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Lewis J. Borsellino v. Gerald D. Putnam

December 2, 2011

LEWIS J. BORSELLINO,
PLAINTIFF-APPELLEE AND CROSS-APPELLANT,
v.
GERALD D. PUTNAM, MARRGWEN TOWNSEND, AND STUART TOWNSEND, DEFENDANTS-APPELLANTS AND CROSS-APPELLEES.



Appeal from the Circuit Court of Cook County. Nos. 00 CH 13958, 04 L 3326 (cons.) Honorable Ronald F. Bartkowicz, Judge Presiding.

The opinion of the court was delivered by: Presiding Justice Robert E. Gordon

PRESIDING JUSTICE ROBERT E. GORDON delivered the judgment of the court, with opinion.

Justices Cahill and Lampkin concurred in the judgment and opinion.

OPINION

¶ 1 These consolidated appeals arise from a dispute concerning the effect of a settlement reached in an earlier lawsuit between the same parties involved in the instant appeals. The parties were business associates whose companies were members of Chicago Trading & Arbitrage, L.L.C. (CTA*fn1 ), an Illinois limited liability company. In 1998, plaintiff Lewis Borsellino's company filed a derivative suit on behalf of CTA, claiming that defendants Gerald Putnam, Marrgwen Townsend, and Stuart Townsend and their respective companies had used CTA's resources for the benefit of competing companies owned by Putnam and the Townsends and that they concealed CTA's financial records, which would have disclosed this information.

¶ 2 In 1998, the parties settled the claim, entering into a settlement agreement in which $250,000 was paid in exchange for releasing any claims against the defendants or their companies. Borsellino later filed two lawsuits against the current defendants alleging fraud; the actions were eventually consolidated. After a trial, the jury found in Borsellino's favor against all three defendants and the trial court entered judgment in the amount of $10.78 million. The trial court initially awarded Borsellino prejudgment interest, but later granted defendants' posttrial motion in part and vacated the award of prejudgment interest. Both parties filed posttrial motions but, other than the portion of defendants' motion concerning prejudgment interest, both motions were denied.

¶ 3 Defendants appeal, requesting reversal of the trial court's judgment for four reasons: (1) Borsellino lacked standing, (2) the claim is barred by the release and the judgment in the 1998 lawsuit, (3) the cause of action under which Borsellino recovered is not recognized under Illinois law, and (4) Borsellino failed to establish that defendants owed him fiduciary duties and that he reasonably relied on their representations. Defendants also argue that the amount of damages awarded Borsellino was not legally available to him and request that the amount of the judgment be reduced if not reversed. In his cross-appeal, Borsellino requests a new trial on the issue of punitive damages, which the trial court refused to allow to be presented to the jury, and asks for the trial court's award of prejudgment interest to be reinstated. In the event that Borsellino prevails on his cross-appeal, defendants also request a new trial based on four rulings made by the trial court: (1) the jury instruction on burden of proof, (2) two evidentiary rulings, and (3) the trial court's limitation on defendants' cross-examination of Borsellino. We reverse.

¶ 4 BACKGROUND

¶ 5 I. Parties

¶ 6 Plaintiff Lewis Borsellino was a member of the Chicago Mercantile Exchange and a trader of stock futures. At trial, Borsellino testified that he was a trader at the Chicago Mercantile Exchange from 1981 through 2002 and at the time of the formation and operation of CTA, was approximately 35 years old and had been a trader for 15 years. Borsellino was the owner of I.M. Acquisitions, L.L.C. (IMA), an Illinois limited liability company. The offices of IMA were in the same location as the offices of CTA.

¶ 7 Defendant Gerald Putnam was the majority shareholder of GDP, Inc. (GDP), an Illinois corporation. Putnam was also the owner of Terra Nova Trading, L.L.C. (Terra Nova), an Illinois limited liability company that operated as a broker-dealer,*fn2 specializing in options trading or derivative trading. The offices of Terra Nova were in the same location as the offices of CTA. We refer to Putnam, GDP, and Terra Nova as the "Putnam-related defendants."

¶ 8 Defendants Marrgwen and Stuart Townsend*fn3 were members of Virago Enterprises, L.L.C.

(Virago), an Illinois limited liability company. The Townsends were also owners of Townsend Analytics, Ltd. (TAL), a software development company organized as an Illinois corporation. Stuart Townsend testified that the "core business" of TAL was financial software and computer display software, including a program called RealTick. We refer to the Townsends, Virago, and TAL as the "Townsend-related defendants."

¶ 9 II. Formation of CTA

¶ 10 According to Putnam's trial testimony, in October 1995, Putnam and the Townsends discussed the creating of a small order execution system (SOES) electronic trading room.*fn4

Putnam testified that he spoke to Borsellino about establishing a SOES trading room in Chicago, and Borsellino was interested.

