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11/14/96 BROWN LEASING v. ERROL STONE

November 14, 1996

BROWN LEASING, INC., F/K/A CAPITOL LEASING COMPANY, PLAINTIFF-APPELLANT,
v.
ERROL STONE, JAMES E. WELLS, ALEX M. VERCILLO, GEROLD J. DENICHOLAS, MYRON P. ALCOCK, ROBERT BURSTEIN, MICHAEL V. CARELLI, PAUL V. CARELLI III, CAROL ANN CARELLI, ROBERT G. CUNNINGHAM, FRED R. EISEMAN III, MARY ANN KIRCHSCHLAGER, ROBERT NAGY, RICHARD ROSENOW, JAMES S. STEFO, MARIE WELLS, ANTONIO GUILLEN, SUSAN KASTNER, RICHARD M. RANDICK, DON DYBUS, JEROME A. COSENTINO, CARELLI FAMILY TRUST, A TRUST UNDER THE LAWS OF THE STATE OF ILLINOIS, AND COSMOPOLITAN BANCORP, INC., AND ILLINOIS CORPORATION, DEFENDANTS-APPELLEES, AND MICHAEL HIGH, SR., CHARLES E. ROBBINS, DENNIS POLK, AND DONNELLY A. DYBUS, LTD., A PROFESSIONAL CORPORATION, DEFENDANTS.



APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. HONORABLE PATRICK McGANN, JUDGE PRESIDING.

Released for Publication December 22, 1996.

Presiding Justice Hoffman delivered the opinion of the court: Cahill and Theis, JJ., concur.

The opinion of the court was delivered by: Hoffman

PRESIDING JUSTICE HOFFMAN delivered the opinion of the court:

The plaintiff, Brown Leasing Inc., filed the instant appeal seeking the reversal of two orders of the circuit court which dismissed a number of counts contained in its original complaint and denied the plaintiff leave to file its proposed first amended complaint. We have also taken two procedural motions filed by the parties for consideration along with the substantive issues raised on appeal. For the reasons which follow, we (1) deny the motion to dismiss this appeal filed by the defendant, Gerald J. DeNicholas; (2) deny the plaintiff's motion to strike portions of DeNicholas' brief; (3) affirm the trial court, in part; (4) reverse the trial court, in part; and (5) remand this case to the circuit court for further proceedings consistent with the opinions expressed herein. Due, however, to the page limitations imposed on our published opinions by Supreme Court Rule 23 (Official Reports Advance Sheet No. 15 (July 20, 1994, R. 23, eff. July 1, 1994), the only portions of our analysis that will be published relate to DeNicholas' motion to dismiss and the propriety of the trial court's ruling denying the plaintiff leave to file one of the breach of warranty of authority claims contained in its proposed first amended complaint.

Prior to setting forth our legal analysis, it is necessary that we place this case in both its procedural and factual context.

The plaintiff filed the instant action against 27 individual and corporate defendants seeking to recover damages for losses incurred in connection with a $1,950,000 loan that the plaintiff made to defendant Jerome Cosentino. In its original complaint, the plaintiff sought recovery against the former officers and directors of the Cosmopolitan National Bank of Chicago (Bank); the Bank's parent company, Cosmopolitan Bancorp, Inc. (Bancorp); Bancorp's officers, directors and shareholders; and several other individuals, including Cosentino. For ease of analysis, we will group a number of these defendants and refer to them by collective descriptions. Because of their relationship to the Bank and Bancorp, some of the defendants will be included within several descriptive groupings; however, unless indicated otherwise, our resolution of issues relating to each descriptive group is a resolution of the issues as to each member of the group, but only in the capacity he or she shares in common with other members of that group.

When we refer to the "Bank's Directors," we are referring to the following defendants in their capacity as former directors of the Bank: Errol L. Stone, James Wells (Wells), Alex M. Vercillo, Gerald J. DeNicholas, Myron P. Alcock, Robert Burstein, Michael V. Carelli (Carelli), Paul V. Carelli III, Robert G. Cunningham, Fred R. Eiseman III, Mary Anne Kirchschlager, Robert Nagy, Richard C. Rosenow, and James S. Stefo. "Outside Directors" is a designation given to a sub-group of the Bank's Directors which includes: Stone, Alcock, Burstein, Carelli, Carelli III, Cunningham, Eiseman, Kirchschlager, Nagy, Rosenow, and Stefo. Our references to "Bancorp's Directors" includes the following individuals in their capacity as directors of Bancorp: Stone, Wells, Vercillo, DeNicholas, Alcock, Burstein, Carelli, Carelli III, Cunningham, Eiseman, Kirchschlager, Nagy, Rosenow, and Stefo. "Shareholders" refers to the following defendants in their capacity as shareholders of Bancorp: Stone, Wells, Vercillo, DeNicholas, Alcock, Burstein, Carelli, Carelli III, Carol Ann Carelli, Cunningham, Eiseman, Kirchschlager, Nagy, Rosenow, Stefo, Marie Wells, and the Carelli Family Trust (Trust).

