Johnston v. Bumba, 88 C 10244

• Decision Date: 26 April 1991
• Docket Number: 89 C 00169,88 C 10251 to 88 C 10254,89 C 09129,88 C 10248,88 C 10277,89 C 00121,89 C 00120,89 C 00115,No. 88 C 10244,90 C 02723 and 90 C 02724.,89 C 00117,89 C 00118,88 C 10245,89 C 07660,88 C 10244
• Citation: 764 F. Supp. 1263
• Court: U.S. District Court — Northern District of Illinois
• Parties: Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Lincoln J. BUMBA, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. James DIIORIO and Dorothy Diiorio, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Ralph W. EWRY, Jr., Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Anthony J. ALBERT, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Eugene ANDERSON, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Jerry BAUER, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Michael R. BENNETT, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Daniel R. LEE, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Thomas J. WASHBURN, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Carmen G. TUMINO, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Ralph RYDHOLM, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Harold K. RIDGWAY, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Vincent A. PERNS, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Fred K. HALL, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Charles M. CARTER, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Philip D. KNELL, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Charles LEMASTER, Defendant. Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Harry M. KROGH, Defendant.

764 F. Supp. 1263

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Lincoln J. BUMBA, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. James DIIORIO and Dorothy Diiorio, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Ralph W. EWRY, Jr., Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Anthony J. ALBERT, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Eugene ANDERSON, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Jerry BAUER, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Michael R. BENNETT, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Daniel R. LEE, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Thomas J. WASHBURN, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Carmen G. TUMINO, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Ralph RYDHOLM, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Harold K. RIDGWAY, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Vincent A. PERNS, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Fred K. HALL, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Charles M. CARTER, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Philip D. KNELL, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Charles LEMASTER, Defendant.

Newman JOHNSTON III and Phillip C. Asher, d/b/a Worldwide Collections, a general partnership, Plaintiffs, v. Harry M. KROGH, Defendant.

Nos. 88 C 10244, 88 C 10245, 88 C 10248, 88 C 10251 to 88 C 10254, 88 C 10277, 89 C 00115, 89 C 00117, 89 C 00118, 89 C 00120, 89 C 00121, 89 C 00169, 89 C 07660, 89 C 09129, 90 C 02723 and 90 C 02724.

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

April 26, 1991.

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James A. Stamos, Stamos & Rimland, Chicago, Ill., for plaintiffs.

Alan I. Becker, Burditt, Bowles & Radzius, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

ASPEN, District Judge:

This matter is presently before us for decision following a bench trial on case No. 88 C 10244. The plaintiffs, Newman Johnston, III, and Phillip Asher brought this suit seeking to collect on a promissory note which they allege was executed and delivered by the defendant, Lincoln J. Bumba, in connection with Bumba's acquisition of an interest in a limited partnership known as Aqua-Solar Associates Limited ("Aqua-Solar"). This case is essentially identical to 17 other suits brought by the plaintiffs against individuals who executed promissory notes in the venture. We have consolidated these cases and each of the defendants has agreed to be bound in each of their own suits by the disposition of Bumba's case at trial. Having reviewed all of the testimony, exhibits, and stipulations of the parties, and for the reasons stated in these findings and conclusions, we enter judgment in favor of Bumba and each of the defendants.

I. Background Findings of Fact

The following findings of fact are based on undisputed evidence and provide background for the further findings of fact and conclusions of law set forth in Section II. These facts set forth the basic chain of events and corporate history that give context to this dispute.

The Aqua-Solar limited partnership was formed in 1982 by A.T. Bliss & Company, Inc. ("Bliss"). Bliss, now known as Omni Equities, Inc., is a Massachusetts Corporation and served as general partner, managing the business of Aqua-Solar. The business plan for Aqua-Solar was to purchase solar water heating systems and lease those systems to homeowners in Florida. The purpose of the partnership was to make a profit from the leasing of the solar water systems. It was also intended that the investors in Aqua-Solar would receive tax benefits, including investment tax credits and solar energy credits based on Aqua-Solar's acquisition of the solar water heating systems.

