Tully v. McLean

• Court: Appellate Court of Illinois
• Decided: April 26, 2011
• Docket: 1-09-2976 Rel
• Status: Published

Opinion

SECOND DIVISION April 26, 2011

No. 1-09-2976

THOMAS M. TULLY, Trustee of the Thomas M. Tully ) Appeal from the Trust, and F.P.A., LLC, an Illinois Limited Liability ) Circuit Court of Company, Individually and Derivatively on Behalf of ) Cook County Old Town Development Associates, LLC, ) ) Plaintiffs-Appellees, ) ) v. ) ) DANIEL E. McLEAN, PIPER’S ALLEY ) No. 06 CH 5431 MANAGEMENT, INC., an Illinois Corporation, ) LINCOLN PARK DEVELOPMENT ASSOCIATES, LP, ) an Illinois Limited Partnership, MCL COMPANIES OF ) CHICAGO, INC., an Illinois Corporation, MCL ) MANAGEMENT CORPORATION, an Illinois ) Corporation, and OLD TOWN DEVELOPMENT ) ASSOCIATES, LLC, an Illinois Limited Liability ) Company and Nominal Defendant, ) Honorable ) Stuart E. Palmer, Defendants-Appellants. ) Judge Presiding.

JUSTICE KARNEZIS delivered the judgment of the court, with opinion. Presiding Justice Cunningham and Justice Harris concurred in the judgment and opinion.

OPINION

Plaintiffs Thomas M. Tully, as trustee of the Thomas M. Tully Trust, and F.P.A.,

LLC (FPA), individually and derivatively on behalf of Old Town Development

Associates, LLC (OTD), filed an action against defendants Daniel E. McLean, Piper’s 1-09-2976

Alley Management, Inc. (PAM), Lincoln Park Development Associates, LP (LPDA),

MCL Companies of Chicago, Inc. (MCL), MCL Management Corp. (MCL Management)

(collectively defendants) and nominally against OTD. They asserted defendants

committed fraud and breach of their fiduciary duties to plaintiffs in their management of

OTD. The court agreed and ordered defendants to pay compensatory and punitive

damages. Defendants argue (1) the judgment against LPDA must be vacated because

there was no evidence of wrongdoing by LPDA; (2) the judgment ordering MCL

Construction Corp., a nonparty, to disgorge fees must be vacated for lack of

jurisdiction; (3) OTD must be dissolved as a matter of law; (4) the punitive damage

award must be vacated for failure to comport with Illinois common law and

constitutional due process or, alternatively, reduced because it was excessive and

improperly calculated; and (5) the compensatory damage award must be reduced

because the court erred in ordering disgorgement of management and construction

fees and in awarding 13% equitable interest damages. We affirm in part and reverse in

part.

BACKGROUND

McLean, a real estate developer, founded OTD in 1996 to purchase and develop

Piper’s Alley, a retail and entertainment complex in Chicago’s Old Town neighborhood.

OTD’s operations were governed by an operating agreement. Pursuant to the

agreement, OTD was a manager-managed limited liability company and the manager

had to be a member of OTD. The manager-member of OTD had exclusive

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responsibility for conducting OTD’s business and the other members were to take no

part in the management, conduct or control of the company.

In 1997, OTD bought Piper’s Alley and spent considerable amounts renovating

it. At that time, OTD’s members/owners were: MCL, McLean, LPDA and private

investors. MCL, a company owned and managed by McLean, was the original

manager-member of OTD. MCL was replaced as manager and 1% member of OTD in

November 2004 by PAM, another company owned and managed by McLean. LPDA

was a company established by McLean to hold trusts he established for his children.

The children’s trusts owned 99% of LPDA. McLean owned the other 1% and managed

LPDA. MCL Management, also a McLean-owned and managed company, was the

property manager for Piper’s Alley, serving as such until December 2005.

In 1999, FPA invested in OTD and became a 50% owner/member of OTD.

Members of FPA were the Thomas M. Tully Trust (Tully Trust) and five individual trusts,

one for each of Tully’s children. Tully is the trustee of the Tully Trust, which is the

manager-member of FPA. Tully, therefore, manages FPA.

In Tully’s role as manager of FPA, he received monthly financial statements

regarding OTD’s operations. In 2002, he noticed an intercompany transfer from OTD to

one of McLean’s many other business entities unrelated to OTD. His accountant

discovered numerous transfers back and forth between OTD and unrelated McLean-

controlled enterprises. When questioned, McLean told Tully it was his regular practice

to move funds back and forth between his assorted businesses as needed for funding

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and cash flow. He told Tully the transfers were recorded on the books and periodically

returned or paid back but that no interest was paid on the intercompany transfers.

McLean agreed to Tully’s request that he cease this practice as to OTD. He agreed

that Tully would be a signatory on any OTD money transfer in excess of $5,000.

McLean repaid all outstanding transfers and stopped making intercompany transfers

from OTD.

In 2005, Tully learned that McLean had resumed transferring money in and out

of OTD within six months of his 2002 promise to stop doing so. Instead of noting the

transfers on OTD’s books as he had done previously, McLean now hid the transfers in

fictional accounts. McLean told Tully in January 2006 that he had been making

transfers between OTD and non-OTD related accounts as “cash was needed here or

elsewhere.” Tully demanded PAM step down as manager-member of OTD and that

McLean and his entities have no further involvement in running OTD. McLean refused,

asserting he would never be a participant in a venture in which he was not the

manager.

On March 17, 2006, Tully, as trustee of his own trust, and FPA, individually and

derivatively on behalf of OTD, filed a complaint alleging fraud and breach of fiduciary

duty against McLean, LPDA, PAM, MCL, MCL Management and nominally against

OTD. At the time of the complaint, FPA owned 50% of OTD, McLean owned 39%,

LPDA owned 10% and PAM, the manager-member, owned 1%. MCL was the former

manager-member of OTD and MCL Management was the former property manager of

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the Piper’s Alley complex. Plaintiffs sought to enjoin further misappropriation by

defendants of OTD’s assets, asserting that McLean, through his entities, had been

using the assets of OTD “as a private piggy bank” and had been systematically looting

the assets of OTD. They alleged McLean was the alter ego of PAM, MCL and MCL

Management, all three being wholly owned and controlled by McLean, and that he was

the de facto manager of OTD and Piper’s Alley.

Plaintiffs requested a temporary restraining order and preliminary and

permanent injunctions precluding defendants, and specifically McLean, whether directly

or indirectly, from managing or acting on behalf of OTD in any way and from denying

plaintiffs access to OTD’s records. They also sought appointment of an independent

receiver to manage OTD; an accounting of OTD’s business; expulsion of PAM as

member and manager of OTD pursuant to section 35-45(6) of the Illinois Limited

Liability Company Act (805 ILCS 180/1 et seq. (West 2008)) (the Act); compensatory

and punitive damages for defendants’ fraud, embezzlement and breach of fiduciary

duty in their management of OTD; forfeiture by defendants of any compensation paid to

them during the period of the fraud/breach; and no sharing by any defendant in the

damage award.

By agreed order, the court ordered that McLean, MCL, MCL Management, PAM

and their affiliates could no longer exercise any control over OTD’s bank and escrow

accounts and FPA would act on behalf of OTD pending appointment of a receiver.

Subsequently, by agreed order, the court appointed Tully as the sole manager of OTD

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for the duration of the litigation or until further order of court.

Defendants moved to dissolve OTD and appoint a receiver to wind up OTD’s

business. They asserted dissolution was required under section 6.1 of the operating

agreement and section 35-1 of the Act because PAM had been removed as manager of

OTD and Tully and McLean’s relationship had completely deteriorated to the point that

they could no longer work together. Plaintiffs opposed the motion. Defendants then

filed a counterclaim seeking assorted declarations by the trial court and dissolution of

OTD on essentially the same bases as raised in their motion to dissolve. The parties

agreed that defendants’ counterclaim and plaintiffs’ count requesting PAM be expelled

as member and manager of OTD would be tried separately from plaintiffs’ counts for

fraud and breach of fiduciary duty.

