Burke v. 401 N. Wabash Venture, L.L.C.

Filing 94

MEMORANDUM Opinion and Order Signed by the Honorable George M. Marovich on 6/28/2011. Mailed notice(nf, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

MICHAEL BURKE,
Plaintiff,
v.
401 N. WABASH VENTURE, LLC,
Defendant.

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08 C 5330
Judge George M. Marovich

MEMORANDUM OPINION AND ORDER
After the Court dismissed his first two complaints (in rounds one and two), plaintiff
Michael Burke (“Burke”) filed a second-amended complaint against defendant 401 N. Wabash
Venture, LLC. (the “developer”). The second-amended complaint included sixteen counts. The
Court struck Counts IX, X, XI, XII and XV, because, in those counts, plaintiff had attempted to
re-plead claims the Court had already dismissed with prejudice. Defendant now moves to
dismiss the remaining claims in the first-amended complaint. For the reasons set forth below,
the Court grants in part and denies in part the motion to dismiss.
I.

Background
For purposes of this motion to dismiss, the Court takes as true the allegations in

plaintiff’s second-amended complaint. The Court may consider the documents plaintiff attached
to his complaint. See Fed.R.Civ.P. 10(c). The Court may also consider documents referred to in
plaintiff’s complaint and central to his claim (so long as the documents do not require discovery
to authenticate or disambiguate), because those documents are considered part of the pleadings.
See Tierney v. Vahle, 304 F.3d 734, 739 (7th Cir. 2002).

In this case that means the Court considers the 2003Property Report, which plaintiff
referred to in his complaint and defendant attached to its motion to dismiss. This should come as
no surprise to plaintiff since the Court considered the 2003 Property Report when it dismissed
plaintiff’s first-amended complaint. Still, plaintiff asked the Court to convert defendant’s motion
to a motion for summary judgment. The Court declined, because the Court had (and still has) no
intention of considering matters outside the pleadings. When it so ruled, the Court instructed
plaintiff as follows:
Should plaintiff believe that any matters defendant submitted in connection with
its motion to dismiss are outside the pleadings, the plaintiff should so argue in its
response to the motion to dismiss and should support its argument with citations
to legal authority.
(Dkt. No. 85). Plaintiff failed to do so. Instead, plaintiff assumed (incorrectly) that everything
attached to defendant’s motion was outside the pleadings and refused to address those
documents in his response to defendant’s motion. Burying one’s head in the sand is a strategy,
but it is not a good one.
Plaintiff Burke wants his deposit back for a condominium unit he agreed to purchase but
on which he failed to close. Defendant 401 N. Wabash, LLC developed a building at 401 N.
Wabash in Chicago. The building includes several hundred condominium units, which
defendant ventured to sell.
In or about December 2006, plaintiff Burke entered a purchase agreement (the
“Agreement”) with defendant for the purchase of unit 31K and two parking spaces. Plaintiff
paid an earnest money deposit of more than $400,000.00. At the time, defendant gave plaintiff a
copy of the Property Report dated September 24, 2003 (the “2003 Property Report”). Among
other things, the 2003 Property Report stated:
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The Condominium will contain approximately three hundred twenty-six (326)
residential dwelling units that the Developer currently intends will occupy floors
forty (40) through forty-eight (48) and fifty-one (51) through eighty-eight (88) in
the Building, an undetermined number of unit parking spaces within the aboveground parking facilities that the Developer currently intends will be located on
some of floors three (3) through twelve (12) in the Building (provided that the
unit parking spaces will occupy only a portion of such above-ground parking
garage area, and the balance of the above-ground parking garage area will be
occupied by the public parking garage facility more fully described below) . . .
(2003 Property Report at 2).
On or about August 5, 2008, defendant set a closing date of August 7, 2008. Defendant
also provided Burke a copy of the condominium’s Declaration and a copy of a Special
Amendment to the Declaration. The Special Amendment stated that the sixth floor would be
used for parking spaces. Plaintiff asserts that turning the sixth floor into parking lowered the
value of his parking space and increased the amount of maintenance fees he would be required to
pay. In addition, in or about October 2007, defendant issued a Fourth Property Report. In the
Fourth Property Report, as compared to the September 2003 Property Report, annual common
expenses (which would be charged to the unit owners) increased to $7,328,455 from $5,595,700.
Finally, plaintiff asserts that defendant put only $69,584 in reserves.
Plaintiff refused to close on the unit. Defendant refused to return his earnest money
deposit. This suit followed.
II.

