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Gerard M. Kenny v. Kenny Industries

December 9, 2010

GERARD M. KENNY, AS TRUSTEE OF THE TRUST OF M. KENNY, PETITIONER-APPELLEE,
v.
KENNY INDUSTRIES, INC., RESPONDENT-APPELLANT.



Appeal from the Gerard Circuit Court of Cook County No. 09 CH 23413

The opinion of the court was delivered by: Honorable William O. Maki, Judge Presiding.

PRESIDING JUSTICE GALLAGHER delivered the opinion of the court: Petitioner-appellee, the Trust of Gerard M. Kenny (Trust), filed a petition to confirm a final arbitration award in favor of the Trust and enter judgment thereon against respondent-appellant, Kenny Industries, Inc. The trial court granted the Trust's motion for summary judgment, confirming the arbitration award of $6,989,626 in total, and entered judgment against Kenny Industries in the amount of $3,074,846.95 through the date of the judgment plus future principal installments and interest as provided for in the arbitration award. Kenny Industries requested a stay of entry or enforcement of the judgment pending the resolution of a separate proceeding; however, the trial court denied the request. On appeal, Kenny Industries contends that the trial court erred in reducing the arbitration award to judgment without modification where the arbitrator ruled on an issue that was beyond the scope of his authority. Kenny Industries further contends that the trial court abused its discretion in refusing to stay entry or enforcement of the judgment despite clear evidence that failing to do so would work an injustice. For the reasons that follow, we affirm.

BACKGROUND

Gerard M. Kenny, Mary Ann Kenny Smith, John E. Kenny, Jr., Patrick B. Kenny, Philip B. Kenny, James C. Kenny, and Joan Kenny Rose are siblings who owned several family businesses together. Kenny Industries was formed in 1985, with Gerard, John, Patrick, Philip, James and Joan as shareholders, to serve as a holding company for several other family-owned businesses. The shareholders transferred all of their common stock of Kenny Construction Company (KCC) and Seven K Construction Company (Seven K) in exchange for all of the common stock of Kenny Industries. In addition, KCC transferred all of the shares it owned in Northgate Investment, Inc. (Northgate), to Kenny Industries. As of December 31, 2005, Kenny Industries was the sole shareholder of KCC; Seven K and Northgate were owned by Kenny Industries (85.61%) and Mary Ann (14.29%). Clinton Industries, LLC (Clinton), is a separate limited liability company engaged in the business of buying, owning, selling and investing in personalty (including securities) and real estate. Its members are Gerard, Mary Ann, John, Patrick, Philip, James and Joan.

On March 25, 1987, Gerard, John, Patrick, Philip, James and Joan entered into a share purchase agreement (SPA) with Kenny Industries. The SPA governs the purchase of shares by Kenny Industries upon the death, total disability, or termination of employment with the Kenny Group of any shareholder. The Kenny Group is defined in the SPA as Kenny Industries, Northgate, KCC and Seven K. The SPA details the method that will be used to determine the purchase price and sets the terms of payment for purchased shares. When the purchase is due to the shareholder's termination of employment, Kenny Industries will make an initial payment within 90 days of the termination, but only after the purchase price has been determined in accordance with the SPA. Kenny Industries will then pay the balance due in 15 equal annual installments with interest. The SPA also contains the following offset provision:

"If, at the time payments are to be made under this Agreement to the Shareholder ***, the Shareholder *** is indebted to any member of the Kenny Group, then [Kenny Industries], in its discretion, may withhold any payment, in whole or in part, and apply such withheld amount to the payment or partial payment of such indebtedness."

The SPA provides that the shares cannot be transferred without the prior written consent of Kenny Industries and all other shareholders, except for the transfer of shares during the shareholder's lifetime to the shareholder as the sole trustee of a Clifford trust or revocable living trust, but any shares so transferred remain subject to the terms of the SPA. It also provides that the agreement shall be binding on any heirs, executors, administrators, successors and assigns of the shareholder. Finally, the SPA contains an arbitration provision that states that any controversy or claim arising out of or relating to the SPA shall be settled by arbitration, "[t]he award by the arbitrator or arbitrators shall be final, and judgment upon the award rendered may be entered in any court having jurisdiction thereof."

