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Eychaner v. Gross

Case Date: 03/30/2001
Court: 1st District Appellate
Docket No: 1-98-3573, 4735 cons. Rel

FIRST DIVISION
March 30, 2001

 

Nos. 1-98-3573, 1-98-4735 (consolidated)


FRED EYCHANER and BETTY LOU WEISS,
                        Plaintiffs-Appellants
          v.
THEODORE GROSS and ROOSEVELT UNIVERSITY,
an Illinois Not-For-Profit Corporation,
                        Defendants-Appellees, Counterdefendants-
                        Appellees and Counterplaintiffs-Appellees

(Auditorium Theatre Council, an Illinois Not-For-Profit
Corporation,
                        Defendant-Appellant and Counterplaintiff-
                        Appellant;

AUDITORIUM THEATRE COUNCIL, an Illinois Not-
For-Profit Corporation, Fred Eychaner and Betty Lou
Weiss,
                        Counterdefendants-Appellants).

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)		 Appeal from the
Circuit Court of
Cook County



No. 94 CH 11328




Honorable
Aaron Jaffe,
Judge Presiding.

JUSTICE O'MARA FROSSARD delivered the opinion of the court:

Plaintiffs, Fred Eychaner and Betty Lou Weiss, as directorsof the Auditorium Theater Council (Council) and the Auditorium Theatre Council, anIllinois not-for-profit corporation (ATC) (collectively referred to asplaintiffs) brought this action to prevent Roosevelt University (Roosevelt) andits president, Theodore Gross (collectively referred to as defendants), fromtransferring funds from the Auditorium Theatre (Theatre). During the ATCexecutive board meeting on December 15, 1994, Gross presented a resolution tohave a distribution from the Theatre of $1.5 million to Roosevelt to financeRoosevelt's new Schaumburg campus. Gross stated:

"*** I'm saying that we need to do this because as Isaid at the outset it's the most important step the University has taken in itshistory. And therefore, this is a primary project and the chief source ofimmediate cash is in the Auditorium Theatre. That belongs to the University. Itdoes not belong to the Auditorium Theatre Council. That is our legalinterpretation of it. The Auditorium Theatre Council can take whatever vote itwants to take in its January meeting. We are going to access those funds,because we must have those funds in order for this project to go forward. Imean, I have to take this hard line because we've reached the point now withwith this fiction and it's a fiction, that the Auditorium Theatre Council, Inc.has some kind of legal authority over those funds. They do not. The AuditoriumTheatre, Inc. was created for fund raising purposes only. The Auditorium; thosefunds are University funds. As much as the funds for any other unit of theUniversity. So that's our interpretation of it."

ATC members objected to the transfer of funds and the meetingwas adjourned in order to get an opinion from Roosevelt's counsel as to thelegality of the transfer.

Eychaner and Weiss brought suit the next day. In the amendedcomplaint they alleged: (1) Roosevelt placed the Theatre in a charitable trustfor the benefit of the public with the Council and its successor, ATC, astrustee; (2) ATC has ownership rights to all funds and assets in the Theatrepursuant to the Illinois Charitable Trust Act (760 ILCS 55/1 et seq.(West 1998)) and the Illinois General Not For Profit Corporation Act of 1986(805 ILCS 105/101.10 et seq. (West 1998)); (3) a constructive trustshould be imposed on Roosevelt, allowing ATC to restore and operate the Theatre;and (4) Roosevelt should be estopped from preventing ATC from operating theTheatre. Defendants brought a counterclaim seeking that Roosevelt be declaredthe sole and exclusive owner of the Theatre and alleging that Eychaner and Weissbreached a fiduciary duty to Roosevelt and ATC. ATC brought a counterclaimagainst Roosevelt and Gross alleging (1) an express charitable public trust; (2)constructive trust; (3) breach of contract based on the 1960 resolution andstandard operating procedures; (4) equitable estoppel; (5) breach of contractbased on a 1993 letter of intent; (6) promissory estoppel; (7) unjustenrichment; and (8) director conflict of interest. The trial court dismissedplaintiffs' causes of action and this court reversed and remanded for trial. Eychanerv. Gross, Nos. 1-95-3614, 1-96-1412 cons. (1997) (unpublished order underSupreme Court Rule 23).

