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10/23/87 Westminster I Apartments, v. Leslie C. Barnard

October 23, 1987





516 N.E.2d 476, 163 Ill. App. 3d 36, 114 Ill. Dec. 321 1987.IL.1581

Appeal from the Circuit Court of Cook County; the Hon. Harry S. Stark, Judge, presiding.


PRESIDING JUSTICE SULLIVAN delivered the opinion of the court. PINCHAM and MURRAY, JJ., concur.


Plaintiff, Westminster I Apartments, brought an action, as assignee of Happiest Partners Corporation against Leslie Barnard for breach of a partnership contract, fraud, breach of fiduciary duty and an accounting, and now appeals from that portion of the trial court's order granting judgment for Barnard on the counts alleging breach of contract and fiduciary duty.

Plaintiff contends that the trial court erred in finding that the parties' respective interests in the property which was the subject matter of the partnership were held by them as individual owners rather than as partners for the benefit of the partnership.

The position taken by plaintiff in its brief was that "[the] trial court's findings were predicated on an erroneous understanding of the facts." Specifically, plaintiff strenuously disputed the trial court's statement that "[although] [the] partnership agreement . . . required Barnard to contribute real estate to the HPC-Barnard partnership . . . contemporaneously with the execution of this agreement, an escrow was entered into between the partners that substantially changed this arrangement." Plaintiff represented to this court that "all parties acknowledged that the escrow arrangement was an accommodation to Barnard's inability to convey the Property to the Partnership" and "was obviously entered into after the Agreement."

However, when the parties appeared for arguments before us, plaintiff expressly withdrew its argument that the escrow and partnership agreements were not contemporaneous while nevertheless adhering to its position that the escrow agreement was nothing more than a minor, isolated modification of the terms of the partnership agreement specifying the manner in which title to the partnership property would be held which was entered into only as a necessary accommodation, without consideration, to Barnard's inability to convey the property to the partnership in accordance with the terms of the partnership agreement. Plaintiff maintains that contrary to the trial court's findings, Barnard's treatment of the interest he held as his own rather than as partnership property constituted a breach of his fiduciary duty to the partnership and a breach of contract of such magnitude as to vitiate the entire agreement.

It is fundamental that in a bench trial, the credibility of witnesses and the meaning of the language in a contract are questions for the trial court and that its findings will not be reversed unless they are contrary to the manifest weight of the evidence. (Howard A. Koop & Associates v. KPK Corp. (1983), 119 Ill. App. 3d 391, 457 N.E.2d 66.) With that principle in mind, we turn to the record before us, which discloses that on April 1, 1975, HPC, a real estate investment corporation, and Barnard, a real estate developer, entered into an agreement to organize a limited partnership to deal with phase one of the Westminster Apartment Complex in the village of Country Hills (the village). The agreement provided that HPC was to make a capital contribution of $250,000 to the partnership in two installments of $150,000 and $100,000 on May 15, 1975, and January 15, 1976, respectively, for which it would receive a 40% interest in the partnership. Upon payment of the first installment, Barnard was to convey all of his interest in the property -- which, he warranted, consisted of a 100% beneficial interest in the First National Bank of Blue Island land trust (the trust) in which the property was held -- in return for a 60% interest in the partnership. Barnard was required to pay HPC a fixed monthly profit of $1,000 between May 15, 1976, to January 1, 1977, and $1,666.67 per month thereafter. Paragraph 7 named Barnard as managing partner of the partnership and designated his responsibilities as manager of the property, but also stated that "[he] shall not be personally liable to HAPPIEST, (beyond his interest in the partnership) so long as he makes no distribution to himself or his successors or assigns, prior to complying with all provisions of paragraph 7(b) hereof." Under paragraph 13, if either party defaulted, i.e., if HPC failed to make timely payment of the second installment or Barnard failed to fulfill his responsibilities under the agreement, the other could elect, after giving 25 days' written notice, to "terminate [the defaulting party's] interest in the partnership"; whereupon the defaulting party would be required to assign his or its interests under the agreement to the non-defaulting partner and forfeit any capital contributions made to that date. The property was, for purposes of the agreement, deemed to have a gross value of $2,159,000 and was subject to a first mortgage of approximately $1,900,000.

