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C.O.A.L., Inc. v. Dana Hotel, LLC

Court of Appeals of Illinois, First District, Fifth Division

August 4, 2017

C.O.A.L., INC., Plaintiff-Appellant,
DANA HOTEL, LLC, Defendant-Appellee.

         Appeal from the Circuit Court of Cook County. No. 13 L 7217 The Honorable Eileen O'Neill Burke, Judge Presiding.

          PRESIDING JUSTICE GORDON delivered the judgment of the court, with opinion. Justices Hall and Lampkin concurred in the judgment and opinion.



         ¶ 1 The instant appeal arises from the trial court's section 2-615 dismissal of the complaint filed by plaintiff C.O.A.L., Inc., regarding the termination of the restaurant manager-owner relationship between plaintiff and defendant Dana Hotel, LLC. The trial court dismissed count I of plaintiff's complaint because it found that the agreement relied on by plaintiff had been superseded by a later agreement and dismissed count III because it found that plaintiff's claims that defendant had breached its fiduciary duty had been released. Plaintiff appeals the dismissal of both counts and, for the reasons that follow, we reverse.

         ¶ 2 BACKGROUND

         ¶ 3 I. Complaint and Exhibits

         ¶ 4 A. Complaint

         ¶ 5 Plaintiff filed a complaint against defendant on June 21, 2013; the complaint was amended twice, and it is the dismissal of the second amended complaint that is at issue on appeal.

         ¶ 6 The complaint alleges that plaintiff is an Illinois corporation engaged in the restaurant management business, and defendant is an Illinois limited liability company that operates the Dana Hotel Chicago, a hotel located in Chicago. Together, plaintiff and defendant are the two members of Argent Restaurant, LLC, an Illinois limited liability company formed to operate the Argent restaurant at the hotel.

         ¶ 7 On October 19, 2011, plaintiff and defendant entered into a restaurant management agreement (management agreement), a written contract for restaurant management services for the restaurant. This management agreement was a five-year contract, with an effective date of May 1, 2012, and a three-year optional renewal period. Under the terms of the management agreement, plaintiff was to provide restaurant management services for the restaurant in exchange for (1) a $100, 000 annual management fee, payable in monthly increments from the first date the restaurant was open and operating; (2) repayment of plaintiff's $154, 000 capital investment, to be paid from the restaurant's profits; and (3) 50% of adjusted net operating income from the restaurant, over and above the amounts needed to repay the parties' invested capital in the project and the funding of an operating reserve fund. Plaintiff's duties in managing the restaurant included (1) the hiring and management of employees, including a chef and general manager; (2) overseeing and ensuring the operation of an orderly, high-quality restaurant in accordance with industry standards; (3) provision of an annual projected budget for the restaurant and operation within the approved budget; (4) provision to defendant of marketing concepts for the restaurant and performance of public relations duties; (5) recordkeeping of revenues and expenses; (6) creation of the restaurant's menu; (7) compliance with all laws pertaining to the operation of the restaurant; and (8) timely submission of invoices for goods and services contracted by plaintiff in connection with the management and operation of the restaurant, to be paid by defendant. The complaint alleges that plaintiff complied with its duties under the management agreement.

         ¶ 8 Shortly after entering into the management agreement, the parties agreed to form Argent Restaurant, LLC (LLC), which was formed on April 4, 2012, with plaintiff and defendant as equal members. The parties agreed that plaintiff's duties to the LLC would mirror its duties as described in the management agreement, while defendant would handle the general accounting for the restaurant and provide plaintiff with weekly profit and loss statements based on the records gathered in defendant's point-of-sale (POS) systems.[1] The parties also agreed that defendant would establish a bank account or accounts in the name of the LLC so that its accounts could be maintained separately from those of the hotel.

         ¶ 9 The complaint alleges that plaintiff made repeated demands for the account information for the LLC's account and was repeatedly denied access to that information by defendant and further alleges that defendant never established a separate account for the LLC or the restaurant and instead commingled funds derived from the restaurant with the hotel's accounts. The complaint alleges that the POS system for the restaurant was part of the same system that defendant used in its other hotel operations, so all data from the restaurant POS went directly to defendant, who was supposed to process the information and provide it in weekly profit and loss statements to plaintiff so that plaintiff could comply with its duties to create an accurate restaurant budget and keep records of the restaurant's revenues and expenses.

         ¶ 10 The complaint alleges that plaintiff began noticing mistakes on each of the weekly profit and loss statements provided by defendant and repeatedly pointed out these mistakes to defendant. Defendant consistently ignored the mistakes and eventually began certifying the restaurant's records for purposes of business accounting without seeking or obtaining plaintiff's approval. Plaintiff was also denied access to the restaurant's books and records and accounting information.

         ¶ 11 According to the complaint, the "mistake-laden" profit and loss statements that were produced between April and December 2012 showed that the restaurant was suffering consistent losses. When plaintiff made demands for its management fee, defendant informed plaintiff that it could not pay the management fee while the restaurant continued to lose money. The complaint alleges that the refusal to pay the management fee constituted a breach of the management agreement, which did not condition payment of the management fee on the restaurant's profits or losses.

