SECOND DIV ISION June 24, 2008

No. 1-07-2058 LEE A. FREEMA N, JR., as Personal Representative of the Estate of Brena D. Freeman; BRENA AND LEE A. FREEM AN, SR ., CH ARITAB LE ANN UITY L EAD TR UST; LEE A. F REEMA N, JR ., IRR EVOCAB LE FAM ILY TR UST; CRISPIN FREEMAN; CLARK FREEMAN; and CASSIDY FREEMAN, Plaintiffs and Cou nterdefenda nts-Appellees,

v. RICHARD WILLIAMSON, as Successor Li quidating Trustee of Lippe r Fixed Income Fund, L.P., a Delaware Limited Partner

ship, Defendant and Counterpl aintiff-Appellant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Appeal from the Circuit C ourt of Cook County

No. 06 CH 054 13

Honorable Bernetta Bush, Judge Pre siding.

JUSTICE KARN EZIS delivered the opinion of the court: This appeal arises from an order by the circuit court granting a declaratory judgment of nonliab ility in favor of plai ntiffs Lee A. Freeman, J r., as perso nal representativ

e of the estate of Brena D . Freeman; the Brena and Lee A. Free man, Sr., Charitable A nnuity Lead Tr ust; the Lee A. F reeman, Jr., Ir revocable Family Tru st; Crispin F reeman; Clark Freeman; and Cas sidy Freeman (plaintiffs) and dismissin g counterclaims

filed by defendant R ichard Williamson, the suc cessor li quidating trustee1-07-2058

2

(Trustee) of the Li pper Fixed Income Fund, L.P. (the fund), a Del aware li mited partnership, against plai ntiffs, who were former limi ted partners/i nvestors in the fund. The court found Trustee' s claims ag ainst plainti ffs were time-b arred under the provisi ons of the Delaware Revi sed Uniform Limit ed Partnershi p Act (6 Del . Code Ann. tit. 6, §17-101 et seq. (Michie 1999)) (Del aware Act) . On appeal, Trustee argues th e court erred in finding his claims time barred un der Delaware law because the claims did not ar ise un der th e part nershi p agreement o r under the De lawa re Act . We affirm. BACKGROUND The fund was a li mited partnersh ip organiz ed under Delaware law i n 1993. Its principal p lace of business was New York, N ew Yor k. Invest ors joined th e fund as limited partners by entering into a partnership agreem ent with the general partner, Lipper & Company , L.P., also a Delaware limited part nership (the general par tner). Pursuant to the ag reement, limite d partners had n o role in the management of the fund, their participation being limited to makin g capital contributions to the fu nd which would be credited to each limited par tner's indi vidual cap ital account. The value of the capital accounts increased or decreas ed according to each limit ed partner's capital contr ibution to the fund and pro rata share of any g ains or los ses in the fund's assets/investments. The agreement assi gned the gener al partner complete control to manage the fund, including the power t o invest t he fund's assets, mai ntain the fund's accounts and records, v

alue the fund's ass ets and send the l imited partner s monthly statements of the value of thei r capital accounts and any increases an d losses therein resulti ng from1-07-2058

3

the fund's operation as determined by the general partner. Section 10.05 of the ag reement, titled "Governing Law," prov ides: "Notwithstanding the pl ace where t his Agreement may be exe cuted by any of the parties, the parties expressly agree that all the terms and provisions hereo f shall be construed under

the laws of the State of Delaware and, wi thout limitati on thereof, that the Par

tnership Act as now adopted or as may be hereafter amended shall g overn the par tnership aspec

ts of this Agr

eement." The agreement defines "P artnership Ac t" as "'the Del aware Rev ised Uniform Li mited Partnership A ct, as amended from ti me to time," i.e. the Delaware Act (6 D el. Code Ann. tit. 6, §17- 101 (Michi e 1999)) (D elaware Ac t). Section 17-607( c) of the Delaware Act prov ides that "[u]nl ess otherw ise agreed, a limited part ner who receives a distributi on from a limited par tnership shal l have no liability under this c hapter or other applicable l aw for the amount of the distributi on after the expirat ion of 3 years from the date of the dist ribution." 6 Del. Code Ann. tit. 6, §17- 607(c) (Michie 1999). Plaintiffs, resident s of Illinois, variously became limited partners in the f und in 1993 and 1994 by ent ering int o a limited par tnership ag reement wit h the general part ner. Plain tif fs e ach c ontr ibut ed to and r ecei ved di strib utio ns f rom t heir resp ecti ve capital accoun ts during their parti cipation in t he fund. In 1999, plai ntiffs withdrew from particip ation in the limit ed part nership . By Octobe r 1999, each ha d cease d being a limited partne r and receiv ed final distri butions from the fund of the bal ances in his or her1-07-2058

