Lopez v. Ram Shirdi Inc., d/b/a Motel 6 of Calumet Park, IL #4501
Filing
189
MEMORANDUM Opinion and Order. Signed by the Honorable Manish S. Shah on 8/26/2014.(psm, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
JOSE LOPEZ
Plaintiff,
No. 10 CV 6590
v.
Judge Manish S. Shah
RAM SHIRDI INC., ET AL.,
Defendants.
MEMORANDUM OPINION AND ORDER
Plaintiff seeks to pierce the corporate veil and hold his former employers
personally liable for retaliation in violation of Title VII of the Civil Rights Act and
the Illinois Human Rights Act. Plaintiff also seeks to hold these individuals
personally liable for failing to pay him overtime in violation of the Fair Labor
Standards Act and the Illinois Minimum Wage Law. Defendants Vivak Khanna and
Ajai Agnihotri, the owners of the now-bankrupt companies at issue, move to dismiss
the complaint for lack of subject matter jurisdiction, arguing that the bankruptcy
trustee alone has standing to bring these claims. These defendants further contend
that plaintiff has failed to state a veil-piercing claim. For the following reasons, the
motions are granted in part, and denied in part. The complaint is dismissed without
prejudice for failure to state a claim.
I.
Legal Standards
A.
Standard Under Rule 12(b)(1)
The standard under Rule 12(b)(1) depends on the motion’s claim. See Apex
Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 443-44 (7th Cir. 2009). If a
defendant challenges the sufficiency of the allegations regarding subject matter
jurisdiction, the court must accept all well-pleaded factual allegations as true and
draw all reasonable inferences in favor of the plaintiff. See Apex Digital, 572 F.3d at
443-44; G & S Holdings LLC v. Continental Casualty Co., 697 F.3d 534, 539 (7th
Cir. 2012). If, however, the defendant denies or controverts the truth of the
jurisdictional allegations, the court may look beyond the pleadings and view any
evidence submitted to determine if subject matter jurisdiction exists. See Apex
Digital, 572 F.3d at 443-44. “Where jurisdiction is in question, the party asserting a
right to a federal forum has the burden of proof, regardless of who raises the
jurisdictional challenge . . . .” Craig v. Ontario Corp., 543 F.3d 872, 876 (7th Cir.
2008).
B.
Standard Under Rule 12(b)(6)
“A motion under Rule 12(b)(6) tests whether the complaint states a claim on
which relief may be granted.” Richards v. Mitcheff, 696 F.3d 635, 637 (7th Cir.
2012). Under Rule 8(a)(2), a complaint must include “a short and plain statement of
the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). The
short and plain statement under Rule 8(a)(2) must “give the defendant fair notice of
what the claim is and the grounds upon which it rests.” Bell Atlantic Corp. v.
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Twombly, 550 U.S. 544, 555 (2007) (quotation omitted). Under the federal notice
pleading standards, a plaintiff’s “[f]actual allegations must be enough to raise a
right to relief above the speculative level . . . .” Twombly, 550 U.S. at 555. Put
differently, a “complaint must contain sufficient factual matter, accepted as true, to
‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009) (quoting Twombly, 550 U.S. at 570). “In reviewing the sufficiency of a
complaint under the plausibility standard, [the court] accept[s] the well-pleaded
facts in the complaint as true . . . .” Alam v. Miller Brewing Co., 709 F.3d 662, 66566 (7th Cir. 2013).
II.
Background
Defendant Vivak Khanna was president of the defendant corporations, Ram
Shirdi, Inc. and American Hotel Partners, Inc., and defendant Ajai Agnihotri was
their secretary. Dkt. 151 ¶¶46-47. At all relevant times, defendants1 each owned 50
percent of these corporations. Id. ¶¶ 48-50. Defendants and their corporations were
in the business of operating hotels. See id. ¶ 79.
In September 2009, defendants hired plaintiff Jose Lopez as a maintenance
worker for their Motel 6 in Calumet Park, Illinois. Dkt. 151 ¶¶ 84-85. Plaintiff was
never paid any overtime even though he regularly worked more than 40 hours a
week. Id. ¶¶ 116-18.
