Semir Sirazi, et al v. General Mediterranean Holding,, et al
Filing
Filed opinion of the court by Judge Posner. AFFIRMED IN PART and REVERSED IN PART. William J. Bauer, Circuit Judge; Richard A. Posner, Circuit Judge and Ann Claire Williams, Circuit Judge. [6759649-1] [6759649] [15-3655, 15-3505]
Case: 15-3655
Document: 48
Filed: 06/20/2016
Pages: 9
In the
United States Court of Appeals
For the Seventh Circuit
____________________
Nos. 15‐3655, 15‐3505
SEMIR D. SIRAZI, GREENSTONE CAPITAL, L.L.C., and MARDINI,
INC.,
Plaintiffs‐Appellees, Cross‐Appellants,
v.
GENERAL MEDITERRANEAN HOLDING, SA, and ORIFARM, SA,
Defendants‐Appellants,
and
NADHMI AUCHI,
Defendant, Cross‐Appellee.
____________________
Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 12 C 653 — William T. Hart, Judge.
____________________
ARGUED MAY 23, 2016 — DECIDED JUNE 20, 2016
____________________
Before BAUER, POSNER, and WILLIAMS, Circuit Judges.
POSNER, Circuit Judge. The dramatis personae of this com‐
plex commercial case (a diversity suit governed by Illinois
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law) are as follows: Plaintiff Sirazi owns or controls the other
two plaintiffs, and to simplify we’ll treat him as the sole
plaintiff. General Mediterranean Holding (usually referred
to as GMH) is the principal defendant and appellant and the
parent of defendant Orifarm, which has been dissolved and
so can be ignored. Defendant Auchi is the owner and board
chairman of GMH. A jury awarded Sirazi compensatory
damages of $12.9 million against GMH and Auchi together,
and punitive damages of $5 million against each of them,
although the judge set aside the award against Auchi, pre‐
cipitating Sirazi’s cross‐appeal.
Antoin Rezko, who is not a party to the suit but played a
key role in the events leading up to it, was until 2006 a high‐
ly successful Chicago businessman, specializing in real es‐
tate. That year he was indicted for fraud, bribery, and other
crimes, and his trial on those charges in 2008 resulted in his
being convicted and sentenced to prison.
In the halcyon years that preceded Rezko’s fall from
grace, Sirazi had helped him finance real estate investments.
Among other assists Sirazi had guaranteed a $5 million loan
to Rezko from Republic Bank. The loan came due in 2006,
when Rezko was, and for several years had been, in default
on millions of dollars that he’d borrowed from Sirazi.
A year earlier Rezko had caused a valuable Chicago
property that he controlled to be sold to GMH. A company
was formed named Riverside District Development, LLC,
owned half by GMH and half by Heritage Development
Partners, LLC, to hold title to the property. Rezko was the 80
percent owner of Heritage and thus a 40 percent owner of
the property, which Heritage was made responsible for
managing and developing. The salaries of Heritage’s presi‐
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dent and CEO (Michael Rumman) and general counsel (Ed‐
ward Wynn) were paid indirectly by GMH, which had
moreover expressly approved Heritage’s hiring Wynn as
general counsel.
In 2006 Sirazi and Rezko signed a settlement agreement
in which Rezko agreed that he owed Sirazi $7.7 million. He
also agreed to repay his $5 million loan from Republic Bank
by May 17 (so that Sirazi’s guaranty would be released),
though the agreement permitted him in the alternative to
negotiate an extension of his loan from Republic Bank or to
assign the loan to Mutual Bank and repay it by July 17,
though in that event he’d be required to pay Sirazi an addi‐
tional $100,000 fee. The settlement agreement also gave Sira‐
zi a security interest in all distributions from Rezko’s in‐
vestment in Heritage and committed Rezko to a priority or‐
der for paying off debts to Sirazi and other creditors from
proceeds of Rezko’s investment in Heritage.
In July, having repaid the Republic Bank loan with a loan
from Mutual Bank, Rezko defaulted on Mutual’s loan, trig‐
gering Sirazi’s guaranty; Sirazi accordingly paid Mutual $5.1
million. Rezko now owed him $12.9 million: $7.7 million +
$5.1 million + $100,000, and with mounting interest on these
debts.
Meanwhile GMH had decided that since Rezko was now
a criminal defendant, his involvement in Heritage reflected
poorly on GMH, which therefore decided to buy him out for
a small amount of cash but a large amount of debt for‐
giveness. There was a certain awkwardness in the decision,
given Sirazi’s security interest in all distributions from Rez‐
ko’s investment in Heritage; some of the proceeds of a sale of
Rezko’s interest in Heritage should therefore have gone to
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Sirazi rather than to Rezko to be applied to his debt to GMH.
