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Eychaner v. Gross

October 03, 2002

FRED EYCHANER ET AL., APPELLEES,
v.
THEODORE GROSS ET AL., APPELLANTS.



The opinion of the court was delivered by: Justice Freeman

Docket No. 91496-Agenda 12-March 2002.

Plaintiffs, Fred Eychaner and Betty Lou Weiss, were directors of the Auditorium Theatre Council (Council). Plaintiffs brought an action against defendants, Roosevelt University and its president, Theodore Gross (collectively Roosevelt), in the circuit court of Cook County. In the claims and counterclaims that developed in this case, the Auditorium Theatre Council, Inc. (ATC Inc.), and Roosevelt, respectively, asserted their authority to control and operate the Auditorium Theatre (Theatre). Specifically, plaintiffs and ATC Inc. claimed that Roosevelt placed the right to control and operate the Theatre into a charitable trust with ATC Inc. as trustee.

At the close of a bench trial, the trial court found in favor of Roosevelt and rejected all theories supporting ATC Inc.'s control of the Theatre. The trial court, inter alia, declared Roosevelt the sole and exclusive owner of the Theatre. The court also ordered an accounting of ATC Inc.'s funds to separate public donations from operating revenues.

The appellate court, with one justice dissenting, reversed these orders and remanded the cause for further proceedings. 321 Ill. App. 3d 759. We allowed defendants' petition for leave to appeal. 177 Ill. 2d R. 315(a). We now reverse the judgment of the appellate court, affirm the order of the trial court, and remand the cause to the trial court for further proceedings.

BACKGROUND

During the 10-week bench trial, the court received approximately 400 documents and heard testimony from 37 witnesses, all of which generated 98 record volumes. The bench trial adduced the following facts.

Setting

The Auditorium Building is located in downtown Chicago, bordered by Michigan Avenue on the east, Congress Parkway on the south, and Wabash Avenue on the west. The building was designed and built in the late nineteenth century by the renowned architects Louis Sullivan and Dankmar Adler. The building originally contained a hotel, commercial office space, and the Theatre, which comprises approximately 40% of the entire building. The Auditorium Building, including the Theatre, with its near-perfect acoustics, was recognized as an architectural masterpiece. However, by the end of World War II, the building, including the Theatre, was abandoned and in a state of disrepair.

Cast

In 1945, Roosevelt was incorporated as an Illinois not-for-profit corporation. In 1946, it became possible for Roosevelt to purchase the Auditorium Building and, to that end, the University solicited and received donations. In 1947, Roosevelt purchased the building, protected the Theatre from further deterioration, and converted the remaining space for use as Roosevelt's campus.

In the mid 1950s, Roosevelt began exploring ways to restore the Theatre. On September 11, 1958, a committee of Roosevelt's board of trustees recommended to the full board that a separate not-for-profit corporation be created to restore and operate the Theatre under that corporation's "trusteeship." On September 25, the full board rejected the proposal amid concerns of giving away rights to the University's property. The board recommended that "[t]he University should remain the `trustee' of the Auditorium Theatre."

At a December 4, 1958, board meeting, trustee Beatrice Spachner submitted "a plan for the restoration of the Auditorium Theater and its operation under the auspices of Roosevelt University." On February 17, 1959, Roosevelt's board of trustees established the Auditorium Restoration and Development Committee (ARDC), composed of Roosevelt Board members and faculty, and community representatives. The ARDC was directed to examine Spachner's Theatre restoration plan.

On October 29, 1959, the ARDC reported to Roosevelt's board of trustees. At that meeting, the board passed a motion tentatively approving a fund drive to restore the Theatre, subject to the following conditions: that the committee's fund-raising efforts not impair Roosevelt's financial resources or credit; that Roosevelt's legal counsel recommend to the board "the legal entity and manner of contract" that would enable Roosevelt to obtain its objectives; and "[t]hat the University not lose ownership or control of the Auditorium Theatre."

