Lansing v. Carroll
Filing
23
MEMORANDUM and Order Signed by the Honorable Blanche M. Manning on 4/11/2012:Mailed notice(rth, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
ROBERT T.E. LANSING,
Plaintiff,
v.
GEORGE W. CARROLL,
Defendant.
)
)
)
)
)
)
)
No. 11 CV 4153
Judge Blanche M. Manning
MEMORANDUM AND ORDER
After 24 years as business partners, the relationship between plaintiff Robert Lansing and
defendant George Carroll deteriorated to the point that Lansing gave Carroll notice that he
wanted to end the partnership. Carroll initially agreed to buy out Lansing’s shares in the various
investment funds they operated, but then failed to do so. Lansing has sued Carroll for breach of
contract, fraud, and for a declaratory judgment establishing the parties’ rights. Before the court is
Carroll’s motion to dismiss most of those claims. For the reasons that follow, the motion to
dismiss is granted.
BACKGROUND
The following facts are taken from the First Amended Complaint, and accepted as true for
purposes of resolving the motion to dismiss. See Scanlan v. Eisenberg, 669 F.3d 838, 841 (7th
Cir. 2012).
In 1996, Lansing and Carroll began establishing a group of investment funds they called
the Westminster Funds, which were vehicles for investing client monies in commercial real
estate. The Westminster Funds is comprised of ten investment funds managed by eleven general
partner entities. Lansing and Carroll are the primary members of each general partner entity, and
each entity is governed by a separate Operating Agreement. In addition, Lansing and Carroll
created Litchfield Advisors, Inc., which provides management services to the Westminster Funds
and is governed by a Shareholders Agreement. Because the relevant provisions of the various
agreements are essentially identical, for ease of analysis the court will follow the parties’ lead
and treat the individual Operating Agreements and the Shareholders Agreement collectively as a
single Operating Agreement. As was done in the First Amended Complaint, the court shall cite
to the Operating Agreement for Westminster Advisors VIII LLC (attached as Exhibit A to the
First Amended Complaint [14-1]).
The Operating Agreement contains a buy/sell provision, under which either partner can
submit to the other partner an offer to both (1) sell his shares to the other partner, and (2) buy out
the other partner’s shares. The other partner has 30 days to decide which of those two offers to
accept. If the other partner fails to accept either offer within 30 days, then the Offeror (here it
was Lansing) obtains the right to purchase the interests of the Offeree (here it was Carroll), and
the Offeree is obligated to sell. Any purchase or sale is required to close within 120 days after
such right to buy or sell has been exercised. The relevant rights and obligations are set out in
§ 6.7(2) of the Operating Agreement:
(2)
Exercise of Buy-Sell Provision. At any time either the Carroll
Owners or the Landing Owners shall be permitted to institute the following
compulsory buy-sell provisions:
(a)
The Offerors may make an Offer to the Offerees to
sell all of the Interests of the Offerors (a “Sell Offer”), and to
purchase all of the Interests of the Offerees (a “Purchase Offer”).
No Offer shall be subject to the provisions of this Section 6.7
unless such Offer is both an Offer to sell all of the Interests of the
Offerors and an Offcer to purchase all of the Interests of the
Offerees, and such Offer must specify a price per Interest at which
the Offerors is [sic] willing both to sell and to purchase all of the
Page 2
applicable Interests (the “Buy/Sell Price”) and that the total
purchase price is payable by bank certified, cashier’s or treasurer’s
check. The Offer shall go into effect on the later of the notice of
the Offer or when the Offerors place into escrow with a mutually
acceptable escrow agent a cash sum equal to five percent (5%) of
the Offer amount to purchase. Such escrow shall be included in
the purchase consideration and delivered to the Offerees if the
Offerees accept the Offer of the Offerors and the Offerors complete
the purchase, or shall be returned to the Offerors if the Offerees do
not accept the Offer to purchase. Should the Offerors fail to
complete a purchase accepted by the Offerees, the funds deposited
in escrow shall be promptly paid to the Offerees by the escrow
agent. Such Offer shall be irrevocable for a period of thirty (30)
days, and the Offerees may, on or before the thirtieth (30th) day
after the date of such Offer, accept either the Sell Offer or the
Purchase Offer.
...
