Gerace v. Andrews et al

Filing 40

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
LINDA GERACE,
Plaintiff,

No. 13 CV 5965

v.

Judge Manish S. Shah

JULIE ANDREWS, SYCAMORE SPEEDWAY &
ASSOCIATES, INC., and WINNER’S CIRCLE
& ASSOCIATES, INC.,
Defendants.
MEMORANDUM OPINION AND ORDER
In 2013, Julie Andrews (a citizen of Florida) filed in federal court an action
against her sister, Linda Gerace (a citizen of Illinois), alleging that Gerace and
others had violated the Racketeer Influenced and Corrupt Organizations Act by
stealing from two businesses co-owned by the sisters. The businesses were
incorporated and operated in Illinois. Later that year, after a related state-court
action was removed by Andrews to federal court and subsequently dismissed,
Gerace filed in federal court a derivative suit on behalf of the corporations, naming
as defendants Andrews and both companies (the latter as nominal defendants).
Gerace’s complaint alleged only state-law claims. For the reasons discussed below, I
find that there is no subject-matter jurisdiction over Gerace’s suit, and I dismiss
that action without prejudice.

I.

Facts
In February 2013, Julie Andrews (a citizen of Florida) filed an action against

her sister, Linda Gerace (a citizen of Illinois), in the District Court for the Northern
District of Illinois. See Andrews v. Gerace, et al., No. 13-cv-1521 (N.D. Ill.). In her
complaint, Andrews alleged that Gerace and others (including Gerace’s husband
and children) had violated the Racketeer Influenced and Corrupt Organizations Act
by stealing from and using for personal gain the property of two businesses coowned by the sisters. The companies—Sycamore Speedway and Winner’s Circle—
were (and are) Illinois corporations with principal places of business in Maple Park,
Illinois. See [1] ¶¶ 16–17.1 Andrews and Gerace had purchased the businesses from
their mother in 2010, and each sister owned 50% of the shares of each company. Id.
¶¶ 13, 19–20.
Two months after Andrews filed the RICO action against Gerace, the
businesses filed a separate state-court action against both sisters, requesting both
declaratory judgment (declaring Andrews to be the de facto secretary of the
corporations and Gerace their de facto president) and injunctive relief (enjoining
Andrews from interfering with the management or operations of the businesses).
See [8-1]. Andrews then filed a notice of removal to federal court. See [8-3]; see also
Sycamore Speedway & Assocs., et al. v. Andrews, et al., No. 13-cv-3530 (N.D. Ill.). In
a hearing on Gerace’s motion to remand the suit to state court, Judge Pallmeyer
suggested that the parties seek relief in the RICO action (then before Judge Zagel)
Citations to the record in the instant action are designated by the document number as reflected on
the Court’s docket for this case, enclosed in brackets.
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and dismissed the case without prejudice. See [37-2] at 8:14–:20, 10:2–:3; [8-6] at 2.
Neither Gerace nor the corporations sought relief in the RICO suit (by, for example,
filing a counterclaim against Andrews).
In August 2013, Gerace filed the instant suit (No. 13-cv-5965) in federal
court—a derivative action naming as defendants Andrews and the two businesses
(the latter as nominal defendants, see [1] ¶ 14), seeking reorganization of the
companies and the return of approximately $45,000 that Andrews allegedly stole
from those entities (as well as the same declaratory and injunctive relief originally
sought in the now-terminated state-court action).2 [1]. Andrews filed a motion to
dismiss the suit—then before Judge Norgle—as duplicative of the earlier state-court
action dismissed by Judge Pallmeyer. See [8]. On Gerace’s motion, the case was
reassigned to Judge Zagel and consolidated with the RICO action for pretrial
purposes (excluding trial and summary judgment). See [16], [18]. In June 2014, both
cases were reassigned to my calendar. During a status hearing on July 21, 2014, I
requested that Gerace file a memorandum regarding subject-matter jurisdiction in
the derivative suit, see [36], which Gerace filed on August 11, 2014, [37].
III.

Analysis
In her motion to dismiss Gerace’s action, [8], Andrews does not address

whether the Court has subject-matter jurisdiction over the case. However, I must
“be alert to jurisdictional requirements,” Grupo Dataflux v. Atlas Global Grp., L.P.,
541 U.S. 567, 593 (2004) (citation omitted), and I must consider sua sponte any

Gerace also brought a breach-of-contract claim based on Andrews’s alleged failure to prepare
certain corporate documents. See [1] ¶¶ 66–77.
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questions concerning subject-matter jurisdiction, Wellness Int’l Network, Ltd. v.
Sharif, 727 F.3d 751, 768 (7th Cir. 2013) (citing Steel Co. v. Citizens for a Better
Env’t, 523 U.S. 83, 94–95 (1998); Capron v. Van Noorden, 6 U.S. 126, 127 (1804)).
The instant suit is a derivative action seeking various forms of relief,
including reorganization of the co-owned businesses and the return to those entities
of monies that Andrews allegedly stole from them. See [1]. None of the claims arises
under federal law. Thus, for subject-matter jurisdiction to exist, it must be
predicated on diversity of citizenship—that is, there must be complete diversity
between Gerace and the named defendants, and the amount in controversy must
exceed $75,000, see 28 U.S.C. § 1332(a). Because I find that diversity in this case is
incomplete, I find that there is no subject-matter jurisdiction.
A.