The ARDC oversaw the drafting of a resolution to implement the fund drive. Attorney Elmer Gertz was the principal drafter of the resolution. In a letter dated January 21, 1960, Gertz asked Kenneth Montgomery, Roosevelt's attorney, to review the draft resolution. Gertz stated:

"[A] draft of the resolution has been agreed upon. I am sending a copy of it herewith. It is the consensus of all involved in this situation that it is best not to form any separate corporation, foundation, trust or other legal entity, but to proceed in the manner set forth in the resolution." (Emphasis added.)

Gertz asked for Montgomery's ideas on the resolution, specifically on the subject of tax exemption.

The ARDC presented the draft resolution to Roosevelt's trustees at their February 11, 1960, board meeting. The proposed resolution renamed the ARDC the Auditorium Theatre Council (Council) and authorized it to raise funds for and to restore the Theatre. Several trustees continued to express concerns that the proposed resolution was not sufficiently explicit in its description of Roosevelt's control over the ARDC. They questioned whether the resolution complied with the board's October 29, 1959, motion that Roosevelt "not lose ownership or control of the Auditorium Theatre." Criticizing the proposed resolution, trustee Lerner stated that the "Theater would be given away in perpetuum, under this proposal. No [Roosevelt] trustee who understands the word `trust' should vote for it."

As reflected in the minutes of the board meeting, Gertz responded to these concerns:

"[Gertz] was not attempting to make policy for the Board, he said, but had simply tried to realize its intent as derived from the Board's own earlier resolutions and statements of policy. He went on to say that no separate corporation had been proposed because this arrangement would be even more subject to the objection that the University would be prevented from exercising control over the Auditorium. He asserted that any action taken by the proposed Auditorium Council could be changed or rescinded by the Board of Trustees."

The resolution was tabled to allow the ARDC to address the concerns that had been raised.

On February 18, 1960, the ARDC presented a revised resolution to Roosevelt's board of trustees. The revision renamed the ARDC the Auditorium Theater Council. The revision made Roosevelt's control more explicit and further limited the authority of the Council. Language stating that the Council would "fully control" the fund-raising, restoration, maintenance, management, and programming for the Theatre was deleted, leaving the Council only "responsible" for fund-raising and restoration and "charged with the responsibility of carrying out the details of" the fund-raising campaign and the management, programming, and operation of the Theatre. Language that would have allowed the Council to "adopt such procedures *** as it may deem necessary" was dropped. Language was added to ensure Roosevelt board approval, on an annual basis, of all new members to the Council's executive committee. Language was added to ensure the board's involvement in establishing a development reserve amount for the Theatre, with all Theatre revenues above that amount being transferred to Roosevelt's unrestricted funds. Language was added requiring the Council to make periodic progress reports regarding the restoration to the board, to provide information requested by the board, to make annual reports of operations to the board, and to submit to an annual audit by accountants. Finally, language was added requiring that the actions and programming of the Council "be in harmony with the aims of the University in serving the educational and cultural aspirations of the community."

The revised resolution, as quoted in the minutes, reads in its entirety:

" `Resolved, that it is the intent of the Board of Trustees of Roosevelt University, for and on behalf of the University to implement as described hereinafter the plan for the restoration and operation of the Auditorium Theater which was submitted by the [ARDC] to the Board at its meeting of October 29, 1959, and incorporated in its minutes of that date.

IT IS, THEREFORE, ORDERED

(1) That the [Council] be now authorized and directed to take such steps as it may deem necessary to carry out a fund drive for the restoration of the Theater with due regard for safeguarding the right, title and interest of the University in and to the Theater and protecting the resources and credits of both the University and the Council.

(2) That the Council be responsible for raising funds for the restoration of the Theater and for the supervision and administration of its restoration.

(3) That the Council be empowered to secure the services of a professional fund-raising executive and staff to guide and operate the campaign for funds.

