Prospect Development, LLC v. City of Prospect HeightsProspect Development, LLC v. City of Prospect Heights
Justices J. GORDON and Howse concurred in the judgment.
O R D E R
HELD: Where manifest weight of evidence showed real estate developer substantially performed contract with municipality to develop arena but had secretly given “loans” to municipality‘s lawyer, the developer‘s reimbursement claim failed due to its unclean hands but the municipality‘s breach of contract claim also failed; the municipality‘s ancillary claim was denied due to lack of proof of any damages; and the municipality‘s third-party claim was rejected because its underlying claim had been rejected.
¶ 1 This appeal arises from the failure of the plaintiff arena development company and the defendant municipality to construct a 12,400-seat indoor sports and entertainment venue in
¶ 2 The record shows the following relevant facts. Attorney Donald J. Kreger was a partner in the Chicago office of Schiff Hardin LLP, and between 1977 and 2003, he acted as general counsel for Prospect Heights.1 Kreger had a close friendship with John G. Wilson, whom he had met when their sons were on the same ice hockey team. In the early 1990‘s, Wilson, who resided in Kenilworth, Illinois, wanted to develop an ice hockey arena somewhere in the north or northwest suburbs of Chicago and formed Ice Ventures for that purpose. Wilson had some experience in real estate development, but no experience developing or operating an ice hockey or sports arena. At the time, Paul Richardz was one of Prospect Heights’ aldermen and was also interested in building a stadium and other facilities. Kreger introduced Wilson and Richardz to each other, and the alderman later introduced Wilson to other members of Prospect Heights’ administration. In early 1994, the city council hired Wilson as a consultant to conduct a
¶ 3 Prospect Heights intended to sell TIF bonds, build the arena in what was then a blighted area, and then repay the bond holders with some of the additional sales tax revenue generated by the new venue and its infrastructure (that is, fund the project through what is known as tax increment financing rather than by selling general obligation bonds that were backed by the town‘s taxing powers). Between 1997 and December 2000, the developer and the municipality courted potential investors but could not sell any bonds. Finally, in 2001, the municipality sold $2.85 million worth of bonds – far less than the $43 million it needed for the arena project – and from the proceeds tendered $1.75 million to Wilson‘s development company. That same year, the municipality entered into a memorandum of understanding to sell $43 million worth of bonds to an English investor in 2002, however, the buyer backed out. In early 2003, the longtime mayor of Prospect Heights, Edward P. Rotchford, retired and a new mayor and city administrator took office. Although the city did not sell any more TIF bonds, it paid Wilson‘s development company an additional $250,000 out of the municipal TIF account. In March 2003, Prospect Development defaulted on a $25.8 million loan it used to buy about 30 acres of blighted land in Prospect Heights in the vicinity of Chicago Executive Airport (formerly
¶ 4 Prospect Development filed its one-count fifth amended complaint in December 2007, contending its substantial performance of the contract entitled it to specific performance in the form of reimbursement of its expenses. The developer‘s expenses totaled $25 million and included mortgage loan interest, the security it lost when it defaulted on the notes, various consultant fees, and administrative expenses. The city responded that the developer failed to perform and came to court with unclean hands because (a) Wilson had secretly given city attorney Kreger at least $150,000 in cash and $50,000 in stock in Ice Ventures between 1996 and 2003, and (b) Kreger had introduced Wilson “to the City as a qualified arena developer” and advocated for actions which benefitted Wilson and his companies. The city knew about the money that had secretly passed from Wilson to Kreger partly because plaintiff Prospect Development complained of the arrangement when it first filed suit. The developer alleged in the original version of its pleading:
“25. In addition, during this time, Kreger, one of the City‘s Agents,
approached Developer‘s principal Wilson on multiple occasions to ‘request’ a $100,000 loan in connection with a personal financial problem. In light of the close role that the City‘s Agents had played in the Arena Project, Wilson granted such a loan in excess of $100,000 for fear that its refusal would adversely affect the Developer‘s ability to complete the Arena Project.”
The city construed this as an admission that Prospect Development knew the “loan” was inappropriate. Thus, in addition to alleging that breach of the Redevelopment Agreement entitled the city to recoup its project expenses (Count I), the city‘s amended counter-complaint against the developer also sought punitive damages for participating in Kreger‘s breach of fiduciary duty owed to the city (Count II), and aiding and abetting Kreger‘s breach of fiduciary duty (Count III). The city also filed a third-party action against Wilson individually for participating in (Count I) and aiding and abetting (Count II) Kreger‘s breach of his fiduciary duty. The city, however, did not sue Kreger or Schiff Hardin LLP.
