LID ASSOCIATES v. Dolan
| Decision Date | 30 August 2001 |
| Docket Number | No. 1-00-0162.,1-00-0162. |
| Citation | 756 N.E.2d 866,258 Ill.Dec. 592,324 Ill. App.3d 1047 |
| Parties | LID ASSOCIATES; Stanley Bresler; 2707-09 Peterson Building Partnership; Jane E. Benson; Edward F. Brennan, Jr.; Gershom R. Cohn Revocable Trust; Milton Diller as Trustee of the Milton Diller Revocable Trust; Larry Ensslin; Jack M. Fazio; Sylvia Federman and Ruth F. Silverstone as Co-Executors of the Estate of Hyman L. Federman; Stuart H. Glicken; Ellen B. Henrikson; Hi-Chicago Trust; Alan Holleb; Gordon Holleb; Paul D. Holleb; Investment Research Associates Ltd.; Joel A. Kaplan, MD; Carolyn J. Korein; Sandor Korein; Joel A. Kunin; L & S Investments; Madhic; Richard E. Marcus; Barbara Moelis; MRL Associates; Robert B. Pildes, MD; James V. Proesel; Herbert N. Rosen, DDS; Howard Ross; Roslyn Saltsberg; Irving and Hilda Solomon; Joe A. Walters; Joanne Woiteshek Revocable Trust; Gilbert Blechman Marital Trust B as Successor to Gilbert Blechman Revocable Trust; Daniel M. Pierce; Albert A. Robin; Bea Ritch Trust; The Holding Co.; Aardvark Trust; Korvision Investors Partnership; Suffolk Investors Partnership; Good News Boys; Hampshire Limited Partnership; Korvestors Limited Partnership; Park Limited Partnership; South Limited Partnership; Sylvestors Limited Partnership, Lafite Trust; Rudolph P. Regez; Martin S. Katz; Norman K. Jacobson; Rex Carr; Harold M. Danzig; Everett Avenue Associates; Robert E. Goldberg; L.I. Cable Venture; L.I.C. II Venture; Anthony Flakus; Bruce H. Johnson; James B. Leahy; Claib Lee Cook, Jr.; Jamm Associates; Associated Capital Corporation; Urban Communications; S-C Partnership; Iris Trust; Leonard Schiller; Philip J. Schiller; Praha Trust; Kromeriz Trust; Gottwaldov Trust; Saturnia Trust; Anna Trust; Hyman Trust; Albert Morris Trust; Luba Trust; Jerusalem Trust; Tel Aviv Trust; Israel Trust; Rhoann Trust; Marthe Trust; Marel Trust; Carrie Trust; Timothy Trust; Lynne Trust; Eileen Trust and Kevin Trust individually and derivatively on behalf of Cablevision of Chicago, Cablevision of Illinois, Chicago Cablevision Investments, and Cablevision Headquarters Investments, Plaintiffs-Appellees and Cross-Appellants, v. Charles F. DOLAN and Cablevision Systems Services Corporation, Defendants-Appellants and Cross-Appellees. |
| Court | United States Appellate Court of Illinois |
Jenner & Block, Chicago (Theodore Tetzlaff, Thomas Mulroy, Jr., Richard Gray, Richard Steinken and William Ryan, of counsel), for Appellants.
Canel, Davis & King, Chicago (Jay Canel and Peter King, of counsel), for Appellees.
Plaintiffs, limited partner investors in Cablevision of Chicago (Partnership), brought an action individually and derivatively on behalf of the Partnership against defendants, general partners Charles F. Dolan and Cablevision Systems Services Corporation (CSSC), for breach of fiduciary duty involving three financing transactions. Plaintiffs claim the transactions unfairly benefitted the general partners, to the detriment of the limited partners.1 A jury found the issues for plaintiffs.
The issues presented on appeal include whether the circuit court erred (1) in allowing certain evidence as to plaintiffs' theory of breach of fiduciary duty; (2) in refusing to submit a defendants' statute of limitations instruction; (3) in refusing a separate verdict form to determine the liability of each defendant; and (4) whether individual verdicts for plaintiffs' claims should not have been submitted to the jury.
The issues presented on cross-appeal include whether the circuit court erred (1) by allowing Partnership indemnification of defendants' attorneys' fees and costs; (2) by denying forfeiture damages; (3) by not submitting the issue of punitive damages to the jury; and (4) by submitting a certain statute of limitations jury instruction.
