Andrews v. Gerace et al
Filing
87
MEMORANDUM Opinion and Order. Signed by the Honorable Manish S. Shah on 9/15/2014.(psm, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
JULIE ANDREWS,
Plaintiff,
No. 13 CV 1521
v.
Judge Manish S. Shah
LINDA GERACE, et al.,
Defendants.
MEMORANDUM OPINION AND ORDER
In the summer of 2010, Julie Andrews and her sister, Linda Gerace, became
co-owners of two corporations located in Maple Park, Illinois. Andrews alleges that
after the sisters bought the companies, Gerace, with the help of Gerace’s husband
and children, began to steal money and other property from the corporations.
According to Andrews, Gerace and her family then attempted to cover up their
misdeeds by hiding some of the stolen property and by cooking the corporate
books—all to the detriment of Andrews, who failed to receive all of the company
profits to which she was entitled as co-owner. In 2013, Andrews filed in federal
court an individual civil action against Gerace and Gerace’s family under the
Racketeer Influenced and Corrupt Organizations Act. The complaint also included
several state-law claims against the defendants, including fraud, unjust
enrichment, and breach of fiduciary duty. The defendants now move to dismiss
Andrews’s claims pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of
Civil Procedure. For the reasons discussed below, I grant in part and deny in part
defendants’ motion.
I.
Legal Standard
Rule 8(a)(2) of the Federal Rules of Civil Procedure requires that any claim
for relief contain “a short and plain statement of the claim showing that the pleader
is entitled to relief.” The purpose of this requirement is to “give the defendant fair
notice of what the . . . claim is and the grounds upon which it rests.” Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41,
47 (1957)). To satisfy these “notice” pleading requirements, the complaint need not
set forth detailed factual allegations. Id. (citation omitted). But it must present
enough “factual matter, accepted as true, [that the] ‘claim to relief . . . is plausible
on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S.
at 570). Where a claim for relief sounds in allegations of fraud, however, the claim is
subject to a heightened pleading standard. Cincinnati Life Ins. Co. v. Beyrer, 722
F.3d 939, 949–50 (7th Cir. 2013) (citing Fed. R. Civ. P. 9(b)). A party alleging fraud
must “state [their claim] with particularity,” Fed. R. Civ. P. 9(b), including the
“who, what, when, where, and how” of the fraud, Beyrer, 722 F.3d at 950. Malice,
intent, or knowledge may be alleged generally. See Fed. R. Civ. P. 9(b).
Motions under Rule 12(b)(6) are meant “to test the sufficiency of the
complaint, not . . . the merits” of the plaintiff’s case. Weiler v. Household Fin. Corp.,
101 F.3d 519, 524 n. 1 (7th Cir. 1996) (quoting Triad Assocs., Inc. v. Chicago Hous.
Auth., 892 F.3d 583, 586 (7th Cir. 1989)). In considering a Rule 12(b)(6) motion to
2
dismiss, I therefore accept as true all well-pleaded factual allegations and draw all
reasonable inferences in the plaintiff’s favor. Beyrer, 722 F.3d at 946 (quoting
Reynolds v. CB Sports Bar, Inc., 623 F.3d 1143, 1146 (7th Cir. 2010)). I do the same
for motions to dismiss brought under Rule 12(b)(1). See G & S Holdings LLC v.
Cont’l Cas. Co., 697 F.3d 534, 540 (7th Cir. 2012) (citing Scanlan v. Eisenberg, 669
F.3d 838, 841 (7th Cir. 2012)).
II.
Facts
In late June of 2010, Julie Andrews (a citizen of Florida, [37]1 ¶ 6) and her
sister, Linda Gerace (a citizen of Illinois, id. ¶ 7), discussed the possibility of
purchasing two businesses, id. ¶¶ 17, 315. One company, Sycamore Speedway &
Associates, was a seasonal race track located in Maple Park, Illinois. See id. ¶¶ 16,
22, 26. The other, Winner’s Circle & Associates, was a bar and restaurant, also
located in Maple Park, Illinois. Id. ¶¶ 16, 22–23. Gerace told Andrews that if the
two sisters became co-owners of the businesses, the companies “would be managed
and operated fairly” between the sisters, and all profits would be split equally
between them. Id. ¶¶ 17, 315. On July 30, 2010, the sisters each purchased 50
percent of each of the two companies. See id. ¶ 16. Linda financed the purchase of
her own shares by taking out a loan from a bank in Florida. See id. ¶ 219.
After the sisters purchased the companies, Andrews alleges that Gerace—
with the help of Gerace’s family—began to steal money (and other property) from
the businesses and thus deprive Andrews of profits to which she was entitled as coCitations to the record are designated by the document number as reflected on the Court’s
docket, enclosed in brackets.
1
3
owner. For example, rather than delivering the companies’ cash earnings to the
businesses’ bank accounts, as required by company policy, see id. ¶¶ 39–42,
Andrews maintains that Gerace and Gerace’s husband, Dan—along with their
children Tiffany, Samantha, Brett, and Kelli; and Tiffany’s boyfriend, Charles—
worked together to pocket a portion of those earnings and then use the stolen funds
to buy electronics, automobiles, and other items for the defendants’ personal use,
see, e.g., id. ¶¶ 63–65, 73, 84, 97, 112, 131–33, 141, 146–47. According to Andrews,
Gerace (and daughter Tiffany) also used company monies to fund personal travel for
the Gerace family, id. ¶ 69–70, and to pay for a graduation party for Gerace’s
daughter, Kelli, id. ¶ 72.