(4) That the Council have authority to supervise the work of reconstruction, select engineers, architects, contractors, approve plans and specifications and contract and pay for the work performed, making periodic progress reports to the Board and providing requested information.

(5) That a special fund be established to be known as the Auditorium Restoration Fund, segregated and separate from other funds of the University, that contributions for the restoration be deposited in this fund, and that the fund be used for no other purpose than the restoration and operation of the fund drive.

(6) That the Council not contract, purchase or enter into obligations of any kind with any supplier or other person for the furnishing of work, services, or materials, or for any other purpose, unless funds or pledges are available for that purpose, and unless arrangements with any such person are in a form approved by legal counsel and embody the following provisions, among others, (a) a waiver of mechanics' liens; (b) the contracting parties will look only to the Restoration Fund for payment and no to any other fund of the University; and (c) the contracting parties will not hold the University nor any member of the Council or University liable or any reason whatsoever.

(7) That the Council nominate for Board approval persons of its selection to be members of an Executive Committee charged with the responsibility for carrying out the details of the fund-raising campaign and for the management, maintenance, budgeting, programming, financing and operation of the restored Auditorium Theater.

(8) That until such time as the Executive Committee of the Council is formed the Executive Committee of the [ARDC], members of which have already been approved by the Board, be responsible for the fund-raising campaign.

(9) That the Executive Committee of the Council be composed of not more than 25 persons; that the initial membership of the Executive Committee be divided into three groups, with terms ending respectively in 1961, 1962, and 1963; and that the Council nominate annually persons for Board approval to serve terms of three years as the initial terms of the original group end.

(10) That the Executive Committee of the Council organize itself and select such officers and committees as it deems necessary.

(11) That after the restoration of the Theater, any funds remaining in the Auditorium Restoration Fund be transferred to an Auditorium Theater Operating Fund to be used only for the maintenance and operation of the Theater and be disbursed by direction of the Executive Committee of the Council.

(12) That any surplus resulting from the operation of the Theater be retained in a development reserve, and that when an adequate sum, as determined by the Executive Committee of the Council in consultation with the Executive Committee of this Board, has been accumulated, any amount above that reserve be transferred to the unrestricted funds of the University.

(13) That the actions and programming of the Council be in harmony with the aims of the University in serving the educational and cultural aspirations of the community.

(14) That the Council or Executive Committee not conduct any capital, operating or maintenance fund-raising campaign other than the initial Restoration Campaign without consent of the Board.

(15) That the Council through its Executive Committee prepare annual reports of its operations for the Board, and that an annual audit of the Council's operations be made by a firm of certified public accountants.' "

Discussion on the resolution followed.

Some trustees proposed additional amendments based on their concerns that the revised resolution did not sufficiently describe the control that the University would have over the Council. Kenneth Montgomery, Roosevelt's attorney, opposed any additional amendments as unnecessary. He described the Council as an "agency" of the University and assured the board that nothing would "prevent the Board of Trustees from `deactivating' the Auditorium Council and Committee [ARDC], who would owe their origin and authority to the Board."

Trustee Gerald Gidwitz, an ARDC member and supporter of the revised resolution, similarly assuaged the board as reflected in the minutes:

"The Committee [ARDC] considered that adequate protection for the University's interest inhered in the Board of Trustees' right to reconstitute or abolish the Auditorium Council and Committee, or to alter, modify, or abolish its powers in any way that the Board of Trustees might see fit. He said that the Board could change its mind about the terms of the resolution at any time in the future and he therefore urged that the resolution be passed without amendment."

In response to a request, Gidwitz agreed that his statement "could be incorporated in the minutes as reflecting the agreed understanding within the Board on the control which the Board could exercise over the Auditorium Council and [its] Executive Committee."

Upon this agreed understanding, the Roosevelt University board of trustees rejected the proposed amendments. The board adopted the revised resolution by a vote of 18 to 7.

