H.C. Duke & Son, LLC v. Prism Marketing Corporation et al

Filing 52

ORDER entered by Judge Sara Darrow on 7/9/2012 DENYING Defendants' 38 Motion to Dismiss. (AP, ilcd)

E-FILED

Monday, 09 July, 2012 11:01:38 AM
Clerk, U.S. District Court, ILCD
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF ILLINOIS
ROCK ISLAND DIVISION
H.C. DUKE & SON, LLC,
Plaintiff,
v.
PRISM MARKETING CORP., et al,
Defendants.

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Case No. 4:11-cv-04006-SLD-JAG

ORDER
This case involves a contract dispute between Plaintiff H.C. Duke & Son, LLC (“Duke”),
a Delaware Corporation with its principal place of business in East Moline, Illinois, and coDefendants Prism Marketing Corporation (“Prism”), a Nevada Corporation with its principal
place of business in Las Vegas, Nevada, Superior Quality Equipment, Inc. (“Superior”), a
California corporation with its principal place of business in Corona, California, and Steven
Levine, a resident of Washington (collectively, the “Defendants”). The Court has diversitybased jurisdiction pursuant to 28 U.S.C. § 1332.
Presently before the Court is Defendants’ Motion to Dismiss. (ECF No. 38.) For the
reasons set forth below, the Court DENIES the Motion.
I.

BACKGROUND
On August 25, 2003, Plaintiff and Prism entered into the Distributorship Agreement (the

“Duke-Prism Distributor Agreement”) for Electro Freeze, a line of soft-serve ice cream
machinery. (See Second Amended Complaint (hereafter referred to as “Sec. Am. Compl.”), Ex.
A, ECF No. 37.) Under the Duke-Prism Distributor Agreement, Prism would actively promote
the sale and distribution of Plaintiff’s Electro Freeze equipment throughout various counties in

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California and Nevada. (Id.) The Agreement included an explicit termination clause, allowing
either party to terminate the contractual relationship by providing thirty days written notice by
certified or registered mail. (Id.) The Agreement also provided that outstanding balances were
due within thirty days of the invoice date. (Id.)
Beyond the disputed Duke-Prism Distributor Agreement, three other agreements are
implicated in this case. First, Steven Levine signed a “Personal Guarantee to H.C. Duke & Son,
Inc.” for any unpaid debt owed by Prism (the “Levine Personal Guarantee”). (Sec. Am. Compl.
Ex. C.) Second, on September 16, 2010, Plaintiff entered into a “Security Agreement” with
Superior, allowing Plaintiff to enforce payment upon any future default by Superior (the
“Superior-Duke Security Agreement”). (Sec. Am. Compl. Ex. D.) The Superior-Duke Security
Agreement included a term specifying that it was to be interpreted pursuant to the California
Commercial Code. (Id.) Third, on October 29, 2010, Plaintiff entered into a separate “Security
Agreement” with Prism (the “Prism-Duke Security Agreement”). (Sec. Am. Compl. Ex. F.)
Clause 24 of the Prism-Duke Security Agreement specified that Nevada Uniform Commercial
Code would govern the default interpretation of any contractual language. (Id.)
The parties’ dispute arose from an alleged breach of contract. Plaintiff claims that it sold
certain goods to Prism pursuant to the Duke-Prism Distributor Agreement but Prism never paid
for them. (Sec. Am. Compl. ¶ 4.) In a letter dated January 18, 2011, Plaintiff informed Prism
and Superior of its intention to terminate their business relationships pursuant to the provision
governing termination in the Duke-Prism Distributorship Agreement. (Sec. Am. Compl. ¶ 12,
Ex. B.) Prism and Superior contend that the letter did not provide proper notice of Plaintiff’s
intent to terminate because it did not comply with the manner of notice specified in the Duke-

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Prism Distributorship Agreement. (Sec. Am. Compl. ¶ 13.)

