aeaahi:

lina

The Trust offers evidence to counter third-party defendants’ claims regarding their
employment status. First, the Trust offers evidence that third-party defendants merely gave
advice to VMS principal entities through individual partners. The Trust’s 56.1 Statement of
Facts Opposing Third-party Defs.’ Motion For Summary Judgment (“Trust Fact Resp.”) at § 10.
Second, the Trust contends the advisors referenced in the CRA included lawyers and accountants
involved in the CRA’s negotiating and structuring. This fact will not be considered by the court.
The Trust does not provide a supporting citation to the record. See Local Rule 56. 1(b)(3)(B).
The Trust also points to undisputed evidence that third-party defendants were not specifically
named in the release. The Trust cites Stro-Wold Farms v. Finnell, 569 N.E. 1156 (Ul. App. Ct.
1991) for the proposition that a party may not be released unless specifically named. However,
this case addressed releases in the context of a settlement agreement and, thus, is not applicable.

The Trust further contends that even if the Fifth Amendment’s transfer of note
obligations conflicts with the release provisions of the original CRA, the amendment is
controlling. The Trust cites Boatmen’s National Bank of St. Louis v. Smith, 835 F.2a 1200, 1203
(7" Cir. 1996) and Robinson v. United States, 408 F.Supp. 132, 136-37 (N.D. Ill. 1976) for the
proposition that specific provisions in a document control over general provisions. These cases
are not applicable. They address general and specific provisions in the same document rather
than two documents executed at different times. Based on the evidence presented, there are
genuine issues of material fact as to whether third-party defendants’ note obligations were

released.

-19-


449, 456-57 (7" Cir. 1991) (contract is ambiguous when it does not provide that naming
subsidiaries releases the parent). “A party releases only those other parties whom he intends to
release.” Jd. at 457. Neither party presents evidence of the parties’ intent in signing the releases.

The court finds additional ambiguities in the agreements. First, Lager’s, Ruff’s and
Callaghan’s agreements refer to VMS and its affiliates. It is unclear from the face of the
agreement which entities constitute VMS and VMS affiliates. Second, Lager’s release is limited
to claims arising from his service as a director or officer or a person acting in “a similar capacity”
to a director or officer. It is unclear whether Lager’s VMS work responsibilities qualify him as a
person acting in “a similar capacity” to an officer or director. Finally, Ruff’s and Callaghan’s
releases are limited to the “employee’s employment with VMS.” It is unclear whether VMS III
note investments fall within the scope of employment.

The parties present conflicting evidence to clarify these ambiguities. Plaintiffs offer
evidence to show they acted in the scope of their VMS Realty Partners employment when they
signed the notes and made investments in VMS III. Pl. Facts. at qi 16, 22. However, as
discussed above, there are issues of material fact as to whether employment with VMS Realty
Partners is covered by the agreements.

The Trust offers evidence the termination agreements did not cover VMS III, Specifically,
plaintiffs signed a “Warranty Assignment of Partnership Interest and Agreement to Make
Payments” after the termination agreements were executed. Def. Add. Fact at ] 88. The Trust
asserts this evidence shows plaintiffs retained their VMS II partnership status after the
agreements were signed. However, plaintiffs offer evidence that at the time they signed this

warranty assignment they no longer possessed partnership interests. They merely signed this

-13-


oa

Third-party Defs. Response to the Trust’s 56.1 Facts (“Third-party Resp. Facts”), Jf 60-61. The
notes were merely part of a plan to obtain tax benefits for VMS. Id. at J] 58-59, 81-92.

The Trust offers further evidence to establish third-party defendants are estopped from
asserting invalidity because they knew about the transfer, but did not object. Specifically, they
point to documents showing the notes were transferred. Jd. at J 33-35, 39-44, 46-47, 49-51. In
response, third-party defendants present evidence they did not actually receive copies of these
documents. Third-party Resp. Facts, {{] 33, 37, 41-47, 49-51. The Trust further asserts that even
if they did not receive a copy of these documents, third-party defendants had a duty as VMS III
partners to review financial statements to discover this information. Third-party defendants
counter with evidence that the purported transfer did not actually occur until November 17, 1993
and that they objected to the transfer soon after this date. Third-party Facts at 1 33, 123-24,
128-29. Third-party defendants present sufficient evidence to withstand summary judgment on

the invalidity defense.

-23-


III. Second amendment to partnership agreement

On September 25, 1985, VMS I and II amended the December 1984 partnership
agreement and made the new agreement retroactive to the inception of VMS III. Pursuant to the
agreement, VMS III would redeem 50% of VMS I and II in order to admit the individual partners
into VMS III. The agreement further provided that in consideration of redemption, VMS III
would distribute the partners’ cash contributions and transfer the notes to VMS I and II. VMS II
signed the agreement. The parties dispute whether plaintiffs and third-party defendants knew
about this agreement when they signed the notes. As VMS III partners, plaintiffs and third-party
defendants received K-1 forms allocating profits. However, they did not receive cash payments.
IV. Termination of employment and “hold harmless” agreements

On December 8, 1986, Hochberg entered into a termination of employment agreement
with Stone. The agreement stated, “The following constitutes the current agreement in
connection with your employment with VMS Realty Partners and supersedes all other prior
agreements or understandings .. .” Pl. Appdx., Ex. 9(B).

