Ferenc et al v. Brenner et al
Filing
37
MEMORANDUM OPINION Signed by the Honorable John F. Grady on February 21, 2013. Mailed notice(cdh, )
12-2071.131-RSK
February 21, 2013
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
SIDNEY FERENC, LEGACY RE, LTD.,
ROCK SOLID GELT LIMITED, and 407
DEARBORN, LLC,
Plaintiffs,
v.
KAREN BRENNER, FORTUNA ASSET
MANAGEMENT, LLC, and MICHAEL
HORRELL,
Defendants.
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No. 12 C 2071
MEMORANDUM OPINION
Before the court are: (1) the motion of defendants Karen
Brenner
and
Fortuna
Asset
Management,
LLC
(“FAM”)
to
compel
arbitration; (2) the plaintiffs’ motion to strike a portion of the
defendants’ reply brief; and (3) defendant Michael Horrell’s motion
to
dismiss.
For
the
reasons
explained
below,
we
grant
the
defendants’ motion to compel arbitration in part and deny it in
part, deny the plaintiffs’ motion to strike, and grant Horrell’s
motion to dismiss.
BACKGROUND
Plaintiffs Sidney Ferenc, Legacy Re, Ltd. (“Legacy Re”), Rock
Solid Gelt Limited (“Rock Solid”), and 407 Dearborn, LLC (“407
Dearborn”) have sued the defendants for breach of fiduciary duty
and RICO fraud.
The plaintiffs allege that in 2005 Brenner
- 2 -
solicited Ferenc (through his company Legacy Re) to make a $2
million investment in Fortuna Stream, L.P. (Compl. ¶ 11.) Brenner
is Fortuna Stream’s general partner, and Legacy Re is a limited
partner.
(Id.)
at ¶ 7.)
Brenner is also the managing member of FAM.
(Id.
In 2006, Ferenc, Legacy Re, and Rock Solid (another
company in which Ferenc holds an interest) entered into “Investment
Management Performance Fee Agreements” (hereinafter, “Investment
Management Agreements”) with FAM.
(See id. at ¶ 12; see also
Investment Management Agreements, attached as Exs. 1-3 to Decl. of
Karen Brenner.)1
Pursuant to these agreement, FAM agreed to
provide “investment management services and advice” to Ferenc,
Legacy Re, and Rock Solid.
(Compl. ¶ 12.)
Among other things, FAM
established an account at Bear Stearns, in Ferenc’s name and for
his
benefit,
authority.”
over
which
FAM
exercised
“discretionary
trading
(Id.)
In 2006, Brenner and FAM advised and encouraged Ferenc to
acquire an interest in a $7.25 million loan that Fortuna Stream had
made to a company called Scattered Corporation (the “Scattered
Loan”). The Scattered Loan was secured in part by mortgages on the
properties commonly known as 407 S. Dearborn, Chicago, Illinois
(the “Dearborn Property”) and 401 S. LaSalle Street, Chicago,
Illinois (the “LaSalle Property.”).
1/
(Id. at ¶ 14.)
The Dearborn
The terms of the three agreements are virtually identical and each is
dated “as of” June 1, 2006.
- 3 -
Property was then owned by Old Colony Partners Limited Partnership
(“Old Colony”) and the LaSalle Property was then owned by 401
(Id. at ¶ 16.)
Properties Limited Partnership (“401 Properties”).
The plaintiffs allege on information and belief that defendant
Michael
Horrell
properties.
had
a
direct
(Id. at ¶ 17.)
or
indirect
interest
in
both
Ferenc (through Legacy Re) purchased
one interest in the loan from Fortuna Stream for $450,000 and
another interest (through Rock Solid) from ACF Property Management,
Inc. for $3.8 million.
(Id. at ¶ 15.)
The plaintiffs allege on
information and belief that AFC Property Management was owned or
controlled by Alan Fox, another investment client of Brenner and
FAM.
(Id.)
Scattered Corporation later defaulted on the loan,
precipitating another series of transactions.
(Id. at ¶ 18.)
First, the Dearborn Property was conveyed to a newly-created
entity, plaintiff 407 Dearborn.
(Id.) Initially, Rock Solid and
Legacy Re were members of 407 Dearborn along with Fortuna Stream
and affiliates of FAM, and the company was managed and controlled
by Brenner, FAM, “and/or” Horrell (directly or indirectly through
a company called 407 Dearborn Manager, LLC).
(Id. at ¶¶ 18-19.)
In June 2011, Rock Solid acquired all of the interests in 407
Dearborn and an affiliate of Rock Solid and/or Ferenc assumed
control
and
management
of
the
company.
(Id.)
Second,
401
Properties executed a new promissory note in the amount of $3.2
million payable to Fortuna Stream (the “401 Note”). (Id. at ¶ 18.)