Following a seven-day bench trial, the court found it unquestionable that

defendants were liable to plaintiffs for common law fraud and breach of fiduciary duty.

It found it undisputed that over the course of the six years defendants managed OTD,

they diverted millions of dollars of OTD’s funds to shore up the finances and pay

overdrafts of unrelated McLean-controlled entities, with the outstanding amount

reaching as high as $2 million at one point. The court held the amounts defendants

transferred from OTD were not loans but misappropriations, done to the detriment of

OTD and impermissible under either the Illinois Limited Liability Company Act or

common law. It found all defendants were controlled by McLean and acted in concert

with McLean with regard to the breaches of fiduciary duty and fraud, and thus liability

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for forfeiture extended to all defendants.

Finding no real issue of liability, the court considered the amount of actual and

punitive damages to be awarded. With regard to actual damages, it awarded plaintiffs

as damages 13% interest on the misappropriated funds. It ordered all management

fees of MCL Management and MCL Construction be forfeited; reimbursement of loan

fees charged by McLean, default loan interest and late fees paid on the mortgages and

interest and penalties paid on the late real estate taxes; and payment of 13% interest

on the security deposit money removed from OTD. The court agreed with defendants

that the compensatory damages and forfeitures payable to plaintiffs should be reduced

by 50% because Tully owned only 50% of OTD.

With regard to punitive damages, the court found “a 3:1 ratio to actual damages

appropriate in this matter as anything less would not sufficiently deter McLean.” It

agreed with defendants that the forfeited management fees should not be included in

the actual damages sum to which the punitive damage multiplier applied but denied

their request to reduce the punitive damages award by 50%, stating that to do so would

discount defendants’ punishment or risk of punishment. The court awarded plaintiffs

$1,010,671.96 in compensatory damages (50% of the total compensatory amount) and

$3,231,550.26 in punitive damages (3x (100% compensatory award minus forfeiture

amounts)), for a total of $4,242,222.22.

After a hearing on both plaintiffs’ claim that PAM should be expelled from OTD

and defendants’ counterclaim seeking dissolution of OTD, the court found in favor of

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plaintiffs on both claims. It ordered that PAM be “judicially expelled and disassociated

from OTD” and that dissolution of OTD was not warranted under either the operating

agreement or the Act. The court denied defendants’ posttrial motion and defendants

filed their timely appeal from the court’s orders.

ANALYSIS

Defendants admit McLean’s practice of moving funds back and forth between

different companies, enterprises and projects was legally improper and they are liable

for actual losses they may have caused OTD. They assert, however, that the court’s

judgments were “seriously, unfairly and unjustifiably excessive” and inequitable and this

case represents a case of judicial overkill. They do not ask this court to overturn the

entirety of the trial court’s judgments. Rather, they request that we:

1. reverse and vacate the judgment against LPDA and dismiss it from the case;

2. vacate the judgment against MCL Construction as void for lack of jurisdiction;

3. order or declare the dissolution of OTD pursuant to section 35-1 of Act and

section 6.1 of the operating agreement;

4. reverse and vacate the punitive damages award or, alternatively, reduce it;

5. reverse and vacate the judgment ordering defendants to forfeit the

management fees of MCL Management and MCL Construction and reduce

the 13% equitable interest rate imposed by the court, reducing the

compensatory and punitive damages accordingly.

We address the arguments seriatim.

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I. Judgment Against LPDA

Defendants ask that we vacate the judgment against LPDA and the claims

against LPDA be dismissed because LPDA cannot be liable for management

misconduct as a matter of law. They assert LPDA was merely an investment

partnership for McLean’s children, did not participate in the management of OTD, had

no fiduciary responsibility to plaintiffs, did nothing wrong and was a victim rather than a

tortfeasor. Plaintiffs respond that defendants forfeited their argument that LPDA,

separate and apart from the other defendants, cannot be liable because they did not

raise it before the trial court until they filed their posttrial motion.

A party forfeits an issue for appellate review unless he has raised the issue both

at trial and in a posttrial motion. Thornton v. Garcini, 237 Ill. 2d 100, 106, 112 (2009).

Accordingly, defendants’ argument regarding LPDA is forfeit if, as plaintiffs assert,

defendants did not raise it until they filed their posttrial motion. Thornton, 237 Ill. 2d at

112.

As plaintiffs point out, the record shows defendants did not raise the argument in

their answer, counterclaim, motion for summary judgment or closing argument. In their

reply brief, defendants do not address plaintiffs’ forfeiture argument. They do not

assert that they raised their argument regarding dismissal of LPDA prior to their filing

the posttrial motion, let alone point us to the salient pages in the record showing they

so raised it. While the forfeiture rule does not bind the court, we are not required to

research and argue issues on defendants’ behalf. People v. O’Connor, 313 Ill. App. 3d

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134, 137 (2000). The question of whether the court erred in finding against LPDA is

forfeit.

II. Judgment Against MCL Construction

Defendants ask that we vacate the court’s judgment ordering MCL Construction

to disgorge fees it received from OTD. They assert MCL Construction was not a party

to the suit, was neither named nor served, did not appear and thus was not subject to

the court’s jurisdiction. Plaintiffs respond that defendants (a) forfeited this argument

because they did not raise it before the trial court until they filed their posttrial motion

and (b) the judgment cannot be reversed or amended because no judgment was ever

entered against MCL Construction and the disgorgement order, therefore, does not

require the court’s jurisdiction over MCL Construction.

Defendants address plaintiffs’ forfeiture argument, albeit only in a short footnote

and without citation to authority. They claim that a jurisdictional issue cannot be forfeit

and the issue did not arise until after entry of the judgment so could not have been

raised earlier. Defendants are correct that the jurisdiction of a trial court may be

challenged at any time so the issue was not forfeited when defendants failed to raise it

below. Norwest Mortgage, Inc. v. Ozuna, 302 Ill. App. 3d 674, 677-78 (1998).

However, jurisdiction is not at issue because, as plaintiffs assert, the court did not enter

a judgment against MCL Construction.

The court’s order was that, “[a]s a result of Defendants’ breach of fiduciary

duties[,] *** all the management fees of MCL Management and MCL Construction listed

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in Plaintiff[s’] Exhibit 39F & G must be forfeited.”1 Defendants assert the court, by this

order, ordered MCL Construction to disgorge the fees it received from OTD. Plaintiffs

respond that the court did not order MCL Construction to disgorge anything, that there

was no judgment entered against MCL Construction. Plaintiffs assert that the fees the

court ordered forfeited were fees paid to MCL Management under a management

agreement between OTD and MCL Management for the operation of Piper’s Alley and

not fees paid to MCL Construction. Defendants do not reply in any meaningful way to

plaintiffs’ assertions.2

From the wording of the order, read in context with the rest of the court’s

discussion of the forfeiture, it appears the court is ordering defendants, not MCL

Construction, to forfeit the management fees. The court discussed its finding that “all

defendants acted in concert with McLean” in breaching the fiduciary duties and

“therefore liability for the forfeiture extends to all defendants.”

Looking at the management agreement referred to by plaintiffs, we find in

1 “As a matter of public policy, a willful and deliberate breach of a fiduciary duty requires complete forfeiture of all compensation during the period of the breach.” LID Associates v. Dolan, 324 Ill. App. 3d 1047, 1071 (2001). It lies within the equitable discretion of the trial court to determine the appropriate remedy for breach of a fiduciary duty. LID Associates, 324 Ill. App. 3d at 1071. 2 Their response is limited to stating: “Indeed, the plaintiffs seem not to oppose a vacation or clarification of that confusing ‘non-judgment’ in [the] order. On this, the parties agree. Accordingly, this [appellate] court should either vacate that disgorgement order or clarify that it is not an enforceable order nor a judgment against MCL Construction.”

