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Daniel v. Ripoli

Court of Appeals of Illinois, First District, Third Division

January 28, 2015

KRIS DANIEL and MARK DANIEL, Independent Co-Executors of the Estate of Benjamin S. Daniel, Deceased, Plaintiffs-Appellees and Cross-Appellants,
v.
DONALD P. RIPOLI, V. JAMES GRIECO, ARNOLD N. SHORN AND COMPANY, an Illinois Partnership and ARNOLD N. SHORN AND COMPANY, LLC, an Illinois Limited Liability Company, Defendants-Appellants and Cross-Appellees.

Appeal from the Circuit Court of Cook County. No. 07 CH 1061 The Honorable Rita M. Novak, Judge Presiding.

PRESIDING JUSTICE PUCINSKI delivered the judgment of the court, with opinion. Justices Lavin and Hyman concurred in the judgment and opinion.

OPINION

PUCINSKI PRESIDING JUSTICE

¶ 1 This action was brought by the defendant limited liability company's (LLC) deceased member's estate to recover the amount of LLC distributions allegedly due to the decedent under the member's participating percentage in the LLC's operating agreement. The members subsequently executed an agreement modifying the decedent's participating percentage in the LLC under the operating agreement. The trial court found that the agreement did not effect a permanent change for the member's participating percentages and that, after the years specified in the agreement, the decedent was due the amount of his original participating percentage, which was awarded to the estate. The court entered judgment against the LLC only and held that the individual LLC members had no personal liability. The LLC appealed, arguing that the court misinterpreted the agreement and that the modification was a permanent change in the participating percentages, and the estate cross-appealed, arguing that the other LLC members also had individual liability and that the LLC conversion failed, that the damages were not based on the evidence, and that the estate was further entitled to post-death distributions to the decedent.

¶ 2 The estate argues as a threshold matter that we do not have jurisdiction of this appeal because we should disregard the timely circuit court file stamp on the face of the notice of appeal as insufficient because it was allegedly stamped at a "self service" box and because it was not stamped specifically by the civil appeals division of the circuit court. There is a dearth of precedent squarely holding that a circuit court file stamp is considered the date the court received the notice of appeal for purposes of jurisdiction. We hold that it is.

¶ 3 As to the merits of the LLC's appeal, we hold that the circuit court erred in determining that the subsequent agreement effected a change in the decedent member's participating percentage in the LLC for only the years 2003 and 2004. Further, we clarify that our standard of review, although the court heard extrinsic evidence, is nevertheless de novo where the trial court bases its judgment solely on its interpretation of a contract. Here, the contract terms are plain and unambiguous and do not limit the change in the capital accounts to only certain years. The court therefore erred in its entry of judgment in favor of the estate and award of damages to the estate. We reverse the entry of judgment and award of damages to the estate on its claim. Although the LLC asserted that it was entitled to entry of judgment and award of damages from the estate on its counterclaim, the LLC waived this argument because it included no authority in its appellate brief, and so we affirm the entry of judgment in the estate's favor and against the LLC on the LLC's counterclaim.

¶ 4 As to the estate's cross-appeal, we hold that the Illinois Limited Liability Company Act (805 ILCS 180/1-1 et seq. (West 1998)) is clear regarding the requirements for an effective conversion to an LLC, which were met in this case, and that individual LLC members have no personal liability. The estate did not provide any support for its contention that an estate could bring suit against the individual LLC members, thereby forfeiting this argument. Also, the trial court's damage award was firmly based on the evidence presented by the estate's expert and the LLC did not present its own countering expert testimony regarding the calculation of damages. But the estate is not entitled to post-death distributions, as an addendum to the operating agreement provided that no post-death distributions would be paid unless a loan taken by decedent and another LLC member was repaid, and there was insufficient evidence that this loan was in fact repaid. We therefore affirm these portions of the court's order finding that defendants Donald Ripoli and James Grieco have no individual liability and denying the estate distributions on death.

¶ 5 BACKGROUND

¶ 6 The parties in this case disputed many facts and issues below in the claim and counterclaim. We summarize only the facts pertinent necessary to a resolution of the limited grounds of the appeal and cross-appeal.

