Fisher Tool Company, Inc. v.Stampede Tool Company
Filing
26
MEMORANDUM OPINION Signed by the Honorable John F. Grady on June 27, 2014. Mailed notice(cdh, )
13-7252.141-RSK
June 26, 2014
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FISHER TOOL CO., INC., d/b/a
ASTRO PNEUMATIC TOOL CO.,
Plaintiff,
v.
STAMPEDE TOOL CO., a/k/a STAMPEDE
TOOL WAREHOUSE, INC., RICHARD R.
KUHN, JOAN P. KUHN, and GERALD
F. HASTINGS,
Defendants.
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No. 13 C 7252
MEMORANDUM OPINION
Before the court are: (1) the motion to dismiss of defendants
Richard R. Kuhn and Joan P. Kuhn; and (2) the motion to dismiss of
defendant Gerald F. Hastings.
For the reasons explained below, we
grant the Kuhn defendants’ motion in part, and deny it in part; and
we deny Hastings’s motion.
BACKGROUND
Plaintiff Fisher Tool Company, Inc., d/b/a Astro Pneumatic
Tool Co. (“Astro”), sells tools, paint, and other products in the
automotive
aftermarket.
(First
Am.
Compl.
¶
1.)
In
1983,
defendant Richard Kuhn told Astro that he owned a startup company
called “Stampede Tool Company” that sold automotive parts and
tools.
startup
(Id. at ¶ 11.)
on
open
credit
Astro agreed to supply tools to Kuhn’s
terms,
but
first
required
personal
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guaranties
from
guaranties
are
Kuhn
dated
and
defendant
August
1,
Gerald
1983,
“borrower” as “Stampede Tool Company.”
and
Hastings.1
both
Both
identify
(Id. at ¶¶ 13-14.)
the
The
complaint alleges that Astro began supplying tools to “Stampede
Tool Company” in “approximately” 1983.
(Id. at ¶ 15.)
In 1984,
someone (presumably Kuhn) incorporated Stampede Tool Warehouse,
Inc. (“Stampede Warehouse”).
(Id. at ¶ 2.)
It is reasonable to
infer from the complaint that “Stampede Tool Company” was merely a
trade name for Kuhn’s and Hastings’s tool business, and not a
distinct legal entity.
Company”
(See, e.g., id. at ¶ 77 (alleging that
“Stampede
Tool
“never
existed”
as
a
separate
legal
entity).)
Throughout the parties’ 30-year business relationship,
Astro believed that it was dealing with “Stampede Tool Company” and
that its debts were guaranteed by Kuhn and Hastings.
(Id. at ¶ 15-
22.)
From December 2012 through June 2013, Stampede Warehouse
doubled the size of its usual orders from Astro.
(Id. at ¶ 23.)
It did not pay those invoices, totaling $120,567.06.
And on July
17, 2013, it executed an Assignment for the Benefit of Creditors.
(Id. at ¶ 26.)
Meanwhile, Kuhn and Hastings have refused Astro’s
demands for payment under the guaranties.
(Id. at ¶¶ 28-31.)
1/
The complaint does not explain Hastings’s relationship to Stampede Tool
Company. Hastings has filed an affidavit with his motion to dismiss that fills
in some of the details. However, we decline to consider his affidavit in ruling
on his motion to dismiss. See, e.g., Cardenas v. Abbott Laboratories, No. 11 C
4860, 2011 WL 4808166, *3 (N.D. Ill. Oct. 7, 2011) (declining to consider an
affidavit filed in support of a motion to dismiss).
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Astro has filed a six-count complaint asserting claims for: (1)
breach of contract against Kuhn (Count I); (2) breach of contract
against Hastings (Count II); (3) fraud against Stampede Warehouse
(Count III); (4) breach of fiduciary duty against Richard and Joan
Kuhn as Stampede Warehouse’s officers (Count IV); (5) reformation
with respect to Kuhn’s guaranty (Count V); and (6) reformation with
respect to Hastings’s guaranty (Count VI).
DISCUSSION
The Kuhns have moved to dismiss Counts I (breach of contract),
IV (breach of fiduciary duty), and V (reformation).
moved
to
dismiss
Counts
II
(breach
of
Hastings has
contract)
and
VI
(reformation).
A.
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
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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.”
Id.
(citing Twombly, 550 U.S. at 555).
B.
Breach of the Guaranties (Counts I, II) and Reformation
(Counts V, VI)
Kuhn and Hastings argue that, construing the guaranties in
their favor, they only agreed to guaranty the obligations of
“Stampede Tool Company,” not “Stampede Tool Warehouse, Inc.” It is
true that Illinois law favors guarantors.
v.
Drexler,
946
N.E.2d
957,
965
(Ill.
See
App.
Riley Acquisitions
Ct.
2011)
(“The
liability of a guarantor is strictly construed in his favor and
against the party in whose favor the guaranty runs.”) (citation and
internal quotation marks omitted).
Nevertheless, guaranties are
still governed by ordinary contract principles.