- 4 -
On September 22, 2009, Fortuna Stream assigned to Legacy Re an
undivided 6.206% interest in the 401 Note and assigned to Rock
Solid an undivided 48.276% interest in the 401 Note. (Id.) Legacy
Re and Rock Solid allege that they have “lost all or much of” their
investment in the Scattered Loan and that they are “unlikely” to
recoup their investments through the post-default transactions.
(Id. at ¶¶ 26, 29.)
The plaintiffs have filed a four-count complaint against the
defendants.
In Count I, Legacy Re and Rock Solid allege that
Brenner and FAM breached their fiduciary duty by failing to
disclose the risks associated with the Scattered Loan transaction.
(Id. at ¶ 23.)
They further allege that they were encouraged to
invest in the Scattered Loan in order to reduce the exposure of
Fortuna Stream, Brenner, and other FAM clients, including Alan Fox.
(Id. at ¶ 24.)
In Count II, 407 Dearborn alleges that Brenner,
FAM, and Horrell exercised their control over the company to cause
it to enter into transactions that benefitted the defendants at the
company’s expense.
(See id. at ¶¶ 34, 37 (alleging that the
defendants caused the 407 Dearborn to pay excessive and unnecessary
fees to Horrell and his affiliates); 35 (alleging that Brenner,
FAM, and/or Horrell caused the company to accept and repay loans
from the defendants or their affiliates at high interest rates).)
In Count III, Ferenc alleges that Brenner and FAM breached their
fiduciary duty to him by recommending investments in which they
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(and Horrell) benefitted.
(Id.
at ¶ 44.)
As we read the
complaint, those investments included bonds that FAM traded on
Ferenc’s behalf.
(See id. at ¶ 46.)
Finally, in Count IV, Ferenc,
Legacy Re, and Rock Solid allege that Brenner and Horrell violated
(Id. at ¶¶ 49-60.)2
the civil RICO statute.
DISCUSSION
Brenner and FAM have moved to compel the plaintiffs to submit
their claims to arbitration pursuant to arbitration clauses in the
Investment Management Agreements.
Horrell, who is not a party to
the Investment Management Agreements, has moved to dismiss the
claims against him under Rule 12(b)(6).
A.
Brenner’s and FAM’s Motion to Compel Arbitration
1.
Legal Standard
The
arbitration
clauses
in
the
Investment
Management
Agreements designate Orange County, California as the forum for
arbitration.
(See Investment Management Agreement ¶ 20.)
We
cannot compel arbitration in a forum outside the Northern District
of Illinois.
See Federal Arbitration Act (“FAA”), 9 U.S.C. § 4;
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Lauer, 49 F.3d 323,
327 (7th Cir. 1995) (“[T]his Circuit has concluded that where the
arbitration agreement contains a forum selection clause, only the
2/
The heading of Count IV does not identify which plaintiffs are joining
the civil RICO claim, but it is apparent from the complaint's allegations that
it is brought by Ferenc, Legacy Re, and Rock Solid.
(See Compl. at 16
("WHEREFORE, Ferenc, Legacy Re and Rock Solid pray for entry of judgment in their
favor and against Karen Brenner and Michael Horrell jointly and severally . . .
.").)
- 6 -
district court in that forum can issue a § 4 order compelling
arbitration.”) (emphasis in original).
Neither side has cited
Merrill Lynch or otherwise acknowledged this limitation on our
authority to compel arbitration.
Rather than move to compel
arbitration, Brenner and FAM should have moved to dismiss the
claims against them for improper venue under Rule 12(b)(3).
See
Continental Cas. Co. v. American Nat. Ins. Co., 417 F.3d 727, 733
(7th Cir. 2005). However, the central question in this case is the
same whether we proceed under § 4 of the FAA or Rule 12(b)(3): did
the plaintiffs agree to arbitrate the claims asserted in their
complaint?
See id. (“The central issue in this case is whether
Continental agreed to arbitrate this dispute.”). Therefore, in the
interests of efficiency, we will convert the defendants’ motion to
compel arbitration into a motion to dismiss for improper venue.
See Fed. R. Civ. P. 12(b)(3).
Under the FAA, an arbitration clause in a “contract evidencing
a transaction involving commerce . . . shall be valid, irrevocable,
and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.”
9 U.S.C. § 2.
Whether
the parties’ dispute in this case is subject to arbitration is a
question
of
contract
interpretation.
See
Kiefer
Specialty
Flooring, Inc. v. Tarkett, Inc., 174 F.3d 907, 909 (7th Cir. 1999).
However, the Supreme Court has interpreted the FAA to require that
“any doubts concerning the scope of arbitrable issues should be
- 7 -
resolved in favor of arbitration.” Moses H. Cone Memorial Hosp. v.