The plaintiff's original complaint, although divided into counts, was based upon a core of operative allegations applicable to each theory of recovery pled. The following facts, which we must take as true for the purpose of our analysis ( Miner v. Gillette Co., 87 Ill. 2d 7, 428 N.E.2d 478, 56 Ill. Dec. 886 (1981)), were alleged in that complaint.

At all times relevant, the Bank was a federal banking agency. The Bank's common stock was owned entirely by Bancorp, an Illinois corporation. Cosentino, then the Illinois State Treasurer, and two companies of which he was the principal shareholder, Fast Motor Service, Inc. (Fast Motor) and U.S. International, Inc. (USI), were customers of the Bank. The plaintiff, then known as Capitol Leasing, Inc., was one of the Bank's largest customers.

From June 1988 through May 31, 1989, Cosentino engaged in a check kiting scheme whereby reciprocal checks were circulated between a USI account at the Bank and a Fast Motor account at Cole Taylor Drovers Bank Drovers). Although Cosentino knew that insufficient funds were on deposit in either account to cover the reciprocal checks drawn on them, he initiated the scheme to create apparent positive balances in both accounts, thereby concealing large overdrafts that existed in both accounts. By the end of 1988, the Bank's Directors were aware of substantial overdrafts in USI's account at the Bank written against deposits of checks drawn on Fast Motor's account at Drovers.

In or around May 1989, Drovers advised the Bank that it would no longer accept USI checks drawn on the Bank to cover overdrafts in Fast Motor's account at Drovers. In order to cover a substantial overdraft in Fast Motor's account, the Bank wire transferred $1,300,000 to Drovers on or about May 31, 1989, resulting in a $1,536,295 negative balance in USI's account at the Bank on that day. In addition to the overdrafts in USI's account, Fast Motor owed the Bank over $250,000 as a result of loans.

DeNicholas and Vercillo asked Terry Brown, the plaintiff's president and principal shareholder, to make a $1,950,000 loan from the plaintiff to Cosentino as an accommodation to the Bank that would enable Cosentino to pay off $1,950,000 in overdrafts. DeNicholas and Vercillo told Terry Brown that Cosentino, Fast Motor, and USI were sound credit risks, and that the loan would be repaid by the end of 1989 from the proceeds of a Small Business Administration (SBA) loan that Cosentino had applied for on behalf of Fast Motor. As further inducement, DeNicholas and Vercillo represented that the loan would be guaranteed by the Bank and co-signed by its chairman, Wells. They also told Terry Brown that the Bank could not make the loan to Cosentino because, if it did, Cosentino's aggregate borrowings from the Bank would exceed federal regulatory lending limits to a single borrower.

Terry Brown agreed to allow the plaintiff to make the requested loan to Cosentino. The following events then occurred on June 29 and 30, 1989. DeNicholas and Vercillo delivered to the plaintiff an unsecured note for $1,950,000 dated June 29, 1989, which was signed by Cosentino as the maker and co-signed by Wells. Accompanying the note was a "Standby Letter of Guarantee" dated June 29, 1989, which was typed on Bancorp stationary and executed by DeNicholas and Vercillo as president and vice-president, respectively. The Standby Letter of Guarantee obligated the "issuer" to buy back the Cosentino note in the event of a default. For its part, the plaintiff delivered to DeNicholas and Vercillo a check for $1,950,000 payable to Cosentino "and/or" Wells. After the exchange of the plaintiff's check for the note and the Standby Letter of Guarantee, DeNicholas and Vercillo delivered the check to Wells who endorsed it and deposited it to USI's account at the Bank. This deposit cleared the overdrafts then existing in USI's account.

In April 1990, DeNicholas and Vercillo requested that the plaintiff restructure the Cosentino loan. They represented to Terry Brown that Cosentino, then a candidate for Illinois Secretary of State, wanted Wells removed as a co-signor of the note because Wells was being investigated by federal authorities. Thereafter, Terry Brown met with DeNicholas, Vercillo, Richard M. Randick, and Don Dybus to discuss the restructuring request. These defendants proposed that the plaintiff cancel Cosentino's original note in exchange for new notes executed by Cosentino, High, Robbins, and Polk. DeNicholas and Vercillo provided the plaintiff with personal financial statements for High, Robbins, and Polk.

On April 19, 1990, the plaintiff cancelled Cosentino's original note in exchange for the following: a $1,000,000 note dated April 19, 1990, signed by Cosentino and guaranteed by High; a $450,000 note dated April 19, 1990, signed by Cosentino; a $250,000 note dated April 19, 1990, signed by Robbins; and, a $250,000 note dated April 19, 1990, signed by Polk. Additionally, DeNicholas and Vercillo orally represented to Terry Brown that the ...


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