Lansing v. Carroll
Filing
197
MEMORANDUM Opinion and Order. Signed by the Honorable Manish S. Shah on 10/20/2014: Counter-defendants' Motion to Dismiss 146 is denied. Status hearing remains set for 11/4/14 at 9:30 a.m. [For further detail see attached order.] Notices mailed by Judicial Staff. (psm, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
ROBERT T.E. LANSING, et al.,
Plaintiffs,
v.
GEORGE CARROLL and GW CARROLL VI
LLC,
Defendants.
and
No. 11 CV 4153
GEORGE CARROLL and GW CARROLL VI
LLC,
Judge Manish S. Shah
Counter-Plaintiffs,
v.
ROBERT T.E. LANSING, REALTY
PORTFOLIO HOLDINGS LP, MICHAEL
COULTER SMITH, as trustee of CELEBRATE
LIFE TRUST, RICHARD J. STEPHENSON, et
al.,
Counter-Defendants.
MEMORANDUM OPINION AND ORDER
George Carroll and Robert Lansing co-founded a real-estate investment
business in which each owned equal interests. Years later, however, the
relationship between the two co-owners soured, and Lansing elected to invoke the
“buy/sell” provisions of various governing agreements. Pursuant to those
agreements, Lansing offered to purchase Carroll’s shares in the business for
approximately 14.5 million dollars, and simultaneously made an offer to sell
Lansing’s own shares to Carroll for the same price. Carroll chose to buy Lansing’s
shares, but was unable to close on the purchase within the prescribed period of
time. When Carroll then refused to allow Lansing to buy his interests for the
previously-set amount, Lansing sued Carroll for breach of contract. Lansing also
purported to purchase Carroll’s interests anyway through a transfer agreement,
which Carroll never signed.
Carroll filed a counterclaim against Lansing, asserting a breach-of-fiduciaryduty claim based on Lansing’s alleged “conversion” of Carroll’s ownership interests.
Carroll also brought counterclaims against the entities that had provided Lansing
with the funds necessary to carry out the conversion, alleging that these entities—
Realty Portfolio Holdings LP, a limited partnership; and its limited partner,
Celebrate Life Trust—participated in the alleged breach. In addition, Carroll
asserted counterclaims against the trust and one of its settlors, Richard
Stephenson, for aiding and abetting that breach. Realty Portfolio filed a motion to
dismiss the participation claim against that entity, which was denied. Celebrate
Life Trust and Richard Stephenson now move to dismiss the counterclaims against
them pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the
reasons discussed below, the motion is denied.
I.
Legal Standard
Rule 8(a)(2) of the Federal Rules of Civil Procedure requires that a claim for
relief contain “a short and plain statement of the claim showing that the pleader is
2
entitled to relief.” The purpose of this requirement is to “give the defendant fair
notice of what the . . . claim is and the grounds upon which it rests.” Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41,
47 (1957)). To satisfy these “notice” pleading requirements, the complaint need not
set forth detailed factual allegations. Id. (citation omitted). But it must present
enough “factual matter, accepted as true, [that the] ‘claim to relief . . . is plausible
on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S.
at 570). Motions under Rule 12(b)(6) are meant “to test the sufficiency of the
complaint, not . . . the merits” of the plaintiff’s case. Weiler v. Household Fin. Corp.,
101 F.3d 519, 524 n. 1 (7th Cir. 1996) (quoting Triad Assocs., Inc. v. Chicago Hous.
Auth., 892 F.3d 583, 586 (7th Cir. 1989)). In considering a Rule 12(b)(6) motion to
dismiss, I therefore accept as true all well-pleaded factual allegations and draw all
reasonable inferences in the plaintiff’s favor. Cincinnati Life Ins. Co. v. Beyrer, 722
F.3d 939, 946 (7th Cir. 2013) (quoting Reynolds v. CB Sports Bar, Inc., 623 F.3d
1143, 1146 (7th Cir. 2010)).
II.
Facts
This is, at bottom, a business divorce between two individuals, but the tangle
of related entities and trusts involved in the case requires some explanation. The
procedural history also warrants some detailed recitation since, through no fault of
the parties, the suit has been assigned to three different district judges during
several years of motion practice over the pleadings.
3
A.
