Before addressing Niemoth's specific breach of contract arguments, we find it appropriate to note the well-recognized "clean hands" maxim that "equity will not aid any person who has done iniquity or is seeking to take advantage of his own wrong." (Mother Earth, Ltd. v. Strawberry Camel, Ltd. (1979), 72 Ill. App. 3d 37, 53, 390 N.E.2d 393.) Here, Niemoth initially brought suit for an injunction against defendants based upon his assertions that they misrepresented certain "liabilities" and he was entitled to a setoff of same against his first 10 monthly payments to them on his note. These consisted of the following: $16,185 (Illinois Bell Horizon computerized telephone system); $821 (Dick Saunders, employee); $217.50 (Emma Winkler, employee); $1,135.50 (one-time telephone installation charge); $29,000 (auto allowance for employees 83 months). At trial, however, Niemoth admitted that he was not entitled to any offset of these amounts prior to actual payment of them and he had not in fact paid these amounts when he wrote defendants saying he was offsetting them against the first 10 monthly payments. Niemoth does not expand on this fact in his brief and apparently relies on his contention that defendants breached the parties' agreement "first" in light of his breach of contract arguments. However, as will be discussed below, we agree with the trial court that the breaches committed by defendants were not "substantial," whereas Niemoth's use of these false "liabilities" to abate his payments to defendants under their agreement should have barred equity to act and constituted a material, and thus the "first," breach of the parties' agreement in that it resulted in his failure to make any installment payments to defendants on his note and, even when, by court order, he was ordered to pay $3,000 per month to defendants, he failed to make the payments and lied to his attorney and the court that he had in fact made the payments.
APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, FIFTH DIVISION
524 N.E.2d 1085, 171 Ill. App. 3d 54, 121 Ill. Dec. 37 1988.IL.800
Appeal from the Circuit Court of Cook County; the Hon. Albert S. Porter, Judge, presiding.
JUSTICE MURRAY delivered the opinion of the court. SULLIVAN and PINCHAM, JJ., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE MURRAY
This appeal arises out of an action brought by plaintiffs, Earl J. Niemoth and Create Acquisitions, Inc. (hereinafter referred to as Niemoth), to recover damages against defendants, Larry Kohls, Robert Lutton and Ebco Realty and Management Company, based upon breach of contract, fraud, and negligent misrepresentation concerning Niemoth's purchase of a realty management business from defendants, and defendants' counterclaim to recover the amount allegedly owed by Niemoth to defendants for the purchase of the business. The circuit court of Cook County entered judgment in defendants' favor on both Niemoth's third amended complaint and defendants' counterclaim, and Niemoth appeals therefrom. Defendants have cross-appealed from the trial court's refusal to allow them to amend their counterclaim after judgment was entered to include a request for attorney fees. For the reasons set forth below, we affirm.
On September 28, 1981, Niemoth purchased the assets of Ebco, which consisted of 37 contracts to manage real estate properties on behalf of condominium associations (valued at $350,000), from defendants Larry Kohls and Robert Lutton, the owners of Ebco. Niemoth formed Create Acquisitions, Inc., to acquire and run the business, which continued to do business under the name of Ebco. According to the terms of the parties' buy-sell agreement, Niemoth purchased Ebco's assets for $400,000: he was required to pay $1,000 as earnest money, deposit $49,000 in an escrow account to be distributed upon closing, and thereafter to make monthly payments of $4,790.79, minus prorations for certain expenses paid by Niemoth on debts incurred by defendants prior to the sale of the business. If the amount of the prorations exceeded the amount of the first payment, Niemoth was to deduct them from subsequent payments. Niemoth also executed a promissory note in the amount of $300,000, pledging as collateral his beneficial interest in a land trust which held title to his condominium.
Pursuant to the agreement, Niemoth's first payment was due October 15, 1981. When he failed to make the payment, defendants, on November 9, notified Niemoth that they were instituting foreclosure proceedings on his note and would hold a sale of his condominium on December 7. On November 13, Niemoth informed defendants by letter that pursuant to the parties' buy-sell agreement he was entitled to offset $49,457, representing liabilities incurred by defendants prior to the sale of Ebco, against his first 10 monthly note payments. Niemoth thus did not make a payment on November 15 and, on December 4, he filed a "Complaint for Injunction and Other Relief" in the circuit court of Cook County, seeking to stop the sale of his condominium and requesting damages arising out of defendants' alleged breach of contract in "misrepresenting the liabilities of Ebco."