4

capital account as determin ed by the general partner. In 2002, upon the res ignation of the fund' s portfolio manag er, the gener al partner discovered that the fund's ass ets had been cumulati vely overstated by more than $329 million for the period betw een January 1 995 and 2001. It made th e decision to liquidate the fund. In 2002, the Sup reme Court of New York g ranted approval for the liq uidation and, in 2003, appoin ted Trustee to oversee the liquidation . In 2004, the New York court authorized Trustee to pursue th e partnership's rights against third parties Trustee determined that limited par tners such as

plaintiffs, w ho received distributi ons from the fund duringthe overv aluation peri od, received overvalued distributi ons, i.e. , more than they were enti tled to recei ve. Althoug h conceding t hat plaintiffs wer

e unaware of the overval uations and innoc ently rec eived the overpay ments, in 2006, Trustee demanded plainti ffs return the overpayments and threatened to sue t hem if they did n ot return cer tain specified por

tions of the distributi ons they had r eceived. Plaintiffs refu sed to return the alleged overpayments and filed a declaratory judgment acti on in the circuit court of C ook County i n 2006 seeking a determination by the court of the r ights of the par ties under both the agreement and the Delawa re Act. They sought a

finding that th ey were not liable t o the Trustee or the fund for any amounts received as past distribution s. Plaintiffs argued, in relevant part, tha t Trustee's claims w ere time barred due to the ex piration of the thr ee-year l iability

period for distributi ons stated in s ection 17-607( c) of the Delaware Act and that the agreement1-07-2058

5

itself prov ided that a partn er had no oblig ation to restor e a negative balance in i ts capital account. Trustee a nswered and filed a three-count counterclaim for unjust enrichment, money

had and received and conver sion. Plaintiffs filed a combined motion purs uant to sections 2-615(e) and 2 -619 of the Illinois Code of Civil Procedure (the Code) (735 ILCS 5/2-61 5(e), 2-619 (W est 2006)) for judgment in favor of plainti ffs on the declarator y judgment and dismissal of the counterclaims

as a matter of law , asserting in relevant part the ex piration of the threeyear peri od provided in section 17- 607(c). The cour t granted di smissal of the conversi on counterclai m. It denied the moti on regardi ng the declar atory judg ment action and the unj ust enrichment a nd money had and received coun terclaims. Subsequently , the court, sua sponte , reconsidered and rever sed its deci sion, finding in favor of plaintiffs on both the declarator y judgment action and dismi ssal of the two remaini ng countercl aims. The court determined that the agreement appli ed to the counterclaims ; Delawar e law appl ied to the agr eement; the three-year statute of limitations in section 17- 607(c) appli ed to the counterc laims; and Trust ee's efforts to recoup the overpayments were, therefore, t ime-barred by the terms of the ag reement. The court dismis sed the counterc laims wi th prejudice. Trustee timely appealed pu rsuant to Supreme Court Rules 30 1 and 303 (155 Ill. 2d Rs. 301, 303) , contesting the court's grant of a decl aratory j udgment of nonliabi lity to plaintiffs and dismi ssal of Trustee's unjust enric hment and money had and received counterclaims . Trustee does not contest the cour

t's dismiss al of its counterclaim for1-07-2058

6

conversi on. ANALYSIS Standard of Revi ew The court granted judgment in f avor of plaintiffs on their motion for a declarato ry judgment of nonliab ility and on their moti on to dismiss Trustee's counter claims pursu ant to sections 2-615 and 2-619 , holding the Delaware Act and section 17-607(c) in particular

applied to Trustee's actions pursuant to the agreement and oper ated to bar his actions. Where, as here, the court's decision to g rant a declar atory judg ment is not based on factual deter minations but r ather on a pure q uestion of law , we rev iew the court's deci sion de novo

