Appeal from the Circuit Court of Cook County. Honorable Lee S. Preston, Judge Presiding. No. 04 L 010671
The opinion of the court was delivered by: Justice Robert E. Gordon
JUSTICE ROBERT E. GORDON delivered the judgment of the court, with opinion. Presiding Justice Garcia and Justice Cahill concurred in the judgment and opinion.
These consolidated appeals arise from a dispute concerning the sales of interests in two joint ventures. Plaintiffs Michael Benson, Edward Dolinar, Joel Stone, and William F. Johnson brought suit against defendant John Stafford, Jr., in the Circuit Court of Cook County, alleging that defendant had breached his duty as a fiduciary in fact and had committed common law fraud, including claims for affirmative fraud and fraudulent concealment. The trial court dismissed plaintiffs' claim of affirmative fraud, and granted summary judgment in defendant's favor on the claim of breach of fiduciary duty and on the claim of fraudulent concealment. The trial court denied defendant's motion for sanctions against plaintiffs and their attorneys, Randall Gold, Michael Fox, and Edwin Durham. Plaintiffs appeal, arguing that the trial court erred in dismissing their affirmative fraud claim and in granting summary judgment on the breach of fiduciary duty and fraudulent concealment claims. Defendant also appeals, arguing that the trial court should have imposed sanctions on plaintiffs and their attorneys. We affirm.
Defendant became an options trader on the Chicago Board Options Exchange (CBOE) in 1975, and at the time of the dispute in this case, had founded and headed the Stafford Group, an options trading business which includes six firms with common ownership. Plaintiffs are traders on the CBOE who have owned and operated trading companies for over ten years; each has a college education and several have masters' degrees.
Plaintiffs' trading companies and defendant's trading companies formed two joint ventures to own and operate "Designated Primary Market-Makers" (DPMs) on the CBOE.*fn2 Each of these joint ventures consisted of one company affiliated with plaintiffs and one company affiliated with defendant. Under the joint venture agreements, plaintiffs' company would control the daily operations of the joint venture, while defendant's company would provide the capital and infrastructure.
Plaintiffs Benson, Stone, and Dolinar (Big Blue plaintiffs), along with non-party John Hayden, formed Big Blue Trading, LLC (Big Blue), which entered into a joint venture agreement with GPZ Trading, LLC (GPZ), which was owned by defendant's two sons. The joint venture was formed to own and run the Big Blue DPM. Under the joint venture agreement, at the time of any sale, the four members of Big Blue would receive 80% of the proceeds, and GPZ would receive 20% of the proceeds. In exchange for its smaller share of the proceeds, GPZ had the right to veto any proposed sale.
Plaintiff Johnson was the sole shareholder of William F. Johnson, Inc. (Johnson, Inc.), which entered into a joint venture agreement with defendant in his individual capacity to own and run the Johnson DPM. Under their joint venture agreement, at the time of a sale, Johnson, Inc. would receive 70% of the proceeds and defendant would receive 30% of the proceeds. On December 1, 2001, three weeks before the sale of the joint venture, JSS Investments, Inc. (JSS), a company affiliated with defendant, was substituted for defendant as a party to the joint venture.
In February 2001, defendant decided to sell the Stafford Group and began marketing it to potential buyers. In spring 2001, defendant began negotiating with Toronto Dominion Bank (TD) to purchase some of defendant's business interests, including the Big Blue DPM and the Johnson DPM. Defendant and TD planned for GPZ and JSS to purchase the interests of their joint venture partners, and TD would acquire those interests when GPZ and JSS merged into a newly-formed subsidiary of TD called TD Options, LLC ("TD Options"). As a result of their negotiations, TD offered defendant a cash payment of between $150 and $200 million, as well as a similar "back-end" payment in the future that would be contingent on the performance of TD Options. Plaintiffs did not become aware of defendant's negotiations with TD or of his plans to sell their interests in the joint ventures until the summer of 2001.
As part of the agreement, TD offered defendant a single, aggregate sum for all of the business and technology assets that he was selling, including the DPM interests of defendant's joint venture partners. TD left it to defendant to reach an agreement with his joint venture partners about the price that they would accept for their interests, which would be deducted from defendant's aggregate payment.
