Mermelstein v. Menora ( 2007 )

THIRD DIVISION
March 21, 2007
No. 1-06-1607
HENRY MERMELSTEIN, ) Appeal from the
) Circuit Court of
Plaintiff and Counterdefendant - Appellee, ) Cook County
)
v. )
)
MOSHE MENORA; TRI-UNITED MANAGEMENT, )
INC., d/b/a Tri-United Companies, an Illinois )
Corporation; SPRINGS TULSA LIMITED )
PARTNERSHIP, an Oklahoma Limited Partnership; )
BEDFORD APTS. LIMITED PARTNERSHIP, an )
Oklahoma Limited Partnership; APPLE CREEK )
LIMITED PARTNERSHIP, an Oklahoma Limited )
Partnership; SUGERBERRY LIMITED )
PARTNERSHIP, an Oklahoma Limited Partnership; )
INDEPENDENCE WILLIAMSBURG L.P., a Missouri )
Limited Partnership; KINGS RIDGE LIMITED )
PARTNERSHIP, a Missouri Limited Partnership; )
QUAIL RUN/COVE LIMITED PARTNERSHIP a )
Missouri Limited Partnership; and SAN ANTONIO )
SIERRA VISTA L.P., a Texas Limited Partnership, ) Honorable
) Mary Anne Mason,
Defendants and Counterplaintiffs - Appellants. ) Judge Presiding.
JUSTICE KARNEZIS delivered the opinion of the court:
This appeal arises from an order of the circuit court awarding plaintiff Henry
Mermelstein damages and prejudgment interest in his action for dissolution, accounting
and other relief against Moshe Menora, Tri-United Management, Inc. (Tri-United),
Springs Tulsa Limited Partnership, Bedford Apts. Limited Partnership, Apple Creek
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Limited Partnership, Sugerberry Limited partnership, Independence Williamsburg L.P.,
Kings Ridge Limited Partnership, Quail Run/Cove Limited Partnership and San Antonio
Sierra Vista L.P. Mermelstein and Menora were partners in the above limited
partnerships. Mermelstein, the limited partner, filed an action seeking damages for
Menora's, the general partner's, breach of his fiduciary duties to Mermelstein under the
terms of the parties' partnership agreements. The court found for Mermelstein,
awarded him $2,215,964.11 in damages and prejudgment interest and denied Menora's
counterclaim. On appeal, Menora argues the court erred in (1) denying his
counterclaim based on section 10.3 of the partnership agreements; (2) granting
Mermelstein’s motion in limine to exclude evidence of an alleged overpayment to
Mermelstein pursuant to section 10.4 of the partnership agreements; (3) awarding
Mermelstein his proportionate share of reimbursements Menora received from the
partnership for payroll he paid to on-site management personnel; (4) ordering Menora
to (a) repay Mermelstein for his proportionate share of the partnership funds Menora
used to pay his legal fees in defending the suit and (b) refrain from using partnership
funds for his legal defense of the case forthwith; and (5) awarding Mermelstein
prejudgment interest. We affirm in part and reverse and remand in part.
Background
Menora and Mermelstein entered into a series of almost identical partnership
agreements in 1991 “to invest in, acquire, hold, maintain, improve, develop, sell,
exchange, operate, lease, mortgage, exchange and otherwise use for profit” eight
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apartment buildings located in Oklahoma, Missouri, and Texas. Mermelstein, an
operator of nursing homes, provided the approximately $8 million capital for the
partnerships. Menora, a developer and manager of real estate, provided management
services for the partnerships through his whollyowned Illinois company, Tri-United.
Seven of the eight agreements named Menora as the general partner holding a 60%
interest and Mermelstein as the class A limited partner holding a 40% interest. In the
Quail Run partnership governing their Missouri property, Menora held a 55% interest
and Mermelstein held a 45% interest.