Mercury Const. Corp., 460 U.S. 1, 24-25 (1983); see also Kiefer,
174 F.3d at 909.
“[A] court may not deny a party’s request to
arbitrate an issue ‘unless it may be said with positive assurance
that the arbitration clause is not susceptible of an interpretation
that covers the asserted dispute.’” Kiefer,
174 F.3d at 909
(quoting United Steelworkers v. Warrior & Gulf Navigation Co., 363
U.S. 574, 582-83 (1960)).
Each of the Investment Management Agreements contains a broad
arbitration clause: “[t]he parties agree that in the event of a
dispute
with
respect
to
this
Agreement
or
their
respective
obligations hereunder, such dispute shall be settled by arbitration
in Orange County, California, in accordance with the rules of the
American Arbitration Association.”
(See Investment Management
Agreement ¶ 20); see also AT&T Technologies, Inc. v. Communications
Workers of America, 475 U.S. 643, 650 (1986) (describing a similar
provision
—
interpretation
“any
of
differences
this
arising
contract
or
with
the
obligation hereunder . . .” — as “broad”).
respect
to
the
performance
of
any
Where, as here, the
parties have adopted a broad arbitration clause, we will compel
arbitration unless there is “forceful evidence” that the parties
intended to exclude their grievance from arbitration.
Warrior &
Gulf Nav., 363 U.S. at 584-85; see also AT&T Tech., 475 U.S. at 650
- 8 -
(similar).3
However, the federal policy favoring arbitration does
not supplant the parties’ intent as expressed in their agreement.
See Stone v. Doerge, 328 F.3d 343, 345-46 (7th Cir. 2003).
2.
Counts I (Legacy Re and Rock Solid — Breach of Fiduciary
Duty) and III (Ferenc — Breach of Fiduciary Duty)
a.
Counts I and III Against FAM
The plaintiffs argue that their claims are not disputes “with
respect to” the Investment Management Agreements, relying on the
following provision:
1.
Services
(a) Client retains FAM to provide investment
management services and to manage Client’s securities in
Client’s investment account (the “Account”). Subject to
Client’s investment restrictions referred to in Section
3(a)(iii) below, Client grants to FAM full discretion as
to all investment decisions regarding the Account,
including, but not limited to, authority to buy, invest
in, hold for investment, own, assign, transfer, sell
(long or short), exchange, trade in, lend, pledge,
deliver and otherwise deal in (on margin or otherwise)
stocks,
bonds,
options,
repurchase
agreements,
commodities and all other securities and intangible
investment instruments and vehicles of every kind and
nature (“Securities”) for the Account, and to exercise,
in FAM’s discretion, all rights, power, privileges and
other incidents of ownership with respect to Securities
in the Account.
[. . .]
(b) FAM may also provide investment advice regarding
other investment opportunities not involving the Account
(“Other Services”). Other Services will primarily be for
3/
Although the cited cases involved labor disputes, the general
principles apply equally to ordinary commercial disputes. See Schacht v. Beacon
Ins. Co., 742 F.2d 386, 390 (7th Cir. 1984) ("While the statutory authority in
the Steelworkers case was section 301(a) of the Labor Management Relations Act
of 1947, 29 U.S.C. § 185(a), we have extended the same presumptions in favor of
arbitration to commercial contracts outside the labor field . . . .").
- 9 -
investment evaluation. The nature and scope of any Other
Services provided to Client by FAM will be determined by
them separately.
(Investment
Management
Agreement
¶
1.)
According
to
the
plaintiffs, all of their claims relate to “Other Services,” which
are subject to “separate[]” terms and conditions not including the
Investment Management Agreement’s arbitration clause. (Investment
Management Agreement ¶ 1(b).)
The defendants respond that all of
the plaintiffs’ investments were part of the plaintiffs’ “Account.”
(Defs.’
Reply
at
2.)
Both
arguments
are
problematic.
The
defendants have not cited any support for their assertion that the
Scattered Loan was part of the “Account” that FAM managed.
And
even assuming that the loan participations constituted “Securities”
as the Investment Management Agreements define that term, there is
no indication in the complaint that FAM exercised its discretionary
authority to acquire them on behalf of Legacy Re, Rock Solid,
and/or Ferenc.
Instead, it appears that the plaintiffs, acting on
FAM’s advice, purchased the loan participations on their own
behalf.
(See Compl. ¶¶ 14-15.)
On its face, then, FAM’s role with
respect to the Scattered Loan transaction appears to have been in
the nature of “investment evaluation.”
Agreement ¶ 1(b).)
(Investment Management
On the other hand, the plaintiffs’ claims are
not based solely on the Scattered Loan transaction. Ferenc’s claim
against FAM in Count III is based in part on fees that FAM charged
him “for managing a bond portfolio . . . .”