Diversity Jurisdiction

Gerace, the shareholder plaintiff in this derivative action, is a citizen of
Illinois. [1] ¶ 9. Andrews, a defendant, is a citizen of Florida. Id. ¶ 10. So far, so
good. However, defendants Sycamore Speedway and Winner’s Circle—both Illinois
corporations whose principal places of business are also in Illinois, id. ¶¶ 16–17—
are, like Gerace, citizens of Illinois. See 29 U.S.C. § 1332(c)(1) (“[A] corporation shall
be deemed to be a citizen of [the state in which] it has been incorporated and [the
state] where it has its principal place of business . . . .”). The question, then, is
whether the citizenships of the businesses—each included only as a nominal
defendant—must be counted for the purposes of determining whether there is
diversity jurisdiction.

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They must. The fact that the businesses are merely nominal defendants
(rather than “real” defendants) does not change their alignment for the purposes of
determining whether there is diversity. Where diversity jurisdiction is concerned,
corporations in derivative suits “are treated as . . . defendant[s],” Beck v. Dobrowski,
559 F.3d 680, 687 (7th Cir. 2009) (citing Smith v. Sperling, 354 U.S. 91, 95–97
(1957)); see also Bagdon v. Bridgestone/Firestone, Inc., 916 F.2d 379, 382 (7th Cir.
1990) (noting that the “unwilling corporation” named in a derivative suit “is aligned
as a defendant”). Thus, to achieve complete diversity—and establish subject-matter
jurisdiction—the corporations must be diverse from Gerace. But they are not. The
corporations, like Gerace, are citizens of Illinois.3

In some instances, the citizenship of a corporation may be discounted for the purposes of
determining whether there is diversity jurisdiction. In a true derivative suit, there are, in effect, two
causes of action: “one against the . . . directors for failing to sue” on a “corporate right that was
allegedly violated,” and another based on the alleged violation, itself. Davis v. Dyson, 387 Ill.App.3d
676, 683 (2008) (citing Brown v. Tenney, 125 Ill.2d 348, 355 (1988)). The corporation is thus a
necessary party and is included as a (nominal) defendant. See id. (citation omitted). In some
instances, however, a plaintiff has filed a derivative action where they could have—or should have—
brought an individual or “direct” claim instead. In those situations, the corporation is not truly a
defendant at all, and its citizenship may be ignored for the purposes of determining whether there is
diversity jurisdiction. See Weinstein v. Schwartz, 422 F.3d 476, 478 (7th Cir. 2005).
Gerace does not argue that she could have brought any of her claims on a direct or individual
basis. And even if Gerace had so argued, her argument would have been unavailing because her
complaint contains at least one claim that could not have been filed as a direct action. As the
Seventh Circuit explained in Bagdon, the rule that “unwilling” corporations are aligned as
defendants in derivative suits “is not a one way street”: a shareholder plaintiff cannot pick and
choose which claims in her complaint are the claims to which the corporation is a necessary party.
See 916 F.2d at 382 (observing that corporations cannot participate in a suit “only when [their]
presence creates federal jurisdiction”). If the corporation is a necessary party to any claim in the
complaint—and the participation of the corporation “spoils jurisdiction” for that claim—the
complaint must be dismissed. Id. Here, then, Gerace’s complaint must be dismissed for lack of
jurisdiction if the participation of Sycamore Speedway and Winner’s Circle as defendants to any one
claim would destroy jurisdiction. Put another way, Gerace’s complaint must be dismissed if it
contains even a single claim that may be brought only as a derivative claim. The next question, then,
is whether Gerace’s complaint contains any such claim.
The question of whether a suit is by nature direct or derivative “is governed by the law of the
state of incorporation,” Kennedy v. Venrock Assocs., 348 F.3d 584, 589 (7th Cir. 2003) (citation
omitted)—here, Illinois. In Illinois, a shareholder must bring a derivative action on behalf of the
corporation (and cannot bring a direct or individual action) if she is “seeking relief for an injury to
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B.