Ruff and Callaghan entered into termination of employment agreements with Morris and
Stone in 1987. The agreements provide releases from “any and all claims or demands of any
nature whatsoever relating to [their] employment with VMS ...” Id at Exs. 8 (B) and 11(B).
The termination agreements further stated that they “supersede all prior understandings and
agreements between the parties including but not limited to any and all partnership agreements in
which VMS or a VMS affiliate and the Employee are partners.” Id.

On March 30, 1990, Stone and Morris issued Lager a hold harmless letter. Section A of

the letter read as follows:

-4.


b. Non-recourse provisions

The CRA provides that no recourse will be taken against any non-recourse party “except
for the right to realize upon . . . assets of the VMS principal entities.” Jd. at 153. Third-party
defendants offer evidence to show they qualify as non-recourse parties because they were
associates of a VMS principal entity, namely VMS Realty Partners. Jd. at 4] 14, 53-56.

The Trust does not dispute third-party defendants were associates of a VMS principal
entity. Instead, the Trust asserts the non-recourse principal entity exception is applicable because
the notes were assets of VMS Realty Partners. Specifically, the Trust asserts that because VMS I
and IJ held the notes and were owned by VMS Realty Partners, the assets were owned by VMS
Realty Partners. The Trust offers the VMS partnership agreement to show that VMS I and II
were owned by VMS Realty Partners. The Trust’s Additional 56.1 Third-party Facts (“Trust
Add. Facts”) at {fj 118-120. Third-party defendants dispute this evidence on the grounds that the
agreement detailed ownership in 1987, not 1993 when the Fifth Amendment was signed.
Furthermore, third-party defendants offer evidence to show the notes were held by VMS IIL, not a
VMS principal entity. Id. at 4954-55.

The Trust offers further evidence that the Fifth Amendment recognized Levine as one of
the note makers and provided that these notes would be transferred to the Trust. Pl. Appdx., Ex.
22 at 002103. The Trust asserts the fact that Levine signed the Fifth Amendment shows his
understanding the notes were still actionable. However, this evidence does not conclusively
establish that Levine agreed to waive the binding effect of the mutual releases and non-recourse
provisions. The Fifth Amendment does not specifically waive the releases and non-recourse

provisions. There are genuine issues of material fact pertaining to whether third-party

-20-


sitll. Ll

ns is.

.

3. Estoppel

Plaintiffs and third-party defendants assert a defense of estoppel on the same grounds they
assert a fraudulent inducement defense. Reasonable reliance is an element of an estoppel
defense. Federal Deposit Insurance Corporation v. Rayman, 117 F.3d 994, 1000 (7" Cir. 1997).
Accordingly, for the reasons discussed under the fraudulent inducement section, this defense is
insufficient for purposes of avoiding note liability.

D. The Trust’s motion for summary judgment on the third-party complaint The
Trust moves for summary judgment on third-party defendants’ affirmative defenses. For the
reasons discussed above, the motion is granted with respect to the estoppel and fraudulent
inducement defenses and denied as it pertains to the release defenses.

In regard to the settlement agreement and unclean hands defenses, the Trust merely rests
on its alleged status as a holder in due course. As discussed in Section B, there are genuine
issues of material fact as to whether the Trust can establish its status as a holder in due course.
Accordingly, its motion for summary judgment on these defenses must be denied.

The only remaining defense asserted by third-party defendants is invalid transfer of the
notes. See Trust Facts at {{] 28-32. For the reasons discussed in Section B(1), the partnership
agreement is ambiguous. To establish that third-party defendants recognized VMS III’s authority
to transfer the notes, the Trust offers evidence they confirmed in 1994 that VMS III had
transferred the notes. Specifically, Lager signed a document on behalf of Wrap Loan corporation
stating that all VMS III assets had been distributed. Third-party Facts at 58-60. Counter-

defendants offer evidence that Lager, Levine, and Hansen did not consider the notes to be assets.

-22-


Trust’s description of their notes as VMS III assets. Based on this evidence, no reasonable jury
could find that the transfer of the notes from VMS III was invalid.!?
2. The Trust’s status as a holder in due course

Plaintiffs contend that even if the transfer were valid, VMS III did not take the notes as a
holder in due course. Therefore, subsequent transferees are not holders in due course. See 810
ILCS 5/3-203(b) (transferee has the same rights as its predecessor in interest, including any right
as a holder in due course). Plaintiffs’ argument is based on a misunderstanding of the holder in
due course rule. As the initial payee, VMS III cannot acquire holder in due course status. See
e.g., Resolution Trust Corporation v. Juergens, 965 F.2d 149, 152 (7" Cir. 1992) (different rules
govern defenses for original payee and subsequent holders).

