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STUART PARK ASSOCS. L.P. v. AMERITECH PENSION TRUS

March 18, 1994

STUART PARK ASSOCIATES LIMITED PARTNERSHIP and STUART PARK/SUMMIT PARTNERS, Plaintiffs,
v.
AMERITECH PENSION TRUST, AMERITECH CORPORATION, and HARRIS TRUST & SAVINGS BANK, Defendants.


ALESIA


The opinion of the court was delivered by: JAMES H. ALESIA

The defendants, Ameritech Pension Trust ("the Pension Trust"), Ameritech Corporation ("Ameritech"), and Harris Trust and Savings Bank ("Harris"), move this court for summary judgment. *fn1" The defendants argue that they are entitled to summary judgment on count I of the plaintiffs' complaint which alleges breach of contract because (1) the contract violates the Employee Retirement Income Security Act ("ERISA") and hence, is unenforceable; (2) the contract never became binding because the plaintiffs failed to fulfil a condition precedent; and/or (3) the contract never became binding because the contract was never actually delivered. The defendants argue they are entitled to judgment on count II of the plaintiffs' complaint because as a matter of law the plaintiffs cannot establish the requirements for promissory estoppel. With respect to the plaintiffs' tort claims, the defendants argue they are entitled to judgment on count IV because the defendants did not owe the plaintiffs the legal duty to act in accordance with good faith and fair dealing. Similarly, the defendants argue that they did not owe the plaintiffs the legal duty to forewarn them that the contract may violate ERISA and consequently, that they are entitled to judgment on count VI of the plaintiff's complaint. Finally, with respect to damages, the defendants argue that the plaintiffs are not entitled to lost profits, punitive damages and/or attorneys' fees. For the reasons set forth below, this court grants the defendants' motion in part and denies it in part. *fn2"

 STATEMENT OF FACTS

 The plaintiffs contacted L&G Realty Advisors ("L&G") in the hopes of obtaining investments in Stuart Park. Id. at P 12. L&G acted as realty investment advisor to the Pension Trust, and it undertook preliminary discussions with the plaintiffs on behalf of the Pension Trust. Id. at PP 12, 13. The plaintiffs understood that the approval of Ameritech was required to commit it to investing in the Stuart Park project. (Plaintiffs' Memorandum in Opposition to Defendants' Motion for Summary Judgment at 2) ("Pl. Mem. in Opp.").

 However, the parties experienced difficulty obtaining that approval. Although their discussions were encouraging, the parties were unable to attract the attention of Lloyd B. Thompson, the Director of Real Estate Investments for the Pension Trust. Id. at 3. Thompson had the authority and responsibility to approve real estate investments for the Pension Trust or to recommend any such investment to the Chief Investment Officer, Judith Mares. (Defendants' Statement of Material Facts as to Which No Genuine Issue Exists at 4-5) ("Def. Stat. of Mat. Facts"). Because the negotiations could not proceed any further without Thompson, the plaintiffs enlisted the assistance of Donald Bennett, a long-time friend of Thompson. (Defendants' Memorandum in Support of Motion for Summary Judgment at 5 ("Def. Mem. in Supp."); Pl. Mem. in Opp. at 2). The plaintiffs agreed to insure that Bennett would receive $ 350,000.00 to direct Thompson's attention to Stuart Park and to play a minor role in the negotiations. *fn3" (Def. Mem. in Supp. at 5; see also Pl. Mem. in Opp. at 3).

 After Bennett directed Thompson's attention to Stuart Park, the plaintiffs undertook formal negotiations with the Pension Trust. The defendants allege, however, that Bennett and Thompson had already negotiated their own deal. The defendants contend that Bennett and Thompson agreed that Thompson would recommend to the Pension Trust those investments in which Bennett had a financial interest. (Def. Reply Br. at 2-4.) In return, Bennett would pay Thompson a portion of Bennett's fees and profits. Id. Thus, Thompson would receive a portion of the $ 350,000.00 fee for the Stuart Park transaction. Id.

 In August of 1990, Mares began to suspect that one of her subordinates was engaged in misconduct, and she retained the law firm of Winston & Strawn ("W&S") to investigate. (Def. Stat. of Mat. Facts at 8). W&S interviewed Thompson in September and October 1990. W&S concluded its investigation in approximately December 1990. W&S ultimately reported to Mares that, in its opinion, Thompson engaged in activity which violated ERISA and directly breached his fiduciary duties to the Pension Trust. (See Affidavit of Howard Pearl at 12-13).