Standard on a motion to dismiss
The Court may dismiss a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil

Procedure if the plaintiff fails “to state a claim upon which relief can be granted.” Fed.R.Civ.P.
12(b)(6). In considering a motion to dismiss, the Court accepts as true all well-pleaded factual
allegations and draws all reasonable inferences in the plaintiff’s favor. McCullah v. Gadert, 344

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F.3d 655, 657 (7th Cir. 2003). Legal conclusions, however, are not entitled to a presumption of
truth. Ashcroft v. Iqbal, 129 S.Ct. 1937, 1951 (2009) (rejecting, as conclusory, allegations that
defendants “knew of, condoned, and willfully and maliciously” engaged in conduct). Under the
notice-pleading requirements of the Federal Rules of Civil Procedure, a complaint must “give the
defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atlantic
Corp. v. Twombly, 127 S.Ct. 1955, 1964 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47
(1957)). A complaint need not provide detailed factual allegations, but mere conclusions and a
“formulaic recitation of the elements of a cause of action” will not suffice. Bell Atlantic, 127
S.Ct. at 1964-1965. A complaint must include enough factual allegations to “raise a right to
relief above a speculative level.” Bell Atlantic, 127 S.Ct. at 1965. “After Bell Atlantic, it is no
longer sufficient for a complaint ‘to avoid foreclosing possible bases for relief; it must actually
suggest that the plaintiff has a right to relief, by providing allegations that raise a right to relief
above the speculative level.’” Tamayo v. Blagojevich, 526 F.3d 1074, 1084 (7th Cir. 2008)
(quoting Equal Employment Opportunity Comm’n v. Concentra Health Services, Inc., 496 F.3d
773, 776 (7th Cir. 2007)). To survive a motion to dismiss, a claim must be plausible. Iqbal, 129
S.Ct. at 1950.

III.

Discussion
A.

Plaintiff’s claims that defendant breached the contract
by not seeking plaintiff’s approval for changes
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In Counts I, II, and III of the second-amended complaint, respectively, plaintiff again
alleges that defendant breached its agreement with plaintiff by: I) using the sixth floor for
parking, II) making changes to the budget, and III) providing inadequate reserves when the
developer turned over the building to the condominium association. The Court previously
dismissed these claims, because plaintiff failed to cite any contract provision that had been
breached and, therefore, failed to state a plausible claim.
This time, plaintiff cites a contract provision he believes defendant breached. The
contract defendant is alleged to have breached is the Agreement between plaintiff and defendant
for the sale of the unit at 401 N. Wabash. (Plaintiff attached a copy of the Agreement to his
second-amended complaint.) The Agreement states, in relevant part:
Prior to closing, Seller will cause the Declaration of Condominium Ownership
and of Easements, Restrictions, Covenants and By-Laws for the Residences at
401 North Wabash Avenue, a Condominium (“Condominium Declaration”) to be
recorded in the Office of the Recorder of Deeds of Cook County, Illinois
(“Recorder’s Office”). Purchaser acknowledges that Seller Delivered to
Purchaser prior to Purchaser’s execution of this Purchase Agreement a copy of (1)
the Condominium Declaration which includes a copy of the By-Laws of the
Association (“By-Laws”), (2) the proposed first year’s budget for the Association
(“Budget”), (3) the Floor Plan of the Purchased Unit, (4) the property report
(“Property Report”) required by Chapter 13-72 of the Municipal Code of Chicago
and (5) all other items required by Section 22 of the Act. The Condominium
Declaration, By-Laws, Budget, Floor Plans and such other documents required by
Chapter 13-72 of the Municipal Code of Chicago and Section 22 of the Act, as
amended from time to time, are collectively called the “Condominium
Documents.” Purchaser acknowledges that Purchaser has had the opportunity to
review the Condominium Documents. Seller reserves the right, in its sole and
absolute discretion, to modify the Condominium Documents, together with the
Articles of Incorporation of the Association and the Statement of Record required
by the Interstate Land Sales Full Disclosure Act (the “HUD”) report, provided
that Seller shall notify Purchaser or obtain the Purchaser’s approval of any
changes in the Condominium Documents, the HUD Report and any such other
documents, as the case may be, when and if such notice or approval is required
by law.

