Super Pawn Jewelry & Loan v. Brewer, et al.

Filing 150

MEMORANDUM Opinion and Order Signed by the Honorable Robert M. Dow, Jr on 3/29/2013. Mailed notice(tbk, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

SUPER PAWN JEWLERY & LOAN, LLC
d/b/a GEMRUSH,
Plaintiff,
v.
AMERICAN ENVIRONMENTAL ENERGY,
INC., et al.,
Defendants.

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Case No. 11-cv-8894
Judge Robert M. Dow, Jr.

MEMORANDUM OPINION AND ORDER

Before the court are motions to dismiss by Defendants American Environmental Energy,
Inc. [57]; Christopher Wilson and Wilson Haglund & Paulsen, P.C. [58]; Brent Brewer, John
Montague, and Steven Byle [59]; and Weaver & Martin, LLC [51]. For the reasons stated
below, those motions are granted. Also before the Court is Defendant TD Ameritrade’s Motion
to compel arbitration [117] and to dismiss [120]. For the reasons stated below, Defendant TD
Ameritrade’s motion to compel arbitration is granted and its motion to dismiss is stricken as
moot. Also pending in this case is Plaintiff’s motion for default [127] against Alan Sinderman
and Quicksilver Stock Transfer, LLC. That motion is not discussed in this opinion and will be
decided in a separate order.

I.

Background

The factual background is drawn from Plaintiff’s complaint.

At this stage in the

proceedings, the Court assumes all well-pled allegations to be true and draws all reasonable

inferences in Plaintiff’s favor. See Killingsworth v. HSBC Bank Nev., N.A., 507 F.3d 614, 618
(7th Cir. 2007).
Plaintiff purchased one million shares of stock in The Conscious Company (CCCX) in
August 2007. Compl. ¶ 2. Plaintiff’s CCCX certificate was deposited in Plaintiff’s brokerage
account with Defendant TD Ameritrade. Compl. ¶ 3. On April 18, 2008, CCCX merged with
Defendant American Environmental Energy, Inc. (AEEI). Compl. ¶ 5. According to the merger
plan, each share of CCCX was to be exchanged with a share of AEEI, the surviving public
company. Compl. ¶ 6. Thus, without any further action, Plaintiff became (or should have
become) an AEEI shareholder. See, e.g., compl. ¶¶ 6, 9.
In October 2008, Lawrence Glassman, owner and operator of Plaintiff Gemrush,
discovered that CCCX had been merged into AEEI.

Compl. ¶ 92.

Glassman contacted

Defendant AEEI to inquire about how to have his CCCX shares reissued as shares of AEEI.
Compl. ¶ 93. Defendant Brewer, AEEI’s chairman and CEO, “acknowledged and apologized to
Mr. Glassman for the oversight in not including Plaintiff’s CCCX shares in the Merger, and told
Mr. Glassman that AEEI would repurchase the shares for $75,000, and that Defendant Wilson
and his firm, Defendant Wilson, Haglund, and Paulson, AEEI’s corporate counsel, would handle
the negotiations for the repurchase of the shares.” Compl. ¶ 94.
From approximately November 2008 to February 2009, Plaintiff and Defendant AEEI,
through its lawyers, engaged in settlement negotiations. Compl. ¶ 95 and exhibits N & O. In
January 2009, Glassman received a draft settlement agreement. Compl. ¶ 97. He did not like the
terms of the settlement offer: AEEI’s repurchase of the shares for $75,000 was no longer
presented as an unconditional obligation, but instead as an option that AEEI could exercise at its
discretion. Compl. ¶ 99. The settlement also proposed to change the status of Plaintiff’s shares

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from “free-trading and unrestricted” to restricted, making them subject to what Plaintiff
describes as “stringent” lock-up provisions. Compl. ¶ 100. Glassman refused to execute the
proposed settlement agreement. Compl. ¶ 102. “When Mr. Glassman refused to sign this
agreement, AEEI, Brewer, and Wilson began to collude to deny Plaintiff of its lawful ownership
of AEEI stock owed it as a result of the merger.

This collusion transformed their mere

negligence [for failing to include Plaintiff’s shares in the merger] to into a fraudulent scheme
against Mr. Glassman.” Compl. ¶ 102. Following the failed settlement negotiations, Defendants
Brewer and Wilson claimed that “Gemrush was in fact not a valid and lawful owner of the
Shares, and that Plaintiff’s shares were ‘counterfeit’ shares.” Compl. ¶ 103. The parties have
continued to dispute ownership of the shares. On December 15, 2011, that dispute spawned this
lawsuit.
Plaintiff describes this as “a very straightforward case” that “simply asks [whether]
plaintiff [is] a valid owner of AEEI common stock” or whether through negligence or fraud
Plaintiff was deprived of its ownership, see [104-1 at 1], but Plaintiff’s 53-page, 240-paragraph
complaint alleging twenty counts against fourteen Defendants belies that description. Or, more
likely, the case is actually “very straightforward” but cannot be straightforwardly resolved
because of Plaintiff’s scattershot approach. Plaintiff has sued AEEI, its chairman and CEO
following the merger (Brent Brewer), several members of AEEI’s board (including Steven Byle
and John Montague), AEEI’s corporate counsel (Christopher Wilson and Wilson Haglund &
Paulsen), AEEI’s auditors (Weaver & Martin, LLC), and the stock brokerage where Plaintiff had
a customer account (TD Ameritrade), and several others who do not have motions currently
before the Court. Defendant TD Ameritrade has moved to compel arbitration. The other
Defendants named in this paragraph have moved to dismiss.

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AEEI has not moved to dismiss all of Plaintiff’s claims against it, so this case is set to
continue as to (at least) a dispute about (1) whether AEEI negligently failed to include Plaintiff’s
shares in the merger (Count I, negligence); (2) whether AEEI converted Plaintiff’s shares to its
own use (Count VIII, conversion); (3) whether AEEI breached a contract with Plaintiff and
violated its duty of good faith and fair dealing by failing to include Plaintiff’s shares in the
merger (Count IX, breach of contract; XIV, duty of good faith and fair dealing); and (4) whether
promissory estoppel prevents AEEI from denying Plaintiff’s ownership of its shares (Count XIII,
promissory estoppel).

II.

Legal Standard

A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint, not the merits of
the case. Gibson v. City of Chi., 910 F.2d 1510, 1520 (7th Cir. 1990). In reviewing a motion to
dismiss under Rule 12(b)(6), the Court takes as true all factual allegations in Plaintiff’s
complaint and draws all reasonable inferences in its favor. Killingsworth, 507 F.3d at 618. To
survive a Rule 12(b)(6) motion to dismiss, the claim first must comply with Rule 8(a) by
providing “a short and plain statement of the claim showing that the pleader is entitled to relief”
(Fed. R. Civ. P. 8(a)(2)), such that the defendant is given “fair notice of what the * * * claim is
and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)
(quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Second, the factual allegations in the claim
must be sufficient to raise the possibility of relief above the “speculative level,” assuming that all
of the allegations in the complaint are true. E.E.O.C. v. Concentra Health Servs., Inc., 496 F.3d
773, 776 (7th Cir. 2007) (quoting Twombly, 550 U.S. at 555). “A pleading that offers ‘labels and
conclusions’ or a ‘formulaic recitation of the elements of a cause of action will not do.’”