Counsel for Menora drafted the agreements, which provided that the general
partner, Menora, had the “exclusive authority to manage the operations and affairs of
the Partnership and to make all the decisions regarding the business of the
Partnership.” He would receive 6% of gross rentals received by the partnership as
"compensation for his management services" and 2% of gross rentals "as
reimbursement for the General Partner's overhead and operating expenses." Menora
had the authority, in his "sole judgment," to incur "all reasonable expenditures" on
behalf of the partnership and would be reimbursed for out-of-pocket expenses incurred
in the performance of his duties, "but not including [his] overhead and operating
expenses." Except for the requirement that Menora had to obtain Mermelstein's
approval before engaging a person in any way related to or affiliated with Menora to
perform services or provide goods, the limited partner could "take no part in the conduct
or control of the business of the partnership" nor act for or bind the partnership.
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Accordingly, other than a yearly audit of the partnership’s finances conducted by his
accountant and weekly discussions with Menora, Mermelstein took no active role in the
operating the partnerships, eventually making $16 million to $17 million on the
partnerships.
In 1997, Mermelstein filed a complaint for a declaratory judgment against
Menora, Tri-United and the partnerships seeking an accounting and other relief. In
1999, Mermelstein filed an amended complaint for dissolution, accounting and other
relief. In 2003, Mermelstein filed a second amended complaint alleging, in relevant
part, that, besides committing numerous accounting improprieties in managing and
operating the partnerships, Menora breached the agreements by reimbursing himself
from partnership funds for salaries Tri-United paid to employees providing management
services on site at the various properties and improperly used partnership funds to
defend himself in this litigation and other ligation between the parties.
Menora denied the charges and counterclaimed, seeking reimbursement to the
partnerships for $1.2 million Mermelstein allegedly received in error pursuant to a
payout under section 10.3 of the agreements. After the close of discovery but before
trial, Menora moved to assert a similar claim for reimbursement based on paragraph
10.4 of the agreements. The court barred this claim pursuant to Mermelstein's motion
in limine. By the time the case went to trial, seven of the eight partnership properties
had been sold.
Following an extended bench trial, the court held, in salient part, that
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Mermelstein was entitled to recover his proportionate share of the partnerships funds
Menora received as reimbursement for salaries paid to on-site management
employees. The court determined these employees were employees of Tri-United, i.e.,
Menora's employees, and their salaries were covered by the 8% Menora received for
his management services and overhead and operating expenses. The court also
determined Menora improperly used partnership funds to pay his legal fees, ordered
that Mermelstein recover his proportionate share of the attorney fees expended and
prohibited Menora from using partnership funds to defend the actions. The court
denied Menora's counterclaim. It also considered Mermelstein's posttrial motion for an
award of prejudgment interest. Noting Mermelstein failed to request such relief in his
complaints, the court ordered the parties to brief the issue and ultimately allowed the
motion, awarding Mermelstein $358,211.67 in prejudgment interest, for a total award of
$2,215,964.11. The court denied Menora's motion to reconsider and Menora timely
appealed.
Analysis
The construction, interpretation, or legal effect of a contract is a matter of law,
which we review de novo. Avery v. State Farm Mutual Automobile Insurance Co., 216
Ill. 2d 100, 129, 835 N.E.2d 801, 821 (2005). Similarly, whether a contract is
ambiguous is a question of law which we review de novo. Central Illinois Light Co. v.
Home Insurance Co., 213 Ill. 2d 141, 153-54, 821 N.E.2d 206, 214 (2004).
Each of the agreements contains a provision stating that the particular
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agreement and the rights of the parties thereunder shall be governed and interpreted
according to the laws of Missouri, Oklahoma or Texas, as applicable to each
agreement. The laws of the relevant states do not materially differ in this area,
requiring we interpret the partnership agreements in such a manner as to prefer a
rational and probable agreement rather than an unusual, unfair or improbable
agreement. Rathbun v. CATO Corp., 93 S.W.3d 771 (Mo. App. 2002); Duncan Oil
Properties, Inc. v. Vastar Resources, Inc.,16 P.3d 465 (Okla. Civ. App. 2000); Illinois
Tool Works, Inc. v. Harris, 194 S.W.3d 529 (Tex. App. 2006). There is no discernable
public policy obstacle to enforcing the choice-of-law provisions; Missouri, Oklahoma
and Texas bear a reasonable relationship to the partnerships and transactions; the
issues in this case involve basic contract law; and there is no material difference
between in the laws of these states. Accordingly, we will apply Missouri, Oklahoma and
Texas law to the substantive issues of contract interpretation. Hubbert v. Dell Corp.,