Creation of the Westminster/Litchfield Business
In the 1990s, George Carroll and Robert Lansing created a real-estate
investment business. As part of this business, Carroll and Lansing established a
series of ten investment funds—the “Westminster funds”—through which
individuals and entities could invest in small- and medium-sized properties. See
[129] ¶ 31.1 Each of the ten funds was created as a limited partnership, each with
its own general partner. See id. ¶ 1; id. at 59 n. 6; see also [129-TAC] ¶ 24. The ten
general partners—one for each fund—were limited liability companies created
jointly by Carroll and Lansing (and of which Carroll and Lansing served as equal
members ). See [129] ¶¶ 1, 31; id. at 59 n. 6.2 As part of their investment business,
Carroll
and
Lansing
management-consulting
also
co-created
company
that
Litchfield
performed
Advisors
various
Incorporated,
advisory
a
and
administrative services for the Westminster funds. See id. ¶ 1. Upon incorporation,
Carroll and Lansing each owned an equal number of Litchfield shares. Id. Carroll
moved to California to manage the corporation’s Los Angeles office, while Lansing
stayed in Illinois to oversee operations there. See id. ¶ 30; [129-TAC] ¶ 23.
Citations to the record are designated by the document number as reflected on the district
court’s docket, enclosed in brackets. Unless otherwise indicated, citations to document [129]
are to the second amended counterclaim. Citations to the portion of this document
comprising plaintiffs’ third amended complaint (or defendants’ answers thereto) are
designated as [129-TAC]. I also note that in some instances the parties have filed two
separate versions of the referenced pleadings: one under seal, and one (redacted) on the
public docket. As I do not rely on any of the redacted statements or materials, all citations
included here are to the publicly-filed versions of those documents.
1
According to Lansing, some of Carroll’s and Lansing’s membership interests, respectively,
were in fact owned by separate business entities created by and affiliated with those
individuals. See [129-TAC] at 14 n. 2. Although these entities are named as parties to the
litigation between Carroll and Lansing, their involvement is not relevant to the instant
2
4
The governing document for Litchfield (the shareholders’ agreement)
included a “buy/sell” provision, which set forth a process whereby one shareholder
could either dissociate from the corporation (by selling his shares to the other
owner) or take full control of the company (by buying the other owner’s shares). See
[129] ¶ 2; see also [129-TAC] ¶¶ 2, 32. The buy/sell provision required that any offer
made under its terms be at once an offer to buy and to sell—that is, if one co-owner
offered to buy the other’s shares for a stated price, the offering owner was also
obligated to sell his own shares for that same price. See Shareholders Agreement of
Litchfield Advisors Inc., [106-2] ¶ 12.2(a); see also [129] at 59 n. 7 (incorporating by
reference the shareholders’ agreement). It would then be up to the offeree to
determine which of the two offers—buy or sell—he wished to accept. See [106-2]
¶ 12.2(a)–(c) Acceptance of either offer marked the start of a 120-day closing period,
at the end of which the offeror and offeree had to buy and sell (or sell and buy) at
the agreed price. See id. ¶ 12.2(c). Similar “buy/sell” provisions were also included in
the operating agreements governing the general partners of the Westminster funds.
See [129] ¶ 2; see also id. at 59 n. 7; [129-TAC] ¶ 2.
B.
Lansing’s Exercise of the Buy/Sell Provisions
On November 1, 2010, Lansing invoked the buy/sell provisions in both the
Litchfield shareholders’ agreement and the Westminster operating agreements. See
[129] ¶¶ 2, 9. Pursuant to the provisions, Lansing offered to buy Carroll’s shares
and, simultaneously, to sell Lansing’s own shares to Carroll for approximately
motion and so is not discussed here. Accordingly, references to “Carroll” or “Lansing”
include those individuals and their affiliated business entities, as appropriate.
5
14.5 million dollars. See id. ¶¶ 2, 55. Carroll elected to buy Lansing’s interests and
so accepted Lansing’s “sell” offer on November 26, 2010—triggering a 120-day
closing period on that sale (ending on March 29, 2011). See id. ¶¶ 10, 57. Carroll
was unable to obtain the funds necessary to complete the transaction, however, and
the March 29 closing did not take place. See id. ¶¶ 12, 63.
Several days later, on April 3, 2011, Lansing informed Carroll that, because
Carroll was unable to complete the purchase of Lansing’s shares, Lansing now had
the right to purchase Carroll’s interests under the governing buy/sell provisions
(and pursuant to the terms of Lansing’s November 2010 offer). See id. ¶ 65. When
Carroll refused to comply, Lansing filed on June 17, 2011 a complaint against
Carroll in federal court, alleging, inter alia, that Carroll had breached the governing
agreements. See id. ¶ 70; see also [1] ¶¶ 59–65. As remedy, Lansing sought (among
other forms of relief) specific performance of the buy/sell provisions invoked in
2010—which, according to Lansing, required Carroll to sell his ownership interests
to Lansing. See [1] at 22.