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section 4.2, in a section titled “Compensation for Management Services,” a provision

that any construction or major alteration to the complex would be overseen “by [MCL

Management] or its affiliate acting as general contractor” for a fee of 2.5% of the total

costs incurred. So, per this agreement, OTD was to pay MCL Management a 2.5 %

management fee for its or its affiliate’s services in overseeing construction projects.3

There is nothing to show these fees were paid to any entity other than MCL

Management. Defendants do not direct us to any evidence showing that any of the

“management fees” the court ordered defendants to forfeit or the management fees

paid to MCL Management under the management agreement were fees actually paid to

or passed on to MCL Construction. Once again, defendants leave it to this court to

make their case for them. We decline to do so. Therefore, although it is possible that

the exhibit 39G fees included construction management fees paid to MCL Construction,

we cannot, without more, assume that this is the case. Accordingly, the court did not

enter a judgment against MCL Construction and defendants’ argument regarding lack

of jurisdiction is, therefore, moot.

III. Dissolution of OTD

Defendants ask that we direct the trial court to order the immediate dissolution

and winding up of OTD. They argue the court erred in denying their request for

dissolution because the court’s removal of PAM as manager-member triggers the

3 This fee was to be paid in addition to the 2.5% general management fee it earned for operating Piper’s Alley.

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dissolution provisions in section 6.1 of the OTD operating agreement and section 35-

1(4)(B) of the Act .

Section 6.1 of the operating agreement provides OTD “shall be dissolved only in

the event *** [o]f the death, removal, liquidation, dissolution, withdrawal or bankruptcy

of a Manager.” Defendants argue that the court’s order directing that “PAM is hereby

judicially expelled and disassociated from OTD” pursuant to section 35-45(6) was

clearly a “removal” of member-manager PAM from OTD and, therefore, triggered the

section 6.1 provision of the agreement that OTD “shall” be dissolved. The court had

declined to apply the section 6.1 dissolution provision. It found PAM had not been

removed as manager pursuant to section 15-1(b)(3) of the Act, which provides that a

manager “must be *** removed *** by a vote, approval, or consent of a majority of the

members” (805 ILCS 180/15-1(b)(3) (West 2008)) and, therefore, dissolution under

section 6.1 of the operating agreement had not occurred.4

The question is whether the court’s judicial expulsion of PAM as a member

pursuant to section 35-45(6) equates, as defendants assert, to PAM’s “removal” as the

manager of OTD under the agreement, thus triggering the agreement’s dissolution

provision. Defendants argue the court improperly limited the section 6.1 removal

4 Section 15-1(b)(3) provides in relevant part: “[i]n a manager-managed company: *** a manager: (A) must be designated, appointed, elected, removed, or replaced by a vote, approval, or consent of a majority of the members; and (B) holds office until a successor has been elected and qualified, unless the manager sooner resigns or is removed.” 805 ILCS 180/15-1(b)(3) (West 2008).

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provision to nonjudicial removals (by approval, vote or consent of the majority of the

members pursuant to section 15-1(b)(3) - which clearly did not happen here). They

assert the term “removal” is not qualified in the operating agreement and, therefore, is

not limited to nonjudicial removals and should include judicial removals such as here by

court decree pursuant to section 35-45(6).

Section 35-45(6) provides:

“A member is dissociated from a limited liability company upon the occurrence of

***

(6) On application by the company or another member, the member's

expulsion by judicial determination because the member:

(A) engaged in wrongful conduct that adversely and materially

affected the company's business;

(B) willfully or persistently committed a material breach of the

operating agreement or of a duty owed to the company or the other

members under Section 15-3; or

(C) engaged in conduct relating to the company's business that

makes it not reasonably practicable to carry on the business with the

member.” (Emphasis added.) 805 ILCS 180/35-45(6) (West 2008).

Citing section 35-45(6), the court found PAM had

“(A) engaged in wrongful conduct that adversely and materially affected the

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company’s business;

(B) willfully and persistently committed a material breach of the operating

agreement or of a duty owed to the company or other members under section

15-3, specifically,

(1) to account to the company and hold as trustee for it any property,

profit, or benefit derived by the member in the conduct or winding up of

the company’s business or *** derived from a use by the member of the

company’s property, including the appropriation of the company’s

opportunity;

(2) to act fairly when a member deals with the company in the conduct or

winding up of the company’s business as or on behalf of a party having

an interest adverse to the company. [Citations.]

(C) engaged in the conduct relating to the company’s business that makes it not

reasonably practicable to carry on the business with the member.”

The court then held: “[t]herefore upon application of the plaintiff member of OTD, PAM

shall be expelled by judicial determination and disassociated from OTD.” It ordered

PAM “judicially expelled and disassociated from OTD” and “OTD shall purchase PAM’s

interest pursuant to the applicable provisions of the [Act].”

The operating agreement does not define or explain what “removal” of the

manager entails or how “removal” can come about. It does provide, in section 1.1(c),

that “[t]he ownership interests, rights and obligations of the Members as members in

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the Company shall be as provided in the Limited Liability Company Act of the State, as

amended, except and to the extent otherwise provided herein.” Pursuant to section 15-

5(a) of the Act, “[t]o the extent the operating agreement does not otherwise provide, this

Act governs the relations among the members, managers, and company.” 805 ILCS

180/15-15(a) (West 2008). Accordingly, because the operating agreement is silent on

what “removal”of a manager entails, we look to the provisions of the Act.

The only provision in the Act that directly addresses how removal of a manager

occurs is section 15-1(b)(3). Under section 15-1(b)(3), “a manager *** must be ***

removed, or replaced by a vote, approval, or consent of a majority of the members.”

(Emphasis added.) 805 ILCS 180/15-1(b)(3) (West 2008). That clearly did not happen

here and there was, therefore, no “removal” of PAM as manager under section 15-

1(b)(3). Arguably, therefore, as plaintiffs assert, there was no “removal” of PAM as

manager under the operating agreement and the dissolution provision was not

triggered.

Defendants argue, however, that termination of PAM’s member status

necessarily terminates its manager status. They assert the court’s expulsion of PAM as

a member pursuant to section 35-45(6) means PAM was removed as manager

because, under the operating agreement, only a member can serve as manager.5 They

5 Section 2.6 of the operating agreement provides that “the manager must own at least a one percent interest” of the company “during the entire existence of the company.”

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suggest there are two bases for removal of managers under the Act: by members’ vote

under section 15-1(b)(3)(A) and by dissociation of member-managers under section 35-

45(b). They argue the section 6.1 dissolution provision is triggered by either type of

removal. We agree.

The expulsion of PAM as a member by judicial decree does equate to “removal”

of PAM as manager under the operating agreement because PAM was both manager

and member. It may not have been the court’s intention to remove PAM as manager

and was certainly not a removal under section 15-1(b)(3), but it was a removal

nonetheless. How can there be any question that expulsion of the member who serves

as the manager is not also the expulsion of the manager? They are the same entity.

Plaintiffs asserted PAM should be expelled as a member OTD because its conduct

relating to OTD made it not reasonably practicable to carry on OTD’s business with

PAM. Yet they argue they did not also intend PAM to be expelled as manager. They

could not work with PAM as a member but could somehow continue to work with PAM

as the manager? Their argument is disingenuous.

On a side note, it appears plaintiffs have changed their argument regarding

removal of PAM as a member from what they originally requested in their complaint. In

plaintiffs’ count III, they initially requested expulsion of PAM “as a member of OTD,”

which is in line with their assertion that they never requested the expulsion of PAM as a

manager. However, their prayer for relief in count III requests the court to determine,

pursuant to section 35-45(6) of the Act, “that PAM be expelled as a member and

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manager of OTD.” (Emphasis added.) When plaintiffs wrote their complaint, they

apparently considered expulsion of member PAM to include expulsion of manager

PAM. They were right. The court’s order ordering the expulsion of PAM as a member

of OTD necessarily includes the expulsion of PAM as the manager of OTD. An

expulsion of the member serving as the manager is a removal of the manager and OTD

should be dissolved under the agreement.

Pursuant to section 35-1(1) of the Act, “[a] limited liability company is dissolved,

and *** its business must be wound up, upon the occurrence of *** [a]n event specified

in the operating agreement.” 805 ILCS 180/35-1(1) (West 2008). Therefore, given

that the agreement calls for dissolution of OTD upon removal of the manager and we

find such removal occurred, section 35-1(1) reinforces that dissolution is required.

