Tower Investors, LLC v. 111 East Chestnut Consultants, Inc.

SUPREME COURT CASES

Laws-info.com » Cases » Illinois » 1st District Appellate » 2007 » Tower Investors, LLC v. 111 East Chestnut Consultants, Inc.

State: Illinois

Court: 1st District Appellate

Docket No: 1-06-0254 Rel

Case Date: 03/14/2007

Preview:THIRD DIVISION March 14, 2007

1-06-0254

TOWER INVESTORS, LLC, an Illinois Corporation, Plaintiff-Appellee, v. 111 EAST CHESTNUT CONSULTANTS, INC., an Illinois Corporation, and INVSCO GROUP, LTD., an Illinois Corporation, Defendants-Appellants.

) ) ) ) ) ) ) ) ) ) )

Appeal from the Circuit Court of Cook County.

No. 02 L 004120

Honorable Allen S. Goldberg, Judge Presiding.

PRESIDING JUSTICE THEIS delivered the opinion of the court: Following a bench trial, the circuit court of Cook County found that defendants, 111 East Chestnut Consultants, Inc. (Consultants), and Invsco Group, Ltd, its parent company (Invsco) (collectively defendants), had breached a contract with plaintiff, Tower Investors, LLC (Tower). That contract provided that in exchange for Tower's forbearance from suing Consultants for repayment of a $350,000 promissory note for roughly one year, Consultants, along with Invsco as guarantor, would repay the principal of the note (the forbearance agreement). The circuit court ordered defendants to pay Tower $350,000 in compensatory damages plus statutory interest from the date of the breach. Defendants now appeal, contending, in essence, that: (1) the law firm Sonnenschein, Nath & Rosenthal (Sonnenschein), of which most Tower members are partners, is an alter ego of Tower, and Tower breached the forbearance agreement when Sonnenschein sued defendants for attorney fees, thereby relieving defendants of performance of their obligations under the forbearance agreement; (2) the forbearance agreement is not an enforceable contract

1-06-0254 because it was not supported by consideration; and (3) the forbearance agreement is not an enforceable contract because it was induced by fraud, specifically, Sonnenschein's failure to disclose that it had a conflict of interest with defendants by virtue of its simultaneous representation of defendants and investment in Consultants through Tower. For the following reasons, we affirm. The record discloses the following relevant facts. Sonnenschein is a large, national law firm with its principal office in Chicago. Sonnenschein has roughly 250 partners. Sonnenschein has never been a party to this case. Tower is a corporation formed by several Sonnenschein partners to enable them to make investments in client-related and other entities for a profit. Tower has been in existence in various corporate forms since the 1930s. The individuals who are members of Tower meet certain requirements, including that they are accredited investors. Tower's membership is also restricted to less than 100 members. At the time of trial, Tower had 75 or 80 members. Tower is managed by its own management committee, and Sonnenschein provides no direction to and has no relationship with Tower's management. Invsco is a privately owned, billion-dollar real estate development firm, which develops condominiums in, not only Illinois, but several other states including Georgia, Florida, Indiana, and Texas. Invsco has developed 40 or 50 buildings in Chicago. Invsco formed Consultants in 1993 to convert an apartment building located at 111 East Chestnut Street in Chicago into condominiums. Invsco has been the sole shareholder of Consultants since its incorporation. Tower commenced the present action when it filed a one-count breach of contract claim

2

1-06-0254 against Consultants and Invsco alleging the following. In January 1995, Tower loaned $350,000 to Consultants for use in the condominium conversion of the 111 East Chestnut building. The loan and the terms of repayment were memorialized in a promissory note, which was due September 1, 1999. However, Consultants failed to make all of the required interest payments and failed to repay any of the principal. In May 2000, Consultants requested that Tower enter into a forbearance agreement and conditional general release (the forbearance agreement), which modified the terms of the promissory note in the following ways. Consultants, along with Invsco as guarantor, agreed to reimburse Tower the principal of the loan, excluding any interest, by December 18, 2001. In exchange, Tower agreed not to prosecute any claims against Consultants, Invsco, or the condominium conversion project by not initiating any litigation in connection with the loan or the project prior to December 18, 2001. Tower alleged that although it had performed its obligation to forbear, neither Consultants nor Invsco made any payment under the agreement. Accordingly, Tower sought $350,000 in damages plus statutory interest from December 18, 2001, and costs. In their answer, defendants claimed that the forbearance agreement was not an enforceable contract between Tower and Invsco because there was no consideration. Defendants also denied that Tower performed its obligations under the forbearance agreement and denied that they breached it. Tower subsequently filed a motion for summary judgment, arguing that defendants breached the forbearance agreement when they failed to repay the $350,000 principal before

