Cross et al v. Batterson

Filing 77

MEMORANDUM Opinion and Order. For the reasons stated herein, the Motion to Dismiss Count I, Breach of Contract, is denied. The Motion to Dismiss Count II, Tortious Interference with Contract, is granted. Enter Memorandum Opinion and Order. Signed by the Honorable Harry D. Leinenweber on 1/8/2021: Mailed notice(maf)

Case: 1:17-cv-00198 Document #: 77 Filed: 01/08/21 Page 1 of 9 PageID #:556

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

ROBERT CROSS and JONATHAN
ZAKIN,
Plaintiffs,
Case No. 17 C 198
v.
Judge Harry D. Leinenweber
LEONARD A. BATTERSON,

Defendant.

MEMORANDUM OPINION AND ORDER
I. BACKGROUND
This is not the first time the Court has considered the
pleadings in this almost four-year-old case. In the original
complaint, Plaintiffs, disgruntled partners of Defendant in a
Delaware limited liability company, sued Defendant for breach of
contract and a host of tort remedies. The Court, in a lengthy
opinion written two-and-one-half years ago, dismissed all but the
breach of contract count (which Defendant had not included in his
motion), holding that, under the facts alleged, the only plausible
remedy was breach of contract. See Cross v. Batterson, No. 17 C
198, 2017 WL 2798398 (N.D. Ill. June 28, 2017). Now, after years
of discovery and a failed attempt at mediation, Plaintiffs amended

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their complaint to reallege breach of contract and to add a tort
of intentional interference with contractual relations allegation
against Defendant.
The

amended

complaint

alleges

similar

background

to

the

original complaint. In 2005, Robert Cross and Jonathan Zakin,
Plaintiffs,

and

Leonard

Batterson,

Defendant,

entered

into

a

contract, denominated as “Operating Agreement,” which created a
Delaware Limited Liability Company named “Batterson Cross Zakin,
LLC” (“BCZ”) for purposes of investing. (Agreement at 14, Mem.,
Ex. A, Dkt. No. 12-1; Am. Compl. ¶ 9, Dkt. No. 70.) One of the
investments, referred to as the “Cleversafe transaction,” involved
the company’s role as manager of an entity named BVC-Cleversafe
LLC that made a direct investment in a company named Cleversafe.
(Am. Compl. ¶¶ 19–20.) At some time prior to the filing of this
lawsuit, Cleversafe was sold to IBM for a substantial sum of money.
(Id. ¶ 19.)
The breach of contract count (Count I) alleges that Defendant
breached the “Operating Agreement” by “diverting and refusing to
pay to Cross and Zakin their ownership and financial interests in
BCZ and proceeds that Cross and Zakin should have received after
the Cleversafe transaction,” and Count II alleges that Batterson
tortuously interfered with Plaintiffs’ contractual relations with
BCZ

by

“prevent[ing]

Cross

and

Zakin

from

receiving

their

respective ownership and financial interests in BCZ and proceeds
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that Cross and Zakin should have received from the Cleversafe
transaction.” (Id. ¶¶ 31 & 39.) Batterson has once again filed a
motion to dismiss but this time has included all counts.
II. LEGAL STANDARD
Under

a

Rule

12(b)(6)

motion

to

dismiss,

a

defendant

challenges the legal sufficiency of the complaint. To survive this
motion, the company must “state a claim to relief that is plausible
on its face.” Adams v. City of Indianapolis, 742 F.3d 720, 728
(7th Cir. 2014) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,
570 (2007)). A claim is plausible “when the pleaded factual content
allows

the

court

to

draw

the

reasonable

inference

that

the

defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 570). The
Court also “draw[s] all reasonable inferences in the light most
favorable to the plaintiffs” as the non-moving party. Abry Partners
V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1045 (Del. Ch.
2006). If after this evaluation the plaintiffs’ pleaded facts do
not support the cause of action, the Court will dismiss the
complaint. Id.
III. DISCUSSION
According