As such, Prism and Superior

contend that the Duke-Prism Distributorship Agreement remains in force.
Plaintiff filed its initial complaint on February 2, 2011, seeking declaratory relief and a
determination of breach of contract under the Duke-Prism Distributorship Agreement and
additional relief under the Levine Personal Guarantee and security agreements. (ECF No. 1.)
On March 31, 2011, Defendants filed a Motion to Dismiss the initial complaint. (ECF No. 11.)
That motion was denied, but thereafter the parties jointly sought and were granted leave for
Plaintiff to file an amended complaint. (See ECF No. 20; June 20, 2011 Text Order.)
Plaintiff filed the Amended Complaint on June 23, 2011, and Defendants responded with
another motion seeking dismissal or, in the alternative, a more definite statement. (See ECF Nos.
21, 23.) Instead of opposing the motion to dismiss, Plaintiff sought permission to file a Second
Amended Complaint to address Defendants’ assertions that it failed to adequately state certain
claims, including that it was deficient in its factual allegations regarding Plaintiff’s alter ego
allegations. (See Mot. and Am. Mot. for Leave to File Sec. Am. Compl., ECF. Nos. 28, 30.)
Leave was granted and on September 26, 2011, Plaintiff filed a Second Amended Complaint.
Specifically, in the Second Amended Complaint Plaintiff expanded on its alter ego allegations
with the following facts:
Plaintiff is informed and believes and thereon alleges there is such a unity of
interest and ownership between Defendants Prism and Superior such that any
individuality and separateness between them have ceased, and that Superior is the
alter ego of Prism in that Plaintiff is informed and believes and thereon alleges
that: (1) Superior was not adequately capitalized, (2) the assets and management
of the two (2) Defendants, Prism and Superior, have been intermingled, and (3)
required corporate formalities as between the two (2) corporate entities have not
been maintained, such that Superior is merely a sham in order to evade liability
that otherwise would rest with Prism. Levine, Prism and Superior have
intentionally schemed to squirrel assets into Superior, in an attempt to remove
assets from the ownership and control of Prism, so as to prevent Plaintiff from
satisfying any judgment obtained against Prism. By their actions, Levine, Prism

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and Superior have abused the corporate form such that adherence to the fiction of
two (2) separate corporate entities would promote injustice.
(Sec. Am. Compl. ¶ 6, ECF No. 37.)
Plaintiff’s Second Amended Complaint seeks relief for five discrete causes of action.
First, Plaintiff seeks a declaratory judgment as to their relationship with Prism and Superior in
view of the January 18, 2011 letter purporting to exercise the termination provision of the DukePrism Distributorship Agreement. (Sec. Am. Compl. ¶ 10-15.) Second, Plaintiff alleges a
breach of contract, claiming that Prism failed to pay past invoices in the amount of $899,881
and, as Prism’s alter ego, Superior is liable for the debt. (Sec. Am. Compl. ¶ 16-20.) Third,
Plaintiff alleges Levine breached the Levine Personal Guarantee as he has not paid the debts
owed by Prism. (Sec. Am. Compl. ¶ 21-26.) Fourth, Plaintiff seeks foreclosure on all collateral
specified in the Prism-Duke Security Agreement. (Sec. Am. Compl. ¶ 27-30.) Finally, Plaintiff
seeks foreclosure on all collateral specified in the Superior-Duke Security Agreement on the
grounds that Superior is liable as the alter ego of the indebted Prism. (Sec. Am. Compl. ¶ 3134.) As relief for these five counts, Plaintiff seeks judgment against Prism, Superior, and Levine
in the amount of $899,881 plus interest at the legal rate allowed by Illinois law.
In response to the Second Amended Complaint, Defendants moved to dismiss Superior
from the first and second causes of action as well as to dismiss the fifth cause of action in its
entirety as to all Defendants pursuant to FRCP 12(b)(6). (Mot. to Dismiss, ECF No. 38.)
Defendants argue that Plaintiff failed to plead sufficient facts to support its contention that
Superior is the alter ego of Prism under Nevada law. (Mot. to Dismiss ¶ 1.) Defendants also
allege that Plaintiff failed to sufficiently plead facts that would demonstrate that Superior is the
alter ego of Prism for the purposes of the Superior-Duke Security Agreement under California
law. (Mot. to Dismiss ¶ 2.)

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II.

