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Thomas M. Tully, Trustee of the Thomas M. Tully v. Daniel E. Mclean

April 26, 2011


Appeal from the Circuit Court Cook County No. 06 CH 5431 HonorableStuart E. Palmer,Judge Presiding.

The opinion of the court was delivered by: Justice Karnezis

JUSTICE KARNEZIS delivered the judgment of the court, with opinion. Presiding Justice Cunningham and Justice Harris concurred in the judgment and opinion.


Plaintiffs Thomas M. Tully, as trustee of the Thomas M. Tully Trust, and F.P.A., LLC (FPA), individually and derivatively on behalf of Old Town Development Associates, LLC (OTD), filed an action against defendants Daniel E. McLean, Piper's lley Management, Inc. (PAM), Lincoln Park Development Associates, LP (LPDA), MCL Companies of Chicago, Inc. (MCL), MCL Management Corp. (MCL Management) (collectively defendants) and nominally against OTD. They asserted defendants committed fraud and breach of their fiduciary duties to plaintiffs in their management of OTD. The court agreed and ordered defendants to pay compensatory and punitive damages. Defendants argue (1) the judgment against LPDA must be vacated because there was no evidence of wrongdoing by LPDA; (2) the judgment ordering MCL Construction Corp., a nonparty, to disgorge fees must be vacated for lack of jurisdiction; (3) OTD must be dissolved as a matter of law; (4) the punitive damage award must be vacated for failure to comport with Illinois common law and constitutional due process or, alternatively, reduced because it was excessive and improperly calculated; and (5) the compensatory damage award must be reduced because the court erred in ordering disgorgement of management and construction fees and in awarding 13% equitable interest damages. We affirm in part and reverse in part.


McLean, a real estate developer, founded OTD in 1996 to purchase and develop Piper's Alley, a retail and entertainment complex in Chicago's Old Town neighborhood. OTD's operations were governed by an operating agreement. Pursuant to the agreement, OTD was a manager-managed limited liability company and the manager had to be a member of OTD. The manager-member of OTD had exclusive responsibility for conducting OTD's business and the other members were to take no part in the management, conduct or control of the company.

In 1997, OTD bought Piper's Alley and spent considerable amounts renovating it. At that time, OTD's members/owners were: MCL, McLean, LPDA and private investors. MCL, a company owned and managed by McLean, was the original manager-member of OTD. MCL was replaced as manager and 1% member of OTD in November 2004 by PAM, another company owned and managed by McLean. LPDA was a company established by McLean to hold trusts he established for his children. The children's trusts owned 99% of LPDA. McLean owned the other 1% and managed LPDA. MCL Management, also a McLean-owned and managed company, was the property manager for Piper's Alley, serving as such until December 2005.

In 1999, FPA invested in OTD and became a 50% owner/member of OTD. Members of FPA were the Thomas M. Tully Trust (Tully Trust) and five individual trusts, one for each of Tully's children. Tully is the trustee of the Tully Trust, which is the manager-member of FPA. Tully, therefore, manages FPA.

In Tully's role as manager of FPA, he received monthly financial statements regarding OTD's operations. In 2002, he noticed an intercompany transfer from OTD to one of McLean's many other business entities unrelated to OTD. His accountant discovered numerous transfers back and forth between OTD and unrelated McLean-controlled enterprises. When questioned, McLean told Tully it was his regular practice to move funds back and forth between his assorted businesses as needed for funding and cash flow. He told Tully the transfers were recorded on the books and periodically returned or paid back but that no interest was paid on the intercompany transfers. McLean agreed to Tully's request that he cease this practice as to OTD. He agreed that Tully would be a signatory on any OTD money transfer in excess of $5,000. McLean repaid all outstanding transfers and stopped making intercompany transfers from OTD.

In 2005, Tully learned that McLean had resumed transferring money in and out of OTD within six months of his 2002 promise to stop doing so. Instead of noting the transfers on OTD's books as he had done previously, McLean now hid the transfers in fictional accounts. McLean told Tully in January 2006 that he had been making transfers between OTD and non-OTD related accounts as "cash was needed here or elsewhere." Tully demanded PAM step down as manager-member of OTD and that McLean and his entities have no further involvement in running OTD. McLean refused, asserting he would never be a participant in a venture in which he was not the manager.