Also on June 17, Lansing reiterated his position that he had a right to
purchase Carroll’s shares, and he sent to Carroll a corresponding draft “transfer
agreement” to be executed by both owners at a closing on June 21, 2011 (a date that
Lansing later pushed back to June 29, 2011). See [129] ¶¶ 68, 74. Also included in
the draft agreement was a provision requiring Carroll and Carroll’s wife to resign
from the various positions they held in the Westminster/Litchfield business. See id.
¶ 68.
6
C.
The June 2011 Closing
Carroll refused to sign the transfer agreement provided to him by Lansing.
See id. ¶¶ 71–73. On June 29, 2011, Lansing nonetheless purported to close on the
purchase of Carroll’s shares by signing the agreement himself. Id. ¶ 74. Lansing
signed the document not only on his own behalf (i.e., in his individual capacity), but
also as manager and sole member of Realty Holdings GP LLC, the general partner
of Realty Portfolio Holdings LP. See id. ¶¶ 24, 74. Realty Portfolio, a limited
partnership created on June 6, 2011, provided the money needed to purchase
Carroll’s shares on June 29 of that year. See id. ¶¶ 69, 100. As of that date, the
(sole) limited partner of Realty Portfolio was Celebrate Life Trust. See id. ¶ 101.
Carroll asserts that one of the trust’s settlors, Richard Stephenson, selected the
trust as the entity to invest in Realty Portfolio as a limited partner (and thus to
contribute funds toward Lansing’s purchase of Carroll’s shares). See id. ¶¶ 101, 119.
Of the money that Realty Portfolio put toward the June 29 transaction, Celebrate
Life Trist provided 99.8 percent. See id. ¶¶ 100–01. The trust did not sign or
otherwise participate in the execution of the transfer agreement between Lansing
and Carroll. See id.
After Lansing executed the transfer agreement, he informed Carroll that, as
a result of the transfer, Carroll no longer possessed any interests in the
Westminster/Litchfield business and would no longer receive any payouts from that
venture. See id. ¶ 74. Two weeks later, on July 15, 2011, Lansing closed Litchfield’s
Los Angeles office and removed Carroll and Carroll’s wife, Laura, from their
7
positions as officers and directors of Litchfield and the Westminster funds. See id.
¶ 77–78. Lansing also amended his complaint in the pending breach-of-contract
action against Carroll. In addition to the original contract claim, the amended
complaint included, inter alia: an additional breach-of-contract claim, this time
based on Carroll’s refusal to voluntarily relinquish his shares on June 29, 2011, see
[14] ¶ 63; and a request for a declaratory judgment that Lansing and Realty
Portfolio had already acquired Carroll’s interests pursuant to the “closing” on that
date, see id. ¶¶ 49–59 (Count I).
D.
Carroll’s Motion to Dismiss and Counterclaim
In August 2011, Carroll demanded that Lansing and Realty Portfolio
disclaim any right to Carroll’s ownership interests, but neither Lansing nor Realty
Portfolio responded. See [129] ¶¶ 80–81. Carroll then filed a motion to dismiss the
newly-added contract and declaratory-judgment claims. See [15] ¶ 3. In an April
2012 order, Judge Manning granted Carroll’s motion. See [23]. Judge Manning
concluded that Lansing’s interpretation of the governing agreements was not
supported by the plain meaning of the buy/sell provisions, and that, consequently,
Lansing had never acquired the right to seize control of Carroll’s shares under those
provisions (even after Carroll failed purchase of Lansing’s shares in March 2011).
See id. at 9–15.
Lansing amended his complaint, now limiting his claims to Carroll’s alleged
breach of contract in March 2011. See [30] ¶¶ 44–49.3 Appended to Carroll’s answer
The second amended complaint also included a new declaratory-judgment claim, this time
premised on an April 2012 finding by the Litchfield Board of Directors that Carroll had
3
8
to the new complaint was a counterclaim against Lansing and Realty Portfolio
Holdings, which included claims against Lansing for fiduciary breach and against
Realty Portfolio for participating in that breach (both based on the alleged
“conversion” of Carroll’s interests on June 29, 2011). See [41] ¶¶ 81–87.4 Realty
Portfolio filed a motion to dismiss the (since-amended) participation-in-breach
claim. See [69]. Judge Lefkow, to whom the case had been reassigned, see [51],
denied the motion, concluding that Carroll had alleged enough facts to suggest that
Realty Portfolio had furthered or completed Lansing’s purported breach, see [93] at
2–4.
