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Franz v. Calaco Development Corp.

October 21, 2004

WILLIAM M. FRANZ PLAINTIFF AND COUNTERDEFENDANT-APPELLANT,
v.
CALACO DEVELOPMENT CORPORATION AND NUNZIO CASALINO, DEFENDANTS AND COUNTERPLANTIFFS-APPELLEES.
WILLIAM M. FRANZ PLAINTIFF AND COUNTERDEFENDANT-APPELLEE,
v.
CALACO DEVELOPMENT CORPORATION AND NUNZIO CASALINO, DEFENDANTS AND COUNTERPLANTIFFS-APPELLANTS.



Appeal from the Circuit Court of McHenry County. No. 99-LA-187. Honorable Maureen P. McIntyre, Judge, Presiding.

The opinion of the court was delivered by: Presiding Justice O'malley

PUBLISHED

Plaintiff William Franz sued defendants, Calaco Development Corporation (Calaco Development) and Nunzio Casalino (Casalino), for breach of a partnership agreement between plaintiff and Calaco Development and breach of fiduciary duty. Defendants counterclaimed for declaratory judgment that plaintiff had become a general partner in the partnership and that plaintiff violated the Illinois Mortgage Act (Mortgage Act) (765 ILCS 905/1 et seq. (West 2002)). After a bench trial, the trial court found for plaintiff on his breach of contract claim and his breach of fiduciary duty claim against Calaco Development, and against plaintiff on the breach of fiduciary duty claim against Casalino personally. The trial court found for plaintiff on both counts of defendants' counterclaim. Plaintiff and defendants appealed. The appeals have been consolidated. In plaintiff's appeal, we affirm, and in defendants' appeal, we affirm in part, reverse in part, and remand the cause.

I. FACTS

On May 8, 1990, plaintiff, along with his brother, Frederic E. Franz, who is not a party to this litigation, entered into a partnership agreement with Calaco Development to form Calaco Limited Partnership (the partnership). Under the limited partnership agreement, plaintiff retained a 33.5% interest in the partnership, and Frederic retained a 16.5% interest, both as limited partners. Calaco Development, as the general partner, retained a 50% interest. Casalino was to serve as the chief operating officer of the partnership. Calaco Development was formed by Casalino and Sebastian Lorenzo, who is not a party to this litigation, for the sole purpose of serving as a general partner to the partnership. Casalino and Lorenzo each held a 40% share of Calaco Development; the remaining shares were held by parties not involved in this litigation.

The purpose of the partnership was to develop, market, and sell a piece of real estate known as Wedgewood, which was previously owned by plaintiff and Frederic Franz. Under the partnership agreement, the Franz brothers conveyed the real estate, valued at $3 million for purposes of the agreement, to the partnership in exchange for a $1 million payment from the partnership at the onset of the agreement, an additional $2 million in scheduled payouts from the partnership, and a share in profits generated by the partnership. Calaco Development was to contribute the initial $1 million and serve as general partner in exchange for $1 million in scheduled payouts from the partnership and a share in partnership profits. In order to secure their $2 million payments, the limited partners obtained a mortgage on Wedgewood signed by the general partner and by Casalino and Sebastian Lorenzo personally.

Under the partnership agreement, Calaco Development was not to accrue interest on its initial $1 million contribution before it was paid out as scheduled; however, the agreement stated that Calaco Development would receive interest on any loans to the partnership that the general partner determined were needed to infuse cash into the partnership.

Three lots on the Wedgewood property were held out of the partnership agreement and instead transferred to persons on behalf of plaintiff. In exchange for holding these three lots out of the agreement, the limited partners granted Calaco Development exclusive rights in two Wedgewood lots of comparable value to those lots held out of the agreement.

The agreement also contained other limitations and duties for the general partner. It stated that Calaco Development could not assign or sell any part of its partnership interest in Wedgewood to third parties related to Casalino or Calaco Development, and it stated that any sale or transfer of interest in Wedgewood, other than individual sales, required written approval from the limited partners. The agreement also stated that the general partner was to obtain all financing for the project, provide monthly reports on the condition of the partnership to all partners, annually commission an audit of the partnership's accounts, and provide all partners with any information regarding the partnership upon request. It further stated that the general partner was responsible for any commissions due to third parties in bringing about the partnership agreement.