359 Ill. App. 3d 976, 982, 835 N.E.2d 113, 120 (2005).
Menora's Section 10.3 Counterclaim
Menora argues that the trial court improperly denied recovery on his
counterclaim based on section 10.3(a) of the partnership agreements. Section 10.3(a)
provides:
“When and to the extent Cash Flow is distributed, it shall be distributed in the
following manner: (a) the Class A Limited Partner shall first receive a sum (the
'cumulative preferred payment') equal to ten (10%) percent per annum on his
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capital contributions (reduced by any capital contributions previously returned by
the Partnership) on a cumulative basis, but prorated for any partial year.”
Mermelstein received millions of dollars in distributions pursuant to section 10.3(a). In
preparing for trial on Mermelstein's action against him, Menora discovered that he did
not record these distributions as reductions to Mermelstein's capital accounts. He filed
a counterclaim asserting this was an error, Mermelstein's capital accounts should have
been reduced by the distributions; the error resulted in over $1.2 million in
overpayments to Mermelstein when the partnerships were sold; and Mermelstein
should be required to return the overpayment. Mermelstein responded that the
distributions were interest and not to be charged against his capital accounts. Finding
section 10.3(a) unambiguous and the payments to be interest, the court denied
Menora's counterclaim.
Menora argues the court erred in its interpretation of the contract because the
distributions under section 10.3(a), whether considered interest or not, should have
reduced Mermelstein’s capital accounts pursuant to sections 8.4 of the agreements.
Section 8.4 provides in relevant part:
"A capital account shall be established for each Partner on the books of the
Partnership, and there shall be credited to each Partners’ capital account the
amount of his initial capital contribution, any additional capital contributions and
his share of profits and income of the Partnership. There shall be charged
against each Partner’s capital account the amount of cash and the Gross Asset
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Value [subsequently defined and irrelevant to this discussion] of property
distributed to each Partner and such Partner's share of any losses of the
Partnership."
Menora asserts that all payments made to either partner are to be treated as
“distributions” pursuant to section 8.4 and the distributions made under section 10.3(a)
should, therefore, have been charged against Mermelstein's capital account.
Per section 8.4, a partner's capital account consists of the amount he has
contributed and his share of the partnership profits and income, minus the amount of
cash and gross asset value distributed to him and his share of partnership losses. We
do not, as Menora appears to argue, read section 8.4 as requiring that any cash
distribution, no matter from where the cash is being distributed, whether it comes from
the partner's capital account or not, should reduce the partner's capital account.
Logically, only cash distributed from a capital account should reduce that account,
because the partner is receiving cash-in-hand for an amount he had on paper; ergo, the
charge against the account.
Section 10.3(a) provides, in salient part, when "cash flow" is distributed, it shall
be distributed first to the limited partner, who receives a sum equal to 10% per annum
on his capital contributions, reduced by any capital contributions previously returned by
the partnership. Then, per section 10.3(b), the remaining amount is distributed to the
partners pursuant to their percentage interest in the partnership. Broadly, the
agreements define "cash flow" as gross cash revenues received by a partnership on its
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business operations, not including capital contributions, minus interest payments on
loans made to the partnership and cash expenditures incurred in operating the
partnership, including management fees. Essentially, it is the cash profit from operating
the business, rental income minus expenses. There is no indication in the agreements
that "cash flow" is kept in a capital account prior to distribution. There is, therefore, no
reason why a distribution of cash flow per section 10.3(a) should operate to reduce
such capital account per section 8.4.