On March 17, 2006, Tully, as trustee of his own trust, and FPA, individually and derivatively on behalf of OTD, filed a complaint alleging fraud and breach of fiduciary duty against McLean, LPDA, PAM, MCL, MCL Management and nominally against OTD. At the time of the complaint, FPA owned 50% of OTD, McLean owned 39%, LPDA owned 10% and PAM, the manager-member, owned 1%. MCL was the former manager-member of OTD and MCL Management was the former property manager of the Piper's Alley complex. Plaintiffs sought to enjoin further misappropriation by defendants of OTD's assets, asserting that McLean, through his entities, had been using the assets of OTD "as a private piggy bank" and had been systematically looting the assets of OTD. They alleged McLean was the alter ego of PAM, MCL and MCL Management, all three being wholly owned and controlled by McLean, and that he was the de facto manager of OTD and Piper's Alley.

Plaintiffs requested a temporary restraining order and preliminary and permanent injunctions precluding defendants, and specifically McLean, whether directly or indirectly, from managing or acting on behalf of OTD in any way and from denying plaintiffs access to OTD's records. They also sought appointment of an independent receiver to manage OTD; an accounting of OTD's business; expulsion of PAM as member and manager of OTD pursuant to section 35-45(6) of the Illinois Limited Liability Company Act (805 ILCS 180/1 et seq. (West 2008)) (the Act); compensatory and punitive damages for defendants' fraud, embezzlement and breach of fiduciary duty in their management of OTD; forfeiture by defendants of any compensation paid to them during the period of the fraud/breach; and no sharing by any defendant in the damage award.

By agreed order, the court ordered that McLean, MCL, MCL Management, PAM and their affiliates could no longer exercise any control over OTD's bank and escrow accounts and FPA would act on behalf of OTD pending appointment of a receiver. Subsequently, by agreed order, the court appointed Tully as the sole manager of OTD for the duration of the litigation or until further order of court.

Defendants moved to dissolve OTD and appoint a receiver to wind up OTD's business. They asserted dissolution was required under section 6.1 of the operating agreement and section 35-1 of the Act because PAM had been removed as manager of OTD and Tully and McLean's relationship had completely deteriorated to the point that they could no longer work together. Plaintiffs opposed the motion. Defendants then filed a counterclaim seeking assorted declarations by the trial court and dissolution of OTD on essentially the same bases as raised in their motion to dissolve. The parties agreed that defendants' counterclaim and plaintiffs' count requesting PAM be expelled as member and manager of OTD would be tried separately from plaintiffs' counts for fraud and breach of fiduciary duty.

Following a seven-day bench trial, the court found it unquestionable that defendants were liable to plaintiffs for common law fraud and breach of fiduciary duty. It found it undisputed that over the course of the six years defendants managed OTD, they diverted millions of dollars of OTD's funds to shore up the finances and pay overdrafts of unrelated McLean-controlled entities, with the outstanding amount reaching as high as $2 million at one point. The court held the amounts defendants transferred from OTD were not loans but misappropriations, done to the detriment of OTD and impermissible under either the Illinois Limited Liability Company Act or common law. It found all defendants were controlled by McLean and acted in concert with McLean with regard to the breaches of fiduciary duty and fraud, and thus liability for forfeiture extended to all defendants.

Finding no real issue of liability, the court considered the amount of actual and punitive damages to be awarded. With regard to actual damages, it awarded plaintiffs as damages 13% interest on the misappropriated funds. It ordered all management fees of MCL Management and MCL Construction be forfeited; reimbursement of loan fees charged by McLean, default loan interest and late fees paid on the mortgages and interest and penalties paid on the late real estate taxes; and payment of 13% interest on the security deposit money removed from OTD. The court agreed with defendants that the compensatory damages and forfeitures payable to plaintiffs should be reduced by 50% because Tully owned only 50% of OTD.