To cover up their theft, Andrews asserts that the defendants hid some of the
stolen cash in various locations, including at Tiffany and Charles’s home, in safetydeposit boxes at several banks, and in a locker at Dan’s workplace. See id. ¶¶ 77,
116, 121, 238. In addition, says Andrews, Gerace (and others) tried to cover up their
theft by denying Andrews access to company records and other property, id. ¶ 33–
34, doctoring the companies’ accounting books to reflect less profit than was
actually earned by the businesses, id. ¶¶ 225–28, and, on multiple occasions,
sending Andrews falsified earnings documents by mail, see id. ¶¶ 212, 214. Andrews
maintains that the monthly checks she received from Gerace and Gerace’s daughter
Tiffany—purporting to total half of the entire profits earned by the businesses each
month—were similarly inaccurate. See id. ¶ 220.
4
In February 2013, Andrews sued Gerace in the District Court for the
Northern District of Illinois. [1]. Also named as defendants were Gerace’s husband,
Dan, their four children (Tiffany, Samantha, Brett, and Kelli), and Tiffany’s
boyfriend, Charles Olson. Id.2 Andrews’s amended complaint, [37], contained six
claims, each asserted against all defendants: violation of the Racketeer Influenced
and Corrupt Organizations Act, 18 U.S.C. § 1962(c) (Count I), id. ¶¶ 247–303;
conspiracy to violate RICO (Count II), id. ¶¶ 304–313; common-law fraud (Count
III), id. ¶¶ 314–24; conspiracy to defraud (Count IV), id. ¶¶ 325–29; unjust
enrichment (Count V), id. ¶¶ 330–33; and breach of fiduciary duty (Count VI), id.
¶¶ 334–37.
III.
Analysis
In support of their motion to dismiss, defendants argue: (1) Andrews lacks
standing to bring her RICO claims, see [44] at 13; (2) regardless of standing,
Andrews’s RICO claims are deficient and should be dismissed, see id. at 5–12; and
(3) Andrews’s state-law claims are also deficient and should be dismissed (or, if the
RICO claim is dismissed, the Court should decline to exercise supplemental
jurisdiction over the other claims), see id. at 13–15. Because I find that Andrews
lacks standing to bring her RICO claims—and, with one exception, also lacks
standing to bring her state-law claims—I do not reach defendants’ arguments
concerning the sufficiency of those claims under Rule 12(b)(6). As I find that
Andrews does have standing to bring an individual action for promissory fraud
The companies’ accountant, Marianne Anderson, [37] ¶ 153, was also named as a
defendant. Andrews and Anderson later reached a settlement, and Anderson is no longer a
party to this suit. See [75]; see also Reassignment Status Report, [83] at 2.
2
5
against Linda Gerace (the exception noted above), I do address the sufficiency of the
allegations underlying that claim.
A.
Standing
1.
The RICO Claims (Counts I and II)
Defendants posit that Andrews cannot assert an individual RICO action
against the defendants because, as a shareholder of the two corporations, Andrews
does not have standing to seek relief for injuries sustained directly by those
companies (and only indirectly by Andrews). See id. at 13. Defendants are correct
that, where the consequences of a RICO operation fall directly on a corporation and
its shareholders suffer only by virtue of being shareholders, “the RICO claim
belongs to the corporation, and not the shareholder.” Gagan v. Am. Cablevision,
Inc., 77 F.3d 951, 959 (7th Cir. 1996) (citing Sears v. Likens, 912 F.2d 889, 892 (7th
Cir. 1990); Flynn v. Merrick, 881 F.2d 446, 449 (7th Cir. 1989); Rylewicz v. Beaton
Servs., Ltd., 888 F.2d 1175, 1178–79 (7th Cir. 1989)). Only where a shareholder has
suffered an “individual and direct injury” does she have standing to bring a RICO
claim on her own behalf. Flynn, 881 F.2d at 450.3
The rule providing that corporate shareholders generally may not bring RICO claims for
injuries sustained directly by the corporation reflects a more general shareholder-standing
rule, discussed infra, which holds that “a shareholder . . . cannot sue for indirect harm he
suffers as a result of an injury to the corporation,” Korte v. Sebelius, 735 F.3d 654, 668 (7th
Cir. 2013) (citation omitted). The shareholder-standing rule is a prudential—not a
jurisdictional—limitation on whether the court may hear a case. Id. Consequently, a
shareholder may have suffered an injury sufficiently concrete to form the basis of a
justiciable case or controversy under Article III, but may still lack prudential standing to
sue because the direct injury was to the corporation and not to the shareholder herself. See,
e.g., Nocula v. UGS Corp., 520 F.3d 719, 726–27 (7th Cir. 2008).
3
6
Andrews argues that she has alleged in her complaint a direct injury4 and
therefore has standing to bring an individual RICO action. See [50] at 13. I
disagree. The heart of Andrews’s complaint is her contention that Gerace, with the
help of Gerace’s husband and children, stole earnings and other property from the
companies and wrongfully converted those stolen assets to personal use. See, e.g.,
[37] ¶ 63 (alleging that Gerace took “thousands of dollars of cash paid in exchange
for the [c]ompanies’ goods and services”); id. ¶¶ 65–66 (alleging theft of “Money
Cans full of cash,” preventing “thousands of dollars of earnings and profits from
being accounted for by the [c]ompanies”); id. ¶ 73 (alleging conversion of stolen
profits into electronic equipment that Gerace gave to her family members).5 Taking
these allegations as true, it seems that whatever damage was done by Gerace et al.
was done directly to the businesses—not individually and directly to Andrews.
