Sears Home Appliance Showrooms, LLC et al v. Charlotte Outlet Store, LLC et al
Filing
69
MEMORANDUM Opinion and Order Signed by the Honorable Young B. Kim on 6/21/2018. (ma,)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
SEARS HOME APPLIANCE
SHOWROOMS, LLC and SEARS
OUTLET STORES, LLC,
Plaintiffs/Counter-Defendants,
v.
CHARLOTTE OUTLET STORE, LLC,
et al.,
Defendants/Counter-Plaintiffs.
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No. 17 CV 8478
Magistrate Judge Young B. Kim
June 21, 2018
MEMORANDUM OPINION and ORDER
This diversity action stems from the breakdown of the parties’ franchise
relationship. Sears Home Appliance Showrooms, LLC (“SHAS”) and Sears Outlet
Stores, LLC (“Sears Outlet”) have sued Charlotte Outlet Store, LLC, Concord Outlet
Store, LLC, Greenville Outlet Store, LLC, Raleigh Outlet Store, LLC (collectively,
“Defendant LLCs”), Vadim Shlangman, and Aliaksandr Ivannikau alleging that
they breached franchise agreements allowing Defendants to operate four Sears
Outlet Stores in North Carolina and South Carolina.
Defendants filed 11
counterclaims alleging breach of contract and various forms of fraud. Before the
court are Plaintiffs’ Motion to Dismiss and to Strike Portions of Counterclaims,
(R. 35), and Defendants’ Motion to Amend Counterclaims Instanter, (R. 58).1 For
The parties have consented to this court’s jurisdiction pursuant to 28 U.S.C.
§ 636(c). (R. 19.)
1
the following reasons, Plaintiffs’ motion is granted and Defendants’ motion is denied
without prejudice:
Facts
The following facts are gleaned from Defendants’ counterclaims and are
taken as true for purposes of the current motion to dismiss. See Berger v. NCAA,
843 F.3d 285, 289-90 (7th Cir. 2016).
On January 22, 2015, Defendant LLCs
entered into Franchise Agreements and First Amendments to the Franchise
Agreements with SHAS to take over preexisting franchise stores in Concord,
Charlotte, and Raleigh, North Carolina and in Greenville, South Carolina. (R. 30,
Counterclaims ¶¶ 1, 4.)
Under the agreements, Defendants were to use the
franchised locations to sell home appliances, hardware, tools, and lawn and garden
equipment to be supplied exclusively by Plaintiffs.
(Id. ¶ 5.)
Shlangman and
Ivannikau signed a Guaranty and Assumption of Franchisee’s Obligations for each
of the four franchise agreements. (Id. ¶ 2.) Defendants took possession of the four
Sears Outlet franchise stores on February 15, 2015, at which time they retained
most of the employees who had been operating those stores before the parties signed
the Franchise Agreements. (Id. ¶ 4.)
Less than two weeks after Defendants took possession of the franchises,
Plaintiffs sent an outside auditor to perform a biannual inventory scan, which led to
a finding that a significant amount of inventory was missing from the Raleigh store.
(Id. ¶ 6.) Defendants discovered that the inventory had been stolen by some of the
employees they had retained when Defendant took over the franchise. (Id. ¶ 7.)
2
Plaintiffs knew about the employee theft problem at the Raleigh location but did not
disclose that information to Defendants before they executed the franchise
agreement for the Raleigh store. (Id. ¶¶ 8, 10.)
The Amended Franchise Agreements state that Plaintiffs will provide
Defendants with the consigned items necessary to maintain adequate inventory
levels in the ordinary course of business, but according to the counterclaims,
beginning in 2016 Plaintiffs regularly failed to provide sufficient inventory. (Id.
¶¶ 11, 13.) Specifically, the inventory deliveries did not meet Defendants’ needs or
requests, and often included off-season merchandise that was in an unsellable
condition. (Id. ¶¶ 14-16.) Because of the deficient inventory deliveries, Defendants
were unable to maintain store floor plans or meet customer demands and had
difficulty meeting company and consumer standards. (Id. ¶¶ 18, 23.)
Although their shipments to franchise-owned stores were deficient, Plaintiffs
supplied their own company-owned and operated stores above and beyond their
franchisees’ stores.
(Id. ¶ 20.)
Plaintiffs prioritized inventory deliveries to
company-owned stores without disclosing this preferential treatment to Defendants.
(Id. ¶ 21.)
Defendants notified Plaintiffs about their concerns regarding the insufficient
inventory shipments on an on-going basis beginning in late 2016. (Id. ¶ 24.) Sears
Outlet often responded by blaming SHAS for the inadequate deliveries and by
promising that SHAS would fix the problems.
(Id. ¶ 25.)
After Defendants
attempted several times to raise their concerns, Plaintiffs sent a notice of default to
3
Defendants on June 14, 2017.
(Id. ¶¶ 38-39.)
After unsuccessful attempts at
mediation and negotiation, on November 12, 2017, Defendants announced that they
were terminating all four Franchise Agreements and returning all assets to
Plaintiffs. (Id. ¶¶ 41-43.) Three days later, Plaintiffs issued notices of default and
termination of Franchise Agreements for all four franchise locations. (Id. ¶ 44.)
Plaintiffs filed this lawsuit shortly thereafter and on January 15, 2018, Defendants
filed the current counterclaims.
Analysis
A.
Motion to Dismiss Counterclaims
In reviewing a motion to dismiss the court takes all of the well-pleaded facts
as true and views them in the light most favorable to the pleading party. See
Berger, 843 F.3d at 289-90. To survive a motion to dismiss under Rule 12(b)(6), the
claims—or in this case, counterclaims—“must contain sufficient factual matter,
accepted as true, to state a claim to relief that is plausible on its face.” See id. at
290 (quotations and citations omitted). Although “detailed factual allegations” are
not required, the pleading party must do more than rest on “labels and conclusions”
or a “formulaic recitation of the elements of a cause of action.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007). That standard is higher with respect to fraud
claims, which demand “pleading with particularity the circumstances constituting
fraud,” see Fed. R. Civ. P. 9(b), meaning the allegations “must describe the who,
what, when, where, and how of the fraud,” United States ex rel. Presser v. Acacia
Mental Health Clinic, LLC, 836 F.3d 770, 776 (7th Cir. 2016) (quotation and citation
4
omitted). That heightened standard is designed to require a plaintiff to engage in a
careful pretrial investigation, to prevent irresponsible allegations of fraud from
being lodged simply to cast blame after suffering a loss, and to allow a defendant to
respond quickly to groundless claims of fraud that might cause reputational harm
during the litigation process. See id. On the other side of that pleading coin, a
party may plead itself out of court by alleging facts demonstrating that it has no
legal claim. See Atkins v. City of Chi., 631 F.3d 823, 832 (7th Cir. 2011).
