Walls v. VRE Chicago Eleven, LLC et al

Filing 232

MEMORANDUM Opinion and Order: For the foregoing reasons, Defendants VPC Chicago11, LLC, Vestapoint Capital II LLC, and Aaron Stearn's motion to dismiss is granted. 218 Signed by the Honorable Thomas M. Durkin on 1/25/2019:Mailed notice(srn, )

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
RAYMOND L. and TERRYLL ANN WALLS,
Plaintiffs,
v.
VRE CHICAGO ELEVEN, LLC, et al.,
Defendants.
VERDAD REAL ESTATE, INC., et al.,
Third-Party Plaintiffs
v.
MARK A. REINSCH, et al.,
Third-Party Defendants.

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No. 16-cv-4048
Judge Thomas M. Durkin

MEMORANDUM OPINION AND ORDER
Plaintiffs brought this suit against various defendants alleging fraudulent
inducement and negligent misrepresentation during their purchase of a commercial
property located in Illinois. Several of the defendants filed motions to dismiss the
Second Amended Complaint. The Court issued a lengthy opinion on those motions on
September 25, 2018. See R. 190; Walls v. VRE Chicago Eleven, LLC, 344 F. Supp. 3d
932 (N.D. Ill. 2018). Familiarity with that opinion for the background and factual
detail of this case is assumed here. Following that opinion, Plaintiffs filed a Third
Amended Complaint (“TAC”). R. 207. Before the Court now is Defendants VPC
Chicago11, LLC, Vestapoint Capital II LLC, and Aaron Stearns’ (collectively,

“Vestapoint”) motion to dismiss Count X of the TAC under Fed. R. Civ. P 12(b)(6). R.
218. For the following reasons, Vestapoint’s motion is granted.
BACKGROUND
As a reminder, Vestapoint is a partial owner of VRE. R. 207 ¶ 157. In the TAC,
Plaintiffs allege that Vestapoint invested over $5M in the Chicago Eleven Properties
deal in March 2014 “with the expectation of receiving a high rate of return, with
repayment expected over a short period of time.” Id. ¶ 159. Between October 2014
and February 2015, Vestapoint, through Defendant Stearns, communicated with
representatives of Verdad regarding the Chicago Eleven Properties, the conversions
from KFCs to Hardees, and the lease modifications. Id. ¶¶ 160-170. By mid-November
2014, Keen (the President of Verdad) set a weekly conference call with Stearns to
provide updates “every week until we determine the solution.” Id. ¶ 162. And
eventually, Keen and Stearns met in person to “discuss everything in greater detail.”
Id. ¶ 165.
As the alleged scheme progressed, Stearns expressed concern about Jason
LeVecke and the transaction. Id. ¶¶ 167, 170. For example, at one point Stearns
stated, “[LeVecke] is taking liberties with our trust and my money (and your
guarantee), and the longer that we remain without any form of documentation, the
more likely it is that the latter scenario is accurate.” Id. ¶ 170. Stearns’ questioning
led Verdad to state that it would use a different capital source for subsequent deals,
see id. ¶ 169, and later Keen wrote “No more levecke deals for [Stearns], unless Joe
and I agree ahead of time. We need to limit his exposure to LeVecke.” See R. 207-28.

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Finally, in February 2015, as Verdad began marketing the properties to
purchasers, Stearns was “surprised” to learn of the marketing efforts because he
thought the parties would agree to revised leases before offering the properties for
sale. R. 207 ¶¶ 173, 174.
Through these facts, Plaintiffs allege Vestapoint “actively encouraged and
supported the plan and agreement; and they were a chief beneficiary of the plan and
agreement in that a large portion of the net proceeds VRE derived from the [sales] . .
. , were paid to [Vestapoint] as a return on its investment.” Id. ¶ 157. Plaintiffs assert
that although Vestapoint was not aware of the fraudulent marketing of the properties
until February 2015, because Vestapoint “did not insist that the properties be pulled
from the market until the leases could be amended to reflect the true economics,” they
are liable for civil conspiracy along with the rest of the defendants in Count X of the
TAC. See R. 226 at 4.
ANALYSIS
To bring a claim for civil conspiracy, Plaintiffs must allege: (1) an agreement
between two or more persons for accomplishing either an unlawful purpose or a
lawful purpose by unlawful means; and (2) at least one tortious act by one of the coconspirators in furtherance of the agreement that caused an injury to the plaintiff.
Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502, 509 (7th Cir. 2007) (citing
Illinois law). Because Plaintiffs’ conspiracy allegations sound in fraud, Plaintiffs must
also plead their allegations with particularity. Id. at 507. (“Although claims of . . .
civil conspiracy are not by definition fraudulent torts, Rule 9(b) applies to ‘averments

