The opinion of the court was delivered by: Presiding Justice Hartman
Appeal from the Circuit Court of Cook County. Honorable Lee Preston, Judge Presiding
Plaintiffs, limited partner investors in Cablevision of Chicago (Partnership), brought an action individually and derivatively on behalf of the Partnership against defendants, general partners Charles F. Dolan and Cablevision Systems Services Corporation (CSSC), for breach of fiduciary duty involving three financing transactions. Plaintiffs claim the transactions unfairly benefitted the general partners, to the detriment of the limited partners. *fn1 A jury found the issues for plaintiffs.
The issues presented on appeal include whether the circuit court erred (1) in allowing certain evidence as to plaintiffs' theory of breach of fiduciary duty; (2) in refusing to submit a defendants' statute of limitations instruction; (3) in refusing a separate verdict form to determine the liability of each defendant; and (4) whether individual verdicts for plaintiffs' claims should not have been submitted to the jury.
The issues presented on cross-appeal include whether the circuit court erred (1) by allowing Partnership indemnification of defendants' attorneys' fees and costs; (2) by denying forfeiture damages; (3) by not submitting the issue of punitive damages to the jury; and (4) by submitting a certain statute of limitations jury instruction.
Dolan, a cable industry pioneer, established the Partnership in 1979 for the purpose of bringing cable television to the Chicago area after a successful cable television venture in Long Island, New York. Bank loans to then-novel cable television companies were considered risky because the companies had few assets to pledge as collateral, needed long-term loans and had cash flow problems. Banks granting such loans in 1979 demanded restrictive loan covenants that required the borrowing cable company to maintain certain financial performance levels or face default.
Dolan formed three Illinois limited partnerships to raise capital for the Partnership. Prior to investing in the three limited partnerships, each plaintiff received a private offering memorandum, which included a copy of the Partnership Agreement and explained that there were substantial risks in investing in start-up cable companies in the early 1980s. Dolan testified that the Partnership Agreements for the Partnership and three limited partnerships were identical, except for monetary terms. Each plaintiff was required to certify that he or she had a substantial net worth, was sophisticated in business and financial affairs and had received the offering memorandum containing a copy of the Partnership Agreement.
Section 8.1(a) of the Partnership Agreement gave Dolan, as a general partner, authority to manage the partnership and enter into transactions in furtherance of the Partnership's business. Section 8.2(d) specifically authorized Dolan, as managing general partner, "to borrow or lend money upon any terms and conditions, including the subordination of such loans; *** guarantee indebtedness or obligations of others; provided, however, that [Dolan] determine in good faith that any such transaction is in furtherance of a Partnership purpose." Further, the Partnership Agreement in section 8.2(h) allowed Dolan, as managing general partner, "to engage in any kind of activity and to perform and carry out contracts of any kind necessary to, or in connection with, or incidental to the accomplishment of the purposes of the Partnership, as may be lawfully carried on or performed by a limited partnership under the laws of the State of Illinois ***."
The Partnership Agreement also specifically contemplated potential conflicts of interest in authorizing transactions with Dolan's affiliate companies. *fn2
During 1979, Dolan created the first limited partnership, Cablevision of Illinois (COI), using proceeds totaling $16,978,000 from the sale of COI partnership units to provide the initial financing for the Partnership.
On December 17, 1980, Dolan and William Bell, chief financial officer of the Partnership, successfully negotiated a loan with a group of banks led by Continental Illinois National Bank and Trust Company of Chicago (collectively Continental Bank) for $42 million at a prime plus 1½% interest rate, which was fully secured by Partnership assets. The loan agreement included numerous covenants and restrictions requiring the Partnership to meet certain standards for cash flow, number of subscribers and that Dolan remain personally involved in Partnership management. Failure to comply with these restrictions would give Continental Bank the right to terminate the loan.
The Partnership faced operational difficulties early on and intense competition to obtain multiple cable franchises, which significantly raised the cost of the local government franchising process. These circumstances resulted in geographically scattered franchises, and increasing construction and technology costs. In addition, the Partnership faced cash flow shortages.
The Partnership's difficulties in obtaining cable franchises and meeting its revenue projections eventuated in its failure to satisfy Continental Bank's restrictions and it defaulted on its loan agreement. Dolan successfully persuaded Continental Bank in September of 1981 to extend the loan term and ease certain restrictions, however, in return for Dolan's agreement to guarantee personally up to $2 million of the bank loan.
