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NIKI DEVELOPMENT CORP. v. HOB HOTEL CHICAGO PARTNERS

March 28, 2003

NIKI DEVELOPMENT CORP., AN ILLINOIS CORPORATION, MARKS THEATRE INVESTMENT, LLC AN ILLINOIS LIMITED LIABILITY COMP, MARKS IV REALTY, INC. AN ILLINOIS CORPORATION, MARKS HOTEL INVESTMENTS, LLC, AN ILLINOIS LIABILITY COMP., ON BEHALF OF HOB HOTEL CHICAGO PARTNERS, L.P. A DELAWARE LIMITED PARTNERSHIP, AND JOHN MARKS, PLAINTIFFS,
v.
HOB HOTEL CHICAGO PARTNERS, L.P. A DELAWARE LIMITED PARTNERSHIP, HOB MARINA CITY PARTNERS, L.P., A DELAWARE LIMITED PARTNERSHIP, HOB HOTEL CHICAGO, INC., A DELAWARE CORPORATION, HOB MARINA CITY, INC., A DELAWARE CORPORATION, HOB ENTERTAINMENT, INC. A DELAWARE CORPORATION, HOB CHICAGO, INC., AND JEFFREY C. LAPIN, DEFENDANTS.



The opinion of the court was delivered by: Ronald A. Guzman, United States Judge

MEMORANDUM OPINION AND ORDER

Before this Court are Defendants HOB Hotel Chicago Partners, L.P., HOB Marina City Partners, L.P., HOB Hotel Chicago, Inc., HOB Marina City, Inc. and HOB Chicago, Inc.'s joint motion for summary judgment as to Counts I, II and III of Plaintiffs' Niki Development Corp, Marks Theatre Investment, L.L.C., Mark IV Realty, Inc., Marks Hotel Investments, LLC and John Marks' first amended complaint. Also pending is Defendant HOB Entertainment, Inc's motion for summary judgment as to Count IV. For the reasons set forth below Defendants' motions for summary judgment are granted.

BACKGROUND FACTS

Plaintiffs Niki Development, Marks Theatre L.L.C., Mark IV Realty, Inc. and Marks Hotels L.L.C ("hereinafter referred to as Plaintiffs) are investment and business vehicles of Plaintiff John Marks and members of the Marks family. In November of 1994, Plaintiff Nike Development (owned by Plaintiff John Marks ("Marks") and other family members) purchased portions of the Marina City complex from bankruptcy for $3,000,000 (Defendants' 56.1 Statement ¶ 13). At that time, the Marina City complex consisted of a movie theatre, retail space, an office building, and a parking garage in the lower floors of the twin condominium towers (Defendants' 56.1 Statement ¶ 14). The condominium portion of the towers was and still is owned and operated by the homeowners, and is not involved in this dispute (Id.).

I. The Theatre Limited Partnership

Sometime in 1995, Marks and his company Niki Development entered into negotiations with HOB Entertainment, Inc. ("HOB Entertainment"), a Delaware corporation located in California, and the parent company of the House of Blues nightclub. The purpose of these negotiations was to open a theatre club in the old (to be rehabbed) movie theatre building at Marina City (Defendants' 56.1 Statement ¶ 15). During negotiations over the Theatre Limited Partnership Agreement, and on "various occasions" thereafter, Marks requested the opportunity to purchase "a million dollars worth of stock" in HOB Entertainment on the belief that the company would some day "go public."(Ex. 4 Marks Dep., pp. 117-19).

In January of 1996, Marks, Niki Development and HOB Entertainment reached an agreement for the redevelopment of the theatre building into a House of Blues nightclub. (Defendants' 56.1 Statement ¶ 16). The Marina City property was then subdivided so the theatre building occupied a separate parcel of the property. (Defendants' 56.1 Statement ¶ 17). Niki Development then conveyed the theatre to a limited partnership, HOB Marina City Partners, L.P. ("Theatre Limited Partnership"), which owns the property, and leases the theatre property to HOB Chicago, Inc. (the Theatre General Partner) for operation of a House of Blues club. (Defendants' 56.1 ¶ 18).