Plaintiffs contend VMS J and II were not holders in.due course and, thus, neither is the
Trust. To establish that VMS I and II did not have notice of defenses, the Trust relies on the
undisputed fact that the notes contained defense waiver clauses. However, the Trust fails to offer
any case law supporting the proposition that a waiver clause precludes a defense based on release
from the waiver clause.'* Thus, the Trust’s status as a holder in due course cannot be resolved by
summary judgment unless plaintiffs cannot prove any defense. As discussed above, there are
genuine issues of material fact as to whether some plaintiffs were released by termination and

“hold harmless” agreements. Furthermore, the Trust has not moved for summary judgment as to

°The Trust’s estoppel arguments are addressed in Section C below.
5Plaintiffs’ argument regarding 810 ILCS 5/3-302(¢)(ii) is moot.
-17-


ei dee.

watt Hk a

materials are essentially unsupported by the record.” Architectural Iron Workers Local No. 63
Welfare Fund et al. v. United Contractors, Inc., 46 F.Supp.2d 769, 770 (N.D. Ill. 1999), The
Trust fails to cite supporting authority for striking disputed evidence on vagueness or conclusory
grounds. Although affiants’ statements are vague, they are technically supported by the record.
See Pl. Facts, ff] 11-13. The Trust does not dispute that affiants were advisors or officers of
VMS Realty Partners and VMS Realty Inc. Def. Fact Resp., § 11.

The consequence of submitting vague and conclusory testimony is that the evidence will
be insufficient for prevailing on a summary judgment motion. The question of whether plaintiffs
offer sufficient support to establish affiants were officers, advisors, or employees of specific
VMS entities must be resolved after consideration of the entire record. Accordingly, the Trust’s
motion to strike portions of plaintiffs’ affidavits and corresponding statement of facts is denied.
IL Summary judgment standard

Summary judgment is appropriate when the moving papers and affidavits show there is
no genuine issue of material fact and the movant is entitled to judgment as a matter of law. Fed.
R. Civ. P. 56 (¢); King v. National Human Resource Committee, Inc., 218 F.3d. 719, 723 (7 Cir.
2000); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Once a moving party has met its
burden, the non-moving party must go beyond the pleadings and set forth specific facts showing
there is a genuine issue for trial. Fed. R. Civ. P. 56 (e); Silk v. City of Chicago, 194 F.3d 788,
798 (7" Cir. 1999). The court considers the record as a whole and draws all reasonable
inferences in the light most favorable to the party opposing the motion. Bay v. Cassens
Transport Co., 212 F.3d 969, 972 (7" Cir. 2000). A genuine issue of material fact exists when

“the evidence is such that a reasonable jury could return a verdict for the nonmoving party.”

-9-


The Trust’s Local Rule 56. 1 Statement of Additional Facts (“Def. Add. Facts”), { 100; The
Trust’s Response to Plaintiffs’ 56.1 Facts (“Def. Fact Resp.”), Ex. 2. The subscription agreement
signed by the partners provides that “[s]ubscriber has received, reviewed, and understands the
Memorandum and ali of the Exhibits thereto ...” Def. Fact Resp., Ex. 1A-1G.
VI. Termination of the VMS III partnership

VMS I, VMS II, and Wrap Loan executed an agreement terminating the VMS III
partnership “as of December 31, 1984.” The agreement provides that “all assets, if any, of the
Partnership have been distributed.” Def. Fact Resp., {{[ 56-57; Ex. 6.
VI. Creditor Repayment Agreement

In 1990, VMS met with creditors in an effort to avoid bankruptcy. On March 31, 1992,
VMS partners and VMS principal entities* entered into the “Creditor Repayment Agreement”
(“CRA”) with their creditors in exchange for mutual releases.’ The following parties are
released:

Each of the VMS Partners and their respective Associates... from

any and all claims whatsoever which any of the VMS Releasing

Partners may have had, presently have or in the future may have
against the Creditor Released Parties which arise, have arisen or

“The CRA defines “VMS partners” as Van Kampen, Morris Stone, XCC Investment
Corp., Brewster Realty, Inc., Van Kampen/Morris/Stone, Inc., Residential Equities, Ltd., VMS
Financial Guarantee Partners, and VMS Realty Guarantee Partners. “VMS principal entities” are
VMS Realty Partners, Chicago Wheaton Partners, VMS Realty Investments, Ltd., VMS Realty
Investors, VMS Financial Services, VMS Financial Guarantee Limited Partnership, and VMS
Realty Guarantee Limited Partnership.

The CRA created three tiers for over 400 VMS entities. Tier I consisted of named VMS
partners plus four additional corporations and two additional partnerships. Tier 2 was made up
of VMS principal entities. Tier 3, entitled “VMS entities,” included VMS partners and principal
entities, VMS Mortgage Companies I, II, and III, and VMS Realty, Inc. Tier 3 representatives
did not sign the CRA or the mutual releases.

-6-


VMS and its Affiliated Entities . .. agree and do hereby indemnify

and hold you harmless, to the full extent permitted by law, from and
against any and all losses, claims, damages, liabilities, judgments,
fines, penalties, amounts paid in settlements . . . and expenses. . .
incurred by you in connection with any action, claim, suit, or other
proceeding . . . against you . . . [including those] brought by one or
more of the security holders of VMS or of any of the Affiliated Entities
or Funds . . . in any way relating to, your serving as a director, officer,
or in a similar capacity of VMS or of any of the Affiliated Entities or
Funds...

Id. at Ex. 32(E).

‘The parties dispute whether Stone gave Bernini a release in his severance agreement.
Plaintiffs cannot find a copy of the agreement. The parties further dispute whether Stone and
Van Kampen orally released Seeland from note indebtedness when his employment with VMS
terminated.