Following Judge Lefkow’s ruling, both parties amended their respective
claims. Carroll amended his counterclaim to now include allegations that Celebrate
Life Trust, too, had participated in Lansing’s fiduciary breach (Count I), and that
both Celebrate Life and Richard Stephenson had aided and abetted the wrongful
transaction (Count III). See [129] ¶¶ 94–104, 111–120.5 Celebrate Life and
Stephenson jointly filed a motion to dismiss those claims. [146, 147]. The case was
subsequently reassigned to me. See [184].
engaged in “shareholder misconduct” when he failed to purchase Lansing’s interests in
March 2011. See [30] ¶¶ 50–56.
4 The cited paragraph numbers refer to the paragraphs in Carroll’s counterclaim.
5 Carroll names as counter-defendant Michael Smith, the trustee of Celebrate Life Trust.
For simplicity, I refer to the claims against Smith (a nominal counter-defendant) as claims
brought against the trust.
9
III.
Analysis
A.
Choice of Law
Although Carroll’s claims against the trust and against Stephenson have
been brought in diversity,6 none of the parties has affirmatively raised the choice-oflaw issue. The parties cite to Illinois law when describing the elements of
participating in a fiduciary breach or of aiding and abetting such a breach. See [147]
at 9, 12; [160] at 3–4, 8. The parties therefore agree that Illinois law governs, and it
is appropriate to apply Illinois substantive law in considering this motion. See
GATX Leasing Corp. v. Nat’l Union Fire Ins. Co., 64 F.3d 1112, 1115 n. 6 (7th Cir.
1995) (observing that “if neither party raises a conflict-of-law issue in a diversity
case,” the court “may apply the law of the state in which [it] sits” (citing Employers
Ins. v. Bodi-Wachs Aviation Ins. Agency, Inc., 39 F.3d 138, 141 n. 2 (7th Cir. 1994))).
B.
Participation in a Fiduciary Breach (Count I)
Under Illinois law, a (non-fiduciary) third party such as Celebrate Life Trust
may be liable for a fiduciary’s breach of duty if the third party actively participates
in that breach—that is, if: (1) the third party commits an act or omission that
furthers or completes the breach of duty; and (2) at the time of the act or omission,
the third party knows (or possesses the “legal equivalent” of knowledge) that the
Carroll is a citizen of California, see [129] ¶ 18. Carroll’s business affiliate, GW Carroll VI
LLC, also a counter-plaintiff, is similarly a citizen of California. See id. ¶ 19 (“Carroll is the
only member of [this limited liability company.]”); Fellowes, Inc. v. Changzhou Xinrui
Fellowes Office Equip. Co. Ltd., 759 F3.d 787, 787 (7th Cir. 2014) (“[A] limited liability
company . . . has the citizenship of each member . . . .” (citing Cosgrove v. Bartolotta, 150
F.3d 729 (7th Cir. 1998))). Smith (and thus Celebrate Life Trust) is a citizen of Missouri, see
id. ¶ 25; Hicklin Eng’g, L.C. v. Bartell, 439 F.3d 346, 348 (7th Cir. 2006) (“The citizenship of
a trust is that of the trustee . . . .” (citing Navarro Sav. Ass’n v. Lee, 446 U.S. 458 (1980))).
Stephenson is a citizen of Illinois. See [129] ¶ 26.
6
10
fiduciary’s actions amount to a breach. See Chabraja v. Martwick, 248 Ill.App.3d
995, 998 (1993) (citing G. Bogert, Trusts & Trustees, 2d Ed., 1982, § 901 at 258–59).
The third party must also benefit from the breach. See, e.g., Kehoe v. Saltarelli, 337
Ill.App.3d 669, 677 (2003).7
Carroll asserts that, as co-owners of the Westminster/Litchfield business,
Carroll and Lansing owed one another a fiduciary duty, and that Lansing breached
that duty when, for example, Lansing “converted” Carroll’s ownership interests in
June 2011. See [129] ¶¶ 95, 96(g). Carroll also contends that, by agreeing to provide
the bulk of the money to fund this “conversion,” Celebrate Life Trust participated in
Lansing’s breach. See id. ¶ 101.
Relying on Allen v. Amber Manor Apartments P’ship, 95 Ill.App.3d 541
(1981), Celebrate Life argues that even if Lansing did breach his duty to Carroll,
The parties dispute whether additional elements must also be proven to establish a
participation claim. While counter-defendants assert that the complainant must also show
that the third party induced the fiduciary to breach his duty, or that the two colluded to
carry out the breach, see [147] at 9–10 (citing Ottawa Sav. Bank v. JDI Loans, Inc., 871
N.E.2d 236, 243 (Ill. App. Ct. 2007)), Carroll disagrees, see, e.g., [160] at 3–4 (citing In re
Pritzker, No. 02 CH 21426, 2004 WL 414313, at *6 (Ill. Cir. Ct. Mar. 5, 2004)).