to

the

amended

complaint,

compensation

of

the

principals under the Operating Agreement was contingent on either
BCZ making money on its own investments, or from third party
investors with whom the company did business. (Id. ¶ 14.) The
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Operating Agreement further provides that BCZ was to be managed by
a three-member Board of Managers consisting of the two Plaintiffs
and the Defendant. (Id. ¶ 10.) The Agreement further required
unanimous

approval

of

the

three

Managers

for

acquisition

or

disposition of investments, adding new members, and amending the
Operating Agreement. (Id. ¶ 11.) The Agreement did not allow any
member to withdraw money from BCZ without authority of the Board
and there were to be no payments to the managing principals except
in the form of “Priority Distribution” as provided for in the
Agreement. (Id. ¶ 14.) Members who hold Promissory Notes issued by
the company are entitled to payments under the terms of the
Promissory Notes after priority distributions are paid to the
Managing Principals. (Id. ¶¶ 36–38.)
Further, according to the amended complaint, Batterson took
millions of dollars from BCZ without approval of the Board of
Managers, including at least $8.5 million that was received by BCZ
from the sale of Cleversafe under the terms of the BVC-Cleversafe
Operating Agreement. (Id. ¶ 19.) When Plaintiffs requested their
share of the Cleversafe proceeds, Defendant told them that they
were no longer members of BCZ because the Operating Agreement had
been amended without their agreement to eliminate them as members
for the purpose of divesting them of their money. (Id. ¶¶ 21–23.)
Moreover, Plaintiffs alleged they had been issued investment notes
by BCZ and Defendant has prevented Plaintiffs from receiving the
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interest and principal that was due them under the terms of the
notes. (Id. ¶ 26.)
A. Breach of Contract - Count I
Under Delaware Law, which governs here, an LLC Agreement is
interpreted to give “the maximum effect to the principle of freedom
of contract and to the enforceability of limited liability company
agreements.” DEL. CODE ANN. tit. 6, § 18-1101(b) (West 2013); Touch
of Italy Salumeria & Pasticceria, LLC v. Bascio, No. 8602-VCG,
2014 WL 108895, at *1 (Del. Ch. Jan. 13, 2014) (“Delaware's law
with respect to LLCs, as this Court has repeatedly noted, is
explicitly contractarian.”). As a result, “[c]lear and unambiguous
language . . . should be given its ordinary and usual meaning.”
Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del.
2006)(citing Rhone-Poulenc Basic Chemicals Co. v. Am. Motorists
Ins. Co., 616 A.2d 1192, 1195 (Del. 1992)). As explained by the
Delaware Supreme Court, “a contract is ambiguous only when the
provisions in controversy are reasonably or fairly susceptible of
different

interpretations

or

may

have

two

or

more

different

meanings.” Id.
The

motion

to

dismiss

Count

I

is

based

on

Defendant’s

contention that, according to the terms of the Operating Agreement,
the breach alleged is with BCZ and therefore Plaintiffs must look
to BCZ for any money claimed to be due. Plaintiffs’ first argument
against the motion is to point out that Defendant answered the
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same claim in the original complaint and so that he cannot now
move to dismiss it. In addition, they rely on Kuroda v. SPJS
Holdings, L.L.C., 971 A.2d 872, 882–83 (Del. Ch. 2009) for the
proposition that explicit liability carve-out provisions do not
unambiguously preclude LLC members from all liability, and thus
LLC members may sue other members for some alleged breaches of
operating agreements.
Defendant, in response, argues that Plaintiffs have cited
specific paragraphs from the Operating Agreement that show their
complaint is with BCZ rather than him. Batterson further argues
that, although that a member may sue another member for breach of
an operating agreement, under the facts alleged in the amended
complaint there is no basis for liability.
However,