As a general rule the court is limited at the motion to dismiss stage to
considering the four corners of the complaint, but an exception exists for
“documents that are critical to the complaint and referred to in it.” Geinosky v. City
of Chi., 675 F.3d 743, 745 n.1 (7th Cir. 2012). Here the Franchise Agreements are
referred to throughout Defendants’ counterclaims and were filed under seal by
Plaintiffs after a protective order was put in place.2 (R. 66.) Because they are
central to the counterclaims, the court may consider the Franchise Agreements
without converting the motion to dismiss into a motion for summary judgment. See
id.; Williamson v. Curran, 714 F.3d 432, 435-36 (7th Cir. 2013).
1.
Breach of Contract Claims (Counts I-IV)
Plaintiffs seek to dismiss counterclaims one through four, which allege that
Plaintiffs breached each of the Franchise Agreements by failing to satisfy inventory
In their complaint Plaintiffs referred to the Franchise Agreements as “exhibits” to
the complaint even though they waited to file the exhibits until after the protective
order was in place. (R. 1, Compl. ¶ 13 n.1.) Under Rule 10(c), “[a] copy of a written
instrument that is an exhibit to a pleading is a part of the pleading for all
purposes.”
2
5
orders or to “provide sellable inventory or supply inventory in a manner that
allowed Defendants to maintain adequate inventory levels.” (R. 30, Counterclaims
¶¶ 51, 58, 65, 72.) Plaintiffs argue that all four counterclaims should be dismissed
with respect to Sears Outlet and the individual Defendants because none of them
are parties to the Franchise Agreements. They further argue that the Franchise
Agreements’ contractual one-year limitations period precludes any claims based on
alleged breaches that took place before January 15, 2017, one year before the date
on which Defendants filed their counterclaims.
In response to the motion to dismiss, Defendants concede that Shlangman
and Ivannikau are not proper counterplaintiffs with respect to the breach of
contract claims, but argue that Sears Outlet is a proper defendant despite not being
a party to the Franchise Agreements. (R. 43, Defs.’ Resp. at 1 n.1, 6.) In support of
that argument, they point to the doctrine of apparent authority. Under Illinois
law—which the parties agree governs the breach of contract claims under the
Franchise Agreements’ choice-of-law provisions—an agent may bind its principal
where “(1) the principal consents to or knowingly acquiesces in the agent’s conduct,
(2) the third party has a reasonable belief that the agent possesses authority to act
on the principal’s behalf, and (3) the third party relied to his detriment on the
agent’s apparent authority.” Bethany Pharmacal Co., Inc. v. QVC, Inc., 241 F.3d
854, 859 (7th Cir. 2001). According to Defendants, Sears Outlet is liable for breach
of contract as an agent of SHAS because the Franchise Agreements’ amendments
state that:
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we [SHAS] or our affiliates shall provide you with all necessary
amounts of Consigned Items so that your store is fully stocked on the
day you take over control of the Store and open for business.
Thereafter, we shall provide you with Consigned Items as necessary
for you to maintain adequate inventory levels of all Consigned Items in
the ordinary course of business.
(R. 66, Ex. A, Franchise Agreement (“F.A.”) § 5.C.5.) In other words, Defendants
argue that because the Franchise Agreements’ amendments reference SHAS’s
“affiliates,” Sears Outlet is liable for breach of contract based on failure to provide
adequate inventory.
Defendants’ argument fails for several reasons.
First, the fact that the
Franchise Agreements reference SHAS affiliates in connection with inventory
obligations does not make those affiliates parties to the agreements. See Northbund
Grp., Inc. v. Norvax, Inc., 795 F.3d 647, 650 (7th Cir. 2015) (“The core principle of
corporate law is that a corporation is a distinct legal entity, separate from its …
affiliated corporations, so that the obligations of a corporation are not shared by
affiliates.”). Second, it is “a basic principle of contract law” that a contract is not
binding upon a non-party to the agreement. Carter v. SSC Odin Operating Co.,
LLC, 2012 IL 113204 ¶ 30.
Third, Defendants’ agency theory gets things
backwards. Under Illinois’s agency doctrine, an apparent agent can enter into an
agreement that is binding on its principal where the principal creates the
appearance of authority in the agent. Sphere Drake Ins. Ltd. v. Am. Gen. Life Ins.
Co., 376 F.3d 664, 673 (7th Cir. 2004). But here, SHAS entered into the Franchise
Agreements on its own behalf, not on behalf of Sears Outlet, and Defendants point
to no language suggesting that the agreements are binding on any of SHAS’s
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affiliates simply because a provision of the amendments to those agreements
references unnamed affiliates. Nor have they alleged that SHAS was authorized or
apparently authorized to bind any of its affiliates in contracting with Defendants.
See Bethany Pharmacal, 241 F.3d at 859. For all of these reasons, neither the
individual Defendants nor Sears Outlet is a proper party to the breach of contract
counterclaims.
Moving to the contractual limitations period, the Franchise Agreements
specify that:
You [the Franchisee] agree that no cause of action arising out of or
under this Agreement may be maintained by you against us unless
brought before the expiration of one year after the act, transaction or
occurrence upon which such action is based or the expiration of one
year after you become aware of the facts or circumstances reasonably
indicating that you may have a claim against [SHAS] hereunder,
whichever occurs sooner, and that any action not brought within this
period shall be barred as a claim, counterclaim, defense, or set-off.