“Defendants” refers to movants Vivak Khanna and Ajai Agnihotri. Sometime after October
2011, Vivak Khanna transferred 90 percent of his ownership of both corporations to Gorav
Khanna. Dkt. 151 ¶ 50. Gorav Khanna is also named as a defendant, but he has not yet
responded to the complaint. For clarity of reference, I will at times refer to Vivak Khanna
as Vivak.
1
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Starting in December 2009, plaintiff became aware that a manager working
for defendants, Pervez Akhtar, was sexually harassing some of defendants’ female
employees. Id. ¶¶ 25, 88-97. When plaintiff complained of Akhtar’s behavior to
Vivak, Vivak asked plaintiff for a list of all the women Akhtar had been harassing.
Id. ¶ 98. Plaintiff gave Vivak the list as well as other details about Akhtar’s
harassment. Id. ¶ 99-101. Although Vivak told plaintiff he would look into it, Vivak
never again spoke with plaintiff about the issue. Id. ¶ 102. Instead, Vivak
terminated plaintiff a few weeks later. Id. ¶ 103.
Plaintiff filed this suit on October 14, 2010, alleging retaliation in violation of
Title VII of the Civil Rights Act, 42 U.S.C. § 2000e, et seq., and the Illinois Human
Rights Act, 775 ILCS 5/6-101, et seq., and failing to pay overtime in violation of the
Fair Labor Standards Act, 29 U.S.C. § 201, et seq., and the Illinois Minimum Wage
Law, 820 ILCS 105/1, et seq. Plaintiff originally named Ram Shirdi and American
Partners as sole defendants, but he later amended his complaint to name Vivak
Khanna and Ajai Agnihotri as well (likely because both corporations filed for
bankruptcy on June 20, 2013, see Case Nos. 13-BK-25356 and 13-BK-25358 (N.D.
Ill. Bankr.)). Dkt. 5; Dkt. 151. Although plaintiff brings his four substantive claims
against only the corporations, he also seeks to hold defendants personally liable by
piercing the corporate veil.2 See Dkt. 151.
Generally speaking, there is no individual liability under Title VII. See EEOC v. AIC
Securities Investigations, Ltd., 55 F.3d 1276, 1279-82 (7th Cir. 1995); Williams v. Banning,
72 F.3d 552, 553-55 (7th Cir. 1995). A recognized exception to this rule, however, is that
shareholders can be made to pay for their company’s Title VII violations to the extent a
plaintiff can pierce the corporate veil. See AIC, 55 F.3d at 1282 n. 11; Worth v. Tyer, 276
F.3d 249, 262 (7th Cir. 2001).
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Defendants move to dismiss plaintiff’s complaint, arguing that he lacks
standing to bring a veil-piercing claim and, thus, that I lack subject matter
jurisdiction. Dkt. 160; Dkt. 166. Defendants also move to dismiss on the ground that
plaintiff has failed to state a veil-piercing claim. Id.
III.
Analysis
A.
Motion to Dismiss for Lack of Subject Matter Jurisdiction
Defendants argue plaintiff lacks standing to bring his alter ego claim because
the bankruptcy trustee alone has standing to do so. Defendants rely primarily on
Koch Refining v. Farmers Union Central Exchange, Inc., 831 F.2d 1339 (7th Cir.
1987). In Koch Refining, the Seventh Circuit held that only a bankruptcy trustee
can bring certain alter ego claims under Illinois law. See id. at 1346. The court
based its decision on two sections of the United States Bankruptcy Code. First,
presuming corporations can pierce their own veils under Illinois law, the Seventh
Circuit held that section 541 of the Code granted trustees exclusive standing to
prosecute alter ego claims as property of the bankruptcy estate. See id. at 1343; 11
U.S.C. § 541. Second, the court held that section 544 of the Code granted trustees
exclusive standing to bring Illinois alter ego claims to the extent they seek to
remedy injuries felt generally by creditors as a class. See Koch Refining, 831 F.2d at
1342-43; 11 U.S.C. § 544.