The Illinois courts sometimes do refer to “participation,” “inducement,” and
“collusion” together. See, e.g., Alpha Sch. Bus Co., Inc. v. Wagner, 391 Ill.App.3d 722, 738
(2009) (citing Paul H. Schwendener, Inc. v. Jupiter Elec. Co., 358 Ill.App.3d 65, 74 (2005));
Kehoe, 337 Ill.App.3d at 677. Regardless of the specific term (or terms) employed, the case
law collectively turns on the same fundamental inquiry—the one I engage here: whether
the plaintiff has alleged facts suggesting that the third-party knowingly or intentionally
involved themselves in a fiduciary’s wrongful behavior. See Chabraja, 248 Ill.App.3d at 999
(noting that “active” participation may comprise misuse of information the defendant knew
to be confidential) (citation omitted); see also In re Pritzker, 2004 WL 414313, at *7
(explaining that under Illinois law, the “active participation” requirement demands that
“the parties knew or had reason to believe at the time of their alleged participation that the
acts were wrongful.”); cf. Dexia Credit Local v. Rogan, No. 02 C 8288, 2003 WL 22349111, at
*8 (N.D. Ill. Oct. 14, 2003) (“A person or entity can be held liable [in Illinois] for colluding in
a breach of fiduciary duty . . . by engaging in activities that are perfectly usual and legal as
long as those activities are done with the requisite knowledge or intent.” (citing Appley v.
West, 832 F.2d 1021, 1030 (7th Cir. 1987))) (emphasis added).
7
11
the trust merely invested in a limited partnership (Royalty Portfolio)—an action for
which the trust cannot be held liable, since a limited partner’s “cash contribution is
substituted for personal liability.” [167] at 5 (quoting Allen, 95 Ill.App.3d at 547).
The reliance on Allen is misplaced. Allen merely explains the legal principle that a
limited partner’s liability “for the debts and obligations of the firm” typically is
capped at the amount initially invested by the limited partner. 95 Ill.App.3d at 547–
48. The question at hand, however, is not whether Realty Portfolio—the limited
partnership in which Celebrate Life invested—has failed to repay a debt or to fulfill
an obligation to another party (and thus whether, and to what extent, Celebrate
Life may be personally liable for that deficiency). The question is whether Celebrate
Life Trust, in agreeing to invest in Realty Portfolio, knowingly participated in a
fiduciary breach by Robert Lansing. I find that Carroll has alleged sufficient facts,
accepted as true, to plausibly suggest that the answer to the latter question is “yes.”
According to Carroll, Celebrate Life Trust knew, before it invested in Realty
Portfolio, that any funds provided to Realty would be used by Lansing to purchase
Carroll’s shares in the Westminster/Litchfield business (i.e., in the “closing” to take
place on June 29, 2011). See [129] ¶ 101. Moreover, says Carroll, the trust’s
attorneys reviewed the agreements governing Carroll and Lansing’s business
relationship—including the buy/sell provisions in dispute—before the trust agreed
to provide any capital to Realty Portfolio.8 Carroll asserts that the trust’s attorneys
Altough Carroll does not state explicitly that the attorneys for Celebrate Life reviewed the
relevant agreements before the trust agreed to invest in the partnership, such a contention
is implied by—and thus may be reasonably inferred from—several allegations in the
counterclaim, including: (1) that the trust, through its attorneys, knew that the planned
8
12
also knew at that time that the terms of the buy/sell provisions would not permit
Lansing to purchase Carroll’s shares on June 29, 2011, because—and as Judge
Manning later confirmed in her April 2012 opinion—any interpretation to the
contrary would run afoul of the plain meaning of those terms. See [129] ¶ 102. As an
attorney’s knowledge is imputed to their client under Illinois law, see Segal v.
Illinois Dep’t of Ins., 404 Ill.App.3d 998, 1002 (2010), Carroll plausibly alleges that
before Celebrate Life Trust agreed to invest in Realty Portfolio (and thus agreed to
fund Lansing’s purchase of Carroll’s shares), the trust itself knew that such an
investment would facilitate a fiduciary breach. The trust went ahead with the
investment, however, and became Realty Portfolio’s limited partner. See id. ¶ 101.
These allegations are sufficient to support the conclusion that Celebrate Life Trust
knowingly furthered a fiduciary breach by Lansing.
