APPEAL from the Circuit Court of Cook County; the Hon.
SAMUEL B. EPSTEIN, Judge, presiding.
MR. PRESIDING JUSTICE GOLDBERG DELIVERED THE OPINION OF THE COURT:
This record brings before us a complicated series of financial transactions which culminated with institution of this suit. Both Northern Illinois Gas Company (plaintiff) and the defendants (Class C limited partners) filed motions for summary judgments. As we would anticipate from this procedure (Ill. Rev. Stat. 1975, ch. 110, par. 57(3)), there are no genuine issues here as to material facts. We will first state the facts, identifying the parties as we proceed.
On April 1, 1967, a limited partnership named Bank Paza Ltd. (Partnership) was organized under the law of Illinois. (Ill. Rev. Stat. 1975, ch. 106 1/2, par. 44 et seq.; hereinafter referred to as the Uniform Limited Partnership Act.) The purpose was construction and operation of the State Bank Building in Evanston. The Partnership had three general partners, and two groups of limited partners referred to as Class A and Class B. One of the general partners was Hartnett-Shaw Evanston, Inc. (Corporation).
In initial organization of the Partnership, the general partners and the single individual who constituted the Class B limited partners together invested $600,000 as a capital contribution to the Partnership. The Class A limited partners also invested $600,000 as a capital contribution. The general partners and the Class A group each loaned the new Partnership $600,000. These two loans were evidenced by 7-percent income debentures executed by the Partnership. Since the Partnership agreement provided that the debentures owned by both types of partners should be retired concurrently, these securities were sometimes referred to as concurrent debentures.
The building was to be equipped with gas appliances for all purposes. As an aid to construction, the Corporation, one of the general partners, negotiated a loan from NI-Gas Energy, Inc. in the amount of $1,100,000. This transaction was worked out by documents dated July 1, 1967. The loan was evidenced by five promissory notes executed by the Corporation drawing interest of 7 1/2 percent per annum. The Corporation secured this loan by pledging its interest in the Partnership and also the Partnership income debentures above described which the Corporation held. The proceeds of this loan were used by the Corporation as its original capital contribution and loan to the Partnership. The sum of $500,000 represented a substantial part of the $600,000 capital contributed by the general partners and the single Class B limited partner. The remaining $600,000 of this loan represented the $600,000 loan advanced by the general partners to the Partnership and evidenced by the 7 percent income debenture issued by the Partnership. This was the debenture pledged by the Corporation to NI-Gas Energy, Inc. as security for the $1,100,000 loan. On October 30, 1970, NI-Gas Energy, Inc. transferred and assigned all of its interest of every kind in the loan transaction to Northern Illinois Gas Company (plaintiff). Plaintiff is presently the owner of the income debenture in the sum of $600,000 executed by the Partnership and originally held by the Corporation.
On June 10, 1969, the Partnership agreement was amended to supply additional capital. This first amendment provided for creation of the Class C limited partners. A total of 16 individuals invested in the project by this participation. This included the 10 Class A limited partners who acquired 75 percent of the Class C participation. Six new investors acquired the remaining share. The entire Class C group invested $20,000 in cash as additional capital for the Partnership. The Class C group also negotiated an interest bearing loan directly to the Partnership by the Continental Illinois National Bank and Trust Company of Chicago in the amount of $1,200,000. This loan was guaranteed to the lender by the Class C limited partners. The loan was to be repaid in 10 equal annual payments.
The Class C group was to receive a share of Partnership profits which the parties agreed was equivalent to 36 percent. As the loan was repaid this share was to be decreased to a final figure of 5.4 percent. The first amendment to the articles of limited partnership referred to this transaction as secondary financing. It acknowledged that the Class C group had severally guaranteed repayment of the loan. Various individual letters of credit from other banks to the Class C limited partners were pledged by them to Continental as additional security for the loan. The amendment provided that the principal amount of the secondary financing "may be repaid before repayment of the income debentures and shall be repaid * * * in ten equal annual installments beginning with an installment payable on or before June 1, 1971." The amendment also provided that the interest due Continental was to be an expense of the Partnership. On July 31, 1969, a letter of consent to this transaction was executed and delivered by plaintiff's assignor, NI-Gas Energy, Inc. This consent was required as a part of the loan agreement.
