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Strosberg v. Brauvin Realty Services Inc.

February 25, 1998



The opinion of the court was delivered by: Honorable Philip Fleischman, Judge Presiding.


David M. Strosberg, the plaintiff, brought this action against Brauvin Realty Services, Inc. (BRSI) alleging breach of contract based upon BRSI's failure to make payment on a promissory note allegedly due and owing Strosberg. Strosberg filed an amended complaint adding Jerome Brault and Cezar Froelich, BRSI's officers and directors, as additional defendants alleging fraud, breach of fiduciary duty and interference with contract. The breach of fiduciary duty claim was dismissed pursuant to section 2-615 of the Code of Civil Procedure (735 ILCS 5/2- 615 (West 1996)). The trial court entered a directed verdict against Strosberg and in favor of Brault and Froelich on the fraud claim and granted Brault and Froelich's motion to strike Strosberg's prayer for punitive damages on his interference with contract claim. Thereafter, the jury returned a verdict in favor of Strosberg and against BRSI in the amount of $151,791.15 on the breach of contract claim and in favor of Strosberg and against Brault and Froelich each in the amount of $75,895.57 on the interference with contract claim. The defendants appeal from the denial of their motion for Judgement notwithstanding the verdict or a new trial. Strosberg cross-appeals from the striking of his prayer for punitive damages against Brault and Froelich.

Background Facts:

BRSI was incorporated in approximately 1980 by Sheldon Lavin and defendants Brault and Froelich to syndicate real estate limited partnerships. (Lavin left the company in the early 1980's.) As a Subchapter S corporation under the Internal Revenue Code, all of BRSI's corporate income or loss passed to BRSI's shareholders. Brault and Froelich served as officers and directors of BRSI and as general partners of the Brauvin limited partnerships.

Strosberg became employed by BRSI in 1983 and in 1986 was promoted to executive vice-president. In approximately August 1986, Brault and Froelich offered Strosberg a twelve percent shareholder interest in BRSI. At approximately the same time, a five percent interest was given to BRSI chief financial officer Donald Drag.

In 1986, working capital for BRSI was furnished by loans made to it by its shareholders in proportion to their shareholder interests in BRSI. The shareholders used income that would have been paid to them by BRSI. For tax purposes, that income was channeled to another Subchapter S corporation, Brauvin Advisory Services, Inc. The dividend payments to Brauvin Advisory Services allowed BRSI's shareholders to defer taxes for approximately one year. The funds for the shareholder loans to BRSI were wire transferred from Brauvin Advisory Services to BRSI. BRSI recorded the loans on its books and issued promissory notes to its shareholders.

The loan that is the subject of the instant dispute was made by Strosberg to BRSI on January 15, 1987 in the amount of $75,342.12. Strosberg testified that the terms of the loan required repayment in two years and interest. He stated that at the time the loan was made he was given a unanimous consent of BRSI's board of directors, signed by Brault and Froelich, authorizing BRSI to accept the loan from Strosberg, and a typewritten note. Strosberg testified that he returned both documents to BRSI's chief financial officer, Donald Drag, pursuant to Drag's request. He stated that later during the first quarter of 1987 he was given a new note after the original note he had given Drag became lost. Strosberg identified the subsequent note and the unanimous consent as Plaintiff's Exhibits 6B and 6A, respectively. The later note, also dated January 15, 1987, was captioned "Non-Negotiable, Non-Transferable Demand Promissory Note." It contained a signature line for Brault, BRSI's president, to sign on BRSI's behalf as maker. That line was left blank without signature. However, notwithstanding the absent signature, there was a pre-signed attestation by Froelich as BRSI's secretary.

In December 1987, BRSI obtained a $1.25 million line of credit from Exchange National Bank (ENB). At ENB's request, BRSI's shareholders, including Strosberg, were asked to sign subordination agreements subordinating their loans to BRSI to the $1.25 million line of credit extended to BRSI by ENB. Strosberg testified that Donald Drag gave him the subordination agreement to sign and a $75,342.12 note to endorse over to ENB. The pre-printed note, Plaintiff's Exhibit 7, dated January 15, 1987, was signed by Froelich on BRSI's behalf as maker and was made payable to Strosberg's order in the amount of $75,342.12. Strosberg testified that that "printed note was for the $75,342.00 loan that we've been talking about." He further testified that he endorsed the back of the note to ENB "for collateral purposes only."

The other BRSI shareholders, Froelich, Brault and Drag, signed similar subordination agreements and endorsed their notes representing their outstanding loans to BRSI. In accordance with the terms of the subordination agreement, each agreed to subordinate the indebtedness evidenced by their notes to any and all debts which BRSI "may now or at any times hereafter" be liable to ENB. The subordination agreement also provided that:

"This Agreement shall be continuing, irrevocable and binding on the Undersigned and on the heirs, personal representatives, successors and assigns of the initial Undersigned and shall inure to the benefit of ENB, its successors and assigns." Each subordination agreement also was assented to by BRSI. In its "Debtor's Assent," BRSI agreed to abide by the terms of the subordination agreement and agreed not to make any payments contrary to the intention of that agreement.

Strosberg testified at trial that when he "signed" the back of the $75,342.12 note "for collateral purposes only," he did not intend to give ENB a right to enforce that note. He understood and intended that his signature evidence ENB's interest in the subordination of his loan. Drag also testified that he did not realize that he had assigned his note or otherwise "signed" his note over to ENB. He stated that he thought he had only subordinated his note.

Strosberg resigned from BRSI in 1989. Strosberg testified that before he left BRSI's employment, he requested that the January 15, 1987 note be paid out. He also made a written demand for satisfaction on March 16, 1989. At that time, BRSI owed ENB approximately $1 million. BRSI did not pay Strosberg. Strosberg then requested that ENB waive its rights under the subordination agreement; ENB refused. In March 1990 ENB refused to renew BRSI's line of credit. In April 1990, BRSI drew $1.3 million on its $1.5 million line of credit from American National Bank and repaid ENB all but $50,000. The remaining $50,000 was converted into a time note signed by Brault, as president of BRSI.

On July 18, 1990, Strosberg wrote to ENB again asking ENB to permit BRSI to pay out his note. Strosberg also offered to purchase BRSI's $50,000 time note issued to ENB at its current principal amount in an effort to control and release the subordination agreements that remained in effect due to BRSI's outstanding indebtedness to ENB so that he could obtain full repayment of his own loan. ENB reported Strosberg's offer to Brault and Froelich who then personally purchased BRSI's $50,000 time note to ENB for $50,000 in cash on August 14, 1990. ENB endorsed the $50,000 note: "Pay to the order of Jerome Brault and Cezar Froelich or their order without recourse." In addition to receiving the $50,000 time note from ENB, Brault and Froelich received a written "Assignment of Note" assigning "all of [ENB's] rights, title and interest in and to that certain note dated April 1, 1990 from Brauvin Realty Services, Inc. to Exchange National Bank ("ENB") in the principal amount of Fifty Thousand Dollars." They also received the original subordination agreements and notes signed and endorsed by Strosberg, Drag and themselves in their personal capacities. ENB did not endorse the subordination agreements or notes subject to the subordination agreements to Brault and Froelich. Brault testified at trial that while the assignment ...

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