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National Jockey Club v. Ganassi

July 21, 2009

NATIONAL JOCKEY CLUB, PLAINTIFF,
v.
FLOYD "CHIP" GANASSI AND CHIP GANASSI GROUP, L.L.C., DEFENDANT.



The opinion of the court was delivered by: Blanche M. Manning United States District Judge

MEMORANDUM AND ORDER

This case flows from the transformation of Sportsman's Park, a horse racing venue in Cicero, Illinois, owned by plaintiff National Jockey Club ("NJC"), into the Chicago Motor Speedway ("CMS"), an ultimately unsuccessful facility for horse and auto racing. To effect this transformation, NJC and defendant Ganassi Group formed CMS, an Illinois limited liability company. Construction was financed through a $60 million construction loan and capital contributions by NJC and Ganassi Group. Pursuant to a lease between NJC and CMS, CMS was responsible for paying the principal and interest on the construction loan as it came due. In addition, defendant Floyd "Chip" Ganassi, who is involved in professional motor racing as both a driver and operator of motor racing teams in the United States, personally guaranteed CMS's obligations under the lease up to $22.5 million, although that amount was subsequently reduced to $10.5 million.

CMS was ultimately unable to prosper and thus ceased operations.*fn1 NJC filed suit against Ganassi and Ganassi Group alleging breach of guaranty against Ganassi (Count I).*fn2 Ganassi and Ganassi Group also have pending amended counterclaims in which they allege breach of guaranty (Count I), breach of contract (Counts II and IX), breach of fiduciary duty (Counts III and IV), fraud and misrepresentation (Count V), and unjust enrichment (Counts VI and VII).*fn3 They also request rescission and restitution (Count X). Numerous motions in limine are presently before the court and are addressed by this order.

I. Standing -- Harris Bank Note

The court begins with the threshold issue of NJC's standing to pursue this action, which remarkably is being presented to this court in 2009 as part of a motion in limine. Both NJC and the defendants filed motions in limine relating to the effect of NJC's assignment of a Harris Bank note and the subsequent sale of that note to an entity called DII Northwest.

A. Background

The court begins with some brief background facts. As noted above, in this action, NJC seeks to enforce a personal guaranty executed by Mr. Ganassi guaranteeing the obligations of CMS under CMS's lease with NJC. Under the lease, CMS was obligated to pay as rent funds sufficient to cover the principal and interest as it came due on the construction loan taken out by NJC to fund construction of CMS. The construction loan was made by a syndicate of banks led by Harris, and the loan was secured by, among other things, a mortgage on Sportman's Park, the real property owned by NJC upon which CMS was to be constructed. At the time NJC entered into this financing arrangement, it executed an Assignment of Leases and Rents ("Assignment") with Harris.

The Assignment provided that NJC assigned the rights to "earnings, renewal rents, and all other sums due which may hereafter become due under or by virtue of the leases and all rights under guarantees or against guarantors of the obligations of lessees under such leases including, without limitation, the personal guaranty of the Speedway Lease provided by Chip Ganassi (individually a "Lease" and collectively the "Leases"). It then provided that if no act of default occurred, NJC retained the right to "enforce the obligations of any lessee under any lease." The final relevant provision in the Assignment states that if an act of default occurred, "the assignee [Harris] may at its option to the extent permitted by law . . . (ii) with or without taking possession of the premises, proceed to enforce the leases and collect all sums due or to become due thereunder."

By 2002, CMS ceased operations and defaulted on the loan. Harris and the syndicate banks declared the loan in default and instead of foreclosing, Harris sold the property to the Village of Cicero and used the proceeds to reduce the amount owed to Harris and the syndicate banks. Even after selling off the property, the banks were owed more than $24,000,000.

In 2006, while this case was pending, Harris sold the note to DII Northwest, who called the note. Since NJC could not cover the amounts it owed, it filed for bankruptcy protection. In the bankruptcy case, the parties reached a settlement regarding the distribution and allocation of any proceeds recovered by NJC in this case.

NJC argues that evidence about the note should be excluded because it is irrelevant to the issues before the court as well as confusing. The defendants contend that NJC lacks standing to prosecute this action because it assigned the guaranty to Harris, which in turn sold its rights to DII. The defendants also assert that certain witnesses stand to financially benefit if judgment is entered in favor of NJC pursuant to the settlement in the bankruptcy case, and that they should be allowed to cross-examine the witnesses to explore this bias.

