WHEN DOES A DISPUTE WARRANT A DECLARATORY JUDGMENT?

May 27, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

During the lifetime of a controversy, there is a fleeting moment when the nifty remedy of declaratory judgment is available.

Figuring out when a controversy is ripe for declaratory judgment -- but not too ripe -- still mystifies many attorneys. But even Appellate Court justices dealing with the same claim can disagree on when this remedy is barred.

A three-count complaint involving the construction of an ethanol plant in Lena, Ill., provides useful lessons for figuring out when you can file a declaratory judgment complaint. Adkins Energy LLC v. Delta-T Corp., 2004 WL 692251 (2 Dist., March 31).

Adkins Energy -- the owner of the corn-to-ethanol processing facility -- filed a complaint against an engineering firm, Delta-T Corp., in Stephenson County Circuit Court.

Delta-T allegedly threatened to su Adkins if it did not receive a contract for work on the project. Striking first, Adkins filed a complaint for declaratory judgment.

Count 1 sought a ruling that Delta-T did not have an equity interest in the ethanol plant. The second count asked for a declaration that Delta-T has no contractual rights against Adkins and that Delta-T is not entitled to a contract for work on the project. The final count prayed for a judgment that Delta-T does not have a right to compensation for its alleged work on the project.

Moving for summary judgment on count 1, Delta-T conceded that it has no right to an equity interest in the Ethanol facility. On the remaining counts, Delta-T moved to dismiss, arguing that the complaint was premature and that Adkins could not sue for a declaration of non-liability for past conduct.

The Circuit Court granted Delta-T's motions, and Adkins appealed. The Appellate Court affirmed the ruling on count 1, but reversed the order dismissing counts 2 and 3, with one justice dissenting on the handling of the third count.

Here are some highlights of Justice Frederick J. Kapala's majority ruling, and Justice Susan Fayette Hutchinson's partial dissent (both with various omissions not noted in the quoted text).

Majority Opinion

"A declaratory judgment action requires (1) a plaintiff with a tangible, legal interest; (2) a defendant with an opposing interest; and (3) an actual controversy between the parties concerning such interests.

"For an actual controversy to exist, the case must present a concrete dispute admitting of an immediate and definitive determination of the parties' rights, the resolution of which will aid in the termination of the controversy or some part thereof. Howlett v. Scott, 69 Ill.2d 135, 141-42 (1977), citing Underground Contractors Association v. City of Chicago, 66 Ill.2d 371, 375 (1977).

"The declaratory judgment process exists so that the court may address a controversy after a dispute has arisen but before steps are taken that would give rise to a claim for damages or other relief. In other words, a suit for declaratory judgment is premature if no actual controversy exists, but as long as the case is not one in which the controversy has progressed so far that there is nothing left for the parties to do except file suit for damages or other consequential relief, the controversy may still be resolved by declaratory judgment."

Ripeness

"Delta-T," Kapala noted, "first maintains that Adkins' declaratory judgment action lacked an actual controversy because it was premature, citing Howlett. In Howlett, the secretary of state sought a declaratory judgment that his receipt of consulting fees was not a conflict of interest with his position on the Vehicle Recycling Board. An investigation by the attorney general's office had found that a conflict of interest existed, but the investigative report recommended delaying any action until the Supreme Court had reviewed two relevant Appellate Court decisions.

"The Howlett court concluded that the secretary's legal action was premature because the attorney general did not indicate an intent to prosecute and the declarations sought depended on the future outcome of the two pending cases. Howlett, 69 Ill.2d at 142; see also Delano Law Offices P.C. v. Choi, 154 Ill.App.3d 172, 174 (1987) (action seeking declaration that medical record charges were unreasonable was premature because defendant had not sought to enforce payment).

"Adkins contends that Miller v. County of Lake, 79 Ill.2d 481 (1980), is more applicable to this situation. There, the Lake County state's attorney issued a formal opinion that Miller had violated corruption laws by serving as a county board member while owning stock in and serving as a director for a bank used as a depository for county money. The state's attorney also indicated that he intended to prosecute Miller for these violations.