         ¶ 12 The complaint alleges that in December 2012, the parties began discussing the possibility of a negotiated buyout by defendant of plaintiff's interest in the LLC, as well as a negotiated termination of the management agreement. "After much negotiation, Plaintiff and Defendant agreed in principle to a so-called 'Separation Agreement' *** by which Defendant would take sole ownership of [the LLC], and Plaintiff would cease to be the Restaurant's Manager under the [management agreement], in exchange for payment of certain amounts to Plaintiff." The complaint alleges that plaintiff's principals executed a copy of the separation agreement on March 25, 2013, "on the understanding that certain conditions in the [separation agreement] would be met by the Defendant before it became effective, " including (1) defendant's provision of profit and loss documentation and other records sufficient to verify and agree upon the total capital invested by the parties in the restaurant (the necessary records); (2) plaintiff's provision of its total capital figure to be used in calculating the total purchase price under the separation agreement, which would be based in significant part on the records provided by defendant; (3) negotiation for settlement of all outstanding invoices by plaintiff, to be paid by defendant; and (4) transfer of all operations from plaintiff to defendant by April 30, 2013. The formula for establishing what plaintiff would be paid for a buyout of its interest in the LLC and the cessation of restaurant operations was outlined in the separation agreement and relied on accounting records to be provided by defendant, which plaintiff had not yet received at the time of execution of the separation agreement.

         ¶ 13 The complaint alleges that, prior to April 2, 2013, and during the pendency of the separation agreement negotiations, Sean Mulroney, on behalf of plaintiff, met with Gene Kornota, on behalf of defendant, to discuss the separation agreement negotiations. During this meeting, they discussed the terms of the separation agreement, and Mulroney indicated that without the necessary documents, the parties would be unable to fix a price or carry out the terms of the separation agreement. Kornota could not provide a timeline for when the necessary records would be provided "and ultimately ended the conversation with a statement that no matter what happened, he and his partners would 'never pay [Plaintiff] a dime.' "

         ¶ 14 The complaint alleges that on March 27, 2013, plaintiff sent defendant an e-mail renewing its request for access to the LLC's books and records. According to the separation agreement, the parties were to agree on a "Total Capital Invested" figure by March 28, 2013, which was to be calculated after defendant's provision of the necessary records, but plaintiff was unable to verify or agree to the figure by that date because it had not been provided any of the necessary records.

         ¶ 15 The complaint alleges that on April 2, 2013, defendant notified plaintiff that it was being locked out of operations as the restaurant's manager and advised plaintiff and the restaurant's staff members that they were no longer allowed to come onto the premises of the hotel or to perform duties under the management agreement. Since that day, plaintiff has been unable to enter the hotel's premises or to perform its duties under the management agreement. On the same day as it locked plaintiff out, defendant provided plaintiff with an executed version of the separation agreement, signed by its principals, "claiming that the signed [separation agreement] provided a valid and enforceable basis for terminating Plaintiff's rights under the [management agreement]."

         ¶ 16 The complaint contains three counts. Count I is for breach of the management agreement and alleges that, at all times, the management agreement was a binding and enforceable contract, requiring plaintiff to perform the duties described in the management agreement in exchange for the payments described therein. Count I alleges that, "[a]t all times before April 2, 2013, Plaintiff performed its duties under the terms of the [management agreement]." Count I further alleges that defendant's act of locking plaintiff out from the hotel and denying plaintiff the ability to perform its duties under the management agreement constitutes a breach of the management agreement. Count I also alleges that despite plaintiff's performance of its duties, defendant never paid plaintiff its management fee of $100, 000 per year and plaintiff was also never compensated for any portion of its initial capital contribution. Count I also alleges that defendant's de facto termination of the management agreement on April 2, 2013, was without cause and that the management agreement specifies that plaintiff is entitled to certain sums of money that plaintiff had not received.

         ¶ 17 With respect to the separation agreement, count I alleges that "[o]n April 1, 2013, before any of the conditions necessary to effect and validate the [separation agreement] had been met by Defendant, and before Defendant's unilateral termination of the [management agreement], Plaintiff notified Defendant that it was cancelling the [separation agreement], and that it intended to continue performing under the [management agreement's] terms." Count I further alleges that "[t]he [separation agreement] was an executory agreement, subject to several conditions of performance by Defendant that were not met" and that "Plaintiff's resignation as manager of the Restaurant was only to be effective under the [separation agreement] at an unspecified future date, when all of the [separation agreement's] conditions had been met." Count I alleges that "[b]ecause the [separation agreement's] conditions were not met prior to Plaintiff's termination of the [separation agreement] on April 1, 2013, the [separation agreement] has no legal effect, and does not serve to invalidate the terms of the [management agreement]." Count I alleges that based on defendant's failure to pay the management fee and other amounts due under the management agreement, plaintiff had sustained damages.