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of fraud,’ not claims of fraud.”). Under Rule 9(b), “a party who alleges fraud or mistake
‘must state with particularity the circumstances constituting fraud or mistake.’”
Pirelli Armstrong Tire Corp. v. Walgreen Co., 631 F.3d 436, 441 (7th Cir. 2011). Thus,
a plaintiff must plead the “who, what, when, where, and how” of the alleged fraud.
Id.
Plaintiffs still fail to allege any agreement by Vestapoint in the conspiracy.
Although Plaintiffs have added significant details of Vestapoint’s knowledge of the
transaction generally, Plaintiffs do not allege Vestapoint had any knowledge of the
fraudulent scheme to sell the properties at inflated values to third-party buyers.
Instead, Plaintiffs explicitly acknowledge that Vestapoint did not even know the
properties were being marketed until February 25, 2015. R. 207 ¶ 173 (“On February
25, 2015, Stearns received an e-mail reflecting that at least four of the Chicago 11
properties were being marketed as KFCs, at prices reflecting that the rent on the
properties was still $171,000 per store, per year. This surprised Stearns, as ‘he
thought we were working on perfecting a revised lease.’”).
From the TAC’s allegations, it is not clear that Vestapoint even knew about
the fraudulent scheme beyond its knowledge that the properties were being
marketed. Plaintiffs also fail to allege agreement or intentionality by Vestapoint to
further the conspiracy. Taking all inferences in favor of Plaintiffs, Plaintiffs at most
allege Vestapoint was negligent for failing to stop the remaining defendants from
carrying out their fraud after Vestapoint discovered the properties were being
marketed at the higher rental rates. But that is not sufficient to state a claim. Miller,

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969 N.E.2d at 925 (“[C]ivil conspiracy is an intentional tort. . . . ‘Accidental,
inadvertent, or negligent participation in a common scheme does not amount to
conspiracy.’”) (citations omitted); Borsellino, 477 F.3d at 509 (defendant’s mere
participation in the creation of a company, without more, was not sufficient to satisfy
Rule 9(b)’s particularity requirements in a case alleging defendants defrauded
plaintiff when they unlawfully created the company); Damato v. Merrill Lynch,
Pierce, Fenner & Smith, 878 F. Supp. 1156, 1162 (N.D. Ill. 1995) (applying Illinois
law and finding allegations that defendants failed to ensure the alleged coconspirators were properly registered with a regulatory commission insufficient to
state a claim for conspiracy to defraud).
Turning to Plaintiffs’ arguments in support of their claims, Plaintiffs argue
that whether Vestapoint committed an intentional act itself does not matter for
purposes of civil conspiracy. R. 226 at 8. While Vestapoint need not commit the
fraudulent act, Vestapoint must still join the conspiracy intentionally—not merely as
a negligent investor. And, as the Court already discussed in detail in its prior opinion,
R. 190 at 34-35, Plaintiffs’ conclusory allegations that Vestapoint “actively
encouraged and supported the plan and agreement,” R. 207 ¶ 157, because it was an
investor in the scheme also fail. Those allegations are not supported by facts that
Vestapoint had any actual knowledge of the fraudulent agreement, and the Court
cannot infer agreement to the scheme simply because Vestapoint rightfully asked for
updates on its $5M investment.

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In sum, Plaintiffs still fail to point to anything suggesting Vestapoint agreed
to the conspiracy. Accordingly, Plaintiffs cannot maintain their conspiracy claim
against Vestapoint. See Independent Trust Corp. v. Stewart Information Services
Corp., 665 F. 3d 930, 938-39 (7th Cir. 2012) (affirming dismissal of a conspiracy claim
where complaint fails to allege an explicit or implicit agreement by the defendant to
the alleged wrongful scheme); R. 190 at 35-36. Count X against Vestapoint is
dismissed with prejudice.
CONCLUSION
For the foregoing reasons, Defendants VPC Chicago11, LLC, Vestapoint
Capital II LLC, and Aaron Stearns’s motion to dismiss, R. 218, is granted.
ENTERED:

____________________________
Honorable Thomas M. Durkin
United States District Judge

Dated: January 25, 2019

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