RNS Servicing, LLC v. Spirit Construction Services, Inc. et al
Filing
29
MEMORANDUM Opinion and Order signed by the Honorable Edmond E. Chang. For the reasons stated in the Opinion, Defendants' motion 15 to dismiss is denied. Emailed notice(slb, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
RNS SERVICING, LLC,
)
)
)
)
)
)
)
)
)
)
Plaintiff,
v.
SPIRIT CONSTRUCTION SERVICES,
INC., et al.
Defendants.
No. 17 C 00108
Judge Edmond E. Chang
MEMORANDUM OPINION AND ORDER
RNS Servicing brings various state-law claims against Spirit Construction
Services and its President, Steven Van Den Heuvel (call him Steve, because his
brother is a role player in the case too).1 R. 1, Compl.2 The claims arise out of a
business relationship gone sour between RNS Servicing’s predecessor-in-interest,
IFC Credit Corporation, and Ronald Van Den Heuvel (Ron, for short), Steve’s
brother. Id. ¶¶ 1-3. Relying partly on assurances made by Steve, IFC agreed to
settle a lawsuit it had brought against Ron and several Ron-affiliated companies in
exchange for promises of future payment. Id. ¶¶ 33-34, 40, 42, 45, 47-48. But almost
immediately after the lawsuit was dismissed, the Ron-affiliated entities defaulted
on their payment obligations. Id. ¶ 50. RNS Servicing now sues Steve and Spirit
1This
Court has subject-matter jurisdiction under 28 U.S.C. § 1332. The parties are
diverse—Spirit Construction is a citizen of Delaware and Georgia, Steve Van Den Heuvel is
a citizen of Wisconsin, and RNS Servicing is a citizen of Illinois (as an LLC, RNS Servicing
takes on the citizenship of its two individual members, both of whom reside in and are
therefore citizens of Illinois), R. 1, Compl. ¶¶ 4-6—and the amount in controversy exceeds
$75,000.
2Citations to the docket are indicated by “R.” followed by the docket number and,
where appropriate, a page or paragraph number.
1
Construction for negligent misrepresentation and fraud, alleging that Steve made a
number of misrepresentations in order to get IFC to drop its lawsuit against Ron
and, without those representations, IFC would not have agreed to settle. Id. The
Defendants move to dismiss the Complaint under Federal Rule of Civil Procedure
12(b)(6). R. 15, Mot. to Dismiss. For the reasons stated below, the motion is denied.
I. Background
For purposes of this motion, the Court accepts as true the allegations in the
Complaint. Erickson v. Pardus, 551 U.S. 89, 94 (2007). IFC Credit Corporation is a
now-dissolved corporation that provided equipment lease financing to commercial
and industrial entities, including four tissue-paper manufacturing companies owned
or operated by Ron (call them the Ron Companies). Compl. ¶ 1, 14. 19, 21. The Ron
Companies executed a master lease with IFC in June 2005 and again in September
2005.3 Id. ¶¶ 19, 21. But by October of that year, it had become clear that the Ron
Companies would default on both leases. Id. ¶ 24. Hoping to stave off a takeover of
his companies’ assets, Ron enlisted his brother Steve to help. Id. ¶ 25.
As President4 of Spirit Construction Services, Compl. ¶ 6, Steve was wellpositioned to lend Ron assistance. Spirit Construction acts as a general contractor
3IFC
then assigned its rights to a subset of the lease payments owed under the June
2005 Master Lease and the September 2005 Master Lease to Fortress Credit Corporation
and George Washington Savings Bank, respectively. Compl. ¶¶ 20, 23. Neither assignee is a
party to this lawsuit.
4 The Complaint states that Steve is the Chief Executive Officer of Spirit
Construction, see, e.g., Compl. ¶ 6, but the Defendants refer to him as Spirit Construction’s
“President,” see, e.g., R. 18, Defs.’ Br. at 1. Because the Acknowledgement of and Consent to
Assignment that forms the basis of RNS Servicing’s claims lists Steve’s title as President, R.