¶ 11 The 1998 complaint alleges that Putnam, Borsellino, and the Townsends agreed to form CTA, which would operate a SOES room located in Chicago. The Townsends had already been involved in the technological side of trading, having developed the RealTick software that displayed information about NASDAQ prices to SOES traders around the country. Putnam had a broker-dealer license through Terra Nova, which was required in order to operate the SOES room, and would run the daily operations of the business. Borsellino testified that he provided the business with capital as well as a "name," since he was well-known in the trading community.

¶ 12 Borsellino testified that he, the Townsends, and Putnam went into business as individuals, but "kind of turned it over" to CTA's attorney to " 'come up with the best corporate structure.' " The attorney organized CTA as a limited liability company in December 1996 and IMA, GDP, and Virago, the companies of Borsellino, Putnam, and the Townsends, respectively, were made the members. The 1998 complaint alleged that Putnam, Borsellino, and the Townsends agreed that the three companies would share profits and liabilities equally and that each would contribute an equal amount of capital to the formation of CTA. All commissions for trades were to proceed through Terra Nova, which was a licensed broker-dealer. CTA became operational as a SOES room in February 1996 and began electronic trading.

¶ 13 III. Archipelago

¶ 14 Shortly thereafter, Putnam testified that he became aware of new Securities and Exchange Commission (SEC) "order handling rules" that were "designed *** to make NASDAQ's marketplace a fairer place." After examining the rules, Putnam noticed an "opportunity" to establish his own electronic communication network (ECN).*fn5 Putnam testified that he approached the Townsends and explained his idea, asking them whether they would be able to design the software to establish the business. Putnam testified that he and the Townsends conceived of forming a company that they called Archipelago to run the ECN. Stuart Townsend testified that they began working on the software for Archipelago in October 1996. A printout from Archipelago's website that was attached to the 1998 complaint stated that "Archipelago is a joint venture by Townsend Analytics Ltd. and Terra Nova Trading that will run an ECN for NASDAQ stocks. TAL is supplying the ECN software. Terra Nova is providing broker dealer services."

¶ 15 Stuart Townsend testified that Archipelago launched on January 20, 1997, and within approximately two months, was trading all of the same stocks as NASDAQ. Putnam testified that Archipelago became the first fully electronic stock exchange in the United States. In 2004, the company went public, and became the first United States stock exchange to be a public company. The company eventually merged with the New York Stock Exchange, where Putnam served as president.

¶ 16 IV. 1998 Suit*fn6

¶ 17 In 1998, IMA filed a derivative suit on behalf of CTA against the Putnam-related defendants, the Townsend-related defendants, and Archipelago. The complaint contained three counts. Count I was for derivative relief and sought an accounting and return of any proceeds wrongfully withheld from CTA. Count II was entitled "Imposition of Constructive Trust" and sought the imposition of a constructive trust and an accounting. Count III was a separate action in law for breach of fiduciary duty and sought monetary damages in excess of $100,000. The complaint alleged that Marrgwen Townsend and Putnam falsely stated that CTA's resources and the contributions of the Townsends, Putnam, and Borsellino would be exclusively used for the use, benefit, or ownership of CTA. The complaint further alleged that, in fact, Marrgwen Townsend and Putnam actively utilized CTA's resources for their personal gain and for the creation of businesses competing against CTA, including Terra Nova and Archipelago.

¶ 18 The complaint also alleged that Marrgwen Townsend and Putnam concealed facts from Bosellino, including that they created businesses that would directly compete with CTA and that they were using CTA's resources for the benefit of these businesses. Finally, the complaint alleged that the 1998 defendants had marketed Archipelago and developed business relationships with clients that should have been offered to CTA and that software developed by the Townsends that permitted the establishment of remote SOES rooms should have belonged to CTA.

¶ 19 Shortly after it was filed,*fn7 the parties settled the lawsuit, executing a confidential "Settlement Agreement and Mutual Release" (the settlement agreement or the release) that read in relevant part:

"1. I. M. ACQUISITIONS, L.L.C., an Illinois limited liability company ('I.M.'), and LEWIS J. BORSELLINO ('LJB') and CHICAGO TRADING & ARBITRAGE, L.L.C., an Illinois limited liability company ('CTA'), for good and valuable consideration, *** hereby forever release and discharge VIRAGO ENTERPRISES, L.L.C., *** MARRGWEN TOWNSEND, individually ***, STUART TOWNSEND, individually ***, and TOWNSEND ANALYTICS, LTD., *** ARCHIPELAGO, L.L.C., *** GDP, INC., *** TERRA NOVA TRADING L.L.C., *** and GERALD D. PUTNAM ***, and their employees, officers, directors, members, parents, successors, affiliates, assigns, heirs and legatees from all claims, demands, damages, suits, judgments, debts, obligations, actions or causes of action, settlements and demands of any nature, whether sounding in contract or in tort, whether based on statute, common law, rule or regulations, whether in law or in equity, whether direct or consequential, compensatory or exemplary, liquidated or unliquidated, known or unknown, which either party hereto now has or ever had or which its respective successors or assigns hereafter shall or may have, on or at any time prior to the date of this Settlement Agreement and Mutual Release including those claims asserted in the Verified Complaint for Derivative and Other Relief, filed in the Circuit Court of Cook County, Illinois, and entitled, I.M. Acquisitions, L.L.C. v. Chicago Trading & Arbitrage, Case No. 98 CH 1363 ***."

