Rep Mcr Realty, L.L.C. v. Lynch

• Citation: 363 F.Supp.2d 984
• Decision Date: 21 March 2005
• Docket Number: No. 02 C 0399.,02 C 0399.
• Parties: REP MCR REALTY, L.L.C., Plaintiff, v. Michael W. LYNCH, an Illinois Resident, Defendant. Michael W. Lynch, an Illinois Resident, Third-Party Plaintiff, v. Seyfarth Shaw and Edward Karlin, an Illinois resident, Third-Party Defendants.
• Court: U.S. District Court — Northern District of Illinois

Page 984

363 F.Supp.2d 984

REP MCR REALTY, L.L.C., Plaintiff, v. Michael W. LYNCH, an Illinois Resident, Defendant.

Michael W. Lynch, an Illinois Resident, Third-Party Plaintiff, v. Seyfarth Shaw and Edward Karlin, an Illinois resident, Third-Party Defendants.

No. 02 C 0399.

United States District Court, N.D. Illinois, Eastern Division.

March 21, 2005.

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Charles Vincent Maloney, Gregory Edward Ostfeld, Perkins Coie, LLC, Charles Albert Duffield, Sonnenschein, Nath & Rosenthal, LLP, Timothy J. Patenode, Katten Muchin Zavis Rosenman, Eugene Edward Murphy, Jr., Bryan Cave, James H. Ryan, Horwood, Marcus & Berk, Chicago, IL, Anthony M. Radice, James Moloney, Morrison & Foerster, New York, NY, for Plaintiffs.

Gerald E. Kubasiak, Scott A. Browdy, Kubasiak, Fylstra, Reizen & Rotunno P.C., John N. Hourihane, Jr., Horwood, Marcus

& Berk, Robert Patrick Cummins, Thomas Cusack Cronin, Cummins & Cronin, LLC, Kevin Mark Murphy, Richard A. Levy, Latham & Watkins LLP, Scott H. Gingold, Perkins Coie LLC, John H. Anderson, Seyfarth Shaw, Donald A. Tarkington, Stephen Novack, Steven J. Ciszewski, Novack & Macey, Chicago, IL, for Defendants.

MEMORANDUM OPINION AND ORDER

FILIP, District Judge.

Plaintiff, REP MCR Realty, L.L.C. ("REP" or "Plaintiff") has sued Michael Lynch ("Lynch" or "Defendant"), and has alleged that Lynch is liable under a personal guaranty ("Guaranty") that Lynch signed. Almost a year after Lynch was sued, he filed a third-party complaint against Seyfarth, Shaw, Fairweather, and Geraldson ("Seyfarth Shaw") and Edward J. Karlin ("Karlin") (collectively, "Third-Party Defendants"), who were attorneys advising Lynch and/or various entities in which he had substantial interests at the time the Guaranty was signed. By his third-party suit, Lynch claimed he was entitled to indemnification in the event he were found to be liable to REP on the Guaranty. (D.E. 62.)

There are three motions pending before this Court. REP has moved for summary judgment against Lynch on the breach-of-guaranty claim. Seyfarth Shaw and Karlin also have moved for summary judgment against Lynch on his third-party indemnification claim. These motions were filed and briefed after Seyfarth Shaw and Karlin moved for dismissal of Lynch's third-party suit against them based on alleged fabrication of three critical documents Lynch produced in the litigation ("Sanctions Motion") — documents that appear to be the strongest, if not, more likely, the only, documentary evidence in support of at least some aspects of Lynch's claims against Seyfarth Shaw and Karlin.

Briefing proceeded on all three motions. During the briefing, REP joined in the Sanctions Motion against Lynch.¹ REP explained that it believed it had a strong case for summary judgment on its suit against Lynch concerning the Guaranty, but REP understandably also wanted an opportunity to argue that it was entitled to the benefit of any sanctions ruling against Lynch. As explained further below in Section III, there are few, if any, material factual disputes concerning REP's summary judgment motion. As one would expect, there are many factual disputes concerning the Sanctions Motion.

On January 20 and 21, 2005, the Court held an evidentiary hearing on the Sanctions Motion that included testimony from several witnesses. Included among the witnesses were Defendant Michael Lynch and Third-Party Defendant Edward Karlin. Based on the evidence presented in connection with the Sanctions Motion, including the live testimony, the Court cannot help but conclude that Lynch wilfully and intentionally attempted to perpetrate a fraud on the other parties in this case, on the system of civil justice generally, and on the Court.²

Perhaps not surprisingly, given the gravity of the allegations against Lynch he never suggested during the proceedings relating to the Sanctions Motion that any sanction short of dismissal with prejudice would be appropriate if Lynch were found, as he has been, to have engaged in the charged document fabrication and perjury. The Court has nonetheless independently considered whether some other, lesser sanction would be appropriate. After engaging in that assessment, the Court cannot conclude that any lesser sanction would be reasonable, fair, or just. As precedent teaches, dismissal with prejudice is not only proportionate to the offenses at issue, but any lesser sanction under the circumstances (such as merely excluding the fabricated documents) would unfairly minimize the seriousness of the misconduct and fail to deter sufficiently such misconduct by others in the future.