Dolan, a cable industry pioneer, established the Partnership in 1979 for the purpose of bringing cable television to the Chicago area after a successful cable television venture in Long Island, New York. Bank loans to then-novel cable television companies were considered risky because the companies had few assets to pledge as collateral, needed long-term loans and had cash flow problems. Banks granting such loans in 1979 demanded restrictive loan covenants that required the borrowing cable company to maintain certain financial performance levels or face default.
Dolan formed three Illinois limited partnerships to raise capital for the Partnership. Prior to investing in the three limited partnerships, each plaintiff received a private offering memorandum, which included a copy of the Partnership Agreement and explained that there were substantial risks in investing in start-up cable companies in the early 1980s. Dolan testified that the Partnership Agreements for the Partnership and three limited partnerships were identical, except for monetary terms. Each plaintiff was required to certify that he or she had a substantial net worth, was sophisticated in business and financial affairs and had received the offering memorandum containing a copy of the Partnership Agreement.
Section 8.1(a) of the Partnership Agreement gave Dolan, as a general partner, authority to manage the partnership and enter into transactions in furtherance of the Partnership's business. Section 8.2(d) specifically authorized Dolan, as managing general partner, "to borrow or lend money upon any terms and conditions, including the subordination of such loans; * * * guarantee indebtedness or obligations of others; provided, however, that [Dolan] determine in good faith that any such transaction is in furtherance of a Partnership purpose." Further, the Partnership Agreement in section 8.2(h) allowed Dolan, as managing general partner, "to engage in any kind of activity and to perform and carry out contracts of any kind necessary to, or in connection with, or incidental to the accomplishment of the purposes of the Partnership, as may be lawfully carried on or performed by a limited partnership under the laws of the State of Illinois * * *."
The Partnership Agreement also specifically contemplated potential conflicts of interest in authorizing transactions with Dolan's affiliate companies.2 During 1979, Dolan created the first limited partnership, Cablevision of Illinois (COI), using proceeds totaling $16,978,000 from the sale of COI partnership units to provide the initial financing for the Partnership.
On December 17, 1980, Dolan and William Bell, chief financial officer of the Partnership, successfully negotiated a loan with a group of banks led by Continental Illinois National Bank and Trust Company of Chicago (collectively Continental Bank) for $42 million at a prime plus 1½% interest rate, which was fully secured by Partnership assets. The loan agreement included numerous covenants and restrictions requiring the Partnership to meet certain standards for cash flow, number of subscribers and that Dolan remain personally involved in Partnership management. Failure to comply with these restrictions would give Continental Bank the right to terminate the loan.
The Partnership faced operational difficulties early on and intense competition to obtain multiple cable franchises, which significantly raised the cost of the local government franchising process. These circumstances resulted in geographically scattered franchises, and increasing construction and technology costs. In addition, the Partnership faced cash flow shortages.
The Partnership's difficulties in obtaining cable franchises and meeting its revenue projections eventuated in its failure to satisfy Continental Bank's restrictions and it defaulted on its loan agreement. Dolan successfully persuaded Continental Bank in September of 1981 to extend the loan term and ease certain restrictions, however, in return for Dolan's agreement to guarantee personally up to $2 million of the bank loan.
In November 1981, Dolan formed the second limited partnership, Chicago Cablevision Investments (CCI), to raise an additional $12,616,831 million in capital by selling CCI limited partnership interests. The CCI Private Offering Memorandum disclosed the Partnership's then-existing financial problems and bank restrictions.3
The Partnership continued to struggle in 1982, but avoided another default when Dolan again persuaded Continental Bank to relax restrictions on the loan agreement. In return, Dolan was required to guarantee part of the debt personally until the Partnership could raise additional capital to reduce that debt.
Financial difficulties continued, and Dolan created a third partnership in 1983, Cablevision Headquarters Investments (CHI), which generated $8.125 million in additional capital through the sale of limited partnership interests. The CHI private offering memorandum disclosed that the Partnership had experienced difficulty in meeting certain covenants in the loan agreement since its inception and that Dolan personally had guaranteed repayment of a specific amount of debt, allowing Continental Bank to waive defaults. The new capital raised through the CHI offering and a new business plan for the Partnership temporarily kept the Partnership out of default.
The Partnership's financial woes increased dramatically in late 1984; it had used most of the $42 million available under its bank loan and again defaulted on the loan agreement. Continental Bank sought to dispose of the financing agreement and demanded that the Partnership pursue alternative long-term solutions to its financing problems. In compliance with this demand, on January 30, 1985, the Partnership called upon the limited partners of CCI to loan $37,500 for each Partnership unit owned to the Partnership at an 18% interest rate, in return for convertible debentures, as authorized by the Articles of Limited Partnership establishing CCI.4 Dolan previously delayed the request for the loans because of the high interest rate and...
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Summation
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