In examining Andrews’s alleged RICO injury, I focus not on each of the individual
predicate acts underlying the RICO claim, but on the harm Andrews claims to have
suffered from the RICO violation as a whole. See RWB Servs., LLC v. Hartford Computer
Grp., Inc., 539 F.3d 681, 687 (7th Cir. 2008) (“Although the plaintiff . . . must allege an
injury resulting from one of the predicate acts, . . . courts must examine these acts in the
context of the entire ‘violation’ when assessing . . . causation.” (citing Beck v. Prupis, 529
U.S. 494, 506 (2000))).
4
See also id. ¶ 84 (asserting that the defendants “developed a scheme to . . . convert stolen
funds into a four-wheeler motor vehicle”) (emphasis added); id. ¶ 91 (stating that Gerace’s
daughter Tiffany “stole[] and . . . misappropriate[d] money and other property derived from”
the corporations) (emphasis added); id. ¶ 100 (alleging that Tiffany “took cash profits from”
the companies); id. ¶ 122 (claiming that the defendants “devised a scheme to steal kegs of
beer purchased by” the corporations); id. ¶ 131, 133 (stating that Gerace’s daughter
Samantha kept cash payments to the companies); id. ¶¶ 141, 146 (contending that Gerace’s
other children, Brett and Kelli, stole “profits and other property derived from” the
businesses); id. ¶ 147 (alleging that Kelli “put[] . . . into her pockets, wallet, purse” monies
paid to the companies).
5
7
Nor is Andrews’s otherwise-indirect injury converted to a direct one merely
because the profit payouts she received from company coffers amounted to less than
what she would have received absent any wrongdoing by the defendants. Andrews
maintains that the monthly checks sent to her by Gerace and Gerace’s daughter
Tiffany did not represent one half of what the businesses had actually earned in
profits. See id. ¶ 220. But when viewed in the context of her complaint as a whole,
the most logical inference to be drawn from this allegation is that Andrews received
less in company payouts because, post looting, the companies had less to give.
Andrews’s assertion that she lost out on profits is no different from an assertion
that, due to the defendants’ ill behavior, Andrews suffered a decreased return on
her investment in the corporations—which is precisely the type of injury that does
not confer upon shareholders an individual right to sue under the RICO Act. See
Sears, 912 F.2d at 892 (concluding that a “diminution in the value of their stock”
was insufficient to generate standing for shareholders to bring an individual RICO
action); see also Flynn, 881 F.2d at 449–50 (holding that shareholders were not
“individually and directly injured,” and thus did not have standing to bring a RICO
suit, where the violation merely “decreased the value of the [shareholders’] interest”
in the corporation); Rylewicz, 888 F.2d at 1179 (similar).
State law also confirms that Andrews does not have standing to bring an
individual RICO action against the defendants. Although Andrews’s RICO claim
constitutes a federal cause of action, state law is instructive because the “standing”
question under RICO is analogous to the question of whether, as a shareholder of
8
Sycamore Speedway and Winner’s Circle, Andrews’s claims against the defendants
are by nature “direct” (to Andrews) or “derivative” of a corporate injury. The director-derivative inquiry is governed by state law—more precisely, by the law of the
state of incorporation. See Massey v. Merrill Lynch & Co., Inc., 464 F.3d 642, 645
(7th Cir. 2006) (citing Boland v. Engle, 113 F.3d 706, 715 (7th Cir. 1997)); see also
Frank v. Hadesman and Frank, Inc., 83 F.3d 158, 159 (7th Cir. 1996).6 In this case,
the state of incorporation is Illinois.
Illinois follows a standing rule similar to the one discussed above: where the
rights of an Illinois corporation are implicated, shareholders do not have standing to
bring an individual claim for relief unless they allege “something more than wrong
to the corporate body,” Davis v. Dyson, 387 Ill.App.3d 676, 689 (2008) (citing
Goldberg v. Michael, 328 Ill.App.3d 593, 599 (2002)) (emphasis added). If the only
injury to the shareholder is an indirect one—that is, if the injury was inflicted
directly on the corporation and was suffered by the shareholder only because she
owned shares in the company—the shareholder does not have standing to sue in her
own right. See Small v. Sussman, 306 Ill.App.3d 639, 643 (1999) (quoting Mann v.
Kemper Fin. Cos., Inc., 247 Ill.App.3d 966, 975–76 (1992)).
Illinois courts would not classify Andrews’s alleged RICO injury as a “direct”
one. Under Illinois law, diversion of profits is essentially a payment of illegal
dividends—“a classic injury to the corporation.” Small, 306 Ill.App.3d at 643–44. In
Indeed, the Seventh Circuit has in some cases looked to state law in determining whether
a plaintiff has standing to bring an individual claim under the RICO Act. See Lefkovitz v.
Wagner, 395 F.3d 773, 776–77 (7th Cir. 2005) (referring to the law of the state in which a
partnership was organized to determine whether the plaintiff had a right to bring
individual RICO and state-law claims).