1-6, Compl. at Exh. F, Continuing Pledge Agmt. at Sch. B, the Court will adopt that styling
in this Opinion.
2
for the engineering, procurement, and construction of tissue-paper plants. Id. Steve
and Ron proposed to restructure the Ron Companies’ payment obligations as follows:
first, Spirit Construction would hire the Ron Companies as subcontractors under
five engineering, procurement, and construction contracts that it expected to
execute soon; second, the Ron Companies would use this future income stream to
attract equity investors in its tissue-paper plants; finally, the Ron Companies would
use the proceeds from the equity sale, along with its subcontracting income, to pay
off IFC. Id. ¶ 26.
Over the next couple of months, Steve and Ron discussed the proposal with
IFC, and preliminary documents were exchanged, but the parties failed to reach a
deal before the Ron Companies defaulted on the master leases. Compl. ¶¶ 27-32. In
August 2006, IFC sued Ron and the Ron Companies in federal court for breach of
the master leases.5 Id. ¶ 33.
By April 2007, however, the parties had come to a settlement agreement.
Compl. ¶ 40. The Ron Companies would pay $23.4 million, with $20 million paid up
front and the remaining $3.4 million to be paid in ten monthly installments
pursuant to a new master lease agreement (call this one the Settlement Master
Lease). Id. ¶¶ 41-42; see also R. 1-4, Compl. at Exh. D, Settlement Agmt.; R. 1-5,
Compl. at Exh. E, Settlement Master Lease. In addition to accepting part of the
settlement amount in future installments, IFC also agreed to lend two of the Ron
Companies an additional $440,000. Compl. ¶ 45; R. 1-7, Compl. at Exh. G, Master
5George
Washington Savings Bank, as assignee of some of IFC’s rights under the
September 2005 Master Lease, filed a separate suit against the Ron Companies. Compl. ¶
34. That suit was consolidated with the IFC suit. Id. ¶ 35.
3
Am. Agmt. As a safeguard, those two Ron Companies assigned to IFC their right to
roughly $3.9 million of compensation (upped from an initial $3.4 million in order to
incorporate the $440,000 loan) for subcontracting services that they were to provide
to Spirit Construction on four of Spirit’s engineering, procurement, and construction
contracts (call them the “EPC Contracts,” for convenience’s sake). Compl. ¶ 44; R. 16, Continuing Pledge Agmt; Master Am. Agmt.
The final—and most important, for the purposes of this lawsuit—piece of the
settlement puzzle was an Acknowledgement of and Consent to Assignment (the
“Acknowledgement,” in brief) executed by Steve on behalf of Spirit Construction and
appended to the assignment of the Ron Companies’ subcontracting income. Compl.
¶¶ 47-48; Continuing Pledge Agmt. at Sch. B, Acknowledgement. In the
Acknowledgement, Spirit Construction represented that the two Ron Companies
receiving the IFC loan “are contractors in connection with the [EPC Contracts] and
that substantial sums of money in excess of $3,900,222 will become owing to them
pursuant to said contracts.”6 What’s more, Spirit Construction promised to pay the
amounts due to the two Ron Companies directly to IFC, up to the $3,900,2227 owed
6The
Continuing Pledge Agreement attached to the Complaint actually contains two
Acknowledgements. Continuing Pledge Agmt. at 11-12. Both are dated March 28, 2007, and
both are signed by Steve. Id. As far as the Court can tell, the only difference between them
is the amount of money pledged to IFC: one copy grants IFC the right to $3,900,222, id. at
11, and the other grants IFC the right to $3.4 million, id. at 12. Because both the Complaint
and the Defendants’ Brief quote the higher figure, see Compl. ¶¶ 47-48; Defs.’ Br. at 1-2, the
Court considers the copy pledging $3,900,222 (that is, the one at page 11 of R. 1-6) as the
proper Acknowledgement.
