Caparos v. Morton
| Decision Date | 03 March 2006 |
| Citation | 364 Ill. App.3d 159,845 N.E.2d 773 |
| Parties | CONSTANTIN CAPAROS; DESPINA CAPAROS; CHARLES ALEXANDER; SHELDON H. CLOOBECK; JOHN P. CULHANE; TREASUREREX FINANCIAL LTD., assignee of Paul M. Daugerdas and Paul M. Daugerdas Jr.; PETER D'AGOSTINO; DRINK INVESTORS, Ralph E. Lowenberg TTE Allen Kohl 1974 Trust, General Partner; DUANE ERICKSON; ETT, INC; ELIZA KAUFMAN FLYNN; BRUCE FRANKENBERG, RALPH S. GERBIE; GERBIE PROFIT SHARING PLAN; JAY HARRIS; IRA KAUFMAN; JOHN KAUFMAN; STEPHEN KAUFMAN; JAMES H. KOULOS; SHELDON KREITMAN, D.P.M.; ALFREDO LOPEZ; MANSUR INVESTMENT III, LP; ROBERT L. PLUMMER, Jr.; JAMES D. POHL; RICK ROEHM; MAURICE SANDERMAN; BENJAMIN B. SARMAS; DAVID H. SHULMAN; MARK SMITH; SHEPARD SWIFT; MELODY SWINK;JEFFREY TESSIATORE; BARRY WEINSTEIN; DANIEL WHITE; and ROBERT ZENDER, Plaintiffs-Appellees, v. MICHAEL MORTON, SCOTT DEGRAFF and LATE NIGHT LAS VEGAS, INC., Defendants-Appellants. No. 1-04-2354 APPELLATE COURT OF ILLINOIS |
| Court | United States Appellate Court of Illinois |
For APPELLANTS, Weinberg Richmond LLP, Chicago, IL (Warren Lupel, Steven DeGraff and Jonathan L. Loew, of counsel).
For APPELLEES, Nisen & Elliott, Chicago, IL (Michael H. Moirano, Claire E. Gorman, of counsel).
Defendants Michael Morton, Scott DeGraff and Late Night Las Vegas, Inc., appeal the trial court's judgment in an action brought by numerous limited partners for breach of fiduciary duty, a constructive trust and an accounting. We hold that although the limited partnership could have been named as a party defendant, the partnership's interests were not prejudiced by its absence from the proceedings in the trial court, and we therefore affirm.
In the early 1990s, Morton and DeGraff developed and opened Drink, a restaurant and nightclub, in Chicago. Late Night Las Vegas, Inc., a Nevada corporation, was formed to build and operate a similar Drink club in Las Vegas. The approximately 35 limited partners who are plaintiffs in this case represent 55 % of the Late Night Las Vegas Limited Partnership, a Nevada limited partnership with its principal offices in Chicago. Late Night Las Vegas, Inc., was the corporate general partner of the limited partnership.
In January 1994, Late Night Las Vegas entered into a 10-year lease of a corner lot near the Las Vegas strip, on which Drink was constructed. The land was owned by Air Storage, Inc. Under the lease, Morton and DeGraff had a purchase option to buy the land from Air Storage at any time during the first five years of the lease. The option allowed Morton and DeGraff to sell the land to a third party without the limited partnership's involvement and with the limited partners having no rights to future development. Fifty limited partnership interests in Drink were offered for $ 50, 000 each, to raise a total of $ 2.5 million. Plaintiffs each purchased an interest. Morton and DeGraff's option to purchase the land from Air Storage was disclosed to plaintiffs. Under the partnership agreement, the cash flow received from Drink's operations would be applied to partnership expenses and then be distributed 99 % to the limited partners and 1 % to the general partner until the limited partners received an amount equal to their original contributions, after which the limited partners and the general partner each would receive 50 % of the income from Drink.
The club opened in May 1995 and was initially profitable, although it encountered operational difficulties and cost overruns that are described in great detail in the parties' briefs but are of little importance here. In October 1997, Morton and DeGraff called a meeting of the limited partners and presented a proposal to relocate Drink to another Las Vegas site. The suggested relocation was prompted by an offer from Grand Plaza, which owned 33 acres of land contiguous to the Drink site. Morton and DeGraff informed the limited partners that Grand Plaza offered to buy the Drink site and the surrounding landfor $ 15 million and sell it to a hotel casino developer. The limited partners voted to approve the transaction and relocate Drink.