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Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). However,
“[s]pecific facts are not necessary; the statement need only give the defendant fair notice of what
the * * * claim is and the grounds upon which it rests.” Erickson v. Pardus, 551 U.S. 89, 93
(2007) (citing Twombly, 550 U.S. at 555) (ellipsis in original). The Court reads the complaint
and assesses its plausibility as a whole. See Atkins v. City of Chi., 631 F.3d 823, 832 (7th Cir.
2011); cf. Scott v. City of Chi., 195 F.3d 950, 952 (7th Cir. 1999) (“Whether a complaint
provides notice, however, is determined by looking at the complaint as a whole.”).
Where a complaint sounds in fraud, the allegations of fraud must satisfy the heightened
pleading requirements of Rule 9(b). Fed. R. Civ. P. 9(b); see also Borsellino v. Goldman Sachs
Group, Inc., 477 F.3d 502, 507 (7th Cir. 2007) (citing Rombach v. Chang, 355 F.3d 164, 170–71
(2d Cir. 2004)). Rule 9(b) states that for “all averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with particularity.” Fed. R. Civ. P. 9(b). A
complaint satisfies Rule 9(b) when it alleges “the who, what, when, where, and how: the first
paragraph of a newspaper story.” Borsellino, 477 F.3d at 507 (quoting DiLeo v. Ernst & Young,
901 F.2d 624, 627 (7th Cir. 1990)). Rule 9(b), read in conjunction with Rule 8, requires that the
plaintiff plead “the time, place and contents” of the purported fraud. Fujisawa Pharm. Co., Ltd.
v. Kapoor, 814 F.Supp. 720 (N.D. Ill. 1993).

“The purpose of this heightened pleading

requirement is to ‘force the plaintiff to do more than the usual investigation before filing his
complaint.’” Amakua Dev. LLC v. H. Ty Warner, 411 F. Supp. 2d 941, 953 (N.D. Ill. 2006)
(citations and internal quotation marks omitted).
Defendants argue that many of Plaintiff’s claims are time-barred.

The period of

limitations is an affirmative defense and “[c]omplaints need not anticipate defenses and attempt
to defeat them.” Richards v. Mitcheff, 969 F.3d 635, 637 (7th Cir. 2012). That said, “[a]

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plaintiff whose allegations show that there is an airtight defense has pleaded himself out of
court.” Id. In such instances, and on a proper motion — whether the motion to dismiss based on
the statute of limitations is correctly described as falling under Rule 12(c) or harmlessly included
in a broader Rule 12(b)(6) motion — the Court will dismiss time-barred claims based on the
pleadings. See Id.

III.

Analysis

A.

Securities Fraud (Counts III, IV, and V)

Plaintiff alleges several claims under Section 10(b) of the Security and Exchange Act of
1934 and SEC Rule 10b-5. Section 10(b) makes it “unlawful for any person * * * [t]o use or
employ, in connection with the purchase or sale of any security * * * any manipulative or
deceptive device or contrivance in contravention of such rules and regulations as the
Commission may prescribe * * * .” 15 U.S.C. § 78j(b). As promulgated by the SEC, Rule 10b–5
makes it unlawful for any person:
a) To employ any device, scheme or artifice to defraud,
b) To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in light of the
circumstances under which they are made, not misleading, or
c) To engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b–5.

In addition, Plaintiff alleges that several Defendants perpetuated

securities fraud as “control persons” in violation of Section 20(a) of the Securities Exchange Act,
15 U.S.C. § 78t(a). Plaintiff’s Section 20(a) claims depend on an actionable primary securities

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law violation. See Boca Raton Firefighters’ and Police Pension Fund v. Devry, Inc., 2012 WL
1030474, at *19 (N.D. Ill. March 27, 2012); In re Allscripts, Inc. Securities Litigation, 2001 WL
743411, at *12 (N.D. Ill. June 29, 2001) (“If a Complaint does not adequately allege an
underlying violation of the securities laws, however, the district court must dismiss the section
20(a) claim.”).
Defendants argue that Plaintiff has failed to state claim under Rule 10b-5 for a number of
reasons. Most fundamentally, Plaintiff has not alleged violations “in connection with a purchase
or sale of any security.” In response, Plaintiff states:
[P]laintiff was indeed a purchaser — he “bought” his AEEI stock on April 16, the
date the date of the Merger — his consideration was the exchange of his CCCX
stock.
Pl’s Resp. [102-1 at 7]. That odd use of scare quotes together with the failure to cite any
authority for the proposition that a shareholder purchases shares through a merger confirms
Defendants’ point.

Regardless, Plaintiff’s complaint undermines the idea advanced in his

response briefs that he purchased shares in the merger. One of the complaint’s unifying themes
is that
Irrespective of AEEI’s negligence in failing to account for Plaintiff’s shares,
Plaintiff automatically became a shareholder of AEEI as a result of the Merger,
whether or not AEEI had or should have had knowledge that Plaintiff was a
CCCX shareholder.
Compl. ¶ 9; Compl. ¶ 73 (“Irrespective of AEEI’s due diligence failure, Plaintiff automatically
became the legal and valid owner of 1,000,000 shares of AEEI common stock simply by virtue
of the execution of the Plan of Merger, without any additional action necessary on its part.”)
(emphasis in original). Plaintiff does not allege a purchase or sale of shares; he claims that he
automatically retained his shares. And losses from retention, if that is his theory, are not
actionable under Rule 10b-5. See Gandhi v. Sitara Capital Mgmt., LLC, 689 F. Supp. 2d 1004,
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1010-11 (N.D. Ill. 2010) (“it is well-established that retention of a security — that is, the
decision not to sell a security — is not actionable under Rule 10b-5.”) (citing Blue Chip Stamps
v. Manor Drug Stores, 421 U.S. 723, 754-55 (1975); O'Brien v. Cont'l Ill. Nat'l Bank & Trust
Co. of Chi., 593 F.2d 54, 58-59 (7th Cir. 1979)).
Moreover, the allegations in Plaintiff’s complaint and its responses to Defendants’
motions to dismiss make it plain that any Rule 10-b5 claims are time-barred. The two-year
statute of limitations for such claims “begins to run once the plaintiff did discover or a
reasonably diligent plaintiff ‘would have discover[ed] the facts constituting the violation’ —
whichever comes first.” Merck & Co., Inc. v. Reynolds, 130 S.Ct 1784, 1789 (2010) (quoting 28.
U.S.C. § 1658(b)(1)); see also McCann v. Hy-Vee, Inc., 633 F.3d 926, 929-30 (7th Cir. 2011).
According to Plaintiff’s complaint, Plaintiff was wrongfully deprived of AEEI shares on
April 18, 2008, when CCCX merged into AEEI. Compl. ¶ 5. Glassman learned that Plaintiff
was not given those shares in October 2008, when he “went online to obtain information about
his CCCX shares.” Compl. ¶ 92. Glassman “then contacted AEEI to inquire how he could get
his CCCX shares reissued as AEEI shares, as per the merger, and obtain a new certificate issued
by AEEI to replace his CCCX certificate.” Compl. ¶ 93. “Defendant Brewer acknowledged and
apologized to Glassman for the oversight in not including Plaintiff’s CCCX shares in the Merger,
and told Glassman that AEEI would repurchase the shares for $75,000 and that Defendant
Wilson and his firm, Defendant Wilson, Haglund, and Paulsen, AEEI’s corporate counsel, would
handle the negotiations for the repurchase of the shares.” Compl. ¶ 94. Negotiations began in
November 2008. Compl. ¶ 95.
In other words, the merger occurred in April 2008 and Plaintiff learned of the problem
with its shares in October 2008. By November 2008, the parties were negotiating a settlement.