7 The Acknowledgement actually pledges two different amounts: $3,900,222 (at
paragraphs 1 and 2) and $3,900,022 (at paragraph 4). The Court assumes this is due to
typographical error; in any case, the actual amount is immaterial to the resolution of this
motion to dismiss.
4
under the Continuing Pledge Agreement, as amended by the Master Amendment
Agreement. Id. Finally, the Acknowledgement “confirm[ed] that the terms of the
EPC Contracts remain in full force and effect and that [the two Ron Companies] are
subcontractors there under and that neither we nor [the two Ron Companies] are
presently in breach of the terms of the EPC Contracts.” Id. Satisfied with this
resolution, IFC dismissed its lawsuit with prejudice on April 19, 2007. Id. ¶ 49.
Problems arose almost immediately. The Ron Companies failed to make any
of their installment payments between the date of dismissal and September 6, 2007,
when IFC brought them back to court for breach of the Settlement Agreement and
Settlement Master Lease. Compl. ¶¶ 50-51. IFC’s new lawsuit also named Spirit
Construction as a defendant, seeking a preliminary injunction to prevent Spirit
from transferring any money to the Ron Companies until IFC was paid in full. Id. ¶
51. Although the court in that case entered judgment against Ron and the Ron
Companies, it granted Spirit summary judgment on standing grounds. Id. ¶¶ 52-53;
R. 1-8, Compl. at Exh. I, Summ. J. Op., IFC Credit Corp. v. Tissue Prods. Tech.
Corp., 07-CV-04351 (N.D. Ill. Mar. 31, 2009). But the judgment was cold comfort to
IFC, which was unable to collect on the judgment from Ron or the Ron Companies
and filed for bankruptcy in 2009. Id. ¶¶ 52, 54. During the bankruptcy process,
plaintiff RNS Servicing purchased IFC’s rights under the Settlement Agreement
and related agreements, including its legal claims against Steve and Spirit
Construction. Id. ¶¶ 55-56.
5
RNS Servicing filed this lawsuit after receiving an email from Sharad Tak in
2016. Compl. ¶ 57. Tak owned ST Paper, a party to the four EPC Contracts, and in
fact signed the EPC Contracts on behalf of his company. Id. ¶¶ 18, 57 He told RNS
Servicing that the EPC Contracts “were frivolous contracts,” and that “Ron tried to
raise money for the[m] but was unsuccessful. Nothing ever happened on th[o]se
contracts.” R. 1-12, Compl. at Exh. L, Tak Emails. Despite this, “Spirit … has been
doing well, [and] ha[s] been very profitable by executing several other construction
contracts[,] including some EPC contracts.” Id. Based partly on Tak’s statements,
RNS Servicing brings claims against Steve and Spirit Construction for negligent
misrepresentation (Count 1), fraudulent inducement (Count 2), violations of the
Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2 et
seq. (Count 3), and civil conspiracy to commit fraud (Count 4). At the heart of these
claims is the allegation that the four EPC Contracts were not bona fide contracts,
but the Defendants represented that they were in order to persuade IFC to settle its
claims against Ron—and to lend him more money on top. Compl. The Defendants
have moved to dismiss RNS Servicing’s claims, arguing that they are not pled with
adequate specificity. Mot. to Dismiss.
II. Standard of Review
“A motion under Rule 12(b)(6) challenges the sufficiency of the complaint to
state a claim upon which relief may be granted.” Hallinan v. Fraternal Order of
Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). “[A] complaint must
contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is
6
plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007)). These allegations “must be enough to
raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555. The
allegations that are entitled to the assumption of truth are those that are factual,
rather than mere legal conclusions. Iqbal, 556 U.S. at 678–79.
Ordinarily, under Federal Rule of Civil Procedure 8(a)(2), a complaint
generally need only include “a short and plain statement of the claim showing that
the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). This short and plain
statement must “give the defendant fair notice of what the ... claim is and the
grounds upon which it rests.” Twombly, 550 U.S. at 555 (alteration in original)
(internal quotation marks and citation omitted). The Seventh Circuit has explained
that this rule “reflects a liberal notice pleading regime, which is intended to ‘focus
litigation on the merits of a claim’ rather than on technicalities that might keep
plaintiffs out of court.” Brooks v. Ross, 578 F.3d 574, 580 (7th Cir. 2009) (quoting
Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514 (2002)).