Vv. ‘Wrap Loan Corporation

On July 31, 1987, VMS III partners consented in writing to assignment of their
individual partnership interests to Wrap Loan Corporation (“Wrap Loan”). As a result, Wrap
Loan became a 50% partner in VMS III. Each former VMS III partner received stock certificates
granting them five shares of Wrap Loan. The confidential offering memorandum stated in part:

The Directors of Wrap Loan Corporation are . . . hereby soliciting

subscriptions for 50 shares . . . from the ten individuals listed in

Appendix A hereto (“the Partners”), each of whom is a general

partner of VMS Mortgage Company III, an Illinois general

partnership . .. Each Note of a subscribing Partner will be fully

non-recourse to the Company (which will not assume any personal

liability thereon), while each subscribing Partner will continue to

remain personally liable for a maximum of 10 percent of the

outstanding balance of principal and accrued and unpaid interest
thereon.


ee

cove aS ie,

whether plaintiffs were released by the CRA’s fifth amendment." Accordingly, the Trust’s
motion for summary judgment on its status as a holder in due course must be denied.

C. Third-party defendant’s motion for summary judgment

Third-party defendants move for summary judgment on the third-party complaint. They
offer evidence to support three defenses and to show the Trust is not a holder in due course. The
court need not address arguments regarding the Trust’s status as a holder in due course because
they fail to establish any defenses as a matter of law.

1. The CRA

Third-party defendants assert their note obligations were released by the CRA’s mutual
releases and non-recourse provisions. As discussed above, the release provisions apply to VMS
partners and their associates. The non-recourse parties include VMS partners, their associates,
and affiliates of a VMS partner or principal entity.

a. The mutual releases

Third-party defendants assert they were associates of VMS partners. They offer evidence
to show they acted as agents and advisors for Van Kampen, Morris, and Stone. Third-party
defendants’ 56.1 Statement of Facts (“Third-party Facts”) at {] 10-13, 15-16, 19-22. Hansen
advised Van Kampen as to whether VMS transactions would pose a risk to Van Kampen
personally. /d. at {20. Hansen regularly advised Van Kampen, Stone, and Morris on whether
and how each VSM non-hotel acquisition would benefit them personally. Levine advised Stone
on VMS’ tax problems and recommended the creation of VMS III. Jd. at 9 27-34. In addition,

Levine was an agent of five other VMS partners. Id. at (17.

‘Plaintiffs’ arguments regarding fraudulent inducement are addressed in Section C.

-18-


VIL. Plaintiffs’ declaratory judgment motion

Plaintiffs seek declaratory judgments that: (1) the recourse provision under the notes was
limited to plaintiffs’ interests in VMS III and their rights under the partnership agreement (Count
1); (2) the note obligations of Ruff, Callaghan, and Berini were released by termination of
employment agreements and the note obligations of Seeland were released by an oral agreement
with Van Kampen and Stone (Count II); (3) plaintiff's’ note obligations were released by the
CRA’s mutual releases (Count II); (4) the Trust waived its rights to assert liability against the
CRA’s non-recourse parties (Count IV); and (5) the Trust is the holder of the notes (Count V).$

DISCUSSION

I. Motion to strike

Summary judgment affidavits must set forth admissible facts and be based on personal
knowledge. Fed.R.Civ.P. 56(e). Paragraph 3 of Callaghan’s affidavit asserts he was “an officer
with or advisor to, or . .. provided employment services to, various VMS entities.” Plaintiffs’
Appdx., Ex. 8 at 13. Hochberg’s, Lager’s, and Ruff’s affidavits make similar statements. Jd.,
Exs. 9-11 and 32 at 3. The Trust asserts these statements should be stricken as vague and
conclusory allegations in a case “where the exact name and position of the employee in a certain
Company are critical...” Def. Fact Resp., J 11.

It is true that conclusory allegations are insufficient support for a summary judgment
motion. Korotko-Hatch v. John G. Shedd Aquarium, 65 F Supp.2d 789, 801 (N.D. Ill. 1999).

However, a motion to strike is disfavored and will only be granted “if the complained of

Count V further seeks a judgment that the statute of limitations bars VMS I’s and II’s
claim against VMS III pertaining to assignment of the notes. Plaintiffs did not address this
request in their summary judgment motion.

-8-


CONCLUSION

The Trust’s motion to strike paragraphs 11-13 of plaintiffs’ 56.1(A) statement of facts
and paragraph 3 of Callaghan’s Hochberg’s, Lager’s, and Ruff’s affidavits is denied. Plaintiffs’
motion for summary judgment on the complaint is denied. The Trust’s motion for partial
summary judgment is granted on Count I and Count II of the complaint to the extent it pertains to
Bernini and Seeland. The motion is denied in all other respect as to the complaint. The Trust’s
motion for summary judgment on the third-party complaint is granted with respect to the
fraudulent inducement and estoppel defenses. The motion is denied in all other respects. Third-

party defendants’ motion for summary judgment on the third-party complaint is denied.

see lk ie

, ENTER:

(Tfertrrrene) 72. Oyo
Svzanng B. Conlon
i August 7, 2001 United States District Judge

-24-


aa a iia

ea to een See aa

> x
Minit@Ordes Form 06/97)

- United States District Court, Northern District of Illinois

Name of Assigned Judge ann Sitting Judge if Other
or Magistrate Judge Suzanne B. Conlon than Assigned Judge
CASE NUMBER 00 C 7337 DATE 8/7/2001
CASE GEORGE RUFF, ET AL. vs. PARTNER’S LIQUIDATING TRUST
TITLE .
{in the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

MOTION: of the motion being presented.]

