Tower Investors v. 111 East Chestnut

• Decision Date: 14 March 2007
• Docket Number: No. 1-06-0254.,1-06-0254.
• Citation: 864 N.E.2d 927
• Parties: 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.
• Court: United States Appellate Court of Illinois

864 N.E.2d 927

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.

No. 1-06-0254.

Appellate Court of Illinois, First District, Third Division.

March 14, 2007.

Rehearing Denied April 9, 2007.

Kristi L. Browne, The Patterson Law Firm, P.C., Chicago, for Defendants-Appellants.

Fred E. Schulz, R. Michael McCann, Wildman, Harrold, Allen & Dixon, LLP, Chicago, for Plaintiff-Appellee.

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 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 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 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 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 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...