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(Agreement ¶ 4(a) (emphasis added)). Plaintiff’s theory is that defendant made a contractual
promise to seek plaintiff’s approval for changes to the Property Report when such approval was
required by law and that, by making changes without seeking plaintiff’s approval when
plaintiff’s approval was required by law, defendant breached the contract. Plaintiff asserts that
the law that required defendant to obtain plaintiff’s approval before making changes is § 22 of
the Illinois Condominium Property Act.
Plaintiff’s breach of contract claims have a fatal flaw, which is that plaintiff has not
pointed to any law that required defendant to obtain plaintiff’s permission before making
changes to the Property Report. Section 22 of the Illinois Condominium Property Act states “no
changes or amendments may be made in any of the items furnished to the prospective buyer
which would materially affect the rights of the buyer or the value of the unit without obtaining
the approval of 75% of the buyers then owning interest in the condominium.” 765 ILCS §
605/22. It does not, however, require a developer to obtain any particular purchaser’s
agreement before changing the Property Report. Because plaintiff has failed to point to a law
that required defendant to obtain plaintiff’s permission before making changes to the Property
Report, plaintiff’s breach of contract claims fail to state a claim. See Goldberg v. 401 N. Wabash
Venture LLC, Case No. 09 C 6455, 2010 WL 1655089 at *12 (N.D. Ill. April 22, 2010).
Counts I, II and III are dismissed.

B.

Plaintiff’s claims for consumer fraud

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In Counts IV and V, plaintiff asserts that defendant violated the Illinois Consumer Fraud
and Deceptive Trade Practices Act. To state a claim under the Act, a plaintiff must allege: “(1)
a deceptive act or practice, (2) intent on the defendants’ part that plaintiff rely on the deception,
and (3) that the deception occurred in the course of conduct involving trade or commerce.”
Siegel v. The Levy Org. Dev’t Co., Inc., 153 Ill.2d 534, 542 (Ill. S.Ct. 1992).
In Count IV, plaintiff asserts that defendant violated the Act by increasing the condo
association’s budget during the time between the 2003 Property Report (which plaintiff alleges
he received when he signed the Agreement) and 2008, when defendant disclosed an amended
budget. The Court dismissed this claim previously, because such a claim was not actionable
unless defendant knew, when it gave plaintiff the budget in 2006, that the operating budget
would actually be much higher than defendant was telling plaintiff. Plaintiff has cured this
defect by pleading that defendant knew the budget in the Property Report was “unrealistically
low and that it would be greatly increased.”
Notwithstanding that change to plaintiff’s claim, defendant argues that plaintiff still fails
to state a claim, because the Property Report that plaintiff actually received included a budget
that was higher than the final budget disclosed in 2008. Specifically, defendant puts forth an
affidavit stating that the Property Report plaintiff actually received when he signed the
Agreement in December 2006 was not the 2003 Property Report (as plaintiff alleges in his
second-amended complaint) but actually the 2005 Property Report. Defendant has attached a
copy of the 2005 Property Report, which, according to defendant, discloses a budget that is
higher than the actual budget in 2008. Thus, defendant argues, plaintiff can have no claim for
fraud. The problem with defendant’s argument, however, is that the Court must take as true

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plaintiff’s allegation that he received the 2003 Property Report. The Court cannot consider the
2005 Property Report, because it was not a document that was mentioned in plaintiff’s secondamended complaint and, therefore, is outside of the pleadings. So, while defendant may have the
makings of a promising summary judgment motion, it has not shown that plaintiff has failed to
state a claim.
Defendant also argues that Count IV fails to state a claim, because the Agreement
allowed defendant to make changes to the Property Report. Nothing in the Agreement, however,
allowed defendant knowingly to understate the budget in an attempt to attract buyers. See
Goldberg, 2010 WL 1655089 at * 8. The Court will not dismiss Count IV.
In Count V, plaintiff alleges that defendant knowingly set the reserves in the operating
budget at an unrealistically low level in order to induce potential purchasers to buy units in the
building. Defendant makes essentially the same arguments for why this claim should be
dismissed as it made with respect to Count IV, and the Court rejects the arguments. Plaintiff has
stated a claim in Count V.
C.