         ¶ 18 Count II is pleaded in the alternative and alleges a breach of the separation agreement. Count II is not at issue on appeal.

         ¶ 19 Count III was for breach of fiduciary duty and alleged that as comembers of the LLC, plaintiff and defendant had fiduciary duties toward each other, "including the duties of loyalty, care, and good faith and fair dealing and, specifically the duty of disclosure of necessary information to members." Count III alleges that based on defendant's conduct in refusing to allow plaintiff access to information, commingling accounts, and refusing to correct its mistakes, defendant breached its fiduciary duties of loyalty, care, and good faith and fair dealing towards plaintiff. Count III further alleges that, on information and belief, defendant maintained two sets of accounting books, one of which reflected accurate information and one of which contained purposefully-modified information that was shared with defendant's investors, and that defendant used funds belonging to the LLC to pay debts owed by defendant. Count III alleges that plaintiff was damaged by defendant's breaches in that it was deprived of the opportunity to realize profits from the restaurant's operations, including payment of its management fees, repayment of its capital contribution, and the ability to realize profits.

         ¶ 20 B. Management Agreement

         ¶ 21 Attached to the complaint was a copy of the management agreement, which was dated October 19, 2011, and provided that plaintiff would be retained to manage the restaurant on defendant's premises and to provide public relations for the restaurant. The initial term of the management agreement was for five years, with an option to renew for an additional three years. Section 3 of the management agreement provided that "[plaintiff] shall receive a management fee (the 'Base Management Fee') equal to $100, 000.00 per fiscal year as a base Management Fee from the operations of [the restaurant], payable in advance on the first day of each month beginning on the first full month after the Launch of [the restaurant], during the Term, plus an incentive fee" as further described by the management agreement, which included 50% of the adjusted net operating income.

         ¶ 22 Section 9 of the management agreement set forth the duties and responsibilities of plaintiff as the manager. Section 9 provided that plaintiff would submit a proposed annual budget to defendant, which defendant would approve at its discretion. Section 9 further provided that plaintiff "shall maintain or compile and shall provide [defendant] with any and all other information, accounts, reports or records related to the Restaurant as the [defendant] may reasonably require" and "shall submit all invoices properly coded to [defendant] at the end of every week." Section 9 provided that defendant "shall cooperate with [plaintiff] with respect to the items set forth in this Section ***. To the extent [defendant] fails to timely provide any information needed to prepare such reports (for example, invoices received directly by [defendant]), [plaintiff] shall not be required to perform."

         ¶ 23 Section 14 of the management agreement pertained to default and termination by defendant and provided that "[i]t shall be an event of default hereunder *** if any one or more of the following events shall occur, " followed by a list of three events of default: (1) "[t]he failure of [plaintiff] to perform, keep or fulfill any of its covenants, undertakings or obligations set forth in this Agreement" if the failure was not cured within the time provided by the management agreement; (2) "[plaintiff's] (including its officers', directors', members', partners' or shareholders') dishonesty, breach of fiduciary duty, breach of duty of loyalty or breach of duty to act in good faith, as determined by [defendant]; and (3) plaintiff's filing of a bankruptcy petition. Section 14 provided that "[t]his Agreement and the Term hereof shall terminate upon the occurrence of an Event of Default. [Defendant] must give [plaintiff] notice of such default in writing and [plaintiff] shall have 30 days from receipt of notice to cure." Section 14 further provided that, if defendant elected to terminate the management agreement without cause, "[defendant] shall pay [plaintiff] 50% of the Base Management Fee for the remainder of the initial term of the Agreement."

         ¶ 24 C. Separation Agreement

         ¶ 25 Also attached to the complaint was a copy of the separation agreement, which provided that it "is made effective as of this 25th day of March, 2013, " and was executed by Sean Mulroney and Julie Darling on behalf of plaintiff and by Gene Kornota and Anthony Klok on behalf of defendant; the signature lines do not have dates written next to the signatures. The recitals of the separation agreement provided:

"WHEREAS, [plaintiff] and [defendant] entered into a Restaurant Management Agreement *** on October 19, 2011 for the redesign and management of the restaurant located in the Dana Hotel;
WHEREAS, [plaintiff] and [defendant] are Members and Managers of Argent Restaurant LLC, each party with a 50% interest;
WHEREAS, [plaintiff] has acted in the capacity of Manager of the restaurant, Argent Restaurant and Raw Bar *** since May 1, 2012;
WHEREAS, [plaintiff] desires to resign as Manager and Member of Argent [R]estaurant LLC and as manager of the Restaurant;
WHEREAS, [plaintiff] also desires [that defendant] redeem all of the Interest in Argent Restaurant LLC held by [plaintiff], constituting a 50% Interest in Argent Restaurant LLC;
WHEREAS, [defendant] desires to accept such resignations; and
WHEREAS, [defendant] is willing to redeem [plaintiff's] Interest, as partial consideration for the releases and ...

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