The trust argues that Carroll’s reference to Judge Manning’s 2012 opinion is
improper, and cannot support Carroll’s claim that the trust knowingly participated
in a fiduciary breach, because the opinion issued nearly a year after the relevant
time period (i.e., when Celebrate Life decided to invest in Realty Portfolio). See [167]
at 10–11. But the trust mischaracterizes what Carroll alleges. Carroll does not
assert that the attorneys for the trust foresaw in 2011 precisely how Judge
Manning would interpret in 2012 the language of the buy/sell provisions. Such an
allegation would indeed be implausible. Carroll instead contends that the attorneys
“transaction would constitute a breach of Lansing’s . . . fiduciary duties” since the “plain
meaning” of the agreements’ terms did not permit Lansing to take such action, see [129]
¶ 102; and (2) that Celebrate Life nevertheless “ignored” the terms of those agreements and
agreed to fund Lansing’s purchase of Carroll’s shares, see id. ¶¶ 74, 101.
13
for Celebrate Life Trust knew (or, at least, must have known) that the buy/sell
provisions would not permit Lansing to take control of Carroll’s shares on June 29
because the plain meaning of the provisions told them as much. See [129] ¶ 102.
That Judge Manning later confirmed Carroll’s interpretation of the agreements to
be correct merely supports the inference that, when Celebrate Life’s attorneys
looked at those agreements in 2011, they knew—or possessed “the legal equivalent
of such knowledge,” Chabraja, 248 Ill.App.3d at 998—that Lansing was headed for
a breach. At the motion-to-dismiss stage, this is enough. See Brown v. Budz, 398
F.3d 904, 914 (7th Cir. 2005) (“Where pleadings concern matters peculiarly within
the knowledge of the defendants, conclusory pleading . . . should be liberally
viewed” (quoting Tankersley v. Albright, 514 F.2d 956, 964 n. 16 (7th Cir. 1975))).
This case is therefore distinguishable from Ottawa Sav. Bank v. JDI Loans,
Inc., 374 Ill.App.3d 394 (2007), on which counter-defendants rely, see [147] at 10–
11; [167] at 6. In Ottawa, the court explained that the plaintiffs had not successfully
pleaded—indeed, could not successfully plead—that the defendants had induced or
participated in a fiduciary breach, because the defendants had never seen the
contract creating the fiduciary’s duty in the first instance. See 374 Ill.App.3d at 403.
Not so here. As discussed above, Carroll alleges that Celebrate Life Trust, through
its attorneys, did see the agreements from which Lansing’s fiduciary duty to Carroll
arose (and saw them before the trust agreed to fund the allegedly wrongful
transaction). See [129] ¶¶ 74, 101–02.
14
Celebrate Life also contends that Carroll’s participation claim must fail
because Carroll has not pleaded any facts indicating that the trust’s attorneys
“directly contacted” the trust or “specifically warn[ed it] that Lansing did not have
the right to purchase” Carroll’s interests. [167] at 12. This argument misses the
point. Under Illinois law, an attorney’s knowledge is imputed to the client—that is,
it is presumed that the client knows what the attorney knows, “notwithstanding
whether the attorney has actually communicated such knowledge to the client,”
Segal, 404 Ill.App.3d at 1002 (citing Eckel v. Bynum, 240 Ill.App.3d 867, 875 (1992);
Williams v. Dorsey, 273 Ill.App.3d 893, 898 (1995)).
Counter-defendants note that in an earlier opinion, Judge Lefkow declined to
dismiss a similar participation claim against Realty Portfolio, in part because
Realty signed the transfer agreement between Lansing and Carroll—which, to
Judge Lefkow, suggested “active misbehavior” on the part of Realty Portfolio and
thus supported an inference that that entity had furthered or completed Lansing’s
fiduciary breach. See [147] at 6 (quoting [93] at 3). As there is no allegation that the
trust, too, executed the same agreement, counter-defendants posit that the trust did
not “actively” participate in the conversion of Carroll’s interests (and so could not
have furthered or completed Lansing’s breach under Illinois law). See, e.g., [167] at
4–5.
I disagree. While the trust may not have been as active a participant in the
transfer as Realty Portfolio, this does not mean that the trust was not an active
participant at all. As discussed above, Carroll alleges facts sufficient to permit an
15
inference that Celebrate Life Trust provided funds to Lansing, through its
investment as a limited partner in Realty Portfolio, despite knowing that the
provision of such capital would facilitate a breach of Lansing’s fiduciary duty. If
true, these allegations convert what Celebrate Life prefers to characterize as an
innocuous business investment into a knowing participation in Lansing’s
misbehavior. A knowing participation is a sufficiently “active” one in Illinois. See
Appley v. West, 832 F.2d 1021, 1031 (7th Cir. 1987) (observing that when a plaintiff
has alleged that a third party knowingly facilitated a fiduciary’s breach, or
facilitated such a breach in bad faith, “there is a legal theory [in Illinois] on which
[the plaintiff] can possibly recover,” and “[he] should be given the opportunity to
proceed with discovery and to test [his] evidence”).
