23-25 Bldg. P'ship v. Testa Produce, Inc. - 381 Ill. App. 3d 751, 320 Ill. Dec. 87, 886 N.E.2d 1156 (2008)

Rule:

A contract induced by fraud is not void, but is voidable at the election of the party claiming to have been defrauded. Although the perpetrator of the fraud cannot enforce a voidable contract, the innocent party may: (1) rescind the contract, or (2) waive the defect, ratify the contract, and enforce it.

Facts:

The 23-25 Building Partnership was owned by the beneficiaries of a land trust. The land trust, and defendants Testa Produce, Inc. and Peter Testa, owned subdivision units. Subsequently, EDC Development Company (EDC) agreed to purchase the entire subdivision if all the unit-owners agreed to sell. Pursuant to an inducement agreement between defendants and the land trust, defendants agreed to pay the partnership $50,000 as an inducement to agree to the sale. After the sale was complete, defendants refused to pay the $50,000, contending that the partnership fraudulently misrepresented that it needed the money because it was "upside down" in its mortgage. The partnership filed a breach of contract suit against Testa and Testa Produce. The trial court entered judgment in favor of the partnership and against the defendants, in the amount of $50,000, plus interest of $17,212.68, attorneys' fees of $27,454.25, and costs and expenses of $2,075.37, for a total of $96,742.30. According to the trial court, the defendants established through clear and convincing evidence that the partnership induced them to enter into the contract through its fraudulent misrepresentation. Notwithstanding the fraud, the court held rescission was not available to the defendants because the parties could not be restored to their original positions. On reconsideration, the court affirmed the original judgment but vacated the award of attorney’s fees. On further appeal, the defendants contended that the partnership lacked standing to file its lawsuit because the partnership was not a party to the Inducement Agreement.

Issue:

1. Did the partnership have standing to initiate the present lawsuit, notwithstanding the fact that it was not party to the Inducement Agreement?
2. Was rescission unavailable to the defendants, notwithstanding the fact that the partnership induced the defendants to enter into the contract through fraudulent misrepresentation?

Answer:

1) Yes. 2) No.

Conclusion:

The appellate court determined that the partnership had standing based on its right to the property's proceeds and the termination of the land trust. However, the court held that rescission was an available remedy to defendants because the inducement agreement was invalid as a product of the partnership's fraudulent misrepresentation. According to the court, although it was impossible to place the partnership in the position it was in prior to the sale of the property, this impossibility was attributable to the fraudulent misrepresentations. Accordingly, the appellate court reversed the trial court’s judgment for the partnership.