Frankfurt v. Mega Entertainment Group II et al
Filing
163
MEMORANDUM Opinion and Order. Signed by the Honorable Manish S. Shah on 1/19/2018: Frankfurt's motion for summary judgment, 112 , is denied. Mega's motion for summary judgment, 114 , is denied. Field's motion for summary judgment, 115 , is denied. Frankfurt's first motion for judicial notice, 132 , is granted in part and denied in part, and his second motion for judicial notice, 159 , is denied. Frankfurt's motion to compel, 162 , is granted in part as to record s of Mega's ownership of the restaurant and hall, but is otherwise denied. Mega shall produce the requested ownership records within three weeks, and a status hearing is set for February 9, 2018 at 9:30 a.m. [For further detail see attached order. Notices mailed. (psm, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
VLADIMIR FRANKFURT,
Plaintiff,
No. 15 CV 667
v.
MEGA ENTERTAINMENT GROUP II, et al.,
Judge Manish S. Shah
Defendants.
MEMORANDUM OPINION AND ORDER
Plaintiff Vladimir Frankfurt claims he was defrauded by defendant
Alexander Field and two other individuals, Gary Fishkin and Edward Renko, in
relation to a series of promissory notes. Frankfurt, proceeding pro se, brought
claims against Field, Fishkin, and Renko, as well as entities Mega Entertainment
Group II and Pavilion Restaurant & Petergof Banquet Hall. He sued the three
individuals for violations of both federal and Illinois securities law, and he sued
Fishkin and the entities for breach of contract. Fishkin and Renko failed to appear
in this case, and an order of default was entered against them on August 18, 2016.
See [99].1 Each of the remaining parties now moves for summary judgment. For the
following reasons, the motions are denied.
I.
Legal Standards
Summary judgment is appropriate if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a
1
Bracketed numbers refer to entries on the district court docket.
matter of law. Fed. R. Civ. P. 56(a). A genuine dispute as to any material fact exists
if “the evidence is such that a reasonable jury could return a verdict for the
nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The
party seeking summary judgment has the burden of establishing that there is no
genuine dispute as to any material fact. See Celotex Corp. v. Catrett, 477 U.S. 317,
323 (1986). A court must “construe all facts and reasonable inferences in the light
most favorable to the non-moving party.” Apex Digital, Inc. v. Sears, Roebuck, &
Co., 735 F.3d 962, 965 (7th Cir. 2013). And on cross-motions for summary judgment,
a court must draw inferences “in favor of the party against whom the motion under
consideration was made.” McKinney v. Cadleway Props., Inc., 548 F.3d 496, 500 (7th
Cir. 2008).
II.
Background2
As a threshold matter, defendants note that many of the facts asserted by
Frankfurt find their source in his declaration, which contains much of the same
language that appears in the complaint, and they request that any statement that
appears in both the declaration and the complaint be stricken. [121] at 7. That
The facts are taken from Mega, Pavilion, and Field’s response to Frankfurt’s LR 56.1
statement of material facts, [122]; Frankfurt’s responses to Field’s statement of facts, [124],
and Mega and Pavilion’s statement of facts, [126]; Field’s response to Frankfurt’s statement
of additional facts, [154]; and Mega and Pavilion’s response to Frankfurt’s statement of
additional facts, [155]. The responses contain both the asserted fact and the response. Any
arguments raised in the LR 56.1 statements and statements that are unsupported by
admissible evidence (or where a party fails to follow LR 56.1’s direction to cite to supporting
material in the record) will be disregarded. Only those facts which are properly
controverted will be considered disputed. While technical errors made by pro se plaintiffs
like Frankfurt may be forgiven, those plaintiffs still must abide by the Federal and Local
Rules. See, e.g., Cady v. Sheahan, 467 F.3d 1057, 1061 (7th Cir. 2006). Defendants are
represented by counsel, and they must comply with the rules. Stevo v. Frasor, 662 F.3d 880,
887 (7th Cir. 2011).
2
2
request is denied. Defendants cite to Malec v. Sanford, 191 F.R.D. 581 (N.D.Ill.
2000), in which Judge Castillo found that the plaintiff could not use affidavit
testimony in support of summary judgment where the testimony was not based on
personal knowledge. Id. at 584–85. Defendants suggest that any affidavit that
repeats the allegations of the complaint cannot be used to support a summary
judgment motion. Not so. So long as Frankfurt’s declaration is based on personal
knowledge (and defendants do not claim otherwise), it may be used to support his
motion for summary judgment. The undisputed facts follow.
