The Fifth District of the Illinois Appellate Court recently affirmed a trial court's refusal to apply the discovery rule to toll the statute of limitations and the entry of summary judgment in an action for conversion of negotiable instruments. Although the Illinois Appellate Court had previously found that the discovery rule does not apply to claims for conversion of negotiable instruments, this decision clarified that the discovery rule is inapplicable even where the victim was not in the best place to discover the injury.
In Hawkins v. National City Bank, 202 IL App (5th) 110553 (Sept. 5, 2012), Corinne Hawkins, had retained defendant Dennis Nalick in order to assist her in obtaining an inheritance from her deceased mother's estate, which was being administered in Ohio. After corresponding with the Ohio probate attorneys, Mr. Nalick received a $137,826.45 check representing Ms. Hawkins' share of her mother's estate. Unbeknownst to Ms. Hawkins, upon receipt of the check, Mr. Nalick forged the plaintiff's endorsement, deposited it into his firm's bank account, and converted the funds to his own use. Mr. Nalick then proceeded to make misrepresentations to Ms. Hawkins regarding the "delay" in obtaining her inheritance. More than three years later, the plaintiff hired a new attorney, who discovered that Mr. Nalick had received the check, forged the plaintiff's endorsement and converted the funds. Plaintiff then filed an action against Mr. Nalick and the bank to recover the funds. The trial court granted the defendant bank's motion for summary judgment based on the plaintiff's failure to file the action within the three-year statute of limitations set forth in the Uniform Commercial Code. In this regard, the trial court declined the plaintiff's invitation to apply the discovery rule in order to toll the statute of limitations. The plaintiff timely appealed the summary judgment ruling.
On appeal, the Fifth District affirmed the trial court's summary judgment order. The court explained that statutes of limitation relating to the conversion of negotiable instruments such as checks are governed by the three-year statute of limitations set forth in section 3-118(g) of the Uniform Commercial Code. Turning to the issue of the applicability of the discovery rule, the court looked to Haddad's of Illinois, Inc. v. Credit Union 1 Credit Union, 286 Ill.App.3d 1069, 1073 (4th Dist. 1997). In Haddad's of Illinois, the Fourth District considered an issue of first impression in Illinois — whether the discovery rule acts to toll the statute of limitations set forth in section 3-118(g) of the UCC. After surveying various jurisdictions, the court in Haddad's found that the discovery rule does not apply to claims alleging conversion of negotiable instruments. The court also considered the First District's decision, ten years later, in Kidney Cancer Ass'n v. North Shore Community Bank and Trust Company, 373 Ill.App.3d 396 (1st Dist. 2007), which reached the same result regarding the discovery rule. In both cases, the courts attempted to ameliorate the potentially harsh results emphasizing that the plaintiff was in the best position to have discovered the conversion. See Kidney Cancer Ass'n, 373 Ill.App.3d at 406 ("In addition, the victim of the conversion is in the best position to easily and quickly detect the loss and take appropriate action. … The Association, more than the Bank, was in better position to establish internal controls for its donations."); Haddad's, 286 Ill.App.3d at 1074–75 ("Those courts declining to apply the discovery rule have done so based on two grounds …. [s]econd … the victim of the conversion is in the best place to easily and quickly detect the loss and take appropriate action."). In Hawkins, the Fifth District explained that the plaintiff was unlike the plaintiffs in Kidney Center Association or Haddad's of Illinois, stating "there is no indication that the plaintiff in the present case was in the best position to easily and quickly detect the loss and take appropriate action or that she could have detected the conversion sooner with adequate bookkeeping." Notwithstanding the fact that the plaintiff was not similarly situated to plaintiffs in the earlier cases, the Fifth District affirmed the trial court's refusal to apply the discovery rule to toll the statute of limitations and its grant of the defendant's motion for summary judgment.
The Fifth District's holding in Hawkins v. Nalick, confirms the strict prohibition against the use of the discovery rule to toll the statute of limitation in cases involving conversion of negotiable instruments. Although the general prohibition had been in place for the 15 years since Haddad's of Illinois, both Haddad's of Illinois and subsequently Kidney Cancer Association, appeared to leave open the possibility that the discovery rule could be available in cases where either the plaintiff was not in a position to easily and quickly detect the loss or where the plaintiff's bookkeeping had been adequate. Hawkins closed the door on that possibility by holding that regardless of whether the plaintiff had an opportunity to detect the loss and regardless of whether better bookkeeping could have caught the loss, the discovery rule is not available to plaintiffs in actions for conversion of negotiable instruments.