Appeal from the Circuit Court of Cook County. No. 04 CH 11729 The Honorable Leroy K. Martin, Judge Presiding.
The opinion of the court was delivered by: Justice Lampkin
JUSTICE LAMPKIN delivered the judgment of the court, with opinion.
Justice Garcia concurred in the judgment and opinion.
Presiding Justice Robert E. Gordon concurred in part and dissented in part, with opinion.
¶ 1 Following a bench trial, a declaratory judgment was entered awarding plaintiff, Michael Downs, 2.5% equity interest in defendant company, Rosenthal Collins Group, L.L.C. (RCG), and the resulting profit/loss distributions since his termination from the company in 2004. The court additionally found that plaintiff was entitled to statutory prejudgment interest. *fn1 The court, however, concluded that plaintiff did not have an additional 4% equity interest in RCG, as claimed by plaintiff.
¶ 2 On appeal, RCG contends the trial court's finding that plaintiff owns 2.5% of the company and is entitled to the resulting profit/loss distributions was against the manifest weight of the evidence because plaintiff failed to execute a promissorynote to purchase the equity interest as required by the parties' employment agreement. Additionally, RCG contends the trial court erred in calculating the requisite "book value" that plaintiff owed for his equity interest. RCG further contends the trial court's award of prejudgment interest was erroneous.
¶ 3 Plaintiff cross-appeals, contending the trial court erred in concluding he does not own an additional 4% of RCG. In the alternative, plaintiff contends he is entitled to damages pursuant to the equitable principle of quantum meruit.
¶ 4 Based on the following, we reverse the judgment of the trial court finding that plaintiff owns 2.5% of RCG and awarding him profits since 2004 and going forward. We consequently reverse the trial court's award of prejudgment interest on that award. We, however, affirm the trial court's judgment finding that plaintiff did not obtain an additional 4% equity interest in the company.
¶ 6 In August 1997, plaintiff became the chief executive officer (CEO) of RCG. At that time, RCG was a limited partnership with J. Robert Collins and Leslie Rosenthal as its general partners. The parties entered an employment agreement on August 1, 1997. The employment agreement described plaintiff's position as having "supervisory responsibility over all day to day trading, administrative, operation and financial matters," while also serving as "the senior executive with respect to the trading financial, operational, business development and administrative matters of [RCG], subject, however, to the advice and direction of the [majority owners]."
¶ 7 In addition, the employment agreement provided plaintiff with an annual salary of $350,000 and the right to purchase, at "book value," a 2.5% limited partnership interest in RCG by executing a promissorynote. "Book value" was not defined in the employment agreement. It is undisputed, however, that plaintiff never executed a note at "book value" for his interest in RCG.*fn2
¶ 8 The employment agreement contained an integration clause providing:
"This Agreement constitutes the entire agreement between the parties and contains all of the agreements between the parties with respect to the subject matter hereof. This agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the subject matter hereof.
No change or modification of this Agreement shall be valid unless the same be in writing and signed by the parties hereto. No waiver of any provision of this Agreement shall be valid unless in writing and signed by the person or party to be charged."
¶ 9 According to his testimony at trial, prior to accepting his position at RCG, plaintiff was employed elsewhere and was not looking for employment. Plaintiff, however, stated that he was induced to accept employment with RCG based on the salary offer and the offer for the right to ownership. Plaintiff testified that he had three conversations with Collins in 1997 and 1998 regarding the execution of a note for his RCG equity interest. Plaintiff testified that he offered to execute the requisite note, but Collins declined because the "book value" of RCG was "unknown, subjective, and difficult to determine" due to an outstanding receivable owed by Rosenthal to the company. Collins disputed the existence of these conversations.
¶ 10 Plaintiff testified that he believed the "book value" at the time he joined RCG in 1997 was approximately $5 million. Plaintiff's calculation was based on the fact that Collins had $11 million equity in RCG, but Rosenthal owed $6.6 million to the company. According to plaintiff, RCG was therefore worth $5 million and 2.5% of that "book value" was approximately $125,000. Richard Horgan, RCG's chief financial officer (CFO), testified regarding his opinion of how to calculate "book value," as did an expert for each party. All three witnesses agreed that "book value" is determined based on the equity of all classes of members. None of these individuals, however, provided a valuation of the "book value" of RCG in 1997 or 2.5% thereof. Horgan did testify that the "book value" of the company when it was a limited partnership was calculated based on the total equity of both general and limited partners.
