Ferenc et al v. Brenner et al
Filing
59
MEMORANDUM OPINION Signed by the Honorable John F. Grady on March 6, 2014. Mailed notice(cdh, )
12-2071.141-RSK
Mar. 6, 2014
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
Management,
the
court
LLC’s
is
Karen
(“FAM”)
motion
Brenner’s
to
and
dismiss
Fortuna
Count
I
Asset
of
the
plaintiffs’ amended complaint. For the reasons explained below, we
deny the defendants’ motion.
BACKGROUND
We will assume that the reader is familiar with our previous
opinion in this case, which dismissed a majority of the plaintiffs’
claims
because
arbitrate.
Ill. 2012).
they
are
governed
by
a
binding
agreement
to
See Ferenc v. Brenner, 927 F.Supp.2d 537, 550 (N.D.
We held that only one claim belonged in this court:
407 Dearborn, LLC’s claim against Brenner, FAM, and Horrell for
breach of fiduciary duty.
Id. at 546.
Nevertheless, we dismissed
that claim because 407 Dearborn had not satisfied Rule 9(b)’s
- 2 -
heightened pleading requirements.
Id. at 547-48.
The following
allegations are drawn from 407 Dearborn’s amended complaint.1
In March 2009, 407 Dearborn acquired property commonly known
as 407 S. Dearborn, Chicago, Illinois (the “Dearborn Property”).
(Am. Compl. ¶ 7.)
At that time, the manager of the 407 Dearborn
was 407 Dearborn Manager, LLC; defendant FAM was the manager of 407
Dearborn Manager; and defendant Brenner was the managing member of
FAM.
(Id. at ¶ 9.)
The complaint further alleges that defendant
Michael Horrell held himself out as “co-manager” of 407 Dearborn
and exercised “de facto control” over the company.
(Id. at ¶ 10.)2
Horrell and Brenner were close business associates and had “various
business interests together.” (Id. at ¶ 13.) 407 Dearborn alleges
that Horrell and Brenner used their control of the company to cause
it to pay improper fees to Horrell and his companies.
The amended
complaint attaches a “General Ledger” listing payments by 407
Dearborn to Horrell and his affiliates. (Id. at ¶¶ 11-12; see also
407 Dearborn “General Ledger,” attached as Ex. C to Am. Compl.)
The “Memo” field of the ledger lists the services that Horrell and
his
company
purportedly
rendered
(e.g.,
“Building
Repairs,”
“Building Supplies,” “Cleaning Contract,” “Leasing Commissions,”
1/
407 Dearborn has repled its claim against the defendants in Count I of
the amended complaint. The other plaintiffs — Sidney Ferenc, Legacy Re, Ltd. and
Rock Solid Gelt Limited — have repled the claims that we dismissed for improper
venue, presumably to preserve their right to appeal.
2/
The plaintiffs have settled their dispute with Horrell and have
dismissed their claims against him.
- 3 -
Management Fees”). (Id.) The amended complaint refers generically
to “mark-ups” and “other excessive charges,” (id. at ¶ 14), but it
does not challenge any particular charge on those grounds.
The
real thrust of the plaintiff’s claim appears to be the more than
$242,000 in “Management Fees” that FAM and Brenner allegedly caused
the company to pay to Horrell and his affiliates.
(See General
Ledger at 3-4 (listing “Management Fees” paid to Aurora Real Estate
and Management, Goriana Alexander, Mozart’s Aria, and Chicago
Historic Realty); see also Am. Compl. ¶ 12 (alleging that these
parties are affiliated with Horrell).)
Chicago Historic Realty
added another $19,000 in “management fees” to the invoices that it
submitted to 407 Dearborn for general building maintenance.
(See
Chicago Historic Realty Invoices, attached as Group Ex. A to Pl.’s
Reply.)3
The plaintiff alleges that Horrell, with the defendants’
participation, was billing the company for services that were
already being provided by a third-party property manager (Joseph
Cacciatore). (Id. at ¶ 11.)
Besides these payments to Horrell and his companies, 407
Dearborn
also
challenges
certain
defendants and their affiliates.
“loan
repayments”
(Id. at ¶ 18.)
to
the
On March 4, 2010,
407 Dearborn paid FAM $950,000, and paid a company called First
Chicago Financial LLC $108,000.
3/
(Id.)
Four days later, it paid
The invoices do not describe the basis for this fee, which was
consistently 25% of the itemized services.
- 4 -
$30,300 to “Managers.”
(Id.)
And on March 10, 2010, 407 Dearborn
made a $71,969.50 interest payment to FAM.
(Id.)
407 Dearborn
alleges “on information and belief” that Brenner and/or Horrell
were the ultimate recipients of these payments.