. Inland Land Apprec iation Fund, L. P. v. County of Kane , 344 Ill. App. 3d 720, 724, 800 N.E.2d 1232 , 1236 (2003); Universal Casualty C

o. v. Lopez

, 376 Ill. A pp. 3 d 459 , 463 , 876 N.E. 2d 27 3, 27 7 (20 07). W e sim ilarl y appl y de novo review to a court's

grant of a motion to dismiss u nder either s ection 2-615 or 2-619 ( Neppl v. Mur

phy , 316 Ill. App. 3d 581, 583, 736 N. E.2d 1174, 1178 (2000) ) and to the construction, interpretati on, or legal effect of a contract (Avery v. Stat e Farm M

utual Automobile

Insurance Co. , 216 Ill. 2d 100, 129, 835 N.E. 2d 801, 821 (2005)).

Application of D elaware Law The sole issue he re is w hether the court erred in appl ying thethree-yea r restricti on in section 17-607(c) of the Delaware Act to Trustee' s action to recoup the overpayments. The validity of the counterclaim s is not at issue, only whether Trustee is time-barred fro m asserting them.1-07-2058

7

The partnership a greement ex pressly incorporates

section 17-607

of the Delaware Act into the ag reement. Section 7.04 of the agreement provides , in relevant part, that the right of a withdrawn partner to receive distributions f rom the partner's capital accoun t "is subject to the prov ision by the General Par tner for all fund l iabilities in accordance with Sect ion 17-607 of the Par tnership Act and other applicable law." Further, sec

tion 10.05 of the ag reement provi des: "Notwithstanding the pl ace where t his Agreement may be exe cuted by any of the parties, the parties expressly agree that all the terms and provisions hereo f shall be construed under

the laws of the State of Delaware and, wi thout limitati on thereof, that the Par

tnership Act as now adopted or as may be hereafter amended shall g overn the par tnership aspec

ts of this Agr

eement." Accordingly, the Delaware Act and, specifically, section 17-607 of the Delaware Act are incorporated i nto the agreement by reference. Section 17-607(a) of th e Delaware Act provides that a partnership cannot m ake distributi ons to a partner if such woul d cause the li abilities of the partnershipto exceed its assets, thus protecti ng creditor s of the partnersh ip. 6 Del. Code Ann. tit. 6, §17- 607(a) (Mi chie 1999). Sec tion 17-607(b) provides that limited p artners rec eiving distributi ons in vi olation of secti on 17-607(a) w ith knowl edge of the vi olation are l iable to the partnershi p for the distri bution, whi le limited par tners wi th no knowl edge of the violatio n are not liabl e for any such distributi on. 6 Del. C ode Ann. tit. 6, §17-607(b) (Michie 19 99). Section 17-607(b) als o provides that "[s]ubject

to [section 17- 607(c)],1-07-2058

8

[17-607(b)] s hall not affect any obligatio n or liabil ity of a li mited partner und er an agreement or ot her applicabl e law for theamount of a distri bution." 6 Del . Code Ann. tit. 6, §17-607( b) (Michi e 1999). Section 17-607( c) provi des that, "[u]nles s otherwi se agreed, a limited partne r who receives a distribution from a limited partnersh ip shall have no liability under this chap ter or o ther appl ica ble law

for t he am ount

of th e di str ibut ion after the expi rat ion of 3 years from the date of the distribution." 6 Del. Code Ann. tit. 6 , §17-607(c) (Michie 1999). Section 17-607(c) i s unambiguous: a limited part ner is not l iable for any distributi on received from a limited par tnership, re gardless of whether that distributi on viola ted s ecti on 17 -607 (a) or "oth er ap plica ble la w," if more than thre e year s have passed since t he distributi on. Although Tr ustee argues to the contrar y, secti on 17- 607( c) d oes n ot ap ply

onl y to dis tri buti ons r

esul tingin a

par tner shi p'sina bil ity

to s atisfy its credit ors, i.e. , distribut ions viol ating secti on 17-607(a). Section 17-607( c) states that a limited part ner "shall hav e no liabili ty