B. Standing

The language of the Assignment expressly provides that the guaranty is considered a lease, since the definition of "lease" includes Mr. Ganassi's guaranty. The assignment to Harris did not assign 100% of NJC's rights away. Specifically, NJC retained the right, prior to any default, "to enforce the obligations of any lessee under any lease" (including the guaranty). Following default, the assignee (Harris) had the option to enforce leases (including the guaranty), but was not required to enforce the guaranty. Indeed, in 2003, Harris expressly told NJC that NJC retained the right to enforce the guaranty. After Harris sold the note and Assignment to DII, DII stepped into the shoes of Harris.

The defendants have not pointed to any specific reason why any arrangements NJC made regarding any proceeds it might obtain if it prevails in this case mean NJC lacks standing. This leaves the fact that NJC retained the right to enforce the guaranty. Because it did so, it has standing to pursue its claim for breach of the guaranty. Thus, the defendants' motion in limine No. 12 to preclude NJC's claim under the guaranty based on lack of standing [#175] is denied.

C. Evidence about the Assignment and Subsequent Sale

This brings the court to NJC's motion based on the Harris note. NJC contends that information about the sale of the note and the ultimate recipients of the proceeds of any judgment entered in favor of NJC will be confusing and not aid the finder of fact. The court agrees: the complete details regarding the sale of the note and the bankruptcy are extremely convoluted and are not relevant to NJC's claim for breach of the guaranty or the defendants' counterclaims.

The defendants nevertheless contend that they need to introduce evidence about the assignment and sale of the note to DII to show that certain witnesses who will testify at trial have a financial interest in the outcome of this case because they will benefit personally if NJC prevails. The fact that witnesses have a direct financial interest in the outcome of this case is relevant to their credibility. See Crowe v. Bolduc, 334 F.3d 124, 132 (1st Cir. 2003) (evidence that a trial witness has a financial incentive in the outcome of the trial is "classic evidence of bias, which is routinely permitted on cross-examination").

Nevertheless, the court has broad powers to regulate the nature and extent of any such cross-examination to prevent confusion and prejudice. At this stage, it is unclear what these witnesses are going to say, the extent of any benefit they might receive from this case if NJC prevails, and whether their financial interest can be explored without going into the details of the transaction at issue. The court thus must consider the scope of cross-examination at trial. The court urges the parties to confer and attempt to reach agreement regarding this issue. Accordingly, NJC's motion to bar any evidence or testimony as to the sale of the Harris Bank note and the beneficiaries and/or recipients of the proceeds of any judgment entered in favor of National Jockey Club [#167] is denied without prejudice.

II. National Jockey Club's Motions In Limine

A. Conversion

In the defendants' conversion counterclaim, which they recently voluntarily dismissed (Docket No. 150), they asserted that the guaranty amount should be offset by certain monies allegedly owed by NJC. Certain affirmative defenses raised by the defendants (15 and 18) are also premised on the idea that an offset applies to the guaranty. In sum, the defendants' position in certain of their affirmative defenses and their now-dismissed conversion counterclaim is that NJC converted monies paid by the defendants to CMS to its own use, in breach of the lease and operating agreement, thereby not only discharging the defendants from the obligation to make any further payments in connection with the CMS project but also discharging Mr. Ganassi from the obligation to make any further payments under the guaranty. Regrettably, the guaranty itself does not specify what payments will decrease or extinguish Mr. Ganassi's obligations under the guaranty.

In light of the still-pending affirmative defenses that are premised on the idea that the defendants are entitled to an offset, NJC asks the court to bar the defendants from presenting any evidence or testimony about amounts allegedly converted by NJC. In support, NJC directs the court's attention to authority indicating that "an action for the conversion of funds may not be maintained to satisfy a mere obligation to pay money." In re Thebus, 108 Ill.2d 255, 260 (Ill. 1985). NJC also contends that in discovery, the defendants and their expert Paul Pocalkyo testified that the claimed offsets are not based on monies allegedly converted by NJC and, instead, are premised on either (1) accounting adjustments or credits owed to them as a member of CMS, or (2) NJC's failure to use its best efforts to remove or reduce the amount guaranteed by Mr. Ganassi.

In response, the defendants acknowledge that they will not be proceeding on their counterclaim for conversion (Count VIII). They also state that NJC's motion in limine "confuses the legal claim of 'conversion' with the verb 'convert'" and argue that even if they do not assert a legal claim of conversion against NJC, evidence of NJC's conversion of money is at the heart of nearly all of their affirmative defenses, so they should be free to introduce evidence that NJC converted monies. Docket No. 201 at 2-3.