Defendants argue that plaintiff’s veil-piercing claim falls within the trustee’s
purview because the injury plaintiff alleges—that the corporations will not be able
to pay any judgment plaintiff obtains for the corporations’ retaliation and overtime
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violations—is an injury felt by all creditors. Dkt. 162 at 4; Dkt. 168 at 4. Defendants
also note plaintiff’s allegation that defendants “dissipated” the corporations’ assets
“after learning of [p]laintiff’s charge of discrimination and Federal Complaint.” Dkt.
151 ¶ 78. This allegation, defendants argue, further demonstrates that plaintiff is
seeking to usurp the trustee’s power because dissipation of corporate assets harms
every creditor. Dkt. 178 at 5.
Defendants’ argument fails for two reasons. First, the Ram Shirdi and
American Partners’ bankruptcy trustee was discharged on August 8, 2013 and both
cases were closed soon after. See Case Nos. 13-BK-25356 and 13-BK-25358 (N.D. Ill.
Bankr.); Dkt. 151. As result, there is currently no trustee to bring plaintiff’s alter
ego claim under either section 541 or section 544. While reopening the cases could
produce a trustee with exclusive power to bring plaintiff’s claim (though not really,
as discussed below), neither reopening a bankruptcy case nor appointing a trustee is
an automatic operation certain to occur. See In re Bianucci, 4 F.3d 526, 528 (7th Cir.
1993) (a court has broad discretion when it comes to reopening cases and granting a
motion to reopen is not mandatory); Fed. R. Bankr. P. 5010 (a trustee can be
appointed in a reopened case only after obtaining from the court an express finding
that one is necessary “to protect the interests of creditors and the debtor or to insure
efficient administration of the case.”). Therefore, until such uncertain events come
to fruition, neither section 541 nor section 544 inhibits plaintiff’s standing to
prosecute his claim. Accord Jackson v. Corporategear, LLC, 2005 WL 3527148, *3
(S.D.N.Y. Dec. 21, 2005).
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Second, even if the bankruptcy cases were open and a trustee were currently
appointed, the trustee would not have the power to bring plaintiff’s Illinois alter ego
claim under either section. Regarding section 541, the Koch Refining court based its
holding—that Illinois alter ego actions are section 541 property—on the
presumption that Illinois law allows a corporation to pierce its own veil. 831 F.2d at
1345. Since the time Koch Refining was decided, however, the Illinois Supreme
Court has made clear that an Illinois corporation cannot pierce its own veil. In re
Rehabilitation of Centaur Insurance Company, 158 Ill.2d 166, 173-74 (1994). As
result, plaintiff’s alter ego action cannot constitute property of the debtorcorporations’ estates under section 541, and thus no trustee could prosecute
plaintiff’s claim on that basis.
As for section 544, any trustee is now time-barred from bringing plaintiff’s
claim on behalf of creditors as a class. See 11 U.S.C. § 546. Under section 546, the
latest a trustee can bring a claim under section 544 is when the bankruptcy case is
closed or dismissed. 11 U.S.C. § 546(a). Here, both corporations’ bankruptcy
proceedings were closed in August 2013. See Case Nos. 13-BK-25356 and 13-BK25358 (N.D. Ill. Bankr.). Since it is too late for any trustee to bring plaintiff’s claim
on this basis, section 544 does not inhibit plaintiff’s standing to prosecute his claim.
In sum, I hold that plaintiff’s veil-piercing claim does not fall within the
exclusive control of a bankruptcy trustee. Defendants Ajai Agnihotri and Vivak
Khanna’s motions, Dkts. 160 and 166, are both denied as to lack of subject matter
jurisdiction.
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B.
Motion to Dismiss for Failure to State a Claim
Under Illinois law,3 the corporate veil will be pierced if: “(1) there is such a
unity of interest and ownership that the separate personalities of the corporation
and the parties who compose it no longer exist, and (2) circumstances are such that
adherence to the fiction of a separate corporation would promote injustice or
inequitable circumstances.” Buckley v. Abuzir, 2014 IL App (1st) 130469, ¶ 13 (1st
Dist. 2014). Defendants argue only that the second prong of this test is not met.