DOCKET ENTRY:

qd) ao Filed motion of [ use listing in “Motion” box above.]

(2) im} Brief in support of motion due

(3) oO Answer brief to motion due . Reply to answer brief due.

(4) oO Ruling/Hearing on set for at

(5) oO Status hearing[held/continued to] [set for/re-set for] on __ set for at

(6) Qa Pretrial conference[held/continued to] [set for/re-set for] on set for at .

() o Trial[set for/re-set for] on at

(8) a [Bench/Jury trial] [Hearing] held/continued to at

(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}

OOFRCP4(m) CGeneralRule21 CIFRCP41(a)(1) CIFRCP4I(a)(2).

(10) | [Other docket entry] Partner Liquidating Trust’s motion to strike {| ‘s 11-13 of plaintiffs’ 56.1(A) statement of facts and | 3 of
Callaghan’s, Hochberg’s, Lager’s, and Ruff's affidavits [78-1] is denied, Plaintiffs’ motion for summary judgment on the complaint [41-1] is denied, The
Trust’s motion for partial summary judgment [43-1 ] is granted on Count] and Count II to the extent it pertains to Bernini and Secland. The motion is denied
in all other respects. The Trust’s motion for summary judgment on the third-party complaint [83-1] is granted with respect to the fraudulent inducement
and estoppel defenses. The motionis denied in al other respects. Third-party defendants Neil Hansen’s and Leonard Levine’s motion for summary judgment
on the third-party complaint [79-1] is denied. The patties shall present their joint modified pretrial order on August 23, 2001 at 9:00 a.m.; plaintiffs” draft
pretrial order shall be given to the defendant and third party defendants by August 16,2001. Bench trial is set for September 17, 2001 at 9:00 am. ENTER
MEMORANDUM OPINION AND ORDER.

(11) a [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required.

J | Notices mailed by judge’s staff.

Notified counsel by telephone.

Docketing to mail notices.

Mail AO 450 form.

Copy to judge/magistrate judge.

courtroom.
sb deputy’s
initials

Gi AUS -7 PH 5:39

number of notices

AUG 0 8 200

f\
alae

87772001

date mailed notice

pe

Date/time received in
central Clerk’s Office

ailing deputy initials



ethan nad alii et i

as surrender of the instrument to the party, destruction .. . cancellation .. . or the addition of
words to the instrument . . . or (ii) by agreeing not to sue or otherwise renouncing rights against
the party by a signed writing.” 810 ILCS §5/3-604 (2001). See also Holman v. Simborg, 504
NE. 2d 967, 969 (Ill. App. Ct. 1987) (“a release is a relinquishment of a right which may be
given gratuitously or for inadequate consideration . . .”).
1. Execution of the notes

Plaintiffs contend their note obligations were discharged by VMS upon execution of the
notes. They offer evidence to show Morris, Stone, and Levine told plaintiffs they would not be
personally liable on the notes. Pl. Facts at ¢21. However, the notes unambiguously state that the
payee will have partial recourse to plaintiffs’ assets. Parol evidence of a prior or
contemporaneous agreement may not be used to alter the meaning of an unambiguous contract.
Grun v. Pneumo Abex Corporation, 163 F.3d 411, 420 (7 Cir. 1999). Plaintiffs’ motion for
summary judgment on Count I must be denied.®

2. Severance and “hold harmless” agreements

Plaintiffs contend their obligations were released by various severance and “hold
harmless” agreements. They offer evidence to show Ruff and Callaghan entered into agreements
with Stone that discharged them from “any and all claims or demands of any nature whatsoever
relating to their employment with VMS ....” Pl. Facts at ]30. The agreements “supersede all
prior understandings and agreements between the parties including but not limited to any and all
partnership agreements in which VMS or a VMS affiliate and the employees are partners . . .”

dd. at {/31. Plaintiffs present evidence Hochberg entered into a termination agreement with VMS

*The Trust’s Statute of Frauds and 810 ILCS § 5/3-604 arguments are moot.

-ll-


Insolia v. Philip Morris, Inc., 216 F.3d 596, 599 (7" Cir. 2000); Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248 (1986).
VWI. Applicable law

The Trust asserts the right to enforce the notes as a holder in due course. A holder in due
course takes the instrument: (1) for value; (2) in good faith; and (3) without notice the instrument
is overdue, dishonored, or subject to any defense or claim. Uniform Commercial Code (“UCC”)

§ 3-302; Northwestern National Insurance Company of Milwaukee, Wisconsin v. Lutz, 71 F.3d
671, 674-75 (7" Cir. 1996). “A holder in due course takes the instrument free of all defenses and
claims except the so-called ‘real’ defenses” listed in UCC, § 3-305. Bank of North Carolina v.
Rock Island Bank, 630 F.2d 1243, 1248 (7° Cir. 1980). However, any defenses the maker has
against the holder rather than the notes themselves may still be asserted. 810 ILCS 5/3-305(b).

