U.S. Bank National Association v. Londrigan, Potter & Randle, P.C.

IN THE UNITED STATES DISTRICT COURT

FOR THE CENTRAL DISTRICT OF ILLINOIS

SPRINGFIELD DIVISION

CSMC 2007-C4 EGIZII PORTFOLIO LLC, )

)

and )

)

U.S. BANK NATIONAL ASSOCIATION, )

as Trustee for the Registered Holders of )

the MEZZ CAP COMMERCIAL )

MORTGAGE TRUST 2007 C-5, )

COMMERCIAL MORTGAGE PASS- )

THROUGH CERTIFICATES, SERIES )

2007-C5, )

)

Plaintiffs, )

)

v. ) Case No. 15-3195

) (consolidated)

SPRINGFIELD PRAIRIE PROPERTIES, )

LLC, an Illinois limited liability company; )

ROBERT W. EGIZII, an individual; THOMAS )

EGIZII, an individual; MICHAEL EGIZII, an )

individual; RODNEY EGIZII, an individual; )

JODI BAPTIST, an individual; JOHN PRUITT, )

an individual; PAMELA JOHNSON, )

EXECUTOR OF THE ESTATE OF CLYDE )

BEIMFOHR; EEI HOLDING )

CORPORATION, an Illinois )

Corporation; and EGIZII PROPERTY )

MANAGERS, LLC, an Illinois limited )

liability company, )

)

Defendants. )

OPINION

RICHARD MILLS, United States District Judge:

This matter is before the Court following a bench trial.

The Court has reviewed the entire record, including the Parties’ proposed

findings of fact and conclusions of law, post-trial briefs, the exhibits and Court

transcripts.

I. BACKGROUND

(A)

In 2007, Defendant Springfield Prairie Properties, LLC (“SPP” or

“Borrower”) took out two loans totaling $23,340,000 from Column Financial, Inc.

to purchase seven properties. Six of the properties are located in the City of

Springfield, Illinois and one is located in Pana, Illinois. The State of Illinois was the

tenant in six of the buildings. Defendant EEI Holding Corporation (“EEI”), along

with its divisions Egizii Electric, Inc. and BRH Builders, leased the premises located

at 700 N. MacArthur until August 2015.

Defendant Egizii Property Managers (“EPM”) managed the real estate owned

by SPP. Defendant Robert W. Egizii is the primary stockholder of EEI, the majority

member of EPM and SPP’s majority member.1 The original Lender was aware of

the ownership structure of SPP, EPM and EEI when the loans were entered into in

2007.

1 On October 27, 2020, Egizii filed a Suggestion of Bankruptcy [d/e 247]. Under 11 U.S.C. § 362(a),

therefore, the proceedings are stayed against Egizii.

SPP’s other members include Marriot Commerce Building, LLC, Fifth Street

Partnership, Egizii Family Limited Partnership, Warehouse Partners, LLC, Bell

Building, LLC and Marco Partnership III, and its managing partner is Springfield

Prairie Properties, SPE, Inc.

Other Defendants include Egizii’s family and friends who own the rest of the

interests in EPM, EEI and SPP. Michael Egizii (son) owns interests in all three.

Rodney Egizii (son), who was dismissed after filing for bankruptcy, owned interests

in all three. Jodi Baptist (daughter) owned interests in all three. Thomas Egizii

(cousin) owned an interest in SPP. John Pruitt and Clyde Beimfohr (since deceased

and substituted by his Estate) owned interests in SPP. These individuals were

referred to as the Constructive Members. They are the members of SPP’s members.

The loans were commercial mortgage backed securities, CMBS loans. The

promissory notes and the mortgages securing the loans were signed by Robert Egizii,

as president of SPP. Egizii guaranteed the loan. None of the other Defendants are

signatories to the promissory notes, the mortgages or the Indemnity and Guaranty

agreement. The Loan documents were drafted by the Lender. The Plaintiffs

acquired the right to recover the Loan through a series of assignments.

The Loan documents also included the Operating Agreement of SPP, the

Property Management Agreement between SPP and EPM, an organizational chart

showing the members of SPP, various tenant estoppel certificates including one from

EEI, by which the tenant agreed to submit rents directly to the Lender if requested

in the event of default.

The Indemnity Clause, Section 18.5 of the Operating Agreement, provides as

follows:

The Company shall indemnify, defend and save harmless each Member

or former Member of the Company against expenses actually and reasonably

incurred by such Member in connection with the defense of an action, suit or

proceeding, civil or criminal, in which such Member is made a party by reason

or being or having been such Member, except in relation to matters as to which

such Member shall be adjudged in the action, suit or proceeding to be liable

for gross negligence or willful misconduct.

The Indemnity Clause, ¶6 of the Property Management Agreement, provides:

SPP agrees:

***

(d) To defend, indemnify, and save PM harmless from any and

all damages, claims, suits, or costs, whether for personal injury or otherwise,

arising out of PM’s management of the Property whether such claims are

filed or damages incurred before or after the termination of this Agreement.

The Loan documents contain no specific language prohibiting SPP from using pre-

receivership rents to pay legal fees to defend itself after a default.

Paragraph 1.5(e) of the Notes allows for partial recourse, i.e., recovery of

rents, issues, profits and revenues derived from any portion of the Property which

are not applied to the ordinary and necessary expenses of owning and operating the

Property, if the rents or profits are received after an Event of Default. It states:

[N]otwithstanding the foregoing provisions of this section, Borrower shall be

fully and personally liable and subject to legal action as follows . . . (e) for

rents, issues, profits and revenues of all or any portion of the Property which

are not either applied to the ordinary and necessary expenses of owning and

operating the Property or paid to the Lender but only to the extent such rents,

issues, profits and revenues are received or applicable to a period after either

an Event of Default or notice from Lender that an event or circumstances has

occurred which, with the passage of time or giving of further notice or both,

would constitute an Event of Default.

Paragraph 1.5(Y) of the Notes provides in part that Lender may recover the full

amount due under the Loan if Borrower transfers any Property without Plaintiffs’

consent:

Notwithstanding anything to the contrary in this Note or any of the other

Loan Documents. . . (Y) all such indebtedness evidenced by the Note and all

the other obligations of Borrower under the Loan Documents shall be

deemed fully recourse to Borrower in the event that: . . . (iii) Borrower

fails to obtain Lender’s prior written consent to any assignment, transfer, or

conveyance of the Property or any interest therein as required by the

Mortgage.

The Notes define “Property” to include “all properties (whether real or personal),

rights, estates and interests now or at any time hereafter securing the payment of this

Note and/or the other obligations of Borrower under the Loan Documents.” Under

the Mortgages, Borrower “GRANTS A SECURITY INTEREST” in all “Property,”

as defined therein. The Mortgages define the “Property” to include “all rents,

royalties, issues, profits, bonus money, revenue, income, rights and other benefits

(collectively, the “Rents” or “Rents and Profits”) of the Land or the Improvements,”

along with other real and personal property.

Section 1.13 of the Mortgages make it an event of default to sell, convey or

otherwise transfer the Property or any part thereof or interest therein without the

Lender’s consent:

[I]n the event that the Property or any part thereof or interest therein shall be

sold (including any installment sales agreement), conveyed, disposed of,

alienated, hypothecated, leased (except to tenants of space in the

improvements in accordance with the provisions of Section 1.12 hereof),

assigned, pledged, mortgaged, further encumbered or otherwise transferred or

Borrower shall be divested of its title to the Property or any interest therein,

in any manner or way, whether voluntarily or involuntarily, without the prior

written consent of Lender being first obtained, which consent may be withheld

in Lender’s sole discretion, then the same shall constitute an Event of Default

and Lender shall have the right, at its option, to declare any or all of the

indebtedness secured hereby, irrespective of the Maturity Date, immediately

due and payable.

The Guaranty at (l) incorporates the language of ¶1.5(Y) in the Notes, providing that

Egizii is personally liable for the full amount of the Loan under the same

circumstances as Borrower:

INDEMNITOR ACKNOWLEDGES THAT PHRASE (Y) IN SECTION

1.5 OF EACH OF THE NOTES DESCRIBES CIRCUMSTANCES

WHEREIN THE ENTIRE INDEBTEDNESS EVIDENCED BY SUCH

NOTE AND THE OTHER OBLIGATIONS OF BORROWER

UNDER THE LOAN DOCUMENTS WOULD BECOME FULLY

RECOURSE TO BORROWER. IF SUCH CIRCUMSTANCES

SHOULD OCCUR THEN INDEMNITOR SHALL ADDITIONALLY

BE DIRECTLY AND PRIMARILY LIABLE, ON A JOINT AND

SEVERAL BASIS, FOR THE ENTIRE INDEBTEDNESS

EVIDENCED BY THE NOTE AND FOR ALL OF BORROWER’S

OBLIGATIONS UNDER THE LOAN DOCUMENTS AND SUCH

INDEBTEDNESS AND OBLIGATIONS SHALL BE INCLUDED

WITHIN THE TERM “COSTS” HEREUNDER.

The Guaranty also contains the following provision:

1. INDEMNITY AND GUARANTY. INDEMNITOR HEREBY

ASSUMES LIABILITY FOR, HEREBY GUARANTEES PAYMENT

TO LENDER OF, HEREBY AND AGAINST, AND HEREBY

INDEMNIFIES LENDER FROM AND AGAINST ANY AND ALL

LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, COSTS AND

EXPENSES (INCLUDING, WITHOUT LIMITATION,

ATTORNEYS’ FEES), CAUSES OF ACTION, SUITS, CLAIMS,

DEMANDS AND JUDGMENTS OF ANY NATURE OR

DESCRIPTION WHATSOEVER (COLLECTIVELY, “COSTS”)

WHICH MAY AT ANY TIME BE IMPOSED UPON, INCURRED

BY OR AWARDED AGAINST LENDER AS A RESULT OF:

***

(e) RENTS, ISSUES, PROFITS AND REVENUES OF ALL OR ANY

PORTION OF THE PROPERTY WHICH ARE NOT EITHER

APPLIED TO THE ORDINARY AND NECESSARY EXPENSES OF

OWNING AND OPERATING THE PROPERTY OR PAID TO

LENDER BUT ONLY TO THE EXTENT SUCH RENTS, ISSUES,

PROFITS AND REVENUES ARE RECEIVED OR

APPLICABLE TO A PERIOD AFTER EITHER AN “EVENT OF

DEFAULT” (AS DEFINED IN SECTION 2.1 OF THE

MORTGAGE) OR NOTICE FROM LENDER THAT AN EVENT

OR CIRCUMSTANCE HAS OCCURRED WHICH, WITH THE

PASSAGE OF TIME OR GIVING OF FURTHER NOTICE OR

BOTH, WOULD CONSTITUTE SUCH AN EVENT OF DEFAULT.

Except for the foregoing provisions, the Loan documents do not set forth any

further definition of the word “transfer.” The Plaintiffs’ expert CPA, Jeffrey

Johnston, defined the word “transfer” to mean a disposal of or parting with interest

in property.”

The Plaintiffs’ corporate representative, William Clarkson, noted that the

Loan documents have no specific definition of “ordinary and necessary expenses.”

Clarkson testified that there is room for a borrower and a lender to disagree on the

definition of “ordinary and necessary expenses.” Clarkson interpreted the phrase to

include “property-level expenses” such as “[u]tilities, electricity, janitorial,

landscaping, repairs and maintenance, real estate taxes, insurance.”

