De Fontaine v. Passalino

• Decision Date: 24 December 1991
• Docket Number: No. 2-90-1279,2-90-1279
• Citation: 584 N.E.2d 933,222 Ill.App.3d 1018,165 Ill.Dec. 499
• Parties: , 165 Ill.Dec. 499 Clance De FONTAINE, Plaintiff-Appellee and Cross-Appellant, v. Joseph C. PASSALINO, et al., Defendants-Appellants and Cross-Appellees.
• Court: United States Appellate Court of Illinois

Page 933

584 N.E.2d 933

222 Ill.App.3d 1018, 165 Ill.Dec. 499

Clance De FONTAINE, Plaintiff-Appellee and Cross-Appellant, v. Joseph C. PASSALINO, et al., Defendants-Appellants and Cross-Appellees.

No. 2-90-1279.

Appellate Court of Illinois,

Second District.

Dec. 24, 1991.

Rehearing Denied Jan. 22, 1992.

Neil S. Ament, Gilbert W. Gordon, Robert Marks (argued), Marks, Marks & Kaplan, Ltd., Chicago, for Joseph G. Passalino and Lake Forest Chateau, Inc.

Kuseski, Flanigan & Associates, Waukegan, Alvin R. Becker (argued), Beermann, Swerdlove, Woloshin & Barezky, Chicago, for Clance De Fontaine.

Justice NICKELS delivered the opinion of the court:

This appeal arises from an accounting action filed by plaintiff, Clance De Fontaine, against defendant, Joseph Passalino (defendant) and Lake Forest Chateau, Inc. (Chateau), as a nominal defendant. The circuit court of Lake County made certain findings and ordered an accounting in an order filed on December 11, 1987. It subsequently amended that order for clarification reasons in another order filed February 10, 1988. Following an accounting proceeding, a judgment was entered on August 8, 1990, for $658,908.66 compensatory damages in favor of plaintiff for the use and benefit of Chateau and against defendant. Defendant was also assessed $20,000 in punitive damages. A subsequent order provided that plaintiff be reimbursed for attorney fees and costs under a "common-fund theory." Both parties' petitions for attorney fees were denied. (134 Ill.2d R. 137.) Defendant appealed, and plaintiff filed a cross-appeal. Several issues are raised with respect to these orders.

Plaintiff filed a complaint for an injunction and other relief (accounting) against defendant and Chateau on July 30, 1985. It was alleged that defendant was a 70% shareholder, officer and director of Chateau and plaintiff was a 30% shareholder. Plaintiff claimed that defendant defrauded plaintiff, breached their agreement, and breached fiduciary duties. It was alleged that defendant diverted Chateau funds for his own use and refused to allow plaintiff access to Chateau's books and records.

Defendant initially denied diverting any funds to his own use in his answer. He filed a counterclaim. It was defendant's contention that plaintiff breached their agreement when plaintiff failed to pay $1 million of a $1.25 million equity or capital contribution. He claimed that plaintiff's share in the corporation was reduced to 6% due to his failure to pay the full amount.

During the trial on plaintiff's complaint, the evidence showed that plaintiff and defendant entered into an oral agreement in 1981 for the construction of a townhouse development in Lake Forest, Illinois, known as Lake Forest Chateau. Defendant was involved in the construction industry in the area. Plaintiff was a member of the Chicago Board of Trade and engaged in the trading of commodities. After entering into the joint venture agreement, the parties formed a corporation, which they then designated as a subchapter S corporation under the Internal Revenue Code. Defendant owned 70% of the shares and was the president, while plaintiff owned 30% and was the secretary-treasurer.

According to plaintiff he met with defendant in the fall of 1981 to discuss the joint venture. Defendant was the contract purchaser for 10 1/2 acres of property in Lake Forest owned by the DeMaries. The sale price was $530,000 with a $180,000 credit toward the purchase of a townhouse for the DeMaries. The development would consist of 36 townhouses or units to be built in phases of six units. After selling the first six units, plaintiff would receive one-half of his investment back and the other one-half of his contribution after the next six units were sold. The project would be self-sustaining out of the profits of each unit and no bank financing would be necessary.

Defendant was carrying over $800,000 in debt, and interest rates were very high. He needed an investor but had been unable to locate one. It was eventually agreed that plaintiff would make a capital contribution of about $1.2 million. However, plaintiff explained that the exact dollar amount was not set during the meeting. Plaintiff admitted that $1.25 million could have been the amount. Defendant testified that the amount to be contributed by plaintiff was $1.25 million. Defendant was to receive 20% more than plaintiff as his share of the profits for his management services and his long involvement with the project over prior years. Defendant testified that he was also to be paid 15% for his services in addition to his 70% share and before any profits were paid.

