HGN CORP. v. Chamberlain, Hrdlicka, White, Johnson & Williams

• Decision Date: 29 August 1986
• Docket Number: No. 85 C 8081.,85 C 8081.
• Citation: 642 F. Supp. 1443
• Court: U.S. District Court — Northern District of Illinois
• Parties: HGN CORPORATION, Plaintiff, v. CHAMBERLAIN, HRDLICKA, WHITE, JOHNSON & WILLIAMS, et al., Defendants.

642 F. Supp. 1443

HGN CORPORATION, Plaintiff, v. CHAMBERLAIN, HRDLICKA, WHITE, JOHNSON & WILLIAMS, et al., Defendants.

No. 85 C 8081.

United States District Court, N.D. Illinois, E.D.

August 29, 1986.

Thomas F. Ging, Alan J. Mandel, Reuben & Proctor, Chicago, Ill., for plaintiff.

Barry S. Alberts, Frederic R. Klein, Meera Werth, Schiff Hardin & Waite, Chicago, Ill., for defendants Chamberlain, Hrdlicka, White, Johnson and Williams.

Ralph E. Brown, Dominique M. Frigo, Paul W. O'Malley, Jr., Walsh, Case, Coale & Brown, Chicago, Ill., for defendant Lance H. Farrell.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

HGN Corporation ("HGN") has filed an eight-count First Amended Complaint (the "Complaint") against Texas law firm Chamberlain, Hrdlicka, White, Johnson & Williams ("Firm"), Firm partner Lance Farrell ("Farrell"), Efren Cenoz Baca ("Cenoz"), and Banco Nacional Perquero y Portuario, S.A. ("Banpesca"), charging:

1. violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (Counts I to IV);

2. common law fraud (Count V);

3. violations of the Illinois Consumer Fraud and Deceptive Business Practices Act and the Illinois Deceptive Trade Practices Act, Ill. Rev. Stat. ch. 121-1/2, ¶¶ 262 and 312 (Count VI);

4. negligent misrepresentation (Count VII); and

5. breach of guaranty (Count VIII);

all arising out of the tax shelter transaction described later in this opinion.¹ Now both Firm and Farrell have moved:²

1. under Fed.R.Civ.P. ("Rule") 12(b)(6) to dismiss Counts I through IV; and

2. under Rule 56 for summary judgment as to the entire Complaint.³

For the reasons stated in this memorandum opinion and order, their summary judgment motions are granted as to Counts I through IV (mooting the Rule 12(b)(6) motion) and denied in all other respects.

Summary Judgment Facts⁴

Farrell, a Firm partner, incorporated Pacific Tuna Corporation ("PTC") on behalf of Cenoz in 1982, to hold title to four tuna fishing vessels then under construction (Martin Aff. ¶ 6). Banpesca had provided the original construction financing for the vessels (id. ¶ 4). In 1982 Cenoz and PTC began to seek American financing to finish the tuna vessels and to stave off yard sales threatened by the shipbuilders (Firm Statement of Material Facts "Firm St." ¶ 16).

Accordingly PTC representatives travelled to Chicago in late December 1982 to negotiate a tax-benefit transfer arrangement with HGN under the Safe Harbor Lease provisions of the Internal Revenue Code (Martin Aff. ¶ 10). PTC eventually agreed on such a transfer to HGN for $6 million (Posner Dep. 119; Pritzker Dep. 112-15).

HGN refused to close the transaction until PTC obtained an insurance policy or letter of credit protecting HGN (Eisenberg Dep. 101; Connolly Dep. 223), but PTC was unable to do that before December 31, 1982 (Handelsman Dep. 159). Accordingly the parties restructured the transaction into a $7 million loan, $6 million of which HGN would convert into a safe harbor lease by January 31, 1983 on PTC's satisfaction of the necessary conditions (id. 157-59). That arrangement allowed PTC to obtain the necessary funds to pay the remaining construction costs and to place the vessels in service by the end of the year, as required by tax regulations (Firm St. ¶ 19).

Before HGN and PTC completed their negotiations, HGN asked Farrell to issue an opinion confirming the sought-after tax consequences of the proposed transfer (Eisenberg Dep. 99, 116):

I believe that we gave Mr. Farrell a series of opinions during the evening of Tuesday for him to review as opinions that would be required from his firm in connection with the safe harbor lease transaction.

* * * * * *

I asked Mr. Farrell many, many questions about this transaction, and the whole series of tax issues that I perceived in this transaction. I wanted to adduce from Mr. Farrell his judgment as to the certainty with respect to each of the issues in the transaction.

Mr. Farrell's oral statements to me were ultimately reflected in the form of an opinion to be issued by his firm, a clear unequivocal, unqualified opinion that the transaction qualified as a safe harbor lease transaction; that interest deductions would be available; depreciation deductions would be available; investment tax credit would be available, and all of the other matters reflected in his opinion.