In August 2005, plaintiff Vladimir Frankfurt met with Gary Fishkin to
discuss one of Fishkin’s companies, Capital Development Group, LLC. [122] ¶ 10. In
addition to Fishkin, Capital’s members included Edward Renko and defendant
Alexander Field. [122] ¶¶ 4–6, 10. At their meeting, Fishkin explained to Frankfurt
that Capital was in the construction business and in good financial condition, and
he asked Frankfurt to buy a promissory note from Capital for $100,000 with a 12%
annual interest rate. [122] ¶ 10. Frankfurt agreed and gave Fishkin a check for the
money, payable to Capital. [122] ¶ 10. In return, he received a note dated August 1,
2005, with a maturity date of August 1, 2006, naming Capital as the borrower, and
signed by Fishkin as its Vice President. [122] ¶¶ 10–11. The note stated that the
money would be used for “developing various projects.” [122] ¶¶ 11, 34.
One year later, over the course of several meetings, Fishkin asked Frankfurt
to buy a promissory note from EAG Capital Holdings, Inc., another company owned
by Fishkin, Renko, and Field. [122] ¶¶ 4–6, 13. EAG was an umbrella corporation
3
that owned Capital and other entities. [122] ¶¶ 13, 44; [155] ¶ 2. Fishkin
represented to Frankfurt that EAG and the other entities were in good financial
condition, and that an investment in EAG would be safe. [122] ¶ 13. As a result,
Frankfurt agreed to use the money he had invested in Capital to buy a promissory
note from EAG. [122] ¶ 13. The new note was dated August 1, 2006, had a maturity
date of August 1, 2007, named EAG as the borrower, and was signed by Renko as
EAG’s CEO. [122] ¶ 14.
In August 2007, Fishkin again represented to Frankfurt that the companies
were in good financial condition. [122] ¶ 15. He asked Frankfurt to renew the note,
and Frankfurt agreed. [122] ¶ 15. The new note was dated August 1, 2007, had a
maturity date of August 1, 2008, named EAG as the borrower, and was signed by
Field as EAG’s president. [122] ¶ 15.
The following year, Frankfurt met with Fishkin in EAG’s office.3 [122] ¶ 16.
Fishkin asked Frankfurt to renew the note again, explaining that they had received
additional funding from Russian investors and were in the process of diversifying
their businesses. [122] ¶ 16. He also said that the businesses remained in good
financial condition despite the general economic downturn. [122] ¶ 16. Based on
those representations, Frankfurt renewed the note for an additional year. [122]
¶ 16. The note was dated August 1, 2008, had a maturity date of August 1, 2009,
named EAG as the borrower, and was signed again by Field as its president. [122]
The parties dispute whether Field attended this meeting. According to Frankfurt’s
declaration, Field was there, but Field denies that he attended any meetings with
Frankfurt and Fishkin involving the notes executed in 2008 or 2009.
3
4
¶ 17. Unlike the previous notes, that note contained a term that allowed Frankfurt
to demand repayment of the principal and interest at any time upon 30 days’
written notice. [122] ¶ 17.
In September 2008, defendants finished a year-long project to build Pavilion
Restaurant and Petergof Banquet Hall. [122] ¶ 35; [155] ¶ 11. The building housing
the restaurant and banquet hall belonged to defendant Mega Entertainment Group
II, LLC, which was also owned by Fishkin, Renko, and Field (among others).4 [122]
¶¶ 4–6, 44; [155] ¶ 2. After its opening, Fishkin gave Frankfurt and other investors
a tour of the place. [122] ¶ 43; [155] ¶ 17; [154] ¶ 17. Frankfurt did not know,
however, that between 2006 and 2008, Field and the others were struggling for cash
and trying to negotiate an extension on a $26 million loan related to one of their
property developments.5 [122] ¶¶ 32–33. After negotiating six extensions on the
Whether Pavilion and Petergof are “merely assumed names of Mega related to its
operation,” or whether they constitute a separate entity or separate entities, is in dispute.
[122] ¶¶ 45–46; [126] ¶ 12. This factual dispute is immaterial to the issues at hand,
however, and defendants Mega and Pavilion and Petergof will be referred to collectively as
“Mega.”
4
This fact and others are supported by statements from a plea agreement entered by Field
in an unrelated criminal case. Defendants object to the admission of those statements based
on Federal Rule of Evidence 410, which prohibits the admission of a plea agreement that
was later withdrawn, but cite no authority to suggest that that rule excludes plea
agreements that were not withdrawn. They also object because Frankfurt did not submit
every page of the plea agreement with his motion. Defendants argue that, because the
document is incomplete, they cannot assess the accuracy of the document. But they do not
actually dispute the accuracy of the document, and Field cannot plausibly claim to be
unable to assess the accuracy of his own plea agreement. Regardless, Frankfurt requests
that judicial notice be taken of a complete copy of the plea agreement and the facts recited
therein. See [132], [148]. That request is granted. Judicial notice may be taken of facts
recited in a plea agreement. See Scholes v. Lehmann, 56 F.3d 750, 762 (7th Cir. 1995)
(“Admissions—in a guilty plea, as elsewhere—are admissions; they bind a party; and the
veracity safeguards surrounding a plea agreement that is accepted as the basis for a guilty
plea and resulting conviction actually exceed those surrounding a deposition.”) (citation
omitted). Therefore, I consider those facts undisputed.