(c)
Upon acceptance of this Offer, the Offerors shall be
required to sell or to purchase, as the case may be. If the Offerees
elect to accept the Sell Offer, each Offeree shall be obligated to
purchase a pro rata portion of each Offeror’s Interest equal to the
product of (i) the total number of Interests held by such Offeror
multipled by (ii) the quotient of such Offeree’s total Interests
divided by the total Interests held by all Offerees. If the Offerees
fail within such thirty (30) day period to accept such Offer to sell
or to purchase, then the Offer shall automatically expire and be of
no further force or effect; provided, however, that the Offerors
shall thereupon have the right, on or before the fifteenth (15th) day
after the expiration of such thirty (30) day period, to purchase the
Interests of the Offerees, at the Buy/Sell Price, and if the Offerors
exercise such right, the Offerees shall be required to sell their
Interests herein. If the Offerors fail to exercise the right to
purchase within the time specified, either Declaring Member may
thereafter make a new Offer pursuant to this Section 6.7.
(d)
If the Offerors or Offerees, as the case may be,
exercise rights hereunder to buy or sell, a closing thereunder shall
be held at the time and place and on the date specified by the
purchasers by written notice to the sellers, which date shall in any
case be on or prior to the one hundred twentieth (120th) day after
Page 3
such right to buy or sell has been exercised. The purchasers shall
have the right to designate nominees or other designees to accept
the Transfer of title to the Company Interests being transferred. A
condition precedent to any closing on such purchase shall be that
the purchasers shall use commercially reasonable efforts to see that
the sellers and any of their principals or Affiliates are released from
all liability on any personal guaranties made by them, with respect
to the Company’s liabilities.
Operating Agreement (attached as Exhibit A to the First Amended Complaint [14–1] at 15-16).
In addition, the Operating Agreement contains a choice of law provision under which
Illinois law governs its interpretation, construction, and enforcement. Id. at 17. It also contains
the following integration clause: “This Agreement contains the entire agreement among the
parties hereto relating to the Company.” Id.
On November 1, 2010, Lansing sent a letter to Carroll pursuant to § 6.7(2)(a) of the
Operating Agreement in which he offered to either buy Carroll’s interests in the Westminster
Funds, or to sell to Carroll his own interests, for $14,045,000, less Carroll’s unmet or future
capital obligations. On November 26, 2010, Carroll responded with a letter in which he accepted
Lansing’s offer to sell. He also deposited 5% of the sales price into escrow, and set the closing
for March 29, 2011. However, Carroll never showed up to the closing and never consummated
the purchase. After the sale fell through, Lansing twice demanded that Carroll release the
$702,250 in escrowed funds to him, but Carroll has not done so.
On April 3, 2011, Lansing wrote to Carroll stating that as a consequence of Carroll’s
failure to purchase Lansing’s shares, the terms of the Operating Agreement now gave Lansing the
right to purchase Carroll’s shares for the previously offered price of $14,045,000, and required
Carroll to forfeit his $702,250 in escrow. In a letter dated April 5, 2011, Carroll rejected
Page 4
Lansing’s interpretation of the Operating Agreement under which Lansing purported to have
acquired the right to purchase Carroll’s shares and to the funds in escrow. Specifically, under
Carroll’s interpretation, the Operating Agreement addresses only the failure of the Offeror
(Lansing) to complete a purchase of the shares of the Offeree (Carroll), in which case the Offeree
acquires the right to purchase the Offeror’s shares and to the funds in escrow. According to
Carroll, the Operating Agreement does not address the situation of an Offeree’s failure to
purchase the Offeror’s interests.
Despite Carroll’s response, Lansing went ahead and scheduled June 21, 2011, as the
closing date on which he intended to complete his purchase of Carroll’s interests in the
Westminster Funds. In advance of the closing date, on June 17, 2011, Lansing sent Carroll a
Transfer Agreement and a copy of a cashier’s check in the amount of $13,016,385.72,
representing the $14,045,000 purchase price Lansing previously offered, less Carroll’s
$21,678.18 unmet and $1,006,936.10 future capital obligations to the Westminster Funds.
Carroll responded to his receipt of the Transfer Agreement and a copy of the cashier’s check by
stating that he needed more time to evaluate the situation. Lansing then delayed the closing date
by one day, to June 22, 2011.