¶ 11 In October 1998, the company changed to a limited liability company. RCG's operating agreement contained three classes of members. The general partners under the limited partnership became class A members and the limited partners became class C members. Collins and Rosenthal were the only class A members, as majority owners and managing members. According to the operating agreement, class A members had the sole authority to carry out management responsibilities and control the operations of the firm. Plaintiff was a nonvoting class C member. As a class C member, plaintiff owned less than one-tenth of 1% of RCG. Class C memberships were given in exchange for a $100 capital contribution. The operating agreement gave the class A members the sole discretion to make cash distributions "in such amounts and at such times" as determined by their unanimous consent. Moreover, pursuant to the operating agreement, the class B and C members gave the class A members the right to purchase their interests and execute a full assignment of those interests at any time provided the class B or C member was given a five-day notice period. Class C members did not participate in the management of the firm. Class C members had the ability to withdraw their capital at any time.
¶ 12 In 1999, plaintiff received compensation over and above his salary in relation to August 1997 through the year-end and for 1998. Up until that point, plaintiff received only his salary. The parties dispute the character of this compensation. According to plaintiff, the money he received was his 2.5% equity distribution for the relevant time. According to Rosenthal, the monies were provided as a performance-based bonus and not in relation to any ownership interest. Thereafter, the parties agree that plaintiff received a 2.5% distribution through 2002; however, Rosenthal maintained that the monies were part of a bonus-based profit-sharing allocation, whereas plaintiff considered the distributions to be related to his ownership interest.
¶ 13 In late 2001 or early 2002, Collins was absent from RCG for approximately six months due to illness. According to plaintiff, his responsibilities at RCG grew as a result, even continuing once Collins returned to work. Plaintiff testified that he and Rosenthal verbally negotiated an additional 4% ownership interest for a total of 6.5% in relation to his increased responsibilities, and he received 6.5% profits thereafter. Rosenthal testified that he agreed to the increased percentage, but considered it an increase in profit-sharing allocation and not any form of equity in the company.
¶ 14 On January 5, 2004, RCG gave plaintiff notice of his termination. Collins and Rosenthal exercised their right and option, as class A members, to purchase plaintiff's class C membership interest for $100. Plaintiff did not cash the check.
¶ 15 Plaintiff filed the underlying lawsuit requesting, in relevant part, a declaratory judgment that he held a 6.5% ownership interest in RCG and the entry of an injunction requiring defendants to provide him with his share of the profits. In the alternative, plaintiff claimed defendants breached the employment agreement where he performed all of his obligations under the contract except for executing the note, performance of which was waived by defendants, yet defendants failed to provide plaintiff his contractual equity.
¶ 16 The trial court ultimately concluded that plaintiff held a 2.5% ownership interest in RCG and was entitled to profit/loss distributions since his employment in 1997 and on a going-forward basis. The court, however, expressly found that RCG did not waive its right to a note for the "book value" of the ownership interest. As a result, the court determined that the parties should be placed in the position they would have been had the note been executed in 1997. The court's decision was based on witness testimony, finding "the parties entered into a contract. And that contract called for Mr. Downs to possess two and a half percent of an interest in the business, provided he executed a note and paid book value. It appears *** that on several occasions, Mr. Downs attempted to do so and was thwarted in his efforts by the actions of the defendant." The decision was further based on the 2.5% distributions that RCG paid plaintiff "early on in their relationship," which were "consistent with [plaintiff's] ownership in the business."
"And I don't believe it is fair-equitable that the defendants should rely upon their failure to supply Mr. Downs with the information that he requested and rely upon that as a basis to deny that he owns two and a half percent.
Though it is true, he never executed the note, he never paid the defendants for the two and a half percent, I believe that his lack of performance was attributable to the impossibility of performing. And that impossibility was as a result of the conduct of the defendants. And I don't think, therefore, that he should be penalized for that.
So I am of the opinion and it is my finding today that Mr. Downs does, in fact own two and a half percent. He should be awarded two and a half percent. I also, in that same vein, gentlemen, I reject the idea that the defendants, however, have waived receiving payment from the two and a half percent because of their actions. I think that what the Court ought to do is attempt to put the parties ...