5
5
loan between December 30, 2006, and September 4, 2008, they defaulted on the
loan. [122] ¶¶ 32–33. By 2009, Capital and EAG were dissolved, and Mega’s
headquarters had moved from the office it had shared with EAG and Capital to the
location of the restaurant. [122] ¶¶ 2, 20.
Frankfurt requested payment of the interest accrued on the 2008 note several
times, but defendants refused. [122] ¶ 62. At the end of 2008, he invoked the
acceleration clause and demanded repayment of the principal and interest. [122]
¶ 62. On January 5, 2009, Frankfurt met with Fishkin and Renko in the EAG office,
and they told him that they could not make payments on the note, blaming market
conditions. [122] ¶ 63. But they said the restaurants were doing fine, and that they
would repay the note upon its maturity. [122] ¶ 63. The parties dispute whether
Field was present at this meeting. [122] ¶ 63. Later that month, the Illinois
Securities Department told Frankfurt that the notes were not registered with the
Secretary of State, in violation of Illinois securities laws. [122] ¶ 64. On January 29,
2009, Frankfurt sent Field, Renko, and Fishkin a letter demanding rescission of the
note and requesting repurchase. [122] ¶ 65. Fishkin refused, telling Frankfurt that
the notes were loans and not governed by securities law. [122] ¶ 66.
When the note matured on August 1, 2009, Frankfurt contacted Fishkin and
requested repayment and threatened to sue if he did not receive payment. [122]
¶ 68. Fishkin asked Frankfurt for an extension until early 2010, because they were
working hard to pay off other debts and to increase business. [122] ¶ 69. Frankfurt
agreed to extend the maturity date of the note to the beginning of 2010. [122] ¶ 70.
6
In March 2010, according to Frankfurt, he met with both Fishkin and Field at the
restaurant, and they both told him that they had met with financial success and
could start paying back investors. [122] ¶ 71. But Field’s presence and participation
at that meeting is in dispute. [122] ¶ 71. Fishkin and Frankfurt negotiated terms,
and Frankfurt eventually agreed to extend the maturity date of the note to the end
of 2011, based on Fishkin’s representations that their financial success would allow
them to repay the note in full in early 2012. [122] ¶ 72. Frankfurt says that the
terms of his agreement with Fishkin were as follows: the defendants would pay
Frankfurt $1,000 per month from April 2010 through December 2011, and then pay
the remainder in a lump sum in early 2012, and in return, Frankfurt would not file
a claim based on a breach of the 2008 promissory note. [122] ¶ 73.
Between April and the following February, Frankfurt received ten monthly
payments in the form of checks, totaling $10,000. [122] ¶ 74. But the check he
received in February 2011 bounced. [122] ¶ 74. Frankfurt met with Fishkin and
Field several times in the Petergof building in March and April 2011. [122] ¶ 75;
[154] ¶ 34. They explained that the payments had stopped because Frankfurt had
cooperated with an investigation by the Illinois Securities Department, and that
they would be restarted if he agreed to stop communicating with the agency and
sign a nondisclosure agreement. [122] ¶ 76; [154] ¶ 34. Frankfurt refused these
terms. [122] ¶ 76; [154] ¶ 34. Frankfurt made several more requests for payments,
but they never restarted. [122] ¶ 77.
7
In August 2014, Frankfurt learned that the businesses had struggled in 2006
to 2008, and that Field and the others had extended the maturity date for a $26
million bank loan six times. [122] ¶ 79; [154] ¶ 36; [155] ¶ 36. He also learned that
they had been in default on the loan when they had convinced Frankfurt in March
2010 to extend the maturity date of his note. [122] ¶ 79; [154] ¶ 36; [155] ¶ 36. Had
he known of their critical financial condition, Frankfurt would not have extended
the maturity date of the note in March 2010. [122] ¶ 80.