(R. 66, Ex. A, F.A. § 19.H.) According to Plaintiffs, this limitations provision bars
any breach of contract claim based on occurrences that took place before January
15, 2017, which is one year before Defendants filed their counterclaims.
In
response, Defendants argue that this limitations provision is unenforceable as a
matter of law because, according to them, a contractual provision that shortens an
otherwise statutory limitations period of 10 years under Illinois law to only 1 year
“is per se unreasonable.” (R. 43, Defs.’ Resp. at 7.) In support Defendants point to a
Massachusetts decision asserting that an agreement to shorten a limitations period
is impermissible under Massachusetts law “unless ‘the agreed upon limitations
period is subject to negotiation by the parties.’”
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(Id. at 8 (emphasis omitted)
(quoting Creative Playthings Franchising Corp. v. Reiser, 978 N.E.2d 765, 766
(Mass 2012)).) Although Defendants assert that “[t]here is no reason to believe
courts in Illinois would diverge from the Massachusetts ruling,” they cite no Illinois
cases discussing the negotiation requirement and develop no argument as to why
they believe Illinois would follow Massachusetts’s ruling.
In fact, under Illinois law, “[t]he parties to a contract may agree to a
shortened contractual limitation period to replace a statute of limitations, so long as
it is reasonable.” Country Preferred Ins. Co. v. Whitehead, 2012 IL 113365, ¶ 29.
Courts applying Illinois law have enforced one-year contractual limitations periods.
See, e.g., Sweiss v. Founders Ins. Co., 2017 IL App (1st) 163157, ¶¶ 59, 62; Stephan
v. Goldinger, 325 F.3d 874, 877 (7th Cir. 2003) (“One year . . . is not an
unreasonably short time for bringing a suit.”); Medrano v. Production Eng’g Co., 774
N.E.2d 371, 375-76 (Ill. App. Ct. 2002); Taylor v. W. & S. Life Ins. Co., 966 F.2d
1188, 1206 (7th Cir. 1992) (finding six-month contractual limitations period
enforceable under Illinois law); Vill. of Lake in the Hills v. Ill. Emcasco Ins. Co., 506
N.E.2d 681, 684 (Ill. App. Ct. 1987); Florsheim v. Travelers Indem. Co. of Ill., 393
N.E.2d 1223, 1228 (Ill. App. Ct. 1977).
Because they have not developed any
argument as to why the one-year limitations period otherwise applicable here is
unreasonable, Defendants have not shown that the provision is unenforceable as a
matter of law.
That said, generally the resolution of a limitations defense comes after the
complaint stage because a complaint “need not anticipate defenses.”
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See Barry
Aviation, Inc. v. Land O’Lakes Mun. Airport Comm’n, 377 F.3d 682, 688 (7th Cir.
2004).
But where a litigant pleads facts demonstrating that the applicable
limitations period has expired, the court may resolve the issue on a motion to
dismiss. Id. Here, Defendants allege that they were aware of the inventory supply
problems that allegedly violated the Franchise Agreements “beginning in late
2016,” which is more than a year before they filed their counterclaims. (R. 30,
Counterclaims ¶ 24.) A breach of contract claim accrues when the breach takes
place, and when a contract contemplates on-going obligations, the limitations period
may begin to run against independent breaches when they occur. See Hassebrock v.
Ceja Corp., 2015 IL App. (5th) 140037, ¶ 35. By claiming that some of the alleged
breaches took place more than a year before they brought their counterclaims,
Defendants may have pleaded themselves out of court on at least those breaches
that pre-date January 15, 2017. See Barry, 377 F.3d at 688.
Perhaps recognizing their vulnerability on the grounds of the contractual
limitations period, Defendants also argue that Plaintiffs should be estopped from
asserting the limitations period, pointing to their allegations that “Sears Outlet
often responded [to inventory shortage issues] by diverting the blame to SHAS and
provided Defendants with false promises that SHAS would fix the problem soon or
that they would find new vendors.” (R. 43, Defs.’ Resp. at 8; R. 30, Counterclaims ¶
25.) Under Illinois law, “[a] party whose conduct has caused another to delay filing
suit until after the limitations period has run may be estopped from asserting the
statute of limitations as a bar to the action.”
10
Weatherly v. Ill. Human Rights
Comm’n, 788 N.E.2d 1175, 1181 (Ill. App. Ct. 2003). To support an assertion of
equitable estoppel, Defendants must plausibly allege that Plaintiffs misrepresented
or concealed material facts and that Defendants reasonably relied on those
misrepresentations or omissions in delaying filing their claims. See Sweiss, 2017 IL
App (1st) 163157 ¶¶ 50-51. Although estoppel is ordinarily an issue for the trier of
fact, dismissal is appropriate where the claim states no facts consistent with
estoppel. See Vill. of Lake in the Hills, 506 N.E.2d at 683.
Defendants’ current allegations are insufficient to support their assertion of
estoppel with respect to the one-year contractual limitations period. Defendants
allege only that Sears Outlet, not SHAS, lulled them into complacency by providing
illusory promises that SHAS would fix the inventory problems. (R. 43, Defs.’ Resp.
at 8.)
But as explained above, Sears Outlet is not a party to the Franchise
Agreements, and therefore it is not a party asserting its rights under the
contractual limitations period.
There are no allegations that SHAS made any
representations that led Defendants to delay filing suit, and Defendants point to no
cases suggesting that SHAS can be estopped from asserting the contractual
limitations period based on representations made by a non-party to the contract.
Moreover, Defendants allege that they relied on promises that the inventory
problems could be worked out without resorting to a lawsuit.
But the “mere
pendency of negotiations” to arrive at an extra-judicial resolution does not support
an estoppel assertion. See Sweiss, 2017 IL App (1st) 163157 ¶ 52; see also Barry,
377 F.3d at 689 (noting that equitable estoppel requires more than a defendant’s
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denial of liability). Instead, Defendants must allege that SHAS misrepresented or
concealed material facts in a way that prevented Defendants from filing suit in a
timely manner. See Sweiss, 2017 IL App (1st) 163157 ¶ 52. Such allegations are
absent here, and accordingly the counterclaims do not support Defendants’
assertion of equitable estoppel. See Smith v. Union Pac. R.R. Co., 474 Fed. Appx.
