THIRD DIVISION March 14, 2007
1-06-0254
TOWER INVESTORS, LLC, an Illinois Corporation, ) Appeal from the ) Circuit Court Plaintiff-Appellee, ) of Cook County. ) v. ) ) No. 02 L 004120 111 EAST CHESTNUT CONSULTANTS, INC., an ) Illinois Corporation, and INVSCO GROUP, LTD., an ) Illinois Corporation, ) Honorable ) Allen S. Goldberg, Defendants-Appellants. ) Judge Presiding.
PRESIDING JUSTICE THEIS delivered the opinion of the court:
Following a bench trial, the circuit court of Cook County found that defendants, 111 East
Chestnut Consultants, Inc. (Consultants), and Invsco Group, Ltd, its parent company (Invsco)
(collectively defendants), had breached a contract with plaintiff, Tower Investors, LLC (Tower).
That contract provided that in exchange for Tower’s forbearance from suing Consultants for
repayment of a $350,000 promissory note for roughly one year, Consultants, along with Invsco as
guarantor, would repay the principal of the note (the forbearance agreement). The circuit court
ordered defendants to pay Tower $350,000 in compensatory damages plus statutory interest from
the date of the breach. Defendants now appeal, contending, in essence, that: (1) the law firm
Sonnenschein, Nath & Rosenthal (Sonnenschein), of which most Tower members are partners, is
an alter ego of Tower, and Tower breached the forbearance agreement when Sonnenschein sued
defendants for attorney fees, thereby relieving defendants of performance of their obligations
under the forbearance agreement; (2) the forbearance agreement is not an enforceable contract 1-06-0254
because it was not supported by consideration; and (3) the forbearance agreement is not an
enforceable contract because it was induced by fraud, specifically, Sonnenschein’s failure to
disclose that it had a conflict of interest with defendants by virtue of its simultaneous
representation of defendants and investment in Consultants through Tower. For the following
reasons, we affirm.
The record discloses the following relevant facts. Sonnenschein is a large, national law
firm with its principal office in Chicago. Sonnenschein has roughly 250 partners. Sonnenschein
has never been a party to this case.
Tower is a corporation formed by several Sonnenschein partners to enable them to make
investments in client-related and other entities for a profit. Tower has been in existence in
various corporate forms since the 1930s. The individuals who are members of Tower meet
certain requirements, including that they are accredited investors. Tower’s membership is also
restricted to less than 100 members. At the time of trial, Tower had 75 or 80 members. Tower is
managed by its own management committee, and Sonnenschein provides no direction to and has
no relationship with Tower’s management.
Invsco is a privately owned, billion-dollar real estate development firm, which develops
condominiums in, not only Illinois, but several other states including Georgia, Florida, Indiana,
and Texas. Invsco has developed 40 or 50 buildings in Chicago. Invsco formed Consultants in
1993 to convert an apartment building located at 111 East Chestnut Street in Chicago into
condominiums. Invsco has been the sole shareholder of Consultants since its incorporation.
Tower commenced the present action when it filed a one-count breach of contract claim
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against Consultants and Invsco alleging the following. In January 1995, Tower loaned $350,000
to Consultants for use in the condominium conversion of the 111 East Chestnut building. The
loan and the terms of repayment were memorialized in a promissory note, which was due
September 1, 1999. However, Consultants failed to make all of the required interest payments
and failed to repay any of the principal.
In May 2000, Consultants requested that Tower enter into a forbearance agreement and
conditional general release (the forbearance agreement), which modified the terms of the
promissory note in the following ways. Consultants, along with Invsco as guarantor, agreed to
reimburse Tower the principal of the loan, excluding any interest, by December 18, 2001. In
exchange, Tower agreed not to prosecute any claims against Consultants, Invsco, or the
condominium conversion project by not initiating any litigation in connection with the loan or
the project prior to December 18, 2001.
Tower alleged that although it had performed its obligation to forbear, neither
Consultants nor Invsco made any payment under the agreement. Accordingly, Tower sought
$350,000 in damages plus statutory interest from December 18, 2001, and costs.
In their answer, defendants claimed that the forbearance agreement was not an
enforceable contract between Tower and Invsco because there was no consideration. Defendants
also denied that Tower performed its obligations under the forbearance agreement and denied
that they breached it.
Tower subsequently filed a motion for summary judgment, arguing that defendants
breached the forbearance agreement when they failed to repay the $350,000 principal before
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December 18, 2001. In response, defendants reiterated that the agreement was unenforceable
because there was no consideration flowing to Invsco. Defendants also claimed that Tower’s
forbearance was invalid because Tower knew that Consultants was insolvent at the time the
agreement was made. In the alternative, defendants claimed that Tower was an alter ego of
Sonnenschein and that Sonnenschein breached the forbearance agreement when it sued
defendants for attorney fees for work Sonnenschein had performed on the 111 East Chestnut
condominium conversion project and another unrelated project. The circuit court denied Tower’s
summary judgment motion.
The circuit court then conducted a bench trial. At that trial, Paul Miller, one of the
managers of Tower, testified for Tower, detailing the circumstances of the $350,000 loan to
Consultants. In summary, in the promissory note, which was dated February 10, 1995,
Consultants agreed to repay Tower the $350,000 principal of the loan, plus 8% interest per
annum, by September 1, 1999. The interest payments were to be paid monthly. Consultants
made some of these interest payments, but never repaid the principal.