Certain aspects of the parties’ dispute depend on Mega’s ownership and
history. In 2007 and 2008, when Mega shared an office with EAG and Capital at
3100 Dundee Road in Northbrook, Illinois, Mega did not have a lease.6 [122] ¶ 51.
Also, Fishkin was an owner, director, and member of Mega from 2007 to 2013, at
which time he owned 50% of Mega. [122] ¶ 54; [155] ¶ 8. Fishkin was also involved
in all activities related to the conception and construction of the restaurant and
banquet hall, and later served as its general manager and operating manager. [122]
¶¶ 42, 55; [155] ¶ 9. But Mega’s management changed in 2013, and its ownership
changed in 2014. [122] ¶¶ 53, 60–61. Field’s sister, Marina Zarovsky, has been an
owner of Mega since its inception, but she is now the sole owner, member, and
To support the assertion that Mega did not have a lease, Frankfurt cites to Mega’s
response to a discovery request. In response to a request for the lease agreement for
“Mega’s Office at 3100 Dundee Rd., Northbrook, IL for 2007 and 2008,” Mega responded
that “[t]here is no such lease.” [116-3] at 16; [122] ¶ 51. Mega cites to the same document in
its LR 56.1 response and explains that it took that position in discovery because Mega does
not currently have an office in that location. [122] ¶ 51; [155] ¶ 1. But the request clearly
identified the time period as 2007 and 2008, and Mega does not dispute that before 2009, it
maintained an office at that address. [122] ¶ 2. Mega does not suggest that there once was a
lease, but that it is no longer in Mega’s possession. Thus, I accept as undisputed the fact
that Mega did not have a lease agreement for its office, which it shared with EAG and
Capital.
6
8
manager of Mega.7 [122] ¶ 61; [154] ¶¶ 10, 23; [155] ¶¶ 10, 23. And Field’s wife,
Tatyana Furman, is the general manager of the restaurant and banquet hall. [122]
¶ 60; [154] ¶ 10; [155] ¶ 10.
Mega and the other defendants do not employ robust record-keeping
procedures. Capital was the contractor for the construction, hiring multiple
subcontractors and paying them, at a minimum, several hundreds of thousands of
dollars.8 [122] ¶¶ 36, 38, 40; [154] ¶¶ 13, 15; [155] ¶ 13, 15. Frankfurt managed to
find publicly-available documentation of those subcontractor relationships, but
Mega said in its discovery responses that it did not have in its possession any
checks, financial documents, and contracts with contractors, including Capital,
related to the construction of the restaurant and banquet hall. [122] ¶¶ 47, 48. Field
said in his discovery responses that he did not have any documents related to
Zarovsky testified that she became an owner through the purchase of shares, but has no
written documentation that could confirm her share purchase. [154] ¶ 23; [155] ¶ 23.
7
Frankfurt submits documentation of several of Capital’s subcontractor relationships.
Defendants object to the admissibility of several of those documents as unauthenticated
business records, and Frankfurt filed a motion in response, explaining that those
documents were filed in unrelated cases in the Circuit Court of Cook County, and
requesting that judicial notice be taken of them. See [132], [159]. Frankfurt wants to file
those documents, in part, to show that Capital did engage subcontractors to construct the
restaurant and banquet hall. But it is undisputed that Capital engaged subcontractors to
build the restaurant and banquet hall, and the precise number of documented
subcontractor relationships is immaterial to the issues at hand. Adding a few more will not
change the disposition of the cross-motions. Frankfurt also wants to show that defendants
were uncooperative in discovery when they claimed to not be in possession of documents
related to contractors involved in the construction and maintenance of the restaurant and
banquet hall. But Frankfurt does not request any particular relief as a consequence of
defendants’ conduct, and the fact that defendants were in possession of certain documents
in the past does not prove that they were being dishonest when they said they were not in
possession of those documents when responding to Frankfurt’s discovery requests. For the
most part, the admission of those documents would not affect the analysis of the crossmotions. Frankfurt’s first motion for judicial notice, [132], is granted only as to Field’s plea
agreement, as explained above. That motion and [159] are otherwise denied.
8
9
payments made from Mega to Capital and EAG after the project was complete, or
any contracts or financial documents between Capital or EAG and subcontractors
related to the construction. [122] ¶¶ 49–50. Finally, Mega said in its discovery
responses that it did not have any documents related to utility payments in 2007
and 2008. [122] ¶ 51.
III.
Analysis
A.
Rule 10b-5 (Count I)
Count I of the complaint alleges violations of both the Securities and
Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, which was promulgated
under § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and
§ 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77l(a)(2). The parties refer to
both Rule 10b-5 and § 12(a)(2) as if they supplied the same cause of action, but their
arguments relate to only the cause of action under Rule 10b-5. Therefore, I consider
only the 10b-5 claim.9 To prevail on that claim, a plaintiff must show: “(1) a
material misrepresentation or omission by the defendant; (2) scienter; (3) a
connection between the misrepresentation or omission and the purchase or sale of a
security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and
(6) loss causation.” Glickenhaus & Co. v. Household Int'l, Inc., 787 F.3d 408, 414
Section 1658’s five-year statute of repose does not, by its language, apply to strict liability
claims under § 12(a)(2) of the 1933 Act. See Lawrence E. Jaffe Pension Plan v. Household
Int’l, Inc., No. 02 C 5893, 2004 WL 574665, at *13–14 (N.D.Ill. Mar. 22, 2004). The 1933 Act
has its own statute of repose for those claims. “A claim under § 12 arises when the security
is first offered to the public, 15 U.S.C. § 77m, and a statute of repose sets three years as the
outer limit for suit.” McCormick v. Indep. Life & Annuity Co., 794 F.3d 817, 820 (7th Cir.