Dkt. 162 at 9-11; Dkt. 168 at 9-11.
The second prong of the veil-piercing analysis is best understood as asking if
there has been an abuse of limited liability. On Command, 705 F.3d at 273. This
requires something less than an affirmative showing of fraud, but something more
than the mere prospect of an unsatisfied judgment. Wachovia Securities, LLC v.
Banco Panamericano, Inc., 674 F.3d 743, 756 (7th Cir. 2012). A plaintiff must show
that the person to be held liable personally benefited from the alleged abuse of the
corporate form. See On Command, 705 F.3d at 273-74.
It is not clear that Illinois law governs veil piercing in this federal question case. See
United States v. Bestfoods, 524 U.S. 51, 63 n. 9 (1998) (noting debate over whether state or
federal common law controls veil piercing in case arising under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980). Defendants cite On
Command Video Corp. v. Roti, 705 F.3d 267, 272 (7th Cir. 2013) for the proposition that
“[v]eil-piercing claims are governed by the law of the state of the corporation whose veil is
sought to be pierced.” Dkt. 162 at 9; Dkt. 168 at 9. Plaintiff impliedly agrees that this rule
applies. Dkt. 171 at 8-11; Dkt. 173 at 8-11. However, in On Command, the court’s
jurisdiction was based not on a federal question, but on diversity of citizenship. 705 F.3d at
269. Nevertheless, because the parties do not argue the choice of law question, I will not
disturb their assumption that Illinois law applies. Bestfoods, 524 U.S. at 63 n. 9;
Vukadinovich v. McCarthy, 59 F.3d 58, 62 (7th Cir. 1995) (“choice of law, not being
jurisdictional, is normally . . . waivable . . . .”).
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In Sea-Land Services, Inc. v. Pepper Source, the Seventh Circuit described
the types of cases in which courts have found the second prong satisfied:
[W]e see that the courts that properly have pierced corporate veils to
avoid “promoting injustice” have found that, unless it did so, some
“wrong” beyond a creditor’s inability to collect would result: the
common sense rules of adverse possession would be undermined;
former partners would be permitted to skirt the legal rules concerning
monetary obligations; a party would be unjustly enriched; a parent
corporation that caused a sub’s liabilities and its inability to pay for
them would escape those liabilities; or an intentional scheme to
squirrel assets into a liability-free corporation while heaping liabilities
upon an asset-free corporation would be successful.
941 F.2d 519, 524 (7th Cir. 1991) (emphasis added).
Here, plaintiff believes he has pled sufficient facts to show that piercing the
corporate veil would prevent a fraud or injustice. Dkt 171 at 9; Dkt. 173 at 9.
Plaintiff contends that paragraphs 47, 49, 52, 54-57, 61-63, 65-66, 74, and 78 clearly
demonstrate fraudulent and unjust behavior, and that these allegations depict
“intentional wrongdoing” that rises to “an affirmative showing of fraud.” Dkt 171 at
9-10; Dkt. 173 at 9-10.
I disagree, however, because plaintiff’s well-pleaded facts do not permit me to
infer more than the mere possibility of the abuse of limited liability. See Iqbal, 556
U.S. at 679. As Twombly and Iqbal instruct, I begin by identifying pleadings that,
because they are no more than conclusions, are not entitled to the assumption of
truth. Id. These conclusory pleadings include paragraphs 52 (defendants “used [the
corporations] as their alter ego”); 79 (the corporations were “a mere façade for the
hotel operations of [defendants]”); 80 (“[t]o the extent a corporate shell separates
[defendants]
any
corporate
formalities
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and
limited
liability
should
be
disregarded”); 81 (“adherence to the fiction of separate corporate existence would
sanction a fraud or promote injustice”); and 82 (“this Court should pierce the
corporate veil and hold [defendants] liable for [the corporations’] obligations”).
Turning to the well-pleaded allegations, paragraphs 60 through 74 are about
how various corporations controlled by defendants, including Ram Shirdi and
American Partners, lacked horizontal corporate distinction. Dkt. 151 ¶¶ 60-74.