3

1-06-0254 December 18, 2001. In response, defendants reiterated that the agreement was unenforceable because there was no consideration flowing to Invsco. Defendants also claimed that Tower's forbearance was invalid because Tower knew that Consultants was insolvent at the time the agreement was made. In the alternative, defendants claimed that Tower was an alter ego of Sonnenschein and that Sonnenschein breached the forbearance agreement when it sued defendants for attorney fees for work Sonnenschein had performed on the 111 East Chestnut condominium conversion project and another unrelated project. The circuit court denied Tower's summary judgment motion. The circuit court then conducted a bench trial. At that trial, Paul Miller, one of the managers of Tower, testified for Tower, detailing the circumstances of the $350,000 loan to Consultants. In summary, in the promissory note, which was dated February 10, 1995, Consultants agreed to repay Tower the $350,000 principal of the loan, plus 8% interest per annum, by September 1, 1999. The interest payments were to be paid monthly. Consultants made some of these interest payments, but never repaid the principal. Sometime after the September 1, 1999, due date of the note, Miller asked Consultants about repayment. Consultants and Invsco then requested that Tower enter into the forbearance agreement. In December 2000, Tower ultimately decided to agree to it. Specifically, that agreement recognized that Tower had invested $350,000 in Consultants for the condominium conversion project and that Consultants and Invsco desired to reimburse Tower the principal amount of its investment. Accordingly, Consultants and Invsco agreed to repay Tower the $350,000 principal investment on or before December 18, 2001, provided that Tower observed

4

1-06-0254 the forbearance undertaking. This required Tower not to: "Prosecute any claims against Consultants, [Invsco Group] Ltd., the [Chestnut Street Holdings, LLC] Company, or the [condominium conversion] Project, or their respective successors, assigns, shareholders, officers, employees, subsidiaries, affiliates, principals, agents, representatives and attorneys * * * including, without limitation, by not initiating any litigation prior to December 18, 2001, arising from or in connection with their Principal Investment or the Project." On cross-examination, Miller added that defendants drafted the agreement. Miller signed the agreement on behalf of Tower. In a response to an interrogatory that was admitted into evidence during Tower's case-in-chief, defendants admitted that Steven E. Gouletas, a divisional president of both Invsco and Consultants, and the son of its chairman, Nicholas S. Gouletas, signed on defendants' behalf. However, neither Consultants nor Invsco repaid the principal by December 18, 2001. Following the close of Miller's testimony and the reading of defendants' responses to two of Tower's interrogatories into the record, Tower rested its case-in-chief. For defendants, Wayne Hannah, who had been a partner at Sonnenschein for 47 years, testified as an adverse witness that Sonnenschein has represented Invsco and related entities for over 15 years. Hannah was also a member of Tower. Sometime in late 1994 or early 1995, Mark Goldstein, the chief executive officer (CEO) of Invsco at the time, telephoned Hannah about the 111 East Chestnut project. Goldstein

5

1-06-0254 informed Hannah that Invsco was in the process of acquiring the 111 East Chestnut building. However, because Sonnenschein represented the seller of the building, and the seller would not "give a waiver," Goldstein explained that Invsco could not hire Hannah to work on the purchase. Nevertheless, Goldstein said that Nicholas Gouletas would like Hannah to handle the conversion of the building from apartments to condominium ownership after the purchase had been completed. Goldstein also told Hannah that Invsco was going to issue a private placement memorandum to request capital investments in the project. Knowing that Hannah was also a member of Tower, and that Tower had invested in approximately five other Invsco projects in the past, Goldstein asked Hannah if he would submit the memorandum to the Tower management committee to see if it was interested in investing in the project. The private offering memorandum indicated that Consultants was seeking up to $4,700,000 in participating notes, that would be due September 1, 1999. The private offering memorandum also indicated that the offering involved a high degree of risk, including potential conflicts of interest, and accordingly restricted participation in the offering to accredited investors only. The memorandum also described the 111 East Chestnut building. Participating notes were to be unsecured and to bear interest of 8% per annum. This memorandum was drafted by outside counsel for Invsco and Consultants, from a firm other than Sonnenschein. Tower agreed to invest $350,000 in Consultants for the project. Hannah believed this occurred before he did any legal work on the project. A Tower investor's bulletin dated October 18, 1994, detailed the terms of the investment. Specifically, Tower invested $250,000 from its liquid capital pool. However, because Tower was experiencing a shortage of liquid funds at that