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Therefore, at the latest, Plaintiff’s claim (if any) accrued in November 2008. By then, Plaintiff
knew enough to seek a settlement. If his actual diligence led him to seek a settlement in
November 2008, his reasonable diligence could have led him to discover the facts that he now
alleges as securities violations. But Plaintiff did not sue before or even soon after the settlement
negotiations with AEEI; Plaintiff waited to sue until December 15, 2011. Therefore, based on
his own allegations, it is evident that Plaintiff’s Securities Act claims are time-barred.1

B.

Illinois Consumer Fraud Act (Counts XVI and XVII)

By depriving Plaintiff of AEEI shares, Plaintiff believes that various Defendants engaged
in “unfair business practices” in violation of the Illinois Consumer Fraud and Deceptive Business
Practices Act (ICFA). ICFA is “a regulatory and remedial statute intended to protect consumers,
borrowers, and business persons against fraud, unfair and deceptive business practices.”
Robinson v. Toyota Motor Credit Corp., 775 N.E.2d 951, 960 (Ill. 2002). “[A] plaintiff may
pursue a private cause of action under [ICFA] if the circumstances that relate to the disputed
transaction occur primarily and substantially in Illinois.” Avery v. State Farm Mut. Auto Ins.,
835 N.E.2d 801, 853-54 (Ill. 2005).

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Plaintiff’s complaint asserts that the Court has subject matter jurisdiction based its federal securities
claims. See 28 U.S.C. § 1331. Once all federal claims are dismissed at an early stage of the case, as here,
the Court typically dismisses remaining state-law claims without prejudice, allowing the Plaintiff to
pursue those claims in federal court. See Groce v. Eli Lilly, 193 F.3d 496, 501 (7th Cir. 1999) (“it is the
well-established law of this circuit that the usual practice is to dismiss without prejudice state
supplemental claims whenever all federal claims have been dismissed prior to trial”). In this case,
however, Plaintiff carefully noted the complete diversity of the parties and that the amount in controversy
exceeds $75,000. See 28 U.S.C. § 1332. Because it is plain that Plaintiff could amend his jurisdictional
statement successfully to reassert subject matter jurisdiction under 28 U.S.C. § 1332, dismissal for lack of
subject matter jurisdiction would be inappropriate. Muscarello v. Ogle County Bd. of Com'rs, 610 F.3d
416, 425 (7th Cir. 2010) (“[T]he rule in this circuit has been that the ‘court’s discretion to dismiss for lack
of subject matter jurisdiction when the plaintiff could have pleaded the existence of jurisdiction and when
in fact such jurisdiction exists, should be exercised sparingly.’”) (quoting Hoefferle Truck Sales, Inc. v.
Divco-Wayne Corp., 523 F.2d 543, 549 (7th Cir. 1975)); see also 28 U.S.C. § 1653.

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The elements of a claim under ICFA are: (1) a deceptive act or unfair practice by the
defendant, (2) the defendant’s intent that the plaintiff rely on that act or practice, and (3) that the
act or practice occurred in the course of trade or commerce. Id.; see also Reeder v. HSBC USA,
Inc., 2009 WL 4788488, *11 (N.D. Ill. Dec. 8, 2009) (citing cases). A claim for damages under
ICFA requires proof of actual damages proximately caused by the defendant. See 815 ILCS
505/10a(a); Oshana v. Coca-Cola Co., 472 F.3d 506, 514-15 (7th Cir. 2006).
The statute of limitations for ICFA claims is three years. 815 ILCS 505/10(a)e. An
ICFA claim accrues when “a person knows or reasonably should know of his injury and also
should know that it was wrongfully caused.” Knox College v. Celotex Corp., 430 N.E.2d 976,
979 (Ill. 1982); Tammerello v. Amerquest Mortg. Co., 2006 WL 2860936, *7 (N.D. Ill. Sept. 29,
2006). In other words, the limitations period begins to run when the fraud was discovered or
could have been discovered through due diligence. Asad v. Hartford Life Ins. Co., 116 F. Supp.
2d 960, 963 (N.D. Ill. 2000).
As with Plaintiff’s securities fraud claims, the allegedly “deceptive” or “unfair” practice
occurred in April 2008, when Plaintiff was not issued shares of AEEI. In October 2008,
Glassman went online and learned of the problem. Negotiations over a settlement of the dispute
got underway in November 2008. All three of those dates are more than three years before
Plaintiff filed this lawsuit on December 15, 2011. So, unless Plaintiff has offered a reason to
delay accrual, Plaintiff’s ICFA claims are time-barred.
In an attempt to save his ICFA claims, Plaintiff invokes the discovery rule. But even if
the Court were to apply it, it would not make Plaintiff’s ICFA claims timely: “when a statute of
limitations does not begin to run until ‘discovery,’ the discovery referred to is merely discovery
that the plaintiff has been wrongfully injured.” Fidelity Nat. Title Ins. Co. of New York v.

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Howard Savings Bank, 436 F.3d 836, 839 (7th Cir. 2006) (applying Illinois law) (citing Golla v.
General Motors Corp., 657 N.E.2d 894, 898 (Ill. 1995); Jackson Jordan, Inc. v. Leydig, Voit &
Mayer, 633 N.E.2d 627, 630-31 (Ill. 1994); Evans v. City of Chicago, 434 F.3d 916, 934, n. 28
(7th Cir. 2006) (Illinois law)). Plaintiff could have sued about his claimed right to AEEI shares
in April 2008. Plaintiff actually knew that he was injured in October 2008. Plaintiff knew that
correcting the injury without litigation was going to require “negotiation” in November 2008.
Plaintiff suggests that the discovery date for his claim is February 2009, when settlement
negotiations with Defendants reached an impasse. But a settlement negotiation does not toll the
limitations period. See Doe v. Blue Cross & Blue Shield United of Wisconsin, 112 F.3d 869, 875
(7th Cir. 1997) (“the running of a limitations period is not suspended by settlement
negotiations”). That is a sensible rule, for Plaintiff “could of course have filed the suit yet
continued negotiating a settlement. Most suits are settled.” Id.; see also Batchelor v. Donovan,
2009 WL 4173180, at *4 (N.D. Ill. Nov. 23, 2009) (“Assuming a reasonable finder of fact could
conclude that [the plaintiff’s] actual reason for not filing a timely complaint was that she thought
settlement was possible, the law does not permit tolling in those circumstances.”). Accordingly,
Plaintiff’s ICFA claims are time-barred.
For completeness, the Court notes that Plaintiff also declares that Glassman could not
have reasonably discovered the alleged fraud until July 31, 2011. Compl. ¶ 118 (“July 31, 2011
Mr. Glassman learned from his counsel for the first time, inter alia, that Defendant AEEI and the
other defendants had perpetrated a fraud against him. Until that time, Plaintiff had no cause to
believe a fraud had been perpetrated upon him.”). But that conclusion is undermined by the
documents that Plaintiff attached to its complaint. Exhibit N, for instance, includes an e-mail to
Glassman from November 2008 discussing a possible settlement with AEEI, and Exhibit O is a