The Defendants’ expert CPA, Donald Wright, testified that legal fees are

deductible as “ordinary and necessary expenses” of operating the business under

generally accepted accounting principles and under §162 of the Internal Revenue

Code, even if incurred to keep a business alive temporarily. Wright testified that

paying the legal expenses of SPP member Egizii and the legal fees of the

constructive members is an ordinary and necessary expense of operating the business

under §18.5 of the Operating Agreement because SPP is a tiered pass through

organization where only individuals are taxed for the distributions they receive.

CPA Dorinda Fitzgerald testified that the legal fees of $143,464 and $683,194

incurred by SPP in 2013 and 2014 were deductible ordinary and necessary expenses

of operating the properties pursuant to §162 of the Internal Revenue Code. Wright

testified it is a common practice for pass through entities to distribute money to their

members at the bottom tier, individual level so that individuals can pay their income

taxes on their share of the taxable income reported by the LLC. Fitzgerald testified

that most pass through entities which report taxable income make distributions to

cover their members’ income tax liability because without those distributions,

members would have to pay taxes on their own.

The Plaintiffs’ expert witness, Johnston, also testified it is a common practice

for LLCs to make distributions to their members for their share of the pass through

income tax liability, though he added it is not common for insolvent companies to

do so. Johnston opined that these expenditures were not ordinary and necessary

expenses of owning the property.

(B)

In 2008, the State of Illinois began having difficulty paying its rents. In turn,

SPP started having trouble making mortgage payments to the Lender as the

commercial real estate market in Springfield deteriorated. SPP fully complied with

the payment terms until October 11, 2012, when SPP failed to make the regularly

scheduled Loan payment on the A Note and the B Note. SPP did not make any

mortgage payments after the October 2012 payment. The Borrower did later make

certain payments to the Plaintiffs that were not contemplated by either of the Notes.

Under the Loan Documents, it is an Event of Default if “any sum payable

under this Note is not paid on or before the date of such payment is due.” The

Plaintiffs notified the Borrower of its defaults by letters dated December 6, 2012,

December 31, 2012, and March 28, 2013.

At the time, Torchlight Loan Services, LLC was the special loan servicer on

behalf of the Plaintiffs. A special servicer is in charge of dealing with defaulted or

distressed loans. William Clarkson, Torchlight’s corporate representative, testified

that although foreclosure is one option, a special servicer is always looking for

something that provides a better recovery.

The Plaintiffs’ March 28, 2013 Demand Letter to SPP and Egizii notified them

that Plaintiffs were electing to accelerate the Loan’s maturity date, demanding

payment in full and invoking the default rate of interest. In the Letter, the Plaintiffs

stated they were entitled to all of the Egizii Portfolio’s income and that the rents and

cash collateral from the Properties could not be used to pay SPP’s attorney’s fees

arising out of the default. They demanded that all rents and cash collateral be

delivered to the Plaintiffs. Clarkson testified that SPP would be entitled to retain

some rents so that SPP could pay for ongoing repair and maintenance expenses of

the Properties.

By the end of 2012, the Borrower was insolvent. SPP was no longer making

its mortgage payments, but was still collecting rents, profits and revenues from the

other tenants. SPP’s sole source of income was rents and profits from the Properties

described in the mortgages. Therefore, SPP had to report income to the IRS in 2013.

SPP, a pass through tax entity, sent distributions totaling $416,255.48 to the

Constructive Members to cover tax liabilities arising out of SPP’s 2013 income.

SPP also made estimated tax distributions to the Constructive Members in

May 2014 ($196,915.92) and September 2014 ($95,619.24) based on anticipated

income for SPP in tax year 2014. The Borrower did not report income to the IRS

for tax year 2014. The Constructive Members owed no taxes in connection with

their interest in SPP for tax year 2014. The Constructive Members are not actual

members of SPP. Its actual members are all entities.

William Clarkson reviewed the Plaintiffs’ Complaint and testified that he

believed the 2014 tax distributions to Constructive Members violated the Loan

documents because the Borrower was insolvent at the time.

(C)

SPP set up a client trust account at Scott & Scott, P.C. (“Scott”) on July 26,

2013, pursuant to a written trust agreement maintained in accordance with the

provisions of Rule 1.15(f) of the Illinois Rules of Professional Conduct.

In July 2013, EEI paid a $20,000 retainer to Perkins Coie LLP (“Perkins”) to

represent Egizii. In September 2013, the Borrower paid retainers to Londrigan,

Potter & Randle P.C. (“Londrigan”) of $20,000, Scott of $30,000 and Sgro,

Hanrahan, Durr & Rabin, LLP (“Sgro”) of $10,000.

Between June 20, 2013 and November 5, 2014, the Borrower made 16

transfers totaling $2,004,358 from its checking accounts to a trust account with

Scott. Between July 17, 2013 and December 23, 2014, SPP made 15 transfers

totaling $1,147,000 from its checking accounts to be held in an IOLTA trust account,

in accordance with Rule 1.15(f), in SPP’s name with Londrigan.

SPP created the Scott and Londrigan trust accounts at the suggestion of

Lawrence Selevan of Chesterfield Faring, Ltd, who was retained by SPP in May

2013 to help work out a deal with the Lender to resolve the default. Attorneys R.

Stephen Scott and James R. Potter testified that the purpose of placing the rents into

the trust accounts was so that the money could be immediately available to transmit

to the Lender if a settlement was reached. SPP disclosed the existence of the trust

accounts to Plaintiffs’ counsel on October 16, 2013. SPP exercised dominion and

control over the contents of the Londrigan and Scott trust accounts and listed them

as assets on its financial records and tax returns. SPP could access these funds at

any time by making a phone call or email to Attorneys Scott or Potter. The trust

accounts were functionally no different than if SPP held the funds in a bank account

in its own name. Neither Attorney Potter, as trustee for the Londrigan trust account,

nor Attorney Scott, as custodian for the Scott trust account, made any disbursements

from those trust accounts without the approval of Robert W. Egizii acting on behalf

of SPP.

William Clarkson testified that SPP’s formation of attorney trust accounts was

the only action it took in 2013 which he believed violated the Loan documents.

Clarkson testified he thought the creation of the attorney trust fund accounts violated

the Loan documents because he did not believe the Lender had access to those funds.

He was unfamiliar with the operation of attorney escrow accounts.

The Plaintiffs demanded a $250,000 payment from the trust funds to

demonstrate the Borrower’s good faith in entering into settlement discussions. That

payment was delivered on September 24, 2014. Over the course of the next month,

SPP paid a total of $625,000 to Plaintiffs from the Scott trust account.

Also on September 24, 2014, SPP caused $550,000 in retainers to be paid to

four law firms: Scott ($150,000), Londrigan ($150,000), Sgro ($150,000) and

Perkins ($100,000) from the Scott and Londrigan trust accounts. The Law Firms

had retainer and special retainer accounts for legal fees and costs that were separate

from the Scott and Londrigan trust accounts.

On September 30, 2014, SPP made a $15,000 advance payment to its

accounting firm, Pehlman and Dold (“Pehlman”) from the trust accounts. SPP

claims it received reasonably equivalent value for the $15,000 payment.

(D)

Before filing the two cases in federal court which were eventually

consolidated, the Plaintiffs on November 26, 2014 filed suit to foreclose and appoint

a receiver in the Circuit Court of Sangamon County, Case Number 2014-CH-456.

On December 19, 2014, the state court granted the Plaintiffs’ motion to appoint a

receiver for the Egizii Portfolio, while permitting the parties to negotiate certain

language. On December 23, 2014, the state court entered an Order Appointing

Receiver.

In the state court Foreclosure Case, the Plaintiffs originally sought a

deficiency judgment in addition to an in rem judgment against SPP. On August 27,

2015, the Plaintiffs filed an amended complaint in the Foreclosure Case seeking only

an in rem judgment against SPP to permit the federal action to proceed in the face

of the Defendants’ objections that Plaintiffs were seeking the same relief in two

separate courts.

On June 13, 2017, a Judgment in rem Foreclosure and Sale was entered in the

state foreclosure action. A Judgment in the Foreclosure Case was entered on April

27, 2018, wherein the court held that the amount due on the Notes was the sum of

(i) on the A Loan, $31,902,226.45, plus $6,420.54 per day in interest after December

11, 2016; (ii) on the B loan, $2,587,785.73, plus $673.28 per day in interest after

December 11, 2016; (iii) attorneys’ fees and costs; and (iv) any advances permitted

by the Plaintiffs under the Loan Documents after December 11, 2016.

On April 17, 2018, an order was entered approving reports of sale of the

foreclosed Property resulting in a credit totaling $9,400,000 for any amounts due

and owing on the claims at issue in this lawsuit.

In the days and weeks before the receiver was appointed, several transactions

took place. On November 12, 2014, an internal Perkins email noted the possibility

of the appointment of a receiver and advised that any unallocated retainer funds be

applied “as soon as possible.” On November 26, 2014, the Borrower issued a check

to EPM for $11,808.33. Between December 4 and December 24, 2014, SPP issued

seven checks to EEI (through divisions Egizii Electric and BRH) totaling

$11,979.30. On December 16, 2014, the Borrower delivered $100,000 to Londrigan

to hold in trust. On December 19, 2014, Londrigan deposited a $150,000 retainer

check that SPP had written to Londrigan on September 24, 2014. On December 23,

2014, the Borrower delivered $150,000 to Londrigan to hold in trust.

Following a 2016 dispute, Pehlman terminated its relationship with Egizii and

his various entities, including non-Defendants. At the time, Egizii and his entities

owed Pehlman $21,114.14. SPP owed Pehlman nothing. In February 2017, Egizii

and those entities worked out a settlement with Pehlman for $15,000. Despite owing

nothing to Pehlman, SPP funded the settlement--$3,617.50 using the remaining

balance of SPP’s advance payment and $11,382.50 using a check from the

Londrigan retainer account that held SPP’s $20,000 retainer from September 2013.

At the time of the trial, a balance of approximately $39,000 remained in the

Londrigan trust account and about $6,000 remained in the Scott trust account.

At trial, the disbursements from the Scott trust account challenged by the

Plaintiffs as not being ordinary and necessary expenses were the expenditures for

legal fees and tax distributions to the Members and Constructive Members. SPP

authorized Attorney Scott to make a number of distributions. SPP authorized

Attorney Scott to make disbursements from the Scott trust in the amount of $100,000

for operating expenses, $708,000 in total tax distributions to the Members, a

$625,000 payment to the Lender on September 14, 2014, and $515,000 attorneys’

fees up through November 29, 2018. Of the $515,000 attorneys’ fees amount,

$320,000 was delivered to the Scott retainer account and $190,000 was delivered to

Perkins’ special retainer account.

On February 28, May 30 and September 10, 2014, SPP authorized

distributions from the Scott Trust Account to Robert W. Egizii, Michael Egizii,

Thomas Egizii, Rodney Egizii, Jodi Baptist, John Pruitt and Clyde Beimfohr based

on their percentage of ownership of SPP or of SPP’s pass through entity members,

in order to pay income taxes on income earned by SPP in 2013. Before receiving

the distributions, each distributee executed a refunding bond in which they agreed,

as a condition of receiving the distributions, to reimburse SPP and Egizii for the

amount of the distribution they received if the Lender recovered that amount from

SPP and guarantor because the distributions were not deemed to be an ordinary and

necessary expense of owning the properties. If the Lender obtained a Judgment

against SPP, the Lender could collect the amount of the distributions by means of a

citation to discover assets against SPP.