¶ 7 Beginning in December 1976, defendant Donald Ripoli and plaintiffs' decedent Benjamin Daniel were partners in the public accounting firm of Arnold N. Schorn & Co., an Illinois general partnership. On December 31, 1998, Ripoli and Daniel filed articles of organization and a statement of conversion with the Illinois Secretary of State, which converted the Arnold N. Schorn & Co. partnership into a limited liability company called the Arnold N. Schorn & Co. LLC. The statement of conversion stated that "[e]ach partner voted for the conversion." The articles became effective on January 1, 1999.

¶ 8 On June 1, 1999 defendant James Grieco became a member of the LLC, and the members entered into an operating agreement providing that the members' participating percentage of profit allocation would be as follows if the LLC's profit was $600, 000 or less: 36.5% to Grieco; 36.5% to Ripoli; and 27% to Daniel. Under the operating agreement, Daniel, Ripoli, and Grieco "approved and ratified" the articles of organization and agreed to operate the business under the Illinois Limited Liability Company Act (805 ILCS 180/1-1 et seq. (West 1998)) and the operating agreement. The operating agreement further provided that "the rights[, ] duties and liabilities of the members shall be those provided in the Act as amended from time to time."

¶ 9 According to the operating agreement, the capital account of a deceased member would be paid over to the member's estate within six months of the date of death. The operating agreement provided that "any capital deficit must be eliminated within 60 days of when the deficit occurs." The operating agreement set forth a formula for distributing additional disbursements upon the death of a member. The operating agreement also contained a buy-out provision to be effective upon any member's death. The operating agreement also permitted amendment by majority approval but required consent of the affected member if the amendment would reduce the participating percentage of that member other than on a pro rata basis.

¶ 10 On October 6, 1999, Ripoli and Daniel entered into an amendment to the operating agreement in which they opted out of the buy-out provision and agreed that this provision would not apply to them unless and until a prior bank loan from American National Bank was paid. The evidence did not establish whether this loan was ever paid off. Grieco did not sign this agreement.

¶ 11 On November 3, 2003, the three members met to discuss a disparity between Daniel's participating percentage and the actual income generated from Daniel's clients. As the Daniel estate's expert, Mike Ryan, testified, from 2000 to 2003 Daniel was given credit for contributing 27%, but his clients paid the LLC only 17%. As a result, Daniel had a negative capital account with the firm. A "capital account" is an accounting term. A capital account represents an accumulation of each member's contributions minus the member's distributions from all prior years and reflects the corresponding amount due between members, if distributions exceed contributions. At trial, Ripoli explained that a capital account is "the difference between the earnings of each individual member minus the draws of each individual member."

¶ 12 The minutes from the meeting of November 3, 2003 revealed that Ripoli's book of business was on target with his participating percentage, at approximately 35.85%. However, Grieco's book of business in 2003 accounted for approximately 50% of the LLC's income, whereas his participating percentage under the operating agreement was set at 36.5%. Daniel's book of business in 2003 amounted to only 13.5% of the LLC's income, while his participating percentage under the operating agreement was 27%. The minutes also reflect that Daniel's capital account was shown as a negative ($79, 379).

¶ 13 Daniel's negative capital account and the disparity between Grieco's and Daniel's contributions in the form of client payments and what each was credited and distributed under the operating agreement created tremendous friction between the partners and threatened to lead to the dissolution of the LLC. The minutes of the members' November 3, 2003 meeting state: "Current ratios will not allow the firm to continue. A disproportionate share of income and draws are directed to Ben Daniel." (Emphases in original.)

¶ 14 On November 24, 2003 the members met again to continue discussing this disparity and discussed various proposals to correct this disparity. The minutes of this meeting indicate that the first option discussed was termination of the firm as of October 31, 2003. The members decided against this option, however, because at the time the firm liabilities exceeded its assets. The second option discussed was that Daniel's clients would remain with the firm but Daniel would "retire" and he would be paid for those clients on a "fee per hour basis."

¶ 15 Under the third option, which is the option the members ultimately agreed upon, the LLC would continue with Daniel as an active member but with adjustments made to his draws. Specifically, the first $100, 000 of Daniel's clients' cash payments to the firm would be used to pay Daniel's share of expenses. In the event that Daniel's clients paid more than $100, 000 he would then receive a draw limited to a maximum of $5, 500 per month or $66, 000 annually. If Daniel's clients paid more than $166, 000, any difference would be paid to the firm as a reduction of Daniel's negative capital account. The firm would provide Daniel with health and life insurance as a firm expense, with the firm designated as the beneficiary of the life insurance policy. Daniel would also be required to sign a promissory note for his negative capital account.