With regard to punitive damages, the court found "a 3:1 ratio to actual damages appropriate in this matter as anything less would not sufficiently deter McLean." It agreed with defendants that the forfeited management fees should not be included in the actual damages sum to which the punitive damage multiplier applied but denied their request to reduce the punitive damages award by 50%, stating that to do so would discount defendants' punishment or risk of punishment. The court awarded plaintiffs $1,010,671.96 in compensatory damages (50% of the total compensatory amount) and $3,231,550.26 in punitive damages (3x (100% compensatory award minus forfeiture amounts)), for a total of $4,242,222.22.

After a hearing on both plaintiffs' claim that PAM should be expelled from OTD and defendants' counterclaim seeking dissolution of OTD, the court found in favor of plaintiffs on both claims. It ordered that PAM be "judicially expelled and disassociated from OTD" and that dissolution of OTD was not warranted under either the operating agreement or the Act. The court denied defendants' posttrial motion and defendants filed their timely appeal from the court's orders.


Defendants admit McLean's practice of moving funds back and forth between different companies, enterprises and projects was legally improper and they are liable for actual losses they may have caused OTD. They assert, however, that the court's judgments were "seriously, unfairly and unjustifiably excessive" and inequitable and this case represents a case of judicial overkill. They do not ask this court to overturn the entirety of the trial court's judgments. Rather, they request that we:

1. reverse and vacate the judgment against LPDA and dismiss it from the case;

2. vacate the judgment against MCL Construction as void for lack of jurisdiction;

3. order or declare the dissolution of OTD pursuant to section 35-1 of Act and section 6.1 of the operating agreement;

4. reverse and vacate the punitive damages award or, alternatively, reduce it;

5. reverse and vacate the judgment ordering defendants to forfeit the management fees of MCL Management and MCL Construction and reduce the 13% equitable interest rate imposed by the court, reducing the compensatory and punitive damages accordingly.

We address the arguments seriatim.

I. Judgment Against LPDA

Defendants ask that we vacate the judgment against LPDA and the claims against LPDA be dismissed because LPDA cannot be liable for management misconduct as a matter of law. They assert LPDA was merely an investment partnership for McLean's children, did not participate in the management of OTD, had no fiduciary responsibility to plaintiffs, did nothing wrong and was a victim rather than a tortfeasor. Plaintiffs respond that defendants forfeited their argument that LPDA, separate and apart from the other defendants, cannot be liable because they did not raise it before the trial court until they filed their posttrial motion.

A party forfeits an issue for appellate review unless he has raised the issue both at trial and in a posttrial motion. Thornton v. Garcini, 237 Ill. 2d 100, 106, 112 (2009). Accordingly, defendants' argument regarding LPDA is forfeit if, as plaintiffs assert, defendants did not raise it until they filed their posttrial motion. Thornton, 237 Ill. 2d at 112.

As plaintiffs point out, the record shows defendants did not raise the argument in their answer, counterclaim, motion for summary judgment or closing argument. In their reply brief, defendants do not address plaintiffs' forfeiture argument. They do not assert that they raised their argument regarding dismissal of LPDA prior to their filing the posttrial motion, let alone point us to the salient pages in the record showing they so raised it. While the forfeiture rule does not bind the court, we are not required to research and argue issues on defendants' behalf. People v. O'Connor, 313 Ill. App. 3d 134, 137 (2000). The question of whether the court erred in finding against LPDA is forfeit.

II. Judgment Against MCL Construction

Defendants ask that we vacate the court's judgment ordering MCL Construction to disgorge fees it received from OTD. They assert MCL Construction was not a party to the suit, was neither named nor served, did not appear and thus was not subject to the court's jurisdiction. Plaintiffs respond that defendants (a) forfeited this argument because they did not raise it before the trial court until they filed their posttrial motion and (b) the judgment cannot be reversed or amended because no judgment was ever entered against MCL Construction and the disgorgement order, therefore, does not require the court's jurisdiction over MCL Construction.

Defendants address plaintiffs' forfeiture argument, albeit only in a short footnote and without citation to authority. They claim that a jurisdictional issue cannot be forfeit and the issue did not arise until after entry of the judgment so could not have been raised earlier. Defendants are correct that the jurisdiction of a trial court may be challenged at any time so the issue was not forfeited when defendants failed to raise it below. Norwest Mortgage, Inc. v. Ozuna, 302 Ill. App. 3d 674, 677-78 (1998). However, jurisdiction is not at issue because, as plaintiffs assert, the court did not enter a judgment against MCL Construction.