During the 10-week trial, the court heard testimony from 37witnesses and reviewed approximately 400 documents generating 98 volumes oftranscripts. On September 28, 1998, the court entered judgment in favor ofRoosevelt and Gross on its counterclaim, denied plaintiffs' theories of reliefand ATC's counterclaim, declared Roosevelt as the sole and exclusive owner ofthe Theatre, ordered an accounting, found Eychaner breached his fiduciary dutyand reserved resolution of damages against Eychaner until after the accounting.

On September 29, 1998, the court ordered that control of theTheatre be immediately turned over to the Auditorium Theatre of RooseveltUniversity (AT of RU), created by Roosevelt to take over and operate theTheatre. On September 29, 1998, plaintiffs filed an interlocutory appeal of theSeptember 28, 1998 order (appeal No. 1-98-3573) and on October 13, 1998, filedan amended appeal of the orders from September 28 and 29. On December 2, 1998,the trial court denied plaintiffs' motion to stay trial court proceedings,ordered the accounting of the Theatre's financial status to proceed, scheduled adamages hearing against Eychaner and scheduled a Rule 137 hearing (155 Ill. 2dR. 137). On December 22, 1998, plaintiffs filed an interlocutory appeal from theDecember 2, 1998, order (appeal No. 1-98-4735). We consolidated these appeals.

I. BACKGROUND

In the 1950s, Roosevelt considered undertaking restoration ofthe Auditorium Theatre. The board of trustees of Roosevelt (Board) initiallyrejected creating a separate not-for-profit corporation for restoration becauseRoosevelt did not want to relinquish control of the Theatre. In 1959 in order togenerate revenue to restore the Theatre, the board of trustees established the"Auditorium Restoration and Development Committee" (ARDC) made up ofRoosevelt's Board, faculty and community members. The Board approved an ARDCfund-raising proposal conditioned upon Roosevelt retaining ownership and controlof the Theatre.

ARDC recommended to the Board formation of a separateorganization and used attorney Elmer Gertz to draft a resolution stating theorganization's mission and responsibilities concerning the Theatre. On January21, 1960, Gertz sent a draft of a resolution to Kenneth Montgomery, Roosevelt'sattorney and stated in an accompanying letter:

"As a result of a good deal of discussion between certain officers and members of the board of Roosevelt University andthe executive committee of the Auditorium Restoration and Development Committee, a draft of the resolution has beenagreed upon ***. It is the consensus of all involved in this situation that itis best not to form any separate corporation, foundation, trust or other legalentity, but to proceed in the manner set forth in the resolution."

Gertz testified that he chose not to create a formal legalentity to avoid becoming "too technical, too bound down in detail" andbecause "it might defeat our purpose of raising funds and restoring theTheatre and operating it. We were against anything that was too rigid inform." Gertz also wanted to preserve real estate and tax exemptions for theTheatre. Regarding public fund-raising, Gertz testified "that their fundswould go not at all to the University, but to the Theatre project and thatRoosevelt would have no right to interfere with the rehabilitation or running ofthe Theatre after it was built."

On February 18, 1960, the Board passed the resolution thatgoverned Theatre restoration and allowed formation of the Council. Montgomerytold the Board that although the University "might be required in thepublic's interest to hold the Auditorium in readiness for public use for someconsiderable period," "*** the Council's power originated from theBoard and the Board could deactivate the Council." Montgomery described theCouncil as an "agency" formed to operate and restore the Theatre.However, the resolution gave broad authority and responsibility to the Councilin areas of maintenance, operation, and fund-raising.