The parties also executed an escrow agreement, which, as has now been conceded by plaintiff, was "of even date," in which it was agreed that Barnard would assign to HPC a 40% beneficial interest in the trust upon receipt of the $150,000; that HPC would then reassign that interest to HPC to be held in escrow by Barnard's attorney, Kalman Schein, until payment of the second installment, at which time it would be reassigned to HPC. Barnard's assignment to HPC of the 40% beneficial interest was delivered to HPC's attorney, Robert Bromberg, together with a transmittal letter dated May 20, 1975, requesting acknowledgment by his signature and return of the letter that "the assignment of the 40% and retention by Barnard of the 60% beneficial interest in the trust was in full compliance by Barnard of that portion [concerning contributions] of the Partnership agreement." Bromberg signed the letter on behalf of HPC and returned it to Schein. When Barnard took the assignment to the trustee, however, he was reminded that he had made a previous collateral assignment of 100% of his beneficial interest to the village in lieu of a performance bond to complete certain improvements on the property. Barnard testified, and Schein corroborated, that he (Barnard) immediately notified Schein and directed him to seek a release of that assignment from the village. Barnard further testified that when he informed Bromberg, by telephone, of the collateral assignment, Bromberg's response was, essentially, "Don't worry about it; just get our 40% back." In contrast, Bromberg testified that he learned of the collateral assignment to the village when he called Schein to inquire why he had not received the executed assignment and that he advised Schein that he wanted "Barnard's full interest reconveyed to him from [the village] because the agreement required that he have his interest unencumbered in the security."

In a letter to the village attorney requesting release of 40% of the assignment held by the village, Schein urged that the liens on the remaining 60% of the beneficial interest of the trust, together with its 100% interest in property designated for phase II of the development, were "more than sufficient surety for the improvements." On June 19, 1975, the village executed an assignment to Barnard of 40% of the beneficial interest it held, which was held in escrow by Schein and then reassigned to HPC immediately following HPC's payment of the second installment in January 1976.

According to Barnard's testimony, by the summer of 1976, revenues from the apartment complex were no longer sufficient to meet operating costs and, after voluntarily contributing $20,000 of his own funds in an effort to salvage the project, he ran out of money and was unable to perform his obligations under the partnership agreement or to make the improvements for which he had executed the collateral assignment of beneficial interest to the village in lieu of a performance bond. He provided HPC with monthly statements showing less-than-anticipated occupancy of the apartments, and in a meeting with Igor Borkowski, HPC's president, at Bromberg's office he asked Borkowski to contribute more money and/or to take over the management of the property, both of which Borkowski declined to do. Barnard denied that HPC demanded or he agreed, at that or any other meeting, to assign his 60% beneficial interest to HPC or the partnership as Borkowski and Bromberg testified. Barnard further testified that he advised HPC that he had received notice from the village of his default and of its intention to sell the 60% beneficial interest to satisfy the amount necessary to complete the improvements -- which the parties agreed was between $11,000 and $26,000 -- and encouraged HPC to negotiate with the village for the purchase of that interest. He also contacted the village attorney and told him that it was his hope that HPC would acquire the 60% interest and that in order to facilitate and expedite such an agreement, he orally agreed to waive any further notice regarding its sale. Bromberg subsequently informed both Schein and Barnard that an agreement with the village was close to finalization but, in fall 1976, the village attorney informed Schein that negotiations had broken down because HPC refused to pay $7,000 for attorney fees sought by the village. He also advised Schein that Evergreen, the mortgagee, was pressuring him to sell the interest to it and threatening to exercise the assignment of rents previously executed by the trustee. Schein related this conversation to Bromberg, who confirmed that the negotiations had been stymied by the issue of attorney fees but once more rejected the suggestion that HPC take over the management of the property. In November 1976, Evergreen exercised its assignment of rents and began to manage the property and, on December 10, 1976, also instituted proceedings to foreclose on the mortgage.

During this same period, Barnard was engaged in litigation with Evergreen concerning loans on three other real estate projects. In January 1977, a settlement agreement was reached whereby Evergreen agreed to release Barnard from his personal guarantees on those notes in return for which Barnard agreed to execute deeds in lieu of foreclosure and to dismiss his counterclaim against Evergreen for failure to honor a loan commitment. On January 11, 1977, as Barnard and Schein met with officers of Evergreen at the First National Bank of Blue Island to finalize the settlement agreement, the village attorney entered and presented Barnard with (1) a "Notice of Private Sale" of the 60% beneficial interest to be held "on or after January 11, 1977" and (2) an "Acknowledgment of Notice and Default and Waiver" to confirm his previous oral waiver of notice. Neither Barnard nor Schein had any knowledge, prior to January 11, of the sale or that Evergreen had filed a foreclosure action. When Barnard and Schein inquired whether HPC had been given notice of the sale, the land trustee informed them that HPC had never lodged any assignment of beneficial interest in the trust and that, therefore, according to the trust documents, Barnard remained the sole owner of the beneficial interest which he had collaterally assigned to the village. Barnard then executed a duplicate assignment to HPC and an affidavit stating that HPC owned 40% of the beneficial interest and "insisted" it be recorded by the land trustee and that no action be taken which would jeopardize HPC's rights. Schein telephoned Bromberg from the bank, but was unable to reach him until later that day, at which time Schein advised Bromberg of the foreclosure action, the proposed private sale and the duplicate assignment. When Bromberg later informed him that he could not locate the original assignment, ...

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