6
9
Small, the Illinois Court of Appeals rejected the proposition that a shareholder of a
closely-held corporation may bring a direct action where the other primary
shareholder has simply diverted all of the company’s assets to himself. Id. (citing
Frank, 83 F.3d at 159). “Such diversion,” the court explained, “affect[s] a company’s
performance generally, and . . . affect[s] shareholders only indirectly.” Id. at 644
(emphasis added); see also Frank, 83 F.3d at 160 (explaining that Illinois has not
embraced the proposition that one principal shareholder may file an individual
action against another merely because the latter “hollowed out [the] business”
(citing Mann, 247 Ill.App.3d at 977)).7 The court in Hamilton v. Conley, 356
Ill.App.3d 1048 (2005), confronted a similar situation, and toed a similar line. In
Hamilton, the plaintiff alleged that the defendant, another shareholder (and
corporate officer), had funneled company assets to himself by transferring them to
other companies owned by that shareholder. Id. at 1051, 1054. The court deemed
the shareholder-officer’s behavior a “classic example of self-dealing,” and thus
classified the plaintiff’s claim as derivative. See id. at 1054 (explaining that “it has
been settled law in Illinois [for more than 25 years] that a claim [of] self-dealing is a
claim of injury to the corporation and . . . must be brought derivatively” (citing
Poliquin v. Sapp, 72 Ill.App.3d 477, 480 (1979))).
The defendants in both Small and Hamilton had looted the corporation to
line their own pockets. In both cases, the Illinois court determined that the
Frank is a Seventh Circuit case (that I discuss further, infra) in which the court applied
Illinois law to determine if the shareholder of a closely-held corporation could bring an
individual action against another co-owner. 83 F.3d 158, 159–60 (7th Cir. 1996).
7
10
plaintiff’s claim was a derivative one. So it is here. Andrews’s allegations that
Gerace and her family misappropriated and wrongfully converted company cash
and property describe a direct injury to the corporations, not to Andrews
individually. As “a byproduct of the damage” to the businesses, Andrews’s purported
injury “is not individually actionable” under Illinois law, Davis, 387 Ill.App.3d at
691–92 (citations omitted).8
Nor is Andrews’s injury rendered individually actionable by her description,
in certain allegations, of the allegedly pilfered assets as assets belonging directly
and personally to her, see, e.g., [37] ¶ 262 (referring to the theft of “money and other
property from Julie”) (emphasis added); id. ¶ 275 (describing the theft of “property
exceeding $50,000 in value belonging to Julie”) (emphasis added).9 Andrews’s
attempt to dress up her otherwise-derivative injury as a direct harm is
unpersuasive, because the costume-switch does not alter the fundamental nature of
Andrews’s injury is also distinguishable from those in cases where the Illinois courts did
infer an individual right to sue. In Sterling Radio Stations, Inc. v. Weinstine, for example,
the court concluded that the plaintiff shareholder had standing to sue in his own right, not
simply on the corporation’s behalf, because he had personally guaranteed a promissory note
executed by the corporation (and therefore was individually liable for the corporation’s
failure to make payments on the note). 328 Ill.App.3d 58, 62 (2002). Andrews has alleged no
such liability in this case. Nor is Andrew’s “lost profits” injury comparable to the injury in
Kovac v. Barron, a recent Illinois case in which the court also found the plaintiff had
standing to bring a direct action. In Kovac, the plaintiff alleged that his co-shareholder had
not only diverted corporate income to himself, but had also failed to pay the plaintiff the
salary he was due. See 6 N.E.3d 819, 832–33 (Ill. App. Ct. 2014). Salary payments to a
corporate officer are not the same as the kind of payouts of company profits that Andrews
describes in her complaint. Whereas a salary amounts to compensation for work performed,
profit payouts are essentially dividends, see Small, 306 Ill.App.3d at 644 (likening a
diversion of profits to the payment of illegal dividends). Here, Andrews alleges only a
reduction in profit payouts or dividends, not a failure to receive an agreed salary.
8
See also, e.g., id. ¶ 277–78, 280 (describing property “belonging to Julie”); id. ¶ 298–99
(property “misappropriate[d] . . . from Julie”).
9
11
her claims. As the complaint as a whole makes clear, the money and property that
Gerace and her family purportedly stole belonged not to Andrews, individually, but
to the corporations. To the extent Andrews was injured by the theft, her injury was
indirect.
Andrews’s RICO claims are derivative of the corporations’ claims and,
consequently, cannot be brought by Andrews directly. Counts I (substantive RICO
violation) and II (conspiracy to violate RICO) of the complaint are therefore
dismissed under Rule 12(b)(1) for lack of standing.
2.
The State-Law Claims (Counts III–VI)
Defendants do not argue that Andrews also lacks standing to bring her statelaw claims. But, as I explain supra at footnote 3, the RICO-based standing rule
reflects a more general shareholder-standing rule, and the general rule also
provides that shareholders—absent certain exceptions—may not seek relief in
federal court for injuries suffered directly by the corporation. Korte v. Sebelius, 735
F.3d 654, 668 (7th Cir. 2013) (citing Rawoof v. Texor Petroleum Co., 521 F.3d 750,
757 (7th Cir. 2008)). Questions arising under the general shareholder-standing rule
may be raised by the court sua sponte, see RK Co. v. See, 622 F.3d 846, 851 (7th Cir.
2010) (citing Weissman v. Weener, 12 F.3d 84, 86 (7th Cir. 1993)), and I do so here.
