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Epstein v. Yoder





APPEAL from the Circuit Court of Cook County; the Hon. DANIEL P. COMAN, Judge, presiding.


Clayton Yoder (defendant) appeals from the grant of summary judgment in favor of Elliot S. Epstein, Lewis Manilow, Lowell E. Sachnoff, Leonard Jay Schrager, Richard C. Jones, and William N. Weaver, Jr., d/b/a Epstein, Manilow and Sachnoff (plaintiffs) and from the dismissal of his second amended counterclaim against plaintiffs. On appeal, he contends that the trial court (1) improperly granted summary judgment because (a) the issues should have been submitted to arbitration and (b) material issues of fact existed; (2) erred in finding that his second amended counterclaim failed to state a cause of action; and (3) erred in failing to find him to be a "withdrawing party" as that term is used in the contract.

In 1967, plaintiffs (a law firm); defendant (a mortgage banker); Altman & Saichek & Associates (an architectual firm); and Jack Shaffer (a real estate broker) formed a joint venture to construct and manage as rental property a 50-unit apartment building. Initially, each of the four original venturers owned 25% of the venture, but when Shaffer failed to participate in the management and operation of the venture, his share was decreased while the remaining shares were proportionally increased. In 1969, 20% of the venture was sold to Donald Green and Ethel Goldenberg, each of whom received a 10% ownership interest while the shares of the original venturers were proportionally reduced. *fn1 In 1971, a disagreement arose among the venturers, with the result that on July 9 the joint venture agreement was reduced to writing and executed by the four original venturers.

Except as otherwise provided in this agreement, no venturer has the authority to act for or to assume any obligation on behalf of another venturer, and all venturers must agree to the sale of the building or to any other decision which would reasonably be expected to have a material effect on the venture. Concerning financing, however, it was provided that should the revenues generated by the building fail to cover the cost of its operation, any venturer may advance a coventurer's unpaid share of such deficit. Moreover, where such payments or advances are made prior to the service of a notice of default (as defined in article VII relating to termination), the amount thereof together with 8% interest during such time as they remain outstanding is recoverable by a suit at law against the noncontributing coventurer.

Article VII delineates three circumstances which could bring about the termination of the venture. One is the failure of a venturer to perform any of his respective obligations under the terms of the agreement. *fn2 Such failure entitles any other venturer to serve a notice of default upon the delinquent venturer setting forth the nature of the unperformed obligation. If within 30 days following receipt of the notice, the defaulting party in good faith commences to perform such obligation and thereafter diligently cures the default, the venturers shall consider the notice as not having been sent and the defaulting party loses no rights under the agreement. If, on the other hand, the defaulting party fails either to commence or to diligently prosecute the completion of a cure of the default, the non-defaulting parties acting unanimously may declare the venture terminated, in which case the defaulting party would be deemed a withdrawing party. In the event of a termination, the nonwithdrawing venturers may elect to institute appraisal procedures which, while forcing the sale of the defaulting party, do not operate as a waiver of other remedies, if any, which may be available at law or in equity.

The institution of such appraisal proceedings envisions the purchase of the withdrawing venturer's ownership interest in the venture at the appraised value thereof. In doing so, the nonwithdrawing parties each select one disinterested M.A.I. appraiser familiar with the value of multiple-unit apartment buildings in the western suburbs of Chicago. The appraised value of the building is the mean of the appraisers' independent determinations of the value of the building, its fixtures, and tangible personal property. That amount is then increased by the value of intangible assets owned by the venture. The withdrawing party's pro rata share of the resultant amount is decreased by his pro rata share of the venture's liabilities including mortgages, real estate and other property taxes, liens, etc. If the interest of the withdrawing party is positive, the contract provides for its purchase by the other venturers within 30 days of its computation; whereas, if the interest is negative, the withdrawing party is required to pay the deficit to the venture in cash within the same time period. The contract provides that the purchase of a positive interest would occur in a series of rounds at a meeting of the nonwithdrawing partners. In round one thereof, each may purchase a portion of such interest not in excess of his percentage of ownership in the venture as a whole. If at the conclusion of the first round an unpurchased portion of the withdrawing party's interest remains, the nonwithdrawing parties may by a similar procedure, and to the extent of their percentage of ownership in the venture, purchase further amounts of such remainder. If it should happen that a portion remains unpurchased and an agreement among the nonwithdrawing parties cannot be reached regarding its disposition, it is provided that the building be sold by the venturers for the best possible price within one year of the notice of default and, if it is not so sold, it is required that the building be placed with a disinterested and capable real estate broker who will be authorized to accept any commercially reasonable offer. The cost of appraisal and half of the cost of the brokerage fee in the event of such sale are to be borne by the defaulting party. Moreover, it is further provided that in the event the withdrawing party's entire ownership interest in the venture is purchased by the nonwithdrawing parties, the venture would be terminated and immediately be re-created with the only change being a reallocation of the percentage of ownership interests of the remaining venturers, with all terms, agreements, obligations and benefits binding on the remaining parties to the venture so re-created.