2015). As a result, any § 12(a)(2) claim is certainly time-barred, and for this additional
reason, I consider only whether Frankfurt has a triable claim under Rule 10b-5.
9
10
(7th Cir. 2015), reh'g denied (July 1, 2015) (quoting Halliburton Co. v. Erica P. John
Fund, Inc., ––– U.S. –––, 134 S.Ct. 2398, 2407 (2014)).
Frankfurt seeks summary judgment on the 10b-5 claim against Field, and he
bases the claim on the events surrounding the March 2010 meeting.10 According to
Frankfurt, he met with both Fishkin and Field in March 2010; they misrepresented
their businesses as being in good financial condition, which would allow repayment
on his note in installments; and neither Fishkin nor Field told him that they had
recently defaulted on a $26 million loan. Based on that discussion, Frankfurt agreed
to change the terms of the 2009 note, extending its maturity date, and to forbear
from filing a lawsuit. Had he known about their dismal financial situation, he never
would have extended the note, and he would have sued immediately. As a result of
the misrepresentations, Frankfurt has not been fully paid on his investment. Field
argues that he did not make any actionable misrepresentations or omissions, that
Field cannot be liable because he acted on behalf of EAG, and that the claim is timebarred.
Frankfurt’s cross-motion is denied, because Field’s presence at the March
2010 meeting is in dispute. It is possible that Field did not participate in that
meeting at all. Because Frankfurt’s claim against Field is based on the misleading
information he received at the March 2010 meeting, Field’s disputed attendance
In his opening brief, Frankfurt sought to bring the securities fraud claims (counts I and
II) against Mega and Pavilion, as well. Defendants note that the complaint did not allege
those claims against Mega and Pavilion, and they argue that it is too late to do so now.
Frankfurt does not respond to that argument and seems to have abandoned his attempt to
name those additional defendants. As a result, I consider the securities fraud claims as
against Field alone.
10
11
presents a genuine issue of material fact. Thus, Frankfurt’s cross-motion for
summary judgment is denied with respect to the 10b-5 claim.
Field’s cross-motion is also denied. Field argues that, even if he did make the
representations that Frankfurt identified, Frankfurt cannot show that Field made a
material misrepresentation or omission. Field concedes that rule 10b-5 requires
disclosure when necessary “to make . . . statements made, in the light of the
circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b5(b). But he states, without explanation, that information regarding the defaulted
$26 million loan was immaterial. An omission is material when there is “a
substantial likelihood that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly altered the ‘total mix’ of
information made available.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38
(2011) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988)). It makes sense
that, when discussing the financial health of a company in which he is investing, a
reasonable investor would consider the potential insolvency of that company, and
that a recent default on a large loan would affect his analysis.11 Field does not
explain why he believes no reasonable jury would consider the omission material.
As a result, he is not entitled to judgment as a matter of law on that ground.
Field also claims, again without explanation, that a representation that his
businesses were in good financial condition is not actionable because it amounts to a
Frankfurt does not explicitly describe the connection between EAG and the $26 million
loan, but as explained in Field’s plea agreement in an unrelated case, EAG was a corporate
guarantor on the loan. See [148] at 3.
11
12
vague opinion that he did not know to be incorrect at the time. But even general
statements as to a company’s status may be misleading if they are “concealing a
disaster.” Eisenstadt v. Centel Corp., 113 F.3d 738, 745 (7th Cir. 1997). Field
concedes that the statement was incorrect, and he does not explain how making
that affirmative representation while omitting the default would not be misleading,
especially in the context of explaining EAG’s ability to take on more debt and repay
that debt. To the extent that Field’s argument is based on a lack of proof of his
knowledge of the financial condition of EAG and the other businesses, he is
disputing the scienter element of the claim. Proof of scienter requires proof that the
defendant either knew that the statement was false (or misleading, in the case of a
material omission) or was reckless in disregarding a substantial risk that it was so.
Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 704 (7th Cir. 2008) (citing
Higginbotham v. Baxter International, Inc., 495 F.3d 753, 756 (7th Cir. 2007)). It is
undisputed that Field and his businesses had defaulted on a $26 million loan after
Field had negotiated an extension on the loan’s maturity date six times, and that
the businesses were not in fact in good financial condition when Frankfurt
discussed extending the note. A reasonable inference is that Field was aware of
those events and the condition of his own companies. Field is not entitled to
summary judgment on the basis of the first two elements of the claim.12
Field does not discuss the remaining elements of the claim. He does not challenge the
connection between the misrepresentation and omission and the March 2010 transaction
(or whether the March 2010 transaction constitutes a purchase or sale of a security). And
he does not discuss the elements of reliance, loss, or loss causation. Therefore, I do not
address those elements, either.
12
13
Field also argues that he is shielded from liability in a Rule 10b-5 claim
because he acted on behalf of EAG and not in his individual capacity. He cites to the
Illinois LLC Act, 805 ILCS 180/10-10(a), which provides that a member or manager
of an LLC “is not personally liable for a debt, obligation, or liability of the company
solely by reason of being or acting as a member or manager.” He also cites to
Carollo v. Irwin, 2011 IL App (1st) 102765, which relied upon that statute to hold
that a corporate agent who entered into a contract on behalf of a company was not
personally bound to that contract. Id. ¶ 63. Field’s argument misses the mark,
because Frankfurt is not asserting a breach of contract action against him, and it is
Field’s own conduct, not his status as a member or manager of EAG, that exposes
him to liability here. Field does not cite to any authority to suggest that the LLC
Act shields corporate officers from liability in 10b-5 actions. In such an action,
liability attaches to the maker of the misrepresentation—“the person or entity with
ultimate authority over the statement, including its content and whether and how
to communicate it.” Glickenhaus, 787 F.3d at 424 (quoting Janus Capital Group,
Inc. v. First Derivative Traders, ––– U.S. ––––, 131 S.Ct. 2296, 2302 (2011)). If Field
participated in the March 2010 meeting and spoke, he would undoubtedly be the
maker of those verbal statements. His argument that the LLC Act precludes
liability fails.
Finally, both Field and Mega argue that the claim is time-barred.13 Federal
securities fraud claims brought under § 10(b) of the Securities Exchange act are
Though Frankfurt brings the 10b-5 claim against Field alone, Mega seeks its dismissal
because it is the only claim giving rise to federal subject-matter jurisdiction.
13
14
subject to a five-year statute of repose. See 28 U.S.C. § 1658(b). The statute of
repose begins running from the date of the alleged misrepresentation or omission
giving rise to the claim. McCann v. Hy-Vee, Inc., 663 F.3d 926, 932 (7th Cir. 2011).
And the time to file under a statute of repose cannot be extended by equitable
estoppel or equitable tolling. Id. at 930.
The parties dispute when the statute of repose began to run on Frankfurt’s
claim. Defendants provide four different possible start times, all of which result in
an extinguished claim: (1) in 2005, when Fishkin told Frankfurt that the first
promissory note would be used for developing specific projects and Frankfurt
purchased the note, [151] at 5, [153] at 5; (2) in 2006, when Fishkin (and possibly
Field) represented that the businesses were in good financial condition, [114] at 14,
[115] at 15; (3) on August 1, 2008, when Fishkin (and possibly Field) represented
again that the companies were in good financial condition, [151] at 6, [153] at 6; and
(4) in 2009, when Fishkin told Frankfurt that they could not pay him and Frankfurt
threatened to sue, [114] at 14, [115] at 15. Frankfurt argues that the period began
to run in March 2010—less than five years before he filed suit—when Fishkin and
Field made representations about the businesses’ financial health and they
negotiated an amendment to the 2008 promissory note.
Defendants provide no further explanation as to which of the four events
started the clock on Frankfurt’s claim. They simply refer to the continuing violation
doctrine, which allows a suit “to be delayed until a series of wrongful acts blossoms
into an injury on which suit can be brought.” Limestone Dev. Corp. v. Vill. of
15
Lemont, Ill., 520 F.3d 797, 801 (7th Cir. 2008). Defendants correctly point out that
that doctrine involves cumulative violations and does not apply to “a series of
discrete acts, each of which is independently actionable, even if those acts form an
overall pattern of wrongdoing.” Kovacs v. United States, 614 F.3d 666, 676 (7th Cir.
2010) (quoting Rodrigue v. Olin Employees Credit Union, 406 F.3d 434, 443 (7th
Cir. 2005)). But the inapplicability of that doctrine does not help defendants if, as
Frankfurt suggests, the March 2010 meeting and contract are independently
actionable under Rule 10b-5 and started the clock anew.
