Artra Group Inc. v. Salomon Brothers Holding Co.

No. 2--96--0788

________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT
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ARTRA GROUP, INC., ) Appeal from the Circuit Court
) of Du Page County.
Plaintiff-Appellant, )
) No. 93--L--2198
v. )
)
SALOMON BROTHERS HOLDING )
COMPANY, INC.; SALOMON BROTHERS, )
INC.; DONALD P. KELLY; CHARLES )
R. BOBRINSKOY; JAMES L. MASSEY; )
WILLIAM RIFKIND; and MICHAEL J. )
ZIMMERMAN, )
)
Defendants ) Honorable
) Michael R. Galasso and
(D.P. Kelly And Associates, ) Hollis L. Webster,
L.P., Defendant-Appellee). ) Judges, Presiding.
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JUSTICE McLAREN delivered the opinion of the court:
The plaintiff, ARTRA Group, Inc., appeals the dismissal of its
claim alleging that the defendant, D.P. Kelly and Associates (DPK),
breached its fiduciary duty to the plaintiff. The parties were
involved in an alleged joint venture for the purpose of performing
a leveraged buy out of Envirodyne Industries, Inc. (Envirodyne),
along with the other named defendants. However, DPK is the only
defendant who is a party to this appeal. We affirm.
The following facts are taken from the pleadings. In 1988 the
plaintiff owned interests in several companies, including
Envirodyne, a publicly traded food packaging and supplies company.
The plaintiff held 4.86 million, approximately 26%, of the shares
in Envirodyne. In 1988, Envirodyne had annual sales in excess of
$480 million and a pretax profit of $75,137,000. The plaintiff
retained Salomon Brothers, Inc. (Salomon), to act as its agent and
advise and represent the plaintiff either in acquiring complete
ownership of Envirodyne or liquidating its interest in the company.
Early in 1989, the plaintiff identified the defendant as a
potential partner in a leveraged buy out of Envirodyne. The
plaintiff believed the defendant provided management expertise
necessary for a successful leveraged buy out. The defendant and
Salomon decided to pursue the acquisition of Envirodyne through a
cash tender offer of its outstanding stock. Salomon proposed the
creation of an entity to purchase all of Envirodyne's stock in a
leveraged buy out. Salomon formed the Emerald Acquisition
Corporation (Emerald), of which it was the sole shareholder.
Emerald, through its subsidiary "Emerald Sub One," would buy the
outstanding stock in a tender offer.
In early 1989, Salomon, the defendant, and the plaintiff
negotiated the details of how Emerald would buy the plaintiff's
Envirodyne stock. The plaintiff alleged that the defendant and
Salomon orally agreed to prepare cash-flow projections and perform
"due diligence." The plaintiff also alleged that, several weeks
later, Salomon informed the plaintiff that the cash-flow
projections and "due diligence" had been properly performed. The
plaintiff alleged that the defendant performed these acts
unreasonably and improperly. The defendant acknowledged that it
performed "due diligence" and prepared cash-flow projections along
with Salomon, but maintains that it performed these tasks properly
and only for its own benefit. Further, the defendant alleged that
it neither had a fiduciary duty of care nor breached the duty, if
it existed.
On March 19, 1989, the plaintiff, the defendant, and Salomon
entered into a series of agreements to proceed with the Envirodyne
transaction. The parties agreed that Emerald would purchase
2,955,000 shares of Envirodyne stock from the plaintiff; and the
plaintiff would receive $75 million in cash, which would be used to
purchase $20.9 million of Emerald subordinated debt and 27.5% of
Emerald common stock. After completion of the transactions,
Emerald became the parent company of Envirodyne, with Salomon as an
approximately 62.5% shareholder, the defendant as a 10%
shareholder, and the plaintiff as a 27.5% shareholder.
In January 1993, Envirodyne filed for chapter 11 bankruptcy
protection in federal court. As a result of the bankruptcy and
reorganization plan, the Emerald subordinated debt and common stock
the plaintiff received in exchange for its Envirodyne stock became
worthless, and the plaintiff lost approximately $136.2 million.
On March 10, 1995, the plaintiff filed its third amended
complaint against the defendant and Salomon. Count V alleged that
the plaintiff and the defendant were joint venturers. It further
alleged that, as joint venturers, the defendant owed the plaintiff
a fiduciary duty of care to the plaintiff and that the defendant
breached its duty. Judge Michael Galasso granted the defendant's
motion to dismiss count V of the plaintiff's third amended
complaint with prejudice pursuant to section 2--615 of the Code of
Civil Procedure (735 ILCS 5/2--615 (West 1994)). The trial court
granted the plaintiff leave to file an amended complaint which did
not allege a breach of fiduciary duty. On July 19, 1995, the
plaintiff filed a fourth amended complaint. Count V realleged a
breach of fiduciary duty, count VI alleged breach of contract, and
count VII alleged promissory estoppel. On June 4, 1996, Judge
Hollis Webster granted the defendant's motion for summary judgment
on counts VI and VII and held that all prior orders were final and
appealable. On July 2, 1996, the plaintiff filed a notice of
appeal.
The plaintiff appeals only the trial court's decision to grant
the defendant's motion to dismiss count V of the plaintiff's third
amended complaint for breach of fiduciary duty against the
defendant. The defendant argues that it owed no duty to the
plaintiff because they were not joint venturers. The defendant
further argues that, even if they are joint venturers, the
plaintiff failed to allege sufficient facts to establish that the
defendant breached a duty owed to the plaintiff.