On November 2, 1999, Gerard transferred all of his shares of Kenny Industries common stock into the Trust, of which he is the sole trustee and beneficiary. Gerard's employment with Kenny Industries and all of the Kenny related entities was terminated in November 2005, triggering the purchase provisions of the SPA. Subsequently, John (as president of Kenny Industries) sent a letter to Gerard dated April 18, 2007. The letter contained a calculation of the value of the shares, but stated that Kenny Industries was entitled to offset $7.6 million under the SPA as monies owed by Gerard personally to the Kenny Group under a separate agreement. On August 2, 2007, Gerard, as trustee of the Trust, commenced arbitration proceedings. A five-day arbitration hearing was held before arbitrator Erwin I. Katz in late 2008. The primary issues to be determined through arbitration were: (1) was the share price calculation performed in accordance with the SPA, and (2) did Kenny Industries have the right to offset $7.6 million against the amounts due to the Trust under the SPA.

An interim award was entered on January 12, 2009. Arbitrator Katz determined that the calculation of the share price was untimely under the SPA, but that in all other respects, the calculation submitted by Kenny Industries conformed with the SPA. With regard to the $7.6 million offset, the interim award noted that although the individual siblings claim that Gerard owes them $7.6 million, the balance sheets for KCC and Kenny Industries do not show a $7.6 million account receivable or note payable from Gerard. The interim award further noted that there is no evidence that KCC ever sued Gerard for the claimed $7.6 million loss or made any demand on Gerard to compensate for that purported loss. Arbitrator Katz concluded:

"[Kenny Industries] asserts that it has a right to offset due to the Contribution Agreement. Nothing contained therein, however, gives such a right to [Kenny Industries]. The individuals are not part of the 'Kenny Group.' No payments have been offered or proved made by the various entities which have not been covered by Clinton. In short, there is no indebtedness to any member of the Kenny Group."

The interim award stated that the value of the Trusts's shares in Kenny Industries, as of December 31, 2005, was $6,989,626. This amount was to be paid to the Trust in 15 yearly equal installments, plus interest, beginning October 1, 2006. On March 25, 2009, the final award was entered, incorporating the interim award. The amount due as of the date of the final award for the years 2006 through 2008, including prejudgment interest, was $2,253,041.58. The postjudgment interest rate of 9% was to apply from the date of the final award to any amounts unpaid going forward until the dates of payment. On July 14, 2009, the Trust filed a petition to confirm the arbitration award and for entry of judgment thereon (arbitration action).

A separate lawsuit*fn1 (contribution action) was also filed as a result of a demand letter for payment under a contribution agreement (CA) entered into in May 2003 between Gerard, his siblings, and KCC. The demand letter was sent to Gerard on June 23, 2005, and was signed by Patrick, John, Philip and Joan on behalf of themselves and James. The letter stated that Gerard owed each of the five siblings $2,057,854. According to the letter, the calculation of this total was based on the terms of the CA, the monies paid by Clinton on a hotel construction project, and a $7.6 million loss to KCC on that project.

On November 21, 2005, Gerard filed a complaint for declaratory judgment against John, Patrick, Joan, Philip and James (Kenny claimants). Mary Ann was later added as a plaintiff and KCC, Northgate and Clinton were added as defendants. Gerard sought a declaration that he had no payment obligations under the CA. The CA provided guarantees and/or agreements to indemnify certain obligations of Bryn Mawr Hotel, LLC (BMH), which was engaged in the construction and development of the Bryn Mawr Hotel. The complaint alleged that the CA was invalid because Mary Ann never signed it. In the alternative, the complaint alleged that even if the CA was valid, Gerard did not owe the Kenny claimants or KCC any money because neither the Kenny claimants nor KCC ever made a BMH payment that was not paid or reimbursable by Clinton under the CA.

Kenny Industries filed an answer in the arbitration action which included affirmative and additional defenses and noted that in the contribution action, Gerard had asserted that the interim arbitration award contained findings that bar the defendants from seeking recovery in the contribution action. Specifically, Gerard argued during summary judgment proceedings in the contribution action that the arbitration award constituted an express finding that he was not responsible for reimbursing his siblings for the $7.6 million advanced by KCC under the CA. Kenny Industries contended that the arbitration award could not be confirmed to the extent the arbitrator made any finding or findings about debts due under the CA, because any such findings would be outside the scope of the arbitrator's authority. Kenny Industries further contended that because the two cases were intertwined, staying judgment on the arbitration award would serve the interests of justice.

Kenny Industries also filed a motion to consolidate the two cases. The motion to consolidate was denied, but the arbitration action was transferred as a related case to the judge ...


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