 On September 27, 1990, the plaintiffs and L&G signed the investment agreement. (Complaint at P 19). Harris, the Pension Trust's trustee, signed it at a later date outside of the presence of the plaintiffs. (Def. Reply Br. at 15). The Pension Trust directed Harris to send the signed agreement to it and to refuse to tender a copy to the plaintiffs. Id. In light of the findings of the W&S investigator, the Pension Trust's in-house counsel worried that because Thompson was a fiduciary of the Pension Trust, his misconduct with respect to the Stuart Park transaction constituted an ERISA violation. (Def. Stat. of Mat. Facts at P 17). Thus, she prevented delivery of the contract while she consulted with outside legal counsel. Id. On November 14, outside legal counsel reported to the Pension Trust that performance of the Investment Agreement would in fact violate ERISA. Id. On November 19, Mares sent a letter to the plaintiffs briefly mentioning the ERISA problems and repudiating the Investment Agreement. Id. at 18.

 Throughout 1991 and the first few months of 1992, the plaintiffs and the defendants attempted to restructure the Stuart Park transaction, to no avail. Consequently, the plaintiffs sued the defendants for breach of contract, promissory estoppel, breach of the duty of good faith and fair dealing, and breach of fiduciary duty. *fn4" The defendants have moved for summary judgment; each of their arguments will be addressed in turn.

 DISCUSSION5

 A. CONTRACT CLAIMS

 
1. Whether the Doctrine of Impossibility Relieves the Defendants of their Contractual Obligations

 The defendants first argue that the Investment Agreement violates ERISA, and, hence, is unenforceable pursuant to the doctrine of impossibility. See, e.g., Commonwealth Edison Co. v. Allied-General Nuclear Servs., 731 F. Supp. 850, 855 (N.D. Ill. 1990) (applying Illinois law and stating that if performance of a contract is illegal, the promisor is discharged without liability pursuant to the doctrine of impossibility). The defendants allege that no genuine issue of material fact exists as to whether Thompson was engaged in an illegal kickback scheme. In support of their contention, the defendants have submitted the affidavit of the W&S investigator attesting that Thompson admitted to him that Bennett did business with the Pension Trust with respect to the Stuart Park transaction, and that Thompson was involved in exercising his discretion and judgment on behalf of the Pension Trust with respect to transactions involving Bennett. (Affidavit of Howard Pearl at 6-7). The investigator also testified that his investigation revealed that Thompson accepted substantial sums of money from Bennett during this time. Id. at 4. The defendants have submitted invoices which total approximately $ 40,000.00 from Thompson Capital Corporation ("TCC"), Thompson's wholly owned corporation. (Def. Reply Br., Exhibit 3). The defendants state that Thompson billed Bennett, through these invoices, for Thompson's share of the fees that Bennett earned from the Pension Trust. (Def. Stat. of Mat. Facts at 5-6). *fn6" This evidence, defendants argue, convincingly shows the illegal Thompson-Bennett scheme.

 Interestingly enough, however, the plaintiffs have submitted the most damaging evidence that Thompson was involved in a kickback scheme. (Pl. Mem. in Opp., Ex. 13). On December 20, 1990, Ameritech filed suit against Thompson for the improprieties revealed by the W&S investigation. Shortly thereafter, Ameritech and Thompson entered into a Settlement Agreement. In this agreement, Thompson admits that Bennett profited from the Stuart Park transaction, that Thompson recommended Stuart Park to the Pension Trust, and that Thompson received approximately $ 40,000.00 from Bennett through TCC. Id. at 2-3. In settlement of Ameritech's possible causes of action, TCC agreed to pay Ameritech over $ 150,000.00, approximately $ 40,000.00 of which represents Bennett's payments to TCC that coincided with Thompson's recommendation of the Stuart Park investment. Id. at 4. Taken together, this evidence strongly indicates that no genuine issue of material fact exists with respect to Thompson's involvement in the kickback scheme with Bennett.

 Further, the plaintiffs have not presented one jot of evidence to the contrary. Yorger v. Pittsburgh Corning Corp., 733 F.2d 1215, 1222 (7th Cir. 1984) (in defending against a motion for summary judgment, the non-movant plaintiff may not rest upon mere allegations). Indeed, the plaintiffs do not even expressly aver that the kickback scheme did not exist. Rather, they merely attack the defendants' evidence as speculative. (Pl. Mem. in Opp. at 1). Given the plaintiffs' failure to adduce any evidence that Thompson acted lawfully or to assert at least that they in good faith do not believe Thompson acted unlawfully, this court must hold that the plaintiffs failed to meet their burden on motion for summary judgment. LaScola v. U.S. Sprint Communications, 946 F.2d 559, 563 (7th Cir. 1991) (in defending against a motion for summary judgment, the non-movant must demonstrate that the record contains the existence of a genuine issue). Accordingly, we find that Thompson participated in a fee-splitting scheme with Bennett in relation to the Stuart Park transaction.