Sometime after the September 1, 1999, due date of the note, Miller asked Consultants
about repayment. Consultants and Invsco then requested that Tower enter into the forbearance
agreement. In December 2000, Tower ultimately decided to agree to it. Specifically, that
agreement recognized that Tower had invested $350,000 in Consultants for the condominium
conversion project and that Consultants and Invsco desired to reimburse Tower the principal
amount of its investment. Accordingly, Consultants and Invsco agreed to repay Tower the
$350,000 principal investment on or before December 18, 2001, provided that Tower observed
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the forbearance undertaking. This required Tower not to:
“Prosecute any claims against Consultants, [Invsco Group] Ltd., the
[Chestnut Street Holdings, LLC] Company, or the [condominium conversion]
Project, or their respective successors, assigns, shareholders, officers, employees,
subsidiaries, affiliates, principals, agents, representatives and attorneys * * *
including, without limitation, by not initiating any litigation prior to December 18,
2001, arising from or in connection with their Principal Investment or the
Project.”
On cross-examination, Miller added that defendants drafted the agreement. Miller signed the
agreement on behalf of Tower. In a response to an interrogatory that was admitted into evidence
during Tower’s case-in-chief, defendants admitted that Steven E. Gouletas, a divisional president
of both Invsco and Consultants, and the son of its chairman, Nicholas S. Gouletas, signed on
defendants’ behalf. However, neither Consultants nor Invsco repaid the principal by December
18, 2001.
Following the close of Miller’s testimony and the reading of defendants’ responses to two
of Tower’s interrogatories into the record, Tower rested its case-in-chief. For defendants, Wayne
Hannah, who had been a partner at Sonnenschein for 47 years, testified as an adverse witness that
Sonnenschein has represented Invsco and related entities for over 15 years. Hannah was also a
member of Tower.
Sometime in late 1994 or early 1995, Mark Goldstein, the chief executive officer (CEO)
of Invsco at the time, telephoned Hannah about the 111 East Chestnut project. Goldstein
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informed Hannah that Invsco was in the process of acquiring the 111 East Chestnut building.
However, because Sonnenschein represented the seller of the building, and the seller would not
“give a waiver,” Goldstein explained that Invsco could not hire Hannah to work on the purchase.
Nevertheless, Goldstein said that Nicholas Gouletas would like Hannah to handle the conversion
of the building from apartments to condominium ownership after the purchase had been
completed. Goldstein also told Hannah that Invsco was going to issue a private placement
memorandum to request capital investments in the project. Knowing that Hannah was also a
member of Tower, and that Tower had invested in approximately five other Invsco projects in the
past, Goldstein asked Hannah if he would submit the memorandum to the Tower management
committee to see if it was interested in investing in the project.
The private offering memorandum indicated that Consultants was seeking up to
$4,700,000 in participating notes, that would be due September 1, 1999. The private offering
memorandum also indicated that the offering involved a high degree of risk, including potential
conflicts of interest, and accordingly restricted participation in the offering to accredited
investors only. The memorandum also described the 111 East Chestnut building. Participating
notes were to be unsecured and to bear interest of 8% per annum. This memorandum was
drafted by outside counsel for Invsco and Consultants, from a firm other than Sonnenschein.
Tower agreed to invest $350,000 in Consultants for the project. Hannah believed this
occurred before he did any legal work on the project. A Tower investor’s bulletin dated October
18, 1994, detailed the terms of the investment. Specifically, Tower invested $250,000 from its
liquid capital pool. However, because Tower was experiencing a shortage of liquid funds at that
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time, the additional $100,000 was provided by Sonnenschein partners who were accredited
investors and who “may or may not have been” members of Tower. Hannah also explained that
this $100,000 was drawn on the particular partners’ personal draw accounts, which contained
funds owned by the individual partners but which were maintained by Sonnenschein.
Starting in early 1999, different people at Sonnenschein met with Mike Fish, the vice-
president of Invsco, regarding payment of legal fees in matters other than the Tower investment.
Hannah recalled personally asking Fish on several occasions whether Sonnenschein would be
paid for the work that he had done. Hannah also spoke with Nicholas Gouletas starting in 1999
about the financial situation of Consultants. However, Hannah added on cross-examination that
he personally never received the financial information he had requested. Hannah also said that
there was no indication that Consultants’ net worth was negative at that time.
Subsequently, defendants sent a letter to all investors in Consultants indicating that their
principal investment would not be returned unless they signed the enclosed forbearance
agreement. The letter and the forbearance agreement were written by Invsco’s general counsel,
Tony DeBenedetto. Tower, as one of Consultants’ investors, received this letter and the
agreement. Neither Tower nor Sonnenschein had any part in drafting the forbearance agreement,
and at no point did any representative of defendants indicate that the forbearance agreement was
also meant to include the legal fees that defendants owed to Sonnenschein. Tower did not sign
the agreement immediately. When it did decide to sign the agreement in December 2000, no
changes had been made to the original document drafted by DeBenedetto.
On December 26, 2000, Hannah returned the forbearance agreement, signed by the
7 1-06-0254
relevant directors of Tower, to Nicholas Gouletas. A letter that Hannah sent to Gouletas along
with Tower’s signed copy of the forbearance agreement indicated that “Mike Fish has promised
payments of the amounts to Sonnenschein for legal fees by the end of January 2001.” Hannah
added that he was “hopeful that this timetable will prove realistic.”