The parties's dispute appears to hinge on a semantic disagreement about the verb "convert." The defendants withdrew their conversion claim, but read NJC's motion in limine regarding conversion as seeking to exclude all evidence that NJC misappropriated money. NJC, on the other hand, appears to simply be trying to prevent the defendants from reintroducing the legal theory of conversion back into this case. With that understanding, NJC's motion in limine to bar evidence relating to a claim that NJC converted monies [#157] is granted, and the defendants may not argue or present evidence to further the theory that NJC is liable for the tort of conversion under Illinois law. Consistent with the remainder of this order, however, they may argue that NJC misappropriated money.

B. Damages or Setoffs Other Than Return of the Defendants' $28M Investment

NJC seeks to bar the defendants from presenting any evidence or testimony relating to individualized accounting damages and/or setoffs other than their claim for the return of their $28 million investment in the Chicago Motor Speedway project. NJC argues that this is necessary because it is consistent with the position of the defendants in discovery since, according to NJC, the defendants did not break down their alleged damages by pointing to specific accounting errors or omissions, and also did not break down what damages were allegedly owed to each counterclaimant.

This motion in limine appears to be another example of the parties talking at cross-purposes. With respect to NJC's claim that Mr. Ganassi breached the guaranty, the defendants take the position that NJC -- not Mr. Ganassi -- in fact breached the guaranty, so they are entitled to have their entire investment returned. In contrast, in the defendants' counterclaims, they assert that they are entitled to damages in connection with a variety of alleged accounting improprieties. The court declines to limit the defendants to an all or nothing position across the board that they are entitled to either $28 million or $0. Accordingly, NJC's motion in limine seeking to bar the defendants/counter-plaintiffs from presenting any evidence of damages or setoffs other than their claim for the return of their $28 million investment in the Chicago Motor Speedway Joint Venture [#160] is denied.

C. Damages in Support of the Defendants' Counterclaims

In its next motion in limine, which is unfortunately overly vituperative, NJC asserts that the defendants should be barred from presenting any evidence of damages in support of their counterclaims because they did not quantify the damages they suffered as a result of NJC's alleged accounting malfeasance and instead only seek return of their entire investment. NJC then argues that return of the defendants' entire investment is only available in connection with the defendants' request for rescission. NJC reasons that to prevail on a claim for rescission, the defendants must establish that it is possible for them to return NJC to its pre-contract state, and concludes that this is impossible given that NJC is bankrupt due to the demise of CMS.

The court begins by noting that NJC's arguments would have been better presented via a dispositive motion, where the court would have had the opportunity to review all of the relevant evidence in the record in an orderly and complete fashion. With this said, NJC's motion is largely but not wholly unpersuasive for three reasons. First, as detailed above, the court has already rejected NJC's claim that the only measure of damages sought by the defendants is the return of their entire investment. Second, even a cursory review of the record shows that the deposition sections highlighted by NJC are not the defendants' sole explanation regarding their alleged damages. Thus, the defendants need not be limited to restitution based on the excerpted deposition sections.

Third, the court disagrees that the defendants can only potentially obtain a refund of all monies paid if they prevail on their rescission claim and that this relief is not available as a matter of law given this case's facts. The remaining counterclaims are for breach of contract (Counts I, II & IX), breach of fiduciary duty (Counts III and IV), fraud (Count V), unjust enrichment (Count VI & VII), and rescission and restitution (Count X). With respect to the breach of contract claim, NJC asserts that "[b]y asking for the return of their $28 million dollar investment, the Ganassi Defendants are asking to be restored to their pre-contract state. They are requesting a determination that no contract with NJC existed at all." Docket No. 163 at 8.

The court reads the defendants' arguments differently: they contend that they are entitled to money damages or restitution in the amount of their initial investment.*fn4 Money damages are unquestionably a standard measure of damages for breach of contract, as is restitution. See MC Baldwin Financial Co. v. DiMaggio, Rosario & Veraja, LLC, 364 Ill.App.3d 6, 18 (1st Dist. 2006) (the "alternative remedies" of restitution and damages can be available in connection with a breach of contract claim). The same can be said for unjust enrichment and breach of fiduciary duty. See Raintree Homes, Inc. v. Village of Long Grove, 209 Ill.2d 248, 256 (Ill. 2004) (unjust enrichment); Williams Electronics Games, Inc. v. Garrity, 366 F.3d 569, 576 (7th Cir. 2004) (breach of fiduciary duty). Thus, the request to bar evidence relating to damages in connection to the breach of contract, unjust enrichment, and breach of fiduciary duty counterclaims is denied.