In summer 2001, defendant met with plaintiffs and his other DPM partners. Defendant told them that TD was a potential buyer with whom he intended to negotiate. Defendant did not tell them that he already had a general offer for all of his business interests, including the interests of plaintiffs. Defendant sought plaintiffs' consent to his negotiating with TD for the sale of both his DPM interests and theirs. Defendant indicated that he was best suited to negotiate with TD because of his experience in the trading business, his knowledge of the market, and his familiarity with TD. Defendant also told plaintiffs that if they allowed him to negotiate with TD, they must allow him to negotiate alone and refrain from negotiating with TD themselves. Plaintiff Stone testified that when he asked whether plaintiffs could contact TD, defendant responded, "[T]his is my deal. I will negotiate for you guys. I'll get you the most I can. *** I'm in a better position to do so. I have experience, *** I don't want all you guys at the table." Stone testified that he responded "fine. Go ahead." Similarly, plaintiff Benson recounted that during the same meeting, plaintiffs were told that if they were interested in negotiating with TD, "th[e] situation was going to be handled by [defendant]. *** [Defendant] would be representing our interests in the negotiations with the bank." The members of Big Blue agreed to allow defendant to negotiate with TD. Benson testified that the Big Blue plaintiffs trusted defendant to negotiate for the best possible purchase price, that they informed defendant that they trusted him, and that on the basis of that trust, they refrained from negotiating with TD directly. Dolinar also testified that he trusted defendant with respect to the TD sale, and that he had trusted defendant on various other business matters for a number of years. Johnson also agreed to allow defendant to negotiate with TD, testifying that he did so because he trusted defendant; Johnson opined that defendant "was someone I respected. *** In my eyes I had hitched myself to a star, and if he said this was going to be a good thing then I trusted that this was going to be a good thing."
Big Blue DPM/Joint Venture
While defendant was negotiating with TD, the members of Big Blue had continued to approach other parties, as defendant had suggested, including Susquehanna and Tag Van Der Molen. They had received a tentative offer from Spear, Leeds & Kellogg (SLK), a subsidiary of Goldman Sachs, to purchase the entire Big Blue DPM, including GPZ's interest, for $17 or $18 million. The members of Big Blue did not accept the offer at that point, because they needed to speak to defendant about it first.
The Big Blue members met with defendant, and defendant told them that "TD was willing to offer" $6 million in cash, with up to $6 million in contingent "back-end" payments. Stone testified that he informed defendant that they had an offer from another party for $17 or $18 million in upfront cash, and Hayden reluctantly told defendant that the offer was from SLK. Defendant responded, "I don't care if SLK offers you 20 million. I'm not going to let you sell it," and said that he would use his veto power to block the sale to SLK; there was evidence that TD highly desired the Big Blue DPM. Martin Fiascone, an associate of defendant's, characterized the dispute over the SLK bid as "a little cat fight" that "got pretty intense at times." Fiascone also testified that "[t]here was no love in the room between those guys [the DPM owners and defendant]. Behind closed doors, there was no love in the room." Hayden, the non-party Big Blue member, testified that he viewed the process as adversarial.
Defendant testified that he spoke to an individual at Goldman Sachs and expressed his opinion that it was a conflict of interest for SLK to make a bid for the Big Blue DPM, because Goldman Sachs was involved with the TD transaction and had a large amount of confidential information about defendant and his business strategies. Fiascone also testified that defendant spoke to Goldman Sachs and told them, "I don't want SLK competitively bidding on my own DPMs." Shortly thereafter, SLK informed plaintiff Benson that while it had been willing to pay in the range of $17 to $18 million for the Big Blue DPM, it could not continue with the negotiations.
In August 2001, after SLK had withdrawn its offer, the Big Blue members retained attorney David Bohan, from the law firm of Sachnoff & Weaver (Sachnoff), in order to determine whether the veto provision could be enforced against them as defendant had threatened. Bohan described the subject of the representation as "Dispute with Joint Venture Partner," but Stone testified that he did not feel as though he had a dispute with defendant or GPZ at the time, and did not entertain the idea of bringing a lawsuit against defendant. The members of Big Blue were also concerned over whether defendant could sue them if they pursued a deal with SLK, and Bohan considered litigation at least a possibility at that stage; a note from one of the plaintiffs suggests that they play "hardball."