While such allegations would be relevant if plaintiff were attempting a sideways
piercing, see On Command, 705 F.3d at 273, they are not relevant to plaintiff’s
attempt to pierce through to defendants. Further, even if I were to favorably
construe these allegations as relevant to plaintiff’s claim, they are at best relevant
only to the first prong of corporate veil-piercing (unity of interests), which
defendants do not contest. Nothing about the absence of horizontal corporate
distinction as pled suggests an effort by the individual defendants to personally
skirt monetary obligations. Next, paragraphs 46 through 50 simply establish
defendants’ ownership of the corporations, while paragraphs 54 through 56, 75, and
76 are again relevant only to the first prong.
Thus, plaintiff is left with three allegations to state his claim—paragraphs 57
(the corporations “also paid Pervez Akhtar tens of thousands of dollars in
management fees even though they claim he did not perform any management or
managerial services in any way”); 77 (the corporations’ “undercapitalization lead
[sic] to the bankruptcy of [the corporations]”); and 78 (“upon information and belief
[defendants] dissipated [the corporations’] assets and dissolved the entities after
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learning of [p]laintiff’s charge of discrimination and Federal Complaint”). Taken as
true, these allegations do not demonstrate that “adherence to the fiction of a
separate corporation would promote injustice or inequitable circumstances,”
Buckley, 2014 IL App (1st) 130469 at ¶ 13. First, that Akhtar received “tens of
thousands of dollars in management fees” does not suggest that defendants
purposely shifted funds to avoid paying a debt, or that defendants were otherwise
unjustly enriched. See Sea-Land, 941 F.2d at 524. Plaintiff does not claim, for
example, that defendants paid Akhtar as a means of covertly pocketing money
themselves.
Second, while defendants dissipating the corporations into bankruptcy is
consistent with a scheme to abuse the corporate form, paragraphs 77 and 78 are
insufficient on their own to nudge plaintiff’s veil-piercing claim “across the line from
conceivable to plausible,” Twombly, 550 U.S. at 570, because dissipation of
corporate assets is as consistent with unjust enrichment as it is with the typical
dealings of a downwardly spiraling business. Like a naked assertion of conspiracy
in the antitrust context, a naked assertion of dissipation in the veil-piercing context
“gets the complaint close to stating a claim, but without some further factual
enhancement [e.g., that defendants transferred the assets to themselves for little or
no consideration,] it stops short of the line between possibility and plausibility of
entitlement to relief.” Id. at 557 (quotation omitted).
Thus, defendants Ajai Agnihotri and Vivak Khanna’s motions, Dkts. 160 and
166, are both granted for failure to state a claim.
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C.
Overtime Claims
Finally, plaintiff argues defendants can be liable, without piercing the veil,
for violations of the Fair Labor Standards Act and the Illinois Minimum Wage Law.
Dkt. 171 at 11-12; Dkt. 173 at 11-12. As defendants correctly note, however,
plaintiff’s complaint does not allege substantive claims against defendants—only
the veil-piercing claim. See Dkt. 151 ¶¶ 1-4, 16-17, 21-22, Count II Prayer (e), Count
III Prayer (e). Because plaintiff cannot amend his complaint with his brief, Pirelli
Armstrong Tire Corp. Retiree Medical Benefits Trust v. Walgreen Co., 631 F.3d 436,
448 (7th Cir. 2011), I reject his argument.
IV.
Conclusion4
Defendant Ajai Agnihotri’s motion, Dkt. 160, is denied as to lack of subject
matter jurisdiction and granted for failure to state a claim. Defendant Vivak
Khanna’s motion, Dkt. 166, is denied as to lack of subject matter jurisdiction and
granted for failure to state a claim. Plaintiff’s complaint against these defendants is
dismissed without prejudice.
ENTER:
___________________________
Manish S. Shah
United States District Judge
Date: 8/26/14
Because I grant defendants’ motions to dismiss on the ground that plaintiff has failed to
state a veil-piercing claim, I do not reach their other arguments under Rule 12(b)(6).
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