Subsequent to the February 18, 1960, board meeting, Montgomery wrote a letter to the United States Internal Revenue Service (IRS), in which he sought a determination on behalf of Roosevelt that contributions to the Council would be tax deductible. Montgomery asked the IRS to grant Roosevelt's request because contributions to the Council were "in fact contributions to [Roosevelt] because the Council is its agent." The IRS ruled that contributions to the Council would be tax deductible to the donor, stating: "Since it appears that contributions to the Council will inure entirely to your [Roosevelt's] benefit such contributions will be considered contributions to you."

The Council employed architects, engineers, construction experts and others to determine a plan to restore the Theatre. The cost of restoration was estimated at a minimum of $2.75 million. Roosevelt would often advance funds for the restoration of the Theatre. On October 31, 1967, the Theatre was reopened to the public.

The Council operated the Theatre under the supervision and control of Roosevelt. At the March 4, 1971, meeting of Roosevelt's board of trustees, Chairperson Jerome Stone reported that Standing Policies and Operating Procedures (SOPs) had been developed for the Theatre. According to the minutes, Stone reported: "This statement reaffirms and supplements the Board's resolution of February 18, 1960 establishing the Council." At its April 22, 1971, meeting, the board approved the SOPs. They mandated procedures the Council was to follow for the day-to-day operation of the Theatre and further secured the University's control over Theatre operations. For example, the SOPs mandated that all Theatre employees be paid by the University and be subject to University regulations.

In the late 1970s, some Council members posited that fund-raising for the Theatre would improve if the Council could obtain its own tax-exempt status from the IRS. According to the minutes of the December 20, 1977, meeting of the Council's executive committee, the Council and Roosevelt were discussing "the establishment of a `Shell Corporation' for the purpose of separate tax-exempt status of the [Council]."

Robert Gorman, the University's attorney, revised a draft of the articles of incorporation and bylaws of the proposed corporation. In a letter dated October 22, 1979, Gorman opined:

"In review, the Articles of incorporation and By-laws establish a separate Illinois not-for-profit corporation named the Auditorium Theatre Council. It is explicitly set forth in the Articles of Incorporation and in the By-laws that this new corporation is for fund raising purposes only and has no duties, rights, or operating responsibilities in connection with the Auditorium Theatre. ***

If the Board of Trustees approves the establishment of a new corporation, the Auditorium Theatre Council will exist in two legal capacities. In one capacity it will continue to exist as it has in the past as an unincorporated agency of Roosevelt University operating under, and subject to, the direction and control of the Board of Trustees of Roosevelt University. The books and accounts of the Auditorium Theatre Council will also continue to be subject to inspection by[,] and among the fiscal responsibilities and duties of[,] the Roosevelt Controller. The use, maintenance, operation and restoration of the Auditorium Theatre will continue in the identical fashion it has always done pursuant to the Resolution of the Board of Trustees of Roosevelt University dated February 18, 1960, and the [1971 SOPs].

In its other legal capacity the Auditorium Theatre Council will exist as an Illinois not-for-profit corporation in accordance with the Articles of Incorporation and By-laws submitted. It will use the name `Auditorium Theatre Council.' However, the corporation will exist and be used for the solicitation of funds only. It will not affect in any way whatsoever the operations of the *** Council and the *** Theatre which will continue in the same manner as in the past."

Gorman concluded that the articles of incorporation and bylaws of the proposed corporation, Auditorium Theatre Council, Inc. (ATC Inc.), "are satisfactory and not in conflict with the interests of Roosevelt University."

Beatrice Spachner, University trustee and chairperson of the Council, reported on the Council's fund-raising efforts at the October 25, 1979, meeting of Roosevelt's board of trustees. She stated that potential donors hesitated to contribute to the Council because it was not separately identified as a not-for-profit corporation organized for tax-exempt purposes. According to Spachner: "To overcome this concern of contributors, it was concluded that an affiliate of the Council should be incorporated only for the purpose of raising funds *** for the restoration, operation and maintenance of the Auditorium Theatre. *** [T]his will be the only function of the Corporation."

