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05/20/88 Earl J. Niemoth Et Al., v. Larry Kohls Et Al.

May 20, 1988

EARL J. NIEMOTH ET AL., PLAINTIFFS-APPELLANTS AND CROSS-APPELLEES

v.

LARRY KOHLS ET AL., DEFENDANTS-APPELLEES AND CROSS-APPELLANTS



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.

APPELLATE Judges:

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 ...


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