(Id. at ¶ 46; see also
- 10 -
id. at ¶ 12 (“Among other things, an account was established by FAM
at Bear Stearns, in the name of or for the benefit of Ferenc, over
which FAM had discretionary trading authority.”).) The plaintiffs’
other claims also suggest, albeit less explicitly, that they are
based at least in part on “Account” services.
In Count I, Legacy
Re and Rock Solid ask us to compel FAM and Brenner to disgorge
“performance” and other fees that they paid to FAM in connection
with the Scattered Loan transaction and “additional investments.”
(Compl.
¶
28.)
“performance
This
fee”
set
allegation
forth
in
appears
the
to
refer
Investment
to
the
Management
Agreements. (See Investment Management Agreement § 7 (requiring the
plaintiffs to pay FAM a “performance fee” based upon a percentage
of profits derived from assets in the Account).)
The plaintiffs
have not identified any other agreement requiring them to pay a
“performance fee” to FAM.
Ultimately, we conclude that it is unnecessary to categorize
each of the plaintiffs’ claims — “Account” versus “Other Services”
—
against FAM.
First, we do not read the “Other Services” section
of the Investment Management Agreements to expressly exclude any
disputes from arbitration.
584-85
(noting
that
the
Cf. Warrior & Gulf Nav., 363 U.S. at
parties
may
expressly
provide
particular disputes are not subject to arbitration).
that
It simply
indicates that the parties will separately determine the “nature
and scope” of those services.
They might agree that disputes
- 11 -
concerning certain services would not be subject to arbitration,
but there is no evidence that they did.
See AT&T Tech., 475 U.S.
at 650; Warrior & Gulf Nav. Co., 363 U.S. at 584-85.
Second, the
Investment Management Agreements supply an essential term for
“Other Services:” FAM’s fee. (See Investment Management Agreements
at C-1 (“Other services will be compensated at an hourly rate of
$350 plus a 15% nonaccountable overhead charge.”).) In that sense,
a claim based upon FAM’s performance of “Other Services” is a claim
“with respect to” the Investment Management Agreements.
plaintiffs’ reliance on
The
Rosenblum v. Travelbyus.com Limited, 299
F.3d 657 (7th Cir. 2002) is misplaced.
In Rosenblum, the Court
held that an arbitration clause in an employment agreement did not
encompass disputes concerning a related acquisition agreement. Id.
at 663.
It was clear from the language of the two contracts that
they concerned separate subjects and that each agreement was
complete in its own right.
Id.
Here, the Investment Management
Agreements create a general framework for all of the parties’
transactions — “Account” and non-“Account” — and establish the fees
for FAM’s services depending on the nature of the transaction.
In
sum, there is no “forceful evidence” indicating that the parties
intended to exclude the plaintiffs’ claims in Counts I and III from
the scope of the arbitration clauses. AT&T Tech., 475 U.S. at 650.
b. Counts I and III Against Brenner and Plaintiffs’
Motion to Strike
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The plaintiffs argue that Brenner cannot compel them to submit
to arbitration because, unlike FAM, she is not a party to the
Investment Management Agreements. She executed the agreements, but
she did so as FAM’s “President.”
Agreements at 12.)
(See Investment Management
Brenner argues that she is entitled to enforce
the provision under two theories: (1) equitable estoppel, and (2)
agency. Before addressing the substance of Brenner’s arguments, we
note that the parties disagree about the governing law.
The
defendants relied on Illinois authorities in their opening brief,
(see Def.’s Mem. at 6), and the plaintiffs followed suit in their
response.
(See Pls.’ Resp. at 6-7.)
In their reply memorandum,
the defendants argued for the first time that California law is
controlling
pursuant
to
the
choice-of-law
Investment Management Agreements.
provision
in
the
(See Defs.’ Reply at 7-8; see
also Investment Management Agreement § 27 (providing that the
agreements shall be governed by California law).)
The plaintiffs
have moved to strike the defendants’ reply brief insofar as it is
predicated on this new argument.
(See Mot. to Strike at 2.)
According to the plaintiffs, the choice of law is critical because
Brenner’s equitable-estoppel theory is not viable under Illinois
law.
(See id.; see also Pls.’ Resp. at 6-7 (citing Ervin v. Nokia,
Inc., 812 N.E.2d 534, 542 (Ill. App. Ct. 2004); Defs.’ Reply at 7
(“Defendants’ concede that under the laws of Illinois, Brenner may
- 13 -
be unable to compel arbitration pursuant to the principle of
equitable estoppel.”).)
However, the law in both jurisdictions supports Brenner’s
alternative theory that she is entitled to enforce the arbitration
clause as FAM’s agent.
Under Illinois and California law, “an
agent acting within the scope of his agency is entitled to invoke
an arbitration agreement entered into by [his] principal.”
