APPEAL from the Circuit Court of Cook County; the Hon.
REGINALD HOLZER, Judge, presiding.
MR. JUSTICE JOHNSON DELIVERED THE OPINION OF THE COURT:
Plaintiffs brought this action pursuant to the Illinois Securities Law of 1953 (Ill. Rev. Stat. 1977, ch. 121 1/2, pars. 137.12, 137.13) and sections 12 and 17 of the Federal Securities Act of 1933 (15 U.S.C. §§ 77(1), 77(q) (1976)), to rescind their purchase of interests in a real estate limited partnership. Plaintiffs' complaint alleged violations involving the misstatement and nondisclosure of material facts as well as failure to file a registration statement. The trial court, sitting without a jury, made a determination that defendants had violated provisions of the two statutes. The court ordered rescission of the purchase agreement, entered a judgment in the amount of $437,500, and ordered payment of funds held by the First National Bank of Chicago in partial satisfaction of judgment. The court also entered judgment against defendants John A. Meatte and Kenneth F. Kortas for punitive and exemplary damages. We affirm the trial court.
Defendants appeal from the judgment of the trial court and place before this court the issues of whether the trial court erred in (1) admitting into evidence complaints of other lawsuits, (2) denying defendants' motion to vacate judgment, and (3) awarding punitive damages and attorneys' fees.
A summary of the facts includes the following: In 1973, defendants Meatte and Kortas conducted business principally in the purchase and sale of real estate. They entered into both private and syndicated transactions by means of selling interests in limited partnerships. They facilitated their business by making use of several different corporations. Among those were defendant Pro Vest, Inc., Sterling Enterprises, Inc., and Dev-Tex., Inc.
In 1977 defendants Meatte and Kortas made private efforts to buy the Thornhill apartment complex located in Houston, Texas. They sought the property for the purpose of converting it to condominiums. Defendants' efforts to acquire the real estate led them to obtain an option to buy the property from the First National Bank of Chicago (hereinafter First National Bank) under a letter of agreement dated April 19, 1977. Financing was not obtained in time to exercise the option to purchase the property, and, as a result, the option was forfeited on October 4, 1977.
Defendants then chose the alternative of syndicating limited partnership interests to acquire the funds needed to buy the property. In January 1978, they decided to raise $25,000 from limited partners, and they proposed to use such funds to supplement other financing. A prospectus for the partnership was prepared during February 1978 and presented to plaintiffs. It was never filed with the Secretary of State of Illinois. Between May 15 and May 18, 1978, plaintiffs purchased 25 units of the Thornhill condominium limited partnership for a total of $437,500. Some of the investors made physical inspections of the Thornhill property personally or through representatives.
The prospectus contained representations of the Thornhill real estate, the financing of the partnership business, and the performance of the defendants in other real estate transactions. It described a mortgage loan of $3,040,000 to be made by Citizens Mortgage Corporation, and an additional loan of $760,000 being obtained from an unspecified source. The $3,040,000 loan was never granted.
The prospectus also made representations as to the description of the Thornhill property, including 10 pages of pictures, diagrams, floor plans, a map, and 2 pages of textual data.
The prospectus contained representations concerning prior accomplishments of defendants as promoters of real estate projects. It contained statements concerning a property called Bimini Isle, located in Houston, Texas. Bimini Isle was the subject of a venture defendants promoted through a syndicated limited partnership, which was described in the Thornhill prospectus as "[a]n example of a successful condominium conversion with which the general partners and their affiliates were associated * * *."
In May 1978, the First National Bank sent to defendants a "backup" contract for the Thornhill property, stipulating that the Bank would consider final execution if its pending deal with another buyer failed to solidify. Later that month, the other buyer executed a contract for the property, thereby making it unavailable to defendants. Nothwithstanding this, defendants executed and submitted the "backup" contract. The contract contained amendments that were later declared unacceptable by the bank.
Defendants' difficulties in acquiring the property were first discovered by securities broker Richard Emerson. On May 23, 1978, Emerson had a conversation with an officer of the First National Bank who indicated the property was firmly contracted to another buyer. Emerson confronted defendants with the information gained from the bank officer. Their response was that a suit had been filed in Houston, Texas, seeking to prevent the bank from selling the property to anyone but defendant Dev-Tex, Inc., owned by the Thornhill partnership. When certain plaintiffs were informed of the circumstances, they grew impatient and began to demand a refund of their money. On July 24, 1978, defendants were told that if the Houston suit did not end favorably by July 31, rescission would be sought. When the suit was decided against defendants, rescission was demanded.