Gerald Gidwitz and Jerome Stone were trustees present at theFebruary 18, 1960, meeting and they testified that Roosevelt never intended torelinquish any authority or ownership in the Auditorium Theatre. Gidwitztestified that Roosevelt permitted a group of volunteers to assist in therestoration of the Theatre rather than giving them ownership, stating: "ifthe [Roosevelt Board] didn't like what was happening, in ten minutes they coulddissolve the [Council's] Board and fire the whole bunch." Stone testifiedthat the Board intended to retain authority to abolish the Council. Gertz,however, testified that based on the resolution Roosevelt could not abolish theCouncil unless the Council failed in its mission to restore the Theatre. Gertzstated:

"It was understood that the university could not changeits mind, as long as the purpose was being accomplished. First of all, the fundshad to be raised, and secondly, the restoration had to take place, and then thetheatre had to be operated as a cultural institution in the best interest of thecity and community of Chicago *** if there was a failure, then the universitywas free to step in, but it didn't fail."

In a letter to the Internal Revenue Service (IRS) Montgomerysought a determination that contributions to the Theatre via the Council wouldbe tax deductible. Montgomery told the IRS that "contributions to theCouncil are, in fact, contributions to it [Roosevelt] because the Council is itsagent." The IRS responded that contributions to the Council would be taxdeductible to the donor because "it appears that contributions to theCouncil will inure entirely to your [Roosevelt's] benefit such contributionswill be considered contributions to you."

Harland Allen chairman of the board of trustees of RooseveltUniversity issued a press release on March 8, 1960 describing the restorationprocess of the Auditorium Theatre and stated: "The University's trusteeshave been impressed by and are fully cognizant of the public trust which theownership of the Theatre has imposed upon them." Chairman Allen and Mrs.Spachner who was Council chairman and a member of Roosevelt's Board asked RobertAhrens to draft a Seven-Point statement to clarify plans for Theatre restorationand operation. Robert Ahrens testified that the Seven-Point statementparaphrased the resolution and did not change its terms. The statement indicatedthat the "[Council] will have full authority and responsibility for therestoration campaign and for the operation of the theatre."

The Council began its restoration campaign. Gertz testifiedthat some people would not contribute to the Theatre unless they were assuredthat the funds would go only to the Theatre and not to Roosevelt. Other donorswanted assurances that Roosevelt would have no right to interfere with Theatrerestoration and operation. A brochure distributed by the Council told potentialdonors that Roosevelt would not control a restored Theatre but that the Councilwould manage and operate the Theatre after the completed restoration. BruceSagan, William Peterson, and Gerald Stanton testified that they donated money tothe Council because they believed the Council would manage and operate theTheatre independent from Roosevelt. Other testimony at trial indicated thatRoosevelt's power to abolish the Council at any time was communicated topotential donors.

The restored Auditorium Theatre opened on October 31, 1967,with the Council undertaking day-to-day operations. During a four-year period,Roosevelt and the Council negotiated an operating procedure or"agreement." On March 4, 1971, Roosevelt and the Council approved"Standing Policies and Operating Procedures for the AuditoriumTheatre" (SOP) confirming the February 1960 resolution, noting bothuniversity and public uses for the Theatre, and preserving Roosevelt's realestate tax exemption because the University's use of the property was deemed"primary." The SOP contained procedures for the day-to-day operationof the Theatre, including maintenance of bank accounts, documentation ofreceipts, and payroll of Theatre staff.

During the 1960s and 1970s, donations to the Theatre weremade pursuant to Roosevelt's tax-exempt status and number. Some members of theCouncil believed that fund-raising would improve if the Council secured its owntax-exempt status from the IRS. The Council sought to establish a corporationfor this fund-raising purpose, approved articles of incorporation and sent themto the Board for approval. Roosevelt's attorney Gorman provided a memo to theBoard regarding the corporation:

"If the Board of Trustees approves the establishment of a new corporation, the [Council] will exist in two legalcapacities. In one capacity it will continue to exist as it has in the past asan unincorporated agency of Roosevelt University operatingunder, and subject to, the direction and control of the Board ofTrustees of Roosevelt University. *** In its other legal capacity the[Council] will exist as an Illinois not-for-profit corporation in accordancewith the Articles of Incorporation and By-laws submitted. *** [T]he corporation will exist and be used for the solicitation offunds only. It will not affect in any way whatsoever the operations of theTheatre Council and the Auditorium Theatre which will continue in the samemanner as in the past."

