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03/09/95 JAMES R. ADLER v. WILLIAM BLAIR & COMPANY

March 9, 1995

JAMES R. ADLER, BURTON A. BOWEN, AS TRUSTEE UNDER DECLARATION OF TRUST OF BURTON A. BOWEN, DATED DECEMBER 15, 1989, JOHN M. DAMAS AND BONITA J. FIEDLER, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, AND DR. ROBERT W. ALFINI, THOMAS I. ANDERSON, SPIROS ARETHAS, GORGE BAKER, NORMAN D. BAKER, JR., DONALD A. AND DIANE C. BARTELT, WILLIAM J. BELL, TRUSTEE OF THE WILLIAM J. BELL TRUST, MAY 3, 1988, DR. MARTIN BERKOWITZ, DAVID R. BETHUNE, JOHN H. BITNER, MR. AND MRS. WILLIS H. BRAMWELL, JAY M. BRODSKY, DAVID G. BURDEN, HARLAN H. BURGESS, MR. AND MRS. DAVID S. BUYHER, NEAL R. CAREY, PHILIP P. CARLSON, THOMAS J. CASEY, ROBERT E. CHILD, CHESTER CONNORS, MR. AND MRS. RALPH J. CONVERSE, DR. F. DAVID COX, DR. ROBERT L. DAVIS, CRAIG W. DEGNARO, ROBERT J. ELLENSOHN, JOSEPH W. EPKINS, THOMAS A. FALESE, ESTATE OF PAUL W. FRIEDRICH, BARBARA VERCELLOTTI, TRUSTEE, RICHARD H. GLANTZ, AS TRUSTEE OF THE RICHARD H. GLANTZ TRUST, HARRY A. HARALAMPOPOULOS, JOSEPH J. HENNESSEY, ALAN HENRICKSON, ROBERT M. HEUER, CHARLES A. HOCH, RICHARD T. HOUGH, TRUSTEE OF THE RICHARD T. HOUGH TRUST, APRIL 10, 1989, PETER C. JOHN, HERBERT AND GLENN KEATS, JOHN KEPOROS, JAMES W. KOHL, MARK A. KOLUDROVIC, MR. AND MRS. JOHN FOSTER LESCH, MELVIN LORENZ, JR., NINA LORENZ, RICHARD T. MAURER, DR. ALAN R. MCCALL, SAHAG G. MELIDOSIAN, JAMES MINICK, DR. ROGELIO MONCADA, FRANK E. MUELLER, III, CHARLES W. MURDOCK, DR. DAVID R. MUSICH, MR. AND MRS. ARTHUR S. MUSKAT, R. AND MRS. STEVE MYHELIC, MR. AND MRS. THOMAS NICKNISH, ROBERT O'BRIEN, JR., C. RICHARD PANICO, JOHN S. PARSONS, CHRISTOPHER L. PATRAS, MR. AND MRS. ROBERT J. PETERS, JEROME J. PIPER, MR. AND MRS. GARY POHLSON, JEROME R. PRASSAS, B. MICHAEL PUFFER, BARRY RABIN, M.D., CHARLES B. RAMENOFSKY, DR. AND MRS. NASIM A. RANA, DONALD G. REID, AS TRUSTEE FOR DONALD G. REID, U/T/A NOVEMBER 28, 1983, ROBERT R. ROSS, MARY SURPLICE RUSSELL, ROGER D. RUTZ, WILLIAM RYAN, DR. CHRIS H. SARLAS, JERALD W. SCHARFENBERG, HAROLD JAMES SCHENCK, III, DR. JAMES D. SCHLENKER, JAMES C. SCHROEDER, CLOYD SELBY, STEPHEN H. SILLS, THOMAS A. STAADT, JUDITH K. STAHL, LORETTA STEMPINSKI, DR. DANIEL E. SULLIVAN, DR. HERME O. SYLORA, RALPH TASH, TRUSTEE, TERRY W. TAYLOR, JOHN T. THOMAS, TOGEN LIMITED, A GENERAL PARTNERSHIP, ODYSSEUS TSAROUHIS, THE VICTOR ENVELOPE COMPANY, THE VICTOR ENVELOPE MFG. COMPANY, DAVID W. VIKARTOFSKY, KERRY E. VOIT, D.D.S., IRA W. WALKER, WILLIAM C. WEINSHEIMER, DR. RONALD N. WHITMIRE, EDWIN N. WILKINS, THOMAS WILLIAMS, RONALD WILLIAMSON, MR. AND MRS. EVERETT WILSON, DANIEL A. WOLF, CARL D. WORKMAN, RONALD F. YOUNG, GEORGE E. ZIELINSKI, INDIVIDUALLY, PLAINTIFFS-APPELLANTS,
v.
WILLIAM BLAIR & COMPANY, A GENERAL PARTNERSHIP, PLUMWOOD CORPORATION, AND ILLINOIS CORPORATION, AND WBRS, LTD., AN ILLINOIS LIMITED PARTNERSHIP, DEFENDANTS-APPELLEES.



Appeal from the Circuit Court of Cook County. Honorable Francis Barth, Judge Presiding. Original Opinion of March 31, 1993,

Rehearing Denied March 30, 1995.

The Honorable Justice Theis delivered the opinion of the court: Cahill and O'brien, S., JJ., concur.