¶ 16 On December 8, 2003, the members, including Daniel, signed an agreement stating that for the year 2003 the members were not going to follow the participating percentages of the original operating agreement. Instead, they would determine that year's participating percentage based on a review of the LLC's financial statements for the year ending December 31, 2003. The agreement provided as follows:

"THE UNDERSIGNED, MEMBERS OF ARNOLD N. SCHORN & CO., LLC, HEREBY AGREE THAT THE PROFIT ALLOCATION AMONG MEMBERS AS REFLECTED IN THE AGREEMENT SIGNED BY THE MEMBERS IN 1999, WILL NOT APPLY TO THE YEAR 2003.
FOR THE YEAR 2003, THE PROFIT ALLOCATION TO BE USED FOR MEMBERS WILL BE DETERMINED UPON REVIEW OF ARNOLD N. SCHORN & CO., LLC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003."

¶ 17 On January 14, 2004, the members, including Daniel, signed another agreement titled, "POINTS FOR AGREEMENT–MEMBERS OF LLC–CHANGES TO OPERATING AGREEMENT SIGNED IN 1999." The members agreed to change their capital accounts as of December 2003 to reflect the actual percentages of what each member's clients cash receipts were, minus each member's actual distributions. The agreement provided the following:

"1. CAPITAL ACCOUNTS TO BE RESTATED AS OF 1/1/03 BASED UPON A RATIO OF CASH RECEIPTS PER PARTNER CLIENTS TO TOTAL CASH RECEIPTS APPLIED TO NET INCOME FOR THE YEAR."

¶ 18 The agreement provided for an adjustment to each member's capital account beginning in 2003 based on the member's actual income to the firm minus his actual distributions from all prior years, referred to by defendants as a "running scoreboard" concept. Paragraph 2 of the January 14, 2004 agreement identified the percentage of actual cash receipts each member's clients paid to the firm in 2003 and allocated profit and loss accordingly for 2003.

¶ 19 Paragraphs 3 and 4 addressed Daniel's draws for 2004 in detail and provided as follows:

"3. FOR YEAR 2004–DRAWS FOR BSD [Daniel] LIMITED TO EXCESS OF CASH RECEIPTS FROM BSD MEMBER CLIENTS LESS $100, 000. MAXIMUM DRAW DISTRIBUTION IN ANY MONTH LIMITED TO $5, 500. IF DRAW SHOULD BE LARGER THAN $66, 000 ($5, 500 X 12 months) EXCESS TO REDUCE NEGATIVE CAPITAL ACCOUNT. IF COLLECTIONS DO NOT WARRANT A $66, 000 DRAW, $5, 500 WILL BE REDUCED ACCORDINGLY. HEALTH AND DENTAL INSURANCE, AICPA LIFE INSURANCE AND $50, 000 INSURANCE ON LIFE OF BSD [Daniel] WITH FIRM AS BENEFICIARY, WILL BE CONSTRUED AS OPERATING EXPENSES FOR THIS COMPUTATION. INCOME ALLOCATION WILL BE BASED UPON CASH RECEIPTS FROM MEMBER CLIENTS TO TOTAL CASH RECEIPTS FROM MEMBER CLIENTS.
4. E.G. MONTHLY CONTRIBUTORY EXPENSES $8, 333. THIS IS CARRIED OVER MONTH TO MONTH MINIMUM CASH REQUIREMENT FOR DRAW TO BE PAID $8, 222 X # OF MONTHS–CASH RECEIPTS TO DATE.
COLLECTIONS IN ANY ONE MONTH ARE FIRST APPLIED TO THE $8, 333 REQUIRED CONTRIBUTION. DRAW OF UP TO $5, 500 CAN THEN BE TAKEN. IF TOTAL RECEIPTS ALLOW.
IF AMOUNT COLLECTED IS LESS THAN $8, 333 LESS AMOUNT COLLECTED IS CARRIED OVER TO THE FOLLOWING MONTH. NO DRAW WILL BE TAKEN FOR THAT MONTH. IN THE SUBSEQUENT MONTH THE $8, 333 PLUS CARRIED OVER AMOUNT NEEDS TO BE COLLECTED BEFORE A DRAW IS PAID."

¶ 20 The January 14, 2004 did not specifically address Daniel's draws for any years beyond 2004.

