APPEAL from the Circuit Court of McHenry County; the Hon.
MICHAEL J. SULLIVAN, Judge, presiding.
JUSTICE NASH DELIVERED THE OPINION OF THE COURT:
Defendants, Kenneth Ritmueller and Ralph Obenauf, appeal from a judgment of the circuit court of McHenry County, sitting without a jury, finding them liable to plaintiffs for $20,000 in actual and $20,000 in exemplary damages for fraudulent misrepresentations. Defendants essentially contend that plaintiffs failed to prove them guilty of fraud by clear and convincing evidence.
Although plaintiffs have not filed a brief in this court we consider the appeal under the standards set forth in First Capitol Mortgage Corp. v. Talandis Construction Corp. (1976), 63 Ill.2d 128, 133, 345 N.E.2d 493, 494; see also Roqueplot v. Roqueplot (1980), 88 Ill. App.3d 59, 60, 410 N.E.2d 441, 442.
Plaintiffs' complaint was brought in two counts. Count I was directed against the individual defendants and count II against defendant Kensu Enterprises, Inc., an Illinois corporation. A default judgment was entered against the corporation and damages by it assessed at $20,000 in favor of plaintiffs. The corporation has not appealed from that judgment.
Evidence was produced in trial that in 1976 plaintiffs owned a five-acre parcel of real estate in McHenry County upon which they wished to erect their residence. The Ronans were referred to Kensu Enterprises, Inc., as a reputable builder. Kensu was incorporated in 1974 for the purpose of the construction of homes, and its stock was closely held by defendant Rittmueller and his wife. On September 17, 1976, plaintiffs met with defendant Obenauf, Kensu's salesman, and Rittmueller, its president, at the corporate office in Woodstock. They brought with them a survey of their land and a house plan taken from a magazine and were advised by defendants that Kensu would have an architect prepare a preliminary plan from it. Defendants advised plaintiffs the residence they desired would cost $48,500. Plaintiffs responded they could not afford more than $47,000 and asked how much down payment would be required. Defendants responded that 10% of the total price would be adequate with the balance payable when the house was almost completed. Plaintiffs also met with defendants to view other homes constructed by Kensu near Elgin. On October 4, however, Mrs. Ronan called the Kensu offices and spoke to Obenauf advising him plaintiffs had decided to wait until spring to build the home.
On October 20 Obenauf called Mrs. Ronan and advised her that if plaintiffs wished to build for $47,000 they would have to do so now as the cost of the home would go up at least $3,000 in the spring. Mrs. Ronan testified Obenauf told her the contract would have to be made at once because of an impending price increase for lumber and building materials which would become effective on November 1, causing a $3,000 increase in the cost of the home. He also stated Kensu had employed an additional crew of carpenters and that construction could start immediately and be under roof by Christmas. She told him to prepare the building contract and that plaintiffs would discuss it and meet with defendants on October 29 at their office.
Mrs. Ronan testified that, based on these representations, plaintiffs decided to proceed with the building. They then secured a loan from their bank for $10,000 and met with defendants on October 29. A construction contract drawn by Rittmueller was tendered to plaintiffs which specified a down payment of $20,000 and for partial additional payments totaling $27,000 to be made during construction. Plaintiffs questioned the amount of the down payment and were advised by Obenauf and Rittmueller that it was required in order to purchase the necessary building materials before the November 1 price increase and store them until needed. Plaintiffs were again told that Kensu had employed another carpenter crew who would start at once, completing construction by Christmas, although the contract tendered to them by Rittmueller provided only for construction to commence by December 15, 1976. The plaintiffs then entered into the contract on that date with Rittmueller signing on behalf of Kensu.
In trial, both defendants denied making the representations attributed to them by Mrs. Ronan. Obenauf initially could not recall the conversation but stated on cross-examination they "could be true." He suggested it was possible he was referring to pulling one of the crews Kensu had working on Rittmueller's personal residence the corporation was then building. Rittmueller testified he had not made the representations to plaintiffs and "doubted" whether Obenauf had done so. He stated plaintiffs offered the additional down payment of their own volition in order to secure a price guarantee of $47,000 and for the deletion of an escalator clause from the contract. Rittmueller agreed that no building materials were ever purchased for the construction of plaintiffs' house.
On October 29, after signing the contract, plaintiffs returned to their bank and borrowed an additional $10,000 and delivered a check for $20,000 to Kensu's office on October 30. At that time, Obenauf told Mr. Ronan that necessary building permits would be secured right away and percolation tests on their land completed in the following week. Obenauf delivered the check to Rittmueller who deposited it in Kensu's account; it had apparently been overdrawn at that time as the balance after the $20,000 was deposited was $18,479.
No work or construction was ever undertaken by defendants on plaintiff's property although weather conditions were favorable and defendants continually promised to start soon. On December 17 Mrs. Ronan attempted to telephone Rittmueller but his business phone had been disconnected. She subsequently did reach him and was advised he had business problems and couldn't do anything on the house at that time. Mrs. Ronan requested return of the $20,000 deposit, and Rittmueller informed her he could not do so as it had been used in the operation of Kensu. He said he could possibly build her house in the spring, but did not do so.
The Ronans repaid their interim $20,000 loan by remortgaging their old home causing their monthly payments for principal and interest to increase from $142 to $260.40 for a period of 15 years.
In trial, George Cumpata, a certified public accountant, testified that Kensu had financial difficulties since its inception in 1974 and that cash flow problems in 1976 occurred because the company took on too much work. In October 1976 Rittmueller, on behalf of Kensu, had borrowed $50,000 to be repaid in 30 days in order to finance the company's operation. At that time, Kensu was building a large house for the personal use of Rittmueller and his wife on a tract of land they jointly owned. Rittmueller testified that in the fall of 1976 he had intended to use the land and new house as collateral in order to increase the working capital of the corporation. He planned to borrow $180,000 so as to repay the $50,000 due to his bank in November, with the remaining $130,000 for working capital but he was not successful. The bank refused the new loan and demanded payment of the $50,000 when in mid-November it was learned that a number of mechanic's liens had been filed against Rittmueller's property: on September 27 for $5,289, on October 23 for $944, on November 10 for $5,474, on November 15 and 16 for $11,603 with six additional liens being filed between November 20 and December 9, 1976. As a result of denial of the $180,000 loan Kensu ceased to function.
During October 1976, $68,175 was deposited in the corporate bank account as was $23,953 in November. These funds, which included the Ronan's $20,000, were credited as accounts receivable paid upon the three houses Kensu was building as of October 4. Rittmueller testified that although $90,000 was deposited in the corporate account after October 1, neither he nor his wife received any funds from the corporation from 1974 through 1976 other than reimbursements for expenses or repayment of officer loans made to it. The money was expended on corporate overhead, materials, wages, machinery, attorney fees and antecedent debts. Kensu had 10 or 12 employees as of November 1, 1976, and they were last paid on November 23. Rittmueller acknowledged that much of Kensu's financial outlay for costs incurred during this period was a direct result of the house being built for his personal use by Kensu; the contract for that construction was signed by Rittmueller both as buyer-owner and as president-general contractor of Kensu. The plaintiffs' $20,000 deposit could not be traced in Kensu's expenditures as its accounting system failed to segregate funds and their application by job, although Kensu's accountant testified that this was an acceptable practice for this type of business.
Rittmueller further testified he believed the corporation to be in sound financial condition until about the third week in November. He disclaimed any knowledge of unsatisfied judgments or recorded liens as of October 29 although when cross-examined as to his knowledge of the pending corporate insolvency he admitted he didn't honestly know whether he knew or not, but that it was possible he did know as of that date. He ...