 The defendants proceed to correctly argue that this fee-splitting arrangement violates ERISA. Thompson was a fiduciary of the Pension Trust. As a fiduciary, he was required to act exclusively for the interests of the Pension Trust participants and their beneficiaries. 29 U.S.C. § 1104(a)(1)(A)(i) (1993). By exchanging favorable recommendations for personal monetary gain, it is clear that Thompson was acting on his own behalf and not solely for the Pension Trust participants and beneficiaries. See, e.g., Whitfield v. Tomasso, 682 F. Supp. 1287, 1301-02 (E.D.N.Y. 1988) (holding that the defendant breached his fiduciary duty by accepting kickbacks); Martin v. Consultants and Adm'rs, Inc. 966 F.2d 1078, 1084, 1089 (7th Cir. 1992) (noting that kickbacks violate section 1104 of ERISA); Anweiler v. American Electric Power Serv. Corp., 3 F.3d 986, 990 (7th Cir. 1993) (stating that an ERISA fiduciary must act solely for a plan's participants and beneficiaries).

 Moreover, a fiduciary is prohibited from accepting consideration from a party dealing with a plan if the receipt of the consideration is connected with a transaction involving the assets of the plan. 29 U.S.C. § 1106(b)(3). Here, Thompson accepted money from Bennett. Bennett was dealing with the Pension Trust, as the Pension Trust expressly agreed to pay Bennett $ 210,000.00. Consequently, Thompson violated section 1106. See, e.g., Lowen v. Tower Asset Mgmt., Inc., 829 F.2d 1209, 1214 (2d Cir. 1987) (holding that an ERISA fiduciary violates section 1106 by receiving money from a company because of the company's dealings with the pension fund); Martin, 966 F.2d at 1084, 1089 (noting that kickbacks violate section 1106 of ERISA). Thus, Thompson violated sections 1104 and 1106 of ERISA.

 Ordinarily, a contract whose performance would violate federal law is unenforceable and, therefore, neither party can recover on it. Comdisco, Inc. v. United States, 756 F.2d 569, 576 (7th Cir. 1985). Indeed, in M & R Investment Co. v. Fitzsimmons, the Ninth Circuit Court of Appeals held that a pension fund could not be sued for breach of contract for refusing to honor a contract which violated ERISA. M & R Inv. Co. v. Fitzsimmons, 685 F.2d 283, 286-288 (9th Cir. 1982). However, in the instant case, the Ameritech defendants cannot invoke the defense of impossibility when their actions rendered the contract illegal. First Nat'l Bank of Chicago v. Atlantic Tele-Network Co., 946 F.2d 516, 521 (7th Cir. 1991) (holding that a party to a contract "cannot make performance impossible and then cry impossibility"); Comdisco Disaster Recovery Servs., Inc. v. Money Mgmt. Systems, Inc., 789 F. Supp. 48, 53 (D.Mass. 1992) (applying Illinois law).

 In Comdisco Disaster Recovery Services, the defendant entered into a contract with the plaintiff in which the plaintiff promised to provide computer services to the defendant in the event that a disaster disabled the defendant's computer system. Id. at 50. Subsequently, the defendant was acquired by SunGuard Data Systems ("SunGuard"). Id. at 51. This takeover was not hostile; the defendant had readily participated in it. Id. at 54. SunGuard also owned SunGuard Recovery Services, the plaintiff's chief competitor. Id. at 51. The defendant ceased performing under its contract with the plaintiff and argued that it was relieved of its duty to perform because such performance would violate the antitrust statutes. Id. at 51, 53. After reviewing Illinois precedent, the court held that a party cannot make performance impossible by positing itself in a position by which contractual performance would violate antitrust laws, and then seek to escape liability. Id. at 54 (citing M.A. Felman Co. v. WJOL, Inc., 104 Ill. App. 2d 66, 72-73, 243 N.E.2d 33, 36-37 (1968) (holding that "illegality must not have come about because any action or non-action on [the] part of either of the parties to the contract")).

