Meder et al v. Chicago Title Insurance Company et al
Filing
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MEMORANDUM Opinion and Order signed by the Honorable Andrea R. Wood on 3/27/2017. Mailed notice(ef, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
RONALD R. PETERSON, as Chapter 7
Trustee of the Estate of Brent Meder, and
MEDER PROPERTY HOLDINGS, LLC,
Plaintiffs,
v.
A CLEAR TITLE AND ESCROW
EXCHANGE, LLC, et al.,
Defendants.
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No. 14-cv-09932
Judge Andrea R. Wood
MEMORANDUM OPINION AND ORDER
Ronald R. Peterson, in his capacity as Chapter 7 bankruptcy trustee for Brent Meder, and
Meder Property Holdings, LLC (together, “Plaintiffs”)1 have sued various defendants, including
Justyna Michalowska, in connection with an alleged scheme to defraud individuals looking for
alternative funding sources for real estate projects by misappropriating their escrow accounts.
With respect to Michalowska in particular, Plaintiffs assert claims for conspiracy (Count II),
common law fraud (Count III), and breach of fiduciary duty (Count VIII). Now before the Court
is Michalowska’s motion to dismiss the claims against her pursuant to Federal Rule of Civil
Procedure 12(b)(6) for failure to state a claim. (Dkt. No. 25.) For the reasons detailed herein,
Michalowska’s motion is granted as to the conspiracy and fraud claims and denied as to the
breach of fiduciary duty claim.
1
This action was originally filed on December 11, 2014 by Brent Meder and Meder Property Holdings,
LLC. Peterson, as Chapter 7 Trustee for the estate of Brent Meder, was substituted as a plaintiff in place
of Brent Meder on June 7, 2016.
BACKGROUND
The following facts are taken from the complaint and assumed to be true for purposes of
Michalowska’s Rule 12(b)(6) motion. See Munson v. Gaetz, 673 F.3d 630, 632 (7th Cir. 2012).
Defendants A Clear Title and Escrow Exchange, LLC (“A Clear Title”), Stephen J.
Cormier, SRV Associates, LLC, and Marek Harrison promoted a Real Estate Funding Program
(“Program”) to many individuals, including Meder.2 Program participants were told that they
could secure funding for real estate projects by depositing approximately 10% of the amount
needed into an escrow account to be used to secure a letter of credit or a bank guarantee. (Compl.
¶ 14, Dkt. No. 1.) Program participants were also told that the money would remain in escrow for
15–20 business days and then would be released back to them at closing. Furthermore, while in
escrow, the money would never be touched or encumbered, and there would be no liens put
against it. (Id. ¶ 15.) Additionally, if a Program participant’s real estate deal did not close, 100%
of the escrowed funds would be returned. (Id.)
In or around 2010, Meder was looking to refinance two properties owned by Meder
Property Holdings. Michael Spies recommended the Program to Meder and put him in touch
with Cormier, who was a Managing Member and Registered Agent of A Clear Title, and
Harrison, who was the sole owner and manager of SRV Associates. (Id. ¶¶ 44–45.) At the time,
A Clear Title was licensed as a title insurance and escrow agency. (Id. ¶ 3.) On November 5,
2010, Meder, SRV Associates, and A Clear Title entered into an agreement, which provided that
Meder would deposit $250,000 into an escrow account established by A Clear Title. (Id. Ex. 3,
2
Defendants Cormier, Harrison, A Clear Title, and SRV Associates were served but failed to appear and
thus have had default orders entered against them. (Dkt. No. 15.) Plaintiffs also originally sued Chicago
Title Insurance Company and Ticor Title Insurance Company; those defendants have been voluntarily
dismissed from the case. (Dkt. No. 9.)
2
Dkt. No. 1–3.)3 The agreement provided that the escrow funds would only be used to obtain a
bank guarantee and that neither SRV nor A Clear Title would have access to the escrow funds
unless such access was granted by Meder in writing. (Id.) Harrison and Cormier also repeatedly
told Meder that the escrow fund deposits would only be used for proof of funds to purchase a
bank guarantee and would not be at risk. (Id. ¶ 49.) After the escrow funds were deposited,
Harrison and Cormier provided Meder with false and misleading information regarding the effort
to obtain a bank guarantee. The misrepresentations included references to ongoing meetings with
banks and other investors. (Id. ¶ 63–64.) At some point, Meder demanded the return of the
escrow funds. (Id. ¶ 68.) Despite repeated demands to Cormier and Harrison, the escrow funds
were never returned. (Id. ¶ 69.) Plaintiffs now claim that A Clear Title and Cormier utilized those
funds for their own benefit. (Id. ¶ 71.)