Lansing attended the June 22, 2011, closing, but Carroll did not. Lansing extended the
closing date to June 29, 2011, but, again, Carroll did not participate. As a result, Lansing
considered Carroll’s interests to have passed to him.
Lansing then filed the instant suit against Carroll. The First Amended Complaint consists
of three counts. In Count I, Lansing seeks a declaratory judgment that under the terms of the
Operating Agreement (1) Lansing (and his designee, Realty Portfolio Holdings LP) acquired
Page 5
Carroll’s interests in the Westminster Funds as of June 29, 2011, and (2) Carroll owes Lansing
the $702,250 placed in escrow. In Count II, Lansing alleges that Carroll breached the Operating
Agreement and the November 26, 2010, agreement to purchase Lansing’s interests by failing to
(1) close the purchase of Lansing’s interests within 120 days of November 26, 2010; (2) tender
the $702,250 that Carroll placed in escrow; (3) honor Lansing’s right to purchase Carroll’s
interests after Carroll failed to purchase Lansing’s interests; (4) voluntarily relinquish control of
his interests to Lansing at the closings scheduled for June 22, 2011, and June 29, 2011; and (5)
act in good faith.
In Count III, Lansing alleges that Carroll made “various false representations” about his
ability to purchase Lansing’s shares. First Am. Compl. [14-1] ¶ 69. However, the only false
representations alleged are: (1) when Carroll’s attorney “informed” Lansing’s attorney on March
17, 2011, that Carroll had the money to close by March 29, 2010, and (2) draft transaction
documents and correspondence sent by Carroll’s attorneys to Lansing’s attorneys beginning on
March 22, 2011. Id. ¶ 71.
Carroll has moved to dismiss Counts I and III in their entirety, and the portions of Count
II in which Lansing alleged that that Carroll breached the parties’ contracts by failing to (1)
tender the $702,250 that Carroll placed in escrow; (2) honor Lansing’s right to purchase Carroll’s
interests after Carroll failed to purchase Lansing’s interests; (3) voluntarily relinquish control of
his interests to Lansing; and (4) act in good faith.
Page 6
ANALYSIS
I.
Standard of Review
A complaint need only contain a “short and plain statement of the claim showing that the
pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). The Seventh Circuit explained that this
“[r]ule reflects a liberal notice pleading regime, which is intended to focus litigation on the
merits of a claim rather than on technicalities that might keep plaintiffs out of court.” Brooks v.
Ross, 578 F.3d 574, 580 (7th Cir. 2009) (internal quotations omitted); see also McCormick v.
City of Chicago, 230 F.3d 319, 322-24 (7th Cir. 2000) (stating that claims under 42 U.S.C.
§ 1983 are not subject to a heightened pleading standard, but are only required to set forth
sufficient allegations to place the court and the defendants on notice of the gravamen of the
complaint).
However, a complaint must contain “enough facts to state a claim to relief that is
plausible on its face” and also must state sufficient facts to raise a plaintiff's right to relief above
the speculative level. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547 (2007). In Ashcroft v.
Iqbal, the Supreme Court stated that a claim has facial plausibility “when the plaintiff pleads
factual content that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009).
The court is neither bound by the plaintiff's legal characterization of the facts, nor
required to ignore facts set forth in the complaint that undermine the plaintiff's claims. Scott v.
O'Grady, 975 F. 2d 366, 368 (7th Cir. 1992). Nevertheless, “in examining the facts and
matching them up with the stated legal claims, we give ‘the plaintiff the benefit of imagination,
Page 7
so long as the hypotheses are consistent with the complaint.’” Bissessur v. Ind. Univ. Bd. of Trs.,
581 F. 3d 599, 603 (7th Cir. 2009).
For ease of analysis, the court begins with the motion to dismiss portions of Lansing’s
breach of contract claim (Count II), before considering the motion to dismiss the declaratory
judgment (Count I) and fraud (Count III) claims.
II.
Count II (Breach of Contract)
Carroll seeks to dismiss those portions of Count II in which Lansing alleged breach of
contract based upon (1) Carroll’s bad faith failure to honor Lansing’s right to purchase Carroll’s
interests and to tender those interests, and (2) Carroll’s failure to tender the money placed into
escrow. Carroll contends that he was not required to do either of those things under the terms of
the Operating Agreement and, therefore, no breach occurred.