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draft settlement agreement dated “February __ 2009.” Plaintiff cannot (and in fact does not)
disavow its exhibits, and the Court will not ignore them. See Thompson v. Ill. Dept. of Prof'l
Reg., 300 F.3d 750, 754 (7th Cir. 2002) (conflicts between a complaint and attached exhibits
may be resolved in favor of the exhibits). That approach is consistent with the principle that
“‘determining whether a complaint states a plausible claim for relief will ... be a context-specific
task that requires the reviewing court to draw on its judicial experience and common sense.’”
Cooney v. Rossiter, 583 F.3d 967, 971 (7th Cir. 2009) (quoting Iqbal, 556 U.S. at 679).
As an additional basis for dismissal, Defendants argue that Plaintiff lacks standing to sue
under the ICFA for a fraud that was allegedly perpetuated in California by a business
incorporated in Nevada. As the Seventh Circuit observed in Crichton v. Golden Rule Ins. Co.,
576 F.3d 392, 396 (7th Cir. 2009), the Illinois Supreme Court has “severely limited the
extraterritorial reach of the ICFA.” In particular, “the ICFA did not create a cause of action
fraudulent acts that had little or no connection to the state of Illinois.” Id. (citing Avery, 835
N.E.2d at 852-53). After the Illinois Supreme Court’s decision in Avery,
a plaintiff may pursue a private cause of action under the Consumer Fraud Act if
the circumstances that relate to the disputed transaction occur primarily and
substantially in Illinois. In adopting this holding, we recognize that there is no
single formula or bright-line test for determining whether a transaction occurs
within this state. Rather, each case must be decided on its own facts.
Avery, 835 N.E.2d at 853-54. The consideration in Avery included “(1) the claimant's residence;
(2) the defendant's place of business; (3) the location of the item that was the subject of the
transaction; (4) the location of the claimant's contacts with the defendant; (5) where the contracts
at issue were executed; (6) the contract's choice of law provisions; (7) where the deceptive
statements were made; (8) where payments for services where sent; and (9) where complaints

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were to be directed.” The Clearing Corp. v. Fin. And Energy Exch. Ltd., 2010 WL 2836717, at
*6 (N.D. Ill. July 16, 2010) (citing Avery, 835 N.E.2d at 853-54).
Defendants argue that the sole connection to Illinois is that Plaintiff is an Illinois business
and that its president is an Illinois resident. There is no allegation that the alleged fraud was
perpetuated in Illinois and Plaintiff does not dispute that all of AEEI’s corporate decisions and
communications originated in California. Even so, Plaintiff believes that the events at issue have
a sufficient connection to Illinois because settlement communications reached him in Illinois.
That, however, is not a connection with the alleged injury but with the attempt to settle the
parties’ dispute. The alleged harm — the failure to recognize Plaintiff’s shares of AEEI — did
not “occur primarily and substantially in Illinois.” See Walker v. S.W.I.F.T. SCRL, 491 F. Supp.
2d 781, 795 (N.D. Ill. 2007) (granting a motion to dismiss an ICFA claim because the only
alleged connection to Illinois was the plaintiff’s residency).

Thus, the Court agrees with

Defendants that the case’s weak connection to Illinois provides an additional basis for dismissing
Plaintiff’s ICFA claims.
C.

Common Law Fraud (Count VI and VII)

In its complaint, Plaintiff’s alleges that (1) the parties disputed Plaintiff’s ownership of
shares through the April 2008 merger; (2) the parties acknowledged the dispute in October 2008;
(3) the parties entered negotiations in November 2008; and (4) the negotiations broke down in
February 2009. Plaintiff’s fraud claim is not about (1), as might be expected, but about (4). In
other words, Plaintiff claims fraud based on broken settlement negotiations. For example, in
response to AEEI’s motion to dismiss:
Plaintiff specifically pled in its complaint AEEI negligently failed to account for
its stock in the CCCX/AEEI merger (Comp. ¶¶ 69-73, 90). Plaintiff also
specifically plead that subsequently, AEEI engaged in a fraudulent scheme to
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deny and prevent plaintiff from receiving its lawful ownership of its shares
(Comp. ¶¶ 123, 124, 125). * * * AEEI’s fraud in preventing and denying
plaintiff of its ownership of AEEI stock began in or about February, 2009, when
AEEI reneged on a repurchase/settlement agreement with plaintiff * * * .
[102-1 at 10 - 11]. In paragraphs 123 – 125, Plaintiff accuses AEEI and its control persons of
having “continued to fraudulently collude in ‘stonewalling’ Plaintiff and preventing Plaintiff
from obtaining lawful ownership of the shares.” Compl. ¶ 124; compl. ¶ 125 (accusing AEEI of
“fraudulently stonewalling”). By “reneging,” Plaintiff does not mean that Defendants breached a
contract, an actual settlement agreement, but that Defendants refused to settle the dispute on
Plaintiff’s terms, or that Plaintiff refused to settle on the terms that AEEI offered.2
In response to Defendants’ motions to dismiss, Plaintiff insists that he has pled the who,
what, when, where, and how of the fraud as required by Rule 9(b). But if “failure to agree to the
settlement that Plaintiff wanted or expected” is the “what,” then Plaintiff has not alleged fraud.
The elements of common law fraud are “(1) a false statement of material fact; (2) knowledge or
belief by the maker that the statement was false; (3) an intent to induce reliance on the statement;
(4) reasonable reliance upon the truth of the statement; and (5) damages resulting from that
reliance.” Petrakopoulou v. DHR Int'l, Inc., 590 F. Supp. 2d 1013, 1016 (N.D. Ill. 2008); Sec'y of
State v. Tretiak, 22 P.3d 1134, 1140 (Nev. 2001) (same). If parties have a dispute and know
what is at issue, as in this case, contentious settlement negotiations – even negotiations that
involve “stonewalling” – will not (without more) amount to fraud. As a New York court put it,
“[t]he court recognizes no cause of action for ‘fruitless negotiation’ or ‘frustration.’”

N.

Triphammer Dev. Corp. v. Ithaca Associates, 704 F. Supp. 422, 428 (S.D.N.Y. 1989) (citation
omitted). In this case, that is precisely what Plaintiff has alleged: fraudulent refusal to settle on

2 Plaintiff

advances the same or similar theory of fraud against Defendants Brewer, Byle, and Montague
(see [103-1 at 7]), Defendants Wilson and Wilson, Haglund & Paulson (AEEI’s corporate counsel) (see
[104-1 at 6-7]), and Defendants Weaver & Martin (the accounting firm (see [105-1 at 10-11]) (fraud
through the 2008 year-end audit).