Defendants argue that the events of the March 2010 meeting cannot form the
basis of the 10b-5 claim, because the complaint described the March 2010 contract
as relating to a payment plan and did not allege that any fraud occurred when
entering into the contract. See [151] ¶ 8; [153] at 6–7. They argue that Frankfurt
changed his position in an attempt to circumvent the statute of repose. The
complaint did describe the March 2010 contract as setting out terms of a payment
plan for the 2008 promissory note, but that description is consistent with
Frankfurt’s description at summary judgment—Frankfurt agreed to extend the
time at which the note would be paid, collecting interest during that additional
period. In other words, Frankfurt agreed to extend the maturity date of the note.
And the complaint alleged that Frankfurt bought and extended the notes based on
misrepresentations of the financial health of the companies, which formed the basis
of the fraud claim. The complaint did not specifically allege that defendants made
any fraudulent statements at the March 2010 meeting. It may be that defendants
16
believe that a fraud claim based on the March 2010 meeting was not pled with the
particularity required by Federal Rule of Civil Procedure 9(b). But defendants fail to
explain and develop their argument, and they do not cite to Rule 9(b) or to any legal
authority. Moreover, they make the argument in the reply briefs on their crossmotions for summary judgment, but not in their response briefs on Frankfurt’s
cross-motion, even though Frankfurt’s legal theory has been consistent throughout
the briefing on the cross-motions. Because defendants failed to develop the
argument and did not raise it in their response to Frankfurt’s cross-motion, it is
forfeited. Defendants do not otherwise explain why the statute-of-repose period
would begin to run before March 2010. Therefore, Field’s and Mega’s cross-motions
for summary judgment are denied with respect to the statute-of-repose defense.
B.
Illinois Securities Law of 1953 (Count II)
The Illinois Securities Law of 1953 prohibits obtaining money or property
“through the sale of securities by means of any untrue statement of a material fact
or any omission.” 815 ILCS 5/12(G). The elements of the claim substantially overlap
with those of a 10b-5 claim. To prevail, a plaintiff must demonstrate that the
defendant (1) made a misstatement or omission of material fact, (2) in connection
with the purchase or sale of securities, (3) upon which the plaintiff relied. Tirapelli
v. Advanced Equities, Inc., 351 Ill.App.3d 450, 455 (1st Dist. 2004). Frankfurt seeks
summary judgment on the claim against Field based on the same facts that support
his federal claim. His cross-motion is denied for the same reason—whether Field
took part in the March 2010 meeting is disputed. In Field’s cross-motion, he makes
17
no relevant legal arguments and attacks only the adequacy of Frankfurt’s response
to a discovery request for documents that support the claim. See [115] at 13–14.
Because the claim is based on oral representations and publicly-filed documents,
the dearth of documentary evidence is unsurprising. Field makes no other reference
to the claim in his cross-motion, so the cross-motion is denied.
C.
Breach of Contract (Count III)
To prevail on a claim for breach of contract under Illinois law, a plaintiff
must prove: (1) the existence of a valid and enforceable contract; (2) the
performance of the contract by plaintiff; (3) the breach of the contract by defendant;
and (4) a resulting injury to plaintiff.” Priebe v. Autobarn, Ltd., 240 F.3d 584, 587
(7th Cir. 2001) (quoting Hickox v. Bell, 195 Ill.App.3d 976, 992 (5th Dist. 1990)).
Frankfurt seeks summary judgment on the breach of contract claim, based on the
same March 2010 meeting that formed the basis of the securities fraud claims,
against Mega. He contends that Fishkin and he entered into an oral contract,
agreeing that Mega would pay Frankfurt on his 2008 promissory note in
installments of $1,000 per month from April 2010 through the end of 2011, followed
by a lump sum payment of the remainder of the note. They also agreed that in
return, Frankfurt would refrain from filing a claim based on a breach of the note.
Frankfurt performed under the contract, but Mega breached the contract and
caused injury when the monthly payments stopped and never resumed.
Mega does not dispute that the contract Frankfurt entered into in March
2010 was valid and enforceable, that Frankfurt performed his obligations under the
18
contract, that the counterparty breached, or that Frankfurt suffered injury as a
result. It disputes only that Fishkin bound it to the contract, and argues that
Frankfurt does not present sufficient evidence to show that Fishkin represented
Mega when he entered into the March 2010 contract.
It is undisputed that Fishkin had the authority to bind Mega to a contract,
but the parties provide limited evidence as to whether he did so. No written
documentation of the contract has been produced. And Frankfurt relies primarily on
his recollection of events, as recited in his declaration. Frankfurt notes that he met
with Fishkin in the restaurant and received his checks there. But as Mega points
out, the fact that meetings occurred in the restaurant does not shed light on what
the parties intended at the March 2010 meeting. Zarovsky and Field both testified
by affidavit that Fishkin did not bind Mega to the contract. But that is of limited
value—Field also testified that he did not attend that meeting (though Frankfurt
claims otherwise), and it is undisputed that Zarovsky was not involved at the time.
