Chicago Title and Trust Co. v. First Arlington Nat. Bank

Citation73 Ill.Dec. 626,118 Ill.App.3d 401,454 N.E.2d 723
Decision Date16 September 1983
Docket NumberNo. 82-1525,82-1525
Parties, 73 Ill.Dec. 626 CHICAGO TITLE AND TRUST COMPANY, Plaintiff-Appellee, v. FIRST ARLINGTON NATIONAL BANK, Executive Construction, Inc., John M. Lewis, Nancy Lewis, and Dennis L. Coates, Defendants, (Appeal of EXECUTIVE CONSTRUCTION, INC. and Dennis L. Coates) and EXECUTIVE CONSTRUCTION, INC., Third-Party Plaintiff, Appellant, v. FIRST ARLINGTON NATIONAL BANK, Third-Party Defendant, Appellee.
CourtUnited States Appellate Court of Illinois

Page 723

454 N.E.2d 723
118 Ill.App.3d 401, 73 Ill.Dec. 626
CHICAGO TITLE AND TRUST COMPANY, Plaintiff-Appellee,
v.
FIRST ARLINGTON NATIONAL BANK, Executive Construction, Inc.,
John M. Lewis, Nancy Lewis, and Dennis L. Coates, Defendants,
(Appeal of EXECUTIVE CONSTRUCTION, INC. and Dennis L. Coates)
and
EXECUTIVE CONSTRUCTION, INC., Third-Party Plaintiff, Appellant,
v.
FIRST ARLINGTON NATIONAL BANK, Third-Party Defendant, Appellee.
No. 82-1525.
Appellate Court of Illinois, First District, Fifth Division.
Sept. 16, 1983.
Rehearing Denied Oct. 17, 1983.

[118 Ill.App.3d 403]

Page 725

[73 Ill.Dec. 628] Berman, Fagel, Haber, Maragos & Abrams, Chicago, for third-party defendant, third-party plaintiff appellee; Joel A. Haber, Alvin D. Meyers, Kenneth G. Anspach, Chicago, of counsel.

Shearer, Blood, Agrella, Boose & Balog, St. Charles, for defendants-cross claimant, third-party plaintiff, appellants; Richard H. Balog, St. Charles, of counsel.

Marshall E. Winokur, Chicago, for plaintiff-appellee.

LORENZ, Justice:

Chicago Title and Trust Company (CT & T) filed a complaint against Executive Construction, Inc. (E.C.I.), Dennis L. Coates, John and Nancy Lewis, and First Arlington National Bank (Arlington Bank), as trustee for the Lewises, seeking (1) restitution of an overpayment mistakenly made to E.C.I. from a CT & T escrow account, and (2) damages for a misrepresentation made by

Page 726

[73 Ill.Dec. 629] E.C.I. and Coates when applying for a disbursement from the escrow.

E.C.I. cross-claimed against the Lewises, and filed a third-party [118 Ill.App.3d 404] complaint against Arlington Bank in its individual capacity. (The action against the Bank as trustee was dismissed before trial.)

Following trial by the court, judgment was entered in favor of CT & T, and against E.C.I. and Coates, in the amount of $40,662.90. The court also entered judgment against E.C.I. in its cross-claim and third-party action.

E.C.I. and Coates appeal, raising the following issues:

1. Was the evidence sufficient to find them liable in tort for deceit?

2. Did the trial court err when it denied E.C.I.'s motion for summary judgment?

3. Does § 2 of the Interest Act (Ill.Rev.Stat.1981, ch. 17, par. 6402) authorize an award of interest against a defendant who has obtained funds by deceit?

4. Did the trial court abuse its discretion by (a) declining to dismiss CT & T's complaint as a sanction for alleged failure to comply with discovery requests, and (b) permitting CT & T to amend its complaint during trial?

5. Is E.C.I. an intended beneficiary of the construction loan agreement between the Lewises and Arlington Bank?

6. Did the trial court abuse its discretion by permitting an architect to give an opinion on the value of construction work completed by E.C.I.?

7. Was it manifestly erroneous to find that E.C.I. was not entitled to judgment against the Lewises on the cross-claim?

We affirm in part and reverse in part. The following evidence is material to our decision.

Arlington Bank agreed to lend $312,000 to the Lewises so that they could build a manufacturing facility in Hoffman Estates, Illinois. E.C.I. was hired as general contractor, and the Lewises, along with Arlington Bank, entered into an escrow agreement with CT & T so that the contractor could obtain progress payments as work was completed on the project.

To receive progress payments under this escrow agreement, E.C.I. was obligated to submit a sworn application detailing the work performed and materials supplied. Once the architect hired by the Lewises certified that the application was correct, Arlington Bank was to furnish CT & T with funds to pay E.C.I.

The first disbursement application was filed on November 4, 1977, and, as requested, E.C.I. received $42,000.20. In its second application, E.C.I. sought a progress payment of $39,459.10. Then, on December 13, 1977, while the second application was pending, CT & T [118 Ill.App.3d 405] mistakenly issued a $42,000 check to E.C.I. although Arlington Bank had not supplied funds to cover this payment. Two days later, CT & T paid E.C.I. the $39,459.10 requested in the second application.