"Miller filed a complaint for declaratory relief. The Supreme Court held that the indication of an intent to prosecute, along with the continuation of the relationship forming the basis of the suit, showed that an actual controversy existed.

"In the present case, Delta-T repeatedly asserted its belief that Adkins had to either include it in the ethanol project or compensate it for expenses. Delta-T also indicated that, if an agreement was not reached with Adkins, Delta-T would file a lawsuit.

"Unlike the circumstances in Howlett, Adkins' rights were not dependent on future events. Further, as in Miller, Delta-T clearly threatened litigation, thus creating an actual controversy. See also Roland Machinery Co. v. Reed, 339 Ill.App.3d 1093, 1099 (2003) ('An expression of intent by one party to take legal action against another can be the basis of an actual controversy ripe for declaratory relief')."

Past Conduct

"Delta-T also maintains that the trial court was correct in granting Delta-T's motion to dismiss," Kapala explained, "because Adkins sought declarations of non-liability for past conduct, which are not obtainable under the declaratory judgment statute. See Howlett, 69 Ill.2d at 143 (plaintiff, who had already terminated relationship at issue, not entitled to declaratory judgment because his rights were fixed).

"Adkins argues that this doctrine is applicable only when the plaintiff's past conduct is at issue and that in this case Adkins did not allege any actions on its part giving rise to the question of liability.

"Delta-T responds that the declarations Adkins sought would necessarily involve the past conduct of both parties. Adkins further maintains that Howlett was limited by the Supreme Court in Miller to situations where the defendant never threatened litigation.
"Both Adkins and Delta-T misconstrue the doctrine of non-liability for past conduct.

"The doctrine of non-liability for past conduct bars an action for declaratory judgment when the conduct that makes a party liable, that is, amenable to suit, has already occurred. The fact that the amount allegedly owed under a contract is already fixed does not preclude a declaratory judgment action, because a party is not amenable to suit until a breach occurs. Therefore, declaratory judgment could guide future conduct in such a situation because a court could determine whether or not a valid contract exists and, thereby, inform the party that potentially owes the money whether or not it would be in breach of contract should it refuse to pay.

"In such a situation, only when a party refuses to pay does a declaratory judgment action become improper because, at that point, the refusal to pay either is or is not a breach of contract and there is no future action to guide. A close examination of the case law in this area supports our interpretation.

"The court in Miller found that Howlett was distinguishable because, unlike in Howlett, there was clear intent to prosecute and the relationship forming the basis of the suit was still ongoing. We believe that the fact that the relationship was still ongoing in Miller was relevant because that meant that the plaintiff could avoid future liability.

"The purpose of a declaratory judgment action is to determine the rights of the parties so that the plaintiff can alter his future conduct to avoid liability. In Miller, the plaintiff could be liable for future acts related to the bank involved in the controversy because he was still involved with the bank. Conversely, in Howlett, the plaintiff was no longer involved with the entity that was involved in the controversy and, hence, could be liable only for past acts related to that entity.

"In Eyman v. McDonough District Hospital, 245 Ill.App.3d 394 (1993), the Appellate Court held that a declaratory judgment that the plaintiff properly terminated her employment agreement and could keep money advanced to her was not obtainable because the plaintiff was not seeking to learn consequences of future acts.

"In Chicago & Eastern Illinois Railroad Co. v. Reserve Insurance Co., 99 Ill.App.3d 433, 437 (1981), the Appellate Court reversed the declaratory relief awarded to the plaintiff by the trial court, because the plaintiff sought a declaration that its past conduct did not breach certain insurance policies rather than a declaration that it would not incur liability for a future course of conduct. These cases turned on whether the act that could be considered the breach of contract had already occurred, not whether the acts that formed the contract had already occurred.