(E)

On September 25, 2014, Londrigan opened a special retainer account with the

$150,000 disbursed from the Londrigan trust account at Egizii’s direction. The trust

accounting shows a total of $148,955 spent for legal fees beginning in January 2015

and continuing through August 16, 2017, and then another $86,000 disbursed

between April 17, 2018 and November 26, 2018. At the time of trial, the balance in

the Londrigan special retainer was $1,500.

On September 23, 2014, at the direction of Egizii, Attorney Scott deposited

$150,000 disbursed from the Scott trust account into a security retainer IOLTA trust

account at the Scott law firm.

On October 8, 2014, Attorney Greg Sgro deposited the Advance Payment

Retainer of $150,000 received from SPP into an IOLTA trust account. The trust

accounting shows a total of $95,050.36 spent for legal fees and costs between

September 19, 2013 and continuing through June 12, 2017. On November 30, 2017,

Attorney Sgro deposited an advance payment retained from the Londrigan trust

account at Egizii’s direction. The trust accounting for the special retainer account

shows a total of $164,949 spent on legal fees between November 2, 2017 and June

19, 2019.

On July 13, 2013, Perkins entered into a security retainer agreement with

Egizii with a payment of $20,000. On September 26, 2014, Perkins entered into an

advanced special retainer account with SPP with the $100,000 dispersed from the

Londrigan trust account at Egizii’s direction.

(F)

SPP directed the Londrigan Trust Account to distribute a total of $196,245 for

repairs and maintenance to the properties including $71,245 for HVAC work to E.L.

Pruitt & Co., $100,000 for repairs due to flooding at the Bucari Building and $25,000

to CWLP for utility bills, and further directed the Londrigan firm to pay SPP another

$29,176.50 for other operating expenses of SPP. SPP also directed the Scott Trust

Account to distribute $100,000 for repairs and maintenance for the work of E.L.

Pruitt & Co. for replacement of cooling equipment at the Ridgely Building.

SPP did not have the prior written consent of the Lender for the deliveries

into the Trust accounts, or the distributions, retainers and payments paid from those

Trust Accounts.

In addition to the $625,000 in accumulated rents delivered to the Plaintiffs on

September 24, 2014, SPP in October 2014 sent to Plaintiffs a check for $130,000

which it had received as an insurance distribution. In January 2015, SPP gave to the

court-appointed receiver $80,000 from the balance of its checking accounts. On

February 14, 2019 Attorney Greg Sgro, on behalf of SPP, sent to the Plaintiffs a

belated rent check in the amount of $17,162.89 received from the State of Illinois.

(G)

In March 2013, Egizii asked Attorneys Greg Sgro, James R. Potter and Steve

Scott to provide legal advice to SPP regarding a notice of default SPP had received

from the lender. Attorney Potter was to be SPP’s negotiator; Attorney Sgro was

engaged because of his expertise in real estate transactions, and Attorney Scott for

his expertise in bankruptcy matters. No written attorney fee agreements were

entered into at that time.

In June 2013, Egizii asked Attorney Potter to find an attorney from a national

law firm as additional counsel. Larry Selevan, the financial settlement advisor or

workout specialist, had recommended taking such action because the Plaintiffs were

represented by a large national law firm. SPP retained Attorney David Neff from

Perkins.

In September and October 2014, SPP and Egizii entered into written

attorneys’ fees agreements with the Londrigan, Sgro, Perkins and Scott law firms

because SPP had been sent a draft foreclosure complaint and it appeared litigation

was likely.

In the written attorney agreement with Londrigan, Egizii retained Londrigan

on behalf of SPP, himself, the constructive members, EEI and EPM. A $150,000

advance payment retainer was specified to become the property of Londrigan.

In a written attorney agreement dated October 7, 2014 with Sgro, SPP per

Egizii retained Sgro to represent SPP in a dispute with its lender. An advance

payment security retainer of $150,000 was specified to become the property of the

Sgro firm, but any balance not used for legal fees was to be refunded to SPP.

On September 23, 2014, SPP per Egizii entered into a written advance

payment retainer agreement with Perkins in connection with its dispute with the

lender. An advance payment retainer fee of $100,000 was agreed to and specified

to be the property of Perkins.

On September 23, 2014, SPP per Egizii entered into a written retainer

agreement with the Scott firm in connection with its dispute with the lender. A

security retainer fee of $150,000 was agreed to with the amount specified to remain

the property of SPP until utilized for legal services in connection with SPP’s dispute

with the lender.

On August 6, 2015, all of the attorneys and parties entered into a “Joint

Defense and Common Interest Agreement.” The Parties agreed that joint

investigations, sharing of discovery and research could be undertaken to benefit the

parties to the agreement.

On September 2, 2015, Londrigan entered into a new joint representation and

waiver of conflicts agreement with Robert Egizii and all of the individual

constructive members of SPP in connection with the defense of this lawsuit.

Londrigan agreed to continue to represent Egizii and his various business pursuits.

The letter stated that the representation was joint, that Londrigan would represent

Egizii and all other constructive members simultaneously and that if any conflict

appeared, Londrigan would withdraw its representation of the constructive members

so that it could continue representing Egizii. The letter specified SPP would be

responsible for the legal fees.

Robert W. Egizii testified he and a bookkeeper reviewed every legal bill that

came from the attorneys to ensure that the items listed pertained only to the dispute

between SPP and the lender, and would call the attorney if there was uncertainty.

Attorneys Scott and Sgro testified they itemized every bill so that it would include

only services rendered for SPP.

(H)

All of the legal fees incurred from March 2013 through August 25, 2015 were

incurred for the direct representation of SPP arising out of its default on the Loans

because each of the four law firms represented SPP during that period. In a previous

Opinion on the Parties’ motions to dismiss, the Court found that SPP appeared to

have received reasonably equivalent value for the services provided by the attorneys.

SPP had a legal obligation to provide a defense to Egizii as a direct member of SPP

under the indemnity provisions of ¶18.5 of the Operating Agreement. The tax

obligations of a pass through entity arise at the individual level. Paragraph 18.7 of

the Operating Agreement provides that the constructive members are assigns of the

direct members of SPP. Plaintiffs’ expert Johnston testified that the constructive

members “are not [Borrower’s] members” and the clause in the Operating

Agreement only applies to an actual member being sued by “by reason of it being or

having been made such Member.”

Londrigan represented Egizii and the constructive members jointly and

simultaneously from August 25, 2015. SPP owed a legal obligation to defend EPM

from any claims arising out of its property management services to SPP under ¶6(d)

of the Property Management Agreement. Sgro represented EPM and EEI jointly and

simultaneously after August 25, 2015 at the direction of SPP.

(I)

EEI’s shareholders include Egizii (92.43%) and his children: Michael

(0.45%), Rodney (6.6%) and Jodi Baptist (0.45%). No stock certificates exist. EEI

has Bylaws but does not hold annual shareholder meetings, nor does it hold regular

officer and director meetings, though all are required by the Bylaws. There are no

minutes of meetings. EEI’s only resolution since 2007 was executed in 2010,

electing officers and directors for two of its divisions, many of whom are no longer

with EEI. While new persons fill some of those roles, no new resolutions have been

signed.

EEI’s employees between 2012 and 2014 included Susan Wesp (CFO),

Theresa Pennington, Julie Farrington/Long and Linda Wells. All were paid by EEI.

All maintained an email domain of “@eeiholding.com” and had email signature

blocks indicated they worked for either EEI Holding Corporation or Egizii Electric,

Inc.

Despite reporting losses in 2013 and 2014, EEI paid Egizii approximately

$395,000 in salary for each of the two years. Egizii had loaned $800,000 to EEI in

2013. EEI’s executive compensation was not reported on prior years’ tax returns

and is unknown.

Vince Toolen was an independent contractor for EPM. He also used an email

domain of “@eeiholding.com” and signed documents in various capacities on behalf

of EPM and SPP. Toolen sent letters on SPP letterhead, signing as “Leasing

Manager” or “Executive Assistant” of SPP. EEI, EPM and SPP all designated

Toolen as their representative witness at trial. Toolen’s hourly fee was paid by the

owner of the property for whom he was working (SPP or other Egizii-owned

enterprises).

EPM is a limited liability company whose members are Egizii (85%) and his

children, Michael (5%) Rodney (5%) and Jodi (5%). EPM has Articles of

Organization, but lacks a limited liability company (or operating) agreement. It has

no resolutions, never held a meeting of the members and has no minutes of meetings.

The Management Agreement contemplates that EPM will, among other tasks,

evict tenants and provide regular financial statements and inspection reports to SPP.

EPM did not perform those services. Toolen calculated EPM’s management fee

based on the Management Agreement and the Egizii Portfolio’s rent roll in 2007.

Toolen never looked at the Management Agreement or recalculated accruals after

2007 even after circumstances changed with rents significantly declining and certain

tenants not paying timely.

Actual cash payments to EPM were $165,316.62 in 2013 and $141,699.96 in

2014. This amounted to 6.04% of SPP’s gross income in 2013 and 5.28% of

Borrower’s gross income in 2014, while the Management Agreement allows fees of

3% to 4% of gross income (depending on the building). In total, the Borrower paid

$330,633.24 to EPM between October 11, 2012 and December 2014.

SPP and EPM had no employees. SPP, EEI and EPM all functioned

separately. The entities had separate bank accounts, separate books, separate

stationery and filed separate tax returns. Susan Wesp testified EEI did not pay

attorney’s fees for SPP. EEI employees would go through the monthly bills for legal

fees to make sure that SPP only paid legal bills attributable to SPP. When EPM and

SPP needed administrative support or assistance with finances, Wesp or other EEI

employees would assist and did not charge EPM or SPP for their time. These

uncompensated tasks benefitted SPP. Wesp and Vince Toolen testified SPP treated

EEI the same as any other contractor that provided service to it. William Clarkson

testified he was not specifically aware of any instance in which EEI overcharged or

didn’t provide the repair and maintenance services for which it billed SPP. Although

it owned 700 North MacArthur and did not require a formal lease, SPP occupied part

of the space leased by EEI. EEI and SPP were insolvent in 2013-2014.

Vince Toolen testified SPP gave rent reductions to at least one tenant,

McLeod, similar to what it gave EEI in an effort to keep McLeod as a tenant.

Moreover, it was in SPP’s economic interest to reduce EEI’s rent because no other

tenants were available at the time. EEI was paying $7,400 for utilities per month

which otherwise would have been SPP’s responsibility.

EPM also occupied part of the space at 700 North MacArthur leased by EEI.

EPM did not have a lease or sublease for the space nor did its Management

Agreement permit it to occupy the premises. EPM paid no rent to SPP.

EPM made loans to Egizii and the Egizii Family Limited Partnership, which

is composed of Egizii and his children and which also owns part of SPP. No loan

documents were signed and no repayment terms were established.

EPM paid $211,546, $314,914 and $277,641 to Robert W. Egizii in 2012,

2013 and 2014, respectively. All of the payments were characterized as “Contract

Labor” expenses on EPM’s tax returns. EPM did not make formal distributions to

its members (including Egizii) between 2012 and 2014.

SPP had an Operating Agreement. It has no resolutions after 2007 and never

held any member meetings. SPP never entered into any resolutions or held any

member meetings in connection with the distributions to the Constructive Members

in 2014. SPP had no employees. When it needed administrative support or

assistance with finances, EEI employees would assist and did not charge SPP for

their time.