Ellis
v. Coventry Capital I LLC, No. 08 CV 3083, 2008 WL 4396349, *7
(N.D. Ill. Sept. 24, 2008) (applying Illinois law); see also RN
Solution, Inc. v. Catholic Healthcare West, 81 Cal.Rptr.3d 892, 900
(Cal. Ct. App. 2008) (similar).
The plaintiffs are suing Brenner
for actions she undertook as FAM’s agent. (See Compl. ¶¶ 13
(“Brenner was a subagent employed by FAM and owed to Ferenc the
same fiduciary duties owed to him by FAM.”); 28 (“Legacy Re and
Rock Solid paid to FAM ‘performance’ or other fees for its services
and advice, which FAM in turn paid over to Brenner, in whole or in
part.”).)
Therefore, she is entitled to enforce the arbitration
clause in the Investment Management Agreements under both Illinois
and California law.
The plaintiffs’ motion to strike is denied as
effectively moot.
Finally, the plaintiffs’ reliance on McCarthy v. Azure, 22
F.3d 351, 356-361 (1st Cir. 1994) does not persuade us to reach a
different result.
(See Pls.’ Resp. at 8.)
The McCarthy court
rejected a non-party agent’s attempt to enforce an arbitration
- 14 -
clause in a purchase agreement that he executed on his principal’s
behalf.
McCarthy, 22 F.3d at 357.
applying
Illinois
or
California
First, the court was not
law.4
The
law
in
those
jurisdictions is consistent with the authorities that McCarthy
distinguished and/or rejected.
See id.; see, e.g., Pritzker v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110, 1121-22
(3d Cir. 1993).
Second, the court expressly distinguished cases,
like this one, involving service contracts: “[a] person who enters
into a service contract with a firm contemplates an ongoing
relationship in which the firm’s promises can only be fulfilled by
future (unspecified) acts of its employees or agents stretching
well into an uncertain future.
A person who contracts to transfer
assets to a company faces a much different prospect: a one-shot
transaction in which the purchaser’s obligations are specified and
are, essentially, performed in full at the closing, or soon
thereafter.
So it is here.”
Id. at 357.
Unlike the purchase
agreement in McCarthy, the Investment Management Agreements are
service contracts.
See CD Partners, LLC v. Grizzle, 424 F.3d 795,
799-800 (8th Cir. 2005) (distinguishing McCarthy on the grounds
that that case involved a “one-shot” transaction); Lamson v. LFG,
LLC, No. 00 C 3094, 2000 WL 33539382, *1 (N.D. Ill. June 22, 2000)
4/
The McCarthy court applied federal common law. See McCarthy, 22 F.3d
at 355.
We believe that the Seventh Circuit would apply state law to this
question.
See Stone, 328 F.3d at 345 (concluding that state law governed
disputes about the scope and meaning of an arbitration clause, and that federal
law only comes into play if the state has adopted “special rules” for arbitration
inconsistent with federal policy).
- 15 -
(similar). Brenner’s performance as FAM’s agent over the course of
the
parties’
business
plaintiffs’ complaint.
relationship
is
at
the
heart
of
the
(See Compl. ¶¶ 11-15, 19, 21-25, 28, 44-47
(alleging that “Brenner and FAM” provided dubious investment advice
to the plaintiffs).)
In sum, Counts I and III — asserted by Legacy Re, Rock Solid,
and Ferenc against Brenner and FAM — are subject to arbitration in
their entirety.
3.
407 Dearborn’s Claims as Against Brenner and FAM (Count
II)
In Count II, 407 Dearborn alleges breach of fiduciary duty by
Brenner,
FAM,
and
Horrell.
Brenner
and
FAM
argue
that
407
Dearborn, which is not a party to the Investment Management
Agreements, is nevertheless bound by the arbitration clause because
the company was “formed as part of the work-out facilitated by FAM
when the Scattered Loan defaulted.”
they
have
not
cited
any
(Defs.’ Mem. at 5.)
relevant
authority
However,
supporting
the
proposition that a non-party may be compelled to arbitrate its
claims simply because it participated in transactions with parties
bound
by
an
arbitration
clause.
In
their
reply
brief,
the
defendants belatedly cite JSM Tuscany, LLC v. Superior Court, 123
Cal.Rptr.3d 429, 443-44 (Cal. Ct. App. 2011) for the proposition
that a non-party plaintiff may be bound by an arbitration clause
under equitable-estoppel principles if it sues for breach of a
contract containing such a clause.
But 407 Dearborn’s claims are
- 16 -
not even loosely based upon the Investment Management Agreements.
Instead,
407
Dearborn
alleges
that
the
defendants
enriched
themselves at the company’s expense during the time period when
they controlled the company (March 2009 through June 2011).
Compl. ¶¶ 33-40.)
(See
We conclude that 407 Dearborn’s claims in Count
II are not subject to arbitration.
4.
