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Glenna K. Mo, Individually and On Behalf of v. Alexander Hergan

December 17, 2012

GLENNA K. MO, INDIVIDUALLY AND ON BEHALF OF )
RHOMBUS ASSET MANAGEMENT, INC. AND CENTRAL AND EASTERN EUROPEAN INVESTMENT FUND, PLAINTIFF-APPELLANT,
v.
ALEXANDER HERGAN, AN INDIVIDUAL, MARK PROSKINE, AN INDIVIDUAL, EDWIN WARMERDAM, AN INDIVIDUAL, PRICEWATERHOUSECOOPERS, A ROMANIAN ACCOUNTING AND FINANCIAL SERVICES FIRM, PRICEWATERHOUSECOOPERS INTERNATIONAL LIMITED, A GLOBAL NETWORK COMPANY, RHOMBUS ASSET MANAGEMENT, INC., AN ILLINOIS CORPORATION, AND CENTRAL AND EASTERN EUROPEAN INVESTMENT FUND, A CYPRIOT CORPORATION,
DEFENDANTS-APPELLEES.



Appeal from the Circuit Court of Cook County. No. 08 L 5888 The Honorable Sanjay T. Tailor, Judge Presiding

The opinion of the court was delivered by: Presiding Justice Hoffman

(Consolidated)

PRESIDING JUSTICE HOFFMAN delivered the judgment of the court, with opinion. Justices Cunningham and Delort concurred in the judgment and opinion.

OPINION

¶ 1 In appeal number 1-11-3179, the plaintiff, Glenna Mo (on behalf of Rhombus Asset Management, Inc. (Rhombus), and Central and Eastern European Investment Fund (Central)) appeals the circuit court judgments dismissing six counts of her complaint against defendants Alexander Hergan and Mark Proskine, granting summary judgment in favor of Hergan on three counts of her complaint, and dismissing Proskine from the case as a discovery sanction. In appeal number 1-11-3731, the plaintiff appeals a circuit court ruling denying her postjudgment request for further proceedings, namely, a ruling on an issue the court had deemed moot.*fn1 For the reasons that follow, we affirm the judgment of the circuit court in appeal number 1-11-3179, and we dismiss appeal number 1-11-3731.

¶ 2 In November 2008, the plaintiff filed her corrected amended complaint seeking over $150,000,000 in damages from the defendants. According to the complaint, Hergan, Wasendorf, Proskine, and the plaintiff formed Rhombus in 1998 for the purpose of acquiring real estate that they referred to as the Avrig 35 project. The plaintiff contributed $500,000 to the venture and loaned Hergan $185,000 of his contribution. At the time, the plaintiff was given a 15.43% ownership interest in the Avrig 35 project; she alleged that she accepted this minimal share after Hergan promised that the ownership interests would be recalculated later to reflect the owners' actual contributions. The venture subsequently acquired a second property--the Barthelot property--and the plaintiff alleged that she loaned Hergan $119,000 of his $127,000 contribution to that acquisition. According to the complaint, for the next four years, Hergan found additional real estate opportunities and solicited funds from the Rhombus owners, but the plaintiff was the only shareholder to contribute money to "many" of these investments.

¶ 3 For one such investment, the Canadian Embassy project, she contributed $500,000, with $250,000 in the form of a loan to Hergan; an outside investor contributed $500,000; and the remaining Rhombus shareholders contributed nothing. She alleged that she made her contribution with the understanding that she and Hergan alone would share a one-half interest in the property. She later learned, however, that the ownership interest had been allocated to all four Rhombus shareholders in the same proportions as their Rhombus ownership, so that she received only 15.43% of the one-half interest. The plaintiff alleged that she confronted Hergan regarding this discrepancy and was assured that the ownership interests would be corrected.

¶ 4 In a second project, the Charles de Gaulle project, the plaintiff again was the only shareholder to contribute (both with her own money and with loans she obtained), and again she contributed with the understanding that only she and Hergan would hold ownership in the project. A bank later purchased half of this project for $5.5 million, and, over the plaintiff's objection, Hergan used some of these funds to pay liabilities on the Avrig 35 project and to pay dividends to Rhombus shareholders. Hergan also allowed additional Rhombus shareholders to invest in the project, whose value had increased to $11 million, by contributing $250,000. The ownership interests in the project were then allocated in the same proportions as the Avrig 35 project.

¶ 5 According to the complaint, Hergan eventually approached PWC and worked with Edwin Warmerdam to obtain financial and accounting advice. Warmerdam and PWC recommended that new entities be formed for each investment the parties undertook, and that all these entities be owned by a Netherlands corporation, F&C International BV (F&C), which in turn would be owned by Central. When Central was formed, its ownership was allocated in the same percentages as the Avril 35 project, despite the plaintiff's understanding that her contributions would be reflected in new ownership allocations.

¶ 6 The complaint alleged that, in January 2004, Proskine, Hergan, and the plaintiff agreed to a reallocation of the ownership interests of each of the properties in which they had invested. However, following a 2004 meeting of Central's shareholders, the ownership of the Charles de Gaulle project was modified to indicate an even larger allocation to Hergan and Proskine. At a 2005 Central shareholders meeting, the plaintiff again raised her concerns about the ownership allocations, but Hergan and Proskine responded that they were not interested in decreasing their ownership stakes.

¶ 7 Around June 2006, Central's shareholders held another meeting, where the plaintiff agreed, "[i]n an effort to finally put an end to the dispute," to accept a 25% interest in the Avrig 35, Charles de Gualle, and Canadian Embassy projects; a 25% interest in one additional project; and a 20% interest in all remaining projects. However, Wamerdam--at that time a new Central shareholder--refused to sign that agreement. Proceeds of the Charles de Gaulle project were later distributed without giving the plaintiff the increased stake she had requested.