The settlement agreement provided that IMA would dismiss the derivative suit and that consideration included a payment of $250,000. The settlement agreement further stated that pursuant to a separate agreement to be executed at the same time as the settlement agreement, IMA would assign its interest in CTA to Virago and GDP. Borsellino signed the settlement agreement both on behalf of IMA and on his own behalf.

¶ 20 The parties entered into a stipulation that the action be dismissed with prejudice, which was filed on March 4, 1998. On the same day, the trial court entered the following agreed order of dismissal:

"THIS MATTER COMING BEFORE THE COURT on the parties' Agreed Motion to Dismiss; the parties having reached a[n] agreement and having entered into a Settlement Agreement and Mutual Release; the Court having been duly advised in the premises;

IT IS HEREBY ORDERED THAT:

This matter is dismissed with prejudice, with each party to bear its own costs."

¶ 21 V. 2000 Suit

¶ 22 On September 25, 2000, Borsellino and IMA filed suit against the Putnam-related defendants, the Townsend-related defendants, Archipelago, and several other companies and individuals not relevant to the instant appeals.*fn8 The verified complaint contained six counts: (1) rescission of the settlement agreement, (2) fraud, (3) breach of fiduciary duty, (4) constructive trust, (5) accounting, and (6) declaratory judgment. The complaint alleged that after the 1998 derivative suit, Putnam and Marrgwen Townsend offered to pay Borsellino $250,000 for his one-third ownership in CTA.*fn9 Shortly after the transaction, Borsellino learned that Putnam and Marrgwen Townsend sold assets of the business to third parties for approximately $75 million. Borsellino alleged that Putnam and Marrgwen Townsend never disclosed the value of the assets or that they were intending to sell them and had they done so, Borsellino would not have agreed to sell his interest for $250,000. Borsellino sought to rescind the parties' settlement agreement as well as compensatory and punitive damages, each in excess of $25 million.

¶ 23 The 2000 complaint expanded on the allegations of the 1998 complaint, including the establishment of remote SOES rooms that routed their trades to CTA, which the complaint alleged would not have been possible without the use of a routing system developed for the use and benefit of CTA. The complaint further alleged that while refusing to provide Borsellino with financial records, Putnam represented to Borsellino that CTA was not making any money.

¶ 24 The complaint also alleged that Borsellino became aware of more details concerning the establishment of Archipelago. He learned that Putnam and Marrgwen Townsend had applied for the right to own and operate an ECN, which was a conflict of interest for a trading firm such as CTA. Borsellino alleged that when Putnam and Marrgwen Townsend finally provided him with financial documents, they stated that the original business of CTA had concluded and failed to mention Archipelago. Borsellino specifically requested information about Archipelago, including its value, but that information was not provided. Finally, Borsellino alleged that while he was negotiating the settlement of the 1998 suit, Putnam and Marrgwen Townsend were actively engaged in preliminary negotiations with third parties, including Goldman Sachs, concerning Archipelago and intentionally concealed that information from Borsellino.

¶ 25 Prior to filing their answers, the 2000 defendants, with the exception of Archipelago, filed a motion to dismiss pursuant to sections 2-615 and 2-619(a)(4) of the Code of Civil Procedure (Code) (735 ILCS 5/2-615, 2-619(a)(4) (West 1998)). The defendants claimed that the complaint failed to state a claim against any of the defendants and that all of the claims were barred by the prior judgment entered in the 1998 suit because: (1) the claim was barred by res judicata, (2) the plaintiffs impermissibly filed the 2000 complaint without first vacating the 1998 judgment under section 2-1401 of the Code (735 ILCS 5/2-1401 (West 1998)), (3) Borsellino lacked standing to seek any relief other than rescission of the settlement agreement, and (4) the parties were not in a fiduciary relationship. Archipelago also filed a motion to dismiss pursuant to section 2-615 of the Code, claiming that the 2000 complaint should be dismissed on the basis of res judicata*fn10 and based on the terms of the settlement agreement; Archipelago also claimed that the complaint failed to state a cause of action on any of the counts against Archipelago.