"The recent decision in Roland, demonstrates that when the potentially breaching act has not yet occurred, a declaratory judgment action is proper. In Roland the plaintiff had contracted to sell the defendant a bulldozer. The plaintiff delivered the bulldozer, which the defendant accepted. After complaining of various defects in the bulldozer, the defendant attempted to revoke his acceptance and obtain a refund of the purchase price. Instead of denying the defendant's request, the plaintiff brought a declaratory judgment action seeking a declaration that it was not obligated to accept the return of the bulldozer and refund the purchase price.

"The Roland court held that the doctrine of non-liability for past conduct was not applicable in that case because, inter alia, the plaintiff was seeking guidance on whether he would be obligated under the contract to accept the return and issue a refund.

"This case involves the determination of whether Adkins has any obligations to Delta-T. Therefore, Adkins would be liable to Delta-T only if it breached any such obligations. The instant situation is similar to that of an insurance company that seeks to determine whether it must pay an insured under an insurance contract.
"Although there is scant Illinois case law on the application of the doctrine of non-liability for past conduct to insurance cases, we may look to foreign jurisdictions for guidance. In interpreting its declaratory judgment statute, which is based on the Uniform Declaratory Judgments Act, the Georgia Supreme Court held that it is proper for an insurance company to bring a declaratory judgment action to seek a determination that it need not pay the insured. See Atlanta Casualty Co. v. Fountain, 413 S.E.2d 450, 452 (1992). However, if the insurance company has already denied the claim, then declaratory judgment is improper because the insurance company would be seeking a determination that its denial of the claim, that is, past conduct, did not constitute a breach of contract.

"In this case, Delta-T essentially seeks to be made a subcontractor or, in lieu of such an appointment, be paid for its expenses incurred in connection with the Adkins plant. Consequently, Adkins would not have breached any such agreement until it has made Delta-T a subcontractor and has refused to pay Delta-T's expenses.

"There is no indication that Adkins has already refused either of Delta-T's demands. Analogous to an insurance company seeking a determination of its obligations under an insurance contract, Adkins is using declaratory judgment to determine whether it will be liable for breach of contract if it refuses to comply with Delta-T's assertions. Therefore, we hold that the doctrine of non- liability for past conduct does not bar either count 2 or count 3 of Adkins' amended complaint."

Terminating the Controversy

"Delta-T points out that a court must refuse to enter a declaratory judgment if it will not terminate the controversy or some part of the controversy," Kapala wrote. "Delta-T contends that this doctrine should bar count 2 because, if the trial court concludes that Delta-T is entitled to a subcontract, the controversy will continue. However, Delta-T misapplies the rule.

"If the trial court grants the relief sought in count 2, a declaration that Delta-T does not have subcontractor rights, this portion of the controversy will be resolved.

"Accordingly, we reverse the trial court's dismissal of counts 2 and 3 and remand for further proceedings."

The Dissent

Dissenting in part, Hutchinson concluded that count 3 was properly dismissed.

"In count 3 Adkins sought a declaration that Delta-T had no right to compensation from Adkins for expenses that Delta-T had incurred in connection with the ethanol plant. The letters sent to Adkins by Delta-T reflect that Delta-T was requesting compensation in some manner for its 'efforts.' As such, Delta-T sought to enter into a contractual agreement with Lurgi PSI, one of Adkins' entities, or in the alternative, to be compensated 'for the services it has provided to Adkins and Adkins' predecessors since 1995.'

"Based on these representations, it appears that Delta-T was seeking compensation for services that it had provided in the past on behalf of Lurgi PSI, a related entity of Adkins.

"The purpose of a declaratory judgment is 'to settle and fix rights before there has been an irrevocable change in the position of the parties that will jeopardize their respective claims of right.' In this case, whatever compensation Delta-T may be entitled to for services and other expenses that it previously incurred is already fixed, and Adkins is not now attempting to avoid liability for a future course of conduct.

"I believe that an action sounding in contract would be a more appropriate forum in which to litigate Delta-T's claim of compensation owing for past services. I further believe that Delta-T, as the allegedly aggrieved party, should have the opportunity to seek relief at a time and in a forum of its choosing.

"Accordingly, I would have affirmed the trial court's dismissal of count 3 of Adkins' complaint. I therefore respectfully concur in part and dissent in part."

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