¶ 5 After a bench trial, neither side could be characterized as the decisive winner. The trial judge ruled that Prospect Development established most of the elements of its equitable claim for specific performance but was entitled to no relief because Wilson engaged in “bad faith” and “clear misconduct” when he failed to disclose the secret financial relationship he had with Kreger and thus, Prospect Development had come to court with unclean hands. Nonetheless, the evidence that the developer had substantially performed all of its material obligations under the contract was also reason for the judge to reject the city‘s cross-allegations
¶ 6 Brian Bradley was the project manager for Prospect Development, had a master‘s degree in management, and was a former employee of Accenture and Anderson Consulting. Bradley testified about expenses incurred to bring the plans and contracts for construction to the point that a bond buyer would review them and propose final modifications. The package was sufficiently comprehensive and complete that the financial services company UBS PaineWebber had marketed them. There were numerous architectural drawings, a guaranteed maximum price commitment from the design-build firm Ryan Companies US, Inc., a bank‘s commitment to lend $22.5 million provided there were $43 million in bond sales, a commitment of $3 million from a company that managed arenas and their concessions, and $750,000 from a ticketing company. Bradley acknowledged that Illinois Department of Transportation (hereinafter IDOT) did not commit $4 million for road improvements; however, the city and the developer were both contractually required to pursue that commitment. He also disagreed with the allegation that the developer failed in its duty to secure various government permits, because there were permits to
¶ 7 Dr. Bernard Mullin testified as a sports marketing consultant for Prospect Development between 1997 and April 2000 when he resigned to work for the NBA. He had reduced his usual consulting rate and received 2.5% ownership in Prospect Development. Dr. Mullin‘s experience included building and operating small fitness centers, health centers, and professional and academic sports arenas; increasing the revenues of professional sports teams and sports leagues; and writing a sports marketing textbook. His concept for the arena in Prospect Heights was for it to fill a niche in the suburbs and provide an alternative to downtown sports and entertainment events. The facility would be “one step down” in market size from the United Center in Chicago, seat about 12,000 people, and be the home of figure skating events, tennis events, and the best minor league franchises including ice hockey, arena football, lacrosse, indoor soccer, women‘s basketball, and roller hockey. This critical mass of tenants would be supplemented with bookings for concerts and family shows, because Dr. Mullin‘s experience told
¶ 8 Former Mayor Rotchford had served as mayor for 12 years and prior to that was an alderman for six years. He attributed the arena project to alderman Richardz, who was then chair of the committee for economic development. The city had been too slow to acquire land necessary to bring in the large retailers Wal-Mart and Sam‘s Club, so Richardz proposed erecting a large multi-sports complex, did a couple of feasability studies, started to look for financing, and met Wilson. Kreger did not announce his personal relationship with Wilson until the city council was ready to proceed with the project. Kreger said they were “hockey friends” and did not disclose any business transactions or money between them. Had the mayor known Kreger was receiving money from Wilson, the city would not have approved the project.
¶ 9 Donald J. Kreger testified that during the many years he worked for Prospect Heights,
¶ 10 On cross examination, Kreger acknowledged that although Wilson gave him a series of checks between 1996 and 2001, there had never been a written loan contract or a discussion of terms of repayment or interest, and that Kreger had repaid only $18,000. Also, while the Ice Ventures redevelopment proposal was pending with the city in mid 1996, Kreger owned stock in Ice Ventures and Huvard was not be hired until late 1996. Kreger, however, never disclosed the loans or his ownership. Minutes of an executive session of the city council on June 10, 1996, indicated Kreger was there when Alderman Koeppen asked and Wilson denied that Kreger had an interest in the proposed project. Kreger recalled that he was the one who actually answered that question. Records also indicated that around this time, Kreger‘s wife, Victoria, and their son, Jeremy, worked for Wilson or his company. Kreger was uncertain whether Victoria was paid, but Wilson‘s decision to hire Jeremy as an unpaid intern was done as a favor to Kreger. These relationships were not disclosed. When asked whether Kreger believed his disclosure to the city was “complete,” Kreger responded, “I believed that the disclosure was what was required. It was a close, personal relationship, which could mean a lot of things.” Also, although Kreger‘s work was supposed to be limited to ensuring that the city‘s bond terms complied with the law, there were time records divulged by his law firm indicating the firm later helped acquire one of the land parcels, Kreger talked with a surveyor, Kreger met with Wilson and others, Kreger talked
¶ 11 Darlene Ahlstedt testified that she was elected to a 10-year aldermanic post about two months before the redevelopment agreement was executed in June 1997. Ahlstedt, one other alderman, some of the city staff, Kreger, the developer, and some of the developer‘s consultants formed a redevelopment team which met monthly to address the project‘s progress. The project failed because of division in the council, not because of any breach by the developer. Kreger was described as “bond counsel” but he advised the city on other aspects of the project. On cross examination by Prospect Heights, Ahlstedt said Kreger and the city administrator ran the redevelopment team meetings, Kreger consistently encouraged the council to stick with the project because eventually it would work out, and if Ahlstedt had known Wilson “had provided money” to Kreger she would not have had wanted the city to do any further business with Wilson