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its terms. There was no settlement, so Plaintiff cannot allege that he was fraudulently induced or
coerced into settling, and there is no allegation of extortion or duress. What is alleged is a
serious disagreement between the parties about whether Plaintiff owns AEEI stock and, if it
does, the amount of damages. And that dispute will not be resolved in this opinion. (Recall,
AEEI has not moved to dismiss all the claims against it.) Plaintiff’s fraud claims, however, are
undermined by his own allegations and must be dismissed.
It is not inconceivable that Plaintiff could have alleged a claim of fraud related to a
Defendant’s failure to include Plaintiff’s shares in the merger, but Plaintiff rejects that position
and repeatedly claims that his injury was caused by negligence. But even if Plaintiff would have
alleged fraud based on AEEI’s failure to recognize its shares, those claims would be time-barred.
Defendants AEEI and Brewer, Montague, and Byle argue that Nevada law — the law of the state
where AEEI is incorporated — should apply to Plaintiff’s common law claims. That appears to
be correct: In addressing state-law claims, the Court looks to choice-of-law provisions of the
forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). “‘Illinois
follows the internal affairs doctrine as its choice-of-law principle in cases alleging impropriety of
corporate governance.’ Kellers Sys., Inc. v. Transp. Int'l Pool, Inc., 172 F. Supp. 2d 992, 999
(N.D. Ill. 2001) (citing Bagdon v. Bridgestone/Firestone, Inc., 916 F.2d 379, 382–83 (7th Cir.
1990), Paulman v. Kritzer, 230 N.E.2d 262 (1967), and the Restatement (2d) of Conflicts of Law
§§ 301–10). ‘Under the internal affairs doctrine the substantive law of the state of incorporation
governs.’ Id. (citing Heyman v. Beatrice Co., 1995 WL 151872 at *6 (N.D. Ill. April 3, 1995)).”
Tecnitoys Juguetes, S.A. v. Distributoys.com, Inc., 2011 WL 2293855, *1 n. 2 (N.D. Ill. June 9,
2011). “The internal-affairs doctrine is ‘a conflict of laws principle which recognizes that only
one State should have the authority to regulate a corporation's internal affairs — matters peculiar

15

to the relationships among or between the corporation and its current officers, directors, and
shareholders — because otherwise a corporation could be faced with conflicting demands.’”
LaPlant v. Nw. Mut. Life Ins. Co., 701 F.3d 1137, 1139 (7th Cir. 2012) (quoting Edgar v. MITE
Corp., 457 U.S. 624, 645 (1982)).
AEEI is incorporated in Nevada, and Plaintiff does not argue that the law of a different
state should apply. Under Nevada law, “[t]he statute of limitations for a fraud claim is three
years from ‘the discovery by the aggrieved party of the facts constituting the fraud.’ NEV. REV.
STAT. § 11.190(3)(d); see Sierra Pac. Power Co. v. Nye, 389 P.2d 387, 390 (Nev. 1964) (‘mere
ignorance of the existence of ... the facts which constitute the cause will not postpone the
operation of the statute of limitations ... if the facts may be ascertained by inquiry or diligence’).”
Brignand v. Van Wagoner Funds, Inc., 2009 WL 2175623, at *3 (D. Nev. July 16, 2009). In this
case, Plaintiff knew that he had a dispute with AEEI in October 2008 and began negotiations to
resolve the dispute in November 2008. Plaintiff sued in December 2011, more than three years
later. Under Nevada law, Plaintiff’s fraud claims are time-barred.

D.

Conspiracy (Count X)

“Civil conspiracy is not an independent tort, rather there must be an independent cause of
action underlying a civil conspiracy claim.” Nieman v. Versuslaw, Inc., 2012 WL 3201931
(C.D. Ill. Aug. 3, 2012) ; Champion Parts, Inc. v. Oppenheimer & Co., 878 F.2d 1003, 1008 (7th
Cir. 1989) (“conspiracy becomes actionable only when the underlying conduct which is the
subject of the conspiracy is independently tortious”).

In this case, Plaintiff alleges that

Defendants “had an implicit, covert agreement to defraud Plaintiff, and to misappropriate
Plaintiff’s shares.” Compl. ¶ 185. As explained, Plaintiff has not stated a fraud claim against

16

any Defendant who has moved to dismiss.

Accordingly, Defendants’ motions to dismiss

Plaintiff’s conspiracy claim is granted.
E.

Breach of Fiduciary Duty (Counts XI and XII)

To state a claim for breach of fiduciary duty, Plaintiff must plausibly allege that a
Defendant has a fiduciary duty to it, that the duty was breached, and that the breach caused
Plaintiff’s injury. See Gross v. Town of Cicero, 619 F.3d 697, 709 (7th Cir. 2010) (Illinois law);
Stalk v. Mushkin, 125 P.3d 838, 843 (Nev. 2009) (Nevada law). Plaintiff has alleged breach of
fiduciary duty against Defendant AEEI and Defendants Brewer, Montague, and Byle. They have
moved to dismiss Plaintiff’s claims as barred by Nevada’s three-year statute of limitations. See
Brignand, 2009 WL 2175623, at *3 (“Under Nevada law, the statute of limitations for a breach
of fiduciary duty claim is three years from the date the plaintiff ‘knew or reasonably should have
known facts giving rise to [the] alleged breach.’”) (quoting Shupe v. Ham, 639 P.2d 540, 542
(Nev. 1982)). As discussed in the previous section, Plaintiff does not oppose Defendants choiceof-law argument and Plaintiff’s discovery-rule arguments are unavailing. Thus, for the reasons
stated in the previous sections, the Court dismisses Plaintiff’s breach-of-fiduciary-duty claims as
time-barred.

F.

Breach of the Duty of Good Faith and Fair Dealing (Counts XIV and XV)

Defendants Brewer, Montague, and Byle; Wilson and Wilson Haglund & Paulsen; and
Weaver & Martin have moved to dismiss Plaintiff’s claims for breach of the duty of good faith
and fair dealing. They argue that they did not have a contract with Plaintiff and that there is no
such free-floating duty without a contract. See e.g., Cobb-Alvarez v. Union Pac. Corp., 962 F.
Supp. 1049, 1055 (N.D. Ill. 1997) (“[The] implied covenant [of good faith and fair dealing] is
17

imputed into every contract under Illinois law, but a breach of good faith and fair dealing does
not create an independent cause of action separate from the breach of contract claim. The
implied duty is used primarily as a construction tool in determining the parties’ intent; vague
notions of fair dealing do not form the basis for an independent tort. Any breach of the implied
covenant of good faith and fair dealing must be encompassed in the claim of breach of
contract.”) (internal citations omitted); see also Racine & Laramie Ltd. v. Dep’t of Parks and
Recreation, 11 Cal. App. 4th 1026, 1031-32 (Cal. Ct. App. 1992) (California law); A.C. Shaw
Construction, Inc. v. Washoe County, 784 Nev. 913, 913 (Nev. 1989) (Nevada law). On this
issue, Plaintiff does not respond to Defendants’ motions or their supporting arguments. That is
unsurprising, for the Court sees no basis for Plaintiff’s claims. Defendants’ motions to dismiss
this claim are granted.
G.