See id. (“General
rules of contract construction apply to guaranty contracts . . .
.”).
That means that they must be construed as a whole and in a
way that does not yield an absurd result.
See Suburban Auto
Rebuilders, Inc. v. Associated Tile Dealers Warehouse, Inc., 902
N.E.2d
1178,
1190
(Ill.
Ct.
App.
2009).
According
to
the
complaint, “Stampede Tool Company” was not formed or incorporated
as a limited-liability entity when the defendants executed the
guaranties.
If the defendants’ interpretation is correct, then
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they superfluously guaranteed their own performance.
(See First
Am. Compl. ¶ 77 (“The Kuhn Guarantee as written is illogical since
Stampede Tool Company never existed.”).)
We can avoid this absurd
result by construing the guaranties to apply to the defendants’
tool business, which they briefly conducted under the trade name
“Stampede
Tool
Company”
Warehouse, Inc.
before
incorporating
Stampede
(See First Am. Compl. Counts I & II.)
Tool
Or else we
can reform the guaranties to achieve the same result — substituting
“Stampede Tool Warehouse, Inc.” for “Stampede Tool Company” — which
Astro contends is consistent with the parties’ actual intentions.
(See id. at Counts V & VI.)
In either case, the circumstances
surrounding the guaranties and the parties’ course of performance
may be relevant.
We conclude that Astro is entitled to discovery
that may support its theory.
Richard Kuhn’s motion to dismiss
Counts I and V, and Hastings’s motion to dismiss Counts II and VI,
are denied.
B.
Breach of Fiduciary Duty (Count IV)
In
Count
IV,
Astro
claims
that
the
Kuhns,
as
Stampede
Warehouse’s officers, owed a fiduciary duty to Astro and the
company’s other creditors after the company became insolvent.
“In
general, the officers and directors of a corporation do not owe
fiduciary duties to creditors of the corporation.” Judson Atkinson
Candies, Inc. v. Latini-Hohberger Dhimantec, 529 F.3d 371, 384 (7th
Cir. 2008).
“But in special circumstances, such as insolvency,
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directors do owe a duty to creditors.”
Id.
The Illinois Supreme
Court has not addressed whether an individual creditor may bring a
direct claim for breach of this “special” duty. Id.
Some Illinois
appellate courts have allowed creditors to bring such claims.
See
O’Connell v. Pharmaco, Inc., 493 N.E.2d 1175, 1181-82 (Ill. App.
Ct.
1986)
wrongfully
(“When
an
converting
officer
or
breaches
his
fiduciary
misappropriating
funds
and
duty
by
thereby
adversely affecting the relation between the corporation and its
creditors, a creditor can maintain an action against the officer
personally.”); Circle Security Agency, Inc., 425 N.E.2d 1283, 1286
(Ill. App. Ct. 1981) (“It is well settled that where an officer or
agent of a corporation breaches his fiduciary responsibility by
wrongfully
converting
or
misappropriating
funds
and
thereby
adversely affecting the contractual and equitable relation between
the corporation and a creditor, the creditor can maintain an action
against the officer personally.”).
The Kuhns argue that creditors
cannot bring such claims, relying primarily on Prime Leasing, Inc.
v. Kendig, 773 N.E.2d 84 (Ill. Ct. App. 2002).
The Prime Leasing
court held, as a matter of Delaware law, that “only the corporation
or its representative in bankruptcy” may maintain a claim for
breach of the “special circumstances” fiduciary duty.
Id. at 97.
The Delaware Supreme Court later reached the same conclusion in
North American Catholic Educational Programming Foundation, Inc. v.
Gheewalla, 930 A.2d 92, 103 (Del. 2007).
The Gheewalla court
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reasoned that allowing direct claims by individual creditors would
create conflicts of interest:
Recognizing that directors of an insolvent corporation
owe direct fiduciary duties to creditors, would create
uncertainty for directors who have a fiduciary duty to
exercise their business judgment in the best interest of
the insolvent corporation. To recognize a new right for
creditors to bring direct fiduciary claims against those
directors would create a conflict between those
directors’ duty to maximize the value of the insolvent
corporation for the benefit of all those having an
interest in it, and the newly recognized direct fiduciary
duty to individual creditors. Directors of insolvent
corporations must retain the freedom to engage in
vigorous, good faith negotiations with individual
creditors for the benefit of the corporation.
Id.
Several district courts have predicted that the Illinois
Supreme Court would follow Prime Leasing and Gheewalla.
See
GoHealth v. Simpson, No. 13 C 02334, 2013 WL 6183024, *5 n.3 (N.D.
Ill. Nov. 26, 2013); RMB Fasteners, Ltd. v. Heads & Threads Intern.,
LLC, No. 11 CV 02071, 2012 WL 401490, *14-15 (N.D. Ill. Feb. 7,
2012); In re Netzel, 442 B.R. 896, 899-900 (N.D. Ill. Bkr. 2011).
One district court has reached the opposite conclusion.