Plaintiffs

have

plainly

alleged

that

Defendant

breached the Operating Agreement in a multitude of ways: (1) by
having the Operating Agreement amended without their approval to
eliminate them as Manager-Members; (2) by withdrawing money from
BCZ without their agreement or knowledge; and (3) by admitting new
Members without their approval, which then reduced their ownership
interests.
In Kuroda, the Delaware Chancery Court held that on a motion
to dismiss, if a provision alleged to have been violated by a
member and that member is not specifically exculpated under another
provision of the agreement, a question of fact exists as to whether
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a member can be held liable to another member for an alleged
breach. 971 A.2d at 883 (“Given the ambiguity in [the relevant
provisions],

I

am

unable

to

conclude

that

defendants'

interpretation—that the managing members cannot, as a matter of
law, be liable for breach of the provisions of the LLC Agreement—
is the only reasonable interpretation of the LLC Agreement.”).
The

BCZ

Operating

Agreement

does

contain

an

exculpatory

provision in Section 6.7 which limits liability of a managing
principal such as Defendant to any member of the LLC for acts
performed or failure to perform for acts “within the scope of
authority conferred on such Managing Principal” unless such acts
or omissions constitute “willful misconduct or gross negligence.”
(Agreement at 28.) However, the acts complained of by Plaintiffs
in Count I are acts arguably not within the scope of authority
conferred on Defendant by the Operating Agreement. Under the BCZ
Operating Agreement a managing partner may not be removed without
his agreement and a Manager may not withdraw money from BCZ without
authority of the Board of Managers. (Agreement at 23; Am. Compl.
¶ 11.) Since these acts are arguably outside the protection of the
exculpatory provision, they could be determined to be ultra vires
as well as constitute willful misconduct or gross negligence. The
forgoing allegations therefore raise questions of fact as to
whether the Defendant breached the Operating Agreement. The motion
to dismiss Count I is denied.
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B. The Contractual Interference – Count II
In Count II of the amended complaint, Plaintiffs allege that
Defendant tortuously interfered with their contractual relations
with BCZ by “prevent[ing] Cross and Zakin from receiving their
respective
proceeds

ownership

that

Cleversafe

Cross

and
and

transaction.”

financial
Zakin
(Am.

interests

should
Compl.

have
¶

in

BCZ

received

39.)

In

and

the

from

the

other

words,

Plaintiffs allege that Batterson’s interference caused Cross and
Zakin harm by preventing them from receiving funds owned to them
by BCZ. Defendant’s motion to dismiss this count is based on his
contention that, as a matter of law, a party cannot tortuously
interfere under his own contract. He cites Anthony v. Bickley,
2014 WL 3943687 (Del. Sup. Ct. Aug. 8, 2014), aff’d., 113 A.3d
1080 (Del. 2015) in support. Plaintiffs apparently do not dispute
this proposition, because they attempt to differentiate in their
brief in opposition between the claim that Defendant’s misconduct
interfered with their rights under the Operating Agreement and
emphasize instead that Defendant’s misconduct interfered with the
contractual rights they possessed under the Promissory Notes they
received from BCZ. So, the argument goes, the rights interfered
were contractual-the rights between themselves and BCZ created by
the notes issued by BCZ. However, the amended complaint alleges
that

the

promissory

notes

and

their

obligations

were

issued

“pursuant to Section 5.5 of the BCZ Agreement,” so that Plaintiffs
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ultimately look to the Operating Agreement for the rights they
claimed were interfered by Defendant. (Am. Compl. ¶ 20.) Therefore,
the tort claim is essentially the same claim made in Count I. This
is another attempt by Plaintiffs to turn a business contractual
dispute into a tort. This attempt fails here for the same reasons
that the attempt did in the original complaint. See Batterson,
2017 WL 2798398, at *3–5. The motion to dismiss Count II is
granted.
IV. CONCLUSION
For the reasons stated herein, the Motion to Dismiss Count I,
Breach of Contract, is denied. The Motion to Dismiss Count II,
Tortious Interference with Contract, is granted.
IT IS SO ORDERED.

Harry D. Leinenweber, Judge
United States District Court
Dated: 1/8/2021

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