Negligence (Count I)
1.

AEEI

AEEI did not move to dismiss Plaintiff’s negligence claim in its motion to dismiss or
argue for dismissal in its opening brief. See [57-2 at 1]. Despite that, AEEI argues for dismissal
in its reply brief, focusing on the statute of limitations. See [114 at 3]. With rare exceptions,
arguments raised for the first time in a reply brief are waived and cannot be considered at the
motion to dismiss stage. See United States v. Adamson, 441 F.3d 513, 521 n. 2 (7th Cir. 2006).
Perhaps AEEI thought that Plaintiff opened the door to its argument by supporting the
negligence claim in its response brief. AEEI does not make that argument, but simply argues for
dismissal in reply. Because the Court believes that it would be prejudicial to Plaintiff to read its
support for a claim criticized by other defendants as a response to arguments that AEEI had not
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made, the Court will follow the usual rule and will not consider the arguments that AEEI made
for the first time in its reply brief.
2.

Brewer, Byle, and Montague

To state a claim against Defendants Brewer, Byle, and Montague for negligence, Plaintiff
must allege that those Defendants “breached a duty of care to him and caused him harm”
Williams v. Centers for Disease Control & Prevention, 96 F. App’x 399, 400 (7th Cir. 2004);
Orzoff v. BAC Home Loans Servicing, LP, 2012 WL 1681862, *2 (D. Nev. May 11, 2012)
(Nevada law). Defendants argue that Plaintiff has not stated a claim because Plaintiff has not
alleged that Defendants owed Plaintiff a duty of care at the time when the alleged injury occurred
— in April 2008, when Plaintiff claims to have been harmed by somebody’s negligence.
Plaintiff responds that “Defendants’ duty to Plaintiff is factually supported in a clear manner.
(Compl ¶¶ 6, 26, 49).” [103-1 at 6]. Remarkably, Plaintiff did not bother to summarize the
listed paragraphs. Nevertheless, here they are:
6. The Merger Plan called for each share of CCCX (now AEEI-MN) to be
exchanged with one share of AEEI-NV, the surviving public company (Defendant
AEEI herein). Under Section 1.02, Plaintiff automatically, without any further
action, became an AEEI common shareholder. Plaintiff was therefore entitled to
receive ownership of 1,000,000 shares of Defendant AEEI's common stock as a
result of the Merger.
26. Defendant American Environmental Energy, Inc. ("AEEI") is a Nevada
corporation with its principal place of business located in Houston, Texas. AEEI's
common stock is registered with the Securities and Exchange Commission (the
"Commission") under Section 12(g) of the Securities Exchange Act, as amended (the
"Exchange Act"). AEEI's common stock is traded over the counter on the "pink
sheets" under the symbol AEEI.pk.
49. On April18, 2008, through a series of complex corporate transactions, all
effected on that day, CCCX was merged into AEEI was effected (the "Merger"). The
Merger included: (a) CCCX changing its name to AEEI, a Minnesota Corporation
("AEEI-MN"); followed by (b) A Plan of merger of AEEI-MN (formerly CCCX) into

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Defendant American Environmental Energy, Inc. a Nevada Corporation, and the
Defendant herein ("AEEI" or AEEI-NV") (the "Merger Plan"). A copy of the
certificate of name change from CCCX to AEEI is attached hereto as Exhibit E. A
copy of the Merger Plan and the corresponding Form 8-K is annexed hereto as
Exhibit F.
Compl. ¶¶ 6, 26, 49. Those paragraphs do not mention Brewer, Montague, or Byle, so Plaintiff’s

idea must be that those Defendants owed Plaintiff a duty of care at the time of its injury simply
by virtue of their connection with AEEI. According to Plaintiff, however, Byle was not on the
board of AEEI until March 3, 2009. Compl. ¶ 30. Defendants state (and Plaintiff does not
dispute) that Montague joined AEEI’s board the same day. See [59-2 at 4]; [103-1 at 6]. Since
Plaintiff’s injury was a product of the merger, Plaintiff’s failure to allege Montague and Byle had
anything to do with the April 2008 merger is fatal to Plaintiff’s claims against them.
As for Defendant Brewer, Plaintiff mentions him frequently, but Plaintiff also declares
that Brewer was not yet an officer or board member of AEEI at the time of the merger. If he was
not a director or officer of AEEI at the time of the merger, it is not clear how he could be
responsible for failing to include Plaintiff’s shares in the merger. That leaves Plaintiff with the
theory that Brewer “negligently” failed to correct an existing problem with his shares, and should
have done so before October 2008, before Plaintiff and Defendants started down their long path
to resolving this dispute. But once Plaintiff made his claim on AEEI in October 2008, no theory
of negligence can account for the harm to Plaintiff: it is not negligence to refuse to accede to an
adverse party’s demands for a settlement. Plaintiff has not alleged that, for some reason, as soon
as Brewer became an AEEI officer, after April 18, 2008, a duty of care arose for him to correct
the alleged problem with Plaintiff’s shares and that he had breached his duty to Plaintiff by
October or November of 2008, when Plaintiff sought to have the error corrected and opened
settlement negotiations. Thus, as to Brewer, Montague, and Byle, Plaintiff does not describe,

20

and the Court does not detect, any plausible theory of negligence consistent with Plaintiff’s
allegations.
It is possible that Plaintiff may find it hard to articulate a viable negligence theory, or to
offer any case discussing a similar theory of negligence, because the claim may be a kind of
category mistake. Plaintiff is alleging purely economic injury but seeks to recover in tort. The
economic loss doctrine, which bars “recovery in tort for purely monetary harm in product
liability and in negligence cases unrelated to product liability” may be the problem. Giles v.
Gen. Motors Acceptance Corp., 494 F.3d 865, 879 (9th Cir. 2007) (Nevada law); ARCO
Products Co. v. May, 948 P.2d 263, 266 (Nev. 1997) (“Because May’s claimed damages are
purely economic in nature, the district court erred in failing to dismiss May’s negligence claim
pursuant to the economic loss doctrine.”). But the parties do not address that issue directly, so
the Court will set that concern to the side at present.
The Court will also set aside the possible statute-of-limitations problem with Plaintiff’s
negligence claims against Defendants Brewer, Montague, and Byle. Like Defendant AEEI,
Defendants Brewer, Montague, and Byle argue for the first time in their reply brief that
Plaintiff’s negligence claim is barred by Nevada’s three-year statute of limitations. And not only
do Defendants improperly raise this argument for the first time their reply, but they also fail to
cite relevant authority for Nevada’s statute of limitations for a negligence claim of the sort
Plaintiff alleges.

3.

