Doll v. Bernard

• Decision Date: 16 August 1991
• Docket Number: No. 1-90-3452,1-90-3452
• Citation: 161 Ill.Dec. 407,578 N.E.2d 1053,218 Ill.App.3d 719
• Parties: , 161 Ill.Dec. 407 W. Gary DOLL and Richard C. Swanson, Plaintiffs-Appellants, v. David A. BERNARD, Corsicana Plaza Associates, a Delaware Ltd. Partnership, and Royal Plaza Associates, a Delaward Ltd. Partnership, Defendants-Appellees.
• Court: United States Appellate Court of Illinois

Page 1053

578 N.E.2d 1053

218 Ill.App.3d 719, 161 Ill.Dec. 407

W. Gary DOLL and Richard C. Swanson, Plaintiffs-Appellants, v. David A. BERNARD, Corsicana Plaza Associates, a Delaware Ltd. Partnership, and Royal Plaza Associates, a Delaward Ltd. Partnership, Defendants-Appellees.

No. 1-90-3452.

Appellate Court of Illinois First District, Sixth Division.

Aug. 16, 1991.

Beeler, Schad & Diamon, P.C., (Stephen B. Diamon, Lawrence W. Schad, David J. Philipps and William H. London, of counsel), Fishman & Merrick, P.C., (David A. Genelly, of counsel), Joyce & Kubasiak (Ed. T. Joyce, of counsel), Chicago, for plaintiffs-appellants.

Sachnoff & Weaver, Ltd., Chicago (Jack L. Block, Joan L. Feder, of counsel), for defendants-appellees.

Justice McNAMARA delivered the opinion of the court:

Plaintiffs, W. Gary Doll and Richard C. Swanson, filed this action seeking rescission of the sale of limited partnership interests against defendants David A. Bernard as general partner, Corsicana Plaza Associates and Royal Plaza Associates. Plaintiffs' interests were sold by an unregistered broker in violation of the Illinois Securities Law of 1953. (Ill.Rev.Stat.1985, ch. 121 1/2, par. 137.8.) (Act). Plaintiffs' three-count complaint sought damages for alleged violations of the Act, breach of fiduciary duty, and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act. (Ill.Rev.Stat.1985, ch. 121 1/2, par. 261 et seq.) (Consumer Fraud Act). The court granted defendants' motion to dismiss count I because the action was not commenced within the period of the statute of limitations, and counts II and III for failure to state a cause of action. Plaintiffs appeal the dismissal of all three counts.

The relevant facts are as follows. Limited partnership interests in Corsicana Plaza and Royal Plaza were offered to plaintiffs during 1985 and 1986 by Earl Dean Gordon, Kenneth F. Boula and two companies owned and controlled by Gordon and Boula, KFB Securities, Inc. and Financial Concepts, Ltd. (collectively referred to as Gordon-Boula). Defendants, through their sponsoring company, Concord Assets Group, Inc. (Concord), participated in and financed sales seminars coordinated and promoted by Gordon-Boula. (Gordon-Boula is not a party in this action).

On November 11, 1985, Doll submitted to Gordon-Boula subscription papers for a limited partnership interest in the amount of $76,950 in Corsicana Plaza. On November 19, 1985, Swanson submitted his subscription papers for a limited partnership interest in the amount of $76,825 in Royal Plaza Associates. Plaintiffs contracted to buy these interests through a series of installment notes. In December 1985, plaintiffs were approved and accepted as limited partners in their respective partnerships, and made their first installment payments in January 1986. (To date, Doll has paid $56,500 and Swanson has paid $56,750 toward their interests).

In July 1986, the Illinois Secretary of State brought an action against Gordon-Boula for illegally selling interests in another real estate limited partnership sponsored by Concord. Defendants ceased doing business with Gordon-Boula after learning that it was not licensed to act as dealers or salespersons in accordance with Section 8 of the Act; however, defendants did not notify plaintiffs about Gordon-Boula's status as an unregistered broker.

In May 1989 plaintiffs learned that Gordon-Boula was unregistered. On June 1, 1989, Doll gave notice pursuant to section 13 of the Act of its election to rescind, followed on September 5, 1989 by Swanson's notice to rescind.