¶ 8 The complaint further alleged that Proskine allowed the plaintiff to make interest payments on Rhombus's behalf, and later to personally repay loans she had obtained for Rhombus, while he caused Rhombus to reimburse him for similar expenses. In addition, the complaint asserted that Proskine and Hergan caused Rhombus to issue very favorable loans to their friends, without the plaintiff's knowledge. Further, the complaint stated that Proskine had "routinely" written checks from Rhombus to himself (in one case to purchase a personal automobile) or to friends, and had in fact forged the plaintiff's signature on company checks and cashed checks without the account's required second signature.

¶ 9 The plaintiff alleged that, in October 2000, as these investment activities were ongoing, she and Hergan reached a separate agreement under which he agreed to transfer to her 5% of his interest in Avrig 35 in exchange for forgiveness of $250,000 in loans she had given him. According to the complaint, that 5% interest was never conveyed to the plaintiff.

¶ 10 Based on these allegations, the complaint raised claims against Hergan, Proskine, and Warmerdam for breach of fiduciary duty (Count I); common law fraud (Count III); a scheme to defraud (Count IV); conversion (Count VI); and civil conspiracy (Count VII). The complaint added claims against PWC and PWCI for aiding and abetting a breach of fiduciary duty (Count II); aiding and abetting a scheme to defraud (Count V). It also raised derivative claims (on behalf of Rhombus and Central) against Hergan, Proskine, and Warmerdam for breach of fiduciary duty (Count VIII) and waste of corporate assets (Count IX).

¶ 11 Hergan and Proskine filed motions to dismiss the complaint, and, on November 24, 2009, the circuit court granted those motions with respect to counts II through VII; Counts I, VIII, and IX were advanced for further proceedings.

¶ 12 In February 2010, after Hergan and Proskine had filed their answers to the complaint, the circuit court entered a case management order directing the parties to complete discovery by August 9, 2010. In July, Hergan filed a motion to compel the plaintiff's compliance with discovery; that document asserted that the plaintiff had failed to respond to interrogatories or requests for production of documents despite entreaties from opposing counsel. The circuit court granted Hergan's motion to compel and ordered the plaintiff to comply with discovery requests before August 5, 2010. On August 20, the date of the next hearing in the case, the circuit court entered an order noting that counsel for Hergan and Proskine had moved for sanctions, and setting the matter for hearing "for [the plaintiff's counsel] to offer proof of deposition noticed" in the case and "continuances asked resetting of the same." On August 27, the circuit court entered an order stating that the matter had been heard and that "[p]laintiff's representations to the Court on August 20, 2010 were false and no discovery has been issued by Plaintiff." The order sanctioned the plaintiff's counsel and ordered the plaintiff to comply with discovery requests by September 6, 2010. On September 8, the court entered an order noting that the matter had been heard and ordering that Proskine be dismissed from the case with prejudice. No transcripts of any hearings relating to this discovery dispute appear in the record on appeal.

¶ 13 In July 2011, Hergan filed a motion for summary judgment on Counts I, VIII, and IX of the complaint. With respect to the latter two counts, which were brought as derivative actions on behalf of Rhombus and Central, Hergan asserted that the plaintiff's suit should be dismissed because she had failed to serve those corporations; that he was protected by the business judgment rule; that there was no showing that he breached a duty to the plaintiff or the corporations; that there was no showing that he wasted corporate assets; and that the plaintiff's claims should be barred by laches.

¶ 14 In an excerpt of the transcript of Proskine's deposition attached to Hergan's motion, Proskine testified that the Rhombus ownership allocation was determined by agreement of the owners and was intended to reflect the amount of work each owner put into the venture. He testified that all of the owners made equal initial investments of $500,000. Proskine further testified that the plaintiff began arguing that her loans to the company should be converted to equity only after she saw that the venture was thriving.

¶ 15 In excerpts of Hergan's deposition, Hergan testified that all of the Rhombus owners agreed to the equity distribution and that the owners all contributed equal equity to the venture. He said that any funds that came into the company after that initial investment, including capital calls, came in the form of loans from the owners.

¶ 16 Among the documentary evidence attached to Hergan's motion for summary judgment was a 1998 organizational agreement signed by the plaintiff setting her Rhombus ownership at 17% and an October 2002 agreement signed by the plaintiff indicating that the plaintiff held a 15% share in Central.

¶ 17 Hergan attached to his motion for summary judgment a copy of a June 9, 2006, agreement among several of the Central owners (and signed by the plaintiff). The agreement stated that the plaintiff would have a 15% ownership interest in Central and in the Charles de Gaulle, Canadian Embassy, and Avrig 35 projects. The agreement further stated that Central would repay loans and expenses to several parties before distributing equity. The plaintiff is listed among the parties whose debt and expenses were to be reimbursed, but her name is accompanied by a note stating "expense reimbursement only, including but not limited to legal fees she incurred in an amount not to exceed $70,000."

ΒΆ 18 Hergan testified that, at some point, the plaintiff sought to convert her loans to equity instead of having the loans paid off with cash from the company. According to Hergan, Rhombus determined in 2006 that it could make a distribution to its shareholders, but it decided to first pay off its outstanding loans. Hergan said that loans sourced by the plaintiff were not paid off at that time, because the plaintiff "chose to get her money as a conversion of her loans and to equity, and, as such, she was paid exactly what the ...


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