Hannah explained on cross-examination that Sonnenschein completed work on its last
Invsco-affiliated legal project in April 1999. Beginning in 2000, Sonnenschein told Hannah that
neither he nor the rest of the firm could perform any additional legal services for Invsco or
related entities. Nevertheless, Hannah believed that he still had an attorney-client relationship
with defendants throughout 2000. Hannah also never had any further meetings with Invsco
regarding collection of fees. However, although Hannah was neither a partner of Sonnenschein,
because of his age, nor a member of the management committee of Tower at the time, Hannah
recommended to the Sonnenschein finance committee that they sue Consultants to collect the
unpaid fees.
Sonnenschein did ultimately sue Invsco, Consultants, Nicholas Gouletas, and another
Invsco entity for unpaid legal fees on August 10, 2001. On cross-examination, Hannah added
that the majority of the fees sought in that suit were from projects other than the 111 East
Chestnut project.
On December 5, 2001, Hannah wrote to Nicholas Gouletas and asked him if Tower could
expect repayment of the $350,000 principal by December 18, 2001. Hannah reminded Gouletas
that “[r]ecognizing your problems, we’ve accomodated you.” However, defendants never paid
Tower.
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Paul Miller testified again as an adverse witness for defendants. He explained the origins
of Tower, its purpose, and how it operated. Among other things, Miller emphasized that Tower
was run by a management committee, which met roughly once a month and made the decisions
about investments. Sonnenschein had no input in that committee, nor did Tower’s management
committee have any input in Sonnenschein’s management. Daniel Swett, a corporate and
securities lawyer for Sonnenschein and a member of Tower, also testified as an adverse witness
and related substantially the same information about Tower.
Miller also described more of the circumstances surrounding the advent of the
forbearance agreement. Specifically, he indicated that he received financial data regarding
Consultants on May 16, 2000, from Nicholas Gouletas. This information indicated that
Consultants’ net worth was approximately $13 million while its liabilities were roughly $15
million; however, Miller believed that its value was more than Gouletas had disclosed. In
addition, Consultants continued to operate, generate revenue, and pay bills. Miller also noted
that the forbearance agreement was drafted by Invsco’s general counsel and that it was not
altered from the time it was proposed in late 1999 until it was entered into in late 2000. Miller
was not aware of the fee dispute between Sonnenschein and defendants.
Mike Fish, vice-president of Consultants, testified that Hannah and Gouletas had been
working together since the 1970s. When Fish joined Consultants in 1995, Hannah was working
with both Consultants and Invsco. Fish explained that the 111 East Chestnut project was
performing very poorly in the late 1990s because of unforseen construction costs and other
expenses. At the time of trial, the project was operating at a $6 million loss.
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Regarding the value of Consultants, Fish explained that although the net worth on a
historical cost basis was negative, on a market value basis, it was not. This was because the
value of the assets of the firm was more than the historical cost to acquire them. Regarding the
forbearance agreement, Fish did not favor it because he did not believe it benefitted Invsco
economically.
Nicholas Gouletas, the chairman and founder of Invsco, also testified for the defense. He
provided background detail about Invsco and Consultants. Gouletas explained that he had
known Hannah for over 30 years, and Hannah had worked on anywhere between 30 and 50 of
Gouletas’s projects. Regarding defendants’ alter ego claim, Gouletas added that he believed
Sonnenschein and Tower were one and the same.
Following the trial, the court announced its findings of fact and conclusions of law in a
written memorandum. Specifically, the court found that there was valid consideration to support
the forbearance agreement because Consultants had assets and was operating at the time of the
agreement. The court further found that Tower’s forbearance was sufficient to bind both
defendants because Invsco’s guaranty was executed contemporaneously with Consultants’
promise to pay. Regarding defendants’ anticipatory breach claim, the court found that
Sonnenschein was not an alter ego of Tower; therefore, Sonnenchein was not bound by the
forbearance agreement. Thus, the court held that Consultants and Invsco had breached the
forbearance agreement and awarded Tower $350,000 in damages plus statutory interest from the
date of the breach.
Subsequently, defendants filed a motion to vacate the judgment. Therein, they claimed
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that Sonnenschein was Tower’s alter ego and that Sonnenschein’s actions in suing defendants for
legal fees constituted a breach of the forbearance agreement. They also claimed that the
forbearance agreement was unenforceable because it was unsupported by consideration and
induced by fraud, namely the conflict of interest between Sonnenschein and Tower. The court
denied defendants’ motion. Defendants then filed this timely appeal.
We will address defendants’ arguments on appeal in a logical order. We will first address
defendants’ arguments regarding whether the forbearance agreement was a valid, enforceable
contract because that is the threshold issue in this appeal. See, e.g., Zirp-Burnham, LLC v. E.
Terrell Associates, Inc., 356 Ill. App. 3d 590, 600, 826 N.E.2d 430, 439 (2005) (observing that
the first element of a breach of contract claim is the existence of a valid, enforceable contract).
Specifically, defendants claim that the forbearance agreement is unenforceable for two reasons:
(1) it is void because it was not supported by consideration and (2) it is voidable because it was
induced by fraud. We must note that if either of these arguments were to prevail, only Invsco
would be absolved of liability because the original January 1995 promissory note agreement
would remain in effect.
Regarding defendants’ allegations that the forbearance agreement is void and
unenforceable, defendants claim that the consideration supporting it fails for two reasons.
