Archive for May 2014

Condo Developer’s Marketing Material and Alleged Lack of Adequate Reserve Funding Sufficient to Raise Finding of Fact for Fraudulent Concealment

May 5, 2014

In Henderson Square Condominium Association v. LAB Townhomes, L.L.C., 2014 IL App (1st) 120764, the Illinois Appellate Court found that defendant LAB Townhomes’ (“Developer”) issuance of a marketing packet for a condominium project – which included specific grades of insulation – paired with insufficient funding of reserves, raised a question of fact as to whether defendants owed a duty to plaintiff Henderson Square Condominium Association (“Condo Association”), and whether the Developer’s actions amounted to fraudulent concealment for purposes of preserving certain construction-related causes of action.

In 1996, the Developer and related entities entered into a contract with the City of Chicago to construct a mixed-use project which included retail space, a parking structure, loft condominiums, and townhouses for $7.5 million (the “Project”).  The Developer began to sell individual units and represented in its informational packet that the Project would be habitable and free from defects.  Shortly after owners began to occupy their units, certain units experienced water seepage and resulting damage.  The Condo Association filed a five-count complaint against the Developer for various causes of action including fraud, negligence, and breach of fiduciary duty.

The trial court dismissed the Condo Association’s complaint because certain counts were time barred and other counts failed to allege a cause of action.  The Illinois Appellate Court reversed.  The court, finding the recent decision in Gillespie v. Wight instructive, stated that “fraudulent concealment stops the running of the limitations period until the cause of action is discovered.”  To assert that a defendant engaged in fraudulent concealment, a plaintiff must show an affirmative misrepresentation, or, in the absence of such, show deceptive conduct resulting in an act of concealment. 

The Condo Association argued on appeal that through the misrepresentations in the Developer’s packet given to prospective purchasers, along with Developer’s deceptive conduct such as failing to budget properly for reserves, the Developer concealed the true nature of the building.  The Illinois Appellate Court agreed.  The Project’s exterior walls and third floor ceiling either lacked insulation entirely or lacked adequate insulation.  The court found that the Developer’s use of a packet to market the Project, and the representation that the Project would include specific grades of insulation, would likely encourage prospective purchasers not to make further inquiries into the type of insulation used in the Project.  Therefore, the Condo Association pleaded adequate facts to raise a question of whether the Developer owed a duty to reveal that, contrary to the representations made in the packet, exterior walls and third floor ceiling lacked insulation entirely or lacked insufficient insulation.

Lastly, reasonably budgeting for reserves is a question of fact.  The Illinois Appellate Court found that the Developer’s budget of reserves was a statement about the estimated useful life and condition of the Project, and Condo Association therefore did not make further inquiry into the condition of the property.  Thus, the Condo Association raised a question of fact as to whether the defendants’ concealment of the insulation led to their failure to reasonably fund the reserves.  The Illinois Appellate Court  reversed and remanded for further proceedings.

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