But with the acquiescence and assistance of Heritage general
counsel Edward Wynn, it was decided in the presence and
with the approval of Auchi, GMH’s chairman, that in deal‐
ing with Rezko GMH would ignore Sirazi’s interest. A strat‐
egy memorandum sent by Heritage’s president, Rumman, to
a senior official of GMH named Al‐Miqdadi, advised: “Do
nothing with regard to the potential Sirazi claim. … This
claim, if made, would be litigated.” It was made, and it has
been litigated—in this case.
GMH claims to have been unaware that Rezko had
committed to pay Sirazi as soon as he obtained proceeds
from selling his Heritage shares. But there was enough evi‐
dence to entitle the jury to find that it was aware. Wynn and
Rumman had a copy of the settlement agreement, and Wynn
emailed Rumman that Rezko could not sell his shares with‐
out paying off his obligations to Sirazi. A conference call,
with Auchi and Al‐Miqdadi participating, was held to dis‐
cuss the matter. Al‐Miqdadi testified that the participants in
the call agreed that the settlement agreement was invalid.
But the jury was entitled to reject his testimony, and to infer
that Wynn had communicated to GMH the opinion stated in
his emails that Rezko could not lawfully sell his shares with‐
out first repaying Sirazi.
After the conference call Auchi asked GMH’s board to
approve the decision to buy out Rezko’s interest in Heritage,
which the board did (unsurprisingly, since Auchi owns 100
percent of GMH). The proceeds of the sale—$31.8 million,
though most of it was in debt forgiveness rather than cash—
would, had they been cash, have been more than sufficient
to repay Sirazi the entire $12.9 million that Rezko owed him;
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and that was the amount the jury awarded Sirazi in compen‐
satory damages.
All this makes the jury’s verdict against GMH seem un‐
exceptionable; and most of GMH’s contrary arguments,
which are both hypertechnical and more suitable for resolu‐
tion by a factual inquiry at a trial than on appeal, do not re‐
quire discussion. But two do. Both are based on a provision
of the settlement agreement between Sirazi and Rezko which
states that “within three (3) days following Rezko’s receipt
of all or any portion of the Distributions [a term so broadly
defined in the agreement as to encompass all proceeds from
the sale of Rezko’s shares of Heritage], Rezko shall pay, ap‐
ply and disburse such distributions as follows:” first, re‐
payment of the loan that Republic Bank had made to him;
second, repayment of his other liabilities up to $14.25 million
(including the Republic loan); next, $4.7 million of repay‐
ment to Sirazi; then repayment of other liabilities, up to $10.5
million; and finally “twenty five percent (25%) of … such
Distributions to Sirazi.” According to GMH, the previously
listed obligations of Rezko would leave very little for Sirazi’s
25 percent share of distributions received by Rezko from the
sale of his stock in Heritage.
GMH valued Rezko’s holdings in Heritage at $31.8 mil‐
lion, far more than the $12.9 million that Rezko owed Sirazi
(not including interest). But there was a hitch: as we said,
Rezko hadn’t received anywhere near $31.8 million in cash
for giving up his Heritage holdings to GMH. Owing GMH
as he did more than $26 million, he received only about $5
million, most of which went to pay for the defense of the
criminal case against him. The balance of the $31.8 million
thus consisted of forgiveness of Rezko’s debt to GMH.
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GMH argues that only money actually received by Rezko
can be deemed “proceeds” owed Sirazi under the settlement
agreement, and therefore that Rezko could not pay Sirazi
from his deal with GMH because the deal had yielded Rezko
only $5 million in actual money. One might think that if
Rezko’s holdings in Heritage were indeed worth $31.8 mil‐
lion (which the jury was entitled to believe on the basis of
GMH’s book valuation and the opinion of Sirazi’s expert,
discussed below), he should have been able to repay Sirazi
$12.9 million. The reason he couldn’t is that he’d lost control
of the $31.8 million, first because of his large debts to GMH
and second because of the desperation that enveloped him
when he was prosecuted, inducing him to give up his prop‐
erty in exchange for the relatively modest amount of cash
that he needed in order to pay his lawyers. It probably was a
matter of indifference to him whether he conferred the value
obtained from his investment in Heritage on GMH or on Si‐
razi; but in fact he owed a significant part of it to the latter
rather than all of it to the former.
