APPELLATE COURT OF ILLINOIS, THIRD DISTRICT
532 N.E.2d 931, 177 Ill. App. 3d 793, 127 Ill. Dec. 102 1988.IL.1896
Appeal from the Circuit Court of Peoria County; the Hon. Richard Eagleton, Judge, presiding.
JUSTICE SCOTT delivered the opinion of the court. STOUDER, P.J., and WOMBACHER, J., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE SCOTT
It is rare that parties come together, form a partnership, and plan to lose money in their endeavor. Nevertheless, the old saw teaches that the "best laid plans of mice and men" will occasionally go awry. This is the legal culmination of just such an ill-fated endeavor.
Prior to June 1975, First Federal Savings and Loan Association of Peoria advanced money for the expansion of the Voyager Inn, an existing hotel in downtown Peoria. Before the expansion was complete, First Federal had taken possession of the property as mortgagee. Thereupon, First Federal entered into negotiations with G. Raymond Becker, one of the plaintiffs, to strike a deal under which Becker would take over the parcel and complete the hotel addition. In furtherance of that deal, Becker formed the partnership which was to become the subject of the instant dispute.
Becker assembled a partnership team that included parties with various skills and services that could be valuable to the enterprise. He himself was a developer and president of a construction company, Gordon E. Burns was an architect, John P. Dailey was a financier, John C. Parkhurst was an attorney, and Rosel was the prospective hotel manager. These original five partners entered into a formal written agreement on June 20, 1975. None of the original five partners funded the partnership with any cash capital, but each agreed to contribute his services; the evidence adduced in the trial court establishes that the five partners did so throughout the partnership's operation of the hotel.
With the exception of Rosel, and his successor White, who also managed the hotel, the original partners were not compensated for their services. Salaries were prohibited by the partnership agreement. The cash contributions necessary to get the partnership off the ground came from Thomas Killarney and Bernard Feely. Within months following the original formation of the partnership, Killarney had contributed $160,000 for an 8% interest and Feely had contributed $100,000 for a 5% interest. Both Killarney and Feeley had been previous business associates of Becker, and both signed identical amendments to the partnership agreement setting forth the rights and obligations of the new partners.
The project proceeded, aided by a $10,500,000 non-recourse first mortgage loan from First Federal and credit extended by the contractor, Becker Bros., Inc., Becker's construction company. The capital contribution of Killarney and Feely provided working capital for the partnership. It appears, however, that the hotel, once constructed and open, was something less than a commercial success. After the hotel had been open for some time, it became necessary to negotiate an additional $500,000 loan from First Federal to be used as working capital. Indeed, the hotel consistently lost money, not just tax-shelter losses but real cash losses, and the losses increased as time passed. In August of 1979, the partners were assessed $100,000 according to their respective interests, in order to raise money to pay the bills. Again in April of 1980, a second assessment of $100,000 was necessary, and all the partners paid their percentage shares.
As the losses mounted, in September 1984 the hotel property was transferred back to First Federal. Unlike the original mortgage loan, not all obligations of the partnership featured non-recourse agreements to protect the partners. A dispute arose as to the obligation of the various partners to pay for these partnership debts and the subject lawsuit resulted. In the circuit court of Peoria County, four of the original partners, Becker, Burns, Dailey and Parkhurst, complained for a money judgment against the two defendant partners, Killarney and Feely, for their shares of the partnership debts. The defendant partners counterclaimed, alleging that the plaintiffs owed money to the partnership. After a trial extending for a period of weeks, the Peoria court entered judgment against the plaintiffs and for the defendants. The plaintiffs appeal that judgment.
The circuit court concluded the law required that the partnership capital accounts of Killarney and Feely should reflect their cash contributions and be applied to their share of the net loss; that is, the net losses of the partnership should be calculated according to each partner's percentage commencing with the first dollar of loss, and not simply those losses which exceeded the original capital contributions of Killarney and Feely. The plaintiffs, those partners who contributed services rather than cash to the partnership, believe the circuit court erred in permitting the "cash partners" to apply their original investments totaling $260,000 against their share of the losses.
(a) The assets of the partnership are: I. The partnership property, II. The contributions of the partners ...