The court must first interpret the Operating Agreement in order to determine the parties’
rights and obligations. Under Illinois law, the interpretation of a contract is generally a question
of law, and the “starting point of contract analysis is the language of the contract itself.” Avery v.
State Farm Mut. Auto. Ins. Co., 835 N.E.2d 801, 821 (Ill. 2005). Under the four corners rule, the
court begins by determining whether the contract is facially unambiguous and, if it is, then the
contract is “‘presumed to speak the intention of the parties who signed it. It speaks for itself, and
the intention with which it was executed must be determined from the language used. It is not to
be changed by extrinsic evidence.’” Air Safety, Inc. v. Teachers Realty Corp., 706 N.E.2d 882,
884 (Ill. 1999) (quoting Western Illinois Oil Co. v. Thompson, 186 N.E.2d 285, 287 (1962)).
If the contract contains ambiguous terms susceptible to more than one meaning, “[o]nly
then may parol evidence be admitted to aid the trier of fact in resolving the ambiguity.” Id.
Page 8
Some Illinois courts have also provisionally looked to parol evidence to show that a contract that
appears to be facially unambiguous actually contains an ambiguity. Id. at 885. However, this
provisional admission approach is inapplicable to the Operating Agreement because it contains
an integration clause. Id. (“This court, however, has never formally adopted the provisional
admission approach, and we decline to do so today because the contract in the case before us
contains an explicit integration clause.”).
A.
Lansing’s Purported Right to Purchase Carroll’s Interests
When Carroll failed to close the purchase of Lansing’s interests in the Westminster
Funds, Lansing contends that he acquired the right to purchase Carroll’s interests, and that
Carroll breached the Operating Agreement by refusing to sell his interests to Lansing. However,
Lansing’s interpretation of the Operating Agreement is not supported by the plain meaning of its
terms. Under the Operating Agreement, Carroll was obligated to sell his shares to Lansing under
only two circumstances. First, Carroll was obligated to sell to Lansing only if he accepted
Lansing’s offer to sell or, as the Operating Agreement puts it, in the event Carroll
exercise[s] rights hereunder to . . . sell, a closing thereunder shall
be held at the time and place and on the date specified by the
purchasers by written notice to the sellers, which date shall in any
case be on or prior to the one hundred twentieth (120th) day after
such right to buy or sell has been exercised.
Operating Agreement (attached as Exhibit A to the First Amended Complaint [14-1]) § 6.7(2)(d).
Second, Carroll is obligated to sell to Lansing if Lansing submits a buy/sell offer, but Carroll
fail[s] within such thirty (30) day period to accept such Offer to
sell or to purchase[. T]he Offerors shall thereupon have the right,
on or before the fifteenth (15th) day after the expiration of such
thirty (30) day period, to purchase the Interests of the Offerees at
Page 9
the Buy/Sell Price, and if the Offerors exercise such right, the
Offerees shall be required to sell their Interests herein.
Id. § 6.7(2)(c).
Neither circumstance occurred here. On November 26, 2010, Carroll wrote to Lansing
and accepted Lansing’s offer to sell his interests to Carroll. Therefore, under the terms of
§ 6.7(2)(d), Carroll was obligated to buy Lansing’s interests, as opposed to being obligated to sell
his interests to Lansing. In addition, because Carroll accepted Lansing’s buy/sell offer on
November 26, 2010, Carroll never acquired the right under § 6.7(2)(c) to “purchase the Interests
of the Offerees at the Buy/Sell Price.”
Nevertheless, Lansing argues that Carroll’s acceptance on November 26, 2010, should be
ignored, and he should be deemed to have acquired the right to purchase Carroll’s shares under
§ 6.7(2)(c), because Carroll’s acceptance was invalid. Lansing contends that Carroll’s
acceptance was invalid for two reasons: (1) Carroll repudiated the contract, and (2) he breached
the duty of good faith and fair dealing. As a result, Lansing contends that Carroll’s acceptance
was a nullity and, therefore, Lansing acquired the right to purchase Carroll’s shares upon
Carroll’s failure to accept his buy/sell offer. The court addresses each argument in turn.