In September of 1981, ATC was incorporated pursuant to theIllinois General Not For Profit Corporation Act and filed its bylaws with theAttorney General. The articles of incorporation were identical to the articlesthat the Board approved in 1979 and limited the function of the corporation tofund-raising. The bylaws filed with the Attorney General which defendantscontend differ from the bylaws approved by the Board state that ATC's purposewas to "restore, modernize, and operate the Auditorium Theatre *** so thatit will serve as a cultural center for the people of Chicagoland, withparticular reference to the performing arts." The bylaws required ATC tocreate standing committees to oversee the Theatre restoration and operation. Thebylaws required that 25% of the members of ATC's executive committee betrustees, officers, or faculty of Roosevelt. In contrast to these broad powers,paragraph 4 of the bylaws described ATC's power in terms consistent with thearticles of incorporation and stated that ATC was organized "for the solepurpose of raising funds for the Auditorium Theatre Council, an independentboard of Roosevelt University." This paragraph also stated that "[ATC]has no function in connection with the restoration, operation, use andmaintenance of the Auditorium Theatre other than to raise funds for suchactivities. The responsibility to restore, operate, use, and maintain theAuditorium Theatre resides solely with the Board."

In 1983 the parties revised the 1971 SOP which issubstantially similar to the original SOP, noting that the purpose of theCouncil is to maintain and to continue to restore the Theatre "for thebenefit of faculty and students of Roosevelt, and subject to academic prioritiesof the University, to make artistic, cultural and educational contributions tothe people of greater Chicago through the sponsorship of events in theperforming arts." The 1983 SOP also stated that the sole purpose of ATC isto solicit funds for the Theatre.

On July 12, 1989, Ed Weil, the chair of the Council and ATC,proposed that Roosevelt lease the Theatre to ATC for $1 a year and that ATCconduct fund-raising independent of Roosevelt. President Gross and the Boardrejected this proposal and passed a resolution requiring ATC to report to Grossregarding "budgetary and general operating matters." In response tothese events, 17 members of the Council and ATC resigned. The resignationsthreatened the Theatre's production of Phantom of the Opera. Gross,university officials, Council and ATC members compromised and resignations wererescinded. In return for the Council and ATC receiving assurance of independencefrom Roosevelt, Gross was elected chairman of the Council and ATC.

On August 1, 1989, John Blew, secretary of the Council,acknowledged that Roosevelt owned the Theatre but wanted to disband the Counciland transfer all operating authority to ATC. Roosevelt rejected this proposal.In 1993, Roosevelt and ATC discussed other proposals including the execution ofa license agreement between Roosevelt and ATC and the effect of any transfer onATC's tax-exempt status. ATC in a letter asked the IRS about the tax-exemptstatus of ATC if it took over Theatre operations. The letter acknowledged thatthe Council previously operated the Theatre, that the Council constituted a"separate, unincorporated unit within the University," and thatfollowing any transfer to ATC, Roosevelt officials or trustees would constitutea majority of ATC's board. In June 1994, the IRS responded that "theproposed transfer of operation of the Theatre from the Council to you [ATC] willnot adversely affect your exempt status under 501(c)(3) of the Code."

Both the Council and ATC had similar names, and had the samemembers, officers, directors, and bylaws. In August 1989, Gross became thechairmen of both organizations. Many members of the Council and ATC were unawarethat there were two organizations. The Council took no official action totransfer or delegate any right to operate the Theatre to ATC. Roosevelt did notapprove transfer or delegation of the right to operate the Theatre from theCouncil to ATC and did not amend the 1979 resolution prohibiting ATC fromoperating the Theatre.

ATC