Defendants first claim that Tower’s forbearance from suit against Consultants was insufficient
consideration to bind Invsco. Defendants also claim that Tower knew that Consultants was
insolvent at the time; therefore, Tower’s forbearance was invalid because it knew the debt under
the note was uncollectible. We will address each argument separately.
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Included among the elements of an enforceable contract are: (1) offer and acceptance; (2)
definite and certain terms; (3) consideration; and (4) performance of all required conditions.
Zirp-Burnham, 356 Ill. App. 3d at 600, 826 N.E.2d at 439. Consideration means a bargained-for
exchange of promises or performance. Village of South Elgin v. Waste Management of Illinois,
Inc., 348 Ill. App. 3d 929, 940, 810 N.E.2d 658, 669 (2004). Forbearance, including the
compromise of a disputed claim or a promise to forgo legal action, is also consideration. F.H.
Prince & Co. v. Towers Financial Corp., 275 Ill. App. 3d 792, 798-99, 656 N.E.2d 142, 147
(1995).
Here, in the forbearance agreement, Invsco agreed to assume an obligation to repay
Consultants’ debt of $350,000, excluding interest, to Tower. Thus, Invsco’s role in the
forbearance agreement is a guaranty because it is a promise to pay Consultants’ debt to Tower.
Town & Country Bank of Quincy v. E & D Bankshares, Inc., 172 Ill. App. 3d 1066, 1073, 527
N.E.2d 637, 641 (1988).
Generally, a guaranty must be supported by consideration just as any other contract would
be. Restatement (Third) of Suretyship and Guaranty §9 (1996). Significantly, the consideration
flowing to the guarantor does not have to render a personal benefit to the guarantor. Restatement
(Third) of Suretyship and Guaranty §9, Illustration 1, at 35 (1996) (“C agrees to lend D $1,000 if
S will guarantee D’s obligation to C. Following S’s execution of a written guaranty, C makes the
loan. S’s guaranty is supported by consideration even though S receives no direct benefit from
the loan”). A promise based on consideration to benefit a third person constitutes sufficient
consideration to bind the guarantor. Lauer v. Blustein, 1 Ill. App. 3d 519, 521, 274 N.E.2d 868,
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869-70 (1971).
Typically, the consideration supporting the underlying obligation will also support the
guaranty. Restatement (Third) of Suretyship and Guaranty §9, Comment a, Illustration 1, at 35
(1996). In those circumstances, no separate consideration flowing to the guarantor is necessary.
Restatement (Third) of Suretyship and Guaranty §9, Comment a, at 35 (1996); see also City
National Bank of Hoopeston v. Russell, 246 Ill. App. 3d 302, 307, 615 N.E.2d 1308, 1312
(1993). However, where the guaranty is executed after the underlying obligation has been
entered into, new consideration becomes necessary to support it. Russell, 246 Ill. App. 3d at 307,
615 N.E.2d at 1312.
Here, the circuit court found that Invsco’s guaranty was executed contemporaneously
with the original obligation of indebtedness. However, this conclusion is against the manifest
weight of the evidence. The record is clear, and the parties do not dispute, that the $350,000 debt
arose from a February 10, 1995 promissory note, while the parties did not enter into the
forbearance agreement, in which Invsco guaranteed Consultants’ debt to Tower, until December
of 2000. Thus, the guaranty was not executed contemporaneously with the underlying obligation
of indebtedness. We accordingly reverse the trial court’s finding in this regard. See Chicago
Transparent Products, Inc. v. American National Bank & Trust Co., 337 Ill. App. 3d 931, 940,
788 N.E.2d 23, 30 (2002).
Because the guaranty was executed after the guaranteed debt was incurred, new
consideration was necessary to support it. Russell, 246 Ill. App. 3d at 307, 615 N.E.2d at 1312.
Invsco claims that its guaranty of Consultants’ preexisting debt to Tower is unenforceable
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because Invsco personally received no benefit from the forbearance agreement. This is simply
incorrect. As we explained above, Invsco itself did not need to receive a direct benefit for its
written guaranty to be enforceable. Lauer, 1 Ill. App. 3d at 521, 274 N.E.2d at 869-70. Rather,
to be enforceable, there had to be some exchange of new consideration between the parties that
modified the terms of the original loan agreement to make the guaranty enforceable. Finn v.
Heritage Bank & Trust Co., 178 Ill. App. 3d 609, 611-12, 533 N.E.2d 539, 542 (1989). Because
forbearance is valid consideration, Tower’s forbearance from exercising its right to take legal
action against Consultants constitutes adequate consideration to support Invsco’s guaranty of
Consultants’ preexisting debt. See, e.g., F.H. Prince, 275 Ill. App. 3d at 799, 656 N.E.2d at 148
(holding that plaintiff’s forbearance from suit against subsidiary was sufficient consideration to
support defendant’s guaranty of defendant’s subsidiary’s preexisting debt); Finn, 178 Ill. App. 3d
at 612, 533 N.E.2d at 542 (holding that consideration for guaranty of loan previously made was
that guarantor’s friend, the bank manager who issued the loan, would not lose his job for making
a bad loan). Therefore, defendants’ assertion that Tower’s forbearance was insufficient
consideration to bind Invsco to the forbearance agreement is incorrect.