Farrell refused to sign the opinions drafted by HGN before closing the loan (Eisenberg Dep. 160). Instead he signed a cover letter that said (Complaint Ex. G):

As we have discussed during our negotiations with your client in regard to a loan of $7,000,000, a Tax Benefit Lease Transaction between our respective clients is anticipated to be completed and executed prior to January 31, 1983. In that regard, our firm and your firm have drafted, in addition to the Loan Agreement which is being executed today, an Equipment Purchase and Lease Agreement which our client has contractually agreed to enter into. The Equipment Purchase and Lease Agreement requires certain opinions of counsel which we have discussed and reviewed with you and which are attached to this letter as Exhibit "A". We have no reason to believe that we will not be able to give the attached opinions, however, this letter should not be construed and is not an opinion on the points at this time.

HGN and PTC closed the Loan Agreement December 30, 1982 (Complaint Ex. B), secured by a "First Preferred Fleet Mortgage" (Complaint Ex. F) covering the four tuna fishing vessels. Loan Agreement ¶ 6.02(c) contained a liquidated damages provision:

(c) The parties acknowledge that the principal purpose for the Loan transaction herein contemplated is to provide Borrower funds to enable it to have sufficient time to satisfy the conditions precedent to the tax benefit transactions referred to in Article V, and Lender is willing to make the Loan in anticipation of the benefits which will accrue to it under the TBT Agreements. Accordingly, in the event the transactions contemplated by Article V are not consummated on or before the TBT Closing Date for any reason other than the breach or default by Lender, then Lender shall have suffered serious and substantial losses which will not be subject to accurate measurement. Accordingly, in addition to each of its remedies with respect to the Loan set forth above, Lender shall be entitled to an additional amount of $500,000 as liquidated damages for the loss of the benefit of its bargain, and not as a penalty, and the payment thereof shall be deemed so much additional indebtedness of Borrower secured by the Fleet Mortgage. If liquidated damages become due and payable hereunder, the amount thereof shall be added to the principal amount of the Note effective on and as of February 1, 1983.

In January 1983 HGN learned it would not receive the insurance policy it required to proceed with the tax-benefit transaction (Eisenberg Dep. 151; Posner Dep. 117-18). On February 28 PTC paid the first interest installment due under the Loan Agreement (D. Ex. 15). On March 1 HGN declared the Loan Agreement and its accompanying security agreements in default (D. Ex. 17).

That same day HGN filed suit in the United States District Court for the Southern District of California against three of the tuna fishing vessels (as defendants in rem) and PTC (as a defendant in personam), seeking to recover both the $7 million loan principal and the $500,000 liquidated damages (D.Ex. 2). HGN did not join Firm, Farrell, Cenoz or Banpesca as defendants (D.Ex. 1). In May 1983 Banpesca intervened in HGN's San Diego action, suing the four tuna fishing vessels (in rem)⁵ and HGN, Cenoz and PTC (in personam) (D.Exs. 1, 4).

On December 10, 1984 the San Diego court entered a final judgment in HGN's favor, awarding it the proceeds from the sale of the two seized vessels, the full liquidated damages amount, interest, attorneys' fees, costs and expenses, all totaling $8,860,719 (D.Exs. 1, 16). Banpesca won nothing on its complaint for intervention (id.). HGN eventually collected $6,443,772 on the San Diego judgment (D.Ex. 1).

Firm-Farrell Summary Judgment Contentions

Firm and Farrell make four arguments in support of their summary judgment motions:

1. HGN's San Diego action bars this entire suit on res judicata grounds.

2. HGN has already won in its San Diego lawsuit the relief it seeks under Counts V and VII of this action.

3. HGN's RICO claims are barred by a two-year statute of limitations.

4. HGN cannot recover under Illinois law for Farrell's negligent misrepresentations.

Farrell also asserts the doctrine of unclean hands bars HGN's recovery here.

Res Judicata

This Court recently discussed general res judicata principles in Magnus Electronics, Inc. v. Argentine Republic, 637 F.Supp. 487, 489-90, (N.D.Ill., 1986):

Res judicata principles encompass both "claim preclusion," which prohibits litigants from splitting a single cause of action into more than one proceeding, and "issue preclusion," which forbids litigants from relitigating issues actually resolved in an earlier proceeding. Migra v. Warren City School District, Board of Education, 465 U.S. 75, 77 n. 1 104 S.Ct. 892, 894 n. 1, 79 L.Ed.2d 56 (1984) thoroughly explains that terminology. Claim preclusion applies to bar theories that were or that could have been raised in the prior case, Nevada v. United States, 463 U.S. 110, 129-30 103 S.Ct. 2906, 2917-18, 77 L.Ed.2d 509 (1983):

Simply put, the doctrine of res judicata provides that when a final judgment has been entered on the merits of a case, "it is a finality as to the claim or demand in controversy, concluding parties and those in privity with them, not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose." Cromwell v. County of Sac, 94 U.S. 351, 352 4 Otto 351, 24 L.Ed. 195 (1877). The final "judgment puts an end to the

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