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Lease Resolution Corp. v. Larney

September 23, 1999

LEASE RESOLUTION CORPORATION, A DELAWARE CORPORATION, AS GENERAL PARTNER, AND DATRONIC EQUIPMENT INCOME FUND XVII, L.P., A DELAWARE LIMITED PARTNERSHIP,
PLAINTIFFS-APPELLANTS,
V.
DENNIS LARNEY AND MIDLAND CAPITAL CORPORATION, AN ILLINOIS CORPORATION,
DEFENDANTS-APPELLEES
(EDMUND J. LOPINSKI, JR.,) DEFENDANT.



APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY No. 95 L 17332 HONORABLE LEE PRESTON, JUDGE PRESIDING.

The opinion of the court was delivered by: Justice Hall

Plaintiffs, Lease Resolution Corporation (LRC), the successor general partner of a limited partnership, and Datronic Equipment Income Fund XVII (the Fund), the limited partnership, appeal from the dismissal with prejudice of their third amended complaint. On December 15, 1995, LRC and the Fund filed a complaint against defendants Dennis Larney, Midland Capital Corporation (Midland), and Edmund J. Lopinski, Jr., the officers and agents of the former general partner, alleging that they had converted funds belonging to the Fund. The circuit court dismissed plaintiff's third amended complaint with prejudice, finding that the cause of action was time barred and that plaintiffs had failed to allege sufficient facts to invoke the adverse domination doctrine. In this case we are asked to decide whether Illinois will recognize the adverse domination doctrine. We find that it will.

In 1989, Datronic was the general partner of the Fund, which it managed pursuant to a limited partnership agreement. Limited partnership interests in the Fund were offered as investments to the general public. The limited partners of the Fund were passive investors who took no part in the management of the Fund. The Fund was in the business of acquiring, managing, operating, and disposing of equipment leases. The Fund had no employees of its own.

Midland provided consulting and other services to Datronic in connection with the acquisition of equipment leases and equipment lease portfolios. Larney was the sole shareholder and president of Midland. Larney also served as a director of Datronic until his resignation on December 31, 1988. Lopinski was chairman of the board and president of Datronic.

At all relevant times, the board of directors of Datronic (the Board) was comprised of three directors. Lopinski, by virtue of his ownership of approximately 95% of the stock of Datronic, appointed all of the directors. From December 31, 1988, through September 30, 1989, the Board consisted of Lopinski, Stephen S. Buckley, and Gary G. Gebis. On September 30, 1989, Gebis resigned from the Board, questioning the propriety of various Datronic transactions, including the Bank of California (BankCal) transaction. On December 12, 1989, Lopinski appointed Edmund C. Lipinski to the Board. From December 12, 1989, until May 1, 1992, the Board was comprised of Lopinski, Buckley, and Lipinski.

Plaintiffs alleged that during the period of December 12, 1989, to May 1, 1992, the Board "was not an independent body" and "was, in effect, a 'rubber stamp' for the corporate decisions of Lopinski." Plaintiffs further alleged that Lipinski executed corporate resolutions and other corporate documents when directed to do so by Lopinski, without questioning the propriety of such actions.

In early 1989, Larney and Lopinski located and, on behalf of the Fund, negotiated for the acquisition of an equipment loan portfolio from BankCal. Larney, acting on behalf of the Fund, bid $40,077,196.06 for the purchase of the loan portfolio. On June 16, 1989, Larney met with BankCal representatives to negotiate the details of the transaction. At that time, BankCal offered a 6% discount on the purchase price if Datronic purchased the portfolio without recourse. Datronic, on behalf of the Fund, accepted the discount offer and entered into a sale and purchase agreement with BankCal for the acquisition of the loan portfolio. The initial purchase price of $40,077,196.06 was reduced by 6% or $2,404,631.76 to $37,672.564.30.

Datronic, with the knowledge of Larney and Lopinski, caused $40,077,196.06 belonging to the Fund to be deposited into an account in Datronic's name at BankCal. BankCal then withdrew $37,672,564.30 from the account as consideration for the sale of the loan portfolio, leaving $2,404,631.76 of the Fund's money remaining in the account.

Plaintiffs allege that the $2,404,631.76 remaining in the account was converted by Datronic, Lopinski, and Larney for their own use and benefit. On August 8, 1989, Midland received a consulting fee of $601,157.94 from Datronic. This money was paid out of the allegedly converted funds. On that same date, Buckley was paid $100,000 from the allegedly converted funds.

Plaintiffs allege that in October 1989 and again on December 20, 1989, Larney falsely represented to attorneys and auditors for Datronic and the Fund that the $2,404,631.76 retained by Datronic as a result of the BankCal transaction was a fee and not a discount. On December 18, 1989, a corporate resolution was adopted by the Board approving a May 1, 1989, agreement between Datronic and Midland. Pursuant to this agreement, Midland would receive a commission of 1 1/2% of the purchase price of all lease portfolios purchased by Datronic or its affiliates.

On May 2, 1992, both Lopinski and Lipinski resigned from the Board. On May 18, 1992, a class action lawsuit entitled Ventre v. Datronic Rental Corp., 92 C-3289, was filed in the United States District Court for the Northern District of Illinois (the Ventre action) on behalf of 35,000 investors in the various limited partnerships managed by Datronic, including the Fund. The Ventre action was brought against Datronic and several of Datronic's officers, including Lopinski and Lipinski, alleging RICO (18 U.S.C. §§1962(c),(d)(1994)) claims, violations of Federal securities laws, and fraud. On March 4, 1993, the district court approved a partial settlement of the Ventre action, which provided, inter alia, that LRC would be substituted for Datronic as the general partner of the Fund with full authority to manage its funds and affairs.

Following its appointment as general partner, LRC, through its accountants and attorneys, investigated various transactions involving the Fund. As a result of this investigation, a complaint was filed against Midland, Larney, and Lopinski in the circuit court of Cook County on October 12, 1994. Count I of the complaint sought a judicial accounting of the fees paid to Midland and Larney. Count II alleged a scheme to defraud in connection with the diversion of $2.4 million of the Fund's money in the BankCal transaction.

Midland and Larney filed a combined motion to dismiss the October 12, 1994, complaint arguing that the state court did not have subject matter jurisdiction over the lawsuit. On May 18, 1995, Judge Edwin Berman entered an order dismissing the complaint without prejudice and directing the case to be transferred to the United States District Court for the Northern District of Illinois, Eastern Division. The order further provided that, "should the District Court decline to exercise jurisdiction the cause shall be returned to this court, all parties shall have the right to assert any and all claims, defenses or motions that are presently pending." The claims against Larney and Midland were promptly refiled in federal court. On December 5, 1995, the federal court action against Larney and Midland was dismissed without prejudice for want of federal jurisdiction.

The two-count complaint in the case sub judice was filed on December 15, 1995. Count I sought damages for conversion, and count II sought a judicial accounting of the fees paid to Midland and Larney. On February 13, 1997, the circuit court dismissed the complaint on limitations grounds but allowed plaintiffs leave to file an amended complaint to more fully plead the adverse domination doctrine. Plaintiffs filed their amended complaint on March 13, 1997, which was dismissed as time barred because plaintiffs failed to allege sufficient facts to invoke the adverse domination doctrine. On October 15, 1997, the circuit court entered an order denying ...


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