¶ 12 John G. “Jack” Wilson testified that prior to forming Prospect Development he gained experience in residential, suburban, downtown commercial and office high rise development projects in Chicago, Evanston, and southern Michigan. The signed Redevelopment Agreement required the developer to obtain financing and equity commitments to pay for and ensure completion of the work after taking into account the proceeds derived from TIF bonds. Wilson fulfilled this obligation by obtaining a $3 million commitment from a stadium concessionaire, a $750,000 commitment from a ticket vendor, a $22.5 million construction loan commitment provided the city sold $43 million worth of bonds, and a guaranteed maximum price commitment from the design-build firm Ryan Companies, and he did other things required by the contract. Prospect Heights was contractually obligated to reimburse the developer for certain project costs, and the developer was seeking $13 million in TIF eligible expenses, including an engineering analysis, a pedestrian study, a cladding wind load study, a structural wind load study, a roof snow loading assessment, architectural fees, rent, salaries, and so forth. There had been a small, $2.85 million bond sale in March 2001, but these funds were applied to interest that was accumulating against the city as it waited for more TIF revenues. It was not until after that the city suggested the developer had failed to perform its contractual obligations and, in fact, the parties executed an operating agreement indicating all the respective obligations and covenants of the redevelopment agreement had been fully performed and were being supplemented by the operating agreement. Everything that could be done on the project had been completed and all that remained was funding and construction. For instance, UBS Paine Webber and the
¶ 13 On cross examination, Wilson testified that he had no previous experience determining the feasability of a sports arena prior to being hired by the city in 1994. Kreger‘s “recusal” meant he was not supposed to discuss “any subjects relating to the arena project” with
¶ 14 Cris Papierniak, a professional licensed civil engineer and director of public works for the Village of Cary, Illinois, was employed by Prospect Heights between 1996 and 2004, as a civil engineer and later as the director of public works. Papierniak participated in redevelopment team meetings and was familiar with the arena design plans. He testified that the developer failed to obtain final plans from its architects or engineers; final approval from the city, final
¶ 15 On cross-examination, however, Papierniak acknowledged having no prior experience as a public works director, the city hired a planning specialist to help it through the large development project, and the planning consultant participated in the redevelopment meetings. Papierniak did not recall that the design-build plans were sufficiently complete for the contractor to have committed to a guaranteed maximum price and that IDOT would not commit to road improvements until the arena project was fully funded. Papierniak also did not recall that the developer hired a civil engineering firm with considerable experience in permit applications for arena and other municipal improvements, the firm prepared a detailed plan for what permits would be needed and when they should be sought, and the firm obtained permits from the IEPA, ComEd, and Ameritech. The city had given merely preliminary rather than final approval to the construction plans, but Papierniak did not realize that until the bond purchaser gave approval, there would be no final plans to submit to the city. Meeting minutes indicating the city was preparing to close on the big bond sale in 2002 did not suggest that Papierniak was contemporaneously complaining about a lack of permits or any breach by the developer or that he criticized the civil engineering firm which had outlined the timeline for obtaining permits in the future. Also, when a new city administrator took office in early 2003, Papierniak talked with him about the arena project but did not suggest that the developer was in breach.
¶ 16 Bruce Huvard testified that he joined Altheimer & Gray in 1983 as an associate
¶ 17 On cross-examination by the developer‘s attorney, Huvard disagreed with the
¶ 18 Rodney M. Pace had lived in Prospect Heights for the past 20 years, was elected its mayor upon Rotchford‘s retirement in 2003, and served in that capacity for about five years. While he was mayor-elect, he was invited to the mayor‘s office to meet with Rotchford, Kreger,
¶ 19 On cross-examination, Pace acknowledged that his deposition testimony indicated Rotchford asked Pace to make Wilson whole for his expenditures on the arena, however, Pace testified that his deposition answer was about a different meeting than the introductory meeting
¶ 20 Irwin Lyons was a certified public accountant and had been auditing the city‘s accounts since 1995. Lyons testified that the TIF district was bringing in revenue, but when offset against the City‘s expenses, the City needed $10 million from the developer to be made whole. On cross examination, Lyons said the TIF district would be in effect for 23 years after it was established in 1997 and its revenue could be applied to any TIF expenses, and that after regaining the land, the City sold some of it to the nearby airport, but that transaction was not reflected in the trial exhibits.