Michalowska was a Managing Member of A Clear Title. (Id. ¶ 5.) According to
Plaintiffs, at all relevant times, “Michalowska was aware that Cormier was making false
statements to Meder and was misappropriating the Meder Escrow Funds as well as other funds in
the Fifth Third escrow account.” (Id. ¶ 89.) Plaintiffs further allege that A Clear Title transferred
some of the misappropriated escrow funds to Michalowska under the guise of commission
checks. (Id. ¶ 30.) They also claim that “[b]y failing to take any action to prevent the false
statements and misappropriation of funds, Michalowska knowingly and substantially assisted in
fraud,” that “as a Managing Member of A Clear Title [Michalowska] owed Meder a fiduciary
duty to prevent any misappropriation,” and that “[b]y failing to take any action to prevent
misappropriation, Michalowski [sic] breached her fiduciary duties to Meder.” (Id. ¶¶ 89, 129.)
3
Barry Koller, an acquaintance of Meder’s, was also a signatory to the agreement. (Compl. Ex. 3, Dkt.
No. 1–3.) According to the complaint, Meder obtained the $250,000 from Koller and signed a promissory
note agreeing to repay Koller the $250,000. (Compl. ¶ 48, Dkt. No. 1.) Koller is not a party to this
lawsuit.
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DISCUSSION
Under Federal Rule of Civil Procedure 8(a)(2) a complaint must contain a “short and
plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).
To survive a Rule 12(b)(6) motion to dismiss, the short and plain statement must meet two
threshold requirements. First, the complaint’s factual allegations must be sufficient to give the
defendant fair notice of the claim and grounds upon which it rests. Bell Atl. Corp. v. Twombly,
550 U.S. 544, 555 (2007). Second, the complaint “must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). While the complaint need not contain
detailed factual allegations, there “must be enough to raise a right to relief above the speculative
level.” Twombly, 550 U.S. at 555. “A pleading that offers ‘labels and conclusions’ or ‘a
formulaic recitation of the elements of a cause of action will not do.’” Iqbal, 556 U.S. at 678
(quoting Twombly, 550 U.S. at 555). Rather, “[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.” Iqbal, 556 U.S. at 678.
If the plaintiff is alleging fraud or mistake, the heightened pleading standard of Federal
Rule of Civil Procedure 9(b) also applies. The plaintiff “must state with particularity the
circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). However, “[m]alice, intent,
knowledge, and other conditions of a person’s mind may be alleged generally.” Id. At a
minimum, the complaint must state “the identity of the person making the misrepresentation, the
time, place, and content of the misrepresentation, and the method by which the misrepresentation
was communicated to the plaintiff.” Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677,
683 (7th Cir. 1992) (quoting Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990)).
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I. Breach of Fiduciary Duty
In her motion, Michalowska argues that the breach of fiduciary claim against her should
be dismissed because it is not pleaded with the degree of particularity required by Rule 9(b). But
fiduciary duty claims are subject only to Rule 8(a), and not the heightened pleading standards of
Rule 9(b). See Gondeck v. A Clear Title & Escrow Exch., LLC, No. 11 C 6341, 2012 WL
5200091, at *3 (N.D. Ill. Oct. 22, 2012) (citing Heffernan v. Bass, 647 F.3d 596, 601 (7th Cir.
2006)). Under Illinois law, “in order to state a claim for breach of fiduciary duty, it must be
alleged that a fiduciary duty exists, that the fiduciary duty was breached, and that such breach
proximately caused the injury of which the plaintiff complains.” Neade v. Portes, 739 N.E.2d
496, 502 (Ill. 2000).4 A Clear Title was at all relevant times a title insurance and escrow agency.
Plaintiffs allege that, as a managing member of A Clear Title, Michalowska owed and breached
an independent fiduciary duty to Meder by knowingly permitting funds to be inappropriately
withdrawn from escrow. This is sufficient to meet the notice pleading standard of Rule 8.