6

1-06-0254 time, the additional $100,000 was provided by Sonnenschein partners who were accredited investors and who "may or may not have been" members of Tower. Hannah also explained that this $100,000 was drawn on the particular partners' personal draw accounts, which contained funds owned by the individual partners but which were maintained by Sonnenschein. Starting in early 1999, different people at Sonnenschein met with Mike Fish, the vicepresident of Invsco, regarding payment of legal fees in matters other than the Tower investment. Hannah recalled personally asking Fish on several occasions whether Sonnenschein would be paid for the work that he had done. Hannah also spoke with Nicholas Gouletas starting in 1999 about the financial situation of Consultants. However, Hannah added on cross-examination that he personally never received the financial information he had requested. Hannah also said that there was no indication that Consultants' net worth was negative at that time. Subsequently, defendants sent a letter to all investors in Consultants indicating that their principal investment would not be returned unless they signed the enclosed forbearance agreement. The letter and the forbearance agreement were written by Invsco's general counsel, Tony DeBenedetto. Tower, as one of Consultants' investors, received this letter and the agreement. Neither Tower nor Sonnenschein had any part in drafting the forbearance agreement, and at no point did any representative of defendants indicate that the forbearance agreement was also meant to include the legal fees that defendants owed to Sonnenschein. Tower did not sign the agreement immediately. When it did decide to sign the agreement in December 2000, no changes had been made to the original document drafted by DeBenedetto. On December 26, 2000, Hannah returned the forbearance agreement, signed by the

7

1-06-0254 relevant directors of Tower, to Nicholas Gouletas. A letter that Hannah sent to Gouletas along with Tower's signed copy of the forbearance agreement indicated that "Mike Fish has promised payments of the amounts to Sonnenschein for legal fees by the end of January 2001." Hannah added that he was "hopeful that this timetable will prove realistic." Hannah explained on cross-examination that Sonnenschein completed work on its last Invsco-affiliated legal project in April 1999. Beginning in 2000, Sonnenschein told Hannah that neither he nor the rest of the firm could perform any additional legal services for Invsco or related entities. Nevertheless, Hannah believed that he still had an attorney-client relationship with defendants throughout 2000. Hannah also never had any further meetings with Invsco regarding collection of fees. However, although Hannah was neither a partner of Sonnenschein, because of his age, nor a member of the management committee of Tower at the time, Hannah recommended to the Sonnenschein finance committee that they sue Consultants to collect the unpaid fees. Sonnenschein did ultimately sue Invsco, Consultants, Nicholas Gouletas, and another Invsco entity for unpaid legal fees on August 10, 2001. On cross-examination, Hannah added that the majority of the fees sought in that suit were from projects other than the 111 East Chestnut project. On December 5, 2001, Hannah wrote to Nicholas Gouletas and asked him if Tower could expect repayment of the $350,000 principal by December 18, 2001. Hannah reminded Gouletas that "[r]ecognizing your problems, we've accomodated you." However, defendants never paid Tower.

8

1-06-0254 Paul Miller testified again as an adverse witness for defendants. He explained the origins of Tower, its purpose, and how it operated. Among other things, Miller emphasized that Tower was run by a management committee, which met roughly once a month and made the decisions about investments. Sonnenschein had no input in that committee, nor did Tower's management committee have any input in Sonnenschein's management. Daniel Swett, a corporate and securities lawyer for Sonnenschein and a member of Tower, also testified as an adverse witness and related substantially the same information about Tower. Miller also described more of the circumstances surrounding the advent of the forbearance agreement. Specifically, he indicated that he received financial data regarding Consultants on May 16, 2000, from Nicholas Gouletas. This information indicated that Consultants' net worth was approximately $13 million while its liabilities were roughly $15 million; however, Miller believed that its value was more than Gouletas had disclosed. In addition, Consultants continued to operate, generate revenue, and pay bills. Miller also noted that the forbearance agreement was drafted by Invsco's general counsel and that it was not altered from the time it was proposed in late 1999 until it was entered into in late 2000. Miller was not aware of the fee dispute between Sonnenschein and defendants. Mike Fish, vice-president of Consultants, testified that Hannah and Gouletas had been working together since the 1970s. When Fish joined Consultants in 1995, Hannah was working with both Consultants and Invsco. Fish explained that the 111 East Chestnut project was performing very poorly in the late 1990s because of unforseen construction costs and other expenses. At the time of trial, the project was operating at a $6 million loss.