As a current representative of Mega, Zarovsky may be competent to assert that
Mega was not a party to any contract formed in March 2010, but this at most raises
a dispute that would require a fact-finder to resolve based on Frankfurt’s and
Zarovsky’s credibility. Mega states, without support, that Fishkin entered into the
contract either on behalf of Capital or EAG or in his individual capacity. Frankfurt
responds that Fishkin could not have been acting on behalf of Capital or EAG,
because both companies had been dissolved by March 2010, and that he could not
have been acting in his individual capacity, because he was not a signatory to or a
19
personal guarantor of the 2008 note.14 Drawing inferences in Frankfurt’s favor,
Fishkin—an owner of Mega—said that Mega would pay Frankfurt. That is
sufficient to raise a dispute over whether Mega was a party to the March 2010
contract, and precludes summary judgment for either side.
D.
Motion to Compel
In addition to his cross-motion for summary judgment, Frankfurt filed a
motion to compel defendants to produce certain documents. See [162]. In discovery,
Frankfurt requested ownership documents for the restaurant and banquet hall, and
Mega responded that it “does not own the property and therefore cannot provide
these documents.” [114] at 46, ¶ 4. Mega now concedes that it did own that
property. [122] ¶ 46. In light of Mega’s concession, Frankfurt renews his request for
those documents. Frankfurt’s motion is granted in part. Mega shall produce records
demonstrating its ownership of the restaurant and hall.
Frankfurt’s point that Fishkin could not have been acting in his individual capacity
because he was not personally liable for the 2008 note suggests that Frankfurt believes
Fishkin acted only on behalf of those parties bound to the 2008 note. But Mega was not a
named party to the 2008 note (EAG was the borrower), so for Mega to be bound to the 2008
note, Frankfurt would have to prove that Mega was an alter ego of EAG. “Generally, before
the separate corporate identity of one corporation will be disregarded and treated as the
alter ego of another, it must be shown that it is so controlled and its affairs so conducted
that it is a mere instrumentality of another, and it must further appear that observance of
the fiction of separate existence would, under the circumstances, sanction a fraud or
promote injustice.” Northbound Grp., Inc. v. Norvax, Inc., 795 F.3d 647, 652 (7th Cir. 2015)
(quoting Main Bank of Chi. v. Baker, 86 Ill.2d 188, 205 (1981)). In a breach of contract case,
courts typically “apply an even more stringent standard to determine when to pierce the
corporate veil than in tort cases.” Saletech, LLC v. E. Balt, Inc., 2014 IL App (1st) 132639, ¶
26 (quoting Tower Investors, LLC v. 111 East Chestnut Consultants, Inc., 371 Ill.App.3d
1019, 1033 (1st Dist. 2007)). Frankfurt has some evidence that the entities ignored the
corporate form, and there are factual disputes over whether assets were commingled. But
overall, the parties have not adequately addressed the concept of alter ego liability such
that that issue can be resolved at summary judgment.
14
20
Frankfurt also takes issue with the defendants’ lack of documentation of
Zarovsky’s purchase of shares in Mega or of subcontractor agreements related to the
construction of the restaurant and banquet hall. Frankfurt already moved to compel
defendants to search for Mega’s financial and accounting records, [102], after which
I ordered Mega to explain its search for records. See [104]. Zarovsky filed an
affidavit identifying the third-party accounting firm that had been entrusted with
record-keeping duties, explaining that neither she nor Field could get a response
from that firm or its employees, and that she had produced all of the requested
documents in her possession. See [105]. Frankfurt did not find this explanation
credible and filed a second motion to compel. See [10]. I denied that motion and
informed Frankfurt that he could raise the consequences of their lack of documents
at summary judgment. [108]. The pending motion to compel treads the same ground
as the last two. As a result, it is denied in part. The lack of documentation has not
caused any prejudice to Frankfurt at this stage of the case—he has defeated
defendants’ attempt at summary judgment and his claims will move forward.
IV.
Conclusion
Frankfurt’s motion for summary judgment, [112], is denied. Mega’s motion
for summary judgment, [114], is denied. Field’s motion for summary judgment,
[115], is denied. Frankfurt’s first motion for judicial notice, [132], is granted in part
and denied in part, and his second motion for judicial notice, [159], is denied.
Frankfurt’s motion to compel, [162], is granted in part as to records of Mega’s
ownership of the restaurant and hall, but is otherwise denied. Mega shall produce
21
the requested ownership records within three weeks, and a status hearing is set for
February 9, 2018 at 9:30 a.m.
ENTER:
___________________________
Manish S. Shah
United States District Judge
Date: January 19, 2018
22
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?