Other provisions of the joint venture agreement state that all original venturers were to extend their best efforts to procure refinancing of the first and second mortgages on a non-recourse basis and, having accomplished this refinancing, the original venturers' loans would lose their identity as such; that any joint financing arrangements would be available to all original venturers except that any joint financing among two or more of the original venturers and/or other venturers to purchase the ownership interest of an original venturer upon his failure to repay his pro rata share of the original venturers' loans was not required to be made available to all original venturers.

Regarding default in repayment of the original venturers' loans, the agreement contains the following:

"Section 9. In the event any Original Venturer fails or refuses to repay his or their pro rata share of Original Venturers Loans, or any refinancing thereof, or any due installment thereof, one of the following procedures may be pursued:

(a) after forty-five (45) days written notice the defaulting Original Venturer may be sued at law for the amount then due and owing;

(b) any other Original Venturer may pay (after five (5) days written notice) the defaulting Original Venturers' share and receive eight percent (8%) interest on any monies advanced, said interest to commence from the date of advancement. After forty-five (45) days written notice to the defaulting Original Venturer, the defaulting Original Venturer may be sued at law for the amount advanced in his (their) behalf plus interest as aforesaid; (c) any other Venturer (hereinafter the Purchasing Venturer) (as opposed to Original Venturers only) upon giving five (5) days written notice of his intent to all other Venturers (including the defaulting party) may advance the pro-rata share then due, of the defaulting party. After the advance and after forty-five (45) days written notice to the defaulting party, the defaulting Original Venturer relinquishes and sells all right, title and interest in and to said defaulting Original Venturers' share of the entire Venture * * *. In consideration said Purchasing Venturer undertakes to pay all of the defaulting Original Venturers pro rata share of the Original Venturers Loans when and as they become due and to save the defaulting Original Venturer and hold him harmless from any claims arising out of said defaulting Original Venturers pro-rata share of the Original Venturers Loans. Said Purchasing Venturer undertakes to remove the defaulting Original Venturers name and signature from any renewals or refinancing of the Original Venturers Loans occurring after the defaulting Original Venturer has relinquished and sold all right, title and interest in the Venture. In the event that more than one Venturer desires to participate in the purchase of the defaulting Original Venturers' interest, the participation of each such Venturer shall be determined by utilizing the method set forth in Article VII, Section 6(d) herein. [Article VII is the article relating to termination. Section 6(d) provides for the purchase of a withdrawing party's ownership interest in the venture for the amount of its appraised value less his pro rata share of the venture's liabilities in a series of rounds.] (Any reference to the sale of the building in said Article and Section shall not apply to this Section 9(c))."

A further provision states that, except for disagreements regarding the appraisal procedure, any claim or controversy arising out of the agreement or the breach thereof will be settled by arbitration.

On July 14, 1972, plaintiffs notified defendant that $26,148.51 which they had advanced on his behalf to retire venture liabilities has been outstanding since February 5, 1972. On August 25, 1972, defendant replied that two fees — one of $12,000 due him in September and the other of $10,000 due on November 1 — would, when received by him, be contributed to the venture. On October 17, 1972, defendant remitted $12,000, of which $10,565.03 was applied to reduce the balance owed to plaintiffs with the remainder ($1,434.97) treated as interest pursuant to section 9 of the joint venture agreement.

On August 3, 1973, plaintiffs sent notice to defendant that if he did not within five days remit $933.75, his pro rata share of a second mortgage payment then due and owing, it would advance such sum and within 45 days thereafter assume his interest in the venture pursuant to the terms of section 9(c). Thereafter, defendant ...

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