1.
Repudiation
Under Illinois law, repudiation occurs when a party states that it cannot or will not
perform its obligations under a contract. See Busse v. Paul Revere Life Ins. Co., 793 N.E.2d 779,
783 (Ill. App. Ct. 2003). “Although a party may state that it intends to honor its obligations, it
may still repudiate the contract by insisting that it is obligated to perform only according to its
own incorrect interpretation of the contract's terms.” Id.
Page 10
Lansing argues that Carroll repudiated the Operating Agreement much like the plaintiff
did in PAMI-LEMB I Inc. v. EMB-NHC, LLC, 857 A.2d 998 (Del. Ch. 2004). PAMI involved an
agreement between partners that included a buy/sell provision similar to the one in the Operating
Agreement. Specifically, like the buy/sell provision at issue here, in PAMI if the offeree failed to
accept an offer to either buy or sell, the offeror acquired the right to purchase the offeree’s
interests. Id. at 1014-15. Rather than accept NHC’s buy/sell offer as made, PAMI purported to
accept it on terms different than the ones offered. Id. at 1014. The court held that PAMI’s
purported acceptance on terms other than those offered was a repudiation of the contract and,
therefore, the acceptance was invalid. Id. Because of the lack of a valid acceptance, the court
held that NHC had acquired the right to purchase PAMI’s interests. Id. at 1015.
The court notes first that PAMI was decided under Delaware, not Illinois law. However,
even if the states’ laws on repudiation are similar, PAMI is nevertheless distinguishable because
the acceptance in that case was invalid because it purported to change the terms of the offer. In
contrast, Carroll accepted Lansing’s November 1, 2010, offer without any attempt to change its
terms. Therefore, even under PAMI, Carroll’s acceptance was not a repudiation of the Operating
Agreement.
Lansing’s allegations are inconsistent with any repudiation by Carroll for the additional
reasons that Carroll offered repeated assurances that he would close his purchase of Lansing’s
shares right up to the planned closing on March 29, 2011. First Am. Compl. ¶ 36. He has also
alleged that Carroll sent a letter to Westminster Funds’ investors stating that he “‘plan[ned] to
close the transaction as soon as possible.’” Id. ¶ 34 (quoting Carroll letter dated January 4, 2011,
attached as Exhibit G).
Page 11
Because Carroll’s acceptance did not attempt to alter the terms of Lansing’s offer, and
because he repeatedly stated that he intended to go through with his purchase of Lansing’s
interests, Lansing’s allegations are inconsistent with his argument that Carroll repudiated the
Operating Agreement.
2.
Good Faith and Fair Dealing
Alternatively, Lansing contends that Carroll’s acceptance was invalid because it was not
made in good faith. Under Illinois law, a duty of good faith and fair dealing is implied in every
contract. See Reserve at Woodstock, LLC v. City of Woodstock, 958 N.E.2d 1100, 1112-13 (Ill.
App. Ct. 2011). “Its purpose is to ensure that parties do not take advantage of each other in a
way that could not have been contemplated at the time the contract was drafted or do anything
that will destroy the other party's right to receive the benefit of the contract.” Gore v. Indiana
Ins. Co., 876 N.E.2d 156, 161 (Ill. App. Ct. 2007). The duty requires “a party vested with
contractual discretion to exercise it reasonably, and not arbitrarily, capriciously, or in a manner
inconsistent with the reasonable expectations of the parties.” Seip v. Rogers Raw Materials
Fund, L.P., 948 N.E.2d 628, 637 (Ill. App. Ct. 2011). However, the duty is “not an independent
source of duties for the parties to a contract, and is ‘used as a construction aid in determining the
intent of the parties where an instrument is susceptible of two conflicting constructions.’” Id.
(quoting Fox v. Heimann, 872 N.E.2d 126, 134 (Ill. App. Ct. 2007)).
Lansing alleges that Carroll exercised discretion when he decided to accept Lansing’s
November 1, 2010, offer to sell, that he did so in bad faith because he “never had the resources or
the ability to purchase Lansing’s interests,” and that his bad faith stemmed “from his ill will
developed against Lansing after [Lansing] initiated the buy/sell process.” First Am. Compl. ¶ 32.