In return for conveyance of the real property, Niki Development (now Marks Theatre Investment, LLC) was deemed to have contributed $5,000,000 to the Theatre Limited Partnership (the other partners contributed cash) and Niki Development/Marks Theatre Investment, LLC received a 35% limited partnership interest in the Theatre Limited Partnership (Defendants' 56.1 Statement ¶ 19). Platinum Blues Chicago, L.L.C. ("Platinum") and HOB Chicago, Inc. were the other two limited partners. (Plaintiffs' 56.1 Statement ¶ 9, Exhibit A to Plaintiffs' complaint, page 1).

The Theatre Limited Partnership Agreement provided, among other things, that in the event that HOB Entertainment, its parent company, sold all or substantially all of' its assets, completed an IPO, or transferred its voting control to a third party, "Niki Development, now Marks Theatre L.L.C." and Platinum shall, together and not independently, have ninety (90) days . . . to exercise the right to put [i.e. sell back] their respective Limited Partnership interests to the General Partner" at a fixed amount equal to their initial capital contribution, as adjusted, plus interest at the greater of 12% per year or 36% in total. (Ex. 1, Theatre Limited Partnership Agreement, pp.37-28, § 12.1). The Theatre Limited Partnership was to continue until September 30, 2045 and this agreement is governed by the laws of Delaware (Plaintiff's Complaint, Exhibit A, § 11.2). In the Spring of 1996, Marks purchased HOB stock valued at $300,000 based upon the HOB "concept and people." (Marks' Tr. p. 29).

Subsequent to the closing of the theatre transaction, HOB Entertainment and Marks discussed the remainder of the commercial property at Marina City. (Defendants' 56.1 Statement ¶ 21). Marks wanted to convert the vacant office building into a Hilton Gardens Hotel (Defendants' 56.1 Statement ¶ 22) and HOB Entertainment was interested in extending its brand name to a house of Blues-themed hotel (Defendants' 56.1 Statement ¶ 23). To no one's surprise the House of Blues hotel concept won out over Marks's proposed Hilton Garden concept.

II. First Amendment to the Theatre Limited Partnership

In August 1996, Marks and the Theatre General Partner — HOB Marina, Inc. (Plaintiffs' Complaint. Exhibit 2, page 1) began to discuss a proposed First Amendment to the Theatre Limited Partnership Agreement (Defendants' 56.1 Statement ¶ 31). It is undisputed that Marks had been informed in the Fall of 1996 that large losses had occurred at the Atlanta House of Blues Club during the 1996 Summer Olympics. (Ex. 4 Marks Dep. pp. 229-232, 234). Marks was also aware that substantial losses had occurred during the construction of the theatre (Ex. 4 Marks Dep. p 230).

On August 16, 1996. counsel for the Theatre General Partner, HOB Marina City, Inc., sent a draft of the proposed First Amendment to Marks' counsel (Defendants 56.1 Statement ¶ 32). The draft indicated that only Niki Development and not Platinum, would be giving up its option or "put" right, pursuant to Section 12.1 of the Partnership Agreement. (Defendants' 56.1 Statement ¶ 32).

In October of 1996, it is undisputed that both Isaac Tigrett, HOB's Entertainment's CEO and Eric Levine, a close advisor of Tigrett's, told Marks that HOB Entertainment needed to refinance the Club because of high construction costs, and that they needed to make changes in the Theatre Partnership Agreement because of the "put" provisions (Plaintiffs' 56.1 Statement ¶ 155). It is undisputed that HOB was negotiating for additional financing with a lender, Sun America Investment, Inc. The limited partners "puts" provisions made the investment opportunity less desirable to a lender such as Sun America.

On December 12, 1996, the Theatre General Partner sent Marks a draft of the First Amendment to the Theatre Limited Partnership Agreement (Defendants' Exhibit 9). It is undisputed that the Theatre draft on its face indicated in paragraph 4 that Platinum was not relinquishing its put right. (Defendants' Exhibit 9).

On December 19, 1996, HOB Entertainment's attorney sent to Mark's attorney by telecopy and overnight messenger (1) a Stock Purchase Agreement, in which HOB Entertainment agreed to sell 1,000,000 shares of preferred stock in HOB Entertainment at $3.00 per share to Marks; and (2) "the most recent draft of the Form S-1 Registration Statement' for HOB Entertainment. (Defendants' 56.1 Statement ¶ 42). It is undisputed that this S-1 draft identified losses from HOB Entertainment's operations, including those incurred at the Atlanta HOB's Club during the 1996 Summer Olympics. (Defendants' 56.1 ¶ 46).