On March 6, 1990, plaintiff filed this three-count complaint against defendants. In count I, plaintiffs sought rescission of their investments based upon defendants' failure to inform plaintiffs that Gordon-Boula was an unregistered broker. Counts II and III sought damages for breach of fiduciary duty and alleged violations of the Consumer Fraud Act, respectively. The trial court granted defendants' motion to dismiss all three counts.

On appeal, plaintiffs argue that their securities claims were filed within the statutory time period because defendants never made an absolute transfer of rights. Plaintiffs further argue that defendants' failure to disclose the illegal nature of the sales constituted a breach of fiduciary duty, and nondisclosure of their use of an unregistered broker violated the Consumer Fraud Act.

We turn first to plaintiffs' contention that a sale for purposes of the Act has not occurred because defendants never made an absolute transfer of the rights to plaintiffs. Plaintiffs maintain that they never received an absolute and unqualified right in the subject securities because defendants held a security interest to secure the payment of future promissory notes, and controlled the transferability of the securities.

The trial court concluded that count I was barred by the statute of limitations, as it was not commenced until four years after the date of sale. Section 13 of the Act provides in relevant part:

"D. No action shall be brought for relief under this Section or upon or because of any of the matters for which relief is granted by this Section after 3 years from the date of sale * * *." (Emphasis added). Ill.Rev.Stat.1985, ch. 121 1/2 par. 137.13.D.

Relying upon Frantzve v. Joseph (1986), 150 Ill.App.3d 850, 104 Ill.Dec. 133, 502 N.E.2d 396, the trial court found that plaintiffs were entitled to all rights and benefits of the limited partnerships in January 1986, the time they were accepted as limited partners and made their first payments.

We are unpersuaded by plaintiffs' argument that defendants never made an absolute transfer of rights. The contract provides that subscriber is:

" * * * granting the Partnership a security interest in his Unit to secure the payment of future installments of his capital contribution and his related promissory notes." (Emphasis added).

The security interest that plaintiffs granted to seller was for the express purpose of securing financing on the promissory notes. As such, plaintiffs' grant of the security interest cannot be construed as precluding defendants from making an absolute transfer of rights.

Plaintiffs' claim that an absolute transfer of rights had not occurred because the general partners' consent was required for the sale or assignment of the limited partnership interests fares no better. A limited partner whose property interest in the partnership originates with a general partner may be regarded as the true owner of that property, notwithstanding that the general partner retains substantial powers over it, provided that the powers retained are such as are normally incident to that type of partnership and the agreement does not contain substantial restrictions. (Leeb v. Jarecki (N.D.Ill.1957), 156 F.Supp. 6.) Plaintiffs do not contend, nor do we find after review of the proviso at issue, that it contains restrictions that can be characterized as substantial or unduly burdensome.

Illinois courts have interpreted the "date of sale" for purposes of determining the date upon which the limitations period is triggered for claims under the Act. (See Frantzve v. Joseph; James v. Erlinder Manufacturing Co. (1979), 80 Ill.App.3d 4, 35 Ill.Dec. 275, 398 N.E.2d 1225; Levine v. Unruh (1968), 99 Ill.App.2d 94, 240 N.E.2d 521; Silverman v. Chicago Ramada Inn, Inc. (1965), 63 Ill.App.2d 96, 211 N.E.2d 596.) In order to determine the date of sale, the court has focused upon the date on which the plaintiff acquires a legal interest in the securities and the date when the rights of the parties to the transaction are fixed. Frantzve v. Joseph, 150 Ill.App.3d at 852, 104 Ill.Dec. at 135, 502 N.E.2d at 398.

Both parties signed their subscription agreements in November 1985 and were accepted into the limited partnership in December 1985. The payment of the first installment of the purchase price, which provided consideration for the subscription agreement, occurred during January 1986. As members of a limited partnership, plaintiffs acquired a legal interest at that time which entitled them to share in the profits and losses of the partnership. Allen v. Amber Manor Apartments Partnership (1981), 95 Ill.App.3d 541, 51 Ill.Dec. 26, 420 N.E.2d 440.

The complaint...