The Plaintiffs’ RICO Claim as Against Brenner (Count IV)
In Count IV, Ferenc, Legacy Re, and Rock Solid allege that
Brenner and Horrell violated 18 U.S.C. § 1962(c) and (d).
Insofar
as this claim is brought against Brenner, we conclude that it is
subject
to
arbitration.
The
sufficiency
of
the
plaintiffs’
complaint is beyond the scope of the defendants’ motion,5 but Count
IV appears to be yet another instance of a “garden-variety”
business dispute masquerading as a civil RICO claim for treble
damages.
Midwest Grinding Co., Inc. v. Spitz, 976 F.2d 1016, 1025
(7th Cir. 1992). (“While it is clear that the scope of civil RICO
extends
beyond
the
prototypical
mobster
or
organized
crime
syndicate, it is equally evident that RICO has not federalized
every state common-law cause of action available to remedy business
deals gone sour.”).
5/
The complaint does not identify any other
See AT&T Tech., 475 U.S. at 649-50 (“[I]n deciding whether the parties
have agreed to submit a particular grievance to arbitration, a court is not to
rule on the potential merits of the underlying claims. Whether “arguable” or not,
indeed even if it appears to the court to be frivolous, the union's claim that
the employer has violated the collective-bargaining agreement is to be decided,
not by the court asked to order arbitration, but as the parties have agreed, by
the arbitrator.”).
- 17 -
victims of the alleged RICO conspiracy besides Ferenc and his
companies.
And although the complaint vaguely refers to “other
investments,”
plaintiffs
(Compl.
have
pled
¶
54),
with
the
even
only
minimal
allegations underlying Counts I and III.6
allegations
that
the
detail
the
same
are
Moreover, given the
breadth of the arbitration clause, it seems likely that the “other
investments” are likewise subject to that clause. (See supra.) We
conclude that the plaintiffs’ RICO claim against Brenner is a claim
“with
respect
to”
the
Investment
Management
Agreements
and
therefore subject to arbitration.
Horrell, who is also named as a defendant in Count IV, is
neither a party to the Investment Management Agreements nor an
agent of a party to those agreements.
However, we cannot override
Brenner’s right to arbitration because the plaintiffs’ RICO claim
involves a nonparty: “[u]nder the Arbitration Act, an arbitration
agreement must be enforced notwithstanding the presence of other
persons who are parties to the underlying dispute but not to the
arbitration agreement.”
Moses H. Cone Memorial Hosp., 460 U.S. at
20; see also Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 217
(1985) (“[T]he Arbitration Act requires district courts to compel
arbitration of pendent arbitrable claims when one of the parties
6/
Ferenc, Legacy Re, and Rock Solid also allege losses stemming from “the
improper transfer of property from 407 Dearborn,” (see Compl. ¶ 59), but they are
not the real parties in interest to such a claim. That claim belongs to 407
Dearborn. See, e.g., Freed v. JPMorgan Chase Bank, N.A., No. 12 C 1477, 2012 WL
6193964, *4 (N.D. Ill. Dec. 12, 2012).
- 18 -
files a motion to compel, even where the result would be the
possibly
inefficient
maintenance
of
separate
proceedings
in
different forums.”).
B.
Horrell’s Motion to Dismiss
1.
Legal Standard
The purpose of a 12(b)(6) motion to dismiss is to test the
sufficiency of the complaint, not to resolve the case on the
merits.
5B Charles Alan Wright & Arthur R. Miller, Federal
Practice and Procedure § 1356, at 354 (3d ed. 2004).
To survive
such a motion, “a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on
its face.’
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) (citing Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570, 556 (2007)).
When evaluating
a motion to dismiss a complaint, the court must accept as true all
factual allegations in the complaint.
However,
we
need
not
accept
as
Iqbal, 129 S. Ct. at 1949.
true
its
legal
conclusions;
“[t]hreadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice.”
(citing Twombly, 550 U.S. at 555).
Id.
- 19 -
2.
407 Dearborn’s Breach of Fiduciary Duty Claim Against
Horrell (Count II)7
Horrell argues that 407 Dearborn’s breach of fiduciary duty
claim is subject Rule 9(b)’s heightened pleading standard.
See
Robinson v. Caster, 356 F.2d 924, 925 (7th Cir. 1966) (“A breach of
fiduciary duty claim premised on fraud is subject to Rule 9(b).”).
Although it is a close question, we conclude that Count II does
sound in fraud. The plaintiffs allege that from March 2009 through
June 2011 407 Dearborn “was controlled and managed by Brenner, FAM
and/or
Horrell
Manager, LLC).”
(directly
or
indirectly
through
407
Dearborn
(Compl. ¶ 19; see also id. at ¶ 33 (“From March,
2009 through June, 2011, 407 Dearborn was controlled and dominated
by Brenner, FAM and Horrell.”).)
