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First Merit Realty Services, Inc. v. Amberly Square Apartments

May 10, 2007

FIRST MERIT REALTY SERVICES, INC., AND FIRST MERIT VENTURE, PLAINTIFFS-APPELLEES,
v.
AMBERLY SQUARE APARTMENTS, L.P., ASHWOOD APARTMENTS, L.P., BRITTANY APARTMENTS, L.P., EASTPOINTE APARTMENTS, L.P., GREEN OAKS AT PALOS HILLS, L.P., KETTERING SQUARE APARTMENTS, L.P., PINE ISLAND APARTMENTS, L.L.C., SOUTHMOOR HILLS APARTMENTS, L.P., WOODVIEW APARTMENTS LLC, AND COMMUNITY ECONOMIC REDEVELOPMENT CORPORATION OF WISCONSIN, DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Cook County. Honorable Julia M. Nowicki Judge Presiding.

The opinion of the court was delivered by: Presiding Justice Quinn

MODIFIED UPON REHEARING

Defendants Amberly Square Apartments, L.P. (Amberly), Ashwood Apartments, L.P. (Ashwood), Brittany Apartments, L.P. (Brittany), Eastpointe Apartments, L.P. (Eastpointe), Green Oaks at Palos Hills, L.P. (Green Oaks), Kettering Square Apartments, L.P. (Kettering), Pine Island Apartments, L.L.C. (Pine Island), Southmoor Hills Apartments, L.P. (Southmoor), Woodview Apartments, L.L.C. (Woodview), and Community Economic Redevelopment Corporation of Wisconsin (CERC) appeal the circuit court's order confirming the arbitration award granted to plaintiffs First Merit Realty (FMR) and First Merit Venture (FMV). On appeal, defendants contend that the arbitrators exceeded their authority by "reforming" the parties' written agreements and that Illinois public policy precludes the confirmation of the arbitration award.

BACKGROUND

Plaintiffs, FMR and FMV, are property management businesses. FMR is wholly owned by Gary Baxter. FMV is a limited partnership of which Baxter is part owner. Josyln Development Company, of which Baxter is president, is FMV's corporate general partner. Baxter has been in the real estate business since 1966.

Defendants are business entities that own apartment complexes in various locations across the United States. Scott Canel is associated with each of the defendants in some capacity. He is also a lawyer who has been winding up his legal practice to primarily focus on real estate. As a lawyer, Canel has represented Baxter and entities owned or controlled by Baxter in tax and transactional matters.*fn1

Beginning in 1996 and continuing through 2002, Baxter, through his business entities, sold a series of 10 properties. Each property was sold to one of the defendants. Prior to the sales, FMV or another Baxter business entity managed the properties. After the sale of each of the first nine properties, FMR was retained to manage them. FMV was retained to manage the tenth property, the Southfield property owned by CERC, but was replaced by FMR shortly thereafter. The management of each of the 10 properties was governed by identical management agreements. Further, each property was either directly or indirectly subject to the rules of the United States Department of Housing and Urban Development (HUD).

On March 31, 2003, defendants sent plaintiffs a letter informing them that they were terminating their management agreements effective April 30, 2003. Defendants terminated the agreements pursuant to section 15.1 of the management agreements, which provided in pertinent part:

"It is expressly understood and agreed by and between the parties hereto that the Owner as well as the Agent shall have the right to terminate the Agreement at the end of any calendar month, without penalty, on thirty (30) days' advance written notice to the Agent."

Subsequently, defendants appointed Ten South Management Company (Ten South), which is controlled by Canel, to manage the 10 properties. In addition, Canel hired Richard Price, who had been president of FMR and vice president of Josyln Development Company, to work for Ten South.

On July 16, 2003, plaintiffs filed a demand for arbitration with the American Arbitration Association (AAA) pursuant to section 18 of the management agreements, which provided:

"The [AAA] shall be the final arbitrator of all unresolved disputes between [defendants] and [plaintiffs] and the parties hereto agree to abide by the decision of the Arbitrator in such case made."

On July 22, 2003, defendants filed counterclaims to which plaintiffs responded on August 22, 2003. Following defendants' filing of an amended counterclaim and plaintiffs' filing of a response and affirmative defenses, plaintiffs filed a statement of claim on January 19, 2004. Therein, plaintiffs (1) sought reformation of the management contracts; (2) alleged that defendants through Canel committed fraud; (3) alleged that defendants aided and abetted Canel's alleged legal misconduct; (4) alleged that defendants aided and abetted Price's misconduct; and (5) alleged conspiracy between defendants, Canel, Price, and Ten South. Defendant answered the statement of claim on February 12, 2004.*fn2

The arbitration panel, which consisted of three neutral lawyers-arbitrators, proceeded to oversee discovery and motion practice proceedings, followed by a nine-day evidentiary hearing in September 2005. During the hearing, Baxter testified that he consulted Canel as to how to sell the concerned properties while retaining management of them. Canel allegedly suggested that Baxter sell the 10 properties to Canel's business entities, defendants, with the understanding that plaintiffs, Baxter's business entities, would be retained as management companies of those properties so long as Canel controlled them. Baxter testified that he never told anyone about this deal, including Price, other limited partners, and attorneys. Baxter further testified that ...


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