Plaintiffs’ claim that Michalowska knowingly breached her fiduciary duties is “plausible on its
face” and therefore will not be dismissed.
II. Common Law Fraud
In Illinois, the elements of common law fraud are: “(1) a false statement of material fact;
(2) defendant’s knowledge that the statement was false; (3) defendant’s intent that the statement
induce the plaintiff to act; (4) plaintiff’s reliance upon the truth of the statement; and (5)
plaintiff’s damages resulting from reliance on the statement.” Cohen v. Am. Sec. Ins. Co., 735
F.3d 601, 613 (7th Cir. 2013) (quoting Connick v. Suzuki Motor Co., Ltd., 675 N.E.2d 584, 591
(Ill. 1996)). In challenging the sufficiency of the common law fraud claim against her,
4
The parties did not address choice of law in their briefs. However, both parties cite Illinois case law in
their briefs, and neither has argued that any other state’s law might apply. Consequently, the Court will
apply Illinois law. See McFarland v. Gen. Am. Life Ins. Co., 149 F.3d 583, 586 (7th Cir. 1998).
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Michalowska argues that the complaint fails to state she ever “made a false statement of material
fact.” (Mem. in Supp. of Def.’s Mot. to Dismiss at 4, Dkt. No. 24).
Indeed, while Plaintiffs allege that Michalowska “participated in a scheme to defraud”
(Resp. to Mot. to Dismiss at 4, Dkt. No. 36), the only facts Plaintiffs allege to implicate
Michalowska in the fraud scheme are tangential at best. Nowhere do Plaintiffs allege that
Michalowska herself made a fraudulent misrepresentation or fraudulently concealed a material
fact. See Future Envtl., Inc. v. Forbes, No. 13 C 709, 2014 WL 3026485, at *4 (N.D. Ill. July 3,
2014) (“In Illinois, a plaintiff can base a common law fraud claim on a fraudulent
misrepresentation or on a fraudulent concealment of a material fact.”). Instead, Plaintiffs
essentially argue that the Court should infer that, as a Managing Member of A Clear Title,
Michalowska must have known about Cormier’s fraudulent activity and actively concealed it.
That is not sufficient to satisfy the heightened pleading requirements of Rule 9(b). Plaintiffs must
make some particularized factual allegation that Michalowska made a false statement of material
fact. As their complaint lacks such a factual allegation, the common law fraud claim against
Michalowska must be dismissed.
Perhaps recognizing the deficiency in their original fraud theory, Plaintiffs have
presented a new theory in response to Michalowska’s motion to dismiss—they now argue that
their complaint supports a claim against Michalowska for aiding and abetting common law
fraud.5 To sufficiently plead a claim for aiding and abetting in Illinois, a plaintiff must allege:
“(1) the party whom the defendant aids performed a wrongful act causing an injury, (2) the
defendant was aware of his role when he provided the assistance, and (3) the defendant
5
It is not too late for Plaintiffs to adjust their legal theory and they may do so without amending the
complaint. See Albiero v. City of Kankakee, 122 F.3d 417, 419 (7th Cir. 1997) (“Having specified the
wrong done to him, a plaintiff may substitute one legal theory for another without altering the complaint. .
. . If the extra assertions make out a claim, then the complaint stands.”).
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knowingly and substantially assisted the violation.” Hefferman, 467 F.3d at 601 (quoting
Thornwood, Inc. v. Jenner & Block, 799 N.E.2d 756, 767 (Ill. App. Ct. 2003)).
In Hefferman v. Bass, the Seventh Circuit analyzed a claim for aiding and abetting fraud.
In that case, plaintiff alleged that the defendant, himself, and a friend were all involved in a car
wash venture. 467 F.3d at 598. In the course of that venture, the defendant, who was an attorney,
assured the plaintiff, “I’m your guy. I’ll make sure you’re protected and you get what’s agreed.”
Id. Subsequently, the defendant prepared a release to trick the plaintiff into relinquishing his
interest in the business. Id. The friend, working in alliance with the defendant, “showed up at
[the plaintiff’s] house in the middle of the night with that release and convinced [the plaintiff] to
sign it by showing him only the second page” of the document, which appeared innocuous. Id.
