Opinion ID: 77997
Heading Depth: 3
Heading Rank: 5

Heading: Essex Partnership

Text: Judge Couvillion found the following. John Eulich was a real estate developer and business acquaintance of Ballard, Lisle, and Kanter. In 1975, he started Motor Hotels Management, Incorporated (MHM). MHM began by operating small hotels, but Eulich also wished to acquire management contracts for larger hotels. He believed that Kanter could be of service in this endeavor because of his extensive contacts in the hotel industry, namely with the Pritzker family. John Connolly was employed by a separate hotel management company as the on-site manager of Prudential's Gateway Hilton Hotel (Gateway). Connolly had been instrumental in revamping the once-seedy Gateway. In 1981, he informed Prudential that he was considering leaving his position at the Gateway. Not wishing to lose Connolly, Prudential terminated its contract with Connolly's employer and aimed to award the management contract to Connolly himself. Prudential advised Connolly, however, that he establish a hotel management company of his own. Accordingly, Connolly established Gateway Hotel Management Corporation (GHM). Prudential awarded GHM the management contracts for the Gateway and Midland Hilton Hotel (Midland). Eulich and Kanter came to realize that Connolly could use assistance running GHM, as it would be uneconomical for Connolly to employ the necessary full-time financial manager and accounting staff when he managed only two hotels. They also realized that Eulich's MHM could provide the needed services. Therefore, Eulich, Kanter, and Connolly formed the Essex Partnership to provide consulting and liaison services to its partners. MHM had a 47.5% interest in the partnership, and IRA had a 26.125% interest. The Holding Company, Incorporated (THC), of which Kanter's family trusts owned substantial stock, had a 21.375% interest. Connolly had a 5% interest. The partnership received income by way of fee-sharing agreements with MHM and GHM, whereby each contributed a certain percentage of the fees earned on its management contracts. These fee-sharing agreements were continually adjusted so that MHM and GHM contributed roughly the same amounts. Also, the total fees that MHM contributed roughly equaled its distributive share of the partnership's income. As planned, employees of MHM provided most of the help Connolly needed to run GHM. MHM was not directly paid for these services. Moreover, while IRA and THC received a combined 47.5% of the partnership's income, they provided no similar assistance to Connolly. However, Eulich considered his participation in the Essex Partnership to be a tool by which MHM might obtain contracts for large hotels through Kanter and gain experience and expertise in operating a large hotel through aiding Connolly. In 1986, Eulich sold MHM to Aircoa, an unrelated company. Despite this change in ownership, MHM remained a participant in the Essex Partnership arrangements until approximately 1990. Judge Couvillion found that the Essex Partnership arrangements were not indicative of a kickback scheme. He found that Eulich and MHM participated in the partnership solely in hopes of receiving Kanter's aid in obtaining contracts for large hotels. He also noted that an unrelated company continued to contribute a percentage of MHM's fees to the Essex Partnership until approximately 1990. Judge Haines stated that Judge Couvillion's account of the facts was incomplete or inaccurate and added the following. Ballard and Lisle were instrumental in Prudential's decision to offer Connolly the Gateway management contract. When Prudential relayed this offer, but conditioned it on Connolly establishing his own management company, Ballard realized that Connolly would need assistance. Accordingly, Ballard introduced Eulich to Connolly as someone who could provide the support services Connolly needed. Thereafter, Eulich, most likely with Kanter's assistance, organized GHM for Connolly. Ballard and Lisle also were instrumental in Prudential's awarding GHM the Midland management contract. At approximately the same time as establishing GHM for Connolly, Eulich and Kanter formed the Essex Partnership. Although Connolly was a partner, he was not involved in its formation and remained largely ignorant of its operations and functions. At trial, he did not know the identity of the partners, believed he was offered a 5% interest in the partnership in exchange for referring to MHM any contracts that GHM could not handle, and did not remember that a portion of GHM's fees were paid to the partnership. In the years that followed, MHM provided most of the services needed to run the Gateway and Midland. Connolly's participation was akin to that of an on-site manager. Connolly even received a salary from the Gateway. Indeed, Eulich considered the Gateway a part of MHM's management portfolio, even though the contract for this hotel technically was awarded to Connolly and GHM. In 1984, IRA transferred to Carlco, TMT, and BWK its 26.125% interest in the Essex Partnership. Carlco and TMT each received an 11.75% interest, and BWK received a 2.6125% interest. In concluding that the aforementioned arrangements were part of a kickback scheme, Judge Haines reasoned that the Essex Partnership was a conduit through which Ballard, Lisle, and Kanter received portions of the management fees paid by Prudential for the Gateway and Midland. Judge Haines explained the following. Ballard and Lisle arranged for Prudential to award Connolly the Gateway and Midland management contracts and for Eulich to set up GHM to make it appear as if Connolly was the owner of a hotel management company. GHM, however, was a sham corporation and Connolly merely a pawn. MHM employees did all the work, which suited Eulich because he wanted the contacts and experience. And while MHM's contribution to the partnership equaled its distributive share and Connolly had only a minor distributive share, Kanter's entities took nearly half of the partnership's income. Finally, Kanter later transferred part of his interest to Ballard's TMT, Lisle's Carlco, and his own BWK, so that Ballard and Lisle could receive part of the fees. Contrary to Judge Haines's account of the matter, Eulich testified at trial that the Essex Partnership was his and Kanter's idea. Kanter wanted to get involved with hotel management, and Eulich wanted to develop a relationship with Kanter because Kanter knew the owners of several major hotels. They invited Connolly to become involved because he had the expertise to manage big hotels, which MHM lacked. Eulich believed that Kanter helped arrange for the Essex Partnership partners to get the Gateway Hotel management contract. Eulich described the Gateway Hotel as the biggest hotel with which Essex Partnership was involved. Such testimony, if believed, is certainly plausible. Again, Judge Couvillion is the one who saw and heard the witness and found the testimony credible.