Because we find that section 6.1 provides the basis for dissolving OTD, we need

not address defendants argument regarding dissolution under section 35-1(4)(B).

IV. Punitive Damages Award

Defendants assert the court erred in awarding plaintiffs $3.2 million in punitive

damages. They ask that we (a) vacate the award because it is in violation of common

law; (b) vacate the award because it is in violation of due process; or (c) in the

alternative, reduce the award to a more appropriate amount.

A. Violation of Common Law

The purpose of punitive damages is to act as retribution against the defendant,

deter the defendant from committing similar wrongs in the future and deter others from

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similar conduct. Gambino v. Boulevard Mortgage Corp., 398 Ill. App. 3d 21, 68 (2009).

“Such damages will be awarded only where the defendant's conduct is willful or

outrageous due to evil motive or a reckless indifference to the rights of others.”

Gambino, 398 Ill. App. 3d at 68. Not favored in the law, punitive damages are available

only in cases where the alleged wrongful act “is characterized by wantonness, malice,

oppression, willfulness, or other circumstances of aggravation.” Gambino, 398 Ill. App.

3d at 68. The court must determine (1) whether punitive damages are available as a

matter of law for the cause of action; (2) whether the facts show willfulness or other

aggravating factors; (3) whether punitive damages should be awarded under the facts at

bar; and (4) the amount of the punitive damage award. Gambino, 398 Ill. App. 3d at 69.

1. Availability

On appeal from a bench trial, we first review de novo the court’s determination

that punitive damages were available as a matter of law for plaintiffs’ cause of action.

Gambino, 398 Ill. App. 3d at 69. Defendants acknowledge punitive damages are

available as a matter of law for a breach of fiduciary duty (Levy v. Markal Sales Corp.,

268 Ill. App. 3d 355, 379-80 (1994)), so there is no argument here.

2. Factual Determination

Defendants assert the court erred in finding defendants exhibited a willful and

wanton disregard for the rights of plaintiffs. They argue the evidence and testimony

directly contradict any “evil motive,” malice, oppression or willful and wanton disregard

of plaintiffs’ rights, citing McLean’s testimony that he did not misappropriate funds for his

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personal use, always intended to and did repay any loaned funds and plaintiffs

continued to receive profits and dividends from OTD. Asserting there was no evidence

in the record to contradict McLean’s testimony, defendants argue the court had no basis

for finding McLean, much less all defendants, exhibited willful and wanton disregard for

the rights of plaintiffs warranting imposition of punitive damages.

We review the court’s factual determination that defendants acted willfully and

that aggravating factors exist under the manifest-weight standard of review. Gambino,

398 Ill. App. 3d at 69. A ruling is against the manifest weight of the evidence if it is

arbitrary, unreasonable, arbitrary and not based on the evidence, or when the opposite

conclusion is clearly evident from the record. In re Estate of Michalak, 404 Ill. App. 3d

75, 96 (2010). In applying this standard, we give deference to the trial court as the

finder of fact because it is in the best position to observe the conduct and demeanor of

the parties and the witnesses. In re Estate of Michalak, 404 Ill. App. 3d at 96. For that

reason, we may not substitute our judgment for that of the trial court regarding the

credibility of witnesses, the weight to be given to the evidence, or the inferences to be

drawn. In re Estate of Michalak, 404 Ill. App. 3d at 96.

In determining whether to award punitive damages, the court held defendants’

conduct to be “truly outrageous” and “exhibiting a willful and wanton disregard for the

rights of plaintiffs.” It stated the conduct involved repeated actions rather than one

isolated incident, the evidence establishing “well over 100 misappropriations over a

period of six years.” It also stated the harm incurred resulted from malice, trickery or

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deceit. It held defendants had done their best to hide their conduct from plaintiffs and,

once discovered and having promised to cease the conduct, devised more elaborate

devices by which to conceal it. The court “was shocked by the nonchalance with which

both McLean and his accountant *** described their misconduct in their testimony” and

how any device they could use to deceive Tully was deemed justified because Tully was

considered a pest and an impediment to McLean’s business interests.

The record, in particular the testimony of McLean and his accountant, amply

supports the court’s finding that defendants’ conduct was “truly outrageous” and

“exhibiting a willful and wanton disregard for the rights of plaintiffs.” It is clear that

McLean and his accountant ran all of McLean’s companies as essentially a single

enterprise, transferring funds among the entities as needed for cash flow. McLean’s

accountant testified OTD did not need funds from the other entities and was used as a

cash cow to help support those other companies. In more than 170 transfers,

defendants transferred funds from OTD to other entities and back. They periodically

returned some of the funds they took but not always, resulting in OTD being short on

funds and unable to pay its mortgage or taxes on several occasions. Defendants made

the transfers with full knowledge of the impact on OTD and with a complete disregard for

those consequences. It is uncontested that OTD was a successful investment and Tully

continued to receive profits and dividends from OTD. But that does not mitigate the fact

that funds were being transferred out of OTD without compensation, defendants created

fictional accounts to hide those transfers and this conduct continued for years, even

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after McLean promised he would not do it any more. The court could clearly find

defendants conduct outrageous and a willful disregard of plaintiffs’ rights.

3. Award of Damages

Defendants argue the punitive damage award was not warranted to serve the

purpose of punishment and deterrence because (a) the disgorgement of fees already

constituted an award which was penal in nature and (b) significant evidence

demonstrates the court was prejudiced against defendants prior to and during trial and

the award may have been based on those negative passions. We review the court’s

determination that punitive damages should be awarded under the abuse of discretion

standard. Gambino, 398 Ill. App. 3d at 69. “An abuse of discretion occurs where no

reasonable person would agree with the position adopted by the trial court.” Schwartz v.

Cortelloni, 177 Ill. 2d 166, 176 (1997).

With regard to the first assertion, as will be discussed below in section V(A), the

court properly ordered forfeiture of management fees defendants earned from OTD

during the period of their breach. It specifically excluded those fees from its calculation

of punitive damages and there is, therefore, no merit to defendants’ argument.

With regard to the second assertion, defendants argue the court’s prejudice is

shown by its (i) ordering the disgorgement of all management and construction fees,

including those paid to MCL Construction, which was not a party; (ii) granting relief

against LPDA, against whom plaintiffs did not request relief; and (iii) awarding punitive

damages based on one defendant’s “nonchalance” during testimony.

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As was discussed in section II above, the court ordered disgorgement of

“management fees”; it did not order disgorgement of “construction fees” and it did not

order MCL Construction to disgorge anything at all. This evidence in no way supports

defendants’ claim that the court was prejudiced against McLean/defendants.

On the theory that all defendants, LPDA included, were controlled by McLean

and worked together to defraud plaintiffs, plaintiffs sought recovery from all defendants.

The fact that the court ordered recovery against LPDA does not, therefore, show

prejudice.

There is no question the court was struck by McLean’s “nonchalance” during his

testimony. The court commented on it. This court was struck too by McLean’s matter-

of-fact discussion of how he moved funds in and out of OTD as he needed cash, of how

he considered he had the right to make the transfers - which he referred to as “on-

demand loans” with no paperwork or terms or interest - because he was not charging

OTD an asset management fee for his services in developing the property. The fact that

the court was struck by how commonplace McLean considered his conduct does not

support a finding that the court was biased against him or the other defendants.

McLean’s attitude toward his actions would be relevant to the court’s determination of

whether the violating conduct was a wilful and continuing disregard of plaintiffs’ rights. It

was, therefore, well within the scope of the court’s consideration. There is nothing to

show the court’s decision to award punitive damages was the result of the court’s bias

against defendants and the court improperly decided to award punitive damages.

