Whalen v. Connelly

• Decision Date: 20 March 1996
• Docket Number: No. 94-1897,94-1897
• Citation: 545 N.W.2d 284
• Court: Iowa Supreme Court
• Parties: Michael L. WHALEN, Appellant/Cross-Appellee, v. John E. CONNELLY, Edward S. Ellers, The Connelly Group, L.P., A Limited Partnership, Della III, Inc., President Riverboat Casinos, Inc., and Klehr, Harrison, Harvey, Branzburg and Ellers, A Partnership, Appellees/Cross-Appellants, v. Dennis J. BRITT and Vollertsen & Britt, P.C., Cross-Appellees.

Page 284

545 N.W.2d 284

Michael L. WHALEN, Appellant/Cross-Appellee, v. John E. CONNELLY, Edward S. Ellers, The Connelly Group, L.P., A Limited Partnership, Della III, Inc., President Riverboat Casinos, Inc., and Klehr, Harrison, Harvey, Branzburg and Ellers, A Partnership, Appellees/Cross-Appellants, v. Dennis J. BRITT and Vollertsen & Britt, P.C., Cross-Appellees.

No. 94-1897.

Supreme Court of Iowa.

March 20, 1996.

John R. Perkins of Shearer, Templer, Pingel & Kaplan, P.C., West Des Moines, for appellant and for cross-appellees.

R. Richard Bittner and Jeffrey Bittner of Carlin, Hellstrom & Bittner, Davenport, and W. Stanley Walch and Lawrence C. Friedman of Thompson & Mitchell, St. Louis, Missouri, for appellees.

Considered by HARRIS, P.J., and LARSON, CARTER, SNELL, and ANDREASEN, JJ.

HARRIS, Justice.

The advent of riverboat gambling in Iowa prompted these parties to contract for a business venture. This rather complicated lawsuit is over the extent of the undertaking. The defendants, a Pennsylvania entrepreneur and his enterprises, contend the undertaking was limited to a portion of a Davenport, Iowa, venture. Plaintiff, an Iowa businessman, contends it extended to a portion of all defendants' enterprises. On appeal the question is made a good deal more difficult because it was resolved in district court by way of granting a motion for summary judgment. Because such a motion surrenders all disputed facts, it is a risky way to resolve complex litigation. Nevertheless, like the trial court, we think dismissal of all plaintiffs' claims was correct.

Plaintiff Michael Whalen, the Davenport businessman, believes he is entitled to five percent of the defendant John E. Connelly's gambling enterprises wherever and whenever they materialize. Connelly believes Whalen is entitled to only five percent of a portion of the Davenport gambling development owned by The Connelly Group, L.P. (TCG).

Michael Whalen is a law school graduate who owns and operates a successful restaurant and hotel enterprise in Iowa. John E. Connelly, a resident of Pittsburgh, Pennsylvania, is likewise an accomplished businessman whose interests include a dinner and excursion riverboat operation. The genesis of this controversy occurred in 1987 when the Iowa legislature began considering the legalization of riverboat gambling. Whalen became interested in establishing such an enterprise as a way of expanding his restaurant and hotel business, and he sought out an experienced partner. His quest led him to Connelly, and they discussed potential riverboat gambling in Davenport. When the Iowa legislature authorized riverboat gambling in April 1989, the two utilized Whalen's community ties to quickly promote the passage of a Scott County referendum permitting gambling and later to secure a gaming license for a Davenport riverboat.

Whalen and Connelly's discussions led to extended negotiations which resulted in the formation of TCG, a limited partnership. ¹ During these negotiations Connelly and his interests were represented by Klehr, Harrison, Harvey, Branzberg & Ellers, a Philadelphia law firm. Whalen was represented by counsel from Davenport (first by Stephen Jacobs of Betty, Neuman & McMahon and later by Dennis Britt of Vollersten & Britt). Under the terms of a partnership agreement dated December 29, 1989 (the first partnership agreement), and a letter agreement dated March 2, 1990 (the first letter agreement), Whalen became a five percent limited partner; Della III, Inc., a corporation controlled by Connelly, became a general partner; and St. Louis River Cruise Lines, Inc., a Missouri corporation controlled by Connelly, became the other limited partner. Whalen's capital contribution was $5000 and Della III contributed $500,000. Because Whalen and Connelly knew they had insufficient capital and gaming expertise to run a riverboat gambling venture, both contemplated another gaming partner. ²

TCG subsequently obtained a riverboat gaming license from the Iowa gaming and racing commission subject to adequate financing being in place by April of 1991. Iowa Riverboat Corporation (IRC), a subsidiary of International Gaming Technologies (IGT), ³ became a second general partner in TCG by the terms of an amended (second) partnership agreement dated December 1, 1990. In accordance with the second agreement Connelly entities contributed an additional $5 million in cash, the "President" riverboat with a net value of $9.7 million, and a commissary barge with a net value of $800,000. IRC contributed $400,000 in cash and advanced $10 million of subordinated debt. In addition, IGT leased TCG $5 million in gaming equipment. Under the new (second) partnership agreement, IRC received a forty percent interest, Della III acquired a fifty-five percent interest, and Whalen maintained his five percent share.