Plaintiff made a contribution of $200,000 in December 1981. According to plaintiff he suffered financial losses in the grain market soon thereafter which made it necessary to pull out of the parties' agreement. He still had other assets and was not financially ruined. He met with defendant in January 1982 to explain the situation. He felt badly over the position in which he put defendant. Plaintiff told defendant that he would provide $330,000 to complete the property purchase. Then defendant could sell the property, and defendant could retain any profit. Defendant misstates this testimony by claiming that plaintiff offered to split the profit. Plaintiff would absorb any loss. Plaintiff also told defendant that he could look for other investors while the property was being sold and go ahead with the project.

Defendant asked plaintiff to coguarantee a construction loan with defendant for $1.6 million. If plaintiff would coguarantee such a loan, plaintiff would no longer have to contribute the remaining part of his capital contribution. Plaintiff and defendant agreed to this modification according to plaintiff. Plaintiff later paid $50,000 to Chateau in March 1982 as capital contribution. The parties coguaranteed a construction loan for $1.6 million with Lyons Savings and Loan in June 1983 (Lyons loan), after other attempts to obtain financing. Lyons required a guarantee from both parties to obtain the funds.

Defendant testified as an adverse witness that plaintiff was to contribute $1.25 million and would act like a silent partner. Defendant would be in complete charge of the project. Plaintiff paid $200,000 in December 1981 but kept making excuses about paying more money. Plaintiff paid $50,000 in March 1982. After plaintiff paid this money, he told defendant that he had a lot of positions on the market in an attempt to make a large profit. Plaintiff could not pay defendant any more money because of these positions. Plaintiff never told defendant about reverses on the grain market.

Plaintiff, defendant and Ralph Peters testified about a meeting among them in the summer of 1982. Peters was a business associate of plaintiff. The meeting was initially for the purpose of securing Peters as an investor. Plaintiff and Peters testified that Peters did not invest and advised plaintiff to get out of the deal with defendant because it was a bad investment. Defendant testified that Peters told defendant that plaintiff had severe financial problems. Plaintiff's wife also advised defendant of plaintiff's poor financial condition according to defendant.

Prior to going to Lyons in 1983, defendant testified that he asked plaintiff for his $1 million contribution. Plaintiff could not pay it but wanted to stay involved in the project. He asked for more time to get the money. Defendant agreed to an 18-month extension for plaintiff to pay the $1 million balance. They would obtain a construction loan from Lyons for the interim which would be paid off when plaintiff had the money. The loan was then obtained by defendant and both parties coguaranteed it. Defendant testified that he repeatedly asked plaintiff for $1 million over the following months while plaintiff testified that defendant did not ask for the money.

Construction began in April 1983 with a townhouse. According to plaintiff he examined the books and records in September 1984 and saw numerous expenditures for matters not related to Chateau. Plaintiff and defendant discussed these expenses in November 1984, and defendant denied using the funds for his personal use. Plaintiff testified that defendant asked him for money in December 1984 to meet the interest account for the Lyons loan. Plaintiff had a problem with the books and would not pay any money until he got an accounting. Plaintiff testified that thereafter defendant refused an audit and would not allow plaintiff access to the records. Plaintiff filed his complaint on July 30, 1985.

Defendant said that Lyons was threatening foreclosure in July 1985 because the note was past due. He told plaintiff they had to pay Lyons but plaintiff refused to put any more money into the project. Plaintiff told defendant that when Lyons foreclosed plaintiff could buy the property for $.10 on the dollar. Plaintiff demanded an accounting. Defendant said he would give an accounting if plaintiff deposited $1 million into an escrow account for Lyons. Defendant said he had given plaintiff several extensions to pay the $1 million capital contribution. Plaintiff did not pay the money. Defendant obtained a loan after pledging the property and paid off Lyons. Plaintiff was released from his obligation to pay Lyons as a result.

There was other testimony and evidence regarding certain entries in Chateau's corporate minutes. Evidence was introduced to show that corporate minutes which reflected defendant's version of the modification agreement were fraudulent. There was evidence as well as an admission by defendant that corporate funds were used by defendant for noncorporate expenses.

In its December 11, 1987, order, the trial court found that the parties initially formed a joint venture to develop the property. The order also provided that the parties formed Chateau, a subchapter S corporation, as a business entity to carry out the development. The parties'...