Carroll has also alleged facts sufficient to support an inference that Celebrate
Life Trust derived a benefit from its knowing participation in Lansing’s breach.
According to Carroll, Celebrate Life has benefitted—through its investment as
limited partner of Realty Portfolio—from owning a majority interest in the shares of
the Westminster/Litchfield business that Realty Portfolio and Lansing purportedly
took from Carroll on June 29, 2011. See id. ¶ 103.
I therefore find that Carroll has stated a plausible claim for relief against
Celebrate Life Trust for participating in Lansing’s alleged fiduciary breach.
Counter-defendants’ motion to dismiss Count I of the counterclaim, as that claim
pertains to Celebrate Life Trust, is denied.
16
C.
Aiding and Abetting a Fiduciary Breach (Count III)
In Illinois, courts also recognize a cause of action for aiding and abetting a
fiduciary’s breach. To prevail on an aiding-and-abetting claim, the plaintiff must
prove: (1) that the defendant aided a party who performed a wrongful, injurycausing act; (2) that the defendant was aware of its role at the time it provided the
assistance; and (3) that the defendant knowingly and substantially assisted the
violation. See Hefferman v. Bass, 467 F.3d 596, 601 (7th Cir. 2006) (citing
Thornwood, Inc. v. Jenner & Block, 344 Ill.App.3d 15 (2003)); see also Time Savers,
Inc. v. LaSalle Bank, N.A., 371 Ill.App.3d 759, 772 (2007).
Here, Carroll claims that both Celebrate Life Trust and Richard Stephenson
aided and abetted Lansing’s breach of fiduciary duty. In support of this claim,
Carroll again alleges that Lansing breached his duty toward Carroll by, inter alia,
taking control of Carroll’s shares in the Westminster/Litchfield business on June 29,
2011, see [129] ¶ 113(g). Carroll asserts that Celebrate Life Trust aided and abetted
this breach by providing the majority of the funding to facilitate it, and that Richard
Stephenson aided and abetted the breach by designating the trust as the funding
source in the first instance. See id. ¶¶ 118–19.
1.
Celebrate Life Trust
The trust contends that Carroll has failed to state a proper aiding-andabetting claim because he has not alleged facts suggesting that the trust knowingly
assisted in Lansing’s purported misdeeds. See [147] at 13. In support of this
contention, Celebrate Life reiterates its earlier arguments concerning Carroll’s
17
“participation” claim against the trust. See id. at 13–14. For the reasons discussed
above, however, I do not find these arguments to be persuasive. Carroll’s
allegations, accepted as true, permit the conclusion that Celebrate Life Trust
knowingly furthered—and thus knowingly participated in—Lansing’s breach. Those
same allegations (both incorporated by reference in, and restated in, Count III, see
[129] ¶¶ 111, 118) similarly support the conclusion that Celebrate Life knowingly
“assisted” in that violation.
My inquiry therefore turns on whether the facts as alleged reasonably
suggest: first, that the trust substantially assisted in Lansing’s “conversion” of
Carroll’s shares by contributing funds to the purchase, and second, that the trust
was aware of its role as “aider and abetter” when it provided that money. See
Hefferman, 467 F.3d at 601. I find that Carroll’s allegations are sufficient on both
fronts.
According to Carroll, Celebrate Life provided more than 99% of the capital
Lansing needed to effect the (allegedly) wrongful purchase of Carroll’s interests in
the Westminster/Litchfield business. See [129] ¶ 118. If the act of providing funds to
Lansing constitutes participation in—or, here, assistance of—Lansing’s breach,
then providing the vast majority of those funds certainly qualifies as “substantial”
participation or assistance. Moreover, Carroll alleges that when the trust provided
the funds, it knew that Lansing did not himself have the money needed to carry out
the purchase. See id. The trust, in other words, knew that by investing in Realty
Portfolio, it was facilitating a (wrongful) transaction that may not otherwise have
18
taken place. Carroll therefore has alleged facts sufficient to permit an inference that
Celebrate Life Trust was aware of its role in Lansing’s purported breach.
2.
Richard Stephenson
Carroll asserts that Richard Stephenson also aided and abetted Lansing’s
breach by designating Celebrate Life Trust as the funding source for the unlawful
purchase of Carroll’s shares. See id. ¶ 119. Stephenson argues that Carroll has not
stated a proper aiding-and-abetting claim against him because: (1) the counterclaim
does not establish how Stephenson “knew” that Lansing’s planned purchase could
constitute a fiduciary breach; and (2) the counterclaim lacks allegations “giving rise
to an inference that Stephenson knowingly directed Lansing” to breach his duty. See
[147] at 14–16. Neither argument is persuasive.