¶ 26 On April 11, 2001, the trial court dismissed the suit with prejudice pursuant to section 2-619 of the Code on the basis of res judicata, finding that there were no allegations of intentional fraud or misstatements made during settlement negotiations. Borsellino and IMA filed a motion to vacate the dismissal order and requested leave to file an amended complaint setting forth intentional misrepresentations that they claimed had recently become known to them.

¶ 27 On May 7, 2001, the trial court denied the motion to vacate concerning Archipelago. The court also denied the motion to vacate against the other defendants without prejudice and permitted Borsellino and IMA time to file a motion for leave to file an amended complaint. The court told the plaintiffs' attorney that "if you can actually plead that [the defendants] did something during the settlement negotiations, I will look at an amended complaint to see whether you can file it. If this is it, it doesn't cut it."

¶ 28 On May 17, 2001, Borsellino and IMA again filed a motion to vacate the dismissal order, asking that the portion of the order dismissing the case with prejudice be vacated and that they be permitted to file an amended complaint. After a hearing on November 14, 2001, at which Borsellino identified an additional allegation of an affirmative misrepresentation by the 2000 defendants, the trial court granted the motion to vacate the dismissal order and permitted Borsellino and IMA to file an amended complaint. During the hearing on the motion, counsel for Borsellino stated:

"[Section 2-1401 is] not a requirement. That allows us the opportunity, if we chose to do it that way. Instead, we've decided to affirm that and seek a new action of fraud.

If we file under 2-1401, we're seeking a rescission of that agreement and you have to meet certain requirements. It is not a mandatory requirement under Illinois or any other state that says how you can approach a new fraud."

¶ 29 Borsellino and IMA filed a verified amended complaint on November 15, 2001. The amended complaint was filed solely against Putnam, Marrgwen Townsend, and CTA, and contained a single count for fraud. The complaint removed a number of allegations present in the 2000 complaint, and added five specific statements that Borsellino alleged were material misrepresentations made by Putnam and Marrgwen Townsend. The amended complaint also included recently discovered information that contrary to the defendants' representations, CTA funds were used to develop Archipelago. The complaint sought compensatory and punitive damages, each in excess of $40 million. The complaint did not request rescission of the settlement agreement, but included an allegation that, "[d]ue to the fraudulent conduct of Putnam and [Marrgwen] Townsend, *** the parties' prior settlement agreement of the derivative action is void."

¶ 30 On January 16, 2002, the plaintiffs filed a verified second amended complaint, essentially identical to the amended complaint but adding newly discovered information concerning discussions with Goldman Sachs.

¶ 31 On November 12, 2002, the defendants filed a motion to dismiss the second amended complaint pursuant to section 2-619 of the Code, claiming that the release barred the plaintiffs' claim as a matter of law. Alternatively, the defendants asked the court to strike allegations that the defendants committed fraud by omission.

¶ 32 On March 12, 2004, the plaintiffs filed a motion to amend their complaint. The proposed third amended complaint added six counts to the single fraud count present in the second amended complaint. At a hearing on March 22, 2004, the plaintiffs informed the court that they intended to file a new complaint alleging the same facts and pursuing the same relief as the amended complaint that they sought leave to file.

¶ 33 VI. 2004 Suit

¶ 34 On March 23, 2004, while the motion to dismiss the second amended complaint in the 2000 suit was pending, Borsellino and IMA filed suit against Stuart Townsend, GDP, Terra Nova, TAL, Virago, and two Archipelago-related companies.*fn11 The 2004 complaint contained seven counts:*fn12 (1) rescission of the settlement agreement, (2) breach of fiduciary duty against Stuart Townsend, (3) fraud against Stuart Townsend, (4) unjust enrichment, (5) accounting, (6) piercing the corporate veil against Terra Nova, and (7) civil conspiracy.

¶ 35 The complaint set forth similar allegations as in the 2000 complaints. However, for the first time, the complaint set forth specific allegations concerning the events of the settlement meeting. The complaint alleged that the settlement meeting was held in the office of one of Borsellino's attorneys. Borsellino was present with two attorneys and Putnam and the Townsends were present with their attorney. Borsellino's attorneys began the meeting by discussing the basic allegations made in the 1998 derivative suit. When the attorneys mentioned Archipelago, "Putnam stated that Archipelago had nothing to do with" CTA. The attorney for Putnam and the Townsends also claimed that Archipelago was a separate business.

ΒΆ 36 The complaint alleged that Borsellino grew tired of hearing the attorneys argue and asked them to leave the room, leaving him alone with Putnam and the Townsends. Once the attorneys left, Borsellino asked Putnam and the Townsends whether any CTA funds were used to start Archipelago. They assured Borsellino that Archipelago was a separate business and that no CTA funds were used for the benefit of Archipelago. They had the same response when Borsellino asked them about the remote SOES trading rooms that they had established and the RealTick software. Borsellino questioned them about CTA's profitability, and Putnam and the Townsends assured Borsellino that ...


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