The court's order was that, "[a]s a result of Defendants' breach of fiduciary duties[,] *** all the management fees of MCL Management and MCL Construction listed in Plaintiff[s'] Exhibit 39F & G must be forfeited."*fn1 Defendants assert the court, by this order, ordered MCL Construction to disgorge the fees it received from OTD. Plaintiffs respond that the court did not order MCL Construction to disgorge anything, that there was no judgment entered against MCL Construction. Plaintiffs assert that the fees the court ordered forfeited were fees paid to MCL Management under a management agreement between OTD and MCL Management for the operation of Piper's Alley and not fees paid to MCL Construction. Defendants do not reply in any meaningful way to plaintiffs' assertions.*fn2

From the wording of the order, read in context with the rest of the court's discussion of the forfeiture, it appears the court is ordering defendants, not MCL Construction, to forfeit the management fees. The court discussed its finding that "all defendants acted in concert with McLean" in breaching the fiduciary duties and "therefore liability for the forfeiture extends to all defendants."

Looking at the management agreement referred to by plaintiffs, we find in section 4.2, in a section titled "Compensation for Management Services," a provision that any construction or major alteration to the complex would be overseen "by [MCL Management] or its affiliate acting as general contractor" for a fee of 2.5% of the total costs incurred. So, per this agreement, OTD was to pay MCL Management a 2.5 % management fee for its or its affiliate's services in overseeing construction projects.*fn3

There is nothing to show these fees were paid to any entity other than MCL Management. Defendants do not direct us to any evidence showing that any of the "management fees" the court ordered defendants to forfeit or the management fees paid to MCL Management under the management agreement were fees actually paid to or passed on to MCL Construction. Once again, defendants leave it to this court to make their case for them. We decline to do so. Therefore, although it is possible that the exhibit 39G fees included construction management fees paid to MCL Construction, we cannot, without more, assume that this is the case. Accordingly, the court did not enter a judgment against MCL Construction and defendants' argument regarding lack of jurisdiction is, therefore, moot.

III. Dissolution of OTD

Defendants ask that we direct the trial court to order the immediate dissolution and winding up of OTD. They argue the court erred in denying their request for dissolution because the court's removal of PAM as manager-member triggers the dissolution provisions in section 6.1 of the OTD operating agreement and section 35-1(4)(B) of the Act .

Section 6.1 of the operating agreement provides OTD "shall be dissolved only in the event *** [o]f the death, removal, liquidation, dissolution, withdrawal or bankruptcy of a Manager." Defendants argue that the court's order directing that"PAM is hereby judicially expelled and disassociated from OTD" pursuant to section 35-45(6) was clearly a "removal" of member-manager PAM from OTD and, therefore, triggered the section 6.1 provision of the agreement that OTD "shall" be dissolved. The court had declined to apply the section 6.1 dissolution provision. It found PAM had not been removed as manager pursuant to section 15-1(b)(3) of the Act, which provides that a manager "must be *** removed *** by a vote, approval, or consent of a majority of the members" (805 ILCS 180/15-1(b)(3) (West 2008)) and, therefore, dissolution under section 6.1 of the operating agreement had not occurred.*fn4

The question is whether the court's judicial expulsion of PAM as a member pursuant to section 35-45(6) equates, as defendants assert, to PAM's "removal" as the manager of OTD under the agreement, thus triggering the agreement's dissolution provision. Defendants argue the court improperly limited the section 6.1 removal provision to non-judicial removals (by approval, vote or consent of the majority of the members pursuant to section 15-1(b)(3) - which clearly did not happen here). They assert the term "removal" is not qualified in the operating agreement and, therefore, is not limited to non-judicial removals and should include judicial removals such as here by court decree pursuant to section 35-45(6).

Section 35-45(6) provides: "A member is dissociated from a limited liability company upon the occurrence of

(6) On application by the company or another member, the member's expulsion by judicial ...

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