Supplemental Jurisdiction

In her memorandum on jurisdiction, Gerace argues that “[t]he issue is not
whether the . . . Court has original jurisdiction over” her case, [37] at 4, but whether
the Court can exercise supplemental jurisdiction over her claims, since those claims
are related to—and involve generally the same parties as—the claims at issue in
the RICO action filed earlier by Andrews, see id. at 3–4. Not so. Supplemental
jurisdiction cannot be invoked to save claims in a separate case, however closely
related to the issues in another suit, because Congress has expressly limited the
reach of supplemental jurisdiction to claims in the same action. See 28 U.S.C.
§ 1367(a) (“[I]n any civil action of which the district courts have original
jurisdiction, the district courts shall have supplemental jurisdiction over all other
claims that are so related . . . that they form part of the same case or controversy
. . . .”) (emphasis added). In keeping with Congress’s instructions, courts have
consistently rejected the very proposition that Gerace offers. See, e.g., Feldmeier v.
Hauser, No. CV 13-2027-PHX-DGC (BSB), 2013 WL 6844083, at *4 (D. Ariz. Dec.

the corporation.” Small v. Sussman, 306 Ill.App.3d 639, 643 (1999). Individual shareholder actions
are permissible only where the shareholder alleges an injury “separate and distinct from that
suffered by other shareholders.” See Caparos v. Morton, 364 Ill.App.3d 159, 167 (2006) (citing
Goldberg v. Michael, 328 Ill.App.3d 593, 599 (2002)).
There is at least one claim in Gerace’s complaint—for example, the “conversion” claim (Count
V, see [1] ¶¶ 96–106)—that is necessarily a derivative claim under Illinois law. In support of her
conversion claim, Gerace alleges that Andrews removed from the corporations’ bank account the sum
of $44,765.71, id. ¶ 96, and explains that this money “belonged to [t]he [c]orporations,” id. ¶ 99.
Gerace contends that the removal of the funds from the businesses’ account “injured [t]he
[c]orporations as well as both shareholders.” Id. ¶106 (emphasis added). In short, Gerace alleges a
direct injury only to the companies, and no “separate and distinct” injury to herself. The conversion
claim therefore falls squarely within the definition of a derivative suit under Illinois law. See Small,
306 Ill.App.3d at 643. Because Gerace has alleged in her complaint at least one claim that may be
brought only as a derivative claim, and because naming the corporations as (nominal) defendants to
that claim “spoils jurisdiction,” the entire complaint is disabled and must be dismissed. See Bagdon,
916 F.2d at 382.

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30, 2013); Beneficial Fin. I Inc. v. Grace, Civ. No. 11-00624 SOM-BMK, 2011 WL
6180132, at *2 (D. Haw. Dec. 13, 2011); Rainey v. Bd. of Educ. of Rich Twp. High
Sch. Dist. 227, No. 11 C 107, 2011 WL 741039, at *1–*2 (N.D. Ill. Feb. 24, 2011);
Alford v. LaCoste, No. 10-579-AC, 2010 WL 5487532, at *5 (D. Or. Nov. 18, 2010);
Lerille v. Monsanto Corp., No. 07-3621, 2007 WL 2284570, at *3 (E.D. La. Aug. 6,
2007); Int’l Union of Painters and Allied Trades Dist. Council No. 78 Health &
Welfare Fund v. Old Republic Surety Co., No. 8:06-cv-2222-T-24 EAJ, 2007 WL
1363135, at *1 (M.D. Fla. May 8, 2007); Bantec, Inc. v. Alvarez, No. C 06-05985
JSW, 2007 WL 608118, at *1 (N.D. Cal. Feb. 23, 2007).
Gerace also argues (in the alternative) that this Court has jurisdiction over
her claims because an “independent jurisdictional basis” is not required for
crossclaims. See [37] at 4 (citing Jones v. Ill. Dep’t of Rehabilitation Servs., 689 F.2d
724 (7th Cir. 1982)). But Gerace has not asserted any crossclaims. Crossclaims are
claims filed against a coparty in the same case. See Fed. R. Civ. P. 13(g). Here,
Gerace filed a separate action against Andrews and the corporations. As a separate
suit, Gerace’s complaint cannot ride on the jurisdictional coattails of Andrews’s
RICO action.4
IV.

Conclusion
Though it is true, as Gerace contends, that the principles of judicial economy

generally discourage separate adjudication of two related cases where the parties

Moreover, even if Gerace had chosen instead to try to seek relief in the earlier-filed RICO action
(rather than filing her claims as a separate suit), a crossclaim still would not have been the
appropriate mechanism: in the RICO action, Andrews is (as she is here) an opposing party to
Gerace—not a coparty—and the businesses are not parties at all.
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overlap substantially, I cannot exercise jurisdiction where none exists. Gerace chose
to file a separate action in federal court rather than to seek relief in Andrews’s
earlier-filed RICO action (as Judge Pallmeyer suggested), and there is no subjectmatter jurisdiction over Gerace’s separate suit. Accordingly, and for the reasons
discussed above, the suit is dismissed without prejudice. Andrews’s motion to
dismiss, [8], is denied as moot.

ENTERED:
___________________________
Manish S. Shah
United States District Judge

Date: 9/15/14

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