Plaintiff’s claims for constructive fraud

In Counts VI and VII, plaintiff asserts claims for constructive fraud. Plaintiff asserts that
defendant breached a fiduciary duty to plaintiff when it changed the operating budget (Count VI)
and failed to maintain sufficient reserves (Count VII). Defendant moves to dismiss these claims,
because defendant owes no fiduciary duty to plaintiff. The Court agrees with defendant.
Plaintiff asserts that the fiduciary duty defendant owed plaintiff arises from § 9(c) of the
Illinois Condominium Property Act, which requires condominium boards to adopt budgets that
provide for “reasonable reserves for capital expenditures.” 765 ILCS 605/9(c). Based on this

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provision, courts have concluded that a condominium developer owes a fiduciary duty to the
condominium association to maintain adequate reserves. See Board of Mgrs. of Weathersfield
Condo. Assoc. v. Schaumburg Ltd. Partnership, 717 N.E.2d 429, 435 (Ill. App.Ct. First Dist.
1999); Maerker Pt. Villas Condo. Assoc. v. Szymski, 655 N.E.2d 1192, 1195-1196 (Ill. App.Ct.
2nd Dist. 1995). As this Court has already concluded in this litigation, these cases do not stand
for the proposition that the developer owes a fiduciary duty to a prospective purchaser who
never becomes a unit owner. Plaintiff has put forth no case that suggests defendant owed a
fiduciary duty to him, and he lacks standing to sue on behalf of the condominium association.
Accordingly, the Court agrees that plaintiff has failed to state a claim in Counts VI and
VII. Those claims are dismissed.
D.

Plaintiff’s claim for rescission

Once again, plaintiff seeks to rescind the agreement he made with defendant. This time,
in Count VIII, plaintiff asserts that he is allowed to rescind the contract, because it included what
he considers to be an unenforceable liquidated damages clause (i.e., a penalty).
The purchase agreement includes a liquidated damages provision that, in essence, says
that if the purchaser defaults, the seller can keep the earnest money deposit. The contract further
states:
In accordance with Section 1703(d) of the Interstate Land Sales Full Disclosure
Act, if Seller is otherwise entitled to the liquidated damages described above,
Seller shall return to Purchaser amounts paid to Seller (excluding interest paid
under the Purchase Agreement) in excess of: (x) 15% of the Purchase Price
(excluding any interest paid under the Purchase Agreement) or (y) the amount of
Seller’s actual damages, whichever is greater.
(Agreement at ¶12(a)) (emphasis added). The italicized language is the language plaintiff asserts
constitutes an unlawful liquidated damages penalty.
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In round one, plaintiff argued that this language violated the Illinois Consumer Fraud and
Deceptive Trade Practices Act. In rejecting the argument, as a matter of law, this Court
explained how “the Interstate Land Sales Full Disclosure Act . . . not only authorizes but
strongly encourages the inclusion of the very provision plaintiff says violates the Illinois
Consumer Fraud and Deceptive Trade Practices Act.” (Opinion at 6).
Now, plaintiff argues that the provision is an unenforceable liquidated damages penalty
and that, accordingly, plaintiff may rescind the contract. The Court need not consider whether
the clause is an unenforceable liquidated damages clause under Illinois law. Under Illinois law,
even if the liquidated damages clause is unenforceable, the remedy is not, as plaintiff would like,
to rescind the contract. The remedy is actual damages. See Grossinger Motorcorp, Inc. v.
American Nat’l Bank and Trust, 240 Ill.App.3d 737, 752 (Ill.App.Ct. First Dist. 1993) (“In sum,
we conclude that the liquidated damages provision is unenforceable and that consequently
defendant is only allowed to recover actual damages resulting from the breach.”). Because the
inclusion of an unenforceable liquidated damages provision is not grounds for rescission,
plaintiff’s claim for rescission fails as a matter of law.
Count VIII is dismissed with prejudice.
E.

Plaintiff’s claim for declaratory judgment

In Count XIII, plaintiff seeks a declaratory judgment that defendant breached its
Agreement with plaintiff, inserted an unenforceable liquidated damages clause in the Agreement
and violated the Illinois Condominium Property Act. In other words, plaintiff seeks a
declaration that it should win all of its other claims, including claims that were previously
dismissed with prejudice. This claim is redundant, and, therefore, it is stricken.

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F.