Both the Council and ATC Inc. would share similar names, and would have largely the same membership. However, the resolution authorizing the incorporation of ATC Inc. expressly stated:

"This corporation is authorized for fund raising purposes only. The corporation will have no rights whatsoever for the use, operation, maintenance, or restoration of the Auditorium Theatre. The use, operation, maintenance and restoration of the Auditorium Theatre will continue, without change, to be the responsibility of the Auditorium Theatre Council in its separate legal capacity as an unincorporated agency of Roosevelt University subject to the control of the Roosevelt University Board of Trustees as set forth in the [1971 SOPs]. *** In the event that at any time in the future [ATC Inc.] should exceed any of the duties, rights, or powers granted it by this resolution, the Board of Trustees hereby reserves the right to terminate any uses, duties or rights of [ATC Inc.] in connection with the *** Theatre."

Roosevelt's board of trustees adopted the resolution.

On September 8, 1981, ATC Inc. filed its articles of incorporation with the State of Illinois and was incorporated under the General Not For Profit Corporation Act (see 805 ILCS 105/101.01 et seq. (West 2000)). According to its articles of incorporation, ATC Inc.'s corporate purpose was, in pertinent part:

"To raise funds and gifts from individuals and organizations for the restoration, operation and maintenance of the Auditorium Theatre *** and the presentation of educational, civic and cultural programs therein, with due regard for safeguarding the right, title and interest of Roosevelt University in and to the Theatre, so that it will serve as a cultural center for the people of Chicagoland."

ATC Inc. subsequently obtained an IRS ruling that ATC Inc. was a tax-exempt organization and that donations to it would be tax-deductible by the donor.

Subsequent to the incorporation of ATC Inc., the University updated the 1971 SOPs. The 1983 SOPs stated in pertinent part:

"The purpose of the *** Council is to maintain, operate and continue the restoration of the internationally famed Auditorium Theatre of Roosevelt University. The Council will operate the Theatre for the benefit of the faculty and students of Roosevelt University and also, subject to the academic priorities of the University, to make artistic, cultural and educational contributions to the people of Greater Chicago through the sponsorship of events in the performing arts."

The 1983 SOPs are substantially similar to those of 1971. Significantly, the 1983 SOPs distinguish the identity and the function of the Council from those of ATC Inc. The 1983 SOPs recount that the University created the Council through the 1960 resolution of Roosevelt's board of trustees and that the University created ATC Inc. through the board's October 25, 1979, resolution. The 1983 SOPs state that the "sole purpose" of ATC Inc. "is to solicit funds for the Auditorium Theatre."

Dialogue

The University paid the Theatre's operating costs, such as insurance and employee payroll, from the University's general account. Roosevelt was supposed to be repaid from the Theatre revenue account. However, by the late 1980s, the Theatre's operating expenses exceeded its revenues. The Theatre lost more money than fund raising could offset. The general funds that Roosevelt expended were not reimbursed. Theatre losses and the operating deficit increased. Roosevelt paid this deficit by transferring money from its endowment fund to Theatre accounts.

On July 1, 1986, Roosevelt trustee Robert Mednick met with Council chairperson Jack Whitney to discuss this problem. According to a July 7, 1986, letter from Mednick to Whitney, they agreed that if the Theatre's cumulative operating deficit increased over approximately $250,000, the Theatre would be discontinued due to a lack of community support. An April 29, 1987, letter by a Council officer reflected the understanding that if the cumulative deficit exceeded this amount "at any time, Roosevelt may close down the Council."

The Theatre's cumulative operating deficit eventually totaled over $400,000. However, despite the above-stated understanding, the University kept the Theatre open and continued to support the Theatre. Eventually, during the 1990s, the Theatre attracted large Broadway productions such as "Miss Saigon," "Les Miserables," "Phantom of the Opera," and "ShowBoat." These productions and other popular programs enabled the Council to increase its revenues ...


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