During this same time Whalen and his attorneys (third-party defendants Vollersten & Britt) and Connelly and his attorneys (the Klehr law firm) were negotiating the effect of the first letter agreement. As a result of these negotiations, the parties executed a second letter agreement dated December 11, 1990, redefining the assets to which Whalen's five percent interest attached and clarifying the priorities for cash distributions. ⁴

Riverboat gaming commenced on April 1, 1991. Although business was never sufficiently successful to generate a return on the common equity, it was successful enough to make interest payments on its subordinated debt and preferred capital accounts. ⁵ It was also sufficiently successful to generate complaints from customers who purchased gaming equipment from IGT, the parent corporation of IRC. As a result, IGT approached Connelly and expressed a desire to "cash out" in order to avoid competing with its customers.

Consequently, in 1992, the parties discussed a proposal to form a new company to be named President Riverboat Casinos, Inc. (PRCI), for the purpose of offering stock to the public. At this time the Missouri legislature was in the process of authorizing a referendum on riverboat gambling. Under the proposal, PRCI would combine TCG with potential gaming operations in Missouri controlled by other Connelly entities. ⁶

Whalen was given two options under the initial public offering (IPO). He was first offered the opportunity to purchase a five percent partnership interest in Connelly's Missouri enterprises at a price of $500,000. This would have entitled Whalen to five percent of the total number of shares of PRCI allocated to all the other partners in conjunction with the IPO. Whalen took the position that he would pay the $500,000, but wanted his shares to be sold to the public in the IPO. This way he could "cash out" the same as IGT could. This request was rejected by the underwriters due to adverse tax consequences and also because it would give the appearance that the original investors were "bailing out" if any partner other than IRC were a selling shareholder.

Whalen's second option was to make no additional investment, but then receive only two-and-one-half percent of the total number of shares of PRCI due to the relatively equal value of TCG and the Missouri partnerships. Because Whalen disputed this valuation he declined the option. In the event both options were declined, Whalen was informed the other partners in TCG would transfer their partnership interests (as permitted under section 10 of the second partnership agreement) to PRCI after the IPO, leaving TCG intact.

The IPO eventually went forward under this third alternative. TCG transferred its partnership interests to PRCI. Della III and the other two Connelly affiliated partners in TCG received a cash distribution on December 18, 1992, of $1,230,769 and received 1,118,091 unregistered shares of PRCI. On February 4, 1993, TCG tendered to Whalen $61,538.45 in cash and 55,904 shares of PRCI unregistered common stock (which later split twice and is now represented by 167,712 shares of unregistered common stock).

Whalen filed this suit three months later alleging breaches of oral and written agreements, breach of fiduciary duties, negligent and fraudulent misrepresentation, intentional interference with prospective business advantage and contract, promissory estoppel, unjust enrichment, constructive trust, civil conspiracy, and securities law violations. Whalen claimed he had been wrongfully denied a management role involving the hospitality services related to the gambling venture in Iowa and the expansion rights to Connelly's gambling enterprises in other jurisdictions. The defendants counterclaimed, alleging Whalen breached oral and written contracts and fiduciary duties. The district court granted summary judgment against Whalen on the negligent misrepresentation, promissory estoppel, breach of written contract, civil conspiracy, and intentional interference with prospective business advantage and contract claims. Summary judgment was also granted against Connelly on the counterclaims. The rest of the claims went to trial, but were eventually dismissed on the defendants' motion for a directed verdict. The district court then entered a declaratory judgment that the cash and PRCI stock offered on February 4, 1993, constituted full compliance with the terms of the parties' agreement.

Whalen appeals and the defendants cross-appeal.

I. Whalen first assigns error in the grant of summary judgment on his breach of contract claim. When reviewing a summary judgment ruling, we determine whether a genuine issue of material fact exists and if the law was correctly applied. Ottumwa Hous. Auth. v. State Farm Fire & Cas. Co., 495 N.W.2d 723, 726 (Iowa 1993).

Whalen contends the defendants breached the partnership agreements in two ways. He first argues the defendants denied him his right to invest in the expansion of riverboat gambling outside Iowa. To answer the question, we first consider whether the partnership agreements and letter agreements constituted...