We now turn to defendants’ other argument regarding the consideration supporting the
forbearance agreement. Defendants claim Tower’s forbearance was insufficient to support the
agreement because Tower knew that Consultants was insolvent, meaning that the $350,000 debt
was uncollectible. We disagree.
An entity is insolvent if the sum of its debts is greater than the fair valuation of all of its
assets, and an entity is presumed to be insolvent if it is unable to pay its debts as they fall due or
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in the ordinary course of business. 740 ILCS 160/3 (West 2004); Gray v. Mundelein College,
296 Ill. App. 3d 795, 806, 695 N.E.2d 1379, 1387 (1998); Black’s Law Dictionary 799 (7th ed.
1999). When an entity is insolvent, a debt that it owes is uncollectible; therefore, to forbear from
suing an insolvent entity does not constitute a legal detriment. F.H. Prince, 275 Ill. App. 3d at
799, 656 N.E.2d 147-48. Here, the circuit court found that Consultants was not insolvent
because at the time that the forbearance agreement was created, Consultants was still operating,
generating revenue, paying bills, and holding assets. It continued to do so through the time of
trial. In addition, Fish’s and Miller’s testimony established that the fair market valuation of
Consultants’ assets was greater than its indebtedness. Because the circuit court’s finding that
Consultants was not insolvent is not against the manifest weight of the evidence, we decline to
reverse it here. See Chicago Transparent Products, Inc. v. American National Bank & Trust Co.,
337 Ill. App. 3d 931, 940, 788 N.E.2d 23, 30 (2002).
Moreover, even if Consultants were actually insolvent at the time, in the present case, it
would not change our conclusion. Where a party’s compromise of its claim is made in good
faith, even if that claim is ultimately shown to be invalid, the forbearance is nevertheless
sufficient consideration to support a contract. F.H. Prince, 275 Ill. App. 3d at 801, 656 N.E.2d at
149. Here, the record does not indicate that Tower’s forbearance was not made in good faith.
Both Miller and Hannah testified that they believed that Consultants was not insolvent. Thus,
defendants’ claims that the forbearance agreement lacked consideration fails.
Defendants’ second claim regarding the enforceability of the forbearance agreement is
that it is voidable because it was induced by fraud. Specifically, defendants claim that Tower
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fraudulently induced them to sign the forbearance agreement in two respects. First, they claim
that Tower failed to disclose that Sonnenchein intended to sue defendants for legal fees. Second,
they claim that Sonnenschein and its partners suffered from a conflict of interest due to their
simultaneous representation of defendants and investment in Consultants via Tower.
Fraud in the inducement of a contract is a defect which renders the contract voidable at
the election of the innocent obligor. Illinois State Bar Ass’n Mutual Insurance Co. v. Coregis
Insurance Co., 355 Ill. App. 3d 156, 164, 821 N.E.2d 706, 712-13 (2004). This means that
although the perpetrator of the fraud cannot enforce a voidable contract, the innocent obligor may
either seek to rescind the contract or choose to waive the defect, ratify the contract, and enforce
it. Illinois State Bar Ass’n Mutual Insurance Co., 355 Ill. App. 3d at 164-65, 821 N.E.2d at 713.
In order for a misrepresentation to constitute fraud that would permit a court to set aside a
contract, the party seeking to do so must establish that there was “ ‘a representation in the form *
* * of a material fact, made for the purpose of inducing a party to act; it must be false and known
by the party making it to be false, or not actually believed by him, on reasonable grounds, to be
true; and the party to whom it is made must be ignorant of its falsity, must reasonably believe it
to be true, must act thereon to his damage, and in so acting must rely on the truth of the
statement.’ ” James v. Lifeline Mobile Medics, 341 Ill. App. 3d 451, 456, 792 N.E.2d 461, 465
(2003), quoting Wilkinson v. Appleton, 28 Ill. 2d 184, 187, 190 N.E.2d 727, 729-30 (1963).
Here, defendants’ claim that they were fraudulently induced to enter into the forbearance
agreement is belied by the record in two respects. First, the record shows that defendants, not
Tower, requested that Tower enter into the forbearance agreement. Second, Tower made no false
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statements or attempted to conceal any conflict of interest from defendants. Rather, Mark
Goldstein, the CEO of Invsco at the time, called Wayne Hannah personally and invited him into
the arrangement. Goldstein specifically asked Hannah to simultaneously invest in the project
through Tower and perform legal services for the condominium conversion aspect of the project
through Sonnenschein. Goldstein told Hannah that Nicholas Gouletas had personally requested
this arrangement. In addition, this was not the first time that Invsco and Hannah had worked
together in this manner. Hannah had been providing legal services for Gouletas for over 30 years
and had worked on anywhere between 30 and 50 of his projects. Over the past 15 years, while
Hannah was a member of Tower, Tower had invested in approximately five other Invsco
projects. Thus, the directors of defendants were fully aware of Hannah’s background and the fact
that certain Sonnenschein partners who performed legal services for them were also creditors of
Consultants by virtue of their investment in Consultants through Tower. Because defendants
created this situation with full knowledge of the dual nature of Hannah’s roles, they cannot now
claim that they were fraudulently induced to do anything as a result of their actions. Thus, the
forbearance agreement is a valid, enforceable contract.
We now turn to defendants’ primary argument on appeal. They contend that they should
not be held liable for breach of contract because Tower breached the forbearance agreement first
when Sonnenschein, which it claims is an alter ego of Tower, sued defendants for unpaid
attorney fees related to the 111 East Chestnut project and at least one other project. Defendants
therefore claim that they are relieved of performance of their obligations under the forbearance
agreement. Thus, although defendants do not provide the legal framework for such an argument,
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their theory is, in essence, a defense of anticipatory breach.
