M.D. Bldg. Material Co. v. 910 Const. Venture

• Decision Date: 13 September 1991
• Docket Number: No. 1-91-0031,1-91-0031
• Citation: 579 N.E.2d 1059,162 Ill.Dec. 245,219 Ill.App.3d 509
• Parties: , 162 Ill.Dec. 245 M.D. BUILDING MATERIAL COMPANY, et al., Plaintiffs, v. 910 CONSTRUCTION VENTURE, et al., Defendants (910 Construction Venture et al., Counterplaintiffs and Third Party Plaintiffs-Appellees; 910 South Michigan Partners Limited Partnership, Counterdefendant-Appellant; M.D. Building Material Company, et al., Counterdefendants; 910 Development Corp., et al., Third Party Defendants).
• Court: United States Appellate Court of Illinois

Page 1059

579 N.E.2d 1059

219 Ill.App.3d 509, 162 Ill.Dec. 245

M.D. BUILDING MATERIAL COMPANY, et al., Plaintiffs, v. 910 CONSTRUCTION VENTURE, et al., Defendants (910

Construction Venture et al., Counterplaintiffs and Third

Party Plaintiffs-Appellees; 910 South Michigan Partners

Limited Partnership, Counterdefendant-Appellant; M.D.

Building Material Company, et al., Counterdefendants; 910

Development Corp., et al., Third Party Defendants).

No. 1-91-0031.

Appellate Court of Illinois,

First District, Sixth Division.

Sept. 13, 1991.

Rehearing Denied Oct. 22, 1991.

Michael J. Rovell, Chicago (Michael J. Rovell, Lisa I. Fair and Matthew N. Young, of counsel), Carlins and Moss, Chicago (Joel M. Carlins, of counsel), Barry B. Berk, Chicago, for counter-defendants-appellants.

Miller, Shakman, Hamilton & Kurtzon, Chicago (Michael L. Shakman, Barry A. Miller and Diane F. Klotnia, of counsel), for counter-third-party-plaintiffs-appellees.

Presiding Justice RAKOWSKI delivered the opinion of the court:

This appeal arises from an order entered by the circuit court compelling an arbitration demand filed by 910 Construction Venture (Venture) against Loewenberg/Fitch Partnership, P.C. (Loewenberg/Fitch), an architectural firm. The demand was brought derivatively by Venture as a limited partner of the 910 South Michigan Partners Limited Partnership (Partnership). The general partner, 910 Development Corporation (General Partner) has appealed raising the following issues: (1) whether the trial court erred in compelling derivative arbitration when the entity whose rights were being asserted had made the business decision that the claims, if brought, should be decided in the circuit court; (2) whether the limited partner was an adequate representative to bring a derivative action for arbitration on behalf of the Partnership where Venture has filed a claim against the Partnership, and the Partnership has claims against Venture for terminating construction; (3) whether the Revised Uniform Limited Partnership Act authorizes a derivative action to compel arbitration; and (4) whether a limited partnership is an indispensable party to a derivative arbitration brought on its behalf. Although appellant is identified as the Partnership, both parties in this dispute are part of the Partnership and claim to be acting on its behalf. It is James Loewenberg as president of the General Partner who opposes arbitration and who has appealed from the trial court's order compelling it. Thus, we refer to the appellant as the General Partner.

The underlying dispute in this case is one of multiple disputes among the owners, contractors, subcontractors and architects who were engaged in the rehabilitation of a building at 910 South Michigan Avenue in Chicago. The building at issue is owned by a land trust with the American National Bank and Trust Company of Chicago (Owner) and the beneficial interest in the land trust is held by the Partnership. The Partnership consists of the one general partner and three limited partners. The limited partners are 910 Development Associates, 910 Partners and Venture. James Loewenberg is president of the General Partner which owns 1% interest in the Partnership and also owns and controls the limited partner, 910 Development Associates which owns 44% interest in the Partnership. Leonard Koval owns and controls 910 Partners which owns 45% interest. The third limited partner is The Venture which is a joint venture comprised of Crane Construction Company, Inc. and CDI and Associates, Inc. and which owns 10% interest in the Partnership.

As part of a plan to rehabilitate the building, the Owner entered into a series of contracts. One of the contracts was the agreement with Loewenberg/Fitch for architectural services. James Loewenberg who was the president of the General Partner as well as the owner of the limited partner, 910 Development Associates, was also the president of the architectural firm. It was this contract which contains the arbitration provision which is at issue in this appeal. The Owner also entered into a contract with Century Contractors, Inc. for the demolition work and with Venture for the rehabilitation of the building.