478, 480-81 (7th Cir. 2012) (noting that district court correctly determined equitable
estoppel inapplicable where plaintiff did not plead in complaint that defendant
deceived him).
For these reasons, Plaintiffs’ motion to dismiss counts one through four of the
counterclaims is granted. The breach of contract counterclaims are dismissed with
prejudice to the extent that they are brought against Sears Outlet or by the
individual Defendants. The motion is granted without prejudice with respect to the
breach of contract counterclaims against SHAS. Defendants may amend counts one
through four to the extent that their claims against SHAS accrued within the
applicable one-year limitations period or to include allegations sufficient to support
an assertion of equitable estoppel against SHAS.
2.
Breach of Covenant of Good Faith Claim (Count V)
Count five of Defendants’ counterclaims purports to bring a claim for breach
of the implied covenant of good faith and fair dealing. (R. 30, Counterclaims ¶¶ 7581.) As Plaintiffs correctly point out, in Illinois the implied covenant of good faith
and fair dealing does not support a separate cause of action, but rather is a
guideline for the construction of contracts.
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See Brooklyn Bagel Boys, Inc. v.
Earthgrains Refrigerated Dough Prods., Inc., 212 F.3d 373, 381 (7th Cir. 2000).
Defendants concede as much, stating in their response that they “will re-plead”
their breach of contract claims to incorporate their allegations with respect to the
implied covenant of good faith and fair dealing. Accordingly, Plaintiffs’ motion to
dismiss count five of the counterclaims is granted with prejudice.
3.
Fraud Claims (Counts VI, VII, X & XI)
Plaintiffs move to dismiss all four of Defendants’ fraud counterclaims, which
arise under the Illinois Consumer Fraud and Deceptive Business Practice Act
(“ICFA”), 815 ILCS 505/2, Illinois common law, the North Carolina Unfair &
Deceptive Trade Practice Act, and the South Carolina Unfair Trade Practices Act,
respectively.
Although Plaintiffs make specific arguments targeted at those
individual claims, they also argue globally that all four fraud claims fail to state a
claim because, according to them, they are precluded by the Franchise Agreements’
“no reliance” clause. They also argue globally that Defendants failed to plead any of
the fraud claims with the requisite particularity. The court will address the global
fraud arguments before turning, where necessary, to the more specific arguments
based on the individual fraud statutes.
Starting with the “no reliance” clause argument, Plaintiffs argue that
language in the Franchise Agreements precludes them from bringing fraud claims
based on misrepresentations or omissions that induced them to enter those
agreements. Specifically, they point to language in which Defendants agreed that:
My decision to purchase the franchise has not been influenced by any
oral representations, assurances, warranties, guarantees or promises
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whatsoever made by the Franchisor . . . [and that I am not] not relying
on any statements, promises, representations, promises or assurances
that are not specifically set forth in the Franchise Disclosure
Document.
Plaintiffs attribute this language to “Franchise Agreements, Representations and
Acknowledge Statement,” but provide no pin cite, and it is not clear where in the
exhibits the language can be found.3 (R. 36, Pls.’ Mem. at 8.) Plaintiffs also point to
a clause that states:
[T]he recitals and exhibits to this Agreement are part of this
Agreement, which together with the Operations Manual and our
System Standards and any riders or addenda signed simultaneously
with this Agreement, constitute our and your entire agreement, and
supersede any and all prior agreements concerning its subject matter.
There are no oral or other written understandings, representations, or
agreements between you and us relating to the subject matter of this
Agreement.
We do not authorize and are not bound by any
representation of any nature other than those expressed in this
Agreement.
(R. 66, Ex. A, F.A. § 17.A.) According to Plaintiffs, these “unambiguous integration
and non-reliance clauses” prevent any claim that Defendants justifiably relied on
any misrepresentations they made outside of the Franchise Agreements. (R. 36,
Pls.’ Mem. at 8-9.) Neither side challenges the enforceability of these clauses.
To the extent Plaintiffs rely on Section 17.A of the Franchise Agreements,
because that section “contains no reference to reliance,” it is more accurately
defined as an integration clause rather than a no-reliance clause. See Vigortone AG
Prods., Inc. v. PM AG Prods., Inc., 316 F.3d 641, 645 (7th Cir. 2002).
“[T]he
presence of an integration clause in the agreement does not bar the plaintiffs’
The “Acknowledgments” section of the Franchise Agreements conveys similar
language, but not the exact language Plaintiffs quote. (R. 66, Ex. A, F.A. § 24.)
3
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actions for fraud.” W.W. Vincent & Co. v. First Colony Life Ins. Co., 814 N.E.2d 960,
968 (Ill. App. Ct. 2004); see also Extra Equipamentos E Exportacao Ltda. v. Case
Corp., 541 F.3d 719, 723 (7th Cir. 2008) (noting that most courts hold that an
integration clause does not prevent “a disappointed party to the contract from
basing a tort suit on proof that in the course of the negotiations the other party
made fraudulent representations”). That is because integration clauses are meant
to prevent a party from pointing to the parol evidence rule to argue that some
agreement the contracting parties reached during negotiations should be read into
the written contract. See Vigortone, 316 F.3d at 644. But the parol evidence rule
does not apply to fraud claims because fraud is a product of tort law rather than
contract law. Id. Because “an integration clause does not bar a claim of fraud
based on statements not contained in the contract,” id., Section 17.A of the
Franchise Agreements cannot bar Defendants’ fraud claims.
Assuming arguendo that the quoted language from the “Representations and
Acknowledge Statement” appears in the Franchise Agreements, according to
Plaintiffs that language states that Defendants did not rely on any statements
made outside the written agreement, and therefore qualifies as a “no-reliance
clause.” Because justifiable reliance is an element of any fraud claim, parties to a
contract may “head off the possibility of a fraud suit” by incorporating a no-reliance
clause into their written contract, “stating that neither party has relied on any
representations made by the other.” Vigortone, 316 F.3d at 644. But while a noreliance clause may effectively ward off a fraudulent misrepresentation claim,
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Illinois courts have suggested that a no-reliance clause will not bar a fraudulent
concealment claim unless the clause specifically references omissions. See Walls v.