Page 12
As a result, Lansing contends that Carroll’s bad faith nullifies his acceptance. In support, he cites
Pielet v. Hiffman, 948 N.E.2d 87 (Ill. App. Ct. 2011), for the proposition that an act performed in
bad faith can be disregarded, and the other party may proceed as if the bad faith conduct had not
occurred. Response [20-1] at 8.
In Pielet, a real estate partnership offered limited partnerships to its employees as an
inducement to stay with the company. Id. at 97. However, the limited partnerships were subject
to a repurchase clause, under which the general partners could buy back the limited partnerships
owned by departing employees. Id. The general partners did not exercise the repurchase clause
when two employees left the company in the early 1990's. Id. In 2001, those two former
employees sued the general partners for breach of fiduciary duty regarding the limited
partnerships they still owned. Id. at 91.
Eight years after the former employees filed suit, the general partners for the first time
purported to exercise the repurchase clause. Id. at 93. They then filed a motion to dismiss,
arguing that because the former employees no longer owned limited partnerships, they lacked
standing. Id. The state circuit court agreed and dismissed the breach of fiduciary duty count. Id.
However, the state appellate court reversed because the repurchase clause had been exercised in
bad faith and, therefore, dismissal for lack of standing had been improvidently granted:
The motivation behind the exercise of that right was not to buy
back interests of limited partners no longer associated with HSA,
but primarily to simply remove intervenors’ standing. Doing so is
an exercise of discretion that was utilized in a manner inconsistent
with the parties’ reasonable expectations.
Page 13
Id. at 97. Because the general partners exercised the repurchase agreement in a manner that
could not have been contemplated when it was drafted and did so to destroy the plaintiffs’ rights,
the repurchase “cannot operate to remove a party’s standing under circumstances like those.” Id.
Lansing contends that Carroll’s conduct likewise falls outside the scope of what the
parties could have contemplated when drafting the Operating Agreement. Specifically, he
contends that as drafted, the Operating Agreement “would allow Carroll to repeatedly avoid his
buy/sell obligations by sending ‘acceptance’ notices without ever having to close or even having
the intention to close the deal.” Response [20-1] at 10. However, as evidenced by the terms of
the Operating Agreement, the parties did contemplate an Offeree agreeing to purchase the
Offeree’s interests, but then failing to timely complete the purchase, and guarded against that risk
by imposing a 120-day deadline. Missing the deadline subjects the party who failed to complete
the buy-out to a claim of breach of contract, and the remedies that flow from the breach. Because
the Operating Agreement contemplates an Offeree’s failure to complete a purchase and treats it
as a breach of contract, the situation presented here is a far cry from the situation presented in
Pielet, where the parties never contemplated exercising a repurchase clause in order to defeat
standing.
As discussed above, the duty of good faith and fair dealing is not an independent source
of duties for parties. See Fox, 872 N.E.2d at 134. Therefore, it cannot be used to create
additional contractual terms. See LaSalle Bank Nat'l Ass'n v. Moran Foods, Inc., 477 F. Supp. 2d
932, 938-39 (N.D. Ill. 2007). Yet Lansing attempts to do just that by interpreting the Operating
Agreement to give him the right to purchase Carroll’s shares in the event that Carroll accepted an
offer to purchase Lansing’s shares but failed to do so within the 120-day deadline. The explicit
Page 14
terms of the contract do not give him that right, and he may not use the duty of good faith and
fair dealing to create such a right. Rather, as the Operating Agreement contemplates, any failure
to complete an agreed-upon transaction within 120 days results in a breach of contract, and that is
where Lansing must look to for any remedies he is owed.
Accordingly, based upon the terms of the Operating Agreement and the allegations of the
First Amended Complaint, the duty of good faith and fair dealing is inapplicable to Carroll’s
acceptance of Lansing’s offer to sell, and does not nullify Carroll’s acceptance.
3.
Carroll’s Acceptance Was Not “Invalid”
Neither the doctrine of repudiation nor the duty of good faith and fair dealing serve to
invalidate Carroll’s acceptance of Lansing’s offer to sell. Therefore, under the terms of the
Operating Agreement, Lansing never acquired the right to purchase Carroll’s interests, and the
claims in Count II that Carroll breached the Operating Agreement by failing to (1) honor
Lansing’s right to purchase his interests, (2) relinquish his shares to Lansing, and (3) act in good
faith regarding his acceptance of Lansing’s offer to sell are dismissed with prejudice.