The Seventh Circuit reversed the district court’s ruling, which dismissed the aiding and abetting
claim against the defendant as insufficiently pleaded under Rule 9(b). In so doing, the Seventh
Circuit first concluded that the plaintiff had properly identified a fraud scheme. Id. at 601–02.
Next, the Seventh Circuit found that the plaintiff had properly alleged that the defendant aided
and abetted in that fraud scheme by not only specifying that the defendant’s participation in the
fraud was knowing and intentional, but also identifying the assistance defendant provided—i.e.,
drafting the release. Id.
Here, the complaint alleges that Cormier and Harrison knowingly lied to Meder in telling
him that the escrow funds would not be released without written authorization. Cormier’s and
Harrison’s intent was to induce Meder to deposit $250,000 into the escrow account and, in
reliance on the truth of their statement, Meder did just that. Subsequently, the funds were
misappropriated from Meder’s escrow fund. These facts plausibly allege a fraud scheme
perpetuated by Cormier and Harrison that harmed Meder. Plaintiffs also sufficiently allege that
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“Michalowska knowingly . . . assisted the fraud.” (Compl. ¶ 89, Dkt. No. 1); see also Fed. R.
Civ. P. 9(b) (permitting knowledge to be alleged generally). Nonetheless, Plaintiffs’ aiding and
abetting claim fails because the complaint does not adequately plead how Michalowska assisted
in the fraud. Instead, the complaint at most suggests Michalowska’s passive acceptance of the
fraud scheme. Unlike in Hefferman, the allegations against Michalowska do not include any
action or failure to act that contributed to the scheme. This is not sufficient to meet Rule 9(b)’s
heightened pleading standards. For that reasons, the fraud claim against Michalowska does not
survive based on an aiding and abetting theory either.
III. Conspiracy
Michalowska also contests the sufficiency of Plaintiffs’ civil conspiracy claim, arguing
that the allegations against her are conclusory and lacking in specificity. In Illinois, civil
conspiracy requires proof of the following: “(1) an agreement between two or more persons for
the purpose of accomplishing either an unlawful purpose or a lawful purpose by unlawful means;
and (2) at least one tortious act by one of the co-conspirators in furtherance of the agreement that
caused an injury to the plaintiff.” Borsellino v. Goldman Sachs Grp., Inc., 477 F.3d 502, 509 (7th
Cir. 2007). “The agreement is a necessary and important element of this cause of action.” Id.
(quoting McClure v. Owens Corning Fiberglas Corp., 720 N.E.2d 242, 258 (Ill. 1999)).
Here, the complaint sufficiently alleges at least one tortious act committed by a purported
co-conspirator. Specifically, the complaint states that Harrison and Cormier misappropriated the
Meder escrow funds. Nonetheless, Plaintiffs they have failed to allege any facts regarding the
nature of the purported agreement between Michalowska, Cormier, and Harrison. The complaint
does not specify when the agreement occurred, who arranged the conspiracy, or even what the
agreement actually entailed (and, in particular, what role Michalowska played in it). The most
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Plaintiffs state in their complaint is that Michalowska was “aware that Cormier was making false
statement to Meder and was misappropriating the Meder Escrow Funds as well as other funds in
the Fifth Third escrow account.” (Compl. ¶ 89, Dkt. No. 1.) This is not enough detail about the
nature of the agreement—and Michalowska’s role—to satisfy Rule 9(b)’s particularity
requirements. See Borsellino, 477 F.3d at 509 (affirming dismissal of civil conspiracy claim
where the complaint said “nothing about the nature of the purported agreement to defraud
plaintiffs, such as when it was made or which individual at Goldman Sachs arranged the
conspiracy”). The conspiracy claim is therefore dismissed.
CONCLUSION
For the reasons stated above, Michalowska’s motion to dismiss (Dkt. No. 25) is granted
in part and denied in part. The motion is granted with respect to Counts II and III. Those counts
are dismissed without prejudice; Plaintiffs may seek leave to file an amended complaint that
remedies the pleading deficiencies of those claims. The motion is denied with respect to Count
VIII.
ENTERED:
Dated: March 27, 2017
__________________________
Andrea R. Wood
United States District Judge
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