Wilson Haugland & Wilson

Defendants Wilson and Wilson Haugland & Wilson, have moved to dismiss Plaintiff’s
negligence claim arguing, like the others, that Plaintiff has not alleged that they had a duty to

21

Plaintiff related to Plaintiff’s claimed injuries. Defendants believe that the nature of their
relationship to Plaintiff makes that plain. Plaintiff admits that these Defendants were corporate
counsel to AEEI (¶ 32), and Plaintiff acknowledges that the law firm was called on to negotiate
a settlement with Plaintiff (¶ 94). But in order for an attorney to owe a duty of care to a nonclient, Plaintiff needed to be the intended beneficiary of its legal advice. See Pelham v.
Griesheimer, 440 N.E.2d 96, 99 (Ill. 1982) (“to establish a duty owed by the defendant attorney
to the nonclient the nonclient must allege and prove that the intent of the client to benefit the
nonclient third party was the primary or direct purpose of the transaction or relationship).
Plaintiff does not allege that Defendants intended to give him legal advice, because Defendants,
as counsel for AEEI, were adverse to Plaintiff in settlement negotiations. Furthermore, [u]nder
Illinois law, an attorney’s representation of a corporation does not create an attorney-client
relationship with the shareholders, investors, agents, and consultants of the corporation. Barrett
Industrial Trucks, Inc. v. Old Republic Ins, Co., 129 F.R.D. 515, 517-18 (N.D. Ill. 1990).
Plaintiff responds that “Defendants duty to plaintiff is factually supported in a clear
manner. (Compl. ¶¶ 6, 27, 32, 95).” [104-1 at 6]. Again, Plaintiff does not summarize those
paragraphs, so the Court turns to its complaint:
6. The Merger Plan called for each share of CCCX (now AEEI-MN) to be
exchanged with one share of AEEI-NV, the surviving public company (Defendant
AEEI herein). Under Section 1.02, Plaintiff automatically, without any further
action, became an AEEI common shareholder. Plaintiff was therefore entitled to
receive ownership of 1,000,000 shares of Defendant AEEI's common stock as a
result of the Merger.
27. Defendant Christopher Wilson is a resident of California. Mr. Wilson is a
licensed California attorney representing AEEI since in or about 2008. Mr.Wilson is
a "control person" of AEEI, as that term is defined in the Exchange Act. Mr.
Wilson controlled and directed, and continues to control and direct the fraudulent
scheme against Plaintiff described herein.

22

32. Defendant Wilson, Haglund & Paulsen, P.C. ("WH&P") is a law firm located
in Irvine, California.Wilson, Haglund & Paulsen is corporate counsel to Defendant
AEEI. Defendant Christopher Wilson is a principal in WH&P.
95. In or about the period November, 2008-February 2009, Defendants AEEI,
Brewer and Wilson attempted to buy Mr. Glassman's silence concerning their
recklessness in not knowing Plaintiff was a CCCX shareholder. Accordingly,
during that period, these defendants attempted to get Mr. Glassman to execute a
settlement and release agreement whereby AEEI promised to pay Mr. Glassman
$75,000.00 to retire his shares, and maintain strict confidentiality about AEEI's
negligence. Both Mr. Brewer and Mr. Wilson informed Mr. Glassman they were
concerned that if AEEI's mistake in not accounting for Plaintiffs shares was
disclosed and corrected, the public "float" would be greatly increased, resulting in
shareholder dilution, and a decrease in AEEI's stock price. As such, both
Defendants Wilson and Brewer informed Mr. Glassman they did not want to have
to risk pique the ire of disgruntled shareholders, or have to deal with the Securities
and Exchange Commission.

Compl. ¶¶ 6, 27, 32, 95.

Those paragraphs support Defendants’ argument that Plaintiff

negligence claim against them is a product of its dissatisfaction with their approach to the
settlement negotiations. The Court agrees that Plaintiff has not alleged that Defendants had a
duty to Plaintiff and that therefore its negligence claim against them must be dismissed.
4.

Weaver & Martin

Defendant Weaver & Martin — an accounting firm employed by AEEI between 2007
and 2010 — put up a defense similar to the law firm’s: Plaintiff has not alleged that it owed
Plaintiff a duty of care and that, therefore, Plaintiff’s negligence claim must be dismissed. The
Court agrees. Plaintiff was not Weaver & Martin’s client. AEEI was the client. In Illinois, for
an accountant to be liable to non-client third-parties “[t]he plaintiff must show that a primary
purpose and intent of the accountant-client relationship was to benefit or influence the third-party
plaintiff.” Tricontinental Industries, Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 83738 (7th Cir. 2007). Plaintiff argues that Missouri law should apply to its claims against Weaver
& Martin, a Missouri firm, but on this point, Missouri’s law is substantially the same as Illinois’:

23

“In order for an accountant to be held to a legal duty to a third party not in privity, the third party
must be a known recipient or be within the limited class of persons the services were intended to
benefit and guide.” Lindner Fund v. Abney, 770 S.W.2d 437, 438 (Mo. Ct. App. 1989) (citing
Aluma Kraft Manufacturing Co. v. Elmer Fox & Co., 493 S.W.2d 378, 383 (Mo.App.1973)).
Plaintiff appears to imagine that Weaver & Martin could have harmed it at two points: (1)
at the time of the merger and/or (2) following the merger. Plaintiff does not explain how Weaver
& Martin could possibly have a duty to Plaintiff that is any different from the duty to any other
third-party shareholder. For example, in its response to Weaver & Martin’s motion to dismiss,
Plaintiff states:
Surely, an experienced certified public auditor charged with auditing the
financials of a public company with the SEC public disclosure obligations such as
AEEI, would know that the audited financial statements it prepared for AEEI to
file would know that a shareholder of its client like Gemrush would be among the
class of recipients for whom its client (AEEI) intended to supply such financial
information.
[105-1 at 6 n. 2]. Surely? The cases cited above explain that AEEI’s accountants do not have a
duty of care to all of AEEI’s shareholders. See, e.g., Tricontinental, 475 F.3d at 838 (for liability
to a third-party, accountant needed to be aware that “a primary intent of the client was for the
professional services to benefit or influence the particular person.”). Plaintiff offers no reasons
in its briefs to support its conclusion that the accountants intended to influence Plaintiff, it does
not direct the Court to any supporting allegations in its complaint, and the Court has not found
any basis for the firm’s duty to Plaintiff on its own. Accordingly, Plaintiff has not put the firm
on notice of how a bad audit for AEEI could conceivably make Weaver and Martin answerable
to Plaintiff in tort. That is not surprising: AEEI employed Weaver & Martin, and so Weaver &
Martin had a duty to its client, AEEI. If Weaver & Martin committed an error that harmed one

24

of AEEI’s shareholders, then AEEI will be accountable. And if AEEI believes that the error was
caused by its accountants’ malpractice, then AEEI can seek a remedy from the accountants.
Plaintiff’s negligence allegations are even less clear when focusing on Weaver &
Martin’s conduct after the merger. The accounting firm is alleged to have done the 2008 yearend audit.