According to the Operating Agreement, SPP’s members are 700 North

MacArthur, LLC (12.0263%), Egizii Family Limited Partnership (15.1176%), Fifth

Street Partnership (16.6967%), Marriot Commerce Building, LLC (27.7759%),

Marco Partnership III (4.4615%), Bell Building, LLC (8.1798%), Warehouse

Partners, LLC (12.7422%) and Marco (3.0%). SPP’s tax returns are similar, but

reflect Robert Egizii individually owning its 12.0263% interest (instead of 700 North

MacArthur, LLC). The returns also do not reflect Marco owning any part of the

Borrower. Instead, Marriot Commerce Building, LLC owns 30.7759% of SPP, or

3% more than stated in the Operating Agreement. No assignments exist.

SPP’s Operating Agreement did not have any provisions in it exempting its

members from the rights and immunities provided by 805 ILCS 180/10-10(a).

Robert Egizii was the primary decisionmaker for EEI, EPM and SPP.

In June 2014, SPP paid $2,600 to Pehlman in partial satisfaction of its invoice

dated May 2, 2014. This invoice was issued to EEI and was for services performed

exclusively for EEI.

(J)

In May 2013, the Parties began settlement discussions. The Defendants

utilized the services of Larry Selevan, the financial workout specialist. Selevan was

terminated on November 12, 2013, because he was not able to get the settlement

accomplished. The Defendants also believed that his presence exacerbated instead

of facilitated settlement discussions. Following Selevan’s departure, David Neff of

the Perkins firm took the lead in conducting settlement negotiations for SPP and

Egizii. Ultimately, the settlement efforts were unsuccessful.

(K)

In Count I, the Plaintiffs assert breach of contract claims seeking Judgment on

Note, full recourse, against SPP. The Plaintiffs also assert SPP, EEI and EPM were

alter egos of one another. The Plaintiffs allege they are entitled to Judgment against

Borrower for $31,380,470.40, plus $7,093.82 per diem through the date of judgment,

plus interest at the federal judgment rate thereafter.

In Count II, the Plaintiffs assert breach of contract claims seeking Judgment

on Note, partial recourse, against SPP. The Plaintiffs also assert SPP, EEI and EPM

were alter egos of one another. The Plaintiffs allege SPP failed to deliver to

Plaintiffs $2,771,917.45 in post-default rental income ($3,379,032.60 delivered to

the Law Firms plus the $1,667.81 and $16,217.04 left in the Borrower’s accounts

minus $625,000 paid to Plaintiffs). The Plaintiffs also seek entry of judgment

against Borrower, EEI and EPM based on alter ego theories of liability.

In Count III, the Plaintiffs allege a breach of contract claim seeking Judgment

on Guaranty, partial recourse, against Egizii.

In Count IV, the Plaintiffs allege a breach of contract claim seeking Judgment

on Guaranty, full recourse, against Egizii. As the Court noted, the proceedings are

stayed against Egizii pursuant to his bankruptcy filing.

In Count V, the Plaintiffs asserted claims for breach of Illinois Limited

Liability Company Act against the Borrower and Members. In an Order entered on

August 15, 2016 [d/e 28], the Court dismissed Count V.

In Count VI, the Plaintiffs assert claims under the Illinois Uniform Fraudulent

Transfer Act (“UFTA”), Constructive Fraud, against SPP, Egizii and the

Constructive Members. The Plaintiffs allege SPP committed constructively

fraudulent transfers in the amount of $4,748,465.84. They further contend that the

Constructive Members are liable under 740 ILCS 160/9(b)(1) as follows: Thomas

Egizii is liable for $59,172.32; Michael Egizii is liable for $18,125.76; Jodi Baptist

is liable for $13,797.72; John Pruitt is liable for $45,157.76; and the Estate of Clyde

Beimfohr for $123,298.57.

In Count VII, the Plaintiffs assert claims under the UFTA, Actual Fraud,

against SPP, Egizii and the Constructive Members. They allege the Borrower

committed actually fraudulent transfers, 740 ILCS 160/5(a)(1), in the amount of

$4,748,465.84.

In Count VIII, the Plaintiffs assert civil conspiracy claims against all

Defendants.

Count IX was a tortious interference with contractual rights claim asserted

against EEI that was dismissed prior to trial pursuant to that Parties’ joint motion.

(L)

In an August 15, 2016 Opinion and Order on the Defendants’ motion to

dismiss, the Court granted the motion to dismiss of the four Law Firm Defendants,

concluding that “the Plaintiffs have no right to pre-receivership income to the extent

it is sought from the Law Firms,” and dismissed all of the claims asserted against the

Defendants’ Law Firms. [d/e 28 at 45] The Court also determined that Plaintiffs

could not assert any fraudulent transfer claims against the Law Firm Defendants

because the Plaintiffs could not establish that a retainer transferred to a law firm

lacks reasonably equivalent value or that payment of a retainer to a law firm

constituted a fraudulent transfer. The Court further concluded that, because the

Plaintiffs had no right to the pre-receivership income, SPP “could not have intended

to defraud the Plaintiffs by transferring property to the Law Firms.” Id. at 49.

In an August 14, 2018 Opinion and Order denying the Plaintiffs’ motion for

leave to file a second amended complaint, the Court noted it previously “dismissed

the fraudulent transfer claims asserted against the Law Firms on the basis that

Plaintiffs ‘had no right to the income prior to the appointment of a receiver on

December 23, 2014.’” [d/e 152 at 7]. The Court also determined that, because the

Law Firms were paid solely from pre-receivership income, the Plaintiffs’ fraudulent

transfer claims would be futile. The Court concluded that Plaintiffs aiding and

abetting and conspiracy claims would also fail “[b]ecause the Plaintiffs have no right

to the pre-receivership income as the Court previously held.” Id. at 9.

In his December 23, 2014 Order appointing Receiver, Sangamon County

Circuit Judge John Madonia determined that Plaintiffs were not entitled to pre-

receivership rents under Illinois law. The Order defined the receivership property

to include only rents generated by the real estate after the appointment of the

receiver.

In an Opinion and Order entered on February 28, 2019, this Court granted

summary judgment in favor of Plaintiffs and against SPP on Count I and against

Egizii on Count IV in the amount of $34,490,012.18. The Court found that the

Borrower had transferred property without the Plaintiffs’ consent in violation of ¶

1.5(Y) and full recourse liability was triggered.

II. DISCUSSION

Legal standards

In order to establish a breach of contract as alleged in Counts I, II, III and IV,

the Plaintiffs must prove their allegations by a preponderance of the evidence.

As for Count VI, the Plaintiffs must prove constructive fraud by a

preponderance of the evidence. See Wachovia Securities v. Newhauser, 528 F.

Supp.2d 834, 859 (N.D. Ill. 2007).

Regarding Count VII, the Plaintiffs’ actual fraud claims under 740 ILCS

160/5(a)(1) must be proven by clear and convincing evidence. See Ray v. Winter,

67 Ill.2d 296, 304 (1977).

As for Count VIII, civil conspiracy is almost always established by

circumstantial evidence and not direct evidence, though the circumstantial evidence

must be clear and convincing. See McClure v. Owens Corning Fiberglass Corp.,

188 Ill.2d 102, 134 (1999). “Clear and convincing evidence” has often been defined

as “the quantum of proof that leaves no reasonable doubt in the mind of the fact

finder as to the truth of the proposition in question.” See Bazydlo v. Volant, 164

Ill.2d 207, 213 (1995).

Breach of contract claims against SPP- Count I

Under Count I, based on the Court’s prior Opinion [d/e 173] and the affidavits

of Plaintiffs and its counsel, the Plaintiffs allege they are entitled to judgment against

the SPP for $31,380,470.40, plus $7,093.82 per diem through the date of judgment,

plus interest at the federal judgment rate thereafter.2

The Defendants contend that SPP’s creation of the Londrigan and Scott trust

accounts and deposit of funds therein are not prohibited “transfers” under ¶1.5(Y) of

2 The Plaintiffs make the same arguments as to Robert Egizii and allege those parties are jointly and

severally liable. However, the proceedings are stayed as to Egizii due to his bankruptcy filing.

the Loan Documents under whatever definition of “transfer” is used—whether a

dictionary definition or the IUFTA definition, which defines “transfer” as “every

mode, direct or indirect, absolute or conditional, voluntary or involuntary, of

disposing with or parting with an asset or an interest in an asset, and includes

payment of money, release, lease, and creation of a lien or other encumbrance.” See

740 ILCS 160/2(l). Because SPP did not relinquish control of the pre-receivership

rents, the Defendants claim there was no transfer and they are entitled to

reconsideration on Count I.

The Plaintiffs’ predecessor Lender was the drafter of the documents.

Therefore, any ambiguity in the Loan documents must be construed against the

Lender. See Phillips v. Lincoln Nat. Life Ins. Co., 978 F.2d 302, 311 (7th Cir. 1992);

Nicor v. Associated Elec. Gas. 223 Ill.2d 407, 417 (2006).

Because the record establishes that the Scott and Londrigan trust accounts

were subject to garnishment, remained the property of SPP and were listed as assets

on SPP’s balance sheets, the Defendants allege the Court should reconsider its prior

ruling that it would be more difficult to collect from the Law Firms than from a

borrower’s account. See d/e 173, at 31. The Plaintiffs were advised of the trust

accounts in October 2013, a few months after they were created. If the Lender had

chosen to proceed to judgment against SPP, SPP’s bank accounts and the attorney

trust funds would have been subject to garnishment.

While the Borrower’s initial deposits into the attorney trust accounts might

not constitute prohibited transfers under ¶1.5(Y) given that the deposits were not a

parting of interest and SPP maintained control over the funds, there eventually were

prohibited transfers under the provisions when the funds were disbursed for

attorney’s fees and tax distributions without SPP’s first obtaining the Lender’s prior

written consent. The funds were typically distributed at Egizii’s direction. Because

SPP did not first obtain the Lender’s consent before making the distributions, “all

such indebtedness evidenced by the Note and all the other obligations of Borrower

under the Loan Documents [were] fully recourse to Borrower” under ¶1.5(Y).

The Plaintiffs have proven by a preponderance of the evidence that the loans

are fully recourse based on SPP’s prohibited transfers. Based on the foregoing, the

Court finds that it has no basis to reconsider its earlier ruling wherein it granted

summary judgment in favor of Plaintiffs and against SPP as to Count I. The Court

hereby modifies the previously ordered amount of $34,490,012.18, plus interest and

attorney’s fees, to $31,380,470.40.

Breach of contract claims against SPP- Count II

In Count II, the Plaintiffs seek Judgment on Note, partial recourse, against

SPP, in the amount of $2,771,917.45, in post-default rental income, based on SPP’s

failure to make payments required under the Note beginning with the payment due

on October 11, 2012. Under Section 2.1 of the Note, the failure to make loan

payments as required constitutes an Event of Default. Following the defaults, the

Lender accelerated the maturity of the Loan and declared the entire Loan balance

due and payable.

Under ¶1.5(e), the Borrower agreed to be personally liable for certain losses,

including any post-default rent not paid to the Lender and “not applied to the

ordinary and necessary expenses of owning and operating the Property.” The

Plaintiffs claim SPP is liable for $2,771,917.45 in post-default rental income for the

amount it failed to deliver in post-default rents, less a credit for any money used to

pay “ordinary and necessary expenses of owning and operating the Property.”

The Loan documents have no specific definition of “ordinary and necessary

expenses.” The terms of an agreement should generally be enforced as they appear.