As
discussed
above,
whether
a
shareholder’s
claim
is
“direct”
or
“derivative”—and thus whether she has standing to bring an individual action—is a
question governed by the law of the state of incorporation. See Massey, 464 F.3d at
645 (citation omitted); see also Rawoof, 521 F.3d at 762 (Ripple, J., dissenting)
12
(“Although federal law generally controls the question of standing, whether the
shareholder’s claims are derivative or direct for purposes of the shareholder
standing rule is controlled by the law of the state of incorporation . . . .” (citing
Massey, 464 F.3d at 645)). Here again, the relevant state law is the law of Illinois,
which provides that corporate shareholders may not bring an individual action to
redress wrongs to the corporation unless the shareholder also alleges: (1) a
“separate and distinct” injury; or (2) an injury “that involves a contractual right”
independent of any corporate right. Davis, 387 Ill.App.3d at 689 (citing Caparos v.
Morton, 364 Ill.App.3d 159, 167 (2006)). As Andrews does not allege or argue that a
contractual right governs her claims, I assess for each of her state-law claims only
whether she has alleged a sufficiently separate harm.
a.
Unjust Enrichment
In support of her unjust-enrichment claim (Count V), Andrews maintains
that the defendants wrongfully took and converted to personal use money and other
property “rightfully belong[ing] to” Andrews, and then refused to return what they
stole. See [37] at ¶¶ 330–31, 333. Although she now characterizes the pilfered
property as property belonging directly to her, Andrews is again playing dress-up
with her claims. On the whole, the statements in Andrews’s complaint—including
(and especially) the allegations “common to all counts,” see id. at 3, which Andrews
incorporates by reference in her unjust-enrichment claim—illustrate that whatever
assets were stolen were not Andrews’s own but the property of the corporations of
which she is merely a shareholder. The nucleus of her complaint is a purported
13
theft from the companies. For the reasons discussed above, Andrews does not have
an individual right to seek redress for that injury.
Andrews’s unjust-enrichment claim (Count V) is therefore dismissed for lack
of standing.
b.
Fiduciary Breach
Andrews also asserts a breach-of-fiduciary-duty claim against all defendants
(Count VI). See id. ¶¶ 334–37. However, as defendants point out in their motion to
dismiss, see [44] at 14 n. 5, Andrews alleges only that Linda Gerace owed Andrews a
fiduciary duty in the first instance, see [37] ¶ 335. Andrews neglects to address any
duty supposedly owed by any of the other defendants, none of whom is an officer or
shareholder of the corporations. Although there are instances in which a non-officer,
non-shareholder defendant owes a fiduciary duty to a shareholder plaintiff under
Illinois common law, see, e.g., Mann, 247 Ill.App.3d at 980 (describing a commonlaw duty owed by sellers of securities to individual investors), Andrews alleges the
existence of no such duty here. Andrews’s claim of fiduciary breach therefore must
be dismissed to the extent it concerns any defendants other than Linda Gerace.
Whether Andrews may bring a direct claim of fiduciary breach against her
sister Linda is more complicated. It is true that Gerace owed Andrews a fiduciary
duty. See Anest v. Audino, 332 Ill.App.3d 468, 476 (2002) (“Shareholders in a close
corporation owe to each other fiduciary duties similar to those of partners in a
partnership.”) (citing Hagshenas v. Gaylord, 199 Ill.App.3d 60, 71 (1990)). The
question, then, is whether the mere fact that Gerace owed her sister a duty confers
14
upon Andrews an automatic right to sue for a breach. It does not. Andrews’s
allegations also indicate that Gerace was, if not a nominal officer of the
corporations, at least a de facto one. See, e.g., [37] ¶ 50 (describing Gerace’s
responsibility for the day-to-day operations of the companies). Gerace therefore
owed a fiduciary duty to the corporations, as well. See Anest, 332 Ill.App.3d at 476
(“Individuals
who
control
corporations
owe
a
fiduciary
duty
to
th[e]
corporations . . . .” (citing Kerrigan v. Unity Savings Ass’n, 58 Ill.2d 20, 27 (1974);
Levy v. Markal Sales Corp., 268 Ill.App.3d 355, 364 (1994); Graham v. Mimms, 111
Ill.App.3d 751, 761 (1982))). And where the rights of the corporation are also in
play, Illinois case law suggests that it is the nature of the injury—not the mere
existence of a duty—that determines whether a claim of fiduciary breach may be
brought on an individual basis.
In Frank v. Hadesman and Frank, Inc., the Seventh Circuit addressed a set
of facts similar to those presented here: one principal shareholder of a closely-held
corporation filed an individual action against the other principal shareholder after
the latter (allegedly) made off with the corporation’s business and assets. See 83
F.3d at 159. The court focused not on the mere existence of a duty, however, but on
the nature of the plaintiff’s injury—and concluded that, under current Illinois law,
the plaintiff did not have an individual right to sue. Id. at 160–61. The plaintiff in
Frank could not bring an individual action against his co-owner under Illinois law
because, in pleading that the co-owner’s misdeeds had “hollowed out” the
corporation, the plaintiff had pleaded an injury to the company, and thus had stated
15
a derivative—not a direct—claim. See id. at 160. Indeed, the Seventh Circuit
explained that, even supposing the plaintiff had been a 50-percent shareholder (as
Andrews is here), the Illinois courts still would not have permitted him to file a
direct action against the other shareholder, because the purported injury stemmed
from the theft of corporate, not personal, assets. See id. at 161. No exception existed
in Illinois by which a shareholder might obtain “direct access to the courts” merely
because the corporation was closely held. See id. at 161–62 (“Much of [the plaintiff’s]
argument amounts to a plea that we establish a special rule for close corporations,
permitting wronged investors direct access to the courts without the . . . formalities
of derivative litigation. . . . [But n]one of the Illinois cases . . . establishes . . . any
discretionary power to treat a derivative injury as if it were direct.”).