NJC's motion, however, fares better with respect to the fraud counterclaim. It is true that "restitution is equally a legal and an equitable remedy, it can be sought from a jury in a fraud case." Williams Electronics Games, Inc. v. Garrity, 366 F.3d 569, 578 (7th Cir. 2004). However, restitution is only available as a measure of damages for fraud if the allegedly injured party claims that it is a victim of fraud in the inducement. See Sciarabba v. Chrysler Corp., 173 Ill.App.3d 57, 61-62 (1st Dist. 1988) (party alleging fraud could contend "that he was induced to enter into the contract as a result of fraud and ask to have the contract rescinded and restitution ordered"). The defendants appear to be contending that NJC defrauded them after the parties entered into the contract (by engaging in accounting improprieties), as opposed to making a fraud in the inducement claim. Thus, the defendants will be limited to evidence about damages at trial and cannot ask the jury to return them to their pre-contract position by awarding them restitution.

This leaves the defendants' requests for rescission and restitution. The parties agree that the defendants may only potentially recover these damages if NJC is first returned to the position it was in prior to executing the contract. According to NJC, this is impossible since CMS failed, causing NJC to spiral into financial ruin. Once again, this is an attempt to obtain partial summary judgment masquerading as a motion seeking a pretrial evidentiary ruling.

The court also cannot resolve the motion based on the present record. "Restoration of the status quo requires the rescinding party to return any consideration it received from the other party under the contract." 23-25 Bldg. Partnership v. Testa Produce, Inc., 381 Ill.App.3d 751, 757 (1st Dist. 2008). The defendants contend that NJC's consideration was the use of its property, and that NJC has already gotten this back since it took back possession of its property and sold it. NJC has not weighed in on what consideration it provided to the defendants. NJC's motion in limine relating to rescission is thus denied without prejudice. The court strongly urges the parties to attempt to resolve this issue themselves in light of the guidance in this order.

To sum up, NJC's motion to bar evidence relating to damages [#162] is denied as to the breach of contract, unjust enrichment, and breach of fiduciary duty counterclaims, granted as to the fraud counterclaim, and denied without prejudice as to the counterclaim seeking rescission.

D. The "Best Reasonable Efforts" Clause in Ganassi's Guaranty

NJC's sole claim directly against Mr. Ganassi is for breach of his guaranty of CMS's obligations under CMS's lease with NJC. Specifically, Mr. Ganassi guaranteed the payment to NJC of "fifty (50%) percent of funds borrowed to make Landlord Improvements as set forth in Section 8(a) of the above and foregoing lease, but limited to a maximum personal guaranty of $22,500,000.00." The guaranty also stated that "National Jockey Club and Chicago Motor Speedway, LLC agree to use their best reasonable efforts to remove and vacate the requirement for the personal guaranty of Chip Ganassi as soon as acceptable to the lender(s) of the aforesaid primary financing for Landlord Improvements for which Chip Ganassi provides his personal guaranty."

The defendants contend that NJC breached the "best reasonable efforts" clause and that NJC's breach relieves Mr. Ganassi of any further obligations under the guaranty, entitles him to damages and/or entitles him to certain offsets against any amount he is found to owe on the guaranty. NJC, on the other hand, contends that all evidence relating to the best efforts clause should be excluded because such clauses are too vague to be enforceable under Illinois law.

Contrary to NJC's argument, "Illinois courts have not categorically rejected best efforts clauses as vague and unenforceable." Beraha v. Baxter Health Care Corp., 956 F.2d 1436, 1440 (7th Cir. 1992). Instead, these clauses are unenforceable only if "the parties so indefinitely expressed their intentions that the court cannot enforce their agreement." Id. at 1440-41; see also Clever Ideas, Inc. v. Citicorp Diners Club, Inc., No. 02 C 5096, 2003 WL 21982141, at *15-18 (N.D. Ill. Aug. 20, 2003) (collecting cases). The court finds that the best efforts clause here is enforceable and provides a sufficient basis for imposing contractual duties on NJC because it sufficiently articulates NJC's obligation to act to achieve the goal specified in the contract. Thus, NJC's motion to bar testimony and evidence relating to the best efforts clause [#166] is denied.

E. Paul Pocalyko

Rule 702 of the Federal Rules of Evidence and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), govern the admissibility of expert testimony in federal court. See Naeem v. ...


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