See Dexia
Credit Local v. Rogan, No. 02 C 8288, 2003 WL 22349111, *5 (N.D.
Ill. Oct. 14, 2003) (predicting that the Illinois Supreme Court
would not follow Prime Leasing).
The Dexia court rejected Prime
Leasing’s per se rule, holding instead that individual creditors
have standing to sue for injuries that are “personal,” but not
injures that affect “all creditors alike.”
Id. at *6 (relying on
Seventh Circuit case law in the federal bankruptcy context).
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We find GoHealth, RMB Fasteners, and In re Netzel
persuasive than Dexia.
more
First, the state-court cases that Dexia
relied on do not meaningfully analyze the standing of individual
creditors to pursue direct claims for breach of fiduciary duty. See
In re Netzel, 442 B.R. at 899-900 (distinguishing the cases that
Dexia cited because they did not address standing); see also
GoHealth, 2013 WL 6183024, *5 n.3 (similar); RMB Fasteners, 2012 WL
401490, *15 (similar).
Circuit
authority
inapplicable.
that
Second, Dexia relied on a line of Seventh
the
Prime
Leasing
court
rejected
as
See Dexia, 2003 WL 22349111, *6 (distinguishing
between “personal” and “general” creditor claims) (citing Koch
Refining v. Farmers Union Cent. Exchange, Inc., 831 F.2d 1339 (7th
Cir. 1987)); Prime Leasing, 773 N.E.2d at 97 (Koch “recognizes that
creditors
personal
generally
claims,
have
but
standing,
nothing
in
post-bankruptcy,
that
case
to
suggests
raise
that
special-circumstance fiduciary duty claims are personal to an
individual creditor.”).
Although the Prime Leasing court was
applying Delaware law, we have no reason to believe that it would
have reached a different result under Illinois law.
As the court
in In re Netzel pointed out, Prime Leasing cited Delaware cases only
for the general proposition that the officers of an insolvent
corporation owe a fiduciary duty to the corporation’s creditors.
See Prime Leasing, 773 N.E.2d at 96 (citing Geyer v. Ingersoll
Publications Co., 621 A.2d 784, 787 (Del. Ch. 1992)); see also In
re Netzel, 442 B.R. at 900.
It did not cite any Delaware cases
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supporting its conclusion that “[t]he special-circumstance fiduciary
duty runs to all creditors as a group, and not to any individual
creditor.”
Prime
Leasing,
773
N.E.2d
at
97.2
Rather,
that
conclusion appears to have been based upon the nature of the duty
itself.
Id.
Finally, Prime Leasing is consistent with Illinois
Supreme Court cases holding that the insolvent corporation’s assets
are held in trust for the benefit of all creditors.
See Atwater v.
American Exchange Nat. Bank, 38 N.E. 1017, 1020 (Ill. 1893) (“When
a corporation becomes insolvent, its assets are regarded as a trust
fund for the payment of its creditors; and the directors, who are
the agents or trustees of the stockholders during the solvency of
the corporation, occupy a fiduciary relation towards the creditors
when the corporation becomes insolvent.”); Beach v. Miller, 22 N.E.
464, 466 (Ill. 1889) (“[T]he moment a corporation becomes insolvent
its directors occupy a different relation. The assets of the
corporation must then be regarded as a trust fund for the payment
of all its creditors, and the directors occupy the position of
trustees, and, a fiduciary relation then existing, they may with
propriety be prohibited from purchasing the trust property.”); see
also Prime Leasing, 773 N.E.2d at 97 (“The special-circumstance
fiduciary duty runs to all creditors as a group, and not to any
individual creditor. It includes creditors in the entire corporate
constituency to which a duty is owed.”).
2/
Astro claims that the
Recall that Prime Leasing predates the Delaware Supreme Court’s
Gheewalla decision by five years.
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Kuhns breached their fiduciary duty by “causing Stampede to acquire
assets of Astro to pay other creditors to whom Astro had and has no
obligations.”
(First Am. Compl. ¶ 68.)
It is difficult to see how
this claim can be squared with Atwater and Beach.
Cf. GoHealth,
2013 WL 6183024, *5 (“It would make little sense to deem that
corporate assets are held in trust for all creditors, without
preference, but then allow one creditor (or a subset of creditors)
to sue and, in effect, jump ahead of other creditors.”). Consistent
with what appears to be the trend among courts in this district, we
predict
that
the
Illinois
Supreme
Court
would
not
permit
an
individual creditor to pursue a direct action for breach of the
“special circumstances” fiduciary duty. Therefore, we dismiss Count
IV with prejudice.
CONCLUSION
The Kuhn defendants’ motion to dismiss [14] is granted in part
and denied in part.
The motion is denied as to Counts I and V of
Astro’s First Amended Complaint.
which is dismissed with prejudice.
[22] is denied.
It is granted as to Count IV,
Hastings’s motion to dismiss
A status hearing is set for July 9, 2014 at 10:30
a.m.
DATE:
June 26, 2014
ENTER:
___________________________________________
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John F. Grady, United States District Judge
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