¶ 21 Bruce A. Morris was the city‘s long-term chief of the police and had also held the dual role of city administrator for about 10 months between 1999 or 2000 and 2001 or 2002. As the chief of police, Morris attended redevelopment meetings and gave his input on traffic flow and security measures at the arena. Morris trusted Kreger and relied on his knowledge about the arena development, and although Morris was never on the city council, if Morris had known
¶ 22 Appellant Prospect Development first contends there was insufficient evidence of bad faith to support the application of the doctrine of unclean hands. Furthermore, it contends, the personal friendship was disclosed and proper safeguards were put in to place. Wilson had no duty to disclose his financial relationship with Kreger because he was neither a fiduciary nor in a position of influence or superiority over the city, and the trial judge cited no legal theory which supported imposing a duty of disclosure on Wilson. Also, Kreger had an attorney-client/fiduciary relationship with the city, Kreger is the only culpable party, Kreger and his firm should bear the liability, and it is inequitable to deprive the shareholders of Prospect Development of their recovery.
¶ 23 The doctrine of unclean hands is an affirmative defense that precludes a party who has engaged in misconduct, fraud, or bad faith directed at the defendant in connection with the matter being litigated from receiving any relief from a court of equity. Long v. Kemper Life Insurance Co., 196 Ill. App. 3d 216, 218-19, 553 N.E.2d 439, 441 (1990). The doctrine is not concerned with the effect of the conduct as much as it is with the intent with which the acts were performed. Jaffee Commercial Finance Co. v. Harris, 119 Ill. App. 3d 136, 140, 456 N.E.2d 224, 228 (1983). Whether the doctrine should be applied is left to the sound discretion of the trial court. Long, 196 Ill. App. 3d at 219, 553 N.E.2d at 441. An abuse of discretion occurs when no reasonable person would adopt the same view as the trial court. McGill v. Garza, 378 Ill. App. 3d 73, 75, 881 N.E.2d 419, 422 (2007) (abuse of discretion occurs when a ruling is
¶ 24 The manifest weight of the evidence supports the trial court‘s findings that Wilson, a principal of Prospect Development, committed misconduct and acted in bad faith when he engaged in a secret financial relationship with attorney Kreger while doing business with Kreger‘s client, Prospect Heights. The record indicates that Wilson gave Kreger eight separate “loans” between December 19, 1996 and October 22, 2001 totaling $151,000, there was no contemporaneous record such as a notation on the checks or execution of promissory notes indicating the funds were in fact loans, the terms of these loans were never established orally or in writing, Wilson simply assumed he would get the funds back “when he [Kreger] was able,” and Wilson had returned only $18,000. The record also indicates that for a period of time, Kreger had a sizeable interest (24.5% founder‘s stock) in Wilson‘s Ice Ventures and that Ice Ventures helped start the arena project. It is also undisputed that Wilson hired Kreger‘s wife and son for a period of time. Even if the wife was uncompensated, Kreger understood that Wilson hired the son as a “favor” to Kreger.
¶ 25 Wilson and Kreger denied that the checks were bribes and offered an explanation for the Ice Ventures stock purchase, but the trial judge did not have to accept their version as true. The judge was able to observe them while testifying, and could determine their credibility and weigh all of the evidence before concluding that the transactions were inappropriate and should have been disclosed. Kel-Keef Enterprises, Inc. v. Quality Components Corp., 316 Ill. App. 3d 998, 1013, 738 N.E.2d 524, 534 (2000) (the trial judge‘s findings are given great deference because the judge is able to view and evaluate witness testimony, and is therefore in
¶ 26 Furthermore, Wilson knew that the checks he gave Kreger may have created a conflict of interest or at least the appearance of impropriety. In the original pleading filed in January 2005, Prospect Development complained that Wilson gave Kreger money because Wilson thought that if he did not, the arena project would stall or end. Specifically, it was alleged:
“25. In addition, during this time, Kreger, one of the City‘s Agents, approached Developer‘s principal Wilson on multiple occasions to ‘request’ a $100,000 loan in connection with a personal financial problem. In light of the close role that the City‘s Agents had played in the Arena Project, Wilson granted such a loan in excess of $100,000 for fear that its refusal would adversely affect the Developer‘s ability to complete the Arena Project.”