ANALYSIS
A motion to dismiss pursuant to Rule 12(b)(6) evaluates the sufficiency of the allegations

presented in the complaint. The complaint must contain “a short and plain statement of the claim
showing that the pleader is entitled to relief,” (Fed. R. Civ. P. 8(a)), and must “give the defendant
fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47
(1957))(quotations omitted). The pleader is not required to set forth detailed allegations, but the
claim must be facially plausible. Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). A claim satisfies
the facial plausibility standard when the factual allegations allow the court to draw a “reasonable
inference” that the purported misconduct occurred. Id. But, a mere “formulaic recitation of the
elements of a cause of action” is insufficient. Twombly, 550 U.S. at 555.
The complaint does not need to allege “all, or any, of the facts logically entailed by the
claim and it certainly need not include evidence.” Tamayo v. Blagojevich, 526 F.3d 1074, 1081
(7th Cir. 2008). The factual allegations of the complaint are presumptively true and are viewed
in the “light most favorable to the plaintiff.” Indep. Trust Corp. v. Stewart Info. Servs. Corp.,
665 F.3d 930, 934 (7th Cir. 2012) (citation omitted).
Here, Plaintiff makes sufficient factual allegations about the relationship between Prism
and Superior. In particular, the Second Amended Complaint alleges that Superior is an alter ego
of Prism and “there is such a unity of interest and ownership between Defendants Prism and
Superior such that any individuality and separateness between them have ceased . . . .” (Sec.
Am. Compl. ¶ 6.) Plaintiff further alleges that Superior was not adequately capitalized, the
assets and management of the two corporations are intermingled, and corporate formalities have
not been maintained between Superior and Prism because Superior is a sham corporation whose

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purpose is to assist Prism in evading liability. (Id.) Finally, Plaintiff claims that the three coDefendants schemed to remove assets from Prism, preventing the satisfaction of any judgment
obtained against the corporation. (Id.)
A. The First and Second Causes of Action and Nevada Law on Alter Ego Liability
Defendants argue that Plaintiff’s first and second causes of action fail to satisfy Nevada
requirements for an alter ego theory. To begin, Defendants assert that Illinois choice-of-law
rules require Plaintiff’s alter ego theory to be governed by the law of the incorporating state.
(Def.’s Mem. in Supp. of Mot. to Dismiss 3-4.) Accordingly, because Prism was incorporated in
Nevada, Defendants insist that Nevada law is controlling. (Id.) Yet, even if the Court were to
accept this argument and apply Nevada law, Plaintiff’s factual allegations would still satisfy the
pleading requirements.
Under Nevada law, Plaintiff must demonstrate three elements to satisfy an alter ego
theory. These three straightforward elements require that:
(1) The corporation must be influenced and governed by the person asserted to be
its alter ego[;] (2) [t]here must be such unity of interest and ownership that one is
inseparable from the other; and (3) [t]he facts must be such that adherence to the
fiction of separate entity would, under the circumstances, sanction a fraud or
promote injustice.
Truck Ins. Exchange v. Palmer J. Swanson, 189 P.3d 656, 660 (Nev. 2008). Defendants argue
that Plaintiff’s allegations do not satisfy these three elements. The Court disagrees. The Court
can see no material difference between the particular language of Nevada’s alter ego law and the
reasonable inferences that can be drawn from the factual allegations set forth in Plaintiff’s
Second Amended Complaint. See Las Vegas Police Dept. Health and Welfare Trust v. P & P,
No. 2:11-cv-00734-RCJ-PAL, 2011 WL 6106411, at *7 (D. Nev. Dec. 7, 2011) (explaining that
factual allegations of the creation and the intermingling of funds by direct payment from one