Vre Chi. Eleven, LLC, No. 16 CV 4048, 2016 WL 5477554, at *3 (N.D. Ill. Sept. 29,
2016) (and cases cited therein). That is because “the reliance element for a claim of
fraudulent concealment means reliance on the defendant’s silence.” Id. Because
the clause Plaintiffs quote here refers only to “oral representations, assurances,
warranties, guarantees or promises,” and not omissions, the no-reliance clause does
not preclude Defendants’ fraud counterclaims to the extent they are based on
fraudulent concealment. See id.
Turning to Plaintiffs’ second argument as to all four of the fraud
counterclaims, they argue that Defendants failed to meet Rule 9(b)’s heightened
standards for pleading fraud.
As noted above, that standard has often been
described as requiring allegations regarding “the who, what, when, where, and how
of the fraud.” Presser, 836 F.3d at 776 (internal quotation and citation omitted).
“To state a claim for fraudulent misrepresentation a plaintiff must allege: (1) a false
statement of material fact; (2) known or believed to be false by the party making it;
(3) an intent to induce the plaintiff to act; (4) action by the plaintiff in justifiable
reliance upon the truth of the statement; and (5) damage to the plaintiff resulting
from such reliance.”
Toulon v. Cont’l Cas. Co., 877 F.3d 725, 734 (7th Cir. 2017)
(quotation and citation omitted).
To the extent that Defendants’ fraud claims assert that SHAS and Sears
Outlet engaged in fraudulent misrepresentation, the allegations fall well short of
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the Rule 9(b) standard.
In each of the fraud claims, Defendants assert that
Plaintiffs “made material misrepresentations” or that they entered into the
Franchise Agreements “based on representations made by the plaintiffs.” (R. 30,
Counterclaims ¶¶ 87, 93, 125, 133.)
But they do not identify what those
misrepresentations were, how they were false, or why Defendants’ reliance on those
misrepresentations was justifiable. See Toulon, 877 F.3d at 734. Accordingly, their
claims for fraudulent misrepresentation are insufficient to survive the motion to
dismiss.
Defendants argue that their fraud claims rest not just on misrepresentations
but also on Plaintiffs’ alleged concealment of material facts. Where a party alleges
fraudulent concealment, it must allege that the defendant concealed a material fact
despite having a duty to disclose the fact to the plaintiff. Toulon, 877 F.3d at 737.
Although Rule 9(b) requires pleading with particularity, there is no precise
formulation for pleading fraud and the amount of detail required varies with the
circumstances of each case. Presser, 836 F.3d at 776.
Defendants assert that their fraud claims are based on Plaintiffs’ failure to
disclose the inventory issues at the Raleigh store or their intent to prioritize
company-owned stores for inventory deliveries over franchised stores.
But as
Plaintiffs point out, those allegations assert only that “it would be impractical to
believe Plaintiffs were unaware of the issue” at the Raleigh store before they
entered the Franchise Agreements.
(R. 30, Counterclaims ¶ 95.)
That kind of
speculation is insufficient to meet the fraud standard, which is designed to require a
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pleading party to conduct a reasonable investigation before lodging fraud claims.
See Presser, 836 F.3d at 776. Elsewhere Defendants assert “[o]n information and
belief, this conduct was occurring at the Raleigh Outlet Store location, and was
known by Plaintiffs, prior to Defendants’ purchase of the Raleigh Outlet Store
franchise.”
(R. 30, Counterclaims ¶ 8.)
The Seventh Circuit has held that “a
plaintiff generally cannot satisfy the particularity requirement of Rule 9(b) with a
complaint that is filed on information and belief.” Pirelli Armstrong Tire Corp.
Retiree Med. Benefits Tr. v. Walgreen Co., 631 F.3d 436, 442-43 (7th Cir. 2011).
Defendants also allege that Plaintiffs omitted material facts about their
“ability and intent to provide Defendants with adequate inventory,” and that
Defendants relied on those omissions to their detriment. (R. 30, Counterclaims
¶¶ 87-88.) But it is unclear from the counterclaims what the referenced intent was
and how that intent was inconsistent with the Franchise Agreements’ language
stating that SHAS would ship inventory “based on our inventory stocking plan as
we may periodically revise it.” (Id. ¶ 12.)
In response to the motion to dismiss, Defendants assert that to the extent
that their first attempt at pleading their fraud counterclaims falls short of Rule
9(b)’s requirements, they will amend those claims.
(R. 43, Defs.’ Resp. at 9.)
Accordingly, the common law fraud counterclaim (count seven) is dismissed without
prejudice to allow Defendants a chance to re-plead it with the particularity required
by Rule 9(b). Turning to the arguments specific to the statutory fraud claims, there
18
are additional shortcomings with those claims beyond the pleading requirements, as
described below.
a.
ICFA Claim (Count VI)
Plaintiffs seek dismissal of the counterclaim Defendants bring under the
ICFA, which prohibits unfair or deceptive business practices including the
“suppression or omission of any material fact, with intent that others rely upon” the
omission. See 815 ILCS 505/2. The heightened pleading standards under Rule 9(b)
apply to ICFA claims, meaning that the counterclaim must allege “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.” Haught v. Motorola Mobility, Inc., No. 12 CV 2515,
2012 WL 3643831, at *2 (N.D. Ill. Aug. 23, 2012).
According to Defendants’
counterclaim, Plaintiffs violated the ICFA by failing to disclose to Defendants that
the Raleigh store experienced problems with missing inventory before executing the
Franchise Agreements, and by misrepresenting their “ability and intent to provide
Defendants with adequate inventory.” (R. 30, Counterclaims ¶¶ 84, 87.) Plaintiffs
argue that Defendants have not stated a claim under the ICFA because their
allegations demonstrate that the relevant transactions took place primarily in
North and South Carolina, not in Illinois. Defendants have not responded in any
meaningful way to this argument. (R. 43, Defs.’ Resp. at 12-13.)
In Avery v. State Farm Mutual Automobile Insurance Company, 216 Ill.2d
100, 185 (2005), the Illinois Supreme Court determined that “the General Assembly
19
did not intend the Consumer Fraud Act to apply to fraudulent transactions which
take place outside Illinois.”