On August 16, 1978, plaintiffs, all of the limited partners, brought this action. The same day, defendants notified them that a new but unidentified property had been selected in Houston to serve as a substitute for Thornhill. By that time, approximately $63,000 of plaintiffs' initial contribution of $437,500 had been expended by defendants.
In their appeal to this court, defendants question the relevance of complaints from other lawsuits which were presented at trial. Specifically, they contend that three complaints taken from lawsuits involving other real estate deals and defendants Meatte and Kortas should not have been admitted into evidence, the admission of such evidence being highly prejudicial.
On November 1, 1976, defendant Meatte and others were sued in the District Court of the United States for the Northern District of Illinois, Eastern Division. They were charged with violations of certain sections of the Federal Securities Act by certain investors in a "Mission Street Plaza" real estate development. The venture, a limited partnership with defendant Meatte as a general partner, was formed to acquire and operate a shopping center in Mt. Pleasant, Michigan. In that suit, defendants were charged with failure to disclose to their limited partners the difficulties in purchasing the shopping center, failure to disclose defendants' efforts to acquire substitute real estate, failure to disclose high risk factors in the substitute property, and falsely representing material facts.
On December 16, 1977, defendants Meatte and Kortas, with others, were sued in the District Court of the United States for the Northern District of Illinois, Eastern Division. They were charged with violations of certain sections of the Federal Securities Act by certain investors in an "Equity Properties" real estate development. The venture was a limited partnership formed to acquire and operate a 123-unit apartment complex in Houston, Texas. In that suit, the defendants were charged with material false representation and failure to disclose material information.
On December 23, 1977, defendants Meatte and Kortas, with others, were sued in the Federal District Court for the Northern District of Illinois, Western Division. They were charged with violation of the Federal Securities Act by an investor in a "Blalock Manor" real estate development. Blalock Manor was also formed with a limited partnership. Its purpose, was to acquire a 164-unit apartment complex in Houston, Texas. In that litigation, the defendants were charged with making material false representations and failure to disclose material information.
The complaints from each of those actions were admitted into evidence to establish that litigation was pending against defendants at the time of the issuance of the venture prospectus. The ongoing litigation was not disclosed to plaintiffs in the prospectus, and they had no other knowledge of it. This, plaintiffs claim, was a failure to disclose material information and, therefore, the complaints were relevant to the issues on trial and were properly admitted into evidence.
The issue defendants raise concerning the relevance of evidence is evasive of the more fundamental issue of materiality. The basic question is whether the litigation in which defendants were involved, as evidenced by the complaints, was material to the plaintiffs' purchase of securities. If so, the complaints should have been admitted at trial. We hold the complaints were properly admitted.
The test for materiality of misrepresentation or omission relied on in an action for violation of the Federal securities law is whether a reasonable and prudent investor would attach importance to the facts or fact omitted or misrepresented in determining his choice of action in the transaction in question. See Affiliated Ute Citizens v. United States (1972), 406 U.S. 128, 31 L.Ed.2d 741, 92 S.Ct. 1456; Mills v. Electric Auto-Lite Co. (1970), 396 U.S. 375, 24 L.Ed.2d 593, 90 S.Ct. 616; Securities & Exchange Com. v. Texas Gulf Sulphur Co. (2d Cir. 1968), 401 F.2d 833.
The question of materiality in an action brought under the State securities law requires that we recall the purpose of the legislation. The indicated purpose of the Illinois securities law has been to furnish information, to protect credulity and ignorance from deception, and prevent fraudulent and deceitful sales of securities (Stewart v. Brady (1921), 300 Ill. 425, 439, 133 N.E. 310, 315), and to protect innocent persons who may be induced to invest their money in speculative enterprises over which they have no control (Meihsner v. Runyon (1960), 23 Ill. App.2d 446, 456, 163 N.E.2d 236, 241).
As well, this court takes judicial notice that the Federal Securities and Exchange Commission (hereinafter SEC) recognizes the category of securities generated by investment in real estate limited partnerships. The SEC has issued guides for the registration statements filed upon issuance of such securities. In 1968 the SEC published a Release No. 33-4836 which announced the guides. In that release, the Commission stated:
"These guides are not rules of the Commission nor are they published as bearing the Commission's official approval. They represent policies and practices followed by the Commission's Division of Corporate Finance in the administration of the registration requirements of the Act, but do not purport to furnish complete criteria for the ...