The standard guiding our review of the trial court's decision
to grant the defendant's section 2--615 motions (735 ILCS 5/2--615
(West 1994)) is clear. Section 2--615 of the Code of Civil
Procedure provides for dismissal based on defects in the pleadings
in that the complaint is "substantially insufficient in law." 735
ILCS 5/2--615(a) (West 1994). On review of a section 2--615
dismissal, we must determine whether the allegations of the
complaint, when interpreted in a light most favorable to the
plaintiff, sufficiently set forth a cause of action on which relief
may be granted. Mt. Zion State Bank & Trust v. Consolidated
Communications, Inc., 169 Ill. 2d 110, 115 (1995); T&S Signs, Inc.
v. Village of Wadsworth, 261 Ill. App. 3d 1080, 1083 (1994). A
trial court may not grant a section 2--615 motion "unless it
clearly appears that no set of facts could ever be proved that
would entitle the plaintiff to recover." Mt. Zion State Bank, 169 Ill. 2d at 115. In ruling on the motion, the trial court may only
consider facts which are apparent from the pleadings, matters of
which the court may take judicial notice, and judicial admissions
contained in the record. Mt. Zion State Bank, 169 Ill. 2d at 115.
It is well settled that partnership law governs joint
ventures. In re Johnson, 133 Ill. 2d 516, 526 (1989); Japczyk v.
Gust K. Newberg Construction Co., 224 Ill. App. 3d 325, 328 (1991).
Partners owe a fiduciary duty to each other. McSweeney v. Buti,
263 Ill. App. 3d 955, 959 (1994). Thus, joint venturers owe a
fiduciary duty to each other. Burtell v. First Charter Service
Corp., 76 Ill. 2d 427, 437 (1979); Newton v. Aitken, 260 Ill. App.
3d 717, 722 (1994). The duties of a fiduciary are those of
loyalty, good faith (Newton, 260 Ill. App. 3d at 722), and honesty
(Borys v. Rudd, 207 Ill. App. 3d 610, 620 (1990)). However, a
partner may not be held liable to another partner for the loss of
property unless the loss was caused by a partner's "willful
disregard of duty." Snell v. DeLand, 136 Ill. 533, 538 (1891).
Thus, "partnership losses occasioned by a partner's poor judgment
or mistakes of judgment will be borne by the partnership so long as
the decision does not involve fraud, illegality, or conflict of
interest." Borys, 207 Ill. App. 3d at 620.
In the instant case, the plaintiff alleged in count V of its
third amended complaint:
"[The defendant] breached its [fiduciary] duty of due
care to [the plaintiff] by making unreasonably optimistic
future cash flow projections and failing to properly conduct
due diligence of Envirodyne."
More specifically, the plaintiff alleged:
"Salomon and [the defendant] also did not disclose that
their projections of Envirodyne's future financial condition
made a number of significant assumptions about Envirodyne's
future prospects which were unreasonably optimistic. These
included assumptions that: (1) the sales revenues of
Envirodyne's subsidiary Viskase would increase annually at
rates that were unreasonably high given the market share
already held by Viskase; (2) Envirodyne's subsidiary
Clearshield would not be subject to fluctuations in raw
material prices; (3) Envirodyne's corporate overhead would not
increase significantly; (4) Envirodyne could achieve
significant savings in the cost of goods sold; (5)
Envirodyne's capital expenditures could be reduced; (6)
Envirodyne's research and development expenditures could be
reduced; and (7) Envirodyne's working capital could be
increased by delaying payment of payables and accelerating the
collection of receivables."
Taken in a light most favorable to the plaintiff, the
allegations fail to establish that the defendant's actions amount
to anything more than poor business judgment. Without more, an
exercise of poor business judgment does not constitute a breach of
a fiduciary duty. Borys, 207 Ill. App. 3d at 620. The plaintiff
does not allege facts that would establish that the defendant
knowingly misrepresented Envirodyne's financial condition, engaged
in illegal activity, or purposefully benefitted at the expense of
the joint venture. Thus, the plaintiff has failed to "sufficiently
set forth a cause of action on which relief may be granted." T&S
Signs, 261 Ill. App. 3d at 1083. Accordingly, the trial court
properly dismissed count V of the plaintiff's third amended
complaint. See 735 ILCS 5/2--615 (West 1994).
The plaintiff cites Marcus v. Green, 13 Ill. App. 3d 699, 710
(1973), for the proposition that it was merely required to allege
that the defendant was culpably negligent. However, this
proposition is not controlling in this case. The plaintiff fails
to cite to an Illinois case which defines this term, and we have
not uncovered an Illinois case which defines this term. Further,
Marcus' citation to Snell v. DeLand for the proposition is
erroneous. Marcus, 13 Ill. App. 3d at 710. Snell does not contain
the term "culpable negligence." Instead, Snell states that a
partner "can only be held for a loss of property when such loss
occurs from a willful disregard of duty." Snell, 136 Ill. at 538.
We acknowledge that Marcus cites to two treatises for the
proposition, however; treatises, unsupported by case law, are not
binding on this court. Because the first district is the only
district to hold that a partner may be liable to another partner
for "culpable negligence" and the holding conflicts with our
supreme court's decision in Snell, we are not bound by Marcus.
Jachim v. Townsley, 249 Ill. App. 3d 878, 882 (1993).
We also note that, because we have decided that the plaintiff
failed to establish that the defendant breached its fiduciary duty,
we need not address whether the parties were, in fact, joint
venturers.
The judgment of the circuit court of Du Page County is
affirmed.
Affirmed.
GEIGER, P.J., and INGLIS, J., concur.