The draft SEC S-1 Disclosure Statement sent to Marks' attorney on December 19, 1996 provided that "Mr. Tigrett developed the House of Blues concept, and along with Mr. Akroyd's assistance in promoting the brand, has been essential to the successful growth of the concept to date. The loss of the services of Mr. Tigrett, Mr. Trojan, or Mr. Akroyd could have a material adverse effect upon the Company's business, financial condition or result of operations." (Plaintiffs 56.1 Statement ¶ 81). The letter enclosing the documents specifically advised Plaintiff that: [o]f course, there can be no assurance that a public offering of the Common Stock of HOB Entertainment, Inc. will occur (Defendants' 56.1 Statement ¶ 43).

In addition, the December 19, 1996 letter specifically advised Marks that:

"since August 1996 representatives of DLJ, the lead managing underwriter, Montgomery Securities, Smith Barney, and Dain Bosworth have been working diligently on the Initial Public Offering of the Common Stock of HOB Entertainment, Inc. and committed to the process. You can confirm this commitment by contacting Marc Dien of DLJ. whose direct number is (310) 282-5063. Of course, there can be no assurance that a public offering of the Common Stock of HOB Entertainment, Inc. will occur."
(Defendants' Exhibit 10).

In the draft Stock Purchase Agreement sent to Marks on December 19, in connection with Marks purchase of HOB Entertainment stock, Marks was also called upon to represent and warrant to HOB Entertainment that he:

"has been furnished access to the business records of the Company and such additional information and documents as [he] requested and has been afforded an opportunity to ask questions of and receive information from representatives of the Company concerning the terms and conditions of this Agreement, the purchase of the [stock], the Company's business, operations, market potential, capitalization, financial conditions and prospects, and all of the matters deemed relevant by [Marks] . . ."
(Defendants' Exhibit 10).

The draft Form S-1 that HOB Entertainment sent to Marks contained a lengthy discussion of the business and financial condition of HOB Entertainment and specifically identified the losses from its operation, including those incurred at the Atlanta Club (Defendants' 56.1 ¶ 46) Marks understood at all times that consummation of an IPO was not guaranteed. (Ex. 4 Marks Dep. pp. 133-34 12/12/96 letter).

The letter further stated that, "if the draft documents were acceptable, then the First Amendment to the Theatre limited Partnership Agreement, and the Stock Purchase Agreement would be executed concurrently." (Id). It is undisputed that neither Marks nor his attorneys called anyone to inquire about the status of the IP0 following the receipt of the December 19, 1996 letter. (Defendants' 56.1 Statement ¶ 44).

On December 24, 1996, Marks executed and delivered to the Theatre General Partner the signed First Amendment to the Theatre Limited Partnership Agreement. (Defendants' 56.1 Statement ¶ 49). Section 12.1 of the Amended Partnership Agreement specifically provided the following; [the option to sell or put a limited partner's interest] is hereby modified to delete any and all references therein to Marks and/or Niki so that Section 12.1 shall only apply to Platinum, and Marks hereby waives and releases any and all rights it had under the Partnership Agreement to put its Limited Partnership Interest to the General Partner (Defendants' 56.1 Statement ¶ 50).

The First Amended Partnership Agreement also provided that one of' the limited partner's contributions to capital was increased from $1,880,000 to $6,3000,000 and the Theatre General Partner's contribution was increased from $120,000 to $700,000; but Niki Development's contribution remained the same (Defendants' 56.1 Statement ¶ 51). On or about the same date Marks executed a Stock Purchase Agreement which committed Marks to purchase, and HOB Entertainment to sell 1,000,000 shares of HOB Entertainment preferred stock (Defendants' 56.1 Statement ¶ 52). Marks paid a portion of the purchase price for the stock on January 17, 1997 and the remainder six months later. (Defendants' 56.1 Statement ¶ 54).

III. Hotel Limited Partnerships

In December of 1996, Marks (Niki Development) decided to sell the commercial property to a newly formed limited liability company, Marina City Hotel Enterprises, L.L.C. ("MCHE"), to be owned 56% by Nomura and 44% by a newly created limited partnership HOB Hotel Chicago Partner, Inc. MCHE owns the entire House of Blues Hotel and retail complex. (Ex. 17,) Operating Agreement p. 16-17, ยง 1.1.91). Mark's sale of the commercial ...


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