According to the plaintiffs,
Brenner and FAM caused 407 Dearborn to pay dubious and excessive
management fees to Horrell and/or his affiliates.
37.)
(Compl. ¶¶ 34,
They also allege that “Brenner, FAM, and/or Horrell” caused
407 Dearborn to accept and repay loans from the defendants’
affiliates at exorbitant interest rates.
(Id. at ¶ 35.)
In
paragraph 37, 407 Dearborn alleges that the defendants caused it to
make payments to Horrell and his affiliates without disclosing (or
inadequately disclosing) improper mark-ups and other excessive
charges.
(See id. at ¶ 37.)
Indeed, the complaint indicates that
7/
Although not labeled as such, it is apparent from the complaint and
from the plaintiffs’ response to Horrell’s motion that Count II alleges breach
of fiduciary duty.
- 20 -
Horrell received some payments without conferring any benefits on
407 Dearborn.
(See id.; see also id. at ¶ 34 (indicating that
Horrell received purported “management fees” when, in fact, the
property was managed by another party).)
In essence, 407 Dearborn
alleges that the defendants were siphoning money out of the company
on the pretense that the defendants and/or their affiliates were
providing valuable services.
We think that 407 Dearborn is
alleging fraud, not simple mismanagement or conflict of interest.
Our conclusion is buttressed by the fact that the other plaintiffs’
RICO fraud claim is purportedly based in part upon 407 Dearborn’s
losses. (See Compl. ¶ 59 (alleging that the scheme to defraud
caused losses “including but not limited to . . . the improper
transfer of property from 407 Dearborn.”).
Rule 9(b) requires plaintiffs to allege the circumstances
constituting fraud with particularity.
“This
means
the
who,
what,
when,
paragraph of any newspaper story.”
Fed. R. Civ. P. 9(b).
where,
and
how:
the
first
DiLeo v. Ernst & Young, 901
F.2d 624, 627 (7th Cir. 1990); see also Pirelli Armstrong Tire
Corp. Retiree Medical Benefits Trust v. Walgreen Co., 631 F.3d 436,
442 (7th Cir. 2011) (noting that “the requisite information — what
gets included in that first paragraph — may vary on the facts of a
given case”).
particulars.
Count II is vague concerning nearly all of these
Some allegations indicate that Horrell exercised
direct control over 407 Dearborn, (see Compl. ¶ 19), but how?
Did
- 21 -
Horrell have an interest in 407 Dearborn? Or 407 Dearborn Manager,
LLC?
Other allegations indicate that Horrell was actually an
outsider with personal and/or professional ties to Brenner.
id. at ¶¶ 34, 36, 38, 40.)
(See
In addition, the time frame for the
alleged improper transfers is overbroad: March 2009 through June
2011.
(See id. at ¶ 33.)
407 Dearborn has not identified any
particular improper loan (see id. at ¶ 35), or any particular
invoice containing “mark-ups or other excessive charges . . . .”
(Id. at ¶ 38.)
407 Dearborn’s vague allegations of impropriety
against Horrell do not pass muster under Rule 9(b).
See Pirelli
Armstrong, 631 F.3d at 442 (“Heightened pleading in the fraud
context is required in part because of the potential stigmatic
injury that comes with alleging fraud and the concomitant desire to
ensure that such fraud allegations are not lightly leveled.”).
Horrell’s motion to dismiss Count II is granted.
And because the
defects we have identified apply equally to 407 Dearborn’s claim
against Brenner and FAM, we will dismiss count II against those
defendants as well under Rule 12(b)(6).
3.
Civil RICO (Count IV)
The plaintiffs have filed a RICO conspiracy claim against
Horrell and Brenner.
18 U.S.C. § 1962 states in pertinent part:
(c) It shall be unlawful for any person employed by or
associated with any enterprise engaged in, or the
activities of which affect, interstate or foreign
commerce, to conduct or participate, directly or
indirectly, in the conduct of such enterprise's affairs
through a pattern of racketeering activity ....
- 22 -
(d) It shall be unlawful for any person to conspire to
violate any of the provisions of subsection (a), (b), or
(c) of this section.
18 U.S.C. § 1962(c) & (d).
The elements of a civil RICO claim are:
“(1) conduct (2) of an enterprise (3) through a pattern (4) of
racketeering activity.”
Cir. 2006).
Gamboa v. Velez, 457 F.3d 703, 705 (7th
“[A]llegations of fraud in a civil RICO complaint are
subject to the heightened pleading standard of Fed.R.Civ.P. 9(b),
which requires a plaintiff to plead all averments of fraud with
particularity.”
Slaney v. The Intern. Amateur Athletic Federation,
244 F.3d 580, 597 (7th Cir. 2001).
a.
Enterprise
“A RICO complaint must identify the enterprise.”
Richmond v.
Nationwide Cassel L.P., 52 F.3d 640, 645 (7th Cir. 1995).
hallmark of an enterprise is a structure.”