“does
not
have
records
which
demonstrate
(Id.) The company
that
[the
actually received the proceeds of the purported loans.”
A.
company]
(Id.)
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.
- 5 -
We previously held that the plaintiff’s breach of fiduciary
duty claim was governed by Rule 9(b), although we considered it a
“close question.”
Ferenc, 927 F.Supp.2d at 547.
407 Dearborn has
not asked us to revisit that question, instead arguing that its
amended
complaint
requirements.
satisfies
Rule
9(b)’s
heightened
pleading
See DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th
Cir. 1990) (To satisfy Rule 9(b), the plaintiff must allege “the
who, what, when, where, and how [of the alleged fraud]: the first
paragraph of any newspaper story.”; 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”).
DISCUSSION
A.
Whether 407 Dearborn Has Satisfied Rule 9(b)
The defendants argue that 407 Dearborn’s amended complaint is
defective because it asserts a “claim” without articulating a
particular legal theory.
(See Am. Compl. at 1 (“407 Dearborn
Claims Against Brenner, FAM, and Horrell”).)
The Federal Rules of
Civil Procedure do not require plaintiffs to plead legal theories
in their complaint.
See Currie v. Chhabra, 728 F.3d 626, 629 (7th
Cir. 2013) (“[W]e remind parties again that there is no duty to
plead legal theories.”). They merely require the plaintiff to give
the defendant notice of his claim.
Id.
The defendants affect
- 6 -
ignorance about the nature of the duty that they allegedly owed 407
Dearborn, and how they were supposed to have breached it.
(See
Defs.’ Mot. at 4-5.) But the plaintiff has clearly spelled out the
nature of its claim in the amended complaint.
FAM controlled 407
Dearborn Manager, and Brenner controlled FAM.
The plaintiff
alleges that, in that circumstance, the defendants had a duty to
act in the company’s best interests.
authorizing
the
company
to
pay
They breached that duty by
excessive
and
“management fees” to Horrell and his affiliates.
duplicative
407 Dearborn
suggests several legal theories that would permit it to recover
damages against the defendants for this conduct.
(See Pl.’s Resp.
at 2-6 (breach of the defendants’ fiduciary duty to plaintiff;
knowing participation in Horrell’s breach of fiduciary duty; unjust
enrichment).)
The defendants argue that the plaintiff’s claim is
a nonstarter because it has not alleged that the defendants made
any misrepresentations or material omissions.
6.)
(See Def.’s Mot. at
We previously held that the plaintiff’s claim “sound[ed] in
fraud,” see Ferenc, 927 F.Supp.2d at 547, but that does not mean
that it must prove the elements of fraud to prevail on a claim for
breach of fiduciary duty. Even if the defendants made no effort to
conceal what they were doing, that would not entitle them to act
contrary to the company’s best interests.
The dates and the amounts of the management-fee payments are
listed in Exhibit C to the amended complaint, and in the invoices
- 7 -
attached to the plaintiff’s response brief.4
We conclude that this
is sufficient to satisfy Rule 9(b)’s particularity requirement.
B.
Whether the LLC Agreement Forecloses the Plaintiff’s Claims
The defendants also argue that the challenged transactions
were authorized by 407 Dearborn’s operating agreement and therefore
cannot support a claim for (or premised on) breach of fiduciary
duty.
See 805 ILCS 180/15-5 (an operating agreement may not
“eliminate or reduce a member’s fiduciary duties,” but it may
“identify specific types or categories of activities that do not
violate these duties, if not manifestly unreasonable”); see also
Sirazi v. Panda Exp., Inc., No. 08 C 2345, 2011 WL 6182424, *19
(N.D. Ill. Dec. 13, 2011) (relying on an analogous provision in the
Uniform Limited Partnership Act in granting the defendant summary
judgment on the plaintiff’s claim for breach of fiduciary duty).
Before reaching that argument, we must address two threshold
issues.
First, we reject the plaintiff’s borderline frivolous
argument that we may not consider the operating agreement when
ruling on the defendants’ motion to dismiss.
6.)
(See Pl.’s Resp. at
The plaintiff has attached the operating agreement to its
amended complaint and bases its claim, at least in part, on the
4/
Although the invoices were not attached to the amended complaint,
Dearborn refers to them at paragraph 14. (See Am. Compl. ¶ 14 (“Many of
invoices submitted by Horrell’s affiliates include an additional mark-up
‘management fees’ on top of the other ‘management fees’ paid directly
Horrell.”).)
407
the
for
to
- 8 -
terms of that agreement.
(See Limited Liability Agreement for 407
Dearborn LLC (“LLC Agreement”), attached as Ex. 1 to Am. Compl.;
see also Am. Compl. ¶ 18 (“[N]either Brenner, FAM and/or Horrell,
including their affiliated entities, were authorized under the
operating agreement to make loans to 407 Dearborn, and even if the
loans were permitted, the payment of interest on such loans was not
authorized.”) (emphasis added).)
