, Horbach alleges, the equipment was far from ready and as a result the defendants were not entitled to those payments; yet, the defendants refused his demand for the return of his money. Horbach contends that these allegations are sufficient to establish a viable claim for conversion.
“‘The essence of conversion is the wrongful deprivation of one who has a right to the immediate possession of the object unlawfully held.‘” In re Thebus, 108 Ill.2d 255, 91 Ill.Dec. 623, 483 N.E.2d 1258, 1260 (1985), quoting Bender v. Consolidated Mink Ranch, Inc., 110 Ill.App.3d 207, 65 Ill.Dec. 801, 441 N.E.2d 1315, 1320 (1982); see also National Union Fire Ins. Co. of Pittsburgh, Pa. v. Wilkins-Lowe & Co., 29 F.3d 337, 340 (7th Cir.1994) (per curiam). An asserted right to money normally will not support a claim for conversion. Only if the money at issue can be described as “specific chattel,” Thebus, 91 Ill.Dec. 623, 483 N.E.2d at 1260 — in other words, “a specific fund or specific money in coin or bills,” Mid-America Fire & Marine Ins. Co. v. Middleton, supra, 82 Ill. Dec. 555, 468 N.E.2d at 1339 — will conversion lie. Moreover, the plaintiff‘s right to the money must be absolute. See Thebus, 91 Ill.Dec. 623, 483 N.E.2d at 1260, quoting Jensen v. Chicago & W. Ind. R.R. Co., 94 Ill.App.3d 915, 50 Ill.Dec. 470, 419 N.E.2d 578, 593 (1981). “It must be shown that the money claimed, or its equivalent, at all times belonged to the plaintiff and that the defendant converted it to his own use.” Thebus, 91 Ill.Dec. 623, 483 N.E.2d at 1261 (emphasis supplied); see also National Union Fire Ins. Co., 29 F.3d at 340.
The district court correctly dismissed Horbach‘s conversion claim. Even if we assume that the money Horbach paid to defendants for the completion and storage of the pyrolysis equipment properly could be characterized as specific chattel, Horbach cannot show that his right to possession of that money was absolute. As his complaint reveals, Horbach made the payments in question to the defendants by agreement in exchange for their commitment to complete and store the equipment while he continued the search for an appropriate testing and installation site. The incomplete state of the equipment, and its failure to conform to the agreed-upon specifications, may have given rise to an obligation on the defendants’ part to return of some or all of the money that he had paid to them. But Horbach cannot show that the money at all times belonged unconditionally to him. His agreement with the defendants obligated him to pay them that money; and the defendants’ receipt of that money thus cannot be described as unauthorized or wrongful in the sense that a claim for conversion requires.
III.
For the reasons we have discussed, we AFFIRM the district court‘s decision to dismiss Horbach‘s claims for breach of contract, rescission, constructive trust/unjust enrichment, fraud, and conversion.