On January 27, 1982, the court entered a temporary restraining order, but conditioned it upon the monthly payment of $3,000 by Niemoth to defendants. Subsequently, based on Niemoth's failure to make the monthly payment to defendants in a timely manner (for which he was held in contempt and assessed $2,000 payable to defendants for attorney fees), the court, on April 29, 1982, ordered him to make the payments directly to the Internal Revenue Service on behalf of defendants. On May 1, 1984, trial commenced on Niemoth's third amended complaint and defendants' counterclaim. On June 3, 1986, the trial court entered judgment in defendants' favor in the amount of $355,244 pursuant to their counterclaim for the balance due under the parties' buy-sell agreement. The court also ordered, based on its findings that although defendants breached the parties' agreement, those breaches were not "substantial," that Niemoth receive credit for the termination charges of Ebco's pre-existing computerized telephone system, as well as credit for two management contracts to the date of their expiration which defendants warranted were in existence at the time of the sale but which in fact had been previously cancelled. The court also ordered that Niemoth receive credit, upon proof of payment by him, for any miscellaneous debts of defendants. The court further granted a directed judgment for defendants on Niemoth's fraud count concerning the termination of two additional management contracts, holding that they were legally terminated by the owners. After entry of its order, the court denied a subsequent motion filed by defendants seeking to amend their counterclaim to include a request for attorney fees.
On appeal, Niemoth contends that: (1) the trial court's findings of fact are contrary to the manifest weight of the evidence; (2) the court improperly granted a directed judgment for defendants on his third amended complaint fraud count; (3) defendants breached the parties' agreement "first" and were therefore barred from recovering on their counterclaim; (4) the trial court incorrectly held that the breaches by defendants which it found to exist were not material breaches; and (5) defendant Kohls breached the agreement by terminating two of the management contracts after the sale of Ebco's assets. In defendants' cross-appeal, the sole issue raised concerns their alleged right to attorney fees.
It is well settled that it is within the province of a trial court to determine the credibility of witnesses, the weight to be accorded their testimony, and to resolve inconsistencies and conflicts. A reviewing court will not substitute its judgment for that of the trial court unless its findings are against the manifest weight of the evidence. Corp. v. Diekman (1983), 112 Ill. App. 3d 229, 445 N.E.2d 418.) Here, we first observe that although Niemoth's manifest weight of the evidence argument encompasses all issues raised by him, it centers around the intended function of an "Annualized Pro Forma Income Statement" prepared by Robert Galgan, the vice-president of Ebco prior to the sale of its assets. Niemoth contends that the pro forma statement represented Ebco's income and expenses for the past 12 months of actual operation of Ebco. In support of his contention, he relies on paragraph 2 of the parties' buy-sell agreement, entitled "Representations and Warrantees [ sic ] of Seller and Purchaser," which states as follows:
"Financial Statements -- Sellers will furnish operating statements of the corporation for the years 1980 and 1981 through the month closing. Said statements shall approximate the annualized proforma income statement attached hereto as Exhibit D and made a part hereof." (Emphasis added.)
Niemoth reasons that since the agreement required the 1980 and 1981 operating statements to "approximate" the "pro forma" statement, the pro forma was intended to be representative of the past financial status of Ebco during 1980 and 1981. Because the operating statements showed a large net loss, as opposed to the $86,000 profit indicated on Galgan's pro forma statement, Niemoth argues that the pro forma did not "approximate" Ebco's true financial status and therefore defendants breached the parties' agreement with respect to the warranties provision.
Niemoth further asserts that defendants' failure to inform him of Ebco's financial operating losses for the previous two years, by providing him with pertinent documents or otherwise, also was a breach of the disclosure warranty of paragraph 11, which provides as follows:
"Disclosure -- The Sellers represent that they have made a full and complete disclosure of all relevant factors concerning the financial status of the Corporation, including its expenses and income."
In light of the foregoing, Niemoth contends that defendants breached the parties' agreement first -- "before the ink was even dry." Niemoth also argues these points in support of his contentions that the trial court improperly granted defendants a directed judgment on his fraud count, improperly entered judgment in favor of defendants on their counterclaim, and improperly held that defendants' breaches of the parties' agreement were not substantial.