under this c

hapter or other

applicable l

aw " (emphasis added) (6 Del. C ode Ann. tit. 6, §17-607(c) ( Michie 1999) ), making c lear that no matter what

the basis for l iability

might be, the three-year expirati on period appli es. It is uncontested that more than t hree years have passed s ince plainti ffs received the distributions which Trustee seeks to partially recoup. Accordingly, if section 17 -607(c) applies to thos e distributi ons, plaintiffs are no longer l iable for the re turn of the distr ibuti ons and Truste e is t ime bar red fro m pursu ing a ny cl aims for them. It is uncont ested t hat, i f Illi nois l aw ap pliesto Trustee's counte rclai ms, theclai ms1-07-2058

1 Pursuant to s ection 13-205 of the Code, Illino is has a gen eral five- year statut e of limitation for c ivil ac

tions. Secti on 13-205 prov ides: "actions on unw ritten contr acts, expressed or impli ed, or on awards of arbitration, or to recover damages for an injury done to property, real or personal, or to recover the possess ion of personal pr operty or damages for the detent ion

or conver

sion thereof, and al l civi l actions not otherwis e provided for, shall be commenced within 5 years next after the cau se of action accrued." 735 ILCS 5/13-205 (West 2006). Applying the discovery rul e, Trustee's ca use of action accr ued in 2002 wh en the fund discovered that its assets had been overvalued f or a period of years and that partne rs who received distributions during that period received more mone y than they were entitled to receive. Tr ustee's 2006 acti on to reclaim the overpay ments was, t herefore, within t he five-year limitati ons period in section 13-205 and would not be time-barred under Illinoi s law. 9 are not time-bar red. 1 Trustee's pos ition, therefore , is that Il linois law rather than Delaware law applies to his efforts to recoup the overpayments and the court erred in holding other

wise. Trustee argues

Illinois law appli es to his cl aims because sec tion 17-607(c) of the Delaware A ct is a stat ute of limitati on. Citin g Bellevill e Toyota, Inc. v. Toyota Mot or Sales, U.S.A., Inc. , 199 Ill. 2d 32 5, 770 N.E.2d 177 ( 2002), Trustee as serts that, notwithsta nding the ag reement's choice of law prov ision selec ting Delaw

are law t o1-07-2058

10

apply to the agreement, becaus e the issue here concerns a statute of limitati ons, the law of the forum, I llinois, controls. So l ong as a choi ce of law pr ovision do es not contravene I llinois publ ic policy and there is s ome relationshi p between the c hosen forum and the parties

to the transac

tion, an expr

ess choice of law prov ision wi ll be given full effect. Hartford v. Burns International Secu rity Services, Inc. , 172 Ill. App. 3d 184, 187, 526 N.E.2d 463 (1988). However, Belleville Toyota , Inc. provides that, although a choice of law provision generally will be honored, the law of the forum will control as to statute of limita tions matters because stat utes of limitations are procedural, fix ing the time in which the remedy for a wrong may be soug ht rather than altering substantive rights. Belleville Toyota, Inc. , 199 Ill. 2d at 351, 770 N.E.2d at

194. In Belleville Toyota, Inc. , the parties' contract cont ained a choice of law prov ision stati ng that California law would govern the contract. The court, there fore, applied Califo rnia substantive law pursuant to the choice of law provision but, to determine the timeliness of the plaintiff's cl aim under contract, applied Il linois law to the statute of l imitations i ssue. Plaintiffs respond that Delaware law should apply to Trustee's claims because the three-year restri ction in sec tion 17-607(c) is a statute of repose rather than a statute of limitations. A stat ute o f repose differs from a statute of limitation s in that it is substantive rather than pr ocedural. Ferguson v. McKenzie , 202 Ill. 2d 30 4, 311, 780 N.E.2d 660, 664 ( 2001). While a statute of limit ations merely gives a time limit for bringing a cause of action, with the t ime beginningwhen the act ion has ripened or

accr ued, a st atut e of repose extingui shes any r ight to bri ng the cause of ac tion,1-07-2058