See Dowd & Dowd, Ltd. v. Gleason, 181 Ill.2d 460, 479 (1998). As the drafter of

the documents, any ambiguity must be construed against the Lender. See id. A

number of witnesses testified as to how the phrase might be interpreted. While

Plaintiffs’ representative Clarkson identified “property-level expenses” such as

“[u]tilities, electricity, janitorial, landscaping, repairs and maintenance, real estate

taxes, [and] insurance,” he acknowledged there is room for a borrower and a lender

to disagree on the definition of “ordinary and necessary expenses.”

Defendants’ expert Wright testified that legal fees are deductible as “ordinary

and necessary expenses” of operating the business under generally accepted

accounting principles, even if incurred to keep a business alive on a temporary basis.

CPA Dorinda Fitzgerald testified the post-default legal fees incurred by SPP in 2013

and 2014 were deductible ordinary and necessary expenses of operating the

properties under § 162 of the Internal Revenue Code. SPP’s workout consultant,

Lawrence Selevan, stated that as a financial adviser, he did not believe that legal fees

arising out of Borrower’s default should be paid using the Property’s income. Only

legal fees that directly relate to the economic operation of the property could be paid

using rental income.

SPP also used $283,896.70 of its rental income to pay EPM’s legal fees.

SPP’s rental income was also used to fund EEI’s defense. The Defendants presented

testimony this was done because of the existence of claims asserting that SPP, EPM

and EEI were alter egos of one another, and SPP thus was acting to protect itself.

The Borrower also used rental income to pay the legal fees of the Constructive

Members on the basis that Paragraph 18.5 of the Operating Agreement expressly

indemnifies the Borrower’s “members.” However, Paragraph 18.7 provides that the

constructive members are assigns of the direct members of SPP.

SPP transferred approximately $700,000 to Robert Egizii, Jodi Baptist,

Michael Egizii, Thomas Egizii, Rodney Egizii, Clyde Beimfohr and John Pruitt so

they could pay their personal income taxes. Dorinda Fitzgerald testified that pass

through entities which report taxable income make distributions to cover their

members’ income tax liability because without such distributions, the members

would have to pay taxes on their own. Plaintiffs’ expert Johnston stated it was not

common for insolvent companies to do that. As previously stated, SPP’s actual

members were entities and not those individuals. Accordingly, it is difficult to see

how those payments could constitute an ordinary expense for SPP.

The Plaintiffs further note that under the Operating Agreement, the 2014

distributions would not have been permitted because SPP by then was insolvent and

the Illinois Limited Liability Company Act bars companies from distributing money

while insolvent. Moreover, the Borrower did not report any income on its tax returns

in 2014 to pass through to its members.

Additionally, SPP acknowledged the fact that it had income in 2013 was

primarily because it had stopped making mortgage payments. It seems unlikely that

expenses arising out of such an act would be ordinary and necessary.

In Count II, the Plaintiffs seek $2,771,917.45 in SPP’s post-default rental

income, consisting of $3,379,032.60 delivered to the Law Firms plus $1,667.81 and

$16,217.04 left in SPP’s accounts minus $625,000 paid to the Plaintiffs. The

Borrower is personally liable under ¶1.5(e) if this post-default rent was “not applied

to the ordinary and necessary expenses of owning and operating the property.”

The Court is unable to conclude that any of those funds were used for ordinary

and necessary expenses under ¶1.5(e). While the phrase is not defined, the Court

finds no ambiguity under the circumstances of this case. Legal fees which related

to the operation of the property might qualify as “ordinary and necessary expenses.”

Johnston testified that SPP’s legal expenses in 2011 were about $5,000 and were

also a very low number in 2012. Those fees would likely qualify as “ordinary and

necessary expenses of owning and operating the property.” Here, the Law Firms

held the money in trust and the funds were then sent to the firms for legal expenses

or to other Defendants or third parties.

Because it does not appear that any of the legal fees related to the ownership

and operation of the property, the Court concludes that SPP breached the contract as

alleged in Count II. Moreover, SPP’s transfer of funds while insolvent to the

constructive members—who were not actual members--so that they could pay legal

fees or income taxes also would not constitute “ordinary and necessary expenses of

owning and operating the property.”

Based on the foregoing, the Court concludes that Plaintiffs are entitled to

judgment on Count II against SPP in the amount of $2,771,917.45 in post-default

rental income.

Counts III, IV, V and IX

Counts III and IV are asserted solely against Robert W. Egizii, and the

proceedings as to him are stayed due to his bankruptcy filing.

The Court previously dismissed the Illinois Limited Liability Act claims

asserted in Count V.

The tortious interference with contractual rights claims asserted in Count IX

were also dismissed prior to trial.

Constructive Fraud claims--Count VI

(1)

Count VI includes constructive fraud claims under UFTA against SPP and the

Constructive Members.3 The Plaintiffs allege SPP committed constructively

fraudulent transfers in the amount of $4,748,465.84. This includes $2,004,358 to

Scott to hold in trust and $1,147,000 to Londrigan to hold in trust, along with

$819,841.28 paid to Scott and $577,933.32 it paid to law firms that represent other

3 Count VI is also asserted against Robert W. Egizii, but those proceedings are stayed.

persons or entities. They also assert the constructive members committed

constructive fraud in various amounts.

Constructive fraud occurs when a transfer is made “without receiving a

reasonably equivalent value in exchange for the transfer or obligation,” and either

the debtor “was engaged in or was about to engage in a business or transaction for

which the remaining assets of the debtor were unreasonably small in relation to the

business transaction” or the debtor “intended to incur, or believed or reasonably

should have believed he would incur, debts beyond his ability to pay as they became

due.” 740 ILCS 160/5(a). The value of a reasonably equivalent transfer is

determined at the time the transfer was made. See In re McCook Metals, L.L.C., 319

B.R. 570, 579 (Bankr. N.D. Ill. 2005). The plaintiff must prove that the debtor

received less than reasonably equivalent value. See Barber v. Golden Seed Co., Inc.,

129 F.3d 382, 387 (7th Cir. 1997).

The Plaintiffs cite the testimony of Vince Toolen, the Borrower’s designated

corporate witness, who stated that “Mr. Egizii transferred over $3.5 million to four

different law firms because he was worried about the lender seizing the account[.]”

The Plaintiffs contend the Act exists to prevent transfers such as this.

All of the transfers occurred when the Borrower was insolvent. The Plaintiffs

note there is no rational purpose for SPP to have paid $3.2 million to the Law Firms

in 2013 and 2014, when SPP incurred legal fees of $5,577.60 in 2012. When the

Plaintiffs in December 2014 requested that the Law Firms turn over the trust funds,

the Scott and Londrigan firms claimed that the money was paid to them and

protected as advance payment retainers. In April 2015, the Plaintiffs sent another

letter demanding turnover of the trust funds only. Scott and Londrigan responded

that the funds were protected as advance payment retainers. The attorneys testified

at trial that they held security retainers, not advance payment retainers.

In Dowling v. Chicago Options Associates, Inc., 226 Ill.2d 277 (2007), the

Illinois Supreme Court warned that advance payment retainers could be abused in

cases where the debtor is resisting a creditor’s efforts to collect on a judgment: “We

are aware of the potential for abuse of advance payment retainers, particularly in

circumstances such as the instant case where a judgment debtor seeks to resist efforts

of a judgment creditor to collect on a judgment. No argument has been raised in this

case that the retainers paid to Piper were excessive in light of the services that the

parties anticipated Piper would render to Davis and Seibel.” Id. at 295.

At the time the $450,000 in advance payment retainers were paid in

September 2014, the Parties were discussing a potential settlement. The Law Firms

had been paid for all legal invoices to that point and had received $80,000 in

retainers. The Illinois State Court Foreclosure Case was filed in November 2014.

This case was not filed until June 2015. The Plaintiffs contend the Borrower thus

did not receive reasonably equivalent value at the time of the transfer.

The Defendants claim that the issue of whether attorney’s fees constituted

fraudulent transfers was decided in an August 16, 2016 Opinion and Order [d/e 48]

allowing the motion to dismiss of the Law Firm Defendants, when the Court held

that Plaintiffs have no right under Illinois law to Trust Funds and Retainer Funds

paid to the Law Firms before December 23, 2014, the date on which a receiver was

appointed. The Court stated, “Because the Plaintiffs had no right to the income prior

to the appointment of a receiver on December 23, 2014, the Borrower could not have

intended to defraud the Plaintiffs by transferring property to the Law Firms.” [d/e

28, at 49].

Two years later, in denying the Plaintiffs’ motion for leave to file a second

amended complaint, the Court reiterated that Plaintiffs could not assert constructive

fraudulent claims against the Law Firms: “The Court finds that the Plaintiffs have

alleged no new evidence showing a lack of reasonably equivalent value regarding

payments made. Accordingly, the fraudulent transfers claims fail for the same

reason.”

The Defendants further allege that because the Court has already determined

there was both reasonably equivalent value and no intent to defraud creditors, it

follows that the Constructive Members can have no liability for fraudulent transfers

related to those transfers. This is true even though the motion to dismiss the

fraudulent transfer claims as to SPP and the constructive members was denied in the

August 16, 2016 Order.

The Defendants note that, at the time the complaint was filed, the attorney’s

fees were only $149,000, while the advance payment retainers amounted to

$500,000. Since then, the circumstances have changed and attorney’s fees have been

incurred. The Defendants contend, therefore, that what might have seemed a

plausible fraud claim in 2016 is no longer viable.

At trial, Robert W. Egizii testified that SPP hired four law firms because the

law firm representing the Plaintiffs, Miller Canfield, had approximately 275 lawyers

and could overwhelm any single Springfield firm. Although only two lawyers from

Miller Canfield worked on the instant case, the Defendants note that ten attorneys

worked on the State Court Foreclosure Case for the Plaintiffs. Egizii testified the

Londrigan firm was hired so that Bud Potter could be the negotiator; the Sgro firm

was hired because of Greg Sgro’s real estate experience; the Scott firm was hired

due to Steve Scott’s bankruptcy experience; and David Neff of Perkins was hired

when Larry Selevan recommended that a national firm be retained. The four firms

collaborated and signed a Joint Defense Agreement.

The delivery of funds by what was then an insolvent SPP to Scott and

Londrigan to hold in trust certainly looks suspicious under all of the circumstances—

when the funds were later used to pay the Law Firms, other entities and the

constructive members. This is particularly true when compared with the amounts

expended on attorney’s fees in previous years. However, the existence of the trust

funds was disclosed at the time the Parties were engaged in settlement negotiations.

If an agreement was reached, the funds in the trust accounts would have been a major

component of the settlement. Each of the Defendants’ settlement proposals was

rejected by the Plaintiffs. The Plaintiffs contend the Defendants never had any

intention of settling, which is why Selevan was terminated when he believed the

Parties were on the verge of settlement. It was also during active settlement

discussions that retainers were distributed to the Law Firms and funds were

distributed to the constructive members.

At the time the trust funds were created, a receiver had not yet been appointed

so the Borrower was not precluded from contracting for legal services. When

settlement was not reached, the funds were used to pay for the legal fees. The Court

has no basis to question that SPP received reasonably equivalent value for the

attorney’s fees that were paid. There was testimony SPP hired each of the four firms

to perform different tasks. The four firms represented SPP from the date of default

through August 25, 2015.