Following that vote, Morton and DeGraff entered into a purchase agreement with Grand Plaza in November 1997 which provided that they would buy the Drink land from Air Storage under their purchase option and then sell the land to Grand Plaza. Under the agreement, Grand Plaza was to pay defendants $ 250, 000 of refundable earnest money and an escrow deposit of $ 3 million. In December 1997, Morton and DeGraff bought the Drink land from Air Storage, thereby becoming the partnership's landlord.
In March 1999, after numerous extensions of the closing date, Grand Plaza cancelled its agreement with Morton and DeGraff. In July 2000, after Morton and DeGraff informed the limited partners that Drink was losing money and that they had been unsuccessful in finding a buyer, Morton and DeGraff told the limited partners that Drink would close on July 31, 2000, which it did. To that point, each limited partner had received about $ 35, 000 back on a $ 50, 000 investment, or a similar percentage on a smaller investment. (Some limited partnership interests were purchased by investors pooling funds to purchase a single interest.)
On August 28, 2000, Morton and DeGraff wrote to the limited partners that the lease of the Drink property from Air Storage was "in default for the nonpayment of rent" and that the partnership's lease of the property was terminated on July 31, 2000. The letter stated that a third party had offered to buy the partnership's assets (the building, equipment and inventory) for $ 450, 000. Morton and DeGraff asked the partners to vote on the potential sale.
Morton and DeGraff contend that when several limited partners demanded that they reinstate the Drink lease, they offered to do so if the partnership approved a capital call (through which the partnership seeks additional money from the limited partners to pay partnership debts), to which the partners did not respond. However, plaintiffs assert that after Drink closed, Morton and DeGraff continued to lease the Drink property from Air Storage and subleased it to a promoter who operated it as Club Utopia for about a year. Plaintiffs state that in August 2003, Morton and DeGraff leased the property to another venture that opened a club called Ice.
Plaintiffs contend that Morton and DeGraff, freed of the partnership's lease of the property, profited from the sublease arrangements even though the former Drink building, equipment and inventory belonged to the partnership. Morton and DeGraff maintain that they "carried the property" and that no profit was made. In October 2000, plaintiffs filed suit for breach of fiduciary duty, a constructive trust, and an accounting, seeking their "pro rata" share of the value of the lease with Air Storage. The limited partnership was not a party to the complaint. Plaintiffs later amended the complaint to add counts of conversion and unjust enrichment.
Defendants counterclaimed for unpaid management fees, and the counterclaim did not name the limited partnership as a party. Plaintiffs moved to dismiss the counterclaim, referring to themselves as "a group of individuals representing some of the Limited Partners in the Limited Partnership" and contending that to obtain a judgment against the limited partnership, defendants must name the limited partnership as a party. The trial court grantedplaintiffs' motion to dismiss defendants' counterclaim.
As to plaintiffs' amended complaint, defendants moved for judgment on the pleadings, asserting that plaintiffs alleged no injuries distinct from those sustained by the partnership. Defendants contended that plaintiffs could only prevail in a derivative action to which the partnership was a necessary party, and defendants pointed to plaintiffs' position in their motion to dismiss that they represented only some of the limited partners and not the partnership.
The court allowed plaintiffs to bring a second amended complaint and ordered defendants to answer the complaint, barring them from moving to dismiss it. In the second amended complaint, plaintiffs brought their claims "both as individuals and derivatively pursuant to 805 ILCS 210/1001," a section of the Revised Uniform Limited Partnership Act as adopted in Illinois (the Illinois Act) . Plaintiffs alleged that Morton and DeGraff terminated the lease with Air Storage to allow them to sell the property and "wrongfully reap a multimillion dollar profit for themselves." They alleged that by retaining the option to purchase the land, Morton and DeGraff had a conflict of interest with the partnership and the limited partners because the two men effectively became the partnership's landlord, which the complaint alleged was in conflict with Morton and DeGraffs "personal desires to maximize their investment in the Property." The five-count complaint alleged that although Morton and DeGraff blamed Drink's demise on an increasingly competitive nightclub scene in Las Vegas, they pursued further investment opportunities there, including three new nightclubs and one "restaurant venture." DeGraff testified at trial that he had interests in four clubs that opened between 2000 and 2002.
Count I of plaintiffs' second amended complaint alleged that defendants owed the limited partners a fiduciary duty to disclose all material facts concerning the partnership's business and act in its best interests. Plaintiffs alleged that they and the other limited partners should receive pro rata shares of the profits and assets converted by Morton and DeGraff. Count II alleged that Morton and DeGraff converted property that belonged to the limited partnership, including $ 900, 000 in "extension fees" that Grand Plaza paid them under the purchase agreement to extend the closing date....
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