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Mermelstein v. Menora

March 21, 2007

HENRY MERMELSTEIN, PLAINTIFF AND COUNTERDEFENDANT - APPELLEE,
v.
MOSHE MENORA; TRI-UNITED MANAGEMENT, INC., D/B/A TRI-UNITED COMPANIES, AN ILLINOIS CORPORATION; SPRINGS TULSA LIMITED PARTNERSHIP, AN OKLAHOMA LIMITED PARTNERSHIP; BEDFORD APTS. LIMITED PARTNERSHIP, AN OKLAHOMA LIMITED PARTNERSHIP; APPLE CREEK LIMITED PARTNERSHIP, AN OKLAHOMA LIMITED PARTNERSHIP; SUGERBERRY LIMITED PARTNERSHIP, AN OKLAHOMA LIMITED PARTNERSHIP; INDEPENDENCE WILLIAMSBURG L.P., A MISSOURI LIMITED PARTNERSHIP; KINGS RIDGE LIMITED PARTNERSHIP, A MISSOURI LIMITED PARTNERSHIP; QUAIL RUN/COVE LIMITED PARTNERSHIP A MISSOURI LIMITED PARTNERSHIP; AND SAN ANTONIO SIERRA VISTA L.P., A TEXAS LIMITED PARTNERSHIP, DEFENDANTS AND COUNTERPLAINTIFFS - APPELLANTS.



Appeal from the Circuit Court of Cook County, Honorable Mary Anne Mason, Judge Presiding.

The opinion of the court was delivered by: Justice Karnezis

This appeal arises from an order of the circuit court awarding plaintiff Henry Mermelstein damages and prejudgment interest in his action for dissolution, accounting and other relief against Moshe Menora, Tri-United Management, Inc. (Tri-United), Springs Tulsa Limited Partnership, Bedford Apts. Limited Partnership, Apple Creek Limited Partnership, Sugerberry Limited partnership, Independence Williamsburg L.P., Kings Ridge Limited Partnership, Quail Run/Cove Limited Partnership and San Antonio Sierra Vista L.P. Mermelstein and Menora were partners in the above limited partnerships. Mermelstein, the limited partner, filed an action seeking damages for Menora's, the general partner's, breach of his fiduciary duties to Mermelstein under the terms of the parties' partnership agreements. The court found for Mermelstein, awarded him $2,215,964.11 in damages and prejudgment interest and denied Menora's counterclaim. On appeal, Menora argues the court erred in (1) denying his counterclaim based on section 10.3 of the partnership agreements; (2) granting Mermelstein's motion in limine to exclude evidence of an alleged overpayment to Mermelstein pursuant to section 10.4 of the partnership agreements; (3) awarding Mermelstein his proportionate share of reimbursements Menora received from the partnership for payroll he paid to on-site management personnel; (4) ordering Menora to (a) repay Mermelstein for his proportionate share of the partnership funds Menora used to pay his legal fees in defending the suit and (b) refrain from using partnership funds for his legal defense of the case forthwith; and (5) awarding Mermelstein prejudgment interest. We affirm in part and reverse and remand in part.

Background

Menora and Mermelstein entered into a series of almost identical partnership agreements in 1991 "to invest in, acquire, hold, maintain, improve, develop, sell, exchange, operate, lease, mortgage, exchange and otherwise use for profit" eight apartment buildings located in Oklahoma, Missouri, and Texas. Mermelstein, an operator of nursing homes, provided the approximately $8 million capital for the partnerships. Menora, a developer and manager of real estate, provided management services for the partnerships through his whollyowned Illinois company, Tri-United. Seven of the eight agreements named Menora as the general partner holding a 60% interest and Mermelstein as the class A limited partner holding a 40% interest. In the Quail Run partnership governing their Missouri property, Menora held a 55% interest and Mermelstein held a 45% interest.

Counsel for Menora drafted the agreements, which provided that the general partner, Menora, had the "exclusive authority to manage the operations and affairs of the Partnership and to make all the decisions regarding the business of the Partnership." He would receive 6% of gross rentals received by the partnership as "compensation for his management services" and 2% of gross rentals "as reimbursement for the General Partner's overhead and operating expenses." Menora had the authority, in his "sole judgment," to incur "all reasonable expenditures" on behalf of the partnership and would be reimbursed for out-of-pocket expenses incurred in the performance of his duties, "but not including [his] overhead and operating expenses." Except for the requirement that Menora had to obtain Mermelstein's approval before engaging a person in any way related to or affiliated with Menora to perform services or provide goods, the limited partner could "take no part in the conduct or control of the business of the partnership" nor act for or bind the partnership.

Accordingly, other than a yearly audit of the partnership's finances conducted by his accountant and weekly discussions with Menora, Mermelstein took no active role in the operating the partnerships, eventually making $16 million to $17 million on the partnerships.