(2)

After August 25, 2015, the Londrigan firm represented Robert W. Egizii, a

member of SPP, jointly with the constructive members. While the indemnity clause

of the SPP Operating Agreement creates a legal obligation for SPP to defend its

members such as Egizii, it would not appear to apply to the constructive members,

who are assigns of the direct members. Given that the Londrigan firm represented

Egizii simultaneously with the constructive members—none of whom were deposed

or called at trial and none of whom had a role in SPP’s management—any time spent

exclusively on the defense of the constructive members would have likely been

minimal.

Attorney Greg Sgro represented EPM and EEI jointly and pursuant to Defense

Counsel’s Joint Defense Agreement. It does not appear that SPP had a duty to

defend EPM under ¶6(d) of the Property Management Agreement because the

Parties’ dispute does not pertain to the management of the property. Attorney Sgro

testified it was for the benefit and protection of SPP that EPM and EEI be represented

in this case because of the alter ego allegations in the complaint. Because EPM and

EEI were alleged to be alter egos of SPP, a default judgment against EPM or EEI

would also constitute a default judgment against SPP. SPP thus received a benefit

from fees expended on EPM and EEI.

Based on the foregoing, the Court finds that SPP received reasonably

equivalent value from Londrigan’s and Sgro’s representation of the related parties—

the constructive members, EEI and EPM. Because it finds that SPP received

reasonably equivalent value for the attorney’s fees that were paid, the Court is unable

to conclude there was constructive fraud as to the attorney’s fees.

(3)

The Plaintiffs allege the Borrower did not receive reasonably equivalent value

for the $708,790.64 it distributed to the constructive members in 2014. Under 805

ILCS 25-30(a), a limited liability company may not distribute money while

insolvent. The Parties dispute whether the refunding bonds signed by the

constructive members promising to pay the money back if the expenses were not

ordinary and necessary expenses of operating the property constituted reasonably

equivalent value.

The Plaintiffs note that nothing in the Borrower’s Operating Agreement

mandates distributions. The Operating Agreement incorporates the Illinois Limited

Liability Company Act’s prohibition on distributions while insolvent.

There is no evidence that the constructive members delivered any tangible

assets or provided any services. The Defendants claim that the refunding bonds

signed by Robert Egizii and each constructive member before receiving the tax

distributions provided reasonably equivalent value at the time the transfers were

made. Attorneys Scott and Sgro testified that by obtaining a judgment, the Lender

could have obtained access to these funds in a citation proceeding.

Plaintiffs’ expert Jeffrey Johnston described the refunding bonds as a

“contingent asset, and the value of that asset would need to be considered in the

context of whether or not it constituted reasonably equivalent value.” Johnston

testified that while the refunding bond may have some value, it is not “reasonably

equivalent value” because of the “uncertainty associated with it.”

At the time of the transfers, the value of the refunding bonds was, at best,

speculative. Because consideration is valued at the time of the transfer, see McCook

Metals, 319 B.R. at 579, and there was no judgment against SPP at the time, any

consideration that the refunding bonds had was not then in a form available to

creditors and does not constitute reasonably equivalent value under the UFTA.

Accordingly, the Court concludes that SPP committed fraud in the amount of

$708,790.64 by distributing the funds to the constructive members in 2014 when it

was insolvent.

To the extent that Plaintiffs allege the constructive members are liable for

constructive fraud as transferees under 740 ILCS 160/9(b)(1) for receiving funds

from SPP for tax distributions, the Court disagrees. A member generally is not liable

for the debts or obligations of a limited liability company. See 180 ILCS 10/10(a).

A member may be liable if the articles of organization contain a provision

authorizing such liability and the member has consented or agreed to be bound by

the provision. See 180 ILCS 10/10(d). SPP’s Operating Agreement has no

provisions which makes SPP’s members or their assigns such as the constructive

members liable for any torts, debts or liabilities of the company.

The Plaintiffs rely on a recent Seventh Circuit case which confirmed that an

individual who is sued because of his individual acts as a participant in a fraudulent

scheme can be held liable, despite the language in the Illinois Limited Liability Act

That court stated:

Kaufman participated individually in each of the closings as counsel for the

seller. He also personally directed Traditional Title’s employees to conceal

the fraud from Fifth Third. In these dual roles he participated in the fraud for

his own personal gain. The judgment against Kaufman was not derived solely

from Traditional Title’s liability, based on his membership in the LLC.

Section 10-10 does not bar his liability here.

Fifth Third Mortgage Co. v. Kaufman, 934 F.3d 585, 589 (7th Cir. 2019).

The Plaintiffs claim the constructive members actively participated in the

conspiracy by signing the refunding bonds, with full knowledge of the Plaintiffs’

claims and the Borrower’s efforts to deprive Plaintiffs of their funds. Vince Toolen

had delivered the Plaintiffs’ March 2013 letter to the constructive members which

stated that Plaintiffs claimed a right in the rents.

As noted earlier, the constructive members as members of the members of

SPP are at best indirect members. However, the Court is unable to conclude that the

constructive members are at all similar to an attorney who actively participated in

and directed concealment of a fraudulent scheme at real estate closings as in

Kaufman. While the constructive members benefitted from SPP’s fraud, the

constructive members did not make the transfer and were passive actors. There is

no evidence they originated the plans to receive the distributions. Because of their

limited participation, the constructive members are not liable in Count VI for fraud.

The constructive members also are not liable for fraud under UFTA for the

same reason the Court determined in its August 15, 2016 Order that the Law Firms

had no liability for fraud. The Court noted that the Law Firms had not signed any

of the Loan Documents and had received pre-receivership rents. The constructive

members are in precisely the same position.

For the foregoing reasons, the Court concludes that the SPP’s constructive

members are not liable for constructive or actual fraud under UFTA.

(4)

On the eve of the final day of trial, the Plaintiffs sought to file an amended

complaint asserting fraud claims in Counts VI and VII against EPM and EEI based

on alter ego theories of liability. In the final Pretrial Order, the Plaintiffs assert

damages under Counts VI and VII alleging post-default fraudulent transfers to EPM

in the amount of $330,633.24. The Plaintiffs also claim that SPP’s failure to collect

rent from EEI amounted to a transfer of $1,003,800 for which SPP did not receive

reasonably equivalent value.

The Court notes that neither EPM nor EEI is listed as a Defendant in Counts

VI and VII of the Plaintiffs’ original complaint. The Plaintiffs’ motion for leave to

file an amended complaint was denied. To the extent that Plaintiffs pursue those

legal theories against EPM and EEI in their final briefs, the Court declines to find

that EPM and/or EEI are liable for fraud under Count VI and VII.

The Plaintiffs also now allege that the Borrower did not receive reasonably

equivalent value for the $15,000 advance payment in September 2014 to Pehlman

or the $15,000 Pehlman settlement that Borrower fully funded in February 2017.

Because these allegations were not included in the complaint, the Court declines to

find that the payments to Pehlman constituted fraud under Count VI and Count VII.

Actual fraud claims- Count VII

Count VII includes actual fraud claims. The Plaintiffs must prove actual fraud

under 740 ILCS 160/5(a)(1) by clear and convincing evidence. See Ray, 67 Ill.2d at

304. A debtor makes a transfer or incurs an obligation that is fraudulent to a creditor

when done “with actual intent to hinder, delay, or defraud any creditor of the debtor.”

740 ILCS 160/5(a)(1). Illinois recognizes the right of debtors to pay their attorneys

advance payment retainers before the debtor files for bankruptcy. See Dowling v,

Chicago Options Assocs., Inc., 226 Ill.2d 277, 289-290 (2007). Under such fees

arrangements, attorneys are required to promptly refund any unearned fees after the

representation concludes. See id. at 293.

To assist in determining actual intent, the statute contains a list of eleven non-

exhaustive badges of fraud, or factors that may be considered in determining whether

a transfer was made with the requisite intent. See In re Grube, 462 B.R. 663, 664

(C.D. Ill. 2012). A number of those badges of fraud under 740 ILCS 160/5(a)(1) are

present in this case. Some of the transfers were made to insiders—the constructive

members, EEI and EPM. Some transfers were concealed and not disclosed. SPP

had been threatened with suit and engaged in the transfers while insolvent.

Moreover, the transfers occurred soon after the Loan was accelerated.

The Plaintiffs must show it was highly probable that the attorney’s fees

payments and other transfers were made to defraud the Lender. The Plaintiffs point

to testimony that SPP’s intent in delivering money to Scott and Londrigan to hold in

trust was to affect settlement negotiations with Plaintiffs and/or pay its operating

expenses while avoiding paying Plaintiffs and thereby staying in business.

Plaintiffs’ expert Johnston testified that the only reasonable explanation for SPP’s

course of dealing around the time the retainers were paid and immediately prior to

the appointment of a receiver is that SPP was attempting to put its funds out of

Plaintiffs’ reach.

Certainly, there is some evidence of fraudulent intent. However, SPP’s

multiple settlement offers to Plaintiffs also suggests there was no actual or specific

intent to defraud the Lender. While the Court recognizes that Plaintiffs had to

investigate SPP’s financial position before accepting any settlement and no

settlement was reached, the offers tend to negate any actual intent to defraud the

Lender. In September 2014, SPP even paid $625,000 as a showing of good faith

during negotiations. While the Plaintiffs question SPP’s sincerity in pursuing

settlement, it was Plaintiffs who rejected the proposals. Although the offers were

not acceptable to the Plaintiffs, the Court has no basis to find that they were made in

bad faith.

Based on the foregoing, the Court finds that Plaintiffs cannot prove by clear

and convincing evidence that SPP’s transfers after becoming insolvent were done

with intent to defraud the Lender. Accordingly, the Plaintiffs have not proven the

Borrower committed actually fraudulent transfers as alleged in Count VII. To the

extent that actual fraud is asserted against the constructive members, the Court

concludes that Plaintiffs have not established by clear and convincing evidence that

constructive members committed actual fraud.

Alter ego claims

In Count I, the Plaintiffs also seek to pierce the corporate veil of SPP on the

basis that EEI and EPM function as a mere instrumentality, alter ego and agent of

SPP. The Plaintiffs assert that allowing EEI and EPM to maintain separate corporate

identities would result in injustice to Lender because of assets transferred from the

Borrower to the Lender.

“Generally, before the separate corporate identity of one corporation will be

disregarded and treated as the alter ego of another, it must be shown that it is so

controlled and its affairs so conducted that it is a mere instrumentality of another,

and it must further appear that observance of the fiction of separate existence would,

under the circumstances, sanction a fraud or promote injustice.” See Main Bank of

Chicago v. Baker, 86 Ill.2d 188, 205 (1981). To pierce the corporate veil, Plaintiffs

must establish the following elements: (1) there must be such unity of interest and

ownership that the separate personalities of the corporations no longer existed; and

(2) the adherence to the fiction of separate corporate existences would sanction a

fraud. See Van Dorn Co. v. Future Chem. & Oil Corp., 753 F.2d 565, 569-70 (7th

Cir. 1985). “[P]iercing of the corporate veil on an alter ego theory is available only

where failing to provide such relief would promote injustice or inequity.”

International Financial Services Corp. v. Chromas Technologies Canada, Inc., 356

F.3d 731, 737 (7th Cir. 2004).

(1)

The Defendants note alter ego liability in breach of contract cases is a very

difficult standard to meet, especially when the contracting parties knew of the

common ownership at the time of contracting. The Lender approved the

organizational documents for each entity. EEI was involved in the electrical

contracting business; EPM managed real estate for SPP and other properties and SPP

owned the real estate at issue.

The Plaintiffs state that because of the potential for abuse, it was very

important that the entities maintain arms-length relationships. Therefore, the

Borrower’s Agreement and the Mortgage documents contain provisions which

include safeguards that must be observed for the Borrower to maintain its separate

identity.