11

regardles s of whether i t has accrued or whether any injur

y has res ulted. Ferguson, 202 Ill. 2d at 311, 780 N.E.2d at 664; Cornett v. Gromann Service Company-Retail, 227 Ill. App. 3d 148, 150, 590 N .E.2d 1013, 1015 (1992 ). "A st atut e of repo se give s ef fec t to a polic y diff eren t fro m tha t adva nced by a statute of limitat ions; it is intended to termi nate the possibi lity of li ability after a defined period of time, regardless of a potential plaintiff 's lack of knowledge of his or her cause of action." Ferguson , 202 Ill. 2d at 311, 780 N.E.2d at

664. The function of a stat ute of repose " 'is thus rather to define sub stantive rights than to alter or modify a remedy.' ” Thornton v. M

ono Manufacturi

ng Co. , 99 Ill. App. 3d 722, 726, 425 N.E. 2d 522, 525 (1981), quoting Rosenberg v. T own of North Ber

gen , 61 N.J. 190, 1 99, 293 A.2d 662, 667 (1972). Because a statu te of repose is substantive, where an issue con cerns a statute of repose, a choice of law provisi on govern s. Belleville Toyota, Inc. , 199 Ill. 2d at 351, 770 N.E.2d at 194. Section 17-607(c) is a statute of repose. Its provision that, "[u]nless othe rwise agreed, a limited partner who receives a distribution from a limited partnership shall have no liab ility under this chap ter or other applicable l aw for the amount of the distribution after the expiration of 3 years from the date of th e distribution" clearly terminates the pos sibility of the limited par

tner's lia bility after a defined period of time, thr ee y ears

after rec eiv ing a di str ibut ion, reg ardl ess of w heth er a pote ntia l pl aint iff knows of his

or her cause of action. Secti on 17-607(c) defines substantiv e rights. It does not merely

alter or modi fy a time peri od within which a cause of action may be1-07-2058

2 Throughout the a greement, prov isions speci fically refer to "partners", "former partners," "g eneral partner s," "former gener

al partners, " "limited part ners" and "former limited partne rs," clearl y indicat ing that a "par tner," wheth er general or limited, is not the same as a "former par

tner." Section 2.09(e) of the ag reement defines "former l imited partne rs" an d "former

gener al par tners " as "pe rsonsor ent ities whi ch from time to

time 12 brought after ac crual but, r ather, exti nguishes any right a potential plai ntiff has to bring a cause of action against a limite d partner for a distribution without regard to whether a

caus e of actio n has actu ally ac crue d or whe ther any in jury ha s resu lted . Acco rdin gly, because section 17-607(c) i s a statute of repos e affecting substant ive rig hts, to determine the timeline ss of Trustee's claims und er the agreement, we must apply Delaware law pursuant to the parties' choice of law provision. Under Delaware Act section 17-607( c), Trustee's claims filed mor

e than three years after plai ntiffs received the contested distributions ar e time-barred. Trustee argues, however, that his claims do not arise und er the partnership

a g r e e m e n t a n d , t h e r e fo r e , t h e c h o i c e o f l a wp r o v i s i o n d o e s n o t a p p l yt o h i s c l a i m s

. We grant that th ere is no pr ovision i n the agreement w hich deals di rectly with the i ssue of overpay ments to partners or wit h the obligat ions of partners who have withdrawn from the partnershi p to reimburse the partnershi p for overpay ments. Indeed, there is no provisi on in the agreement that addresse s the oblig ations of a limit ed partner after t hat partner has w ithdrawn from the partnershi p and ceased to be a partner, i.e., become a "former partner" as

defined by the ag reement. 21-07-2058

cease to be limited partners or a general pa rtner, as the case may be, under this agreement." Sec

tion 7.03 of the agr

eement specifies that , a "limited par tner ceases to be a partner" on t he effective date of the l imited partner 's with drawal from t he partnership/fund. Therefore, when plaintiffs wi thdrew from thepartnership in 1999, they ceased to be "li mited partners" and became "former li mited partners" or "former partners."