On July 7, 1970, by a second amendment effective as of January 1, 1970, the Partnership agreement created Class D limited partners. There were a total of 13 individuals in this group. Nine of them were participants as Class A or Class C limited partners to the extent of 77.1 percent of the total Class D participation. This new group contributed $350,000 in cash as additional Partnership capital. The Class D limited partners also loaned the Partnership $350,000. This loan was evidenced and secured by subordinate debentures executed and delivered by the Partnership which provided for interest at the rate of 10 percent per annum.
On June 1, 1970, a letter agreement was executed by the Corporation and NI-Gas Energy, Inc. plaintiff's assignor. The agreement provided for an increase of interest rate on the promissory notes executed by the Corporation and held by NI-Gas Energy, Inc. to 8 1/2 percent per annum compounded semiannually. The letter evidenced the consent of NI-Gas Energy, Inc., to the creation of the Class D limited partners.
The debenture agreements between the Partnership and the Class D limited partners provided for prior payment by the Partnership of its obligations described as "Senior Debt." This was defined as including the Partnership "indebtedness to be undertaken in order to finance the Project, except the unsecured debentures * * *." However, the Partnership agreed in the document that it would discharge all of its obligations under the senior debt, the 7 percent income debentures and the "Secondary Financing." These two last words referred to the loan to the Partnership by the Continental Bank guaranteed by the Class C limited partners.
In June of 1975, the Partnership sold its interest in the entire project to an insurance company. The net proceeds of the sale, which may be available for distribution to creditors including the parties to this litigation, is some $400,000. This fund is being administered by the circuit court. The 7 percent concurrent income debentures executed by the Partnership, representing the original loan by the general partners of $600,000 and a loan by the Class A limited partners of like amount, have never been paid. The Partnership made payments to the Continental Bank which reduced the principal amount of the indebtedness of the Partnership, resulting from the secondary financing, to $840,000. On October 15, 1975, this entire principal balance was paid in full to Continental Bank by the Class C limited partners.
Plaintiff's complaint is in two counts. Count I seeks judgment against the Corporation upon the loan agreement and notes for $1,100,000. Count II prays a declaration that the proceeds of sale of the Partnership real estate be divided pro rata between plaintiff and the Class A limited partners.
After a complete hearing on both of the motions for summary judgment, the trial judge filed a memorandum opinion. The court concluded that the equities were with the Class C limited partners who should be subrogated to the rights of the Continental Bank, against the Partnership and thus have priority over the debentures and the rights of plaintiff. The trial judge analyzed the participating percentage granted to the Class C partners in the secondary financing as a bonus for the risk entailed in their guarantee. The court entered a final order granting summary judgment in favor of the Class C limited partners and against plaintiff. The order provided that the indebtedness of the Class C group should be paid in full before any payment from the assets of the Partnership was made to plaintiff and that the net remaining assets of the Partnership were to be paid to the Class C group in proportion to and in full up to the amount of the respective payments by each of the Class C group upon the debt of the Partnership to the Continental Bank. The court also granted judgment in favor of plaintiff against the Corporation, one of the general partners, in the amount of $1,724,137.20 representing balance of principal plus accrued interest on the loan made by plaintiff's assignor to the Corporation.
Plaintiff has appealed from the order denying its motion for summary judgment and granting summary judgment to the Class C limited partners. In our opinion, only questions of law are presented by this record. In this court plaintiff contends that under the provisions of the Partnership agreement the Partnership debenture issued to the Corporation, a general partner, and presently held by plaintiff should share on an equal basis with sums owed to the limited partners and has priority over the return of capital contributions made by the limited partners; the claims of the Class C partners should be treated as capital investments and subordinated to the concurrent income debentures; even if the Class C claim be considered as a debt rather than a capital contribution the Class C partners should share proportionately with the Class A limited partners and with plaintiff; subrogation of the claims of the Class C partners to the claim of a general creditor of the Partnership would be inequitable; and, finally, that the parties intended that the Class C claims would be subordinate to the income debentures and a conclusion that the parties intended priority for the Class C partners would be totally unreasonable. On the contrary, the Class C partners contend that the Uniform Limited Partnership Act gives priority to the Class C claim over the ...