An anticipatory breach, also called anticipatory repudiation, is a manifestation by one
party to a contract of an intent not to perform its contractual duty when the time comes for it to
do so even if the other party has rendered full and complete performance. In re Marriage of
Olsen, 124 Ill. 2d 19, 24, 528 N.E.2d 684, 686 (1988); Podolsky & Associates, L.P. v. Discipio,
297 Ill. App. 3d 1014, 1023, 697 N.E.2d 840, 846 (1998). When one party anticipatorily
breaches a contract, the non-breaching party generally has three options: (1) to rescind the
contract altogether and pursue the remedies based on the rescission; (2) to elect to treat the
repudiation as an immediate breach by bringing suit or by making some change in position; or (3)
to await the time for performance of the contract and bring suit after that time has arrived. 23 R.
Lord, Williston on Contracts §63:33, at 561 (4th ed. 2002); see also Builder’s Concrete Co. v.
Fred Faubel & Sons, Inc., 58 Ill. App. 3d 100, 103, 373 N.E.2d 863, 867 (1978). Put another
way, when one party repudiates a contract, the nonrepudiating party is excused from performing
(see, e.g., Curtis Casket Co. v. D.A. Brown & Co., 259 Ill. App. 3d 800, 806, 632 N.E.2d 204,
209 (1994)) or may continue to perform and seek damages for the breach. Yale Development
Co. v. Aurora Pizza Hut, Inc., 95 Ill. App. 3d 523, 526, 420 N.E.2d 823, 825 (1981); 23 R. Lord,
Williston on Contracts §63:33, at 561-62 (4th ed. 2002). In addition, if the party who repudiated
the contract subsequently sues the non-repudiating party for failing to perform, the plaintiff’s
repudiation is a defense. 23 R. Lord, Williston on Contracts §63:37, at 571 (4th ed. 2002).
Here, defendants’ theory of anticipatory breach depends upon treating Tower and
Sonnenschein as one and the same entity. We must observe that at no point in this litigation have
18 1-06-0254
the parties, or even the circuit court, engaged in a discussion about whether the equitable doctrine
of piercing the corporate veil can be used in these circumstances. In essence, defendants seek to
use the theory as a means to defend a breach of contract action by imputing the conduct of one
business entity, Sonnenschein, to another allegedly related entity, Tower.
At oral argument, we asked the parties to submit supplemental briefs on this issue.
Responding to our request, defendants cite two cases applying an “alter ego defense,” a 43-year-
old case from Tennessee (Neese v. Fireman’s Fund Insurance Co., 53 Tenn. App. 710, 386
S.W.2d 918 (1964)) and a Sixth Circuit Court of Appeals case applying Tennessee law (Federal
Deposit Insurance Corp. v. Aetna Casualty & Surety Co., 947 F.2d 196 (6th Cir. 1991)).
However, those cases are not about a “mere defensive application of [the] veil piercing doctrine”
based on common law. Bird v. Centennial Insurance Co., 11 F.3d 228, 232 n.6 (1st Cir. 1993).
Rather, the “alter ego defense” discussed in those cases is a defense derived from the language of
specific insurance policies at issue, under which no coverage is available for the acts of an “alter
ego” of the insured. Bird, 11 F.3d at 232 n.6. In that context, the term “alter ego” is used to refer
to a dominant corporate officer. Bird, 11 F.3d at 232. To allow the corporation to recover under
a policy for the fraudulent acts of the corporation’s dominating personality, which are essentially
the corporation’s own fraudulent acts, would be contrary to public policy. Bird, 11 F.3d at 233
n.7. That is not the case here.
Accordingly, we decline to follow the authority cited by defendants and express no
opinion as to whether the equitable doctrine of piercing the corporate veil may be used in this
situation. Nevertheless, we find that even if the doctrine could be employed as a means to
19 1-06-0254
impute Sonnenschein’s actions to Tower in order to defend against Tower’s breach of contract
suit, the circumstances here would still not warrant piercing the corporate veil.
In general, the law regards a corporation as an entity separate and distinct from its
officers, shareholders, and directors, and those parties will not be held personally liable for the
corporation’s debts and obligations. Melko v. Dionisio, 219 Ill. App. 3d 1048, 1063, 580 N.E.2d
586, 594 (1991). However, in certain circumstances, the corporate form may be disregarded,
such as where the corporation is merely the alter ego or the business conduit of another
dominating personality. Melko, 219 Ill. App. 3d at 1063, 580 N.E.2d at 594. Notably, although
usually it is the corporate veil between the parent corporation and its subsidiary that is pierced,
courts may also pierce the corporate veil between two affiliated, or “sister,” corporations. Main
Bank of Chicago v. Baker, 86 Ill. 2d 188, 205, 427 N.E.2d 94, 101 (1981).
“Piercing [the] corporate veil is a task which courts should undertake reluctantly.”
Pederson v. Paragon Pool Enterprises, 214 Ill. App. 3d 815, 819, 574 N.E.2d 165, 167 (1991).
The court should not interfere with the corporate form anymore than it would a private contract,
and the corporate veil should only be pierced when it appears that something in the particular
situation has “gone amiss.” 1 W. Fletcher, Cyclopedia of Corporations §41, at 557 (1999).