B.
Lansing’s Purported Right to Earnest Money
Lansing alleges that Carroll also breached the Operating Agreement by failing to release
the $702,250 Carroll placed in escrow when he accepted Lansing’s offer to sell. In support,
Lansing cites the following language from the buy/sell provision in the Operating Agreement:
The Offer shall go into effect on the later of the notice of the Offer
or when the Offerors place into escrow with a mutually acceptable
escrow agent a cash sum equal to five percent (5%) of the Offer
amount to purchase. . . . Should the Offerors fail to complete a
purchase accepted by the Offerees, the funds deposited in escrow
shall be promptly paid to the Offerees by the escrow agent.
Page 15
Operating Agreement (attached as Exhibit B to the First Am. Compl. [14-1]) § 6.7(2)(a). The
quoted language does not support Lansing’s position. Under § 6.7(2)(a), only the Offeror
(Lansing) was required to place 5% of the offer amount into escrow, and only a failure to
complete the purchase by the Offeror required the release of the funds held in escrow to the
Offeree (Carroll). The provision places no requirement on the Offeree to place any funds in
escrow, nor does it require the Offeree to release any funds placed in escrow.
Nevertheless, Lansing argues that the Operating Agreement “plainly contemplates that the
purchasing party under the buy/sell provision is required to escrow money which would be paid
to the seller party in the event of a failure to complete the purchase . . . regardless of the
definition of ‘Offeror’ and ‘Offeree’ . . .” Response [20-1] at 13. He argues that his
interpretation is further supported by the fact that Carroll placed money in escrow even though
the Operating Agreement does not explicitly require the Offeree to do so.
Under Illinois law, contracts are interpreted based on the plain meaning of the terms used,
and the parties’ intent is discerned solely from those terms absent any ambiguity. See Avery, 835
N.E.2d at 821. The Operating Agreement unambiguously requires only the Offeror to place
money in escrow, and those funds must be released only if the Offeror fails to complete an
agreed-upon purchase. Accordingly, the Operating Agreement does not require Carroll to release
to Lansing the funds placed in escrow or to release funds that are held in escrow.
Therefore, the claim in Count II alleging that Carroll breached the Operating Agreement
by failing to release the escrow funds is dismissed with prejudice.
Page 16
III.
Declaratory Judgment (Count I)
Carroll also seeks the dismissal of Count I, in which Lansing seeks a declaratory
judgment that (1) he and his designee, Realty Portfolio, have acquired Carroll’s interests in the
Westminster Funds, and (2) Carroll must release to Lansing the $702,250 in escrow.
To begin, the court notes that in Count I, Lansing essentially seeks the same relief sought
in Count II—an order that Carroll’s interests in the Westminster Funds have passed to Lansing
because of Carroll’s breach, and that Carroll must release to Lansing the funds in escrow.
Because the declaratory judgment claim (Count I) “fails to add anything” not already raised in the
breach of contract claim (Count II), in an exercise of its discretion the court dismisses Count I.
See Vulcan Golf, LLC v. Google, Inc., 552 F. Supp. 2d 752, 778 (N.D. Ill. 2008) (the court has
discretion not to hear a declaratory judgment claim, including the discretion to dismiss a
declaratory judgment claim that is duplicative of other claims).
In addition, the court notes that even if it had not exercised its discretion to dismiss the
declaratory judgment claims as duplicative, those claims would be subject to dismissal for the
same reasons that led the court to dismiss portions of Count II. Specifically, Lansing’s
allegations that Carroll was obligated to purchase Lansing’s interests and was obligated to release
to Lansing the funds in escrow are at odds with the plain language of the Operating Agreement.
Accordingly, Count I is dismissed with prejudice.
IV.