But by then Plaintiff had suffered its injury and was involved in settlement

negotiations. Plaintiff does not allege that it took any action in reliance on the audits; they are
just part of its ongoing conflict with AEEI about whether he is the rightful owner of shares and,
if so, what he is owed. See e.g., Freight Train Adver., LLC v. Chicago Rail Link, LLC, 2012 WL
5520400, at *9 (N.D. Ill. Nov. 14, 2012) (“Under Illinois law, a cause of action for negligent
misrepresentation has the following elements: (1) a duty owed by the defendant to the plaintiff to
communicate accurate information, (2) a false statement of material fact, (3) carelessness or
negligence in ascertaining the truth of the statement by the defendant, (4) the defendant's
intention to induce action by the plaintiff, (5) action by the plaintiff in reliance upon the truth of
the statement, and (6) damage to the plaintiff resulting from such reliance.”).
H.

TD Ameritrade’s Motion to Compel Arbitration

In 2007, Plaintiff’s shares of CCCX were deposited in Plaintiff’s stock brokerage account
with Defendant TD Ameritrade. Plaintiff’s complaint alleges one claim of negligence against
TD Ameritrade for failing to “perform customary due diligence” before confirming to Plaintiff
that the CCCX shares had cleared legal review and were “free trading shares.” In other words,
Plaintiff’s theory is that if its CCCX shares were not in fact “free trading,” then TD Ameritrade’s
statement to the contrary was a negligent misrepresentation that harmed Plaintiff.

TD

Ameritrade has moved to compel arbitration [117]. In the alternative, if the Court denies TD

25

Ameritrade’s motion to compel, TD Ameritrade has asked the court to consider its motion to
dismiss [120].
Section 2 of the Federal Arbitration Act (FAA), 9 U.S.C. § 2, embodies the “national
policy favoring arbitration and places arbitration agreements on equal footing with all other
contracts.” Buckeye Check Cashing, Inc. v. Cardenga, 546 U.S. 440, 444 (1996); Volkswagen of
America, Inc. v Sud’s of Peoria, Inc., 474 F.3d 966, 970 (7th Cir. 2007). In this case, Plaintiff
signed an account agreement with TD Ameritrade on July 13, 2007. That contract contains an
arbitration clause:

The following contains the predispute arbitration clauses applicable to my
account. Through my signature on the account application, I agree to be bound as
follows:
a. All parties to this Agreement are giving up their right to sue each other in court,
including the right to a trial by jury, except as provided by the rules of the arbitration
forum in which a claim is filed.
*****
All controversies concerning (a) any transaction, (b) the construction, performance
or breach of this or any other agreement, whether entered into prior to, on or after the
date of this Agreement, or (c) any other matter which may arise between TD
AMERITRADE . . . and me shall be determined by arbitration in accordance with the
rules of the National Association of Securities Dealers, Inc.

Plaintiff does not dispute the validity of the arbitration provision or that that Plaintiff’s claim
falls within its scope. Instead, Plaintiff contends that TD Ameritrade waived its right to seek
arbitration by (1) waiting almost six months after being served with Plaintiff’s complaint before
filing its motion to compel, (2) participation in status conferences, (3) participation with Plaintiff
and other Defendants in scheduling, (4) attempting to negotiate a settlement, (5) requesting
extensions of time to reply to Plaintiff’s complaint. In opposition to Plaintiff’s list, Defendant
argues that its actions clearly demonstrated that it intended to compel arbitration if the parties

26

could not reach a settlement. Among other things, Defendant notes that (1) at least twice it
stated on the record its intent to compel arbitration if a settlement could not be reached, (2) it did
not file any dispositive motions, (3) it did not engage in any formal discovery, (4) it filed its
motion to compel the same month as the settlement negotiations failed.
A waiver of a contractual right to invoke arbitration can be implied or express.
Cabinetree of Wisconsin, Inc. v. Kraftmain Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir. 1995).
“For waiver of the right to arbitrate to be inferred, [the Court] must determine that, considering
the totality of the circumstances, a party acted inconsistently with the right to arbitrate.”
Kawasaki Heavy Indus., Ltd. v. Bombardier Recreational Products, Inc., 660 F.3d 988, 994 (7th
Cir. 2011). Other considerations “include whether the allegedly defaulting party participated in
litigation, substantially delayed its request for arbitration, or participated in discovery.” Id.
“[W]aiver is not lightly inferred; the strong federal policy favoring enforcement of arbitration
agreements impresses upon a party asserting waiver a heavy burden.” Williams v. Katten,
Muchin & Zavis, 837 F. Supp. 1430, 1442 (N.D. Ill. 1993); see also Dickinson v. Heinold Secs.,
Inc., 661 F.2d 638, 641 (7th Cir. 1981) (“a waiver of arbitration is not lightly to be inferred”).
In this case, the Court concludes that TD Ameritrade did not waive its right to compel
arbitration by not moving to compel arbitration while attempting to negotiate a settlement. This
is a particularly easy conclusion for the Court because TD Ameritrade never concealed its
intentions.

At a status hearing before Magistrate Judge Schenkier on June 13, 2012, TD

Ameritrade’s counsel stated:
We don’t think there is much of a claim against TD Ameritrade. We – I talked
with [Plaintiff’s counsel]. We also have a, I think, pretty good motion to compel
arbitration based on the client agreement that the plaintiff had with us, and we’re
preparing that motion.
And again, at a status hearing on October 23, 2012:
27

We have asked Judge Dow to give us until the end of sometime mid-November to
either get [this case] settled against us or we can file our motion to dismiss and
our motion to compel arbitration.
“Given this candidness, it is hard to see how [Plaintiff] could have believed that [TD Ameritrade]
did not desire arbitration.” Kawasaki Heavy Indus., Ltd, 660 F.3d at 996. The Court is therefore
not impressed by the six month delay during settlement discussions. Without surprise to the
opposing party, courts have tolerated much longer delays.

See, e.g., id. (two-year delay).

Engaging in settlement negotiation is not tantamount to waiver, and even when settlement
negotiations occur after lawsuit has been initiated. See Dickinson v. Heinold Securities, Inc. 661
F.2d 638, 641 (7th Cir. 1981) (eighteen-month settlement negotiations prior to lawsuit not
sufficient to waive arbitration); Carbajal v. Household Bank, FSB, 2003 WL 22159473 (N.D. Ill.
2003) (“Although the delay in Dickinson took place prior to the filing of the lawsuit, there is
nothing in the opinion that would suggest that this conclusion should not also be extended to
settlement efforts after the suit has been filed especially when those efforts take place in court.”).
TD Ameritrade’s motion to compel arbitration [117] is granted. TD Ameritrade’s motion to
dismiss [120] is stricken as moot.

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IV.

Conclusion

For the reasons stated above, Defendants’ motions to dismiss [57, 58, 59, and 51] are
granted and TD Ameritrade’s Motion to compel arbitration [117] is granted. TD Ameritrade’s
motion to dismiss [120] is stricken as moot. Plaintiff is given until April 22, 2013 to file an
amended complaint if Plaintiff believes, consistent with Fed. R. Civ. P. 11, that it can overcome
any of the grounds for dismissal set forth above. This case is set for further status hearing on
April 25, 2013, at 9:00 a.m.

Dated: March 29, 2013
___________________________________
Robert M. Dow, Jr.
United States District Judge

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