Accordingly, the defendants may
rely on LLC Agreement’s terms to support their motion to dismiss.
See, e.g., 188 LLC v. Trinity Industries, Inc., 300 F.3d 730, 735
(7th Cir. 2002).
Second, the parties appear to agree that terms
applicable to the company’s “Manager” — 407 Dearborn Manager — also
apply to the defendants.
5-7.)
(See Pl.’s Resp. at 6-9; Defs.’ Reply at
We see no reason at this point to rule otherwise.
The defendants rely on §§ 5.1, 5.4, 5.5, and 5.6 of the LLC
Agreement to support their argument that they were permitted to
engage in the transactions alleged in the complaint.
We will
address the defendants’ arguments with respect to each provision in
turn.
As the defendants point out, § 5.1 vests the Manager with
substantial discretion to manage the company’s affairs:
5.1 Management by the Manager. The business, property and
affairs of the Company shall be managed by the Manager,
and the Manager shall direct, manage and control the
business of the Company. Except for situations in which
the approval of the Members is expressly required by
nonwaivable provisions of the Act, the Manager shall have
full and complete authority, power and discretion to
manage and control the business, affairs and properties
of the Company, to make all decisions regarding those
matters and to perform any and all other acts or
- 9 -
activities customary or incident to the management of the
Company's interests.
(LLC Agmt. § 5.1.)
under
§
5.1
to
The fact that the Manager has broad discretion
manage
the
company
does
not
foreclose
the
plaintiff’s claim that the defendants exercised that discretion
improperly.
The defendants also argue that the LLC Agreement
authorized the March 8, 2010 payment to “Managers:”
5.4 Compensation and Reimbursement of Manager. The
Company will pay on the date hereof through December 31,
2009 and on the first day of each calendar year hereafter
an amount equal to the Management Fee for such calendar
year. The Manager shall be entitled to reimbursement of
ordinary and necessary business expenses incurred in
connection with its duties to the Company.
(Id. at § 5.4.)
It is not clear whether the $30,300 payment really
was for “Management Fees” as the LLC Agreement defines that term.
(Cf. Am. Compl. ¶ 18 (“[T]he following amounts were paid to the
following persons or entities, which were characterized in 407
Dearborn’s general ledger as loan repayments: . . . $30,300 was
paid to ‘Managers’ on March 8, 2010).)
And even if the LLC
Agreement authorized that particular payment, it is only one of
numerous payments for “management fees” that the plaintiff is
challenging.
(See Am. Compl. ¶ 12.)
The defendants also contend
that the plaintiff’s claim is barred by the LLC Agreement’s limits
on Manager liability:
5.5 Liability of the Manager. The Manager shall not have
liability to the Company or to any Member for any loss
suffered by the Company, provided that such action or
inaction does not constitute gross negligence or any of
the following:
- 10 -
(a) A willful failure to deal fairly with the Company or
the Members in connection with a matter in which a
Manager has a material conflict of interest.
(b) A violation of criminal law, unless the Manager had
reasonable cause to believe that his conduct was lawful,
or no reasonable cause to believe that it was unlawful;
or
(c) A transaction from which
improper pecuniary profit.
(LLC Agmt. § 5.5.)
a
Manager
derived
an
Assuming that this provision applies to the
defendants, the amended complaint clearly alleges a willful failure
to deal fairly with the company.
Brenner and FAM allegedly caused
the company to pay excessive and unnecessary management fees to
Brenner’s close business partner.
Finally, the defendants argue
that the transactions with Horrell and his companies were permitted
affiliate transactions:
5.6 Transactions with Manager and Affiliates. The Company
may enter into agreements with a or [sic] any Affiliate
thereof for the provision of property, goods or services
to the Company, Provided that the price and terms for
such property, goods, or services are no less favorable
to the company than the price and terms for property,
goods, or services reasonably available from unrelated
Persons for comparable property, good or services in the
same geographic area.
(Id. at § 5.6.)
Whether 407 Dearborn received services from
Horrell and his companies on terms comparable to what it would have
received from an unrelated company is a fact question that will
have to await further development in discovery.
- 11 -
CONCLUSION
The defendants’ motion to dismiss Count I of the plaintiffs’
amended complaint [47] is denied.
The defendants shall answer the
amended complaint by March 28, 2014. The parties shall serve their
Rule 26(a) disclosures by April 11, 2014.
A status hearing is set
for April 23, 2014 at 11:00 a.m. to schedule further discovery.
DATE:
March 6, 2014
ENTER:
___________________________________________
John F. Grady, United States District Judge
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