Between late August and October 2001, six Sachnoff attorneys spent hundreds of hours on the matter at a cost of approximately $60,000. Bohan and Douglas Newkirk, a Sachnoff transactional attorney with expertise in joint venture partners' legal obligations, advised the Big Blue members that defendant had the right to withhold consent from a sale, but that the right was limited. Bohan and Newkirk considered defendant to be the Big Blue members' "partner" in their joint venture and advised them that they should stress to defendant that in exercising his veto power, he owed them an obligation as their partner to exercise his power in good faith and to obtain the best possible price for their DPM interests.
The Big Blue members asked defendant to counter the previous offer from TD to $15 million, to be paid over three years. Benson testified that TD was not receptive to the counteroffer. Defendant responded with a counteroffer of $16 million, with $8 million to be paid upfront and another $8 million in contingent "back-end" rights. Stone testified that defendant told him that the "train's leaving the station." Stone relayed the offer to the Big Blue members. They agreed that since the SLK offer had disappeared, and because Hayden had indicated that there were some threats by defendant that he would sue them and "squash [them] like bugs" if they did not go forward with the deal, they accepted the offer.
Johnson DPM/Joint Venture
Johnson also testified that he pursued opportunities with other firms. He said that he received a tentative oral offer of $5 million for his interest from SLK, but the negotiations ended after Johnson made a counteroffer of $9 million. Johnson stated that he did not mention the bid to defendant because "it was too early in the process to get back to him."
In September 2001, plaintiff Johnson met with defendant and defendant's negotiator, who told Johnson that the amount TD was willing to pay for Johnson's share of the Johnson DPM was $1.75 million in cash and rights for up to $2.625 million in "back-end" payments. The next day, Johnson approached defendant on the trading floor of the CBOE and asked, "is this the most that TD is willing to pay for the DPM?" Defendant responded that it was. Shortly thereafter, Johnson told defendant that he was "on board" with the offer and testified that he did so because "[t]he overall package I felt was going to be more lucrative than anything else," although he did not want to sign a memorandum of understanding until more details were included. Johnson did not consult with an attorney before accepting the offer.
TD's lead negotiator testified that TD never told defendant that TD would be willing to pay more for the DPMs, and documents prepared by TD showed that TD valued the interests at the price that it had paid. TD's investment banker also testified that TD never placed a higher value on the DPM interests than the amount that they paid.
Specialist Purchase Agreements/TD Options Agreements In early December 2001, plaintiffs received draft Specialist Purchase Agreements (SPAs), which they were to enter into with TD. Plaintiffs, including both the Big Blue members and Johnson, engaged another Sachnoff attorney, Bill Doran, to advise them concerning the SPAs. Doran and another Sachnoff attorney discovered that the tax treatment of the back-end payments was different than plaintiffs had anticipated, so the parties agreed to "gross up" the amount of the potential back-end payments. Plaintiff Dolinar also testified that the Big Blue members added a provision that their employment with TD Options would only last one year.
The SPAs provided that plaintiffs would sell their DPM interests directly to TD, rather than to defendant's companies as originally agreed. The upfront payment was in Class A shares, which would then be sold for cash, while the "back-end" payments were Class B-3 shares. Additionally, defendant was not made a party to the SPAs but entered into a separate Master Purchase Agreement (MPA) with TD to sell his business interests, including his DPM interests. Since the SPAs did not reflect the compensation that defendant was to receive, plaintiffs added a provision to their SPAs warranting that the amount of compensation received by defendant and his family members would not be disproportionate to his companies' interests in the DPMs.
In addition to the warranty provision, the SPAs and TD Options agreements that plaintiffs also entered into contained several other representations, including statements that plaintiffs were sophisticated investors and had the ability to make independent and competent decisions to enter into the transaction and statements that plaintiffs had the opportunity to obtain relevant documents and information and to ask questions of TD's management about the transaction.