There was testimony at trial that the three entities kept separate bank accounts,

separate books, separate stationery, filed separate tax returns, they did not

commingle funds; SPP and EPM kept their records in separate filing cabinets, EEI

kept its records in a separate office, EEI had a separate accounting system, servers

and logins. EEI employees examined the bills for legal fees to ensure that SPP only

paid legal bills attributable to SPP. Vince Toolen, who was the corporate witness

under Federal Rule of Civil Procedure 30(b)(6) for each of the three entities, testified

that SPP treated EEI the same as any other contractor that provided services to it.

EEI and SPP were both insolvent after 2012 and there was also testimony that

safeguards were not always observed. SPP and EPM both occupied a portion of the

space leased to EEI at 700 North McArthur. Neither had a sublease or paid rent.

The three entities all shared the same administrative staff: Linda Wells, Julie

Farrington/Long and Theresa Pennington. All were employed and paid by EEI but,

according to Toolen, performed work for the Borrower “on a daily basis.” They

entered SPP’s accounting information into the computer. They directed the Law

Firms on how to dispose of funds in SPP’s trust accounts. Toolen testified they

helped him locate materials to respond to the Borrower’s discovery requests. The

three entities kept their books and records in the same office.

(2)

Vince Toolen testified he worked as an “independent contractor” for EPM,

though he did not receive his paycheck from EPM. EPM had no employees. Toolen

testified that in order to get paid, he would invoice whichever of Egizii’s properties

he happened to be working for, such as SPP. He would then give the invoice to one

of EEI’s administrative employees who would obtain Egizii’s approval for payment.

Toolen spent approximately 90% of his time in the same office where the three

entities were all located.

At different times, Toolen held himself out as “Borrower’s Executive

Assistant,” when he advocated for a rent reduction on behalf of EEI, and Borrower’s

“Leasing Manager,” when communicating with the Plaintiffs’ representatives about

the Loan. On one occasion, he directed an EEI employee, Theresa Pennington, to

prepare a check to the Plaintiffs from the Borrower’s checking account to effect a

reduction in EEI’s rent, under EPM’s signature. Toolen testified he had access to

EEI’s financials as well as SPP’s. He reviewed SPP’s accounting information at the

end of each month.

Susan Wesp, EEI’s CFO from June 2008 to November 2013, testified she was

a signatory on EEI’s checking account and also an authorized signatory on the

Borrower’s checking account. Robert W. Egizii testified Wesp was an authorized

signatory for SPP because he was often away from the office and it was more

convenient. Wesp also helped Toolen respond to the Plaintiffs’ inquiries relating to

the Egizii portfolio. Wesp testified she also helped out with EPM if needed.

Vince Toolen testified he did not see a conflict with EEI’s CFO assisting with

SPP and described it as “free help.” This was around the time that EEI requested a

rent reduction. Egizii testified Wesp also provided information about SPP to Larry

Selevan, SPP’s workout representative. During this period, Egizii and Wesp

appeared to be the only officers or directors who played an active role for EEI.

(3)

The record establishes that each of the three entities was undercapitalized.

Undercapitalization is an important factor in determining whether the corporate

entity should be disregarded. See Fentress v. Triple Min., Inc., 262 Ill. App.3d 930,

938 (4th Dist. 1994). Plaintiffs’ expert Johnston testified that “[u]ndercapitalization

refers to the inability to pay debts as they become due, either presently or in the

future . . . due to a lack of capital.” Johnston strongly believed SPP was

undercapitalized at least from 2012 on. The Borrower reported losses on its tax

returns in 2012 and 2014 and would have in 2013 if it had paid interest to the

Plaintiffs.

Johnston also testified that EEI was undercapitalized. The evidence showed

that EEI requested a number of rent reductions for the space it occupied at 700 North

MacArthur and eventually stopped paying rent altogether. EEI’s business was

failing due to the poor economy. It reported losses on its tax returns in 2012, 2013

and 2014.

EPM was also undercapitalized and claimed a loss on its taxes for years 2013

and 2014.

This resulted in the financial interdependence of the entities. Johnston noted

that EEI was financially dependent on SPP because it owed rent to SPP and relied

on the Borrower’s grant of rent reductions. EEI owed the Borrower $325,000 in

annual rent and paid nothing in 2013 or 2014. EPM was tasked with enforcing leases

under the Management Agreement, though neither SPP nor EPM ever demanded

payment from EEI or sought eviction. EPM was financially dependent on the

Borrower.

(4)

The record also shows that none of the entities observed corporate formalities.

When the membership of SPP changed, it was not documented in the Operating

Agreement as required. The Operating Agreement provided that SPP shall hold

regular meetings. Toolen had no knowledge of regular meetings.

Section 8 of the Operating Agreement only permits distributions “[t]o the

fullest extent allowed by the Illinois Limited Liability Company Act[.]” The

Borrower did not issue distributions until it was insolvent in 2014. In 2014, it made

distributions to the constructive members, rather than SPP’s actual members.

Vince Toolen testified he and EEI employees Linda Wells and Susan Wesp

all had access to Borrower’s financials. Section 13(d) of the Operating Agreement

states that Borrower shall “hold itself out to creditors and to the public as a legal

entity separate and distinct from any other entity.” It was also to “correct any known

misunderstandings regarding its separate identity.” However each officer, director

and employee of EEI, EPM and Borrower—including Egizii, Toolen, Wesp, Wells,

Farrington/Long and Pennington, used @eeiholding.com as their email domain,

thereby holding themselves out to the public as EEI employees. This confused the

Plaintiffs, who addressed two separate letters in February 2013 intended for the

Borrower to EEI employees Wesp and Wells.

All three entities used the same accounting firm, Pehlman, and EEI employees

communicated with Pehlman regarding all three entities.

In sum, SPP never held itself out to third parties as separate from the other

entities. Moreover, the officials who were affiliated with any of the entities also did

not treat SPP as separate from EEI and EPM.

EEI’s actions also did not reflect any provisions of its by-laws. Neither

Toolen nor Wesp recalled any formal meetings.

EPM did not have a formal operating agreement. It held no formal meetings

and kept no minutes of meetings.

EPM made no distributions but paid $314,914 and $277,641 in 2013 and 2014

to Egizii, its 85% owner, for “contract labor.”

(5)

The record shows that at times, the three entities did not keep each other at

arm’s length as required under Illinois law and Section 13(g) of the Borrower’s

Operating Agreement.

When EEI’s lease began in 1998, Robert W. Egizii signed individually as

Lessor and also signed for Egizii Electric, one of EEI’s divisions. In the amendment

in 2002, Egizii signed as CEO of Egizii Electric and individually as Lessor. In Lease

Amendment No. 2 in 2006, Egizii signed as CEO of Egizii Electric and Manager of

700 North MacArthur, LLC. Lease Amendment No. 3 was signed in 2009 by Egizii

as President of Springfield Prairie Properties SPE, Inc., as Manager on behalf of

Borrower, and Wesp signed on behalf of EEI.

The leases show that Egizii was in control of both landlord and tenant. The

lease amendments do not recite anything about the landlord changes from Egizii,

individually, to 700 North MacArthur, LLC to Borrower. Toolen testified he was

unaware of any assignments of the initial lease. This suggests that before 2011 SPP,

EEI and EPM were not operating at arm’s length.

Lease Amendment No. 3 reduced EEI’s monthly rent from $27,100 to

$22,000 per month for a two-year period, at the end of which rent would return to

$27,100 per month. When the period expired in September 2011, SPP left rent at

$22,000 per month. Neither the Borrower nor EEI requested an extension of the rent

reduction. This cost SPP more than $60,000 over the year that followed.

Lease amendments required the Plaintiffs’ approval after the loan was made.

When the Borrower sought approval for Lease Amendment No. 3 in 2009, Toolen

signed the letter as SPP’s executive assistant, even though he was an independent

contractor for EPM. EPM’s Management Agreement did not contemplate EPM

representing SPP in dealing with the Plaintiffs. Toolen spoke for the Borrower in

advocating for a rent reduction for EEI. The Plaintiffs approved Lease Amendment

No. 3, not knowing that Toolen was not actually employed or engaged by Borrower.

On October 31, 2012 Toolen, while acting as “Leasing Manager” for SPP,

wrote to the Plaintiffs asking to cut EEI’s rent in half from $22,000 to $11,000 per

month, even though the rent should have returned to $27,100 per month more than

one year earlier. Toolen’s letter regarding cutting EEI’s rent to $11,000 per month

does not include any discussion of whether the property could be re-leased and at

what rate. Susan Wesp, who signed the letter for EEI requesting a rent reduction,

was consulted regarding market conditions. Toolen testified that SPP never hired a

broker to market 700 North MacArthur for lease in order to try to find a tenant who

might pay a higher rent than EEI. The Plaintiffs did not approve the amendment

request because a further reduction would have worsened the Borrower’s precarious

financial position.

Even though it was not approved by the Plaintiffs and neither SPP nor EEI

signed the lease documents, SPP reduced EEI’s rent obligation on SPP’s books to

$11,000 per month beginning on January 1, 2013. However, EEI stopped paying

rent altogether on January 1, 2013. Toolen testified that the reason EEI stopped

paying rent was to prompt the Plaintiffs to negotiate with SPP about the Loan. EEI

had a contract with SPP and it would not be an appropriate negotiation tool for a

third party to default to force settlement discussions.

Following EEI’s default, neither the Borrower nor EPM demanded payment

from EEI or sought to evict it from 700 North MacArthur. EEI stayed on site for

two years after defaulting until a receiver was appointed without paying any rent to

SPP. This cost the Borrower $650,000. During the same period, SPP paid EEI more

than $350,000 for EEI’s services without ever offsetting against rent. SPP even

provided a $55,000 credit against its back due rent.

As with EEI, SPP gave rent reductions to McLeod in an effort to keep them

as a tenant. Thus, some evidence was presented that another entity was treated

similarly to EEI. Toolen testified it was in SPP’s economic interest to reduce EEI’s

rent because other tenants were not available. The $7,400 per month in utilities paid

by EEI would otherwise have been SPP’s responsibility.

Toolen testified that other State of Illinois tenants were in default and the

Borrower had to treat all tenants the same. He stated EEI was not evicted for that

reason. However, the State did not fail to pay entirely. The State was in arrears but

paid some of the funds it owed during the two years EEI paid nothing. As Plaintiffs’

expert Johnston testified, moreover, it was a failure of corporate formalities for

neither SPP nor EPM to enforce EEI’s lease.

There were also loans to Robert Egizii and Egizii Family Limited Partnership

(composed of Egizii and his children) which were reflected on EPM’s financial

statements, including its tax returns for 2012-2014 and its balance sheets. Loans to

Egizii Family Limited Partnership appear on EPM’s financial information but no

documents were produced and no one could identify the loans or their terms.

The record showed there was commingling of funds among the three entities.

Wesp acknowledged it would be commingling if SPP was paying the bills of EEI.

SPP was also required under the Operating Agreement to “maintain books and

records and bank accounts separate for any other person.” The evidence showed that

Borrower paid the expenses of other entities. SPP paid $350 annually for corporate

fees of RWE of Illinois, LLC and RWE of Springfield, Inc. It paid $650 to Pehlman

for an EEI invoice. It paid EEI’s $3,000 portion of a legal invoice issued by

Londrigan. In February 2017, the Borrower paid all of a settlement payment to

Pehlman which resolved over $20,000 in obligations owed by non-Borrower entities,

$8,495.20 of which was owed by EEI. SPP also paid legal fees incurred to defend

EEI and EPM. EEI paid Egizii’s initial retainer to the Perkins firm.