In 1997, Mermelstein filed a complaint for a declaratory judgment against Menora, Tri-United and the partnerships seeking an accounting and other relief. In 1999, Mermelstein filed an amended complaint for dissolution, accounting and other relief. In 2003, Mermelstein filed a second amended complaint alleging, in relevant part, that, besides committing numerous accounting improprieties in managing and operating the partnerships, Menora breached the agreements by reimbursing himself from partnership funds for salaries Tri-United paid to employees providing management services on site at the various properties and improperly used partnership funds to defend himself in this litigation and other ligation between the parties.

Menora denied the charges and counterclaimed, seeking reimbursement to the partnerships for $1.2 million Mermelstein allegedly received in error pursuant to a payout under section 10.3 of the agreements. After the close of discovery but before trial, Menora moved to assert a similar claim for reimbursement based on paragraph 10.4 of the agreements. The court barred this claim pursuant to Mermelstein's motion in limine. By the time the case went to trial, seven of the eight partnership properties had been sold.

Following an extended bench trial, the court held, in salient part, that Mermelstein was entitled to recover his proportionate share of the partnerships funds Menora received as reimbursement for salaries paid to on-site management employees. The court determined these employees were employees of Tri-United, i.e., Menora's employees, and their salaries were covered by the 8% Menora received for his management services and overhead and operating expenses. The court also determined Menora improperly used partnership funds to pay his legal fees, ordered that Mermelstein recover his proportionate share of the attorney fees expended and prohibited Menora from using partnership funds to defend the actions. The court denied Menora's counterclaim. It also considered Mermelstein's posttrial motion for an award of prejudgment interest. Noting Mermelstein failed to request such relief in his complaints, the court ordered the parties to brief the issue and ultimately allowed the motion, awarding Mermelstein $358,211.67 in prejudgment interest, for a total award of $2,215,964.11. The court denied Menora's motion to reconsider and Menora timely appealed.

Analysis

The construction, interpretation, or legal effect of a contract is a matter of law, which we review de novo. Avery v. State Farm Mutual Automobile Insurance Co., 216 Ill. 2d 100, 129, 835 N.E.2d 801, 821 (2005). Similarly, whether a contract is ambiguous is a question of law which we review de novo. Central Illinois Light Co. v. Home Insurance Co., 213 Ill. 2d 141, 153-54, 821 N.E.2d 206, 214 (2004).

Each of the agreements contains a provision stating that the particular agreement and the rights of the parties thereunder shall be governed and interpreted according to the laws of Missouri, Oklahoma or Texas, as applicable to each agreement. The laws of the relevant states do not materially differ in this area, requiring we interpret the partnership agreements in such a manner as to prefer a rational and probable agreement rather than an unusual, unfair or improbable agreement. Rathbun v. CATO Corp., 93 S.W.3d 771 (Mo. App. 2002); Duncan Oil Properties, Inc. v. Vastar Resources, Inc.,16 P.3d 465 (Okla. Civ. App. 2000); Illinois Tool Works, Inc. v. Harris, 194 S.W.3d 529 (Tex. App. 2006). There is no discernable public policy obstacle to enforcing the choice-of-law provisions; Missouri, Oklahoma and Texas bear a reasonable relationship to the partnerships and transactions; the issues in this case involve basic contract law; and there is no material difference between in the laws of these states. Accordingly, we will apply Missouri, Oklahoma and Texas law to the substantive issues of contract interpretation. Hubbert v. Dell Corp., 359 Ill. App. 3d 976, 982, 835 N.E.2d 113, 120 (2005).

Menora's Section 10.3 Counterclaim

Menora argues that the trial court improperly denied recovery on his counterclaim based on section 10.3(a) of the partnership agreements. Section 10.3(a) provides:

"When and to the extent Cash Flow is distributed, it shall be distributed in the following manner: (a) the Class A Limited Partner shall first receive a sum (the 'cumulative preferred payment') equal to ten (10%) percent per annum on his capital contributions (reduced by any capital contributions previously returned by the Partnership) on a cumulative basis, but prorated for any partial year." Mermelstein received millions of dollars in distributions pursuant to section 10.3(a). In preparing for trial on Mermelstein's action against him, Menora discovered that he did not record these distributions as reductions to Mermelstein's capital accounts. He filed a counterclaim asserting this was an error, Mermelstein's capital accounts should have been reduced by the distributions; the error resulted in over $1.2 million in overpayments to Mermelstein when the partnerships were sold; and Mermelstein should be required to return the overpayment. Mermelstein responded that the distributions were interest and not to be charged against his capital accounts. Finding section 10.3(a) unambiguous and the payments to be interest, the court denied Menora's counterclaim.

Menora argues the court erred in its interpretation of the contract because the distributions under section 10.3(a), whether considered interest or not, should have reduced Mermelstein's capital accounts pursuant to sections 8.4 of the agreements.

Section 8.4 provides in relevant part:

"A capital account shall be established for each Partner on the books of the Partnership, and there shall be credited to each Partners' capital account the amount of his initial capital contribution, any additional capital contributions and his share of profits and income of the Partnership. There shall be charged against each Partner's capital account the amount of cash and the Gross Asset Value [subsequently defined and irrelevant to ...


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