Particularly, in breach of contract cases, courts should apply even more stringent standards to
determine when to pierce the corporate veil than they would in tort cases. 1 W. Fletcher,
Cyclopedia of Corporations §41.85, at 692 (1999). “This is because the party seeking relief in a
contract case is presumed to have voluntarily and knowingly entered into an agreement with a
corporate entity, and is expected to suffer the consequences of the limited liability associated
20 1-06-0254
with the corporate business form.” 1 W. Fletcher, Cyclopedia of Corporations §41.85, at 692
(1999).
Illinois courts will pierce the corporate veil where: (1) there is such a unity of interest and
ownership that the separate personalities of the corporation and the parties who compose it no
longer exist, and (2) circumstances are such that adherence to the fiction of a separate corporation
would promote injustice or inequitable circumstances. Pederson, 214 Ill. App. 3d at 819-20, 574
N.E.2d at 167. In a breach of contract case, “ ‘additional compelling facts,’ ” such as a finding of
fraud, may also be required. Baker, 86 Ill. 2d at 205-06, 427 N.E.2d at 101-02.
Where there is no evidence of any misrepresentation, no attempt to conceal any facts, and
the parties possess a total understanding of all of the transactions involved, Illinois courts will not
pierce the corporate veil in a breach of contract situation. Baker, 86 Ill. 2d at 205, 427 N.E.2d at
102. For example, in Baker, two affiliated corporate entities conducted an equipment purchase
through a “straw man,” which was comprised of two individuals who owned 20% of the stock of
one corporation. That corporation loaned money to the straw man, then the straw man leased the
equipment back to the affiliate. The first corporate entity subsequently sued the straw man for
breach of the loan agreement. Baker, 86 Ill. 2d at 194-96, 427 N.E.2d at 96-97.
However, the supreme court refused to allow the straw man to raise a counterclaim
seeking to pierce the corporate veil of the affiliate corporation, which was not making lease
payments, and impute its conduct to the plaintiff corporation. Baker, 86 Ill. 2d at 205, 427
N.E.2d at 102. Specifically, the court found that there was no evidence of misrepresentation of
any kind, no one attempted to deceive the defendants or conceal anything under corporate names,
21 1-06-0254 and the defendants, who were represented by counsel at the time the transactions were made, had
a total understanding of them. Baker, 86 Ill. 2d at 205, 427 N.E.2d at 102. Significantly, the
court observed that one “cannot assert the equitable doctrine of piercing the corporate veil to
disregard the separate corporate existence of a corporation he himself created to gain an
advantage which would be lost under his present contention.” Baker, 86 Ill. 2d at 206, 427
N.E.2d at 102.
Here, we find that even if defendants could have shown the requisite unity of interest and
ownership, the circumstances in this case are not such that adherence to the fiction of separate
entities would promote injustice or inequity. Wayne Hannah testified that Mark Goldstein, the
president of Invsco at the time, called him personally to ask him if Tower would be interested in
investing money in the 111 East Chestnut project. Goldstein also asked Hannah if he would like
to perform the legal services necessary to convert the building to condominium ownership once
Consultants’ purchase of the building was complete, understanding that Hannah could not assist
Consultants with the purchase because of a conflict of interest.
Thus, defendants created the present situation with full knowledge of the relationship
between Tower, its members, and Sonnenschein. Nothing had “gone amiss” in the present
situation that would have led to an injustice. See 1 W. Fletcher, Cyclopedia of Corporations §41,
at 557 (1999). Because the fraud or inequity that the alter ego doctrine aims to protect against
must be that of “the party against whom the doctrine is invoked and the party must have been an
actor in the course of conduct constituting the abuse of corporate privilege” (1 W. Fletcher,
Cyclopedia of Corporations §41.20, at 596 (1999)), defendants cannot claim that it was Tower’s
22 1-06-0254 actions which caused them harm.
Further, defendants created this situation for their own benefit. It enabled them to finance
their project and obtain the necessary legal services to complete it. As the supreme court
observed in Baker, we find that they should not now be able to assert the equitable doctrine of
piercing the corporate veil to circumvent a situation from which they benefitted. Baker, 86 Ill. 2d
at 206, 427 N.E.2d at 102.
Finally, the record contains neither evidence of any misrepresentations by Tower and
Sonnenschein, nor evidence that Tower and Sonnenschein tried to conceal any facts from
defendants. See Baker, 86 Ill. 2d at 205, 427 N.E.2d at 102. In fact, as Hannah’s December 26,
2000 letter to Gouletas illustrates, Tower did not believe that its entry into the forbearance
agreement affected the payment of legal fees to Sonnenschein. Rather, Hannah expressed his
belief that the matter of Tower’s loan and Sonnenschein’s fees were proceeding under two
separate timetables.
The fact that this situation involved an attorney-client relationship does not change this
conclusion. Defendants argue, based on both contract and disciplinary law, that because Tower
was comprised of attorneys including Hannah, Tower’s actions essentially amounted to attorneys
investing in their client’s project while rendering legal advice. Defendants maintain that
Sonnenschein’s failure to make an affirmative disclosure of this dual role amounted to a fraud or
injustice sufficient to warrant piercing the corporate veil. We disagree.
