Comparative Negligence Not A Defense to Breach of Fiduciary Duty in Illinois Federal Judge Rules

In a first-of-its-kind decision, an Illinois Federal District Court ruled that comparative negligence is not a defense to a claim for breach of fiduciary duty. Judge Andrea Wood, in explaining her ruling, acknowledged that no Illinois court had considered the issue before and, as such, she was forced to rule as she believed the Illinois Supreme Court would rule if faced with the same issue.

The case, Federal Deposit Insurance Corporation (FDIC) v. Chicago Title Insurance Company and Chicago Title and Trust Company, concerned four commercial real estate closings in which the defendants, collectively referred to as Chicago Title, acted as the escrow agent. After being appointed receiver of Founders Bank, the lender in the four transactions, the FDIC filed the lawsuit alleging that Chicago Title breached its fiduciary duty by misrepresenting the true sales price and other critical information related to the four closings. The FDIC also asserted claims for breach of contract, negligent misrepresentation, and negligence.

The FDIC alleged that each of the four real estate transactions followed a similar pattern. Each purchase was funded by a down payment with the remainder coming from a loan from Founders Bank. The down payment and loan proceeds were placed with Chicago Title who released the down payment to an entity closely related to the purchaser, instead of to the seller.

On the day each transaction closed, Chicago Title also closed a separate, second transaction for the same property for a lower price. Chicago Title only recorded a deed from the first, higher-priced conveyance, however. The scheme allowed the purchasers to avoid paying a down payment and obtain the properties using solely the funds loaned by Founders Bank. The purchasers ultimately defaulted on all four loans forcing the bank to sell the properties at a loss.

The case proceeded to trial where a jury entered judgment in favor of the FDIC and against Chicago Title on all four transactions. The jury ultimately reduced the FDIC’s award by 50% due to Founders Bank’s own negligence in failing to discover and prevent the scheme. Due to a mistake in one of the jury instructions, the Court ordered a new trial as to the damages awarded for the breach of fiduciary duty, negligence, and negligent misrepresentation claims. The FDIC argued that no new trial was needed on the breach of fiduciary duty claims because contributory negligence was not a defense to a breach of fiduciary duty.

The Court acknowledged that no Illinois court had decided the issue previously so it began by reviewing both the cause of action of breach of fiduciary duty and the defense of contributory negligence. In Illinois, contributory negligence, the Court explained, is an affirmative defense that operates to reduce a tort plaintiff’s recovery where the plaintiff’s own negligence is a contributing proximate cause of its injury. The operative characteristic is that the defense applies only to tort claims.

A breach of fiduciary duty, however, is not a tort claim under Illinois law the Court explained. Although it has elements similar to a tort claim, the Illinois Supreme Court has held that claims for breaches of fiduciary duty are governed by the substantive laws of agency, contract and equity. For a breach of fiduciary duty claim to lie, the defendant must be in a position of trust and confidence. In other words, the fiduciary is in a superior position to the other party and the other party must trust and rely on the fiduciary to carry out its duties honestly and appropriately. “Absolving a fiduciary of fault, in whole or in part, on the basis of another party’s negligence would be inconsistent with the relationship giving rise to a fiduciary’s duty,” the Court concluded.

The Court’s full opinion is available here.

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