Three years later, the Illinois Court of Appeals confirmed that no such
exception existed under Illinois law. See Small, 306 Ill.App.3d at 643 (observing
that “no Illinois cases have adopted [a] rule” affording “minority shareholders the
right to bring a direct action against co-shareholders when the corporation is closely
held.”) The Small court clarified that “[t]he law controlling whether an action is
derivative or direct . . . requires a strict focus on the nature of the alleged injury”—
that is, a close examination of whether the injury is to the corporation or to the
individual shareholder when the rights of both are implicated. Id. at 644 (emphasis
added) (citation omitted). In Small, just as in this case, the plaintiff claimed that a
co-owner had breached a fiduciary duty by diverting corporate profits in order to
line his own pockets, see id. at 642–43. And, as discussed previously, the Illinois
16
court classified such “self-dealings” as “a classic injury to the corporation,” and
prohibited the plaintiff from pursuing an individual remedy, id. at 643–44.
Andrews points to no authority indicating that Small (or Frank) has been
overruled.10 The focus of Andrews’s complaint is a theft of corporate assets and a
subsequent diversion of those assets to the defendants’ pockets. As the Small court
explained, this a “classic” derivative action that cannot be pursued by Andrews
individually, notwithstanding the fact that Gerace, as a co-shareholder of a closelyheld corporation, owed Andrews a fiduciary duty. Andrews’s claim of fiduciary
breach, insofar as it pertains to Linda Gerace, is dismissed for lack of standing.
Andrews’s claim of fiduciary breach as to the other defendants is dismissed for
To the contrary, Illinois courts continue to maintain a “strict focus” on the nature of the
alleged injury when determining whether an action may be brought directly. See Alpha
School Bus Co., Inc. v. Wagner, 391 Ill.App.3d 722, 746 (2009) (citing Sterling, 328
Ill.App.3d at 62). A recent Illinois case, Kovac v. Barron, is also informative. In Kovac (also
discussed supra at footnote 8), the plaintiff included in his complaint two separate counts
based on fiduciary breach: one a simple breach-of-duty claim, and the other a constructivefraud claim (in effect an allegation of fiduciary breach, see 6 N.E.3d at 832–33). The Illinois
Court of Appeals concluded that, with respect to the constructive-fraud claim (Count V), the
plaintiff, “as a 50% shareholder, sustained an individual injury and could bring a [direct
claim] for those damages.” Id. at 835. Importantly, however, the court did not opine that
because the plaintiff was a 50-percent shareholder, he necessarily had suffered a personal
injury and therefore had obtained an automatic right to sue on his own behalf. Featured
prominently in the court’s discussion of Count V was the fact that the defendant (the other
50-percent shareholder) had not only diverted income from the businesses but had also
agreed to pay the plaintiff an equal salary and then failed to do so. See id. at 832–33.
Whereas the plaintiff was permitted to bring a direct action based on Count V, which
included the salary-based injury, the court concluded that he did not have standing to bring
an individual action based on the general breach-of-fiduciary-duty claim (Count II), which
included only an injury to the corporations (i.e., the diversion of corporate income). See id.
at 834–35. Kovac confirms that, under current Illinois law, the mere existence of a fiduciary
duty between shareholders of a closely-held corporation does not automatically confer on
those shareholders a right to bring a direct action for fiduciary breach when the rights of
the corporation are also implicated.
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failure to state a claim upon which relief may be granted, as they owed to Andrews
no fiduciary duty at all.
c.
Fraud
Andrews also brings fraud-related claims against all defendants. See [37]
¶¶ 314–24 (fraud, Count III); id. ¶¶ 325–29 (conspiracy to defraud, Count IV).
i.
Substantive Fraud
Andrews alleges only a single substantive fraud claim (Count III). However,
in support of that claim, Andrews asserts that she relied on two (sets of)
misrepresentations. First, Andrews contends that all of the defendants made
misrepresentations to Andrews in an effort to conceal from her the “predicate acts”
underlying Andrews’s RICO claims (i.e., defendants’ purported theft and conversion
of company cash and other property). See id. ¶ 319. However, Andrews also alleges
that on or before June 30, 2010—that is, before the sisters bought shares in the
corporations—Gerace told Andrews that the businesses “would be managed and
operated fairly between them and that all profits would be split equally,” but that
Gerace had no intention of keeping that promise. See id. ¶¶ 315–16. In effect,
Andrews has alleged two separate frauds. I address them individually.
Defendants argue that Andrews’s first claim of fraud (based on defendants’
alleged misrepresentations concerning their theft from the companies) fails
because, inter alia, the allegations supporting that claim do not meet the
heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil
18
Procedure. See [44] at 14. I need not reach defendants’ argument because, as with
Andrews’s RICO and other state-law claims, there is a standing problem.
While at least some of defendants’ purported misrepresentations were
allegedly made to Andrews directly, see, e.g., [37] ¶¶ 182–83 (alleging that Gerace’s
daughter Tiffany lied to Andrews when Tiffany sent her an e-mail stating that all of
the companies’ earnings had been deposited in the companies’ accounts), others
were not, see, e.g., id. ¶¶ 136, 149–50 (alleging that Gerace’s daughters Samantha
and Kelli doctored the company books to conceal the defendants’ theft). More
importantly, the injury was not. Again, the centerpiece of Andrews’s claim is that
the defendants committed a wrong against the corporations: first by stealing from
them, then by attempting to cover up the theft. As explained previously, this type of
claim is not one that Andrews may bring directly; she must bring it derivatively on
the corporations’ behalf. Consequently, I find that Andrews does not have standing
to bring a claim of fraud against all defendants.