The Sanctions Motion (D.E. 161) is granted, and Lynch's third-party complaint against Seyfarth Shaw and Karlin is dismissed with prejudice. The summary judgment motion of Seyfarth Shaw and Karlin against Lynch's third-party claims (D.E. 129) is dismissed as moot. REP's summary judgment motion (D.E. 120) against Lynch concerning his liability under the Guaranty is granted.

I. FACTS³

A. Introductory Backdrop

Defendant, Michael Lynch, is a young entrepreneur who engaged in hundreds of millions of dollars in transactions in the last fifteen years or so, largely in the area of distressed real estate and distressed business acquisition. (Sanctions Hr'g Tr. at 232-33, 330-31.) He has, or at least had, a controlling and/or substantial interest in various business entities. (E.g., id. at 232, 243, 331.) In connection with his business endeavors, he has been personally involved in financing over $460 million in debt since 1991. (Id. at 239, 330.)

As Lynch described it,⁴ in the summer of 1998, Lynch and a group of business associates completed a business acquisition. (Id. at 233, 235.) As is typical in such acquisitions, there were various corporate entities involved in the acquisition and in the structuring of the final corporate landscape. In general terms, in the summer of 1998, the Lynch camp acquired, through an entity known as "McCook Metals LLC," a large distressed aluminum plant located in McCook, Illinois, for some $97 million. (Id.) Profits would be passed through to the entrepreneurs through the LLC entity. (Id. at 235.) In general terms, Seyfarth Shaw and Karlin were attorneys who counseled Lynch and/or his camp in connection with the McCook acquisition and the eventual Guaranty, which was completed as one of the various corporate moves that followed the initial acquisition.⁵

Approximately 30 days after the closing of the acquisition, Lynch and his fellow entrepreneurs began considering further corporate moves that would enure to their benefit from a tax perspective. (Id.) The purchased assets would be restructured into seven or eight different limited liability corporations, with a reallocation of the purchase price based on third-party appraisals. (Id. at 236.) The restructuring also was attractive because it would, among other things, allow the Lynch camp to eliminate the potential of other participants to acquire substantial additional equity ownership interests in upcoming years. (Id. at 237.) The potential would have allowed those other participants to move from 5% to 30% equity ownership positions, in an entity or entities that Lynch believed were worth, or at least could be worth, anywhere from $80 million, to $150 million, to as much as $1 billion dollars.⁶ (Id. at 237, 282.) In addition the additional corporate moves that were being contemplated would allow Lynch and his colleagues to free up 150 acres of land at the aluminum plant, which Lynch believed had a potential development value for them of $100 to $150 million. (Id. at 237.) Lynch admitted that he saw the potential moves as presenting a "very unique opportunity" for him and his associates. (Id.)

The corporate moves also would involve placing a new long-term mortgage on the property that would remain in use as an aluminum plant. (Id. at 238.) Lynch engaged his former fraternity brother, an investment banker named Scott Miller of Cohen Financial in Chicago, to help broker the transaction. (Id.) Lynch was the person from his group who negotiated the mortgage, and Lynch was also the lead person involved in the McCook Properties endeavor overall. (E.g., id. at 322; Mov. Ex. 8.) He owned, directly or indirectly, approximately 49-51% of McCook Properties, and he was the leading actor related to it. (Sanctions Hr'g Tr. at 322.)

As discussed immediately below, Lynch eventually negotiated for $30 million in financing for the ongoing aluminum operations with Morgan Guaranty Trust Company of New York ("Morgan"). In connection with that loan, Lynch executed a personal Guaranty that, as the Court explains in detail below, obligated Lynch to personally guaranty the obligations of McCook Properties, LLC ("McCook Properties") in the event of a default, which could include, among other things, a voluntary bankruptcy filing by McCook Properties.

B. The Morgan Guaranty Trust Company of New York Transaction⁷

On December 30, 1998, Morgan officially entered into a loan with McCook Properties for $30,850,000 ("Loan"). (D.E. 121 ¶¶ 7-8.) The Loan was evidenced by, among other things, a fixed rate note for $30,850,000 issued by McCook Properties to Morgan dated December 30, 1998 ("Note"), and it was secured by, among other things, a Mortgage and Security Agreement ("Security Instrument"). (Id. ¶ 8.) Michael Lynch, President of Cloverleaf Holdings, Inc., the managing member of McCook Properties, executed the Note and Security Instrument on behalf of McCook Properties. (Id. ¶ 9; D.E. 139 ¶ 9.) The parties (i.e., REP and the Movants generally, on the one hand, and Lynch, on the other) vary slightly in their estimation of how much of McCook Properties Lynch owned, although the difference appears to be inconsequential. REP maintains that Lynch "owned approximately fifty percent of McCook Properties" (D.E. 121 ¶ 9), while Lynch explains that he owned between forty-nine and...