After Venture entered into the construction contract various problems and disputes developed. Venture claims that the building was not adequately prepared for reconstruction following the demolition work. Disputes also arose over the architectural plans, and the fact that the General Partner and architect failed to authorize change orders for necessary work and stopped authorizing payments to Venture and its subcontractors. When a subsequent settlement arrangement failed Venture and its subcontractors ceased work. Construction on the project terminated on June 4, 1990. Since then the building has been abandoned and vulnerable to vandalism as well as weather conditions. On January 3, 1991, Venture filed a motion to appoint a receiver to protect the building against further damage which the trial court granted. According to Venture, the Owner Partnership defaulted on a $19 million construction loan obtained through the United States Department of Housing and Urban Development (HUD), and the lender has assigned the loan to the Government National Mortgage Association (GNMA) who will be assigning the mortgage to the Federal Housing Authority (FHA). A claim will be made by GNMA against the FHA for the amount of the construction loan under the appropriate FHA insurance program. Unless a settlement acceptable to the FHA can be arranged, there will be a foreclosure on the mortgage and a subsequent sale of the property which will leave the Partnership without any assets.

After construction on the project terminated several mechanic's lien suits were filed. The complaints filed were (1) Fred Berglund & Sons, Inc. v. CDI & Associates, Inc.; (2) Century Contractors, Inc. v. American National Bank & Trust Co. Of Chicago As Trustee under Trust No. 32501; and (3) M.D. Building Material Co. v. 910 Construction Venture. The complaints were consolidated on September 6, 1990. On October 15, 1990, Venture, filed its Motion to Compel Arbitration in a derivative capacity pursuant to section 1001 of the Revised Uniform Limited Partnership Act (RULPA) (Ill.Rev.Stat.1989, ch. 106 1/2, par. 160-1), based on an arbitration provision in the Owner Partnership/Architect contract. On the same day Venture also filed a 26 count counterclaim and third-party complaint against various subcontractors, the architect and the limited Partnership. In Count IX Venture realleged the claims of its arbitration demand and asked the court to compel arbitration of Venture's derivative claim against Loewenberg/Fitch if arbitration was contested. The major allegations of Count IX of the Counterclaim were that James Loewenberg had a conflict of interest because he controlled both the Partnership and the Architect, the architectural malpractice proximately caused the termination of the construction and the resulting injury to the Partnership, and that because of the existing conflict of interest, James Loewenberg would not file an arbitration demand on behalf of the Partnership against Loewenberg/Fitch.

After Venture's demand was filed, notices were sent to counsel for the General Partner and Loewenberg/Fitch. Each party was also sent a list of potential arbitrators and given approximately ten days to strike any names. Counsel for Venture was the only one who responded. Loewenberg/Fitch was subsequently notified of the appointment of an arbitrator as well as the hearing which was scheduled for December 5, 1990. Three weeks later counsel for the General Partner sent a letter to the American Arbitration Association (AAA) with a Stipulation of Dismissal which was also signed by counsel for Loewenberg/Fitch. The document stated that the respective parties agreed to the dismissal of the arbitration. Venture subsequently filed a Motion to Compel Arbitration, and at the hearing on Venture's motion, the General Partner filed a Motion to Stay. The trial court entered an order that the preliminary hearing before the arbitrator should proceed. At the arbitration proceeding, the arbitrator denied the Motions to dismiss or stay the arbitration pending the trial court's ruling. On December 17, 1990, the trial court granted Venture's Motion to Compel Arbitration and also granted the motion of the General Partner for an interlocutory appeal pursuant to Supreme Court Rule 308(a) (134 Ill.2d R. 308(a)), finding that its order "involved a question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of litigation". We allowed the 308(a) appeal. The question of law submitted was whether Venture had the right to pursue arbitration in a derivative capacity. On January 11, 1991, the trial court granted the motion to stay arbitration proceedings pending this appeal.

The issue of whether the RULPA authorizes derivative arbitration, although listed as appellant's third issue, is the basis of the 308 appeal. Therefore, we will address it first. We will also address the other issues because this appeal is in part brought pursuant to Supreme Court Rule 307(a)(1) (134 Ill.2d R. 307(a)(1)).

Because there is no controlling precedent, an initial step in resolving this issue is to closely examine the relevant statute in order to determine the legislative intent as found in the history, existing circumstances and contemporary conditions of the legislation. (Miller v. Department of Public Aid (1981), 94 Ill.App.3d 11, 14, 49 Ill.Dec. 534, 418 N.E.2d 178, citing People ex rel. Hanrahan v. White (1972), 52 Ill.2d 70, 285 N.E.2d 129.) Section 1001 of the RULPA provides that:

"No action shall be brought by a limited partner, or assignee who is entitled to exercise the rights of a partner to bring an action, in the right of a limited...