Rezko’s investment in Heritage might have been worth
$31.8 million to him had he found a cash buyer, and in that
event he could have repaid Sirazi. But because he either
couldn’t find such a buyer or didn’t look for one, he was able
to obtain only the $5 million in cash from GMH. The remain‐
ing $26 million may seem to have been an entirely phantom
number: forgiveness for debts he couldn’t pay. It would not
belong in “proceeds” of his deal with GMH unless for‐
giveness conferred some benefit on Rezko. Debt is a cost,
cancellation of a debt therefore a benefit, but how great a one
in this case is unknown. But because Sirazi’s expert witness
testified that the entire $31.8 million should be treated as
proceeds, to conform to general accounting principles, and
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because GMH provided no alternative expert estimate of the
value of the debt forgiveness to Rezko, the jury was entitled
to treat the entire $31.8 million as proceeds.
Rezko breached the settlement agreement by failing to
pay Sirazi anything, and the jury could as it did find GMH
liable for tortious interference with contract because it in‐
duced Rezko to flout his agreement to repay Sirazi. But Sira‐
zi’s suit also charges GMH with unjust enrichment and con‐
spiracy, and this may seem piling on unjustly. But it isn’t. A
person or firm can tortiously interfere with a contract with‐
out obtaining any money from his tort. But GMH did obtain
money from defrauding Sirazi, by deflecting to itself money
owed Sirazi. It was thus enriched unjustly. Likewise it con‐
spired with Rezko to transfer his property to it without pay‐
ing anything to Sirazi, thus further deflecting to GMH mon‐
ey owed Sirazi. As there was no possible excuse for the de‐
liberate misconduct, amounting to theft, in which GMH en‐
gaged, there is no basis for overruling the jury’s award of $5
million in punitive damages against GMH.
GMH challenges the amount of compensatory damages
that the jury awarded Sirazi. It argues that the settlement
agreement did not require Rezko to repay Sirazi, out of the
proceeds of Rezko’s sale of his interest in Heritage, for Sira‐
zi’s having repaid Mutual Bank after Rezko defaulted on his
$5 million bank loan. The settlement agreement had Rezko
assigning the Republic Bank loan to Mutual Bank in order to
extend the deadline for repayment, yet instead Rezko had
repaid the Republic Bank loan out of a new loan he obtained
from Mutual Bank, also with Sirazi’s guaranty. But to allow
Rezko to avoid his obligation to Sirazi (to the benefit of
GMH) because he refinanced the loan rather than having it
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assigned would be to embrace a distinction without a differ‐
ence, contrary to Illinois contract law. See Gallagher v. Lenart,
874 N.E.2d 43, 58 (Ill. 2007); Medcom Holding Co. v. Baxter
Travenol Laboratories, Inc., 984 F.2d 223, 226 (7th Cir. 1993)
(Illinois law). ”[A] contract will not be interpreted literally if
doing so would produce absurd results, in the sense of re‐
sults that the parties, presumed to be rational persons pursu‐
ing rational ends, are very unlikely to have agreed to seek.”
Beanstalk Group, Inc. v. AM General Corp., 283 F.3d 856, 859–
60 (7th Cir. 2002) (Indiana law).
GMH’s last argument is that the $12.9 million award of
compensatory damages should have been offset by the
$524,000 that Sirazi has already recovered from Rezko’s
bankruptcy. Sirazi points out that the jury knew about the
bankruptcy recovery. But the jury would not have awarded
Sirazi $12.9 million in damages had it subtracted the bank‐
ruptcy recovery. And Sirazi had stipulated to such an offset.
GMH is entitled to it therefore, and so the jury’s award must
be reduced by $524,000.
It remains only to consider Sirazi’s cross‐appeal against
Auchi, whom the jury found liable to Sirazi for unjust en‐
richment, making him jointly liable with GMH for the com‐
pensatory damages awarded by the jury. The jury also
awarded $5 million in punitive damages against him. The
district judge vacated the verdict against Auchi on the
ground that he hadn’t personally received any profits from
GMH’s transaction with Rezko. That was incorrect. Auchi is
not only the chairman of GMH but also the company’s 100
percent owner. He had been kept fully informed of, encour‐
aged, and been centrally involved in approving the fraud
against Sirazi, and as the owner of GMH he was enriched by
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his conduct—unjustly. The jury’s finding him liable for un‐
just enrichment must therefore be reinstated, making him
jointly liable with GMH for the compensatory damages to
which Sirazi is entitled.
As for the award of punitive damages against Auchi,
however, that would be proper only if he’d been guilty of
tortious interference with Sirazi’s contract with Rezko. Giles
v. General Motors Corp., 802 N.E.2d 858, 865–66 (Ill. App.
2003). But the jury exonerated him of tortious interference
(also of civil conspiracy), and therefore Sirazi was not enti‐
tled to punitive damages from him.
In summary, the damages award against GMH is af‐
firmed minus the $524,000 that Sirazi had received previous‐
ly; the damages award against Auchi is reinstated minus
punitive damages; and so the judgment of the district court
is
AFFIRMED IN PART AND REVERSED IN PART.
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