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entity to another was sufficient to allege an alter ego theory in response to a motion to dismiss);
Kabins Family LP v. Chain Consortium, No. 2:09-cv-01125-GMN-RJJ, 2010 WL 3001890, at
*5 (D. Nev. July 27, 2010) (the court denied a motion to dismiss because factual allegations of
shared ownership and shared profits between entities raised sufficient questions of fact as to
plaintiff’s alter ego theory); Fairbanks Gold Mining, Inc. v. D & D Tire, Inc., No. 3:10-cv00492-ECR-WGC, 2011 WL 4479692, at *5 (D. Nev. Sept. 23, 2011) (factual allegations that
entities are affiliated and controlled by the same people, even if “probably insufficient” to
ultimately prove an alter ego claim, are sufficient for an inference of alter ego liability and to
overcome a motion to dismiss). More specifically, Defendants’ arguments attempting to create a
material distinction between Nevada’s “influenced and governed” standard and Plaintiff’s factual
allegation that the assets and management of Prism and Superior are intermingled are without
merit. Plaintiff’s additional allegations of failed corporate formalities, a scheme to squirrel away
resources, and abuse of the corporate form provide facts that further satisfy the remaining
requirements of showing alter ego under Nevada law.
B. The Fifth Cause of Action and California Law on Alter Ego Liability
Defendants also argue that Plaintiff’s fifth cause of action fails to sufficiently plead
Superior is the alter ego of Prism under California law. (Def.’s Mem. in Supp. of Mot. to
Dismiss 11.) Defendants claim that the Superior-Duke Security Agreement specifies California
Commercial Code as controlling and, accordingly, California choice-of-law rules apply. (Id.)
Because California applies a “governmental interest” analysis and Superior is located in
California, Plaintiff allegedly must satisfy California requirements to demonstrate an alter ego
theory under this agreement. (Id.) Even if the Court were to accept this line of reasoning, the

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Court remains equally unpersuaded by Defendants’ argument that Plaintiff’s pleading fails to
satisfy California requirements.
Under California law, Plaintiff must demonstrate two elements to prove an alter ego
theory: “(1) that there be such unity of interest and ownership that the separate personalities of
the corporation and the individual no longer exist and (2) that, if the acts are treated as those of
the corporation alone, an inequitable result will follow.” Pac. Mar. Freight, Inc. v. Foster, 10CV-0578-BTM-BLM, 2010 WL 3339432, at *6 (S.D. Cal. Aug. 24, 2010) (quoting Automotriz
Del Golfo De California S.A. De C.V. v. Resnick, 306 P.2d 1, 3 (Cal. 1957)). Again, the Court
finds no material shortcoming in the allegations set forth in Plaintiff’s Second Amended
Complaint in light of California’s legal standard for demonstrating that one entity is the alter ego
of another. See Fed. Reserve Bank of San Francisco v. HK Sys., No. C-95-1190, 1997 WL
227955, at *6 (N.D. Cal. Aug. 24, 1997) (noting that various factual allegations may satisfy the
two-prong alter ego test, including the manipulation of assets, the failure to adequately capitalize,
the use of one corporation as a shell, and the failure to maintain corporate records and legal
formalities); Lincoln Imps. Inc. v. Weaver Flower Co., No. SACV 11-1098-JST (ANx), 2012
WL 1048531, at *4 (C.D. Cal. March 27, 2012) (finding that the party adequately pled an alter
ego claim when they alleged a failure to adequately capitalize, a disregard for corporate
formalities, and a possible unjust result by upholding the corporate veil). Specifically, Plaintiff’s
allegations of intermingled management and failure to maintain corporate formalities almost
explicitly satisfy the “unity of interest and ownership” element required by California law.
Additionally, the “injustice” claimed by Plaintiff is effectively an explicit statement that satisfies

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the “inequitable result” standard. Consequently, the Court finds no basis in California law to
dismiss count five of the Second Amended Complaint.1
III.

CONCLUSION
For the foregoing reasons, the Court DENIES Defendants’ Motion to Dismiss.
Entered this 9th day of July, 2012.
s/ Sara Darrow
SARA DARROW
UNITED STATES DISTRICT JUDGE

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Although Defendants set forth additional arguments regarding the statutory language and the
merits of Plaintiff’s claim, the Court need not evaluate them. In ruling on a 12(b)(6) motion, the
sole purpose of the Court is to determine whether Plaintiff’s factual allegations create a plausible
claim. See Tolliver v. PPG Indus., Inc., No. 11-2302, 2012 WL 1982702, at *2 (C.D. Ill. May
15, 2012) (“[t]he purpose of a motion to dismiss for failure to state a claim is to test the
sufficiency of the complaint, not to decide the merits of the case.”).
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