The parties twice modified the terms of the agreement by executing subsequent contracts allowing the general partner to sell lots out of the Wedgewood property to Villas of Wedgewood, an entity related to Casalino. The first modification, in 1991, allowed Villas of Wedgewood to purchase 22 lots from the partnership. On December 31, 1991, the modification expired on its own terms. The parties signed another modification to the partnership agreement, which allowed Calaco Development to transfer up to 45 lots to Villas of Wedgewood at a price of $50,000 per lot in 1992 and 1993 and $55,000 per lot in 1994. The second modification expired on December 31, 1994. Aside from those two modifications, the partnership agreement was not altered during the course of the partnership.

Though the partnership was able to develop Wedgewood, the property did not generate profits as the parties had anticipated. Running low on operating funds and having difficulty selling lots, Calaco Development transferred several lots to entities related to Casalino in order to infuse cash into the partnership. In addition to the agreed transfers discussed above, Calaco Development purchased 74 lots from the partnership for $40,000 per lot. Casalino also caused an additional 17 Wedgewood lots to be sold to Villas of Wedgewood, partially, he testified, in order to raise enough money to give the limited partners their scheduled distribution. The limited partners approved none of these transfers in writing, and plaintiff alleges that some of the lots were transferred after the partnership had already contracted to sell them to third parties for a higher price than that paid by Calaco Development. Calaco Development also purchased 10 lots from the partnership in 1994 for $40,000 per lot, despite the fact that their modification contract required that the general partner pay $55,000 per lot.

The partnership was able to make all its scheduled payments to the limited partners, but after learning of the general partner's ongoing breaches of the partnership agreement, plaintiff refused to release his mortgage on Wedgewood. Calaco Development received its scheduled payouts but then immediately loaned those payouts back to the partnership in order to provide operating cash for the business.

On July 9, 1999, plaintiff filed a three-count complaint against defendants. In that complaint, plaintiff alleged that defendants breached the partnership agreement and breached their fiduciary duties to him. Defendants filed a two-count counterclaim seeking declaratory judgment that plaintiff had become a general partner in the partnership and that plaintiff violated the Mortgage Act by failing to release the Wedgewood mortgage upon full payment of the $2 million it secured.

Following a bench trial, the trial court found that Calaco Development breached the partnership agreement in several ways, and that it also breached its fiduciary duty to plaintiff. The trial court awarded plaintiff the following damages:

(1) $458,894.75 for the sale of lots out of the partnership without the limited partners' consent;

(2) $30,485 for charging the partnership interest on the general partner's loans to the partnership immediately after its scheduled payouts;

(3) $16,750 for moneys paid as commission out of partnership assets to John Best for his work in facilitating the partnership agreement;

(4) $20,435 for plaintiff's share of proceeds on the transfer of two lots to the general partner in exchange for the three lots held out of the partnership agreement, because those two lots were not comparable in value to plaintiff's lots;

(5) $50,250 for Calaco Development's purchase of lots in 1994 for $40,000 instead of the contractually agreed price of $55,000.

The trial court declined to award punitive damages to plaintiff, and it declined to hold Casalino personally liable to plaintiff. As for defendants' counterclaims, the court found that plaintiff was not a general partner of the partnership, and it denied relief to defendants under the Mortgage Act.

Plaintiff timely appeals the trial court judgment, asserting that Casalino individually breached a fiduciary duty to plaintiff and that the trial court erred in refusing to award punitive damages. Defendants also timely appeal, arguing that Calaco Development is entitled to recovery under the Mortgage Act, that Calaco Development is entitled to interest on its loan to the partnership immediately after its scheduled payouts, that the trial court erred in its valuation of the real estate involved, and that there was not sufficient evidence for the trial court to find that Calaco Development improperly paid commission to John Best out of partnership assets.