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4. Computation of Award

Defendants argue the court’s computation of the amount of punitive damages

was in error. We review the court’s computation of the punitive damages award to

determine whether the amount was excessive or the result of passion, partiality, or

corruption. Gambino, 398 Ill. App. 3d at 69. The amount of the award should be a

reflection of the court’s determination as to the degree of maliciousness evidenced by

defendants’ actions. Gambino, 398 Ill. App. 3d at 69. Defendants assert there is no

evidence that any of defendants’ actions were taken with the deliberate goal of harming

plaintiffs. Instead, the intercompany loans were designed to accommodate cash-flow

issues which inevitably arise within the development business and there was no intent

to harm plaintiffs’ interests in OTD. They assert their actions, which inadvertently

caused solely economic harm and from which they did not directly profit, “fall ‘on the

low-end of the scale for punitive damages.’ ”

The fact that defendants may not have intended to harm plaintiffs does not take

away from the fact that they were fully aware of and ignored the impact their “on-

demand loans” would have on OTD, plaintiffs’ investment. The record shows OTD

received no benefit from the transfers. It was in solid financial condition with sufficient

cash flow of its own and did not require any transfers of funds. That is until the “loans”

taken by defendants from OTD reached such a level that OTD was unable to pay its

mortgage and real estate taxes. OTD was harmed by the transfers in that it could not

meet its financial obligation and was charged late fees and penalties as a result. It also

24 1-09-2976

was unable to use its own funds or earn interest thereon during the period the interest-

free loans were outstanding.

It is disingenuous for defendants to claim they did not directly profit from the

transfers. Of course they directly profited from the transfers. All the enterprises that

received the transfers, as well as their owner, McLean, and all his inter-related

businesses, including the other defendants, profited from the constant source of easily

obtainable, interest-free financing. They made the most of this access for many years,

taking care to hide what they were doing so that their practice could continue. The court

awarded a 3:1 ratio to actual damages because “a 1:1 ratio [would be] insufficient to

deter future misconduct as strong medicine is required to cure defendants’ disrespect

for the law.” We do not find this excessive given the extreme level of misbehavior and

defendants’ attitude toward that misbehavior.

In their reply brief, defendants address the court’s emphasis on McLean’s

cavalier “nonchalance” and perceived arrogance, an attitude the court said was shown

by McLean’s characterizing the compensatory damages as “peanuts.” As defendants

point out, McLean never characterized $2 million as “peanuts.” When plaintiffs’ counsel

asked McLean whether he thought “everything involved here is peanuts,” that Tully was

complaining about “peanuts,” McLean responded “I absolutely do not” and “this is a very

serious case and a very serious matter.” However, having read the entirety of McLean’s

testimony, it is clear that he did indeed think Tully was making trouble over essentially

nothing, even though he might not have termed the amounts at issue to be “peanuts.”

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The court heard the testimony and was best able to judge the demeanor and character

of the witnesses. It may have been wrong that McLean considered that the $2 million to

be peanuts, but it was not wrong that a 3:1 ratio was necessary to deter future

misconduct given McLean’s attitude. This determination was entirely reasonable.

B. Violation of Due Process

Defendants argue the court’s punitive damages award violates the due process

clause of the fourteenth amendment, “which prohibits the imposition of grossly

excessive or arbitrary punishments on a tortfeasor” (International Union of Operating

Engineers, Local 150 v. Lowe Excavating Co., 225 Ill. 2d 456, 466-67 (2006)). We

review this constitutional question de novo. Lowe Excavating Co., 225 Ill. 2d at 469.

“[T]hree guideposts should be considered in reviewing an award of punitive

damages: ‘(1) the degree of reprehensibility of the defendant's misconduct; (2)

the disparity between the actual or potential harm suffered by the plaintiff and the

punitive damages award; and (3) the difference between the punitive damages

awarded by the jury and the civil penalties authorized or imposed in comparable

cases.’ ” Lowe Excavating Co., 225 Ill. 2d at 470 (quoting State Farm Mutual

Automobile Insurance Co. v. Campbell, 538 U.S. 408, 418 (2003)).

Defendants raises arguments regarding all three guideposts.

1. Degree of Reprehensibility

Defendants argue there was no evidence of such reprehensibility that would

warrant the imposition of punitive damages in this case and the court’s determination to

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the contrary should be reversed. The degree of reprehensibility of the defendant’s

conduct is “the most important indicium of the reasonableness of a punitive damages

award.” Lowe Excavating Co., 225 Ill. 2d at 470. When determining reprehensibility,

the court must consider:

“(1) whether the harm caused was physical as opposed to economic; (2) whether

the tortious conduct evinced an indifference to or a reckless disregard for the

health and safety of others; (3) whether the target of the conduct was financially

vulnerable; (4) whether the conduct involved repeated actions or was an isolated

incident; and (5) whether the harm was the result of intentional malice, trickery, or

deceit, or mere accident.” Lowe Excavating Co., 225 Ill. 2d at 470.

“ ‘The existence of any one of these factors weighing in favor of a plaintiff may not be

sufficient to sustain a punitive damages award and the absence of all of them renders

any award suspect.’ ” Lowe Excavating Co., 225 Ill. 2d at 470-71 (quoting State Farm,

538 U.S. at 419). “ ‘It should be presumed a plaintiff has been made whole for his

injuries by compensatory damages, so punitive damages should only be awarded if the

defendant's culpability, after having paid compensatory damages, is so reprehensible as

to warrant the imposition of further sanctions to achieve punishment or deterrence.’ ”

Lowe Excavating Co., 225 Ill. 2d at 471 (quoting State Farm, 538 U.S. at 419).

In determining punitive damages, the court cited the five Lowe factors. With

regard to the fourth factor, it found defendants’ conduct “involved repeated actions as

opposed to an isolated incident” and the evidence established “well over 100 of these

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misappropriations over a period of six years.” With regard to the fifth factor, it found it

“clearly established that the harm incurred was the result of intentional malice, trickery

or deceit.” It stated defendants did their best to hide their conduct from plaintiffs; once

discovered, promised to cease, only to begin again; devised more elaborate ways in

which to conceal their conduct; were nonchalant about the misconduct; and deemed any

device they could use to deceive Tully justified.

Defendants argue the court erred in finding the harm was the result of intentional

malice, trickery or deceit under the fifth factor and that it should have considered the

first three factors, all of which dictate against punitive damages.

With regard to the first two factors, there is no question that the harm here was

purely economic and defendants’ conduct did not evince an indifference or reckless

disregard for the safety of others. With regard to the third factor, defendants assert

there is nothing to show that plaintiffs were financially vulnerable. They acknowledge

that OTD was occasionally cash-poor but state it was a healthy, successful enterprise

and Tully recovered more than 80% of his investment. Defendants argue, taken

together, the first three factors provide no indication that the defendants’ conduct was so

reprehensible as to warrant the imposition of any punitive damages. Although there is

some small question about the financial condition of OTD, defendants’ argument is for

the most part true. However, a finding of reprehensibility does not require that all five

factors be met. Lowe Excavating Co., 225 Ill. 2d at 483. Such a finding can rest, as

here, on the existence of only two of the five factors. Lowe Excavating Co., 225 Ill. 2d at

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483 (court found reprehensibility existed because facts demonstrated defendant acted

with intentional malice (fifth factor) and, to a lesser extent, had repeated its conduct

(fourth factor)). As will be shown, the fourth and fifth factors lend solid weight to a

finding of reprehensibility under the facts of this case.

With regard to the fourth factor, whether the conduct involved repeated actions or

an isolated incident, defendants merely state that they “do not dispute” the court’s

finding that they made the intercompany loans on more than one occasion. The court

did not just find defendants made the intercompany transfers “on more than one

occasion.” It found defendants made the misappropriations from OTD on over 100

occasions. There is clear evidence that defendants made the majority of these

misappropriations with full knowledge that, at a minimum, Tully did not approve, that the

transfers were probably illegal and that they should hide what they were doing. They

engaged in a “pattern of misconduct” that typified the manner in which they ran their

businesses. This is recidivist conduct. Lowe Excavating Co., 225 Ill. 2d at 481. And

recidivist conduct is to be considered reprehensible. Lowe Excavating Co., 225 Ill. 2d at

477.