No matter that the agreements term the section 10.3(a) 10% payment to be a
"cumulative preferred payment," that 10% payment is clearly interest, paid annually by
the partnership to Mermelstein on the balance of his capital contributions for the use of
his capital investment funds. The parties treated it as interest; the partnerships
declared it as interest on their Internal Revenue Service 1099 tax forms. This 10% is
distributed from cash flow, given to Mermelstein off the top of the cash flow/profit
amount, with the remainder of that profit then distributed to the partners on a
percentage ownership basis. The 10% is a return on investment and, logically, would
be paid into an investment account, not out of it. There is no reason that the capital
accounts should be charged for something that did not originate from those accounts,
the only exception being the existence of a shortfall at the end of the year and the
partners having to cover the partnership's losses. The capital accounts receive capital
contributions, profits and losses. Cash flow seems to be a profit, and thus should be
paid into a capital account. Section 10.3's cash flow "distribution" is not the type of
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"cash distribution" contemplated by section 8.3's requirement that cash distributions be
charged against a capital account. We affirm the court's denial of Menora's
counterclaim.
Barring of Menora's Section 10.4 Claim
Menora argues that the trial court erred in granting Mermelstein's motion in
limine to bar Menora's assertion that he incorrectly paid Mermelstein $1.2 million
pursuant to section 10.4 of the partnership agreements.1 He asserts that, even though
the discovery process was closed and the trial date set within a matter of weeks, the
trial court nevertheless could have reopened discovery and granted a relatively brief
continuance. We will not interfere with a trial court's ruling on discovery matters unless
there is manifest abuse of discretion. Shaheen v. Advantage Moving & Storage, Inc.,
369 Ill. App. 3d 535, 860 N.E.2d 375, 380 (2006). To find an abuse of discretion, we
must find that no reasonable person would take the position adopted by the trial court.
Taxman v. First Illinois Bank of Evanston, 336 Ill. App. 3d 92, 97, 782 N.E.2d 803, 807
(2002).
Menora did not plead the section 10.4 theory as a counterclaim nor seek leave to
file it as a counterclaim during the more than eight years the case was open. Instead,
he raised it orally during a mediation hearing some seven weeks before trial, alleging he
1
We will not belabor the details of what the payment errors entailed beyond that
they involved the order of allocation among the partners of net cash proceeds from the
sale of the partnership properties pursuant to section 10.4 of the agreements.
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had just discovered the payment errors. The trial court granted Mermelstein’s motion in
limine to bar reference to this undisclosed theory, finding the theory separate from that
claimed in Menora's section 10.3 counterclaim and Menora’s argument that he had
disclosed the theory during discovery through a named accounting expert
unpersuasive. The disclosure of the expert during discovery in no way mentioned that
he would testify to a section 10.4 miscalculation and the fact that Mermelstein could
have discovered the miscalculation himself by looking through the partnership accounts
made no difference to the court, especially in light of the fact that those accounts were
in Menora’s control and Menora himself did not discover the alleged error until shortly
before trial.
While the issue of reopening discovery and postponing the trial date further is
admittedly close, there is nothing in the record to suggest that the trial court's action
was an abuse of discretion. Under the facts of this case, the trial court could have
reasonably determined that the time for discovery, which at that point had been open
for eight years, was more than ample for Menora to have discovered and disclosed his
section 10.4 theory in a timely manner and he was foreclosed from presenting his
theory now the time had passed. There is nothing in the record to suggest that the
court barred reference to the theory as a discovery sanction. Accordingly, we affirm the
trial court’s grant of the motion in limine.
Reimbursement for On-Site Managers' Salaries
Menora argues that the trial court erred in finding Mermelstein was entitled to
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recover his proportionate share of the reimbursements Menora paid himself from the
partnership assets for salaries Tri-United paid to management employees (leasing
agents, assistant managers and managers) working at the eight partnership properties.
Menora, as the general partner, paid all workers at each of the properties through a
central payroll account maintained by Tri-United. He then reimbursed himself from
partnership funds for those salaries, considering those salaries to be the type of
expense subject to reimbursement under section 14.4 of the agreements. Section 14.4
provides in relevant part:
"The General Partner shall be reimbursed for out-of-pocket expenses incurred in
the performance of duties hereunder, including but not limited to all leasing
commissions and finders fees for securing tenants, but not including General
Partner’s overhead and operating expenses.”
Mermelstein respondes that the provision for reimbursement of 2% of gross
rentals for the general partner's overhead and operating expenses contained in section
14.1 encompassed those salaries, and any additional reimbursement was improper.