Accordingly, it held that “a plaintiff may pursue a
private cause of action under the [ICFA] if the circumstances that relate to the
disputed transaction occur primarily and substantially in Illinois.” Id. at 187. As
the Seventh Circuit has recognized, “[t]hat’s a fuzzy standard,” Morrison v. YTB
Int’l, Inc., 649 F.3d 533, 536 (7th Cir. 2011), that leads to “a highly fact-bound
inquiry in which no single factor would be dispositive,” Crichton v. Golden Rule Ins.
Co., 576 F.3d 392, 396 (7th Cir. 2009). The location of the defendant’s headquarters
and a choice-of-law provision designating Illinois law as controlling are both factors
to be considered in locating the transaction’s center of gravity, but neither is
dispositive. See Haught, 2012 WL 3643831, at *4. Courts also look to factors such
as where the plaintiff resides, where relevant services were rendered, where the
items subject to the disputed transaction are located, where the contracts were
signed, where allegedly deceptive statements or omissions were made, where
payments were received, and where complaints about services were to be lodged.
See id. at *3. Despite the fact-intensive nature of this inquiry, courts will dismiss
an ICFA claim where the allegations demonstrate that “the circumstances of the
alleged fraudulent activity did not occur primarily and substantially in Illinois.”
See Crichton, 576 F.3d at 397 (internal quotation marks omitted).
Although SHAS is located in Illinois and the Franchise Agreements include
an Illinois choice-of-law provision, the rest of the allegations suggest that the
relevant activity relating to the ICFA counterclaim took place primarily in North
20
and South Carolina. Defendant LLCs are North and South Carolina LLCs with
their principal places of business in those states. (R. 30, Defs.’ Ans. ¶¶ 3-6.) The
franchise stores are located in those states.
(Id. ¶ 12.)
The alleged inventory
shrinkage issue took place at the store located in Raleigh, North Carolina. (Id.
Counterclaims ¶¶ 7-10.) The alleged inadequate inventory deliveries were made to
the North and South Carolina stores.
Defendants
bring
these
(Id. ¶ 14.)
counterclaims
based
Because the non-resident
on
“allegedly
fraudulent
representations that were devised in Illinois and received outside of the state,” and
because the center of the transactions Defendants complain of played out in North
and South Carolina, they have “failed to allege that the conduct at issue here
occurred ‘primarily and substantially’ in Illinois.” Haught, 2012 WL 3643831, at *5;
Crichton, 576 F.3d at 397. Especially considering Defendants’ silence on the issue
in response to Plaintiffs’ motion to dismiss, that motion is granted with respect to
the ICFA claim. Dismissal of count six is without prejudice to Defendants refiling
the claim if they can plausibly allege that the conduct at issue here took place
primarily and substantially in Illinois.
b.
Fraud Claims Under North Carolina and South Carolina
Law (Counts X & XI)
Plaintiffs also argue that counterclaims ten and eleven should be dismissed
with prejudice because fraud claims under North Carolina and South Carolina law
are precluded by the Franchise Agreements’ choice-of-law provision, which states
that “all claims arising from the relationship between us and you will be governed
by the laws of the State of Illinois.”
(R. 66, Ex. A, F.A. § 19.D.)
21
In response,
Defendants do not argue that the choice-of-law provision is invalid, but rather
assert without explanation that the provision “does not override statutory
protection granted by the states where the franchisees reside.” (R. 43, Defs.’ Resp.
at 14.) The cases they cite for that proposition do not support the assertion, and
Defendants point to no authority for their argument that the “public policy any
state has in protecting its residents from fraud” should prevent the application of
the parties’ contractual choice-of-law provision. (Id. (emphasis in original).) On the
contrary, “[t]he fact that a different state may provide certain statutory rights for a
plaintiff which are not available under the chosen state’s law does not invalidate a
choice-of-law provision as contrary to public policy.” WTM, Inc. v. Henneck, 125 F.
Supp. 2d 864, 868 (N.D. Ill. 2000). Because the applicable choice-of-law language
here makes clear that Illinois law will govern not just contractual claims, but all
claims related to the parties’ relationship, Defendants are precluded from pursuing
their fraud claims under North Carolina and South Carolina law.
See Facility
Wizard Software, Inc. v. S.E. Tech. Servs., LLC, 647 F. Supp. 2d 938, 945 (N.D. Ill.
2009) (dismissing North Carolina statutory fraud claims where contractual choiceof-law provision made Illinois law controlling). Accordingly, Plaintiffs’ motion to
dismiss counts ten and eleven is granted with prejudice.
4.
UCC Claim (Count VII)
Plaintiffs also seek to dismiss Defendants’ counterclaim brought under two
sections of Article 2 of the Illinois UCC. Defendants allege that Plaintiffs violated
Section 2-306, which imposes on the seller an obligation “to use best efforts to
22
supply the goods,” and Section 2-609, which states that “[a] contract for sale
imposes an obligation on each party that the other’s expectation of receiving due
performance will not be impaired.”
810 ILCS 5/2-306, 5/2-609.
(R. 30,
Counterclaims ¶¶ 106-09.) Plaintiffs argue that Defendants have failed to state a
claim under Article 2 of the UCC because the parties have a consignment
relationship, and Article 2 only applies to the sale of goods, with a “sale” being
defined as “the passing of title from the seller to the buyer for a price.” See 810
ILCS 5/2-106(1). As Plaintiffs point out, the Franchise Agreements state that they
do not govern “a purchase and sale of the Merchandise,” and make clear that “[a]t
no time will [Defendants] acquire title to the Consigned Items.” (R. 66, Ex. A, F.A.
§§ 5.C.1-5.C.2.) More specifically, Defendant LLCs agreed that they “accept, and
will accept, possession of the Consigned Items, as consignee, but the Consigned
Items at all times will be under [SHAS’s] or [SHAS’s] affiliates’ ownership, direction
and control.” (Id. § 5.C.1.)