It is undisputed plaintiff's signed the notes and the Trust currently holds them. Under
these circumstances, the Trust is entitled to recover unless plaintiffs establish a defense. UCC §
3-308; Bank of North Carolina, 630 F.2d at 1247.’ Plaintiffs must establish a defense bya
preponderance of the evidence. Bank of North Carolina, 630 F.2d at 1247. The burden shifts to
the Trust to establish holder in due course status once plaintiffs establish a defense. Id.

A. Plaintiffs’ motion for summary judgment

Plaintiffs move for summary judgment because that they were discharged from their note
obligations. “A person entitled to enforce an instrument, with or without consideration, may

discharge the obligation of a party to pay the instrument (i) by an intentional voluntary act, such

"In Bank of North Carolina, the court refers to UCC § 3-307. UCC § 3-308 was formerly
UCC § 3-307.

-10-


pee ani

may hereinafter arise in whole or in part out of or on account of such

Creditor’s Existing Indebtedness, whether known or unknown and if

unknown, whether or not the unknown matter would have been

material to . . . the decision to enter into this Release or the

Creditor Repayment Agreement.

Second Amended Complaint (“Am. Cmplt.”), Ex. 8. Undefined terms in the mutual releases
have the meaning ascribed to CRA terms. The CRA defines “associates” as directors, officers,
employees, agents and advisors.

The CRA includes non-recourse provisions. Specifically, the agreement provides:

“[N]o recourse (including, without limitation, recourse under any

deficiency judgment) shall be had against the Non-Recourse

Parties . . . or any of their respective assets,” and “each VMS

Partner, with respect to Partner Indebtedness only, hereby waives

the right to seek or assert (A) any respective assets, (B) a judgment

against any Non-Recourse Parties or any of their respective assets,

(C) any other legal action against any Non-Recourse Parties or any

of their respective assets, except for the right to realize

upon . . . assets of the VMS Principal Entities... .

PI. Appdx. at p. 93. “Non-recourse parties” are defined as “any VMS Partner or any affiliates or
associates of any VMS partner or principal entity.” Id. at p. 94.

In November 1993, the Fifth Amendment to the CRA was executed. The amendment
created the Trust for the benefit of creditors. The amendment purported to transfer VMS III
assets, including the notes, to the Trust. Stone signed the amendment and was listed as one of
the VMS creditors receiving rights under the agreement. Levine served as settlor for the Trust

and represented the entities that served as trustee. The notes and other assets were transferred to

the Trust in bulk.


defendants’ note liability is waived by the CRA. Accordingly, third-party defendants are not
entitled to summary judgment based on this defense.
2. Fraudulent inducement

Both plaintiffs and third-party defendants assert a defense based on fraudulent
inducement. Fraudulent inducement may invalidate a contract. Regensburger v. China Adoption
Consultants, Ltd. 138 F.3d 1201, 1207 (7" Cir. 1998). To establish fraudulent inducement,
plaintiffs must show: (1) they were victims of an intentional false representation of a material
fact; (2) the representation was made for the purpose of inducing plaintiffs to act; and (3) they
reasonably relied upon the statements to their detriment. Jd.

Plaintiffs and third-party defendants offer evidence they would not have signed the notes
but for Stone’s and Morris’ representations that their liability under the notes would be limited to
their initial $20,000 investment. Third-party Facts at §{] 33-34, 36-37, 39-41; Pl. Add. Facts at 1
69, 71. “A party who could have discovered the fraud by reading the contract, and in fact had an
opportunity to do so, cannot later be heard to complain that the contractual terms bind her.” Jd.
The clear language of the notes provides that plaintiffs and third-party defendants would be
subject to liability up to ten percent of the principal and unpaid interest. Plaintiffs’ and third-
party defendants’ reliance on promises of no personal liability cannot be considered reasonable.
Id. Their citations to Dellcar & Co. v. Hicks, 685 F Supp. 679, 682 (N.D. Ill. 1988) and similar
cases do not warrant a different result. These cases address the parol evidence rule rather than

reasonable reliance.

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oo lid

etc le kee

et a ee il

VMS principals subsequently sought plaintiffs’ and third-party defendants’ assistance in
developing VMS III. On December 31, 1984, VMS I and II amended the VMS III partnership
agreement to include plaintiffs, third-party defendants, and one other individual as partners. The
amended partnership agreement names VMS II as managing partner and grants the company
power to “execute, acknowledge and deliver any and all instruments necessary to effecuate” any
of its powers. The Trust’s Local Rule 56.1 Statement of Facts (“Def. Facts”), Ex. C.

The VMS III partners agreed to contribute $20,000 of their personal funds and sign
$1,180,000 promissory notes payable to VMS III. In return, they would acquire a 5% interest in
the company individually and 50% collectively. The notes provided in part that the “[p]ayee
shall have partial recourse at all times to the assets of the Maker, to the maximum extent of ten
percent of the outstanding balance of principal and accrued and unpaid interest; otherwise this
Note shall be non-recourse.” Jd. at Ex. Al-A9. The notes further provided that “all decisions of
the Partners shall be made by consent of Partners owning at least 51% of all of the Interests.” Id.
at Ex. C. The final relevant portion of the note reads:

This Note may be transferred and pledged without consent of the

Maker. In the event this Note is transferred, assigned, or pledged,

Maker hereby waives, as against any such transferee, assignee, or

pledgee, any defenses and counterclaim of every kind and description

that Maker may have against the Payee. Maker hereby waives

demand for payment, notice of non-payment, presentment, notice of

dishonor, protest, notice of protest, notice of acceleration, or any other

notice.