Section 14.1 provides in relevant part:
"The General Partner shall receive compensation for his management services
rendered hereunder equal to six (6%) percent of gross rentals received by the
Partnership. The General Partner shall also receive a sum equal to two (2%)
percent of such gross rentals as reimbursement for the General Partner’s
overhead and operating expenses.”
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The trial court found the provisions of the partnership governing Menora’s
reimbursement were unambiguous, the on-site management employees' salaries fell
under section 14.1’s 8% compensation and reimbursements provisions, and any
additional reimbursement taken by Menora was improper. Accordingly, the court
awarded Mermelstein $1,061,797.00 as his proportionate share of the salary
reimbursements Menora received.
Menora argues that section 14.2 provides him with the express authority to incur
expenses in hiring personnel and for reimbursement of those expenses. Section 14.2
provides in relevant part:
"The General Partner is hereby granted the right, power and authority to do on
behalf of the Partnership all things which, in its sole judgment, are necessary,
proper or desirable to carry out the aforementioned duties and responsibilities,
including but not limited to the right, power and authority to incur all reasonable
expenditures and obligations; to employ and dismiss from employment any and
all employees, agents, independent contractors, real estate managers, brokers,
attorneys and accountants.”
The provisions of 14.2 are unambiguous: they provide for Menora's authority to perform
certain acts on behalf of the partnership, namely incurring expenses and hiring
personnel. The terms of section 14.2 do not, however, provide the appropriate method
of reimbursement for expenses incurred in performing those actions.
Section 14.4 does provide for such reimbursement. It provides unambiguously
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for reimbursement to Menora for expenses he incurred on behalf of the partnership,
except for those expenses already reimbursed as the “General Partner’s overhead and
operating expenses” under section 14.1. Mermelstein’s argument to the contrary
notwithstanding, the salaries of the on-site managements employees were not
“overhead and operating expenses.” These were not Menora’s employees. They were
employees of the partnership. While it is true that their salaries were paid through Tri-
United’s payroll system, these employees performed their work at the various
partnership property locations, and there is no evidence that they devoted any of their
time to Menora’s business interests outside of the partnership. The on-site
management employees were clearly working on behalf of the partnership, not on
behalf of Menora, and should be paid by the partnership, not by Menora. Their salaries
were not part of the general partner's overhead and operating expenses but rather were
out-of-pocket expenses incurred on behalf of the partnership, expenses for which
Menora could be reimbursed.
The salaries of all employees working at the various properties, from the
custodial staff to the property manager, are paid from the Tri-United payroll account.
Mermelstein’s counsel stated during oral arguments that all of these salaries fall under
section 14.1’s reimbursement provision as Menora’s “overhead and operating
expenses.” This interpretation of the agreement is so improbable, it reinforces our
determination that the on-site management employees' salaries are not overhead and
operating expenses. It is difficult to imagine that the parties intended 2% of gross
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rental income to sufficiently reimburse Menora for the entirety of day-to-day operating
expenses of the partnership properties. The more logical construction is that the
parties intended Menora’s expenses associated with his management services at the
Tri-United office in Skokie (i.e., utilities, accounting and secretarial services, etc.) to
be reimbursed as overhead and operating expenses under section 14.1 and the
expenses related to the operation of the partnership properties (notably those of the
on-site management personnel) to be reimbursed as out-of-pocket expenses under
section 14.4. Accordingly, we find that Menora was entitled to be reimbursed for the
on-site salaries and reverse the court’s decision in favor of Mermelstein on this issue.
Prejudgment Interest
Citing Gaiser v. Village of Skokie, 271 Ill. App. 3d 85, 96, 648 N.E. 2d 205,
213-14 (1995), Menora argues that the trial court erred in awarding prejudgment
interest to Mermelstein because Mermelstein did not expressly seek prejudgment
interest in his original, amended, or second amended complaint and should therefore
be barred from recovery. Because this is a procedural issue, Illinois, rather than
Missouri, Oklahoma or Texas, law applies. Boersma v. Amoco Oil Co., 276 Ill. App.