II. PLAINTIFF'S APPEAL

A. Casalino's Individual Liability for Breach of Fiduciary Duty to Plaintiff

Plaintiff's first issue on appeal is that Casalino breached his individual fiduciary duty to plaintiff. Plaintiff does not argue that the court should pierce the corporate veil of Calaco Development to find Casalino personally liable. Rather, he argues that, even though Casalino was not a signatory to the partnership agreement, he should still be found to have breached a fiduciary duty independent of the agreement because of his relationship to the other partners. We disagree.

Plaintiff cites Bandringa v. Bandringa, 20 Ill. 2d 167, 174 (1960), Ditis v. Ahlvin Construction Co., 408 Ill. 416, 426-30 (1951), and Hagerman v. Schulte, 349 Ill. 11, 21 (1932), in support of the proposition that parties can owe a fiduciary duty regardless of, and independent from, any written agreement between the parties. Thus, plaintiff urges that Casalino should be held personally liable because he was so involved in the partnership that he created a fiduciary relationship between himself individually and the partners.

However, plaintiff's authority stands merely for the proposition that, where parties carry on as partners or joint venturers, either with or without a partnership agreement, they will owe one another a fiduciary duty. Bandringa, 20 Ill. 2d at 174; Ditis, 408 Ill. at 426-30; Hagerman, 349 Ill. at 21. Bandringa stands merely for the proposition that "a fiduciary relation does obtain between partners." Bandringa, 20 Ill. 2d at 174. In Ditis, the court found that there was a fiduciary relationship between parties despite the fact that there was no formal agreement between them, because they carried on as joint venturers. Ditis, 408 Ill. at 426-30. In Hagerman, the court likewise found that there was a fiduciary relationship between parties despite the fact that there was no formal agreement, because they carried on as joint venturers. Hagerman, 349 Ill. at 21. Therefore, in each of plaintiff's cases, the court inferred an agreement between the parties in order to find a fiduciary relationship.

Here, by contrast, the parties actually entered into a written contract; we need not infer their relationship. The written contract between the parties names Calaco Development, and not Casalino, as partner. None of the parties to the partnership agreement intended or believed that Casalino was personally entering into the partnership agreement. Casalino's involvement in the partnership was as the chief operating officer of Calaco Development, the general partner; he did not directly, personally share in the profits of the partnership. To allow plaintiff's position and hold Casalino personally liable for his involvement in the partnership would be to allow a plaintiff to hold a chief operating officer of a corporation personally liable for his involvement in corporate acts without first showing cause to set aside the corporate form. Because a director, officer, or shareholder may be held personally liable for corporate acts only where there is reason to set aside the corporate form (see Fiumetto v. Garrett Enterprises, Inc., 321 Ill. App. 3d 946, 958 (2001); In re Estate of Wallen, 262 Ill. App. 3d 61, 68 (1994)), plaintiff's argument fails. Accordingly, we hold that Casalino did not breach a fiduciary duty he personally owed to plaintiff.

B. Punitive Damages

Plaintiff's second issue on appeal is that he is entitled to punitive damages for Calaco Development's breach of fiduciary duty. We disagree.

The purposes of punitive damages are punishment of a specific defendant and both general and specific deterrence, and such damages will be awarded only where the defendant's conduct is willful or outrageous due to evil motive or a reckless indifference to the rights of others. Proctor v. Davis, 291 Ill. App. 3d 265, 285 (1997). Because punitive damages are not favored in the law (Black v. Iovino, 219 Ill. App. 3d 378, 393 (1991)), they are available only in cases where the wrongful act complained of is characterized by wantonness, malice, oppression, willfulness, or other circumstances of aggravation (E.J. McKernan Co. v. Gregory, 252 Ill. App. 3d 514, 536 (1993)).

1. Standard of Review for Punitive Damages Awards

At this point, we must digress to discuss the standard of review for punitive damages. Because we do not find elsewhere the complete analysis of the standard of review for punitive damages, we will attempt to provide it here.

For a bench trial, the steps are as follows:

(1) Whether punitive damages are available as a matter of law for the cause of action. This step is reviewed de novo. Black v. Iovino, 219 Ill. App. 3d at 393.

(2) Whether the facts prove willfulness or other aggravating factors. This factual finding is reviewed using a manifest-weight standard. See In re Estate of Wernick, 127 Ill. 2d 61, 83-85 (1989) (applying manifest-weight standard to trial court's ...


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