My inquiry does not end here, however, because—as explained above—
Andrews has pleaded not one, but two substantive frauds. Andrews’s second claim
of fraud (also presented as part of Count III), is grounded not in defendants’
collective effort to conceal their theft from the companies, but in Gerace’s
representation to Andrews that if Andrews consented to buy into the corporations,
the sisters would split the profits equally. See [37] ¶ 315. Defendants argue that
this claim fails because Andrews has alleged “non-performance of a contractual
19
obligation” rather than a proper claim for fraud. See [44] at 14.11 Andrews’s claim of
fraud against Gerace may sound in a (broken) promise, but this is not fatal to her
claim.
To successfully plead a claim of fraud in Illinois, a plaintiff must allege: (1) a
false statement of material fact that (2) is known or believed to be false by the party
making the statement; (3) an intent by that party to induce the other party to act;
(4) action by the other party in reliance on the truth of the statement; and (5)
damage to the other party as a result of their reliance. See Wigod v. Wells Fargo
Bank, N.A., 673 F.3d 547, 569 (7th Cir. 2012) (citing Dloogatch v. Brincat, 396
Ill.App.3d 842 (2009)). Where, as here, a claim of fraud is based on a “false
statement of intent regarding future conduct,” the claim is known in Illinois as a
claim of promissory fraud. Id. at 570 (citing Assoc. Benefit Servs., Inc. v. Caremark
RX, Inc., 493 F.3d 841, 853 (7th Cir. 2007)). Promissory-fraud claims are not
actionable unless the false statement is shown to be “part of a scheme to defraud.”
Id. (citing Assoc. Benefit Servs., 493 F.3d at 853). But the Illinois courts have
interpreted the “scheme exception” so broadly that the exception has more or less
obliterated the rule generally barring such claims. See id. (citing Stamatakis Indus.,
Inc. v. King, 165 Ill.App.3d 879 (1987)). According to the Illinois Court of Appeals,
where a plaintiff pleads merely that the defendant made a promise that they never
intended to keep, the “intentional misrepresentation amounts to a scheme to
In their motion to dismiss, [44], defendants do not distinguish between Andrews’s claim
of fraud against all defendants and Andrews’s claim of fraud against only her sister, Linda
Gerace. However, for the purposes of considering their motion, I assume that defendants’
contract-versus-fraud argument applies (at least) to the latter claim.
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defraud,” and the claim is actionable. Gagnon v. Schickel, 983 N.E.2d 1044, 1054
(Ill. App. Ct. 2012) (discussing the “scheme exception” as explained in Gen. Elec.
Credit Auto Lease, Inc. v. Jankuski, 177 Ill.App.3d 380, 384 (1988)). Here, Andrews
has alleged that Gerace made a promise—to split all profits equally with Andrews if
Andrews bought 50 percent of the companies—that Gerace never intended to keep.
See [37] ¶¶ 315–16. Andrews has pleaded an actionable claim of promissory fraud.
The next step is to determine whether Andrews’s claim meets the heightened
pleading requirements set forth in Rule 9(b) of the Federal Rules of Civil Procedure.
The Rules require that any party alleging fraud “state with particularity the
circumstances constituting [the] fraud.” Fed. R. Civ. P. 9(b). In practice, the federal
courts have interpreted the particularity requirement to mean that a plaintiff must
allege in her complaint facts sufficient to show the “who, what, when, where, and
how” of the fraud. Beyrer, 722 F.3d at 950.
Defendants argue that Andrews’s allegations do not satisfy this standard. See
[44] at 14. I disagree. Andrews asserts that on or before June 30, 2010 (when), in an
effort to induce Andrews to buy into the companies, Gerace told Andrews (who) that
the profits from Sycamore Speedway and Winner’s Circle would be split between
them (what), and that Gerace never intended to—and, in fact, did not—keep this
promise after Andrews, in reliance on Gerace’s statement, incurred debt in order to
purchase her shares of the companies (how). See [37] ¶¶ 16–17, 272, 315–17. The
only missing ingredient is the “where” of the fraud, but I find this detail to be
irrelevant to Andrews’s claim and thus its omission to be inconsequential. Andrews
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has successfully pleaded, with the requisite particularity, at least four (of the five)
elements needed to establish a claim of fraud against Linda Gerace: (1) a false
statement—that is, a false promise—by Gerace (that profits would be split equally);
(2) Gerace’s lack of intent to keep this promise; (3) Gerace’s intent to induce
Andrews to act (i.e., to buy shares in the corporations), and (4) action by Andrews in
reliance on Gerace’s statement (borrowing money to purchase company shares, then
purchasing said shares).12
But has Andrews adequately alleged damages or injury as a result of her
reliance on Gerace’s false promise? Yes. Andrews asserts that Gerace promised an
equal split between the sisters of any company profits, see [37] ¶ 315, and that when
Gerace later broke that promise, Andrews lost out on more than $500,000, see id.
¶ 324. This is not a derivative injury because Andrews’s claim of promissory fraud
stems from events that took place before Andrews or Gerace bought any shares in
the companies. The corporations themselves cannot complain of false promises
intended to induce Andrews to invest in the corporations; only Andrews can do so.