9

1-06-0254 Regarding the value of Consultants, Fish explained that although the net worth on a historical cost basis was negative, on a market value basis, it was not. This was because the value of the assets of the firm was more than the historical cost to acquire them. Regarding the forbearance agreement, Fish did not favor it because he did not believe it benefitted Invsco economically. Nicholas Gouletas, the chairman and founder of Invsco, also testified for the defense. He provided background detail about Invsco and Consultants. Gouletas explained that he had known Hannah for over 30 years, and Hannah had worked on anywhere between 30 and 50 of Gouletas's projects. Regarding defendants' alter ego claim, Gouletas added that he believed Sonnenschein and Tower were one and the same. Following the trial, the court announced its findings of fact and conclusions of law in a written memorandum. Specifically, the court found that there was valid consideration to support the forbearance agreement because Consultants had assets and was operating at the time of the agreement. The court further found that Tower's forbearance was sufficient to bind both defendants because Invsco's guaranty was executed contemporaneously with Consultants' promise to pay. Regarding defendants' anticipatory breach claim, the court found that Sonnenschein was not an alter ego of Tower; therefore, Sonnenchein was not bound by the forbearance agreement. Thus, the court held that Consultants and Invsco had breached the forbearance agreement and awarded Tower $350,000 in damages plus statutory interest from the date of the breach. Subsequently, defendants filed a motion to vacate the judgment. Therein, they claimed

10

1-06-0254 that Sonnenschein was Tower's alter ego and that Sonnenschein's actions in suing defendants for legal fees constituted a breach of the forbearance agreement. They also claimed that the forbearance agreement was unenforceable because it was unsupported by consideration and induced by fraud, namely the conflict of interest between Sonnenschein and Tower. The court denied defendants' motion. Defendants then filed this timely appeal. We will address defendants' arguments on appeal in a logical order. We will first address defendants' arguments regarding whether the forbearance agreement was a valid, enforceable contract because that is the threshold issue in this appeal. See, e.g., Zirp-Burnham, LLC v. E. Terrell Associates, Inc., 356 Ill. App. 3d 590, 600, 826 N.E.2d 430, 439 (2005) (observing that the first element of a breach of contract claim is the existence of a valid, enforceable contract). Specifically, defendants claim that the forbearance agreement is unenforceable for two reasons: (1) it is void because it was not supported by consideration and (2) it is voidable because it was induced by fraud. We must note that if either of these arguments were to prevail, only Invsco would be absolved of liability because the original January 1995 promissory note agreement would remain in effect. Regarding defendants' allegations that the forbearance agreement is void and unenforceable, defendants claim that the consideration supporting it fails for two reasons. Defendants first claim that Tower's forbearance from suit against Consultants was insufficient consideration to bind Invsco. Defendants also claim that Tower knew that Consultants was insolvent at the time; therefore, Tower's forbearance was invalid because it knew the debt under the note was uncollectible. We will address each argument separately.

11

1-06-0254 Included among the elements of an enforceable contract are: (1) offer and acceptance; (2) definite and certain terms; (3) consideration; and (4) performance of all required conditions. Zirp-Burnham, 356 Ill. App. 3d at 600, 826 N.E.2d at 439. Consideration means a bargained-for exchange of promises or performance. Village of South Elgin v. Waste Management of Illinois, Inc., 348 Ill. App. 3d 929, 940, 810 N.E.2d 658, 669 (2004). Forbearance, including the compromise of a disputed claim or a promise to forgo legal action, is also consideration. F.H. Prince & Co. v. Towers Financial Corp., 275 Ill. App. 3d 792, 798-99, 656 N.E.2d 142, 147 (1995). Here, in the forbearance agreement, Invsco agreed to assume an obligation to repay Consultants' debt of $350,000, excluding interest, to Tower. Thus, Invsco's role in the forbearance agreement is a guaranty because it is a promise to pay Consultants' debt to Tower. Town & Country Bank of Quincy v. E & D Bankshares, Inc., 172 Ill. App. 3d 1066, 1073, 527 N.E.2d 637, 641 (1988). Generally, a guaranty must be supported by consideration just as any other contract would be. Restatement (Third) of Suretyship and Guaranty

Download Tower Investors, LLC v. 111 East Chestnut Consultants, Inc..pdf