E.C.I.'s president, Dennis Coates, testified that although he knew the $42,000 had been issued by mistake, the check was deposited in one of E.C.I.'s accounts without notifying CT & T of its error.

E.C.I. submitted a third application on January 15, 1978 seeking a progress payment of $47,187. In his sworn statement, although Coates claimed that the value of work performed and materials supplied by E.C.I. was $136,478.77, and that the contractor had only received payments of $81,459.30, this statement was incorrect, because it omitted the $42,000 payment which had been issued by mistake.

CT & T's escrow officer testified that she relied upon Coates' representation in the third application in deciding to approve the payment of $47,187 and was unaware of the $42,000 mistaken payment. Therefore, CT & T did not recoup the $42,000 overdraw from the $47,187 sought in the third application.

The Lewises cancelled the construction project in February of 1978, and E.C.I. submitted a fourth and final application on February 15. In it, Coates stated that E.C.I. had supplied services and material

Page 727

[73 Ill.Dec. 630] costing $169,272, and payments of $127,866.10 and that it was entitled to a final payment of $41,405.90. When Coates testified he stated that he called John Lewis to explain that E.C.I. had received an unapplied for payment of $42,000, and that E.C.I. would credit this amount toward the balance owed on the terminated contract. (Later, E.C.I. forwarded the excess to Arlington Bank, and the bank sent this money to CT & T.)

On May 19, 1978, CT & T filed a complaint seeking restitution of $40,622.90 from either E.C.I. or the Lewises. The complaint alternatively alleged that either E.C.I. or the Lewises were unjustly enriched by the overdraw in the escrow account, depending upon whether E.C.I. had actually performed the work and supplied the material listed in the fourth application.

E.C.I. cross-claimed against the Lewises, and filed a third-party action against Arlington Bank.

At trial, after Coates testified he knew about the mistakenly issued $42,000 check, CT & T received leave to amend its complaint to add a count against Coates and E.C.I. for tortious misrepresentation. (Coates did not join in E.C.I.'s cross-claim or third-party action, however.)

At the close of the evidence the trial court entered judgment against E.C.I. and Coates in the principle action, and entered judgment[118 Ill.App.3d 406] against E.C.I. in both its cross-claim and third-party action.

Additional evidence is discussed below where pertinent.

OPINION

I.

First we consider whether the evidence was sufficient to justify finding Coates and E.C.I. liable in tort for fraud. The defendants argue that CT & T was not justified in relying on the representation Coates made in the third application because it knew or should have known that Coates' statement was false. Also, the defendants contend that Coates did not act with the requisite culpable mental state when he made this representation.

CT & T's escrow officer testified she was unaware of the $42,000 overdraft, and that she approved the third disbursement without recouping the overdraw because she relied on the representation made by Coates concerning the amount of money which E.C.I. had already received from CT & T. As the defendants point out, however, CT & T's auditors became aware of the overdraw within a few days of when the $42,000 check was mistakenly issued, and the defendants conclude CT & T was not deceived because it had imputed knowledge that Coates' representation was false. Furthermore, the defendants contend that the escrow officer's reliance on Coates' representation was not justified because reasonably prudent investigation would have revealed the falsity of the statement.

We start with the fundamental principle that "[t]he recipient of a fraudulent misrepresentation can recover against its maker for pecuniary loss resulting from it if, but only, if

(a) he relies on the misrepresentation in acting or refraining from action, and

(b) his reliance is justifiable." (Restatement (Second) of Torts (1977) § 537; accord, Soules v. General Motors Corp. (1980), 79 Ill.2d 282, 286, 37 Ill.Dec. 597, 402 N.E.2d 599.) The first element of this two-part requirement refers to factual causation: If plaintiff knew that defendant's representation was false, he could not have relied on the misrepresentation, and was not deceived.

To determine whether CT & T had imputed knowledge that the third application contained a misrepresentation, we turn to principles of agency law.

"Corporations are artificial legal entities, and the only knowledge which a corporation can be said to have is the knowledge which is imputed to it under principles of agency law. (See, 3 Fletcher, Cyclopedia[118 Ill.App.3d 407] of Corporations (1975 Rev.), § 787, at 9.) Thus, knowledge which a corporate agent receives while acting within the scope of his or her

Page 728

[73 Ill.Dec. 631] agency is imputed to the corporation if the knowledge concerns a matter within the scope of the agent's authority." Campen v. Executive House Hotel, Inc. (1982), 105 Ill.App.3d 576, 585-86, 61 Ill.Dec. 358, 434 N.E.2d 511.

CT & T therefore had imputed knowledge of what its auditors became aware of. Nevertheless, a tortfeasor does not automatically escape liability for deceit merely because a defrauded corporation had imputed knowledge of the truth. Corporations typically have a large number of employees, and it would not be reasonable to expect each of them to be aware of all the knowledge obtained by every other corporate employee. To blindly preclude recovery for deceit practiced upon a corporate agent merely because a fellow employee knew the truth would make corporations safe marks for fraud. In an action for deceit, therefore,...

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