But claims alleging fraud must also satisfy the heightened pleading
requirement of Federal Rule of Civil Procedure 9(b), which requires that “[i]n
alleging fraud or mistake, a party must state with particularity the circumstances
constituting fraud or mistake.” Fed. R. Civ. P. 9(b) (emphasis added). Thus, Rule 9(b)
“require[s] the plaintiff to 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.”
7
Uni*Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 923 (7th Cir. 1992) (internal
quotation marks and citation omitted). Put differently, the complaint “ordinarily …
must describe the who, what, when, where, and how of the fraud.” Pirelli Armstrong
Tire Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 441–42 (7th
Cir. 2011) (internal quotation marks and citation omitted).
III. Analysis
The Defendants argue that the Complaint is inadequate in two ways8: first,
RNS Servicing has failed to explain how the statements in the Acknowledgement
were false (an element of all four counts); and second, that RNS Servicing has not
adequately alleged that the Defendants acted with the requisite state of mind as to
Counts 1, 2, and 4. R. 18, Defs.’ Br. The Court will address each of these issues in
turn.
A. Falsity
RNS Servicing alleges that the Acknowledgement contains at least three
false statements of material fact: (1) that two of the Ron Companies would receive
more than $3,900,222 as subcontractors under the EPC Contracts; (2) that Spirit
Construction would pay the Ron Companies’ compensation directly to IFC until the
Ron Companies’ debt was satisfied; and (3) that the EPC Contracts were in “full
8The
Defendants also argued that the Complaint should be dismissed with prejudice
because any amendment would be futile on limitation grounds and because the suit was
brought for an improper purpose. R. 18, Defs.’ Br. at 8-12. But neither of these arguments
was properly raised: the statute of limitations argument is an affirmative defense and
therefore cannot form the basis for a dismissal motion, and the improper-purpose argument
was unaccompanied by an actual Rule 11 motion. See R. 21, 3/23/17 Minute Entry. So the
Court instructed RNS Servicing to ignore those arguments in its response brief, and they
are not discussed in this Opinion. Id.
8
force and effect,” with two Ron Companies as subcontractors thereunder, and none
of the three entities were in breach of the EPC Contracts at the time of execution.
Compl. ¶¶ 59, 69, 78, 87-88.
The Defendants contend that these allegations are “conclusory,” “bare
recitations” that “merely cite elements of the claim” rather than facts that warrant
a presumption of truth at the motion to dismiss stage. Defs.’ Br. at 5; see Iqbal, 556
U.S. at 678–79. RNS Servicing has failed to satisfy even the ordinary motion to
dismiss standard, the Defendants argue, much less the heightened pleading
requirement that applies to its three fraud claims.9 Defs.’ Br. at 5-6; R. 24, Defs.’
Reply Br. at 2-5; see Fed. R. Civ. P. 9(b).
But the Defendants ask too much of RNS Servicing—certainly more than the
law does at this stage. To survive dismissal, RNS Servicing need only “give enough
details about the subject-matter of the case to present a story that holds together.”
See Swanson v. Citibank, N.A., 614 F.3d 400, 404 (7th Cir. 2010). That is, “the court
will ask itself could these things [alleged by the plaintiff] have happened, not did
they happen.” Id. As for Rule 9(b)’s particularity requirements, the heightened
pleading standard merely imposes the burden of stating “the who, what, when,
where, and how” of the fraud alleged in Counts 2 to 4. See DiLeo v. Ernst & Young,
901 F.2d 624, 627 (7th Cir. 1990).
RNS Servicing has met this burden. It has identified the “who,” naming Steve
and Spirit Construction as the persons making the false representations. Compl. ¶¶
Count 1, the negligent-misrepresentation claim, is not a fraud claim and is
therefore not governed by the Rule 9(b) standard. See Tricontinental Indus., Ltd. v.
