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03/04/97 WINSTON KO AND DOROTHY KO v. ELJER

March 4, 1997

WINSTON KO AND DOROTHY KO, PLAINTIFFS-APPELLANTS,
v.
ELJER INDUSTRIES, INC., ELJER MANUFACTURING, INC., HOUSEHOLD MANUFACTURING, INC., HOUSEHOLD INTERNATIONAL, INC., SCOTT G. ARBUCKLE, AND ROBIN G. MUNDEN, DEFENDANT-APPELLEES.



Appeal from the Circuit Court of Cook County. No. 94 L 13564. The Honorable Willard J. Lassers, Judge Presiding.

Released for Publication April 24, 1997.

The Honorable Justice Gallagher delivered the opinion of the court. Buckley And O'brien, JJ., concur.

The opinion of the court was delivered by: Gallagher

JUSTICE GALLAGHER delivered the opinion of the court:

The plaintiffs, Winston and Dorothy Ko (the Kos), allege that they, as guarantors of a promissory note, were defrauded by the corporate defendants, Eljer Industries, Inc., Eljer Manufacturing, Inc., Household Manufacturing, Inc., Household International, Inc., and the individual defendants, Scott G. Arbuckle (Arbuckle), and Robin G. Munden (Munden).

On August 1, 1995, pursuant to section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619 (West 1994)), the circuit court granted the motion of defendants Eljer Industries, Inc., Eljer Manufacturing, Inc. (formerly Household Manufacturing, Inc.), Scott G. Arbuckle and Robin G. Munden and dismissed all of the Kos' claims against them. On August 10, 1995, the court entered an order and final judgment, which dismissed all claims against all defendants, including Household International, Inc. This appeal was taken from those final orders. We affirm.

FACTUAL AND PROCEDURAL HISTORY

The chronology of events in this case is long and tortuous. On September 20, 1984, Simonds Cutting Tools N.A., then a subdivision of Household Manufacturing, Inc., which is now Eljer Manufacturing, Inc., entered into an agreement with the Kos' family-owned company, Kowin Development Corp. The intent of the agreement was to create a company to manufacture steel cutting files and other tools. The new corporation was called Kowin-Simonds, Inc. Approximately two months later, Kowin Development Corp. transferred half of its interest in the new company to Croft Investment Ltd.

In 1985, Kowin-Simonds, Inc., entered into a joint venture contract with Beijing Steel Files Plant of China to invest in a file manufacturing plant in China. Kowin-Simonds borrowed $2,500,000 from the Bank of America, evidenced by two promissory notes of $1,250,000 each. In November 1985, the Kos executed a continuing guaranty of one of the notes. Household Manufacturing guaranteed the other note.

The Kos allege that Household Manufacturing represented from March 1987 onward that it could purchase millions of files from the joint venture and would do so but for the alleged inability of the joint venture to manufacture files of quality and in the numbers required in the joint venture agreement.

The Kos further allege that Simonds Industries, the successor in interest to Household Manufacturing, submitted ostensible purchase orders, asserted its willingness to purchase files, and made other representations to conceal the facts from the Kos.

The Kos further have alleged that the machinery for the manufacture of the files, which was sold to Kowin-Simonds by Household Manufacturing for $3,500,000, had a market value of only $600,000, was unfit for its intended purpose, could not be installed or operated by Chinese personnel, and had never been tested.

Based upon these and other misrepresentations, both oral and written, which the Kos alleged induced them to enter into the agreement with the Household entities, Kowin Development Corp., individually and derivatively on behalf of Kowin-Simonds, brought suit in the federal District Court for the Central District of California on March 17, 1988, against Household Manufacturing and Simonds Cutting Tools, N.A. The complaint alleged securities fraud, fraud and deceit, breach of contract, breach of fiduciary duty, constructive fraud, negligent misrepresentation and subrogation.

In December 1989, the district court granted Household Manufacturing's motion to compel arbitration and stayed all legal proceedings. The parties proceeded to arbitration in Chicago.

On January 31, 1990, Kowin-Development was dissolved. The Kos succeeded to the rights and interests of Kowin-Development with regard to the federal court litigation. Also in January 1990, the loan to Kowin-Simonds was called by the Bank of America. In March 1990, the Kos allege that they were forced to personally execute a new note to the Bank of America for the remaining $625,000 of principal. The Kos were required to give, as security on this new note with an increased interest rate, a second trust deed on their Commodore Hotel property. On December 21, 1990, the new note matured, requiring the Kos to sell the Commodore Hotel property at a loss of $2 million.

On October 30, 1992, the arbitrator rendered his award in favor of Kowin Development Corp. and the Kos as successors in interest. On March 1, 1993, the federal District Court for the Northern District of Illinois affirmed in part the arbitrator's decision. The Seventh Circuit Court of Appeals also affirmed in part the award. The United States Supreme Court denied a petition for certiorari. The Kos ultimately were awarded over $10 million in damages.

On May 24, 1993, the complaint in the federal action in California was amended to name the Kos as individual plaintiffs and to name additional defendants, including Household International, Inc., Eljer Industries, Inc., Eljer Manufacturing, Inc., Arbuckle and Munden. The complaint set forth six causes of action for securities fraud, and one each of RICO, fraud and deceit, breach of fiduciary duty, constructive fraud and negligent misrepresentation. Thereafter, on November 2, 1993, the federal securities claims and RICO claims were dismissed as time barred. The district court declined to exercise pendent jurisdiction as to the remaining state claims and dismissed them without prejudice. The Kos did not appeal the district court's order.

The Kos then filed, on October 13, 1994, an action in the circuit court of Cook County against Eljer Industries, Inc., Eljer Manufacturing, Inc., Household Manufacturing, Inc., and Household International, Inc., alleging a variety of state law causes of action. The Kos then dismissed this action voluntarily on October 26, 1994. On the same day, they filed another action against the same defendants, but added Arbuckle and Munden as defendants.

In January 1995, defendants filed motions to dismiss. In August 1995, the circuit court dismissed this action on the bases of collateral estoppel, res judicata, the time bar of the statute of limitations, as well as section 13-210 (735 ILCS 5/13-210 (West 1994)) and section 13-217 of the Illinois Code of Civil Procedure (735 ILCS ...


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