“The
Richmond v. Nationwide
Cassel L.P., 52 F.3d 640, 645 (7th Cir. 1995) (citation and internal
quotation marks omitted). “An enterprise is distinct, separate, and
apart from a pattern of racketeering activity: although a pattern of
racketeering activity may be the means through which the enterprise
interacts with society, it is not itself the enterprise, for an
enterprise is defined by what it is, not what it does.”
Jennings
v. Emry, 910 F.2d 1434, 1440 (7th Cir. 1990).
The
plaintiffs
purport
to
allege
an
association-in-fact
enterprise consisting of “FAM, Fortuna Stream, and other entities in
which
Brenner
and
Horrell
held
or
controlled
the
interests.”
- 23 -
(Compl. ¶ 51.)
This “nebulous” collection of named and unnamed
entities is insufficient to state a civil RICO violation.
See
Richmond, 52 F.3d at 645 (rejecting a similar allegation as too
“nebulous” and “open ended” to addequately plead an association-infact).
Also, there is no suggestion of any structure or hierarchy.
Limestone Development Corp. v. Village of Lemont, Ill., 520 F.3d
797, 804-05 (7th Cir. 2008) (“Nowhere in the complaint does one find
anything to indicate a structure of any kind. There is no reference
to a system of governance, an administrative hierarchy, a joint
planning committee, a board, a manager, a staff, headquarters,
personnel having differentiated functions, a budget, records, or any
other indicator of a legal or illegal enterprise.”).
Instead, the
complaint merely describes a loose confederation of entities that
“solicit from investors monies to be used by and for the benefit of
various entities and/or projects in which Brenner and Horrell have
an interest, and from which they receive fees and profits.”
(Compl.
¶ 52); cf. Jennings, 910 F.2d at 1440 (“[A]n enterprise is defined
by what it is, not what it does.”).
We conclude that the plaintiffs
have failed to adequately allege a RICO enterprise.
b.
Pattern of Racketeering Activity
“[A] pattern of racketeering activity consists, at a minimum,
of two predicate acts of racketeering (committed within a ten-year
time period).”
Slaney, 244 F.3d at 598-99.
Here, the plaintiffs
allege that the defendants committed multiple acts of mail fraud.
- 24 -
Therefore, with respect to at least two such acts, they “must allege
the identity of the person who made the representation, the time,
place and content of the misrepresentation, and the method by which
the misrepresentation was communicated to the plaintiff.”
599.
Id. at
The complaint contains a table listing 21 letters that
“Brenner and FAM mailed to Ferenc, Legacy Re, and/or Rock Solid.”
(Compl. ¶ 54.)
The complaint does not specify which plaintiffs
received
letters
which
from
which
defendants.
Most
of
the
communications — 16 of 21 — are described as “cover letters”
enclosing financial statements for Fortuna Stream.
(Id.)
The
plaintiffs do not explain why they believe that the letters and/or
the financial statements furthered the alleged scheme.
The same
goes for the three invoices for consulting and performance fees.
(Id.)
Finally, two communications are described only as “Letter
dated __,” (id.), which is plainly insufficient under Rule 9(b).
As we indicated earlier in connection with Brenner’s and FAM’s
motion to compel arbitration, we take a dim view of the plaintiffs’
RICO claim.
Although the plaintiffs vaguely allude to “other
investments,” (Compl. ¶ 54; see also id. at ¶ 44), their complaint
is largely predicated on the fallout from one bad business deal.
This is a flimsy basis for seeking treble damages under the civil
RICO statute.
See Midwest Grinding, 976 F.2d at 1025.
motion is granted as to Count IV.
CONCLUSION
Horrell’s
- 25 -
The plaintiffs’ motion to strike [29] is denied.
arbitration
provision
in
the
Investment
Because the
Management
Agreements
designates an arbitral forum outside this district, we will convert
Brenner’s and FAM’s motion to compel arbitration [21] into a motion
to dismiss for improper venue.
and denied in part.
That motion [21] is granted in part
We conclude that the plaintiffs’ claims against
Brenner and FAM in Counts I, III, and IV of the complaint are
subject to arbitration in Orange County, California.
Accordingly,
we dismiss those claims against Brenner and FAM for improper venue
pursuant to Rule 12(b)(3), without prejudice to the plaintiffs
refiling those claims in the appropriate forum.
Count II is not subject to arbitration.
We conclude that
However, Count II is
dismissed as to all the defendants, without prejudice, pursuant to
Rule 12(b)(6).
Finally, Count IV against Horrell is dismissed
without prejudice pursuant to Rule 12(b)(6).
A status hearing is
set for March 6, 2013 at 11:00 a.m.
DATE:
February 21, 2013
ENTER:
___________________________________________
John F. Grady, United States District Judge
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