In November 1981, Dolan formed the second limited partnership, Chicago Cablevision Investments (CCI), to raise an additional $12,616,831 million in capital by selling CCI limited partnership interests. The CCI Private Offering Memorandum disclosed the Partnership's then-existing financial problems and bank restrictions. *fn3
The Partnership continued to struggle in 1982, but avoided another default when Dolan again persuaded Continental Bank to relax restrictions on the loan agreement. In return, Dolan was required to guarantee part of the debt personally until the Partnership could raise additional capital to reduce that debt.
Financial difficulties continued, and Dolan created a third partnership in 1983, Cablevision Headquarters Investments (CHI), which generated $8.125 million in additional capital through the sale of limited partnership interests. The CHI private offering memorandum disclosed that the Partnership had experienced difficulty in meeting certain covenants in the loan agreement since its inception and that Dolan personally had guaranteed repayment of a specific amount of debt, allowing Continental Bank to waive defaults. The new capital raised through the CHI offering and a new business plan for the Partnership temporarily kept the Partnership out of default.
The Partnership's financial woes increased dramatically in late 1984; it had used most of the $42 million available under its bank loan and again defaulted on the loan agreement. Continental Bank sought to dispose of the financing agreement and demanded that the Partnership pursue alternative long-term solutions to its financing problems. In compliance with this demand, on January 30, 1985, the Partnership called upon the limited partners of CCI to loan $37,500 for each Partnership unit owned to the Partnership at an 18% interest rate, in return for convertible debentures, as authorized by the Articles of Limited Partnership establishing CCI. *fn4 Dolan previously delayed the request for the loans because of the high interest rate and the requirement that this interest be paid on a current basis. The Partnership raised $2.4 million through the 1985 loans from the limited partners, who then received current payments of 18% interest. *fn5
Dolan contemplated selling the Partnership in 1985, but believed he would not be able to obtain a sale price that would allow the investors to recover their initial investment. By the end of that year, when the Partnership carried more than $50 million in outstanding debt, it could not have been sold for more than $55 million, which would have caused plaintiffs to lose virtually their entire investments.
Repeated efforts to obtain new financing for the Partnership continued; however, the only feasible replacement bank financing was the First Canadian Bank, Bank of Montreal (Bank of Montreal), which offered a loan of $32 million, $10 million less than needed to pay off the debt to Continental Bank. The Bank of Montreal established four prerequisites with which the Partnership had to comply in order to receive replacement bank financing: (1) the Partnership was prohibited from paying any management fees during the time Dolan was required to continue managing the Partnership; (2) the Partnership had to raise $10 million to make up the difference between the $42 million Continental Bank loan and the $32 million offered by the Bank of Montreal; (3) the Partnership was required to pay off an outstanding $5.1 million account payable to Home Box Office (HBO), one of the Partnership's principal programming suppliers; and (4) any loans used to satisfy these prerequisites had to be unsecured, subordinated to the Bank of Montreal debt, with no acceleration rights nor rights to receive current payments of principal or interest.
To satisfy these prerequisites and keep the Partnership afloat, Dolan turned to his affiliates for financing, which came about in three specific transactions, and are at the heart of plaintiffs' case.
The first challenged transaction arose from a 1980 management agreement (management fees transaction) in which the Partnership received various management services from Dolan and his management company, Cablevision Systems Company (Management Company). In return for these services, the Partnership was obligated to pay the Management Company each month 3.5% of its gross monthly revenues as compensation for Dolan's personal management of the Partnership. All investors were informed about the Management Agreement prior to their having invested in the Partnership.
In December 1983, Continental Bank's prohibition against the current payment of management fees was memorialized in an amended credit agreement and was considered by the Partnership and its bankers to be permanently in place for the duration of the loan. Because the prohibition was considered permanent, the Partnership and the Management Company entered into an agreement dated December 31, 1983, through Dolan, whereby the Management Company agreed to the indefinite deferral of monthly fees, and the Partnership agreed to accrue interest, compounded monthly, on unpaid fees at the composite borrowing rate of Dolan's public company, Cablevision Systems Corporation (CSC). When Dolan sold partnership interests in CCI in 1981 and CHI in 1983, he did not mention this interest on the accrued fees; accruing interest for management fees, however, was listed in the 1985 and 1986 "Notes to Financial Statements" that the limited partners received, which disclosed that interest was being charged on deferred management fees and the amount of interest charged for that year. In 1986, the interest rate changed to prime plus 2% for simplicity of calculation purposes.
The management fees transaction freed for the Partnership funds that otherwise would have been required to pay management fees, enabling the Partnership to comply with the bank requirement that Dolan continue to provide management services without current pay. Bell and Patrick Cleary, a senior loan officer specializing in cable television company loans for the Continental Bank loan group, testified at trial that the Partnership could not have obtained a more favorable management services arrangement from an unaffiliated party; rather, the interest rate charged for this transaction was at a rate more favorable to the Partnership than it could have received for equivalent, outside financing. Bell also checked with independent parties for other interest rate terms, but he did not consult with parties outside the Cablevision sphere of companies.