The opinion of the court was delivered by: Theis

SUPPLEMENTAL OPINION UPON REMAND *fn1

The Honorable Justice THEIS delivered the opinion of the court:

The plaintiffs in this action are two putative classes and several individuals who invested in a real estate syndication known as William Blair Realty Services Partners III (Partners III), a limited partnership. Following the loss of their investments, the plaintiffs filed an amended complaint alleging common law and statutory fraud, breach of fiduciary duty and misrepresentation against the defendants, William Blair & Company, Plumwood Corporation and William Blair Realty Services Limited. The defendants moved to dismiss the complaint for failure to state a cause of action and on thegrounds that certain of the claims were barred by the applicable limitations period. (Ill. Rev. Stat. 1989, ch. 110, pars. 2-615, 2-619, respectively.) The trial court dismissed the plaintiffs' complaint with prejudice and denied leave to amend.

The issues on appeal are whether the plaintiffs' complaint stated a cause of action for fraud, misrepresentation and breach of fiduciary duty and whether the trial court abused its discretion in denying leave to amend.

A brief explanation of how the parties relate to one another is necessary to an understanding of the issues. The defendant William Blair & Company (Blair) is a general partnership engaged in the securities brokerage business. One of the partners of Blair, Judson C. Ball, was also the president of the defendant Plumwood Corporation (Plumwood). Blair and Plumwood created William Blair Realty Services (WBRS), a limited partnership, for the purpose of creating real estate syndications. Plumwood was the general partner of WBRS and Blair was a limited partner. Under the operating procedures of WBRS, Blair was to "sponsor" all real estate syndications offered by WBRS, and Plumwood was to create and sell the syndications subject to the approval of the WBRS advisory committee. The advisory committee consisted of several individuals who were officers of or held management positions in Blair.

One of the syndications created by WBRS was a limited partnership known as William Blair Realty Services Partners III (Partners III). The private placement memorandum (PPM) given to persons interested in investing in Partners III identified WBRS as the general partner of Partners III. It identified Plumwood as the general partner of WBRS and Blair as the limited partner of WBRS. Blair was not identified as either a general or limited partner of Partners III. However, Blair did act as a selling agent for the Partners III offering.

Limited partnership interests in Partners III were sold as a nonpublic, unregistered offering of securities. Such offerings are exempt from the registration requirements of the securities laws provided they are made only to sophisticated investors. In the case of Partners III, the offering was limited to accredited investors as defined under Federal securities laws and to no more than 35 nonaccredited investors who met certain minimum investment eligibility requirements. To meet the eligibility requirements, a nonaccredited investor had to certify that he had a net worth of at least $250,000, that an investment in Partners III would represent no more than 20% of his joint net worth, that he had sufficient knowledge and experience in business and financial matters to evaluate the risks of an investment inPartners III and that he could withstand the loss of the entire investment. The minimum investment in Partners III was $50,000.

Prior to making an investment in Partners III, prospective investors were given a lengthy private placement memorandum (PPM). Several provisions of the PPM are significant to the issues on appeal, making it necessary to describe the document in some detail. The inside cover page contains a statement in bold print that "THIS OFFERING INVOLVES A HIGH DEGREE OF RISK." The PPM identifies WBRS as the general partner and states that WBRS would answer all inquiries as to the proposed operation of Partners III, the experience of the general partner and any other matters relating to the offering. It further stated that:

"The General Partner will afford prospective investors and offeree representatives the opportunity to obtain any additional information * * * necessary to verify the accuracy of any information set forth in this Memorandum or the attached Exhibits."

The PPM states that Partners III was organized for the purpose of "locating, acquiring, developing, leasing, operating and selling commercial real estate." The principal investment objectives are described as follows:

"1. Preserve and protect the Partnership's capital;

2. Achieve long-term capital gains;

3. Obtain partially 'tax-sheltered' distributions of cash from operations; and

4. Generate reasonable Partnership tax losses from straight-line real estate depreciation to offset or 'shelter' a Unit holder's taxable income from other sources."

The investors are warned in bold print that "THERE CAN BE NO ASSURANCE THAT THESE OBJECTIVES WILL HE ATTAINED." The PPM also states that Partners III was not structured primarily to produce tax benefits for the investors and that WBRS estimates that investors would receive only modest tax losses resulting from the partnership operation. Several pages of the PPM are devoted to a discussion of the tax consequences of an investment in Partners III, and investors are "strongly urged to consult their tax advisors with specific reference to their own tax situation" before investing. Also, the PPM specifically cautions prospective investors that Congress was considering tax law changes which, if adopted, could significantly reduce or eliminate the tax benefits of an investment in Partners III.

The PPM discloses that, as general partner of Partners III, WBRS would have sole authority and responsibility for the management and control of the partnership's operations. Significantly, the PPMexplicitly states that "the General Partner is required to make a contribution of $100 to the capital of the Partnership." The general partner is not personally liable for the return of all or any portion of the capital or profits of any partner. It stated that any such return of capital or profits would be made solely out of the assets of Partners III.

In a section entitled "Conflicts of Interest," the PPM states that Partners III is subject to various conflicts of interest arising out of its relationship with WBRS. Among the conflicts described is the receipt by WBRS of certain benefits and fees, including property management fees arising out of the acquisition of property by Partners III. The PPM further states that "because [Partners III] was organized and will be operated by the General Partner, these conflicts will not be resolved through arm's-length negotiations, but through the exercise of the General Partner's judgment."

Before purchasing an interest in Partners III, prospective investors were required to submit a signed and notarized subscription agreement, representing among other things that:

"1. I have received and read the and am hereby applying for the purchase of Units solely in reliance upon the information contained in the and not ...


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