Authorities say the club had been ordered to shut down because of safety violations, including failure to provide enough exits.
"The management of this business is well aware of this court order," Chicago fire Commissioner James Joyce said at a news conference Monday afternoon.
An attorney for the club quickly responded to the city's allegations, telling a news conference that his client had a deal to stay open.
The club was the site of one of the deadliest stampedes in recent memory.
Hundreds of people packed into the second-floor E2 club on the city's South Side stampeded down a stairwell after security guards broke up a fight and someone sprayed pepper gas or Mace. A lawyer for the club operators suggested someone might have shouted a warning about a terrorist attack.
In the resulting panic, clubgoers found themselves squashed in the stairway, and bodies were flattened against the glass doors. Twenty-one people died and 57 were injured.
"We were literally piled from the top to the bottom of those steps, on top of people, not able to move with people constantly pushing," said witness Lemont James Jr., who suffered a dislocated jaw.
Police Superintendent Terry Hillard said the club owned an elaborate videotaping setup and said police were trying to watch tapes to determine exactly what had happened.
The club was operated by Le Mirage All-Night Studio Inc., which also owned the Epitome restaurant downstairs. E2 has featured such performers as R. Kelly and the rapper 50 Cent.
Rev. Jesse Jackson plans to ask Mayor Richard Daley to appoint a special committee to investigate the stampede. A leading city councilman said he planned to conduct a review of all city and state regulations regarding security guards.
City officials pointed to a court order signed in July by Cook County Circuit Judge Daniel J. Lynch telling owners to shut down second-floor operations. They said criminal contempt charges could be filed as early as Tuesday.
"The owner knows damn well he is not to operate that second-floor facility," Joyce said.
Three times since July, city attorneys went to court in an attempt to force the companies to comply with the order, issued mainly because of structural problems, Deputy City Corporation Counsel Dorothy Capers said.
But an attorney for Le Mirage, Andre Grant, said lawyers for both sides had reached a deal in October under which the second-floor nightclub would remain in operation. Another court hearing was scheduled for next month, he said.
Under the deal, Grant said, an upper level section of VIP seating, known as the skyboxes, was to be closed. The skyboxes were closed Monday, he said.
City officials made no mention of any deal to keep the club open in their public statements Monday but Grant said the city knew the club was operating.
"This is open use and the city is 100 percent aware of it, and in fact management has asked consistently and repeatedly the city to assist with crowd control," he said.
Grant said his clients had rented the club to private promoters, a firm called Envy Entertainment, for Sunday night and those promoters brought in 18 security guards besides 10 supplied by Le Mirage. He said it was the Envy security guards who sprayed pepper gas or Mace.
No telephone number for Envy Entertainment was listed.
Joyce said the owner of the building was Lesly Motors Inc., a company that had once owned an auto dealership next door but sold out three years ago. Calls to the office and home of James R. Hardt, an attorney representing Lesly Motors in the city proceedings, were not immediately returned Monday.
The first floor restaurant and bar area of the building had an occupancy-limit notice of 327, Joyce said. But there was no occupancy limit given for the second floor, where the nightclub operated. Joyce said that if the second floor was being used for any public assembly, there should have been a notice of the occupancy limit.
Throughout the day Monday, friends and relatives of the victims visited area hospitals in search of survivors or made their way to the Cook County Medical Examiner's office to identify the dead.
CBS News affiliate WBBM reports that the Rainbow/PUSH coalition says 12 local churches and four funeral homes had volunteered their services to families who could not afford funerals.
At a late evening prayer vigil outside the Michigan Avenue club, David McGraw leaned against the window and wept for his daughter, 24-year-old Latorya McGraw, who had died on the other side of the glass.
"I'm just sad and I'm hurt," he said. "It's tragic."
Early Tuesday, barely 24 hours after the incident, there were candles burning in front of a pile of signs, flowers and stuffed animals that people deposited on the northern corner of the building housing the club. The pile was nearly two feet high.
A sign taped to the window of the building was from the family of one of the identified victims. It read: "Latorya McGraw. We'll miss you. Love your sister."
Other people had left balloons at the scene, some of them shaped like stars or butterflies. There was also an unopened bottle of champagne.
Survivors described a horrific scene: Hundreds of screaming people stumbling down the darkened stairs only to find themselves trapped at the bottom, gasping for air and stepping on bodies.
"People were being trapped underneath you … so we're actually standing on people's heads and we didn't even know it," said Amishoov Blackwell, a 30-year-old patron. "It was just bodies laying everywhere."