Article 2 of the UCC only governs contracts for the sale of goods, 810 ILCS
5/2-102, but whether a contract is for the sale of goods or the sale of services is
sometimes difficult to parse. In determining whether the UCC applies to a given
contract, Illinois courts apply the “predominant purpose” test, asking whether the
contract is predominantly for the sale of goods or services. See Belleville Toyota,
Inc. v. Toyota Motor Sales, U.S.A., Inc., 199 Ill.2d 325, 352 (2002); Geneva Int’l
Corp. v. Petrof, Spol, S.R.O., 680 F. Supp. 2d 993, 999 (N.D. Ill. 2009). “If the
contract’s predominant purpose, or ‘raison d’etre’ is the sale of goods, then it is
23
governed by Article 2.” Zayre Corp. v. S.M. & R. Co., Inc., 882 F.2d 1145, 1153-54
(7th Cir. 1989). How the contracting parties “choose to describe their transaction is
relevant in determining whether it is a contract for services or a sale of goods.” TDI
Global Solutions, Inc. v. PCTI Holdings, Inc., No. 14 CV 2455, 2016 WL 1213914, at
*2 (N.D. Ill. Mar. 29, 2016).
Although numerous jurisdictions have held that distributor and dealership
agreements are predominantly for the sale of goods, see Belleville Toyota, 199 Ill.2d
at 353 (and cases cited therein); see also Geneva Int’l, 680 F. Supp. 2d at 999, courts
applying the predominant purpose test have been less quick to find that Article 2
applies in the context of franchise agreements for retail store operations, see, e.g.,
DZ Bank AG Deutche Zentral-Genossenschaftsbank v. McCranie, No. 16-14773,
2018 WL 345045, at *9 (11th Cir. Jan. 10, 2018) (addressing franchise agreement
for insurance agency); Noble Roman’s v. Hattenhauer Distrib. Co., No. 1:14-cv-1734WTL-DML, 2015 WL 1526074, at *3 (S.D. Ind. Apr. 3, 2015); Rocky Mountain
Chocolate Factory, Inc. v. SDMS, Inc., No. 06-cv-01212-WYD-BNB, 2007 WL
4268962, at *5 (D. Colo. Nov. 30, 2007); Am. Casual Dining, LP v. Moe’s S.W. Grill,
LLC, 426 F. Supp. 2d 1356, 1369-70 (N.D. Ga. 2006). Those cases have scrutinized
the relevant franchise agreements and concluded that even though the agreements
contemplate the sale of goods, those sales are incidental to the contracting
relationship, which exists primarily for the purpose of granting franchise rights and
enabling the franchisee to set up and operate a store using the franchisor’s marks
and products.
24
A key difference between the distributorship cases and the franchise
agreement cases appears to be that a typical distribution agreement contemplates a
sale of goods between the parties, with the distributor gaining the right to resell the
products. See, e.g., WICO Corp. v. Willis Indus., 567 F. Supp. 352, 354-55 (N.D. Ill.
1983); Belleville Toyota, 199 Ill.2d at 353-54. For example, in Zayre, 882 F.2d at
1154, the Seventh Circuit concluded that Article 2 applied to an agreement
involving a store that became obliged to purchase jewelry from a company operating
a jewelry stand inside the store. Because the store had to purchase jewelry at a
markup and the plaintiff was seeking damages based on the store’s refusal to pay
for the jewelry, the court concluded that the parties’ contract was primarily for the
provision of goods rather than services. Id. But where the franchisor’s profits may
come from franchise fees and royalties rather than retail sales, non-sale aspects of
the agreement may be more likely to predominate. See, e.g., Noble Roman’s, 2015
WL 1526074, at *3; Am. Casual Dining, 426 F. Supp. 2d at 1370.
The court concludes that the predominant purpose of the Franchise
Agreements is for the parties to establish a set of business-related rights and
responsibilities with respect to Defendants’ operation of a set of branded stores.
Under those agreements, what SHAS granted to Defendant LLCs was a license and
franchise to use SHAS’s proprietary operating system and marks to operate a store.
(R. 66, Ex. A, F.A. § 1.A.) Obviously, the eventual sale of goods is one purpose of the
agreements, but under the structure of this franchise relationship Defendants
facilitate the sale of Sears affiliate-owned goods to third parties.
25
Although
Defendants gain possession of those goods before they are sold to customers, title
and control in the goods remains with SHAS until the sale is complete. (Id. § 5.C.1.)
Accordingly, no “sale of goods” takes place between the parties to the Franchise
Agreements. Supporting that view, the Franchise Agreements explicitly disavow
that they govern “a purchase and sale of the Merchandise.” (Id. § 5.C.1.) Moreover,
the main thrust of the Franchise Agreements is not about the nature or logistics of
sales of Sears affiliate-owned goods, but rather about Defendants’ use of Sears
trademarks and copyrights, their operation of the stores, their obligations around
insurance, record-keeping, and information systems, and the establishment of the
exchange of fees and payments. Although the Franchise Agreements contemplate
the eventual sale of goods, under the predominant purpose test, the court concludes
that the Franchise Agreements themselves are predominantly for the provision of
services. Accordingly, Article 2 of the UCC does not apply here and count eight
must be dismissed with prejudice.
5.
The Illinois Franchise Disclosure Act Claim (Count IX)
Finally, Plaintiffs seek to dismiss Defendants’ counterclaim under Section 15
of the Illinois Franchise Disclosure Act (“IFDA”), which provides remedies for
situations where “a franchisor has failed to demonstrate that adequate financial
arrangements have been made to fulfill obligations to provide . . . inventory.”4 815
ILCS 705/15.
Defendants allege that the Franchise Agreements violate that
In their motion to amend their counterclaims, Defendants seek to include an
allegation under Section 6 of the IFDA. That request is addressed in Section C
below.
4
26
provision because in Section 5.E they convey that Plaintiffs “do not guarantee that
the Merchandise or the Display Merchandise we (or our affiliates) send to you will
reflect the actual demand for Merchandise in your Store’s market area.” (R. 30,
Counterclaim ¶ 113 (quoting F.A. § 5.E).) Defendants allege that Plaintiffs violated
the IFDA because Section 5.E reflects an attempt “to remove their obligation to
provide adequate inventory.” (Id. ¶ 115.)