“ ‘Certainly, evidence that a defendant has repeatedly engaged in prohibited

conduct while knowing or suspecting that it was unlawful would provide relevant

support for an argument that strong medicine is required to cure the defendant's

disrespect for the law. [Citation.] Our holdings that a recidivist may be punished

more severely than a first offender recognize that repeated misconduct is more

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reprehensible than an individual instance of malfeasance.’ ” Lowe Excavating

Co., 225 Ill. 2d at 477 (quoting BMW of North America, Inc. v. Gore, 517 U.S.

559, 576-77 (1996)).

The strength of the recidivist evidence under the fourth factor weighs strongly in our

overall assessment of reprehensibility.

With regard to the fifth factor, whether the harm was the result of intentional

malice, trickery, or deceit, or of mere accident, defendants argue the court erred in

finding that their actions were the result of intentional malice, trickery or deceit. They

assert there is no evidence in the record that any of defendants’ actions were taken with

the deliberate goal of harming plaintiffs. They assert the evidence shows defendants

took the intercompany loans to accommodate the inevitable cash-flow issues arising in

the development business, intended to repay those loans and did repay them, and did

not take the loans with the intent of harming OTD or Tully’s interests.

There is no question plaintiffs’ harm resulted from defendants’ trickery and deceit.

The evidence shows defendants made the misappropriations knowing they were

inappropriate and, in order to hide evidence of the misappropriations, disguised them as

transfers to a nonexistent tax escrow account and as “transfer in transit.” They knew the

monthly financial statements they submitted to plaintiffs for OTD’s operations were false,

yet for six years continued their behavior. McLean promised to stop making the

withdrawals but six months later, started taking them again, this time disguising them

more carefully. Defendants clearly acted with intentional trickery and deceit toward

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plaintiffs and the fifth factor is met. Based on the strength of the evidence under the

fourth and fifth factors, we find defendants’ conduct was reprehensible.

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2. Disparity Between Actual Harm and the Punitive Damages Award

Defendants argue that, although the court stated its punitive damages award was

three times the amount of compensatory damages, the award is actually eight times that

amount. Defendants assert the court improperly assessed punitive damages for harm

which resulted to defendants themselves by including in its calculation the amount

defendants were ordered to forfeit as loan fees and by calculating punitive damages on

100% of the compensatory amount, 50% of which was actually compensatory damages

to defendants. They assert the court should have adjusted the compensatory base by

removing all damages which were already punitive in nature (the loan fees) and by

further reducing the base by the 50% ownership in OTD held by defendants. They refer

us to their “section IV.B” argument seeking reduction of the award, addressed in our

section IV(C) below, for further explanation of how the court erred in its calculation of

the award. As will be discussed in section IV(C), the court did not improperly calculate

the punitive damages award and did not award an 8:1 ratio in punitive damages. The

court awarded, as it said, a 3:1 ratio of punitive damages to compensatory damages.

In considering whether the 3:1 ratio is constitutional, we must “consider whether

there is a reasonable relationship between the punitive damages award and the

potential and actual damages resulting from the defendant's conduct.” Lowe

Excavating Co., 225 Ill. 2d at 484. There is no “bright-line ratio which a punitive

damages award cannot exceed,” but rarely will an award greater than a single-digit ratio

between punitive and compensatory damages satisfy due process, with an award

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greater than four times the amount of compensatory damages being “close to the line.”

Lowe Excavating Co., 225 Ill. 2d at 484.

Given the depth of defendants’ deceit and the number of years they perpetrated

it, the 3:1 ratio does not seem excessive. However, the best way to determine whether

the 3:1 ratio is appropriate is to compare it to punitive damages awards in other, similar

cases. Lowe Excavating Co., 225 Ill. 2d at 487. To that end, defendants cite to Franz v.

Calaco Development Corp., 352 Ill. App. 3d 1129 (2004), and Monotronics Corp. v.

Baylor, 107 Ill. App. 3d 14 (1982), cases in which the court found breach of fiduciary

duty but declined to award punitive damages.

In Franz, the court did not analyze the trial court’s decision not to award punitive

damages despite the defendant’s bad faith beyond stating that the trial court did not

abuse its discretion. Franz, 352 Ill. App. 3d at 1149. Franz is, therefore, of no use to

defendants at all in demonstrating the 3:1 ratio imposed here was excessive. In

Monotronics Corp., the court merely stated that the trial court did not abuse its discretion

in failing to award punitive damages because the defendant’s behavior was not found to

be fraudulent or malicious. Since defendants’ behavior here was fraudulent and

malicious, Monotronics Corp. is not apposite.

Defendants also cite to In re Estate of Talty, 376 Ill. App. 3d 1082 (2007); In re

Estate of Hoellen, 367 Ill. App. 3d 240 (2006); and Caparos v. Morton, 364 Ill. App. 3d

159 (2006), in support of their argument that the award is excessive. Again, none of

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these cases are apposite to the situation at bar.6

In Talty, the court affirmed the trial court’s punitive damages award of attorney

fees, costs and witness fees for an executor’s breach of fiduciary duty. Beyond stating

that the award was clearly necessary to punish the defendant for disregarding the

beneficiary’s rights, the court did not discuss the award. There was no discussion

about the relationship between the punitive and compensatory damages awards so the

case is of no use here. In Hoellen, the court affirmed the court’s $50,000 punitive

damages awarded on a $1 compensatory damages award. Given that the punitive

damage to compensatory damage ratio in Hoellen was 50,000:1, this case clearly does

not support an argument that 3:1 (or 8:1) is excessive where reprehensibility is so

evident.

Lastly, in Caparos, the court affirmed a $1 million punitive damages award on a

compensatory damages award of $4.9 million where general partners in business misled

limited partners. The court found the trial court's reason for imposing punitive damages

(that defendants acted fraudulently, maliciously or in a manner warranting punitive

damages) was not contrary to the manifest weight of the evidence. It also found the

award was not excessive because the trial court did not abuse its discretion in finding a

substantial punitive damages award was necessary due to the need for retribution

6 Defendants presented these arguments in the context of the third guidepost, where they are irrelevant. However, we will consider them here in the context of the second guidepost.

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against the wrongdoer, deterrence of similar conduct by that party and by others in

general and the amount of money involved in the transactions. The court did not

discuss the ratio of punitive to compensatory damages at all, let alone in the context of

conduct as egregious as that at issue here, and Casparos is of no use to defendants’

argument.

As plaintiffs point out, a better case analogy would be to Lowe Excavating Co.,

225 Ill. 2d 456, in which the court awarded punitive damages in an 11:1 ratio based on

its finding that the fifth reprehensibility factor was strongly present and the fourth factor

marginally so. Here, where both the fourth and fifth factors are strongly present, an

award of 3:1 does not seem excessive.

3. Sanctions For Comparable Misconduct

The last guidepost to consider is the difference between the punitive damages

awarded and the civil penalties authorized or imposed in comparable cases in order that

substantial deference be accorded to legislative judgments concerning appropriate

sanctions for the conduct at issue. Lowe Excavating Co., 225 Ill. 2d at 489. Defendants

make no argument that there are any civil penalties imposed by statute for breach of

fiduciary duty and we are not aware of any. It being undisputed that there is no

comparable Illinois law imposing a civil penalty for breach of fiduciary duty, we need not

consider this guidepost any further. Lowe Excavating Co., 225 Ill. 2d at 489.

C. Reduction of Award

Defendants argue, in the alternative, that the punitive damages award should be

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reduced because the trial court erred in computing it. Defendants argue the court erred

in not excluding the $270,000 in “loan fees” it ordered defendants to disgorge from the

compensatory base and in not reducing the compensatory base by 50%.

Defendants argue the court should have excluded from the compensatory base

the $270,000 in loan fees it ordered defendants to forfeit. They assert the court properly

excluded from the base the amount of management fees it ordered defendants to forfeit

because that forfeiture was punitive in nature and it should similarly have excluded the

loan fees. However, as discussed in section V(B) below, the “loan fees” were nothing

more than another way of hiding inappropriate transfers. They were not fees earned by

defendants during the period of the breach but misappropriations of funds that belonged

to OTD. The court properly ordered those misappropriated funds be reimbursed to

OTD. Forfeiture of the loan fees was not punitive and the court did not err in including

the fees in its calculation of punitive damages.

