Ready or Not, Here Comes the Statute of Limitations: Illinois Appellate Court Rules the “Discovery Rule” Inapplicable to Claims for Conversion of Negotiable Instruments
The Illinois Appellate Court for the Fifth District recently ruled that three-year statute of limitations governing claims under §3-118(g) of the Uniform Commercial Code, 810 ILCS 5/3-118(g), for conversion of negotiable instruments cannot be equitably tolled by the “discovery rule.” See Hawkins v. Nalick, 2012 IL App (5th) 110553. Accordingly, the court ruled that a plaintiff’s claim alleging that a bank negligently converted a check that belonged to her was time-barred.
The facts giving rise to the plaintiff’s claim in Hawkins are unfortunate. The plaintiff’s mother died in January 2004, leaving the plaintiff claim to an inheritance of $137,826.43. 2012 IL App (5th) 110553 at ¶3. The plaintiff hired an attorney to assist with her inheritance, and her mother’s estate eventually issued a check during the administration of the estate. Id. However, upon receipt of the check, the plaintiff’s attorney forged the plaintiff’s endorsement, deposited the funds into his law firm checking account, and subsequently converted them to his own use. Id. The attorney’s forgery and conversion occurred between July 2006 and August 2006. Id. To cover his tracks, the attorney made repeated misrepresentations to the plaintiff concerning the delay in payment of her inheritance. 2012 IL App (5th) 110553 at ¶4. He even drafted false correspondence purporting to represent communications from him to the plaintiff’s mother’s estate. Id.
Still without her inheritance, the plaintiff eventually hired a new attorney who quickly uncovered the initial attorney’s malfeasance. 2012 IL App (5th) 110553 at ¶5. The plaintiff learned of her prior attorney’s improper actions in March 2010 and filed suit against him and his bank to recover her inheritance funds in April 2010. Id. The plaintiff’s claim against her initial attorney (then deceased) was resolved by summary judgment against his estate. Id. However, the bank filed a motion for summary judgment against the plaintiff, arguing that her claims were time-barred based on the three-year statute of limitations set forth in §3-118(g) of the UCC. The circuit court granted the bank’s motion. 2012 IL App (5th) 110553 at ¶8.
The appellate court affirmed the circuit court’s ruling. The court ruled that the relevant statute required the plaintiff to file her claims within three years after her causes of action accrued. 2012 IL App (5th) 110553 at ¶12, citing 810 ILCS 5/3-118(g). In the plaintiff’s case, the court stated that her claims had accrued sometime between July and August 2006, when her initial attorney forged her endorsement, deposited her funds, and converted them to his own use. 2012 IL App (5th) 110553 at ¶¶13 – 14. Accordingly, the statute required the plaintiff to file her claims no later than August 2009.
Recognizing her claim was filed after the expiration of the limitations period, the plaintiff argued that the relevant limitations period should have been tolled by operation of the “discovery rule,” which is a “judicially created rule that tolls the beginning of a statute of limitations until the injured plaintiff knows or reasonably should know that she has been injured and that her injury was wrongfully caused.” 2012 IL App (5th) 110553 at ¶15. In response, the court acknowledged that there were no facts to suggest that the plaintiff was aware or should have been aware of her claim of conversion until March 2010 — after the expiration of the limitations period. 2012 IL App (5th) 110553 at ¶16. The court also noted that the Illinois Supreme Court “has not addressed the issue of the applicability of the discovery rule in a case of conversion of a negotiable instrument.” 2012 IL App (5th) 110553 at ¶17.
Nevertheless, the court rejected the plaintiff’s argument and ruled that the statute of limitations governing claims for conversion of negotiable instruments cannot be tolled by the discovery rule. 2012 IL App (5th) 110553 at ¶25. In support of its holding, the court analyzed other Illinois appellate decisions and decisions from other states, which combined to form an “overwhelming majority” of jurisdictions that have declined to apply the discovery rule to claims akin to the plaintiff’s. 2012 IL App (5th) 110553 at ¶24. The basis for these decisions is that the strict application of the limitations period facilitates the rapid flow of commerce while providing the plaintiff — who is in the best position to detect his or her losses — an adequate opportunity to seek redress. 2012 IL App (5th) 110553 at ¶¶20 – 21, 24. The court also predicted that the Illinois Supreme Court would adopt this majority position to adhere to Illinois’ policy of following the majority interpretation of the UCC. 2012 IL App (5th) 110553 at ¶25. Finally, the court stated that the Illinois legislature had expressly included the discovery rule in other sections of the UCC, which supported the strict application of the limitations period associated with §3-118(g). 2012 IL App (5th) 110553 at ¶28 (comparing 810 ILCS 5/3-416(d), 5/3-417(f), 5/4-208(f), and 5/3-118(g)).
Ultimately, the court acknowledged that the “mechanical application” of the relevant statute of limitations led to a “harsh result,” given the facts of the plaintiff’s case, but was necessary to serve the “greater good” of “swift resolution of controversies and ‘certainty of liability’ advanced by the U.C.C.” 2012 IL App (5th) 110553 at ¶27, quoting Husker News Co. v. Mahaska State Bank, 460 N.E.2d 476, 479 (Iowa 1990). Hawkins provides a cautionary tale to individuals and businesses and encourages them to take swift action to account for funds they are owed or otherwise scheduled to receive by virtue of a negotiable instrument. The case also reaffirms that banks and other financial institutions enjoy a “certainty” that they cannot incur liability in connection with conversion claims relating to transactions occurring more than three years in the past.