First, I disagree that the counterclaim fails to suggest how Stephenson knew
that Lansing’s purchase of Carroll’s shares might constitute a fiduciary breach.
Carroll alleges that in June 2011, Stephenson shared the same attorneys as
Celebrate Life Trust. See [129] ¶ 119. According to Carroll, Stephenson therefore
“knew” through his lawyers—just as Celebrate Life “knew” through those same
attorneys—that the relevant contractual provisions would not permit Lansing to
purchase Carroll’s interests. See id. For the reasons explained above, this allegation
of knowledge is sufficient to survive counter-defendants’ motion to dismiss.
Stephenson’s second argument is also unavailing, as it does not apply the
appropriate test. Stephenson contends that Carroll’s allegations are deficient
because they fail to suggest that Stephenson ever directed Lansing to breach his
19
duty toward Carroll. See [147] at 15. To successfully plead an aiding-and-abetting
claim, however, Carroll must allege only that Stephenson knowingly assisted
Lansing in committing a breach (and was aware of his role in said breach)—not that
Stephenson individually instructed or “directed” Lansing to commit a particular act.
See Hefferman, 467 F.3d at 601. And here, Carroll has pleaded facts sufficient to
infer a knowing assistance by Stephenson. According to Carroll, Stephenson:
(1) knew that Lansing’s intended acquisition would constitute a fiduciary breach (as
discussed above); (2) had the ability to nonetheless put his family’s money behind
that breach, see [129] ¶ 119 (“Stephenson controls all aspects of his family’s
investments through a . . . web of trusts and [other] entities.”); and (3) exercised
that ability by “designat[ing] the pre-existing Celebrate Life Trust as the funding
source of 99.8% of Realty Portfolio’s capital,” id. And, as Stephenson knew (again
according to Carroll) that Lansing did not otherwise have the financial means to
purchase Carroll’s shares, Stephenson was allegedly aware of his role in facilitating
the wrongful transaction. See id. ¶ 120.9
This case is therefore distinguishable from those cited by Stephenson. See Vasiljevich v.
Levitt, No. 1-10-1329, 2011 IL App (1st) 101329-U, at *8 (Ill. App. Ct. Oct. 31, 2011) (no
facts supporting the allegation that the defendant had “advised and facilitated” a wrongful
sale of property); Fox v. Riverview Realty Partners, No. 12 C 9350, 2013 WL 1966382, at *9
(N.D. Ill. May 10, 2013)) (no facts supporting the allegation that the defendant had
“knowingly encourag[ed], incit[ed], and provid[ed] substantial assistance” in an unlawful
issuance of company stock). In re Parkcentral Global Litig., No. 3:09-CV-0765-M, 2010 WL
3119403 (N.D. Tex. Aug. 5, 2010)), which Stephenson discusses more extensively, see [147]
at 14–15; [167] at 8, applies Texas and Delaware (not Illinois) law, see id. at *9, and in any
event is distinguishable because in that case, there was no factual link between the alleged
“assistance” in the fiduciary breach and the entities charged with having provided that
assistance, see id. Here, by contrast, Stephenson is the one charged with having assisted
Lansing’s purchase of Carroll’s shares, and it is Stephenson who is alleged to have carried
out that assistance by selecting Celebrate Life Trust as the primary funding source for the
purchase. Moreover, to the extent Stephenson suggests that the counterclaim must show or
9
20
Counter-defendants’ motion to dismiss Count III of the counterclaim, as that
claim pertains to Celebrate Life Trust and Richard Stephenson, is therefore denied.
IV.
Conclusion
Accepting as true the facts presented in Carroll’s counterclaim, [129], and
drawing from those facts all reasonable inferences in his favor, I find that the
counterclaim plausibly suggests that Carroll is entitled to relief from Celebrate Life
Trust and from Richard Stephenson. Carroll has put both the trust and Stephenson
on sufficient notice of Carroll’s claims against them. For the reasons discussed
above, counter-defendants’ motion to dismiss Count I of Carroll’s counterclaim
against Celebrate Life Trust (participating in a fiduciary breach), and Count III of
the counterclaim against Celebrate Life Trust and Richard Stephenson (aiding and
abetting a fiduciary breach), [146], is denied.
ENTER:
___________________________
Manish S. Shah
United States District Judge
Date: 10/20/14
establish “evidence” of particular acts or occurrences, see [167] at 8, he invokes the wrong
standard. At the motion-to-dismiss stage, the court “is concerned not with what [counterplaintiff] did or did not show, but rather with what [counter-plaintiff] did or did not allege.”
Brown, 398 F.3d at 914.
21
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?