3d 638, 644-45, 658 N.E.2d 1173, 1180 (1995). Issues relating to the sufficiency of
pleadings raise questions of law and are reviewed de novo. Joseph v. Chicago
Transit Authority, 306 Ill. App. 3d 927, 930, 715 N.E.2d 733, 736 (1999).
This district's pleading standard for prejudgment interest is clear: unless a
plaintiff pleads or requests prejudgment interest in the complaint, there can be no
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award. Gaiser, 271 Ill. App. 3d at 96, 648 N.E. 2d at 213-14. “[T]he law requires that
the proof and the judgment must be consistent with the pleadings. Plaintiff, having
failed to amend his complaint seeking prejudgment interest, was not entitled to it.”
Gaiser, 271 Ill. App. 3d at 96, 648 N.E. 2d at 213-14. The Fifth District held similarly
in Englemann v. Standard Mutual Insurance Co., 4 Ill. App. 3d 55, 280 N.E.2d 240(1972), in which the court disposed of the matter of prejudgment interest “without
further comment because the plaintiff’s complaint omit[ted] to make any claims for
interest.” Englemann, 4 Ill. App. 3d at 57, 280 N.E.2d at 241. (Contrast with Libco
Corp. v. Roland, 99 Ill. App. 3d 1140, 1147, 426 N.E.2d 309, 314 (1981), in which the
Fourth District found the “proper procedure for obtaining prejudgment interest to be to
move for it after verdict and before judgment.”)
There is no question Mermelstein did not specifically request prejudgment
interest in his original, amended, or second amended complaint. While he did request
"such other and further relief as the court deems just and equitable," this broad
language is insufficient to meet the pleading standards of this district. Because the
pleadings were insufficient, we need not reach the issue of whether Mermelstein
would have been awarded prejudgment interest under the substantive laws of
Missouri, Oklahoma, and Texas. Accordingly, we reverse the trial court's award of
prejudgment interest to Mermelstein.
Attorney Fees
Menora argues the trial court erred in ordering him to repay Mermelstein for the
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attorney fees paid by the partnership on Menora’s behalf in defending this case and
prohibiting Menora from using partnership funds to pay such attorney fees in the
future. Menora used partnership assets of the Quail Run partnership to pay his
attorney fees in defending the action brought by Mermelstein, effectively requiring
Mermelstein to pay 45% of his adversary’s legal costs.2 Menora asserts he was
entitled to have the partnership pay for his attorney fees for this case pursuant to
section 14.8 of the partnership agreements.
Section 14.8 provides in relevant part:
"The Partnership shall indemnify and hold harmless the General partner and its
Partners, employees and agents * * * from and against any loss, expense,
damage or injury suffered or sustained by them by reason of any act,
omissions or alleged acts or omissions arising out of their activities on behalf of
the Partnership, including but not limited to any judgment, award, settlement,
reasonable attorneys’ fees and other costs or expenses incurred in connection
with the defense of any actual or threatened action, proceeding or claim and
including any payments made by the General Partner to any of its Partners,
acts or omissions upon which such actual or threatened action, proceeding or
claim are based were in good faith and were not performed or omitted
2
Menora’s choice of the Quail Run partnership as the source for his
indemnification strikes this court as petty given this is the only partnership in which
Mermelstein held 45% rather than 40% of the partnership. Use of the Quail Run
partnership assets was clearly meant to increase the percentage by which Mermelstein
would be obligated to underwrite Menora’s legal fees.
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fraudulently or in bad faith or as a result of wanton and willful misconduct or
gross negligence by such Indemnified Parties.”
The terms of the provision are unambiguous: absent fraud, bad faith, wanton and
willful misconduct or gross negligence, Menora is indemnified by the partnership for
his activites “on behalf of the partnership.” This indemnification specifically includes
"reasonable attorneys’ fees” incurred in defense of an action against him.
Mermelstein’s action was for breach of contractual and fiduciary duties.
Mermelstein argues that when Menora breached those duties, he was in fact acting
on his own behalf, and not that of the partnership, and therefore not entitled to
indemnification under the agreements. However, when the trial court characterized
Menora’s conduct in managing the affairs of the partnership, it specifically found that,
although there were breaches of his fiduciary duty, Menora did not conceal,
misrepresent or seek to take advantage of his partner. The record does not show
otherwise. Mermelstein has failed to show that the breaches resulted from anything
other than accounting errors or misinterpretations of Menora’s rights and duties under
the agreements. Accordingly, Mermelstein has failed to show that Menora performed
the challenged activities on his own behalf and not on behalf of the partnership.