Plaintiff’s Count XIV

In Count XIV, plaintiff brings another claim for breach of contract. The provision that
plaintiff claims defendant breached is the provision that states:
In accordance with Section 1703(d) of the Interstate Land Sales Full Disclosure
Act, if Seller is otherwise entitled to the liquidated damages described above,
Seller shall return to Purchaser amounts paid to Seller (excluding interest paid
under the Purchase Agreement) in excess of: (x) 15% of the Purchase Price
(excluding any interest paid under the Purchase Agreement) or (y) the amount of
Seller’s actual damages, whichever is greater.
(Agreement at ¶12(a)) (emphasis added).
Plaintiff alleges that he signed an Agreement in December 2006 for unit 31K and two
parking spaces. Plaintiff alleges that he put down an earnest-money deposit of $456,426.00,
which constituted 20% of the purchase price. (Agreement at ¶ 1(b)). Plaintiff’s theory is that
defendant breached the contract by not refunding to him the difference between his earnest
money deposit and the greater of (a) 15% of the purchase price or (b) seller’s actual damages. If
plaintiff prevails on this claim, he would be entitled to a refund of up to $114,106.50 of his
earnest-money deposit.
Plaintiff’s claim assumes that the seller’s actual damages are not greater than 20% of the
purchase price. Plaintiff makes no allegations about the seller’s actual damages. Instead,
plaintiff alleges that defendant “has failed to prove actual damages.” The contract does not say
that defendant must prove actual damages, and defendant is not the party attempting to state a
claim. It is plaintiff who must allege a plausible claim. As is widely understood, the value of
residential real estate has fallen precipitously since December 2006, when plaintiff entered the
contract. In order to turn Count XIV into a plausible claim, plaintiff would have to allege that

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seller’s actual damages are less than 20% of the purchase price. Plaintiff has not done so, and
plaintiff’s claim, as currently plead, is not plausible.
The Court dismisses Count XIV.
G.

Plaintiff’s claims under the Interstate Land Sales Full Disclosure Act

In Count XVI of the second-amended complaint, plaintiff has included a claim under the
Interstate Land Sales Full Disclosure Act, 15 U.S.C. § 1701, et seq.
Among other things, the Interstate Land Sales Full Disclosure Act allows a purchaser to
revoke (for a period of two years from the date of signing the contract) a contract if the
developer fails to include certain provisions. One of the provisions the developer is, thus,
strongly encouraged to include is:
that, if the purchaser or lessee loses rights and interest in the lot as a result of a
default or breach of the contract or agreement which occurs after the purchaser or
lessee has paid 15 per centum of the purchase price of the lot, excluding any
interest owed under the contract or agreement, the seller or lessor (or successor
thereof) shall refund to such purchaser or lessee any amount which remains after
subtracting (A) 15 per centum of the purchase price of the lot, excluding any
interest owed under the contract or agreement, or the amount of damages incurred
by the seller or lessor (or successor thereof) as a result of such breach, which ever
is greater, from (B) the amount paid by the purchaser or lessee with respect to the
purchase price of the lot, excluding any interest paid under the contract or
agreement
15 U.S.C. § 1703(d)(3).
In Count XVI, plaintiff asserts that defendant violated this section of the Interstate Land
Sales Full Disclosure Act by failing to refund to him the amount that remained after subtracting
from the earnest money the greater of (a) 15% or (b) defendant’s actual damages. Plaintiff’s
claim is absurd. The statute does not require defendant to refund the difference. The statute
does not even require defendant to include the provision. What the statute does is provide a

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private right of action to revoke the contract for a period of two years if defendant fails to
include the relevant provision. As plaintiff has admitted in the allegations of his secondamended complaint (and as is clear from the Agreement which plaintiff attached to his secondamended complaint), defendant did not fail to include the provision. Defendant included the
provision.
Plaintiff’s Count XVI fails as a matter of law and is dismissed with prejudice.
IV.

Conclusion
For the reasons set out above, the Court grants in part and denies in part defendant’s

motion to dismiss. Counts IV and V are not dismissed. All other claims (Counts I, II, III, VI,
VII, VIII, XIII, XIV and XVI) are dismissed with prejudice, because plaintiff failed to state a
claim after three attempts.
Defendant shall answer on or before July 12, 2011. This case is set for a status hearing
on July 19, 2011 at 11:00 a.m.

ENTER:

George M. Marovich
United States District Judge
DATED: June 28, 2011

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