See Mann, 247 Ill.App.3d at 980 (concluding that a shareholder’s direct claim of
fraudulent misrepresentation should not have been dismissed for lack of standing
because “only the plaintiffs and other investors who invested in the securities . . .
could allege that misrepresentations . . . induced them to invest”). According to
Andrews does not allege any details regarding Gerace’s intent—e.g., Gerace’s purported
intent to induce Andrews to act based on Gerace’s promise, or Gerace’s supposed lack of
intent to ever keep that promise. But the absence of details concerning Gerace’s state of
mind is not detrimental to the viability of Andrews’s claim because, even under the
heightened-pleading standard, intent, knowledge, and “other conditions of a person’s mind”
may be alleged generally. Fed. R. Civ. P. 9(b).
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Andrews, Gerace attempted to induce Andrews to purchase shares in the companies
by making a promise, and then—when Andrews had bought in—Gerace broke that
promise to Andrews’s financial detriment. This is a wrong for which Andrews may
seek an individual remedy.
There is also a subtle difference between the injury that Andrews claims to
have suffered as a result of her reliance on Gerace’s promise and the (indirect)
injury Andrews allegedly sustained from the defendants’ collective looting of the
corporations. While both involve a diversion of profits—and thus implicate harm to
the businesses—only the former includes an additional harm specific to Andrews. In
reliance on Gerace’s statements, Andrews took out a loan to pay for her shares in
the corporations. See [37] ¶ 219. To the extent she received any profit payouts from
the companies, Andrews asserts that she would use those funds to pay down the
debt from the loan. See id. Viewing these allegations in the light most favorable to
Andrews, see Beyrer, 722 F.3d at 946, I find it reasonable to infer that—inasmuch
as Andrews received less in profits than she would have received had Gerace kept
her promise to split all profits equally—Andrews was able to pay off less of her loan,
thus incurring (further) monetary damage in the form of an increased amount of
interest owed to the bank. This injury is not only specific to Andrews, but it is
proximately connected to her reliance on Gerace’s broken promise. Andrews’s claim
for promissory fraud may be brought directly.
Defendants’ motion to dismiss is therefore denied insofar as it pertains to
Andrews’s claim of promissory fraud against Linda Gerace. The remainder of Count
23
III, which includes Andrews’s general claim of fraud against all defendants, is
dismissed for lack of standing.
ii.
Conspiracy to Defraud
In addition to her substantive fraud claims, Andrews also brings a claim
against all defendants for conspiracy to defraud (Count IV). See [37] ¶¶ 325–29. As
Andrews does not have standing to bring an individual action for fraud against all
defendants collectively, I find that she also does not have standing to bring an
individual conspiracy-to-defraud action against that same group of defendants. For
the reasons discussed above, Count IV is dismissed for lack of standing insofar as it
pertains to any purported agreement by the defendants to conceal their alleged
theft from the corporations.
I have found that Andrews has adequately pleaded a promissory-fraud claim
against Gerace, but Andrews’s complaint does not state a claim for conspiracy:
while Andrews asserts that Gerace made her promise “on behalf of the [RICO]
Enterprise” and “in furtherance of the Enterprise’s schemes,” id. ¶¶ 17, 272, there is
no allegation that Gerace agreed with the other defendants to (falsely) promise
Andews a fifty-fifty split in advance of the purchase of the companies. Count IV is
dismissed as to Gerace for failure to state a claim.
B.
Jurisdiction
Defendants argue that, should I dismiss Andrews’s RICO claims (as I have
done), I should decline to exercise supplemental jurisdiction over her state-law
claims. But, as Andrews correctly points out, see [50] at 14, defendants’ argument is
24
misplaced. I need not exercise supplemental jurisdiction where, as here, diversity
jurisdiction permits a state-law claim to remain in federal court.
Diversity jurisdiction exists where the plaintiff and defendant(s) are citizens
of different states and where the amount in controversy exceeds $75,000. See 28
U.S.C. § 1332(a). The only claim remaining in suit is Andrews’s claim of promissory
fraud against Linda Gerace, and both diversity-jurisdiction requirements are
satisfied as to that claim: Andrews is a citizen of Florida, while Gerace is a citizen of
Illinois, see [37] ¶¶ 6–7; the amount in controversy exceeds $75,000, see id. ¶ 324
(alleging damages in excess of $500,000 as a result of the purported fraud).13 Thus,
the promissory-fraud claim may stand on its own, even without a separate federal
“hook.”
IV.
Conclusion
For the reasons discussed above, defendant’s motion to dismiss is granted in
part and denied in part. The motion is denied as it pertains to Andrews’s claim of
promissory fraud against Linda Gerace. The motion is granted as it pertains to all
other claims in the amended complaint, [37]. Claims dismissed for lack of standing
are dismissed without prejudice. Claims dismissed for failure to state a claim upon
which relief may be granted—that is, Count IV (conspiracy to defraud) as it
pertains to Linda Gerace, and Count VI (fiduciary breach) as it pertains to all nonLinda-Gerace defendants—are dismissed with prejudice.
As explained supra, Andrews does not distinguish in Count III between her claim of fraud
against all defendants and her claim of promissory fraud against Linda Gerace. Drawing all
inferences from Andrews’s allegations in her favor, however, I assume that the damages
pleaded generally in Count III apply equally to both of the frauds alleged in that count.
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ENTERED:
___________________________
Manish S. Shah
United States District Judge
Date: 9/15/14
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