According to principles of contract law, attorney-client transactions are not void, but
rather, presumptively fraudulent. Monco v. Janus, 222 Ill. App. 3d 280, 293, 583 N.E.2d 575,
23 1-06-0254 583 (1991). This presumption stems from a public policy against attorneys using their position
of trust and power to take unfair advantage of clients in transactions. Monco, 222 Ill. App. 3d at
293, 583 N.E.2d at 583. However, an attorney can overcome the presumption of undue influence
with clear and convincing evidence showing that: (1) the attorney made a full and frank
disclosure of all relevant information; (2) the attorney gave adequate consideration; and (3) the
client had independent advice before completing the transaction. Monco, 222 Ill. App. 3d at 291,
583 N.E.2d at 581-82.
Similarly, under the Illinois Rules of Professional Conduct:
“(A) Unless the client has consented after disclosure, a lawyer shall not
enter into a business transaction with the client if:
(1) the lawyer knows or reasonably should know that the lawyer
and the client have or may have conflicting interests therein. ” 134 Ill. 2d
R. 1.8.
Where an attorney makes a disclosure of the conflict, and the client has independent advice, the
supreme court has declined to discipline attorneys under this rule. In re Barrick, 87 Ill. 2d 233,
239-40, 429 N.E.2d 842, 846 (1981) (imposing no discipline where attorney, who drafted will
giving himself a $12,000 annuity from a client, described as a “sharp” widow who was “not
easily taken advantage of,” because there had been disclosure and independent advice).
Here, defendants are not raising a claim of undue influence or requesting that Hannah be
disciplined. Thus, neither of the above analyses is directly applicable. However, even using
them as a guideline to determine whether defendants have been the victims of any
24 1-06-0254 misrepresentation, fraudulent concealment, or even a misunderstanding, we would find the
present circumstances insufficient to warrant disregarding the separate existences of Tower and
Sonnenschein for four reasons. First, as we have already discussed, defendants were well aware
of the fact that Hannah was a creditor of Consultants by virtue of Tower’s loan while he was
performing the legal services necessary to convert the building to condominium ownership.
Defendants were also aware of when conflicts of interest become a problem for an attorney.
When Mark Goldstein asked Hannah to propose the investment opportunity to Tower and to
perform the condominium conversion, he also told Hannah that Hannah could not assist
defendants with the purchase of the building because Sonnenschein was already representing the
seller of the building and the seller would not waive the conflict. Thus, although Hannah himself
did not make any affirmative disclosure of the conflict, Invsco and Hannah had transacted
business in this manner in the past, and Invsco had to be fully aware of the duality of Hannah’s
position and the potential problems involved therewith.
Second, defendants had their own general counsel draft the forbearance agreement and
offer it to the entire class of investors of which Tower was a part. Evidence that a client received
independent legal advice is a very compelling means of rebutting a presumption of undue
influence. In re Schuyler, 91 Ill. 2d 6, 16, 434 N.E.2d 1137, 1142 (1982). In addition, it is
unlikely that Hannah, a real estate attorney, would have been able to exercise undue influence
over defendants in connection with a form contractual agreement that was drafted and offered to
him by defendants’ counsel.
Third, as we discussed above at length, the forbearance agreement was supported by
25 1-06-0254 adequate consideration. Invsco’s guaranty and Consultants’ renewed promise to pay were
supported by Tower’s forbearance and agreement to forgo unpaid interest. Finally and perhaps
most importantly, defendants are very sophisticated parties and unlikely to be taken advantage of.
Invsco is a billion-dollar corporation, much more sophisticated than most other types of clients
that an attorney would encounter. See, e.g., Barrick, 87 Ill. 2d at 239-40, 429 N.E.2d at 846.
Accordingly, based on the circumstances present here, the transaction in question cannot be said
to have been the product of any misrepresentation, fraudulent concealment, or other
misunderstanding on the part of defendants.
Therefore, defendants cannot employ the theory of piercing the corporate veil here, and
Sonnenschein’s actions in suing defendants for attorney fees prior to December 18, 2001 cannot
be considered an anticipatory breach of the forbearance agreement. Thus, defendants’ defense
fails, and we affirm the trial court’s judgment awarding Tower damages for defendants’ failure to
perform their obligations under the forbearance agreement.
Affirmed.
GREIMAN and KARNEZIS, JJ., concur.
26 REPORTER OF DECISIONS - ILLINOIS APPELLATE COURT _________________________________________________________________
TOWER INVESTORS, LLC, an Illinois Corporation,
Plaintiff-Appellee,
v.
111 EAST CHESTNUT CONSULTANTS, INC., an Illinois Corporation, and INVSCO GROUP, LTD., an Illinois Corporation,
Defendants-Appellants,
________________________________________________________________
No. 1-06-0254
Appellate Court of Illinois First District, Third Division
Filed: March 14, 2007 _________________________________________________________________
PRESIDING JUSTICE THEIS delivered the opinion of the court.
Greiman and Karnezis, JJ., concur. _________________________________________________________________
Appeal from the Circuit Court of Cook County Honorable Allen S. Goldberg, Judge Presiding _________________________________________________________________
For DEFENDANTS - Kristi L. Browne APPELLANTS The Patterson Law Firm, P.C. 33 N. LaSalle St., Suite 3350 Chicago, IL 60602
For PLAINTIFF - Fred E. Schulz APPELLEE R. Michael McCann Wildman, Harrold, Allen & Dixon, LLP 225 W. Wacker Dr., Suite 2800 Chicago, IL 60606