(6)

Because of these actions diverting money among the three entities, the

Plaintiffs were deprived of significant funds. Robert W. Egizii personally received

$415,037.21 in distributions from the Borrower while it was insolvent. The

constructive members received another $293,753.43. Egizii received almost

$400,000 in annual salary from EEI during the time that EEI paid no rent. Egizii

personally received $211,546, $314,914 and $277,641 from EPM as “Contract

Labor” fees in 2012, 2013 and 2014, respectively, which is consistent with EPM’s

gross receipts of $232,485, $317,957 and $277,776 in the same years. Egizii and

the Egizii Family Limited Partnership owed loans to EPM that were never

documented or paid. These actions contributed to draining SPP of money, while

placing significant funds in Egizii’s pocket along with those of his family and

friends.

Based on the evidence presented at trial, the Court finds, therefore, under

Count I that SPP, EEI and EPM are alter egos of one another. The entities included

the same employees, paid by EEI exclusively. All three entities worked out of the

same office, which was leased exclusively to EEI. EEI’s officers and directors acted

for all three entities and all three utilized the same designated corporate witness.

None held regular meetings or kept corporate minutes. SPP did not document

transfers of its membership interests from 700 North MacArthur, LLC to Robert

Egizii or from Marco Partnership to Marriot Commerce Building, LLC. Each entity

used the same email domain and otherwise held themselves out as one entity. When

the Borrower and EEI became insolvent and were unable to pay their regular

obligations—for the Loan and Lease, respectively—as they came due, SPP and EEI

commingled funds by paying for one another’s obligations, particularly legal

expenses. The Parties failed to maintain arms-length relationships. SPP and EPM

failed to enforce the terms of EEI’s lease, EPM did not perform the management

services required under its contract with SPP, among other things.

The Court further concludes that respecting the corporate form of SPP, EEI

and EPM would work a fundamental injustice. The breach of corporate formalities

and arms-length dealings systematically deprived SPP of funds by overpaying

management fees and underpaying rent without enforcing the terms of the lease. At

the same time, SPP engaged in other activities designed to deprive the Plaintiffs of

any recovery on their Notes. In 2013 and 2014, EEI paid a nearly $400,000 per year

salary to Egizii; EPM paid $592,555 to Egizii as “Contract Labor” fees, and SPP

distributed $415,037.21 to Egizii. Accordingly, EEI and EPM are jointly and

severally liable as alter egos for the amounts for which the Borrower is liable on

Count I.

Civil conspiracy

(1)

In Count VIII, the Plaintiffs allege civil conspiracy claims as to all

Defendants, contending that two or more of the Defendants knowingly conspired in

a common scheme or plan to place the assets of Borrower, Egizii or both outside of

the reach of creditors such as the Lender—by engaging in collateral transfers and

lease transactions. The Plaintiffs assert the Borrower did this to avoid its obligations

to its creditors. They further contend this was accomplished through unlawful

means, including breaching contractual obligations, breaching the Illinois Limited

Liability Company Act and engaging in fraudulent transfers.

Illinois law defines civil conspiracy as “(1) a combination of two or more

persons, (2) for the purpose of accomplishing by some concerted action either an

unlawful purpose or a lawful purpose by unlawful means, (3) in the furtherance of

which one of the conspirators committed an overt tortious or unlawful act.” Fritz v.

Johnston, 209 Ill.2d 302, 317 (2004). “The participants in the conspiracy must share

the general conspiratorial objective, but they need not know all the details of the plan

designed to achieve the objective or possess the same motives for desiring the

intended conspiratorial result.” Lenard v. Argento, 699 F.2d 874, 882 (7th Cir.

1983).

The Defendants claim that SPP, its members and constructive members, EEI

and EPM cannot conspire with each other because a corporation cannot conspire

with its agents. The general rule is that there cannot be conspiracy between a

principal and an agent because the acts of the agent are considered in law to be acts

of the principal. See Buckner v. Atlantic Plant Maintenance, Inc., 182 Ill.2d 12, 24

(1998). An exception to the general rule is when the interests of a separately

incorporated agent diverge from the interests of the corporate principal and the agent

at the time of the conspiracy is acting beyond the scope of his authority or for his

own benefit, rather than that of the principal. See Bilut v. Northwestern University,

296 Ill. App.3d 42, 49 (1998) (citing Pink Supply Corp. v. Hiebert, 788 F.2d 1313,

1317 (8th Cir. 1986)). The second exception is when the agent is acting not as an

agent but as a principal, in which case the agent can be liable for conspiring with the

principal. See Bilut, 296 Ill. App.3d at 49 (citing Morrison v. Murray Biscuit Co.,

797 F.2d 1430 (7th Cir. 1986)).

Because the constructive members are not actually members of SPP, the Court

is unable to conclude that the civil conspiracy claims asserted against them are barred

by the Illinois Limited Liability Company Act. By signing the refunding bonds three

different times, each of the constructive members were aware that they were required

to refund the distributions due SPP’s obligations to Plaintiffs pursuant to the Loan

Documents. The refunding bonds signed by the constructive members expressly

state that Plaintiffs may have a claim under the Note and Guaranty to the money

being distributed.

However, the Court is unable to conclude that Plaintiffs have proved by clear

and convincing evidence that the constructive members were part of a conspiracy to

place the Borrower’s assets out of the reach of the Lender. The constructive

members may have believed that SPP received equivalent value based on their

promise to repay the full amount upon the Plaintiffs obtaining a judgment. As the

Court earlier noted, the constructive members were passive actors. Because it is

unknown precisely whether the constructive members knew of an unlawful purpose

or a lawful purpose by unlawful means, the Court concludes that Plaintiffs have not

established wrongful conduct sufficient to establish civil conspiracy as to the

constructive members.

(2)

The Court does find that Plaintiffs have established by clear and convincing

evidence that SPP, EEI and EPM actively participated in and engaged in a concerted

action for an unlawful purpose by breaching SPP’s contracts with the Plaintiffs.

SPP, EEI and EPM were aware that Borrower claimed a right to the rents dating

back to at least April 2013. Specifically, each of the entities knew because Egizii

had major roles with each—as EEI’s primary stockholder, as EPM’s majority

member and he received the Demand Letter sent to SPP. The evidence showed that

other individuals who acted on behalf of the entities—such as Susan Wesp and Vince

Toolen—had also seen the Demand Letter and acted pursuant to it.

EEI and EPM ensured that EEI’s rent was booked at reduced rates and that

EEI occupied 700 North MacArthur without paying any rent at all. EEI never paid

$1 million in rent. Each collected significant money from SPP after SPP’s default.

SPP also paid significant funds to EEI’s divisions against the rent that EEI owed

without ever offsetting the amounts against the rent that EEI owed Borrower. All of

this resulted in less income and more expenses for SPP, which deprived the Plaintiffs

of funds to which they were entitled pursuant to the Loan Documents.

Because EEI and EPM were acting for their own benefit to the detriment of

SPP, the Court is unable to conclude that the conspiracy claims are barred because

of a principal-agency relationship.

The Plaintiffs have established civil conspiracy by clear and convincing

evidence as to SPP, EEI and EPM. The result was those Defendants paid themselves

instead of the Plaintiffs in violation of the contracts. Accordingly, the Plaintiffs are

entitled to Judgment on Count VIII as to the civil conspiracy claims asserted against

SPP, EEI and EPM for the amount for which SPP is liable under the terms of the

Note.

III. CONCLUSION

To the extent that Defendants rely on laches, failure to mitigate damages

and/or equitable estoppel, the Court finds upon considering all of the evidence that

none of those affirmative defenses bar the Plaintiffs’ claims.

Under Count I, based on the Court’s prior Opinion [d/e 173] and the evidence

in the record and pursuant to the terms of the Note, the Court finds that the Plaintiffs

are entitled to Judgment against the Borrower in the amount of $31,380,470.40, plus

$7,093.82 per diem through the date of Judgment, plus interest at the federal rate

thereafter. EEI and EPM are jointly and severally liable for those amounts as alter

egos of SPP.

Under Count II, pursuant to the terms of the Note, the Court finds that SPP is

liable for $2,771,917.45 in post-default rental income that was not delivered to

Plaintiffs.

Counts III and IV are asserted solely against Defendant Robert W. Egizii. The

proceedings are stayed against Defendant Egizii pursuant to his bankruptcy filing.

The claims pursuant to the Illinois Limited Liability Act in Count V were

previously dismissed.

Under Count VI, the Court finds that Borrower committed constructively

fraudulent transfers in the amount of $708,790.64 based on distributions to the

constructive members without having received reasonably equivalent value. The

constructive members are not liable for constructive fraud. The Court is unable to

find that SPP’s other transfers constituted constructive fraud. Moreover, the Court

did not consider any claims that were not asserted in the original complaint.

Under Count VII, the Court is unable to find by clear and convincing evidence

that the Borrower and Members committed actual fraud.

Under Count VIII, the Court finds that SPP, EEI and EPM are liable for civil

conspiracy. The Court does not find by clear and convincing evidence that the other

Defendants are liable for civil conspiracy.

The tortious interference with contractual rights claims asserted against EEI

in Count IX were dismissed prior to trial.

Ergo, the Clerk will enter Judgment in favor of Plaintiffs and against

Defendant Springfield Prairie Properties, LLC, on Count I in the amount of

$31,380,470.40, plus $7,093.82 per diem since March 28, 2013, through the entry

of Judgment, plus interest at the federal rate thereafter.

As to Count I, Judgment will also be entered against Defendants EEI Holding

Corporation and Egizii Property Managers, LLC, who are jointly and severally liable

as alter egos of Springfield Prairie Properties, LLC, in the amount of

$31,380,470.40, plus $7,093.82 per diem since March 28, 2013, through the date of

Judgment, plus interest at the federal judgment rate thereafter.

The Clerk will enter Judgment in favor of Plaintiffs and against Defendant

Springfield Prairie Properties, LLC, on Count II in the amount of $2,771,917.45.

Because of the stay as to the continuation of any judicial proceeding against

Defendant Robert W. Egizii, no Judgment will enter as to Counts III and IV.

The claims asserted in Count V were previously dismissed.

The Clerk will enter Judgment in favor of the Plaintiffs and against Defendant

Springfield Prairie Properties, LLC, on Count VI in the amount of $708,790.64.

The Clerk will enter Judgment in favor of the Defendants and against the

Plaintiffs as to Count VII.

As to Count VIII, the Clerk will enter Judgment in favor of the Plaintiffs and

against Defendants Springfield Prairie Properties, LLC, EEI Holding Corporation

and Egizii Property Managers, LLC, jointly and severally, in the amount of

$31,380,470.40, plus $7,093.82 per diem since March 28, 2013, through the entry

of Judgment, plus interest at the federal rate thereafter.

The claims asserted in Count IX were previously dismissed.

The Clerk will also enter Judgment pursuant to the Order [d/e 28] allowing

the Motion to Dismiss of Defendants Londrigan, Potter & Randle, P.C., Perkins

Coie, Scott & Scott, P.C. and Sgro, Hanrahan, Durr & Rabin.

Upon entry of Judgment, the Clerk will terminate this case.

IT IS SO ORDERED.

ENTER: March 15, 2021

FOR THE COURT:

/s/ Richard Mills

Richard Mills

United States District Judge