PricewaterhouseCoopers, LLP, 475 F.3d 824, 833 (7th Cir. 2007).
9
9
69, 78, 87-89. It has provided the “time, place, and content of the misrepresentation,”
distilling three specific misleading statements from the Acknowledgement and
attaching the document itself to the Complaint. See Camasta v. Jos. A. Bank
Clothiers, Inc., 761 F.3d 732, 737 (7th Cir. 2014); Compl. ¶¶ 69, 78, 88;
Acknowledgement. And by walking through the history of IFC’s dealings with Ron,
Steve, and Spirit Construction—including a detailed narrative explaining the
impetus behind the Settlement Agreement, Settlement Master Lease, and the
Continuing Pledge Agreement, as well as the relationship between the various
contracts—RNS Servicing has adequately stated “the method by which the
misrepresentation was communicated to the plaintiff”—that is, the “how.”10 U.S. ex
rel. Grenadyor v. Ukrainian Village Pharmacy, Inc., 772 F.3d 1102, 1106 (7th Cir.
2014).
As for the overall plausibility of RNS Servicing’s allegations of falsity, the
Complaint contains enough “factual content that allows the court to draw the
reasonable inference that” the statements contained in the Acknowledgement were
false. See Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). Importantly,
RNS Servicing is “not require[d] … to demonstrate that a representation was indeed
false.” See Hefferman v. Bass, 467 F.3d 596, 601 (7th Cir. 2006); see also Camasta,
761 F.3d at 737. It is enough that the Court can plausibly infer, based on the facts
alleged in the Complaint, that the Defendants’ representations—that the EPC
Contracts were fully-valid agreements that would pay over $3.9 million to IFC (via
10Contrary
to the Defendants’ representations, the “how” component of the Rule 9(b)
“newspaper rule” references how the misrepresentation was communicated, not “how the
representation was false.” See Grenadyor, 772 F.3d at 1106.
10
two Ron Companies)—were false. See U.S. ex rel. Lusby v. Rolls-Royce Corp., 570
F.3d 849, 854 (7th Cir. 2009) (noting that, although “it is essential to show a false
statement,” “much knowledge is inferential,” and it suffices if “the inference that
[the plaintiff] proposes is a plausible one.”). Here, RNS Servicing asserts that a
signatory to the EPC Contracts admitted that the contracts were “frivolous.” Compl.
¶ 57; see Tak Emails. The Defendants argue that this statement, taken in context,
does not mean that the EPC Contracts were invalid. Defs.’ Reply Br. at 5. They urge
the Court to focus on the remainder of the sentence, which states that “Ron tried to
raise money for [the EPC Contracts] but was unsuccessful.” Id.; see Tak Emails.
True, it is possible—plausible, even—to conclude that Steve and Spirit Construction
made the representations in the Acknowledgement in good faith, and the EPC
Contracts fell through for lack of funding. But on a Rule 12(b)(6) motion, the Court
“draw[s] all inferences in the light most favorable to the nonmoving party,” RNS
Servicing. See Vesely v. Armslist LLC, 762 F.3d 661, 665 (7th Cir. 2014). And, from
Tak’s characterization of the EPC Contracts as “frivolous”—coupled with his
assertion that “[n]othing ever happened on” the EPC Contracts, even though other
EPC projects in Spirit Construction’s stable had proceeded successfully and
profitably—one can infer that the EPC Contracts were not bona fide agreements.
See Tak Emails; see also Swanson, 614 F.3d at 404 (“[I]t is not necessary to stack up
inferences side by side and allow the case to go forward only if the plaintiff’s
inferences seem more compelling than the opposing inferences.”).
11
The post-settlement timeline adds to the plausibility of RNS Servicing’s
allegation of falsity. According to the Complaint, the Continuing Pledge Agreement
(which includes the Acknowledgement) was signed on March 28, 2007, and
amended on April 18, 2007. Compl. ¶¶ 44-48; Continuing Pledge Agmt; Master Am.