Given the court’s finding that Menora did not conceal, misrepresent or seek to
take advantage of his partner, Mermelstein also failed to demonstrate that Menora’s
conduct fit into one of the categories disqualifying him from indemnification (fraud,
bad faith, willful and wanton misconduct or gross negligence). In the absence of any
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findings of such disqualifying conduct or failure to act on behalf of the partnership,
Menora is indemnified by section 14.8 of the partnership agreement for his
reasonable attorney’s fees in defending this action. Reading the agreement as a
whole, there is nothing limiting a general partner’s indemnification solely to cases in
which he is defending against third parties. Although the resulting situation, in which
Mermelstein is effectively underwriting the legal costs of his opponent, may be
anomalous, it is nonetheless supported by the plain unambiguous language of the
partnership agreement.
Mermelstein argues that Menora cannot be indemnified against his own
negligence. Under Missouri law, there must generally be clear and unequivocal terms
to indemnify against negligence. Nusbaum v. City of Kansas City, 100 S.W.3d 101,
105 (Mo. 2003). The terms are clear and unequivocal in the agreements: absent
proof of fraud, bad faith, wanton and willful misconduct or gross negligence, Menora is
indemnified in defending his negligence, if any, in any action in which he acted on
behalf of the partnership. Accordingly, we reverse the trial court’s order regarding
Menora’s use of partnership funds to pay his attorney fees and remand on this issue.
For the reasons stated above, we affirm the circuit court's denial of Menora's
section 10.3(a) counterclaim and its grant of Mermelstein's motion in limine to exclude
Menora's section 10.4 claim. We reverse the court's finding that Menora erred in
reimbursing himself the management employees' salaries and its award to
Mermelstein of his proportionate share of the reimbursements Menora received; its
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award of prejudgment interest to Mermelstein; and its finding that Menora improperly
used partnership funds to pay his attorney fees, its award to Mermelstein of his
proportionate share of the funds Menora used to pay those fees and its order that
Menora refrain from using partnership funds to defend this action. We remand for
further proceedings in light of the above.
Affirmed in part and reversed in part; cause remanded.
GREIMAN, J., concurs.
CUNNINGHAM, J., dissenting in part.
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JUSTICE CUNNINGHAM, dissenting in part:
I respectfully dissent from the majority on the sole issue of indemnification of
Menora for his attorney fees in defending this action.
I would affirm the trial court’s ruling barring the use of partnership assets by
Menora to finance his defense against his own mismanagement, probable negligence
and breach of fiduciary duty. A review of the language of section 14.8 of the
partnership agreement leads me to a different construction of its meaning than that of
the majority. It states in relevant part:
“The partnership shall indemnify and hold harmless the
General Partners and their employees and agents *** from
and against any loss, expense, damage or injury suffered or
sustained by them by reason of any act, omissions ***
arising out of their activities on behalf of the partnership
(emphasis added), including but not limited to any
judgement, award, settlement, reasonable attorney’s fees
and any other costs or expenses incurred in connection with
the defense of any actual or threatened action, proceeding
or claim *** provided that the acts, or alleged acts or
omissions upon which such actual or threatened action,
proceeding or claim are based were in good faith and were
not performed or omitted fraudulently or in bad faith or as a
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result of wanton and willful misconduct or gross negligence