Fraud (Count III)
Finally, in Count III Lansing alleges that Carroll made “various false representations
regarding his ability to ‘close’ the transaction,” and did so with “ill will.” First Am. Compl. [141] ¶ 69. The alleged false representations are not quoted, but rather are summarized as follows:
Page 17
(1) Carroll’s attorney “informed Lansing’s attorney on March 17, 2011, that Carroll has the
money and intends to close by March 29,” 2011, and (2) “[e]ach draft and piece of
correspondence” that Carroll instructed his attorneys to send to Lansing’s attorneys beginning on
March 22, 2011, in preparation for the planned March 29, 2011, closing. Id. ¶¶ 70, 71. The
complaint alleges that the misrepresentations “were done with the intent to frustrate Lansing’s
consummation of the buy/sell process,” and caused him to “incur[] significant attorney’s fees to
review and prepare necessary documents” for a closing that never occurred. Id. ¶ 73.
Carroll moves to dismiss for failure to state a claim, focusing on the fact that Illinois law
restricts the ability to prevail on a claim of fraud premised on a promise of future conduct. See,
e.g., HPI Health Care Serv., Inc. v. Mt. Vernon Hosp., Inc., 545 N.E.2d 672, 682 (Ill. 1989)
(“misrepresentations of intention to perform future conduct, even if made without a present intent
to perform, do not generally constitute fraud”). But the court notes a more fundamental problem
with Lansing’s allegations touched on only briefly in the motion to dismiss: the lack of
particularity.
To establish a claim of fraud under Illinois law, a plaintiff must satisfy each of the
following elements: “(1) a false statement of material fact; (2) defendant's knowledge that the
statement was false; (3) defendant's intent that the statement induce the plaintiff to act; (4)
plaintiff's reliance upon the truth of the statement; and (5) plaintiff's damages resulting from
reliance on the statement.” Tricontinental Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475
F.3d 824, 841 (7th Cir. 2007). In addition, under Federal Rule of Civil Procedure 9(b), to state a
claim of fraud, the plaintiff “must state with particularity the circumstances constituting fraud.”
Fed. R. Civ. P. 9(b). To satisfy the particularity requirement, an allegation of fraud must include
Page 18
the “who, what, when, where, and how: the first paragraph of any newspaper story.” DiLeo v.
Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990).
Lansing has failed to satisfy the particularity requirements for stating a claim of fraud.
Although the complaint alleges that the first misrepresentation occurred on March 17, 2011, it
never quotes the specific misrepresentation made and, in fact, never identifies whether the
misrepresentation was written or oral, characterizing it only as Carroll’s attorney having
“informed” Lansing’s attorneys that Carroll had the money to close. As for the draft transaction
documents that Lansing also contends constituted misrepresentations, he alleges only that
Carroll’s attorneys began sending them on March 22, 2011. The complaint does not attach or
quote from the documents, identify whether they were accompanied by any oral or written
statements such as a cover letter, or in any other way describe the circumstances surrounding
their delivery.
Without such particulars, whether Lansing has alleged a misrepresentation about a current
fact or a promise of future performance cannot be assessed, nor can the applicability of Illinois’
economic loss doctrine. Furthermore, in the absence of any allegation about the circumstances
accompanying the delivery of draft closing documents, it is questionable whether their delivery
alone is even a factual assertion that can serve as the basis of a claim of fraud. See In re Polo
Builders, 388 B.R. 338, 379 (Bankr. N.D. Ill. 2008) (the tender of a check as earnest money is
not a factual assertion absent any express representation by the tenderer as to the validity of the
check).
Page 19
Because Lansing has failed to allege fraud with particularity, Count III is dismissed
without prejudice to him filing an amended complaint satisfying the requirements of Federal
Rule of Civil Procedure 9(b).
CONCLUSION
For the reasons stated, the motion to dismiss is granted and the following claims are
dismissed: Count I is dismissed with prejudice; the claims in Count II premised on Lansing’s
alleged rights to Carroll’s interests in the Westminster Funds and in the funds held in escrow are
dismissed with prejudice; and Count III is dismissed without prejudice. The remainder of Count
II—the allegations that Carroll breached the parties’ agreements by failing to purchase Lansing’s
shares—was not the subject of the motion and is not dismissed. Lansing is granted leave to file a
Second Amended Complaint in conformance with this order by May 4, 2012. The parties shall
report for a status hearing on May 29, 2012, at 11:00 a.m.
ENTER:
DATE: April 11, 2012
_________________________________________
Blanche M. Manning
United States District Judge
Page 20
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?