During 1982, Bliss sold limited partnership interests in Aqua-Solar to Bumba and other investors. The Aqua-Solar offering began in March of 1982 and consisted of 185 units, at an investment of $150,000 per full unit and $75,000 per one-half unit. A full unit subscription required a cash payment of $37,500 and a promissory note for $112,500. A one-half unit subscription required a cash payment of $25,000 and a promissory note for $50,000. All of the promissory notes were made to the order of Aqua-Solar. The offering was completed on or about December 28, 1982. Ultimately, approximately 120 units were sold. Bumba purchased a full unit. The limited partnership interest purchased by Bumba was a security as that term is defined by the securities laws of the United States of America.

In December 1982, Bliss, acting as general partner of Aqua-Solar, purchased 5,684 solar water heating systems from Bliss in its individual corporate capacity for a total price of $20,841,352. The purchase price for each unit was $3,660 per system. Aqua-Solar paid Bliss $5,241,352 in cash, and gave Bliss a promissory note ("Purchase Note") in the amount of $15,600,000 bearing interest at 9% per annum. Bliss retained a security interest in the solar water heating systems and the limited partners' promissory notes were pledged to Bliss as security for the credit portion of the purchase price of the solar water heating systems.

The leasing arrangement worked as follows. The business plan for Aqua-Solar provided that Nationwide-Florida ("Nationwide") would serve as servicing agent for Aqua-Solar. Nationwide was a subsidiary of a Delaware corporation, Nationwide Power Corporation. Under a property management agreement with Aqua-Solar, Nationwide's duties were to obtain lessees for the solar water heating systems, install the systems, provide subsequent service for the systems as needed, and collect lease payments from the homeowners. In each case, the homeowner lessee of the solar water heating system was to make an initial rental pre-payment of $478.80 which represented rental payments for two years. After pre-payment the homeowner was to have use of the solar water heating system for two years before any additional rental payments became due. At the end of the two years, the homeowner would have the option of retaining the solar water heating system under lease at a beginning rental of $22.50 per month or cancelling the lease and returning the solar water heating system to the partnership. In 1983, Nationwide succeeded in leasing all 5,684 of the solar water heating systems purchased by Aqua-Solar from Bliss. Nationwide accordingly received from Aqua-Solar the agreed upon fee of $568,400 and a percentage of the lease payments as compensation for its services. In 1983, Bliss also made further payments to Nationwide of approximately $650 per system for obtaining the lessees and installing Aqua-Solar systems. During this time period, Bliss owned between 41.4 and 44.5% of Nationwide's stock.

During 1983, Bliss also organized other limited partnerships, including Bliss Partners '83, Ltd., Solar-Bliss '83, Ltd., and Bliss-Solar '83, Ltd. Each of these limited partnerships had the same business plan as Aqua-Solar, the same general partner, the same servicing agent, and the same form of investment. None of the partnership interests was registered with the SEC.

In December 1984, at the request of Nationwide, Aqua-Solar terminated its service agreement with Nationwide. Nationwide sought to terminate the agreement to act as Aqua-Solar's servicing agent because it wished to pursue a program of selling solar water heating units and found it unprofitable to service Aqua-Solar's water heating systems. At about the same time, Bliss acquired sole ownership of Nationwide from its Delaware parent corporation. Contemporaneously with the termination of the Nationwide service agreement, Aqua-Solar appointed Magnacard, Inc., to become Aqua-Solar's servicing agent. Magnacard was then 80% owned by Bliss. Magnacard is now known as Highlander International Corporation ("Highlander").

During early 1985, the two-year pre-paid rental periods for those persons who had leased the solar water heating systems from the partnership began to expire. Many homeowners elected to cancel leases at the end of the pre-paid rental period and return the solar water heating systems to the partnership. Others, although not initially cancelling their leases, soon ceased to pay rent, thereby terminating the leases. By December 31, 1985, 1,869 systems that had ceased to be leased during 1985 were returned to Bliss. Bliss, in turn, gave Aqua-Solar a credit of $4,924,815 on the partnership's Purchase Note. During 1986, and additional 3,315 Aqua-Solar systems ceased to be leased, leaving approximately 500 on lease.

At some point in late 1985, Bliss organized a corporation named Aqua-Solar Management Corporation. Aqua-Solar management had no assets or employees. Its president was Reinhard Mueller, who was also...