¶ 21 From the beginning of the LLC to the end of 2003, based on actual payments made by Daniel's clients, minus the actual distributions Daniel received, Daniel had a negative capital account of $218, 492. This amount was reflected in the January 14, 2004 agreement.

¶ 22 The result of the January 14, 2004 agreement was that Daniel received a substantially reduced distribution. The total distribution to Daniel in 2003 was $210, 806. Beginning in January 2004, Daniel received only $500 per month in draws, plus the payment of his health insurance benefits. His total distribution for 2004 was $38, 448. For the years 2004, 2005, and 2006, Daniel's participating percentage in the LLC was reduced to 9.3% in 2004, 7.95% in 2005, and 0% in 2006. Daniel accepted these reduced distributions.

¶ 23 In November 2004, Daniel wrote a memo to Ripoli and Grieco to "discuss the compensation policy for Ben Daniel [year 2004] and to discuss what is fair for all concerned." Daniel asserted that the December 8, 2003 agreement was signed regarding "compensation by the partners for 2003 only" and that "nothing has been signed for 2004." Daniel wrote that he wanted $1, 000 per month for living expenses and payment for his estimated taxes and health insurance. Daniel wrote in his memo: "The difference between my share of gross collections and the net to me above will be kept by the firm to reduce my deficit in my capital account." Nevertheless, Daniel continued to receive and accept reduced distributions under the reduced participating percentage.

¶ 24 The LLC members all abided by the terms of the January 14, 2004 amendment to the operating agreement until Daniel passed away. Daniel died on July 12, 2006. After Daniel's death, his estate brought this action in a four-count verified complaint against Ripoli, Grieco, the Arnold N. Schorn & Co. partnership, and the LLC, seeking the amount the estate claimed was owed to Daniel under the amended terms of the operating agreement. Count I alleged breach of contract for breach of the buy-sell agreement by Ripoli and the partnership and asserted, as a factual predicate to this claim, that the conversion from a partnership to an LLC failed. Count II sought a declaratory judgment that under the December 8, 2003 agreement and the January 14, 2004 agreement Daniel's participating percentage in the LLC was 27%, the original participating percentage, for the years 2004, 2005, and 2006. Count III sought rescission of the January 14, 2004 agreement based on Grieco's and Ripoli's breach of fiduciary duty to Daniel. Count IV sought an accounting.

¶ 25 Defendants filed a two-count counterclaim. Count I sought damages for an account stated for Daniel's negative account to recover all amounts Daniel allegedly owed. Count II was brought by Ripoli individually to recover $1, 870.38 he allegedly personally paid as the premiums due on the life insurance policy purchased by the LLC and the balance due on a loan he and Daniel had co-signed dated September 23, 2004.

¶ 26 On March 26, 2009, the Daniel estate field a verified first amended complaint, which alleged the same four original counts, as well as adding two more counts, counts V and VI. Count V sought a declaratory judgment that the January 14, 2004 agreement was unenforceable for lack of consideration, and count VI sought a declaratory judgment regarding some of the terms used in the January 14, 2004 agreement.

¶ 27 After discovery, the parties filed cross-motions for summary judgment. The estate filed a motion for summary judgment on counts I and V and for summary judgment seeking a declaration under count II that Daniel's participating percentage was 27% (the original operating agreement percentage) for the years 2004, 2005, and 2006. Defendants filed a motion for summary judgment in their favor on count III.

¶ 28 On February 3, 2010, the court granted the estate's motion for summary judgment as to the issue of Daniel's participating percentage under count II in part as to 2004, but denied the estate's motion on this count as to the years 2005 and 2006, finding that the January 14, 2004 agreement did not mention the years 2005 and 2006. The court denied the estate's motion for summary judgment on counts I and V.

¶ 29 The court granted defendants' motion for summary judgment on count III (breach of fiduciary duty), finding that the Daniel estate's assertion of the Dead-Man's Act (735 ILCS 5/8-201 (West 2010)) rendered them unable to prove that Grieco and Ripoli breached their fiduciary duty to Daniel.

ΒΆ 30 Regarding count I, the court solicited briefing from the parties and the estate filed a "Motion for the Declaration of the Consequences from the Faulty Conversion." The court denied the estate's motion on July 27, 2010, finding that, notwithstanding the confusing manner in which the LLC members maintained certain partnership documents and tax returns, the LLC conversion occurred as a ...


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