Agmt. On April 19, IFC dismissed its lawsuit against Ron and the Ron Companies
with prejudice. Compl. ¶ 49. Once the lawsuit was dropped, the Ron Companies
immediately breached the Settlement Master Lease, failing to make any payments
from the day the first IFC lawsuit was dismissed to the day that the second IFC
lawsuit, for breach of the Settlement Agreement and Settlement Master Lease, was
filed. Id. ¶¶ 50-51. (Indeed, it is unclear if the Ron Companies ever made any
payments under the Settlement Master Lease.) It is reasonable to infer, based on
the speed with which the Ron Companies breached the Settlement Master Lease,
that the EPC Contracts and the revenue stream that they represented were not
genuine.
B. State of Mind
Even if the statements in the Acknowledgement were false, the Defendants
argue, Counts 1 (negligent misrepresentation), 2 (fraudulent inducement), and 4
(civil conspiracy, incorporating the fraudulent inducement claim) must fail because
the Complaint does not adequately allege that the Defendants possessed the
requisite states of mind. Defs.’ Br. at 6-7. To prevail on a negligent
misrepresentation claim, a plaintiff must show that the defendant should have
known that the relevant statement was false, First Midwest Bank, N.A. v. Stewart
12
Title Guar. Co., 843 N.E.2d 327, 332 (Ill. 2006) (requiring “carelessness or
negligence in ascertaining the truth of the statement by the party making it”); on a
fraudulent inducement claim, the defendant must have actually known of the
statement’s falsity, Board of Educ. of City of Chi. v. A, C and S, Inc., 546 N.E.2d 580,
591 (Ill. 1989). Even under the heightened pleading standard for fraud, however,
“intent, knowledge, and other conditions of a person’s mind may be alleged
generally.” Fed. R. Civ. P. 9(b).
The Complaint alleges simply that the Defendants “knew,” Compl. ¶ 70, or
that they “should have known,” id. ¶ 61, that their statements in the
Acknowledgement were false. No more particularity is needed. See Armstrong v.
Daily, 786 F.3d 529, 547 (7th Cir. 2015) (allegation that defendant “acted ‘with bad
faith from the very beginning … ’ … is no bare legal conclusion,” because “Rule 9(b)
allows states of mind to be alleged generally”). Even so, it is entirely reasonable to
infer that the Defendants knew the EPC Contracts would not amount to much.
Taken together, Steve and Ron’s family relationship, Compl. ¶ 13, Steve’s efforts to
help Ron avoid default under the June 2005 and September 2005 Master Leases, id.
¶¶ 25-31, the Ron Companies’ speedy breach of the Settlement Master Lease, id. ¶¶
49-50, Sharad Tak’s assertion that the EPC Contracts were “frivolous,” id. ¶ 57; Tak
Emails, and Tak’s claim that Spirit’s other EPC projects were successful, id., “afford
a basis for believing that [RNS Servicing] could prove scienter.” 11 See Robin v.
11RNS
Servicing argues that fraudulent intent can be inferred from the fact that Ron
and his wife were indicted on fraud charges in April and October 2016. R. 22, Pl.’s Br. at 8-9.
Although the Court may take judicial notice of the fact that the indictments exist, Indep.
Trust Corp. v. Stewart Infor. Servs. Corp., 665 F.3d 930, 943 (7th Cir. 2012), it will not do so
13
Arthur Young & Co., 915 F.2d 1120, 1127 (7th Cir. 1990) (quoting DiLeo, 901 F.2d
at 629). The Complaint more than adequately satisfies its pleading requirements.
IV. Conclusion
For the reasons stated above, the Defendants’ motion to dismiss, R. 15, is
denied.
ENTERED:
s/Edmond E. Chang
Honorable Edmond E. Chang
United States District Judge
DATE: August 25, 2017
here. Ron is not a party to this action, and his indictment on an entirely unrelated alleged
fraud is not relevant to this dispute. And in any case, the Complaint survives dismissal on
its own merits.
14
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?