APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, SECOND DIVISION
545 N.E.2d 304, 189 Ill. App. 3d 403, 136 Ill. Dec. 780 1989.IL.1494
Appeal from the Circuit Court of Cook County; the Hon. Kenneth L. Gillis, Judge, presiding.
JUSTICE SCARIANO delivered the opinion of the court. BILANDIC, P.J., and HARTMAN, J., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE SCARIANO
We have for decision in this case the issue, as posited by the plaintiffs, of whether management discretion granted solely and exclusively to a general partner in a limited partnership agreement authorizes the general partner to use economic coercion to cause his limited partner investors to sell their interests to him at a bargain price.
Plaintiffs as limited partners invested over $12 million in a cablevision programming limited partnership sponsored and syndicated by defendant general partner Dolan. In 1985, the partnership reported earnings of over $34 million and in 1986, it had earnings of just under $18 million as a result of which each of the limited partners was required to report his pro rata share thereof on his personal income tax returns for those years. Plaintiffs claim that although the partnership had cash available to fund the limited partners' tax obligations, Dolan elected to make only a nominal distribution of cash to cover such liability; accordingly, in 1985 and in 1986 the limited partners were required to pay taxes almost entirely from their own funds on income retained by the partnership. In late November of 1986 an affiliate owned and controlled by Dolan offered to buy out the interests of the limited partners for approximately two-thirds of their book value. Over 90% of the limited partners accepted the offer, but simultaneously filed suit claiming Dolan's tactics to be a breach of his fiduciary duty to them. The circuit court dismissed plaintiffs' complaint with prejudice pursuant to section 2-619(a)(9) of our Code of Civil Procedure (Ill. Rev. Stat. 1987, ch. 110, par. 2-619(a)(9)), holding that Dolan's acts were within the broad discretion granted him under the terms of the partnership agreement. Plaintiffs appeal from that ruling.
The limited partnership in this case, Cablevision Programming Investments , was organized for the purpose of investing in entities that produce and acquire programming for marketing and distribution to cable and other pay television services. Dolan and the Dolan owned and controlled Communications Management Corporation of Delaware were the general partners in this venture. In 1980, CPI sold 85 limited partnership units at a per unit price of $200,000; plaintiffs purchased 62.4595 of those units for a collective price of $12,491,900 and constituted 73% of all investors. The 263-page "Private Placement Memorandum" explained that the proceeds of the CPI offering would be used to purchase 100% of the class A limited partnership interests in another entity (Rainbow) that was organized for the same purpose as CPI; that Rainbow would fund subsidiary partnerships that would produce a variety of programming for distribution to cable TV systems and would have the same general partners as CPI; and that Rainbow would fund another Dolan-controlled entity, Rainbow Programming Services Company, which would distribute "affiliated and unaffiliated cable programming."
The PPM also advised investors that their rights and obligations "are governed by the Articles of Limited Partnership" (the Articles), which were bound as an exhibit to the PPM, and added, in a section entitled "Projected results of Operations of Cablevision Programming Investments," that:
"The Partnership, Cablevision and its affiliates' intended policy is to make cash distributions to partners each year in an amount approximating the amount of taxable income reflected each year, after providing for adequate working capital requirements deemed necessary by the General Partners. Although the projections assume that this policy can be followed in the future, there are significant contingencies relating to many factors which, from time to time, may prohibit any distributions, including, but not limited to cash, cash availability, general working capital requirements, lending restrictions and revised costs and capital requirements."
The Articles provided that Dolan will have "full responsibility and exclusive and complete discretion in the management and control of the business and affairs of the partnership"; that "Dolan in his sole discretion shall determine the availability of Cash Flow for distribution to partners"; that they "contain the entire understanding among the partners and supersede any prior understanding and/or written or oral agreements among them"; and that Dolan would be liable to the limited partners for his willful misconduct but not for "errors in judgment or for any acts or omissions that do not constitute willful misconduct."
CPI limited partnership interests were offered and sold only to "wealthy and sophisticated investors." To qualify for exemption from registration under securities laws, the partnership interests were stated in the PPM to be "suitable only for investors with a net worth in excess of $750,000 (excluding home, furnishings, and automobiles) per unit purchased, and having an anticipated taxable income in 1980, 1981 and 1982 of which a substantial portion would have been taxable in each year for Federal income tax purposes at a rate of 50% or more." Prospective investors were apprised in the PPM, that the "offering and the operations of the entities summarized [therein] are complex," and that a "thorough understanding of such matters is essential in order for prospective investors to evaluate the merits and risks of the offering." In addition, investors were required to represent that they or their representatives were "capable of evaluating the merits and risks of the investment." The offering of 85 units was fully subscribed.
The articles provided also that net profits, net losses and cash flow were to be allocated as follows: Dolan .5%, CMC .5% and limited partners 99%. In 1985, the partnership earned $34,101,000; in 1986 it earned $17,842,000. As noted above, the limited partners were required to pay taxes on these earnings, but Dolan did not distribute cash in an amount sufficient to cover their tax liability. Dolan did, however, lend CPI money to other companies he controlled.
An examination of a limited partner's "K-1" tax forms reveals that from 1980 through 1984, CPI provided no cash to the limited partners but did afford them some tax benefits. In 1985, each partner was required to report a taxable income of $415,331 per unit, while Dolan distributed only $12,000 per unit; and in 1986, the partners were required to report a taxable income of $216,750 per unit, while again receiving a distribution of only $12,000 per unit.
On November 25, 1986, Cablevision Systems Corporation , owned and controlled by Dolan, made an offer to purchase all of the CPI limited partnership interests for $271,870 per unit, payable $90,623 in cash and the remainder was to be paid either in 9% notes due on June 30, 1988, and June 30, 1989, or in CSC class A common stock. The offer disclosed that "Dolan and his affiliates would derive substantial benefits in connection with the offer" and that "although the partnership was potentially very valuable . . . it was extremely difficult to determine its true value since it was likely that current assumptions would not materialize and that unanticipated events and circumstances would occur." The offer further disclosed that although the partnership had incurred an operating loss of $96,000 per unit in 1986, proceeds from extraordinary and nonrecurring sales of assets would result in sizable taxable income to those limited partners who retained their interests. However, the offer continued, by selling their interests, limited partners would realize not only an added $71,870 per unit in cash profits on their initial investment in addition to the $24,000 previously distributed, but they could also convert their position in 1986 from that of having large taxable income to that of showing a sizable tax loss. This was because, as the offer explained, each limited partner's capital account had been inflated for tax purposes by proceeds from extraordinary and nonrecurring sales to the extent that the book value of a limited partnership interest was shown at $405,000. The "business reasons" given for making the offer were that "the buyout would avoid conflicts since both the operating and the programming entities would be under the same ownership, and would provide a needed source of funds for the development of the programming companies." The articles provided that a limited partner could not sell or otherwise transfer his interest in the partnership without the prior written consent of the general partners. More than 90% of the limited partners elected to accept CSC's offer and sold their interests in CPI to CSC.
On December 1, 1986, plaintiff Joel Labovitz, who had owned three units, filed a class action complaint, but after other former owners joined in his suit as individual plaintiffs, that ...