Defendants next argue the court should have reduced the compensatory base by

the amount of ownership in OTD held by defendants, i.e., by 50%. They argue it is

inequitable and unwarranted to award punitive damages based on a damages figure

that includes damages to defendants’ own interests. The court refused to reduce the

compensatory base by defendants’ 50% ownership interest because to do so would

discount defendants’ punishment or risk of punishment. A fiduciary should not benefit

from its own wrongdoing. Caparos, 364 Ill. App. 3d at 180. Accordingly, the court did

not err in awarding punitive damages on 100% of the compensatory damage award

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(minus the forfeited management fees).

For the reasons stated above, the court abused its discretion neither in

determining the compensatory base nor in awarding the 3:1 ratio of punitive damages to

compensatory damages.

V. Compensatory Damage Award

Defendants ask that we reduce the compensatory damages award because it

improperly encompassed (a) disgorgement of management fees paid by OTD to MCL

Management and MCL Construction, because neither entity had a fiduciary duty to OTD

and had been paid under services agreements expressly authorized by OTD’s operating

agreement; (b) disgorgement of brokerage fees paid to MCL because there was no

evidence that MCL did not earn those fees; and (c) 13% interest on the intercompany

loans from OTD because that rate is almost triple the prevailing prime interest rate and

is simply punishment rather than fair compensation. We will not set aside the

assessment of damages by a trial court sitting without a jury unless it is manifestly

erroneous. Vendo Co. v. Stoner, 58 Ill. 2d 289, 311 (1974).

A. Management Fees of MCL Management and MCL Construction

Defendants argue the court erred in ordering MCL Management and MCL

Construction to disgorge management fees they had earned because neither company

had a fiduciary duty to OTD, they should not be punished as a result of McLean’s

breach of fiduciary duty and the fees were expressly authorized under OTD’s operating

agreement. “[A] willful and deliberate breach of a fiduciary duty requires complete

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forfeiture of all compensation during the period of the breach.” LID Associates, 324 Ill.

App. 3d at 1071. The reasoning is that a fiduciary is entitled to compensation only if it

duly and faithfully performs all its duties during the period of breach. Levy, 268 Ill. App.

3d at 373-74. The purpose of ordering forfeiture of a fiduciary’s compensation earned

during the period of a breach is not to compensate the injured party but rather to deprive

the wrongdoer of the gains from the breach of duty and to deter disloyalty. Levy, 268 Ill.

App. 3d at 373. It lies within the equitable discretion of the trial court to determine the

appropriate remedy for breach of a fiduciary duty. LID Associates v. Dolan, 324 Ill. App.

3d 1047, 1071 (2001).

As a result of defendants’ breach of their fiduciary duty to plaintiffs, the court

ordered defendants to forfeit “all the management fees of MCL Management and MCL

Construction listed in [plaintiffs’ exhibits 39F and G].” The court did not, as defendants

assert, order only MCL Management and MCL Construction to disgorge fees. First, as

previously discussed in section II above, the court did not order MCL Construction to do

anything at all, so we will not discuss defendants’ argument with regard to MCL

Construction. Second, it ordered all defendants to disgorge those fees, not just MCL

Management. The court found it unquestionable that all defendants were liable to

plaintiffs for breach of fiduciary duty. It found all defendants were controlled by McLean

and acted in concert with McLean with regard to the breaches of fiduciary duty and

fraud. It, therefore, ordered that liability for forfeiture extended to all defendants, not just

MCL Management.

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Defendants assert MCL Management was not a fiduciary of OTD and, therefore,

should not have been ordered to disgorge fees it had properly earned. They argue MCL

Management’s relationship to OTD was purely contractual and its duties were not

fiduciary in character. They assert MCL Management’s duties consisted of ministerial

bookkeeping and day-to-day handling of bills, subject to the control of the manager of

OTD (i.e., MCL or PAM), and that the manager of OTD bore the fiduciary duty of

overseeing MCL Management.

“To recover for breach of a fiduciary duty, a plaintiff must prove that a fiduciary

duty exists, that the fiduciary duty was breached, and that the breach proximately

caused the injury of which the plaintiff complains.” Crichton v. Golden Rule Insurance

Co., 358 Ill. App. 3d 1137, 1149 (2005). A fiduciary relationship exists where, by reason

of friendship, agency, or business association and experience, trust and confidence are

reposed by one party in another and the latter party gains an influence and superiority

over the first as a result. Maercker Point Villas Condominium Ass'n v. Szymski, 275 Ill.

App. 3d 481, 484 (1995). In a corporate setting, a fiduciary has the duty to act with

utmost loyalty and good faith in managing the corporation. Maercker Point Villas

Condominium Ass'n, 275 Ill. App. 3d at 484. It breaches that duty if it uses corporate

assets to further its own goals or enhances its own personal interests at the expense of

the corporate interests. Levy v. Markal Sales Corp., 268 Ill. App. 3d 355, 369 (1994);

Maercker Point Villas Condominium Ass'n, 275 Ill. App. 3d at 484. A fiduciary is not

allowed to use the corporation's assets without compensating the corporation and

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should not put himself in a position of conflict where he is tempted to use corporate

assets for his own purposes. Levy, 268 Ill. App. 3d at 369.

It is undisputed that McLean, MCL and PAM had a fiduciary duty to OTD and they

breached that duty. MCL and PAM each had been the named manager of OTD

pursuant to the operating agreement and McLean was the manager of both MCL and

PAM. The other members of OTD were, by McLean’s design, silent participants in the

business, necessarily trusting and relying completely on the manager in running the

company. McLean testified that, as manager of OTD, he could do pretty much anything

he liked and freely admitted he made transfers from OTD to his other business entities

as needed for the cash flow of his other enterprises. He stated he took the interest-free

“loans” as compensation for developing Piper’s Alley from a $1.5 million investment into

a $15 million investment without charging for his services.

McLean’s accountant testified the transfers were not for OTD’s benefit but for the

benefit of McLean’s other enterprises. She also testified that OTD was short on funds

and unable to meet its mortgage and tax obligations as a result of the transfers,

resulting in late fees and penalties. She stated she hid the transfers from Tully. She

made the transfers by wiring funds rather than writing checks so that she would not have

to get Tully’s signature on any check over $5,000, as McLean had agreed in 2002. She

also posted the transfers in fictional accounts so that Tully would not notice them .

McLean, MCL and PAM breached their fiduciary duty to OTD and plaintiffs when they

used OTD’s resources for their own benefit, failed to compensate OTD for that usage

40 1-09-2976

and actively worked to hid that usage from the other members of OTD.

Pursuant to the management agreement between OTD and MCL Management,

MCL Management was the manager for the Piper’s Alley complex, OTD’s sole asset. It

was OTD’s exclusive agent for the day-to-day operations of Piper’s Alley, responsible

for maintaining the complex, renting the space, dealing with tenants, collecting rent, and

maintaining the appropriate records. Normal trust between contracting parties does not

turn a contractual relationship into a fiduciary one. In re Estate of Long, 311 Ill. App. 3d

959, 966 (2000). But the trust here was more than normal trust. The essence of a

fiduciary relationship is that one party is dominated by another; the presence of a

significant degree of dominance and superiority. Lagen v. Balcor Co., 274 Ill. App. 3d

11, 21 (1995). That degree of dominance and superiority exists here. OTD and

plaintiffs were completely dependent on OTD’s manager to run the company. The OTD

members gave up all control over the company to the manager on the basis of promised

high returns. The manager of OTD was also the manager of MCL Management.