***.”
I believe that the intent of section 14.8 is to indemnify Menora against actions by
third parties when he is acting on behalf of the partnership. Implicit in a partnership
agreement is a fiduciary duty between partners to act in the best interest of the
partnership. Cronin v. McCarthy, 264 Ill. App. 3d 514, 524, 637 N.E.2d 668, 675
(1994). Under a partnership, a fiduciary relationship is created whereby the partner
assuming control of the business is obligated to manage it in the interest of all the
partners. Rizzo v. Rizzo, 3 Ill. 2d 291, 301, 120 N.E.2d 546, 552 (1954). Where one is
the senior or managing partner, his obligation to deal fairly and openly and disclose
completely is heightened. Cronin, 264 Ill. App. 3d at 524, 637 N.E.2d 688. The record
shows that Menora was the managing partner with the expertise and Mermelstein was a
silent partner who relied upon Menora to provide appropriate management for the
enterprise. Menora’s obligation to properly manage the business free from negligence
and uphold his fiduciary duty is inherent in the partnership agreement. Indemnification
of the managing partner for acts committed by him against the partnership is not a
reasonable construction of the agreement in this case since the trial court has found a
breach of fiduciary duty by the managing partner.
It is significant that the trial court found that Menora acted in a manner that
breached his fiduciary duty to the partnership. For example, with respect to the
allocation of assets following the sale of the Oklahoma property, the court found that
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Menora used a method that financially benefitted himself to Mermelstein’s detriment.
He offered no satisfactory explanation for choosing that method. Additionally, Menora
conceded that he had engaged in certain other irregularities regarding the assets of the
partnership. This was certainly not in the interest of the partnership or Mermelstein.
Allowing Menora to use the partnership assets in this manner is contrary to the implied
duty of care and loyalty which is inherent in the agreement. While it is true the court did
not make a specific finding of fraud, bad faith, willful misconduct or gross negligence on
the part of Menora, it did find that Menora breached his fiduciary duties to the
partnership and Mermelstein and also that he breached the partnership agreement.
Further, the trial court found that Menora acted in a way contrary to Mermelstein’s
interest and that Mermelstein was entitled to relief.
I disagree with the majority’s conclusion that the breach of duty is insufficient to
bar Menora’s indemnification. The language of the agreement states that partners
should be indemnified for “activities on behalf of the partnership.” A partner’s breach of
duty, loyalty or care to the partnership cannot be construed as acting “on behalf of the
partnership” and therefore should not be financed by the partnership assets. Thus, in
my view, construction of the language of the agreement does not provide
indemnification against a legal challenge by one partner against another where the
challenged partner is not acting in a manner consistent with his fiduciary obligation.
Additionally, I interpret differently the specific language of the partnership
agreement cited by Menora in support of his assertion that the language is clear,
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unambiguous and provides him with the right to use the partnership’s assets to defend
himself against his own mismanagement of those assets. The contract is ambiguous if
it is susceptible to more then one interpretation. Ford v. Dovenmuehle Mortgage, Inc.,
273 Ill. App. 3d 240, 244, 651 N.E.2d 751, 754 (1995). Ambiguous contracts are
generally construed against the drafter. Duldulao v. St. Mary of Nazareth Hospital
Center, 115 Ill. 2d 482, 493, 505 N.E.2d 314, 319 (1987). Mermelstein’s challenge to
Menora’s use of the partnership funds to defend himself in this way provides another
fact from which to infer that such a construction was not intended by the parties when
they entered into the agreement.
The primary goal in construing a contract is to give effect to the intent of the
parties. Premier Title Company v. Donahue, 328 Ill. App. 3d 161, 164, 765 N.E.2d 513,
516 (2002). Mermelstein’s objection to the use of his money by Menora to defend
against legitimate allegations of mismanagement by Menora underscores that each
partner interprets the language and intent of the partnership agreement differently on
that point. The disparate interpretations by Mermelstein and Menora underscore the
ambiguous nature of the indemnity provision. Under these circumstances, I cannot
construe the language of the agreement as providing Menora with a right to use more
of the partnership assets to defend against his own inappropriate management and
wrongdoing. Construing the language against the drafter, Menora, would yield a
different result than that reached by the majority. Construing the language of the
agreement so that Mermelstein in effect is obligated to pay a portion of Menora’s legal
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fees has a unique impact on the trial court’s finding. Indemnifying Menora dilutes the
compensation to which the trial court found Mermelstein is entitled and rewards Menora
for breaching his fiduciary duties and the partnership agreement. I think this could not
and should not be the interpretation of section 14.8 of the partnership agreement.
Under the facts of this case, I would affirm the trial court and bar Menora from using
partnership assets to finance his defense.
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