Defendants, on the other hand, contend that the pro forma statement was merely a future projection of Ebco's expenses and income and, therefore, not actionable as a fraudulent misrepresentation nor as a breach of warranty pursuant to their agreement that the operating statements approximate the pro forma statement. In support thereof, they point out that the figures in the pro forma were based upon Ebco's current bills (two to three months) which were multiplied by a certain number to project the anticipated operating expenses and income for the year following Niemoth's purchase of Ebco's assets. Accordingly, defendants assert that the pro forma statement was intended to reflect their opinions solely as to anticipated expenses and income -- not factual admissions or warranties of Ebco's past financial profit and loss history.
We first note that because the parties claim that each other has misstated the evidence presented in the record, we have necessarily carefully reviewed the some 2,500-page transcript and find the following facts relevant to the Disposition of this issue.
At trial, it was established that Niemoth is an experienced businessman, having earned a master's degree from the University of Chicago in business administration, accounting, and financial analysis. He testified that after Galgan submitted his pro forma statement to him, dated "July of 1981," he requested to see Ebco's past operating statements to compare the figures on the pro forma with those of the operating statements. Galgan told him that the current operating statements had not been completed. As a result, Niemoth examined the records of Ebco, which were in disarray due to the fact that its accounting manager had recently quit, and met with Galgan approximately five times between August 1981 and the closing in September to obtain further information about Ebco. He reviewed the documents which Galgan said were used in preparing the pro forma and he was never denied a request for any documents. Niemoth also testified that when Galgan submitted the pro forma statement to him, Galgan said, "This is what the Company is doing"; "this is what it's done for the last year," "or words to that effect," and that he said "the thing is making $86,000 a year on net profit."
Niemoth also stated that as of September 18, 1981, he knew that Ebco was not, in fact, experiencing an actual $86,000 a year operating profit, i.e., "it looked like now they had some problems on some of their expenses." As a result thereof, Niemoth, after looking at some specific Ebco documents from the past two or three months of Ebco's operation, made his own calculations, modifying Galgan's figures, and arriving at a "worst case scenario" showing a $42,647 net profit. Niemoth also testified that he was aware that the figures regarding income could change depending upon whether the accounts decreased or increased, i.e., whether there were changes in management fees in the future; that the $80,000 figure on Galgan's pro forma for its sales division was dependent upon whether Ebco was involved in real estate transactions, in the future, made by other real estate brokers for which Ebco received a brokerage commission and, if no such transactions occurred, the line item of the sales division would be zero; and that he knew the president's salary of $24,000 was not included in the payroll line item of the pro forma statement. The record further indicates that Niemoth responded affirmatively to questions concerning the fact that most of the income and expenses listed in the pro forma were subject to downward or upward adjustments as a whole based on any number of variables encountered in operating a business. Niemoth also stated that in acquiring the assets of Ebco he expected to create a classic corporate "turnaround" of Ebco. He defined a turnaround as "taking a building that was marginally limping along making a little bit of money" and turning it into a "stellar performer." He further testified that he asked Kohls at least five times what the income of the corporation would be and how could he be certain the pro forma figures were correct and that Kohls assured him the figures were correct. He also stated that had he seen Ebco's financial statements, he never would have purchased its assets.
Robert Galgan, Ebco's former vice-president who prepared the pro forma statement at issue, testified that he had no accounting experience; that in 1981 when Ebco was to be offered for sale, he gave all parties interested in purchasing it the same pro forma statement he subsequently gave to Niemoth; and that he prepared the pro forma statement by taking current information available in the office regarding income and expenses, and "projected out a 12-month income/expense" based on that information. With respect to an exhibit of plaintiff's showing a $73,606.17 operating loss by Ebco during the last six months of 1980, Galgan testified that he did not consult this document in preparing his pro forma because he was not trying to prepare a financial statement for a prospective purchaser, but rather an estimate of what expenses were going to be for the person buying the business, and that he made the pro forma statement the way he did because he did not "know the changes that would come about." Because of the method in which he prepared the pro forma statement, Galgan stated it was "his direction to go item by item and explain how we got to the numbers and to make available to Earl [Niemoth] the opportunity to verify whether those numbers were correct or incorrect."
Galgan further stated that he told Niemoth that his salary of $35,000 as vice-president was not included in the pro forma, nor was Robert Lutton's "draw" of $24,000 as president, or debt service and legal fees. He also stated, in answer to a question of whether it was part of his job to review and "be aware of" statements of profit and loss of the corporation, that it was not his job but rather the function of Ebco's accounting department and Lutton. Specifically, the following colloquy occurred:
"Q. Did Mr. Niemoth ever ask you for financial statements of the ...