As the court found and the testimony of McLean and his accountant shows, all

defendants, MCL Management included, were controlled by McLean and acted in

concert with him with regard to the breaches of fiduciary duty. MCL, PAM and MCL

Management were basically the same entity. McLean operated his 50-some business

entities together, using MCL Construction as the clearing house for all transfers to and

from the businesses. McLean was the manager for each business entity and used the

41 1-09-2976

same accounting staff to coordinate the finances of all of them. All McLean’s

businesses were tied together by a web of transfers in and out of essentially a common

fund memorialized on MCL Construction’s books. MCL Management was part of that

web. It was managed by the same man that, in his capacity as manager of MCL and

PAM, managed OTD. The same man who ordered that funds to be siphoned from OTD

and sent to unrelated entities and that evidence of those transfers be hidden from

plaintiffs. All McLean controlled businesses acted together. As the court held, MCL

Management was clearly a fiduciary of OTD and breached that duty by cooperating in

the scheme.

The court did not abuse its discretion in ordering forfeiture of the management

fees. There is no question that MCL Management/defendants worked to earn the

management fees but, as discussed previously, there is also no question that

defendants breached their fiduciary duty to OTD in a wilful and deliberate way for many

years. They failed to be truthful and candid with plaintiffs and used corporate assets for

their own gain with reimbursing OTD. The record supports the court’s finding that

defendants perpetrated “egregious conduct by the misappropriation of significant funds”

throughout the long history of the project and worked together to accomplish this. Full

forfeiture of all compensation was warranted.

B. Brokerage Fees Paid to MCL

Defendants argue the court erred in ordering defendants to reimburse plaintiffs

for two separate “loan fees” transferred from OTD, one for $100,000 and one for

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$170,000. The transfers were allegedly for loan fees MCL earned for arranging the

refinancing of OTD’s debt in October 2003 and in February 2005. The court found no

justification in the operating agreement for the charge to OTD of the fees and that the

fees were a veiled attempt to siphon additional funds from OTD for McLean’s benefit. It

found, additionally, even if the fees were appropriately paid, they were to be forfeited as

a result of McLean’s breach of fiduciary duties.

Defendants asserts the fees were “loan brokerage fees,” legitimately earned by

MCL in procuring two financial arrangements for OTD and commensurate with fees

charged for similar services in the Chicago market. They argue MCL, as OTD’s

manager, had the authority to contract with McLean-related entities and just because

there was no express authority for this particular contract or financial service in OTD’s

operating agreement does not mean the fees were not justified. They also assert the

court ordered the forfeiture as a punishment to McLean and not as a compensatory

measure.

The court did not err in ordering forfeiture of the fees. The record supports the

court’s finding that the fees were actually misappropriations. First, OTD’s management

agreement contains no provision that loan or brokerage fees will be paid to the

manager, whether MCL or PAM, or to an affiliate of the manager. Granted, the manager

has complete authority to contract with other McLean entities but there is no evidence of

any contract committing OTD to pay loan fees to anyone. Second, as plaintiffs point

out, the fees were posted only five days apart, one at nine months after the 2003

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refinancing and the other at seven months before the 2005 refinancing, making their

actual connection with the loans questionable. Lastly, the fees were listed on MCL

Construction’s master ledger as being “asset management fees,” which are (a) not the

same as loan brokerage fees and (b) clearly not authorized under the operating

agreement because, as McLean testified, he decided not to charge OTD asset

management fees for his services.

All in all, we agree with the court that the “loan fees” were nothing more than

another way of hiding inappropriate transfers and should be forfeited because they were

not actually earned and the improperly transferred funds belong to OTD. The court did

not err in ordering forfeiture of the loan fees.

C. 13% Interest Rate

Defendants argue the court erred in awarding plaintiffs 13% prejudgment interest

on the misappropriated funds. Prejudgment interest is proper when authorized by

statute, agreement of the parties or warranted by equitable considerations. Progressive

Land Developers, Inc. v. Exchange National Bank of Chicago, 266 Ill. App. 3d 934, 945

(1994). “In cases involving a breach of fiduciary duty, the rationale behind an award of

interest is to make the injured party whole by forcing the fiduciary to account for profits

gained from his use of the injured party's funds.” Progressive Land Developers, Inc.,

266 Ill. App. 3d at 945 (citing In re Estate of Wernick, 127 Ill. 2d 61, 87 (1989)). The

determination of whether equitable circumstances support an award of interest lies

within the discretion of the trial court. In re Estate of Wernick, 127 Ill. 2d at 87. We will

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not disturb such a determination barring an abuse of that discretion. In re Estate of

Wernick, 127 Ill. 2d at 87.

Defendants agree that the equitable circumstances warrant awarding plaintiffs

prejudgment interest on the interest-free “inter-company loans” from OTD. They assert,

however, that the 13% interest rate is too high and an abuse of discretion because the

prime rate during the time was 4.6% and there was no showing that OTD could generate

anything close to 13% by lending those funds to other businesses or purchasing debt

instruments at that time. They argue the 13% rate is punitive, rather than fair and

equitable, and an abuse of discretion in the setting of equitable interest.

The court did not abuse its discretion in setting the 13% interest rate. There is no

requirement that the court award only the prime rate or prime rate plus 1%. “[I]n equity

the amount of interest allowed need not fall within any precise terms.” In re Estate of

Wernick, 127 Ill. 2d at 87. To paraphrase the court, while McLean could have borrowed

from a bank at a rate of prime plus 1%, he did not do so. Instead, he misappropriated

funds from a private company and he is, therefore, not entitled to benefit from the bank

rate. As the court stated, the true measure of damages is not what defendants would

have had to pay had McLean conducted himself appropriately but rather what the

wrongful conduct cost the victim, the cost of the loss of use of the funds. Progressive

Land Developers, Inc., 266 Ill. App. 3d at 945; In re Estate of Wernick, 127 Ill. 2d at 87.

The plaintiffs requested a 13% interest rate based on a 2001 loan agreement between

McLean and one of his other business enterprises, 455 Central Park West, LLC, a

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development in New York City. Under that agreement, 455 Central Park West, LLC

agreed to borrow money from McLean at a rate of 13% interest. So, apparently, 13% is

a reasonable rate of interest for a loan between an individual and a private business.

Given the circumstances of the case, 13% prejudgment interest was not excessive

compensation to plaintiffs for McLean’s taking the “interest-free loans” and the court did

not abuse its discretion in entering the award.

For the reasons stated above, we affirm the court’s judgment against LPDA, its

judgment ordering forfeiture of management fees and its compensatory and punitive

damage awards. We reverse the court’s order denying defendants’ counterclaim for

dissolution of OTD and order the case remanded for further proceedings.

Affirmed in part and reversed in part; cause remanded.

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REPORTER OF DECISIONS - ILLINOIS APPELLATE COURT (Front Sheet to be Attached to Each case)

THOMAS M. TULLY, Trustee of the Thomas M. Tully Trust, and F.P.A., LLC, an Illinois Limited Liability Company, Individually and Derivatively on Behalf of Old Town Development Associates, LLC,

Plaintiffs-Appellees,

v.

DANIEL E. McLEAN, PIPER’S ALLEY MANAGEMENT, INC., an Illinois Corporation, LINCOLN PARK DEVELOPMENT ASSOCIATES, LP, an Illinois Limited Partnership, MCL COMPANIES OF CHICAGO, INC., an Illinois Corporation, MCL MANAGEMENT CORPORATION, an Illinois Corporation, and OLD TOWN DEVELOPMENT ASSOCIATES, LLC, an Illinois Limited Liability Company and Nominal Defendant,

Defendants-Appellants.

Appellate Court of Illinois First District, Second Division

April 26, 2011

JUSTICE KARNEZIS delivered the opinion of the court.

CUNNINGHAM, P.J., and HARRIS, J., concur.

Appeal from the Circuit Court of Cook County.

The Honorable Stuart E. Palmer, Judge Presiding.

For APPELLANTS: Brown, Udell, Pomerantz & Delrahim, Ltd., of Chicago (Glenn L.

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Udell, David A. Epstein, Lauren C. Walsh and Amanda C. Jones, of counsel)

For APPELLEES: Nisen & Elliott, LLC, of Chicago (Michael H. Moirano and Claire E. Gorman, of counsel)