Pl. Facts Appendix (“P1. Appdx.”), Ex. A.

3.


document to eliminate “phantom income” from their individual income tax returns. Pl. Resp. to
Def. Add. Facts at | 88. The conflicting evidence regarding the coverage of Ruff’s, Callaghan’s,
Lager’s, and Hochberg’s termination agreements is a disputed issue of material fact.

Plaintiffs offer further evidence that Stone released Berini from his note obligations by
way of a termination agreement. Berini’s termination agreement cannot be found. Therefore,
plaintiffs rely solely on Berini’s testimony. Pl. Facts, 434. Self-serving statements are
insufficient for purposes of summary judgment. Shank v. William R. Hague, Inc., 192 F.3d 675,
681-82 (7" Cir. 1999). In addition, Stone’s testimony contradicts Berini’s contention that a
termination agreement released his note obligations. Def. Resp. to Pl. Facts, { 34.

Plaintiffs present evidence Stone orally released Seeland from his note obligations when
his employment with VMS terminated. PI. Facts at §{ 26-27. The Trust contends this evidence
is barred by the parol evidence rule. The Trust misapplies the rule. The rule provides evidence
of a contemporaneous or prior oral agreement may not be used to vary or contradict an
unambiguous written contract. Brooklyn Bagel Boys, Inc. v. Earthgrains Refrigerated Dough
Products, Inc., 212 F.3d 373, 380 (7 Cir. 2000). Subsequent oral modifications to written
agreements are permissible. R.7. Hepworth Company v. Dependable Insurance Company, Inc.,
997 F.2d 315, 317 (7" Cir. 1993).

The Trust contends evidence regarding Seeland’s agreement is barred by the statute of
frauds. Agreements that cannot be performed within one year are barred by the statute of frauds
unless they are in writing. A promise to release a debt cannot be performed within a year. See,
e.g., United Municipal Leasing Corporation v. Lexington Corporate Properties, Inc., No. 95 C

3212, 1996 WL 672253, at *8 (N.D. Ill. November 18, 1996) (internal citations omitted).

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iid

2 a ti a.

B. The Trust’s motion for partial summary judgment on the complaint

The Trust asserts plaintiffs’ defenses in Count I and HI fail as a matter of law. For the
reasons discussed in Section A, the Trust’s motion for summary judgment is granted on Count I.
The motion is granted on Count II only as it pertains to Bernini and Seeland.

The Trust asserts it can prove its status as a holder in due course and, thus, summary
judgment must be granted in its favor on Count V and plaintiffs’ affirmative defenses that are not
directly related to the Trust."'

1. Validity of transfer

Plaintiffs contend VMS II, while acting as VMS III’s managing partner, invalidly

transferred the notes from VMS ITI to VMS I and II. They offer evidence to show the partnership _

agreement precluded this action without approval of 51% of the partners. Pl. Fact Resp. at § 29.
The Trust offers evidence to show the managing partner had the power to “administer” the notes
and to take actions to “enforce its rights as the holder of the notes.” Jd. The partnership
agreement is ambiguous in regard to whether the managing partner was granted the power to
transfer the notes.

The Trust offers undisputed evidence to show plaintiffs believed the managing partner
had the power to transfer the notes. Specifically, Lager signed a document on behalf of Wrap
Loan Corporation stating that all VMS III assets had been distributed. Jd. at ff] 56-57. Plaintiffs

do not challenge Lager’s authority to bind the rest of them. In addition, they do not dispute the

"In the reply brief, the Trust requests summary judgment in its favor on all defenses. The
Trust may not change its summary judgment requests at this stage. Kauthar SDN BHD v.
Sternberg, 149 F.3d 659, 668 (7" Cir. 1998) (new arguments raised in a reply brief are waived).
The court will limit its analysis to the Trust’s original requests.

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ane an

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Facts”) and paragraph 3 of Callaghan’s Hochberg’s, Lager’s, and Ruff’s affidavits, pursuant to
Fed.R.Civ.P. 56(c).

BACKGROUND
I. The parties

All facts are undisputed unless otherwise noted. The Trust is a Delaware trust domiciled
in Delaware. During all relevant times, VMS was a sponsor of syndicated real estate limited
partnerships. VMS attracted investors by creating tax advantages in real estate investments. In
the mid-1980s, VMS was divided into five principal entities: VMS Realty Partners, Chicago
Wheaton Partners, VMS Realty Investment, Ltd., VMS Realty Investors, and VMS Financial
Services.

Robert Van Kampen, Peter Morris, and Joel Stone were VMS founders and acted as
principals of various VMS entities. All plaintiffs and third-party defendants except Shaffer were
executives and employees of VMS entities. Shaffer, an outside broker and advisor, was involved
in VMS deals.>
Il. Creation of VMS III

VMS Mortgage Company I (“VMS I”) and VMS Mortgage Company II (“VMS II”) were
subsidiaries of VMS Realty Partners. On December 21, 1984, VMS I and II created VMS
Mortgage Company III (“VMS III”), pursuant to a partnership agreement. The creation of VMS

IJ enabled VMS and its principals to preserve certain tax advantages.