In 1985, each limited partner received an information memorandum, noting that interest was being charged on the deferred management fees and, from 1985 through 1995, each investor was advised through annual financial statements that interest was being charged on deferred management fees, as well as the amount of interest charged each year.
The second challenged transaction involved a loan from Dolan's public company, CSC (CSC Loan), to the Partnership for $10 million to make up the shortfall between the $42 million owed to Continental Bank and the $32 million the Bank of Montreal was willing to refinance. Dolan previously secured a Partnership loan from CSC for approximately $9 million through 1985 to bring the Partnership into compliance with the financial restrictions in its loan agreement with Continental Bank. This balance and the additional $10 million were reflected in a single, unsecured note with a fixed interest rate of 14%, compounded quarterly, for the term of the loan and, as required by the Bank of Montreal, gave CSC no acceleration rights and no right to receive current payments of principal or interest. *fn6
In setting the Partnership interest rate at 14%, Dolan testified that the interest rate was below market rates from the time they were arranged until the time they were retired and still satisfied the Bank of Montreal's demands that any loans be subordinated to their debt, with no acceleration rights, no security and no current payments of principal or interest. Bell testified that before fixing the interest rate at 14%, CSC, which was much larger and more creditworthy than the Partnership, had to pay 19½% on a subordinated debt requiring current interest payments. Cleary testified that in 1985, deeply subordinated debt commanded at least 20% interest and, that in 1988, when the Partnership's financial condition had improved, available subordinated debt still required current interest payments and an interest rate exceeding 20 percent. Gradually, the Bank of Montreal increased the Partnership's borrowing capacity to $60 million in 1989. This increased borrowing capacity allowed the Partnership to pay CSC $20 million in 1989, of which CSC credited $7,350,000 to principal and $12,649,420 to interest.
In March 1986, a Dolan memorandum informed each limited partner that, as a prerequisite of the Bank of Montreal refinancing agreement, CSC loaned the Partnership $10 million on terms fully subordinated to the bank loan. A May 1986 memorandum to the limited partners advised that CSC had advanced the necessary funds to the Partnership at an interest rate of 14%, and that the loans were fully subordinated to the bank debt. Starting with the fiscal year 1986, the "Notes to the Financial Statements" disclosed the CSC Loan, the amount of principal owed, the amount of interest accrued, the amount of cumulative unpaid interest, the interest rate and the fact that the obligations were subordinated to the bank debt. As payments were made on this and other affiliate loans in 1989 and 1993-1995, the "Notes to the Financial Statements" disclosed those payments.
The CSC Loan balance was paid after the 1995 sale of the Partnership. In total, CSC collected the $19,664,999 it loaned to the Partnership plus $28,217,823 in interest. CSC received $13,610,235 over the amount it paid to borrow the money it loaned to the Partnership.
The third contested transaction, known as the HBO Loan, involves the CSSC affiliate loan Dolan arranged in late 1985 to satisfy the third prerequisite of the Bank of Montreal Loan, that the HBO account be paid off. CSSC guaranteed the Partnership's $5,093,302 account payable to HBO with a five-year note, but paid no interest for four years; the fifth year paid interest at prime. The Partnership gave CSSC an unsecured, subordinated note for approximately $5,100,000 at an interest rate of 14%, compounded quarterly, with CSSC having no acceleration rights and no right to receive current payments of principal or interest. Bell and Cleary both testified that no better terms were available to the Partnership from unaffiliated sources. According to Bell, the HBO Loan was well below market interest rates throughout the life of the loan. HBO's loan was extended to a sixth year at prime and then was refinanced with another lender for 16 months at 13% interest.
In March 1986, each limited partner was sent a memorandum explaining that a Dolan affiliate would loan the Partnership $5 million to pay off a debt mentioned as intending "to satisfy this stipulated condition precedent," evidently referring to the HBO Loan. Starting with fiscal year 1986, the "Notes to the Financial Statements" disclosed the $5 million loan, the amount of principal owed, the amount of interest accrued, the cumulative amount of unpaid accrued interest, the interest rate and the fact that the obligations were subordinated to bank debt.
In 1987, CSSC became the corporate general partner of the Partnership. CSSC was repaid the $5,093,302 it advanced to the Partnership, plus $8,476,798 in interest. Because CSSC paid $1,477,949 in interest to an unaffiliated third party to loan the money to the Partnership and received $8,476,798 ...