3 See footnote 2. 13 As plaintiffs point

out, section 8. 03 of the agreement does provide t hat "[n]o partner shall have an obli gation to restore a negat ive balanc e in its capi tal account." Howeve r, we do not find this sect ion evidenc e that the agreement covers the issue of overpayments to former partne rs or that Trustee's claims are, theref ore, specifically prohibited by

the agreement t hrough secti on 17-604(c). First, s ection 8.03 appli es to "partners", not to "former partner s," such as pl aintiffs, who hav e withdrawn from the partnership and have, by definition , ceased to be partners. 3 Second, as limited partners who have withdraw n from the partners hip, plainti ffs no longer have capital accounts, let alone capital accounts w ith a negati ve balance. Section 8.03 i s clearly not applicabl e to the situation at

bar. Accor

dingly , Trustee is correct that t he agreement does not address dire ctly the s ituation he seek s to remedy by recoupi ng alleg ed overpay ments from plaintiff s. Nevertheless, we find Trustee's claims do arise und er the partnership agreement. The ag reement sets the g eneral partner 's duty to valuate the fund' s assets1-07-2058

14

and make distri butions to li mited partners in the fund and the li mited partners' right to receive s uch distrib utions. There i s, therefore, no q uestion that any distributi ons plain tiffs received we re madepursu ant to t he ter ms of theagre ement. In that same agreement, the parties agreed th at any terms and provisions of the agreeme nt would be construed under

Delaware law and par

tnership aspec

ts of the agreement would be governed by the Del aware Act. A distri bution receiv ed from the partners hip pursuant to the agreement is clearly a partnership aspect of the agreement. The "p artnership aspect" of such a di stribution do es not cease to ex ist merely because the part ner receivi ng the distr ibution ceases to be a partner . The nature of the distribution does not change when the status of its holde r changes. Further, the agreement inco rporates sec tion 17-607(c) by both dir ect (sectio n 7.03 of the agreement) and indirect (choice of law

section 10.05) reference. Sect ion 17- 607(c) speci fically refers to distr ibutions rec eived by limited part ners from the li mited partnership. There is no question th e distributions Trustee is claiming are such distribu tions. T here is, t heref ore, also no questi on that those d istribut ions are , through the incorporat ion of section 17- 607(c) into the agreement and its reference t o distributi ons received by limi ted partners, incorporated i nto the agreement as well and Trustee's cla ims against those distri butions aris e under the agr eement. Because the Trustee's eff orts to recoup the excess distributions arise unde r the agreement, Delaware law applies to those effo rts. Applying section 17-607(c) of the Delaware Act to Trustee 's claims, we find the claims time-barred.1-07-2058

15

For the reaso ns stated above, we affirm the dec ision of the cir cuit court. Affirmed. HOFFMAN, P.J., and SOUTH, J., concur.1-07-2058

16 REPORTER OF DECISIONS - ILLINOIS APPELL ATE COURT

(Front Sheet t o be Attached to Eac h case)

LEE A. FREEMA N, JR., as Personal Representative of the Estate of Brena D . Freeman; BRENA AND LEE A. FREEMA N, SR., CH ARITABLE ANNUI TY LEAD TRUST; LE E A. FREEMAN, JR., IRREVOCABLE FAMILY TRUST; CRISPIN FREEMAN; CLARK FREEMAN; and CASSIDY FREEMAN,

Plaintiffs and Cou nterdefenda nts-Appellees,

v. RICH ARD WILLIAM SON, a s Succ essor Liqu idati ng Tru stee of L ipper Fix ed Inco me Fund, L.P., a De laware Li mited Partners hip,

Defendant and Counterpl aintiff-Appellant. No. 1-07-2058 Appellate Court of Illinois First Di strict, Second Divi sion June 24, 2008

JUSTICE KARN EZIS delivered the opinion of the court. HOFFMAN, P.J., and SOUTH, J., concur. Appe al fr om th e Circ uit Co urt o f Coo k Cou nty. The Hon orable B ernett a Bush, Judge Pre siding. For APPELLANT: Lasky & Rifkind, Ltd. , of Chicago, IL (Norman Rifkind, Le igh R. Lasky and Amelia S. Newton, of cou nsel) and Labaton Such arow LLP, of New York, NY (Joseph Einstein and Jonat han Gardner, of coun sel) For APPELLEE: Jenner & Block, LL P, of Chicago, IL (Richard P. campbe ll, of counsel)1-07-2058

17

and Law Offices of N ancy A. Temple, of Chicago, IL