Section 6.7 of the SPAs provided that the parties did not rely on any representations not set forth in the SPA:
"6.7 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties with respect to the subject matter hereof. There are no warranties, conditions, or representations (including any that may be implied by statute) and there are no agreements in connection with such subject matter except as specifically set forth or referred to in this Agreement. No reliance is placed on any warranty, representation, opinion, advice or assertion of fact made either prior to, contemporaneous with, or after entering into this Agreement, or any amendment or supplement thereto, by any Party or its directors, officers, employees or agents, to any other Party or its directors, officers, employees or agents, except to the extent that the same has been reduced to writing and included as a term of this Agreement, and none of the Parties has been induced to enter into this Agreement or any amendment or supplement by reason of any such warranty, representation, opinion, advice or assertion of fact. Accordingly, there shall be no liability, either in tort or in contract, assessed in relation to any such warranty, representation, opinion, advice or assertion of fact, except to the extent contemplated above."
Section 3.1(d)(viii) of the TD Options agreement also provided a non-reliance clause:
"(d) Representations and Warranties of Members. Each Member hereby represents and warrants to the Company and to each other Member and acknowledges that: *** (viii) the determination of such Member to acquire Units in the Company has been made by such Member independent of any other Member and independent of any statements or opinions as to the advisability of such acquisition or as to the properties, business, prospects or condition (financial or otherwise) of the Company and its Subsidiaries which may have been made or given by any other Member or by any agent, employee or other Affiliate of any other Member."
Circuit Court Proceedings
In 2004, plaintiffs*fn3 filed suit against TD,alleging that TD had fraudulently induced them into selling their interests in the DPMs and that TD had mismanaged TD Options, preventing plaintiffs from receiving their performance-based "back-end" payments. Defendant was not a party to the case, although plaintiffs asked him to join them as a plaintiff, which defendant refused.
Plaintiffs amended their complaint to add defendant to the case as a defendant. In their first amended complaint, plaintiffs alleged that defendant had acted as TD's agent while negotiating against plaintiffs and had breached the fiduciary duties owed between joint venture partners.*fn4 Defendant moved to dismiss the claims pursuant to section 2-615 of the Code of Civil
In their second and third amended complaints, plaintiffs alleged that defendant had been acting as plaintiffs' agent during negotiations with TD and had breached his duties as their agent. The trial court dismissed both of these claims because plaintiffs did not allege sufficient facts to support the elements of agency.
Plaintiffs amended their complaint a fourth time. In their fourth amended complaint, plaintiffs alleged that defendant was their fiduciary in fact. The trial court denied defendant's motion to dismiss the fourth amended complaint pursuant to section 2-615 of the Code, holding that plaintiffs had alleged a fiduciary relationship with defendant with sufficient particularity and that a fraudulent concealment claim was present in Count II, and parties proceeded with discovery; the trial court did, however, hold that plaintiffs could not raise an affirmative fraud claim under Count II as a matter of law because of non-reliance clauses present in their SPAs.
In their expert witness disclosures, plaintiffs included damages calculations indicating what the value of the DPMs would have been had plaintiffs been aware of the facts underlying the transaction.
In a written interrogatory, defendant requested plaintiffs to identify everyone they consulted regarding the sale of the DPM joint ventures. Plaintiffs identified only Doran, the attorney who worked with them on the final agreements. Defendant also sought production of Sachnoff's files regarding their representation of plaintiffs. Plaintiffs claimed that the documents were protected by the attorney-client privilege. Defendant moved to compel production, and plaintiffs argued both that the attorney-client privilege applied and that the documents were protected under the work product doctrine. Plaintiffs also argued against an in camera review of the documents, claiming that they were irrelevant. The trial court ordered an in camera review and, after reviewing the documents, ordered their production.
After receiving the Sachnoff documents, defendant's counsel sent a letter to plaintiffs' counsel stating that the documents showed plaintiffs' claims were unfounded and urged plaintiffs to withdraw their claims. The letter also stated that if they withdrew their claims immediately, defendant would not seek sanctions; if they did not withdraw their claims, then defendant would "seek sanctions encompassing all expenses and legal fees ...