>The parties dispute the nature and extent of plaintiffs’ and third-party defendants’
responsibilities pertaining to their employment with VMS entities.

2-


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
)
GEORGE RUFF, ET AL., ) Z
) No. 00 € 7337 4 QD,
Plaintiff, ) a Ge
) Suzanne B. Conlon, Judge oa “a
v. ) : & 2 Oo
) Za
PARTNER’S LIQUIDATING TRUST )
Defendants.

MEMORANDUM OPINION AND ORDER

George Ruff, Dennis Callaghan, Scott L. Lager, Mitchell Hochberg, Stephen Berini, Jack A.
Shaffer, and Allen R. Seeland (collectively “plaintiffs”) sue Partners Liquidating Trust (“the “Trust”)
for declaratory relief as to the nature and extent of their liability under seven promissory notes (“the
notes”) allegedly assigned to the Trust (Counts I-V).! The Trust counterclaims and sues Neil Hansen
and Leonard Levine (collectively “third-party defendants”) for the principal due on the notes,
interest, attorneys fees, and costs. The parties filed cross motions for summary judgment, pursuant
to Fed.R.Civ.P. 56. Plaintiffs move for summary judgment on the complaint. The Trust moves for
partial summary judgment on Counts I, II, and V, plaintiffs’ affirmative defenses, and the third -party
complaint.’ Third-party defendants move for summary judgment on the third-party complaint. The

Trust further moves to strike paragraphs 11-13 of plaintiffs’ Local Rule 56.1 Statement of Facts (“P1.

‘Count VI requests attorneys fees and costs.

°The Trust’s motion for summary judgment as to its burden of proof is denied. The court
discusses the applicable law in this opinion.

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Realty Partners that “supersedes all other prior agreements and understandings, whether oral or in
writing.” Jd. at ]28. Additionally, plaintiffs offer evidence to show Lager’s note obligations
were released by an agreement to hold him harmless for claims related to his services for VMS or
any of the “affiliated entities or funds.” Plaintiffs’ 56.1 Additional Facts (“PI. Add. Facts”), ¥
141.

The Trust asserts the actual language of the agreements shows plaintiffs were only
released from their obligations in connection with VMS Realty Partners and not VMS III. When
a summary judgment motion depends on contract interpretation, the court must determine “(1) if
the contract is ambiguous or unambiguous and (2) if it is ambiguous, whether after consideration
of the extrinsic evidence, there are any triable issues of fact.” Hickey v. A.E. Staley
Manufacturing, 995 F.2d 1385, 1389 (7" Cir. 1993).

It is undisputed Hochberg’s agreement only released all prior agreements “in connection
with [his] employment with VMS Realty Partners.” Similarly, VMS Realty Partners is the only
VMS entity to sign Callaghan’s and Ruff’s agreements. However, it is also undisputed VMS HI
was a subsidiary of VMS Realty Partners. Plaintiffs argue the releases are general and cover
VMS Realty Partners subsidiaries.

The court finds the agreements are ambiguous on their face. They do not identify VMS I,
Il, or III as parties to the agreement. Furthermore, the agreements do not state that releasing
obligations incurred while working for the principal company operates to release obligations

incurred in connection with subsidiaries. See Lumpkin v. Envirodyne Industries, Inc., 933 F.2d

°Plaintiffs make this argument in their response to the Trust’s motion for summary
judgment. For purposes of clarity, the court will address the argument in this section of the
decision.

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le ii

se

Therefore, Stone’s release must be in writing to be admissible. Plaintiffs’ motion for summary
judgment on Count II must be denied.
3. CRA non-recourse and mutual release provisions

Plaintiffs contend they were released by the CRA’s non-recourse and mutual release
provisions. The mutual release provisions apply to MS partners and their associates. The non-
Tecourse provisions apply to VMS partners and associates and affiliates of a VMS partner or
principal entity. Plaintiffs offer evidence to show they qualify as associates of VMS partners. PI.
Facts at ff 12-13. The Trust challenges the evidence on vagueness grounds. As discussed
above, vague and conclusory allegations are insufficient support for a summary judgment
motion. Korotko-Hatch v. John G. Shedd Aquarium, 65 F.Supp.2d 789, 801 (N.D. Ill. 1999). In
an effort to show they were associates, plaintiffs merely provide conclusory allegations they were
either “an officer of or advisor to, and/or provided employment services for” VMS partners. Pl.
Facts at ff] 12-13. There are no statements detailing the actual services plaintiffs provided and to
whom they were provided. See Local Rule 56.1(a)(3) (summary judgment motions must include
statement of facts showing the moving party is entitled to judgment as a matter of law). It is not
the court’s responsibility to search the record for facts supporting these conclusory allegations.

Accordingly, plaintiffs’ motion for summary judgment on Counts III-V is denied.'®

‘Summary judgment on Count V is denied because the Trust’s status as holder in due
course cannot be challenged until plaintiffs have established a defense by a preponderance of the
evidence,

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