Wilson also testified that he gave Kreger the money because Kreger “was very instrumental and important in the arena project.”
¶ 27 Despite the considerable and increasing financial ties between the two men, the only relationship that was disclosed to Prospect Heights was that the Wilson and Kreger children had been on the same ice hockey team and that the men were on friendly terms.
¶ 28 While Kreger had an interest in Wilson‘s company and owed Wilson money, Kreger suggested which attorney should be brought in as special counsel to avoid the appearance of any conflict of interest. The attorney was Kreger‘s former associate and was never informed of the
¶ 29 Thus, the record indicates that Wilson‘s company began doing business with Prospect Heights while the city did not have a completely independent attorney and Wilson‘s company was kept on the arena project and incurred the expenses sought in this case while the city did not have a completely independent attorney. As the trial judge noted, all of the individuals involved wanted the project to be successful and thus shared a common goal. However, Mayor Rotchford testified that if he had known about the money passing from Wilson to Kreger, the project would not have been approved, and Alderman Ahlstedt testified that she would have wanted to terminate all contacts with Wilson and his companies. In reality, the city officials might have concluded the financial relationship was insufficient reason to cease doing business with Wilson or his companies. What is certain, however, is that the city was deprived of the opportunity to insulate Kreger from all aspects of the arena project, to retain completely
¶ 30 Prospect Development has not cited any authority supporting its suggestion that the unclean hands doctrine is applied only when the plaintiff and defendant in a case stood in a fiduciary relationship. The unclean hands doctrine prevents a plaintiff – any plaintiff – who has engaged in misconduct, fraud, or bad faith directed at the defendant in connection with the matter being litigated from receiving any relief from a court of equity. Long, 196 Ill. App. 3d at 219, 553 N.E.2d at 441; Edens View Realty & Investment, Inc. v. Heritage Enterprises, Inc., 87 Ill. App. 3d 480, 408 N.E.2d 1069 (1980) (it is fundamental that a party seeking equitable relief must come to court with clean hands and cannot take advantage of his own wrong). In Long, for instance, a husband and wife stated in their application for life insurance that he did not suffer from any disease or impairment and was not taking any medication, even though he had been twice diagnosed with a pulmonary disorder which caused lameness and was on prescription medication for this condition. Long, 196 Ill. App. 3d at 217-18, 553 N.E.2d at 439-40. More than a year after issuing the policy, the insurer rescinded the coverage and refunded the couple‘s $100,000 premium. Id. at 217-18, 553 N.E.2d at 439-40. The couple sued, alleging the insurer unjustly retained interest accruing on the $100,000 premium. Id. at 217-18, 553 N.E.2d at 439-40. The circuit court ruled, however, that the couple‘s unclean hands barred them recovering interest, and was affirmed on appeal. Long, 196 Ill. App. 3d 216, 553 N.E.2d 439. In another case, an elder brother failed to tell his sister that she would
¶ 31 On cross-appeal, the municipality contends the court‘s rejection of its breach of contract claim was against the manifest weight of the evidence, the court had adequate evidence to determine whether Kreger breached a fiduciary duty to Prospect Heights, and that rejecting the third party claim for procedural reasons was error. We do not find these arguments persuasive.
¶ 32 First, as set out above, the manifest weight of the evidence supports the conclusion
¶ 33 Second, the city‘s claims against Prospect Development for participating in and aiding and abetting Kreger‘s breach of duty were properly rejected because there was insufficient evidence of the damage prong of this tort claim. Again, the evidence showed that all of the parties involved wanted the project to be successful and they worked to make that happen. There was only speculative testimony from the former mayor, former alderman, and police chief/former city administrator that the city would not have contracted with Prospect Development or would have terminated the contract due to Wilson‘s undisclosed ties to Kreger. There was insufficient testimony and documentary evidence to support the conclusion that Prospect Heights was damaged to the tune of $10 million due to its involvement with Prospect Development. The
¶ 34 Finally, the third-party claims against Wilson individually of “Participation in a Breach of Fiduciary Duty” and “Aiding and Abetting a Breach of Fiduciary Duty” fail because Prospect Heights was found not liable to Prospect Development on the claim seeking specific performance of the reimbursement terms, Prospect Heights owes no damages to the developer, and Prospect Heights does not need to be indemnified by Wilson through the third-party action. Kerschner v. Weiss & Co., 282 Ill. App. 3d 497, 502 (1996) (indicating a third-party action depends on the success of the underlying action). The third-party claim was properly rejected on procedural grounds.
¶ 35 For these reasons, the judgement of the circuit court of Cook County is affirmed.
¶ 36 Affirmed.