 Similarly, in the instant case, Thompson's actions violated ERISA and hence, rendered contractual performance illegal. Yet Thompson was the agent, fiduciary and employee of the Pension Trust and Ameritech. (Def. Stat. of Mat. Facts at 4-5). It is well-established that an employee's actions within the scope of employment are imputed to the employer, Gomien v. Wear-Ever Aluminum, Inc., 50 Ill. 2d 19, 21, 276 N.E.2d 336, 338 (1971); Babb v. Minder, 806 F.2d 749, 752 (7th Cir. 1986) (applying Illinois law), even in the context of ERISA litigation. American Fed'n of Unions Local 102 Health and Welfare Fund v. Equitable Life Assurance Soc'y, 841 F.2d 658, 665 (5th Cir. 1988) (holding that the state law doctrine of respondeat superior applies in ERISA cases); National Football Scouting, Inc. v. Continental Assurance Co., 931 F.2d 646, 648 (10th Cir. 1991) (same); Continental Assurance Co. v. Cedar Rapids Pediatric Clinic, 957 F.2d 588, 589, 590-592 (8th Cir. 1992) (applying state law to determine that a fiduciary who embezzled from the plan was the agent of both the pension plan and his employer). Thus, because the Pension Trust and Ameritech share responsibility for rendering the Investment Agreement illegal, they cannot avoid liability by invoking the doctrine of impossibility. Accordingly, this court must reject their argument that they can escape liability for breach of contract because Thompson rendered contractual performance illegal.

 However, the same does not hold true for defendant Harris. Plaintiffs failed to present any evidence from which one could infer that Thompson could be considered the agent of Harris. Moreover, from the court's independent review of the record, it is clear that Harris and Thompson did not enjoy an agency relationship. To establish an agency relationship, the plaintiff must demonstrate that the defendant had the right to supervise and control the alleged agent and to terminate the relationship at any time. Illinois Nurses Ass'n v. Illinois State Labor Relations Bd., 196 Ill. App. 3d 576, 582, 554 N.E.2d 404, 408, 143 Ill. Dec. 469 (1st Dist.), appeal denied, 132 Ill. 2d 545, 555 N.E.2d 376 (1990); Spivey v. Brown, 150 Ill. App. 3d 139, 143, 502 N.E.2d 23, 25, 103 Ill. Dec. 876 (3d Dist. 1986). No evidence exists demonstrating that Harris, as the trustee for the Ameritech Pension Trust, had the right to control Ameritech employees. To the contrary, Ameritech had complete control over Harris. (Trust Agreement between Harris and Ameritech at P 1.3 ("All instructions and directions to the Trustee [Harris] shall come from the Company [Ameritech] . . . ."); Def. Reply Br. at 15 (stating that Harris is merely Ameritech's "directed trustee" and derives its authority from Ameritech). Because Thompson was not Harris' agent, his unlawful actions cannot be imputed to Harris, and Harris can successfully invoke the doctrine of impossibility. Accordingly, Harris' motion with respect to the breach of the Investment Agreement is granted, and Harris is dismissed from count I of the plaintiffs' complaint.

 The Ameritech defendants proceed to argue that they are entitled to summary judgment nonetheless because as a matter of law, the plaintiffs were in pari delicto with the Ameritech defendants. If the parties to an illegal contract are in pari delicto, then the contract is unenforceable and neither can recover. O'Hara v. Ahlgren, Blumenfeld and Kempster, 127 Ill. 2d 333, 348, 537 N.E.2d 730, 737, 130 Ill. Dec. 401 (1989). The Ameritech defendants aver that the plaintiffs enlisted the assistance of Bennett and insured he would receive $ 350,000.00 for "little or no work." (Def. Mem. in Supp. at 5). The Ameritech defendants argue that, as a matter of law, the size of Bennett's fee demonstrates either that the plaintiffs had knowledge of the scheme between Bennett and Thompson or that the plaintiffs introduced Bennett into the transaction to make "sure that Thompson would fail to act prudently." Id. at 3.

 It is axiomatic that in reviewing a motion for summary judgment, the court must interpret the evidence in the light most favorable to the non-movant. Holland v. Jefferson Nat'l Life Ins. Co., 883 F.2d 1307, 1312 (7th Cir. 1989). Here, the size of Bennett's fee can simply suggest the plaintiffs' zeal to close the Stuart Park deal. The Ameritech defendants do not dispute that the plaintiffs were unable to elicit consideration from Thompson and the Pension Trust before they enlisted Bennett's assistance. Thus, a reasonable jury could find that the size of the fee suggests only that the plaintiffs believed they were required to pay such a fee in order to stimulate negotiations. Moreover, it appears from evidence submitted by both the plaintiffs and the Ameritech defendants that, in the industry, such fees are common. (Affidavit of William Paulsen cited in Def. Mem. in Supp. at 5 (asserting that "such payments were necessary to get deals done"); Pl. Mem. in Opp., Ex. 11 (in a letter to Judith Mares, the plaintiffs' agent states "[Bennett's] fee was consistent with financing fees paid for securing equity joint venture financing in the real estate industry")). Most importantly, the Ameritech defendants do not present any case law or explanation as to why a reasonable jury must infer either that the plaintiffs knew of the kickback scheme or that ...


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