As Plaintiffs point out, “multiple courts have interpreted the IFDA to protect
Illinois residents only,” H.C. Duke & Son, LLC v. Prism Mktg. Corp., No. 4:11-cv04006-SLD-JAG, 2013 WL 5460209, at *8 (C.D. Ill. Sept. 30, 2013) (internal
quotation omitted) (collecting cases), even where the franchise agreement includes
an Illinois choice-of-law provision, see Cromeens, Holloman, Sibert, Inc. v. AB Volvo,
349 F.3d 376, 385 (7th Cir. 2003). That is because “by its own terms, the IFDA
applies only to franchises located within the State of Illinois.” Cromeens, 349 F.3d
at 385.
Although at least one court has questioned whether one specific IFDA
provision, Section 6, applies to franchises located extra-territorially, see, e.g., H.C.
Duke & Son, 2013 WL 5460209, at *9, Defendants offer no support for their
assertion that Section 15 covers their franchises despite their locations in North
Carolina and South Carolina. Accordingly, the motion to dismiss counterclaim nine
is granted with prejudice, subject to the IFDA discussion set forth in Section C
below.
27
B.
Motion to Strike Portions of Counterclaims
In addition to moving to dismiss the counterclaims, Plaintiffs ask this court
to strike Paragraphs 29 through 37 and 80 from the counterclaims as “immaterial
and scandalous.” (R. 36, Pls.’ Mem. at 14.) Specifically, they argue that allegations
stating that Plaintiffs failed to pay timely commissions and miscalculated backcommissions, and allegations that that they mismanaged the brand by suspending
the franchising of new stores are all immaterial and lacking in any pertinent
background information.
(Id. at 14-15.)
Rule 12(f) allows a court to strike a
pleading that is “redundant, immaterial, impertinent, or scandalous.” But motions
to strike generally are disfavored in this district, see Krukowski v. Aetna Health of
Ill., Inc., No. 10 CV 5282, 2012 WL 88215, at *3 (N.D. Ill. Jan. 11, 2012), and “courts
will strike portions of a complaint only if the challenged allegations are so unrelated
to the present claim as to be void of merit and unworthy of consideration,” WTM,
125 F. Supp. 2d at 870.
Despite Plaintiffs’ conclusory labels for the relevant
paragraphs, there is nothing prejudicial or obviously scandalous about the
allegations, and they provide (perhaps somewhat tangential) context for
Defendants’ perspective on the breakdown of the parties’ franchise relationships.
Accordingly, the motion to strike is denied.
C.
Motion to Amend Counterclaims Instanter
Five days after Defendants filed their response to the current motion to
dismiss, they filed a motion to correct the record, asking the court for leave to
amend their IFDA counterclaim to include an allegation under Section 6 of the
28
IFDA, 815 ILCS 705/6. (R. 44.) The court granted the motion to the extent that it
gave Defendants leave to file a motion to amend their counterclaims while
addressing Plaintiffs’ argument that any motion to amend would be futile. (R. 47.)
Defendants complied with that order, but in the proposed amended counterclaims
attached to their motion to amend instanter, they not only included an amended
IFDA counterclaim under Section 6, but they added a new counter-defendant,
inserted a civil RICO claim, and added allegations to their breach of contract and
fraud claims. (See R. 58-1.) For the following reasons, the motion to amend is
denied without prejudice to refiling the motion consistent with this opinion.
Beginning with the request to amend the IFDA claim, which was the premise
of the original motion to correct the record, Defendants argue that they should be
allowed to include a counterclaim under Section 6 of the IFDA. Section 6 prohibits
fraudulent practices in connection with the offer or sale of any franchise, including
untrue statements or omissions of material facts. See 815 ILCS 705/6. Defendants
argue that Section 6—unlike the section on which their original IFDA counterclaim
is based—applies to franchises located outside Illinois. (R. 58, Mot. to Amend at
¶ 10.) Under Section 6, “a sale of a franchise is made in this State when: (1) an offer
to sell or buy a franchise is made in this State and accepted within or outside of this
State[.]” 815 ILCS 705/6. Defendants argue that this language shows that Section
6 applies to franchises located outside of Illinois as long as the offer for sale
originated in Illinois. But they cite no case that has applied Section 6 to a fraud
claim brought by a franchisee located outside of Illinois. Although they highlight
29
one case that described Section 6 as having “its own jurisdictional limits,” that case
declined to resolve whether it implicitly applies to out-of-state franchises where the
offer for sale took place in Illinois.5 See H.C. Duke & Son, 2013 WL 5460209, at *9.
This court also declines to resolve the Section 6 question at this point because
Defendants’ proposed amended counterclaims do not cure the Rule 9(b) deficiencies
highlighted in Section A above. The heightened pleading standards under Rule 9(b)
apply to fraud claims under the IFDA. Putzier v. Ace Hardware Corp., 50 F. Supp.
3d 964, 972 (N.D. Ill. 2014).
In the proposed amended IFDA counterclaim,
Defendants continue to rely on allegations that it would “be impractical to believe”
that Plaintiffs were unaware of inventory shrinkage issues when they entered into
the Franchise Agreements, and continue to couch allegations of misrepresentations
in the inventory supply process on the language of “information and belief.” (R. 581, Proposed Am. Counterclaims ¶¶ 38, 44, 87, 205.)
Accordingly, Defendants’
motion to amend counterclaim nine is denied without prejudice.6
Turning to the remaining arguments raised by Plaintiffs in response to the
current motion to amend, they point out that the proposed amended counterclaims
At least one treatise has adopted Defendants’ interpretation of the scope of
Section 6. See W. Michael Garner, 1 Franch. & Distr. Law & Prac. § 5:20 (Oct.
2017) (“The IFDL’s broadest geographic reach is found in the prohibitions against
fraudulent representations; there is no requirement that a franchisee or franchise
business be located in the State of Illinois.”).
5
To the extent that Defendants amend their IFDA counterclaim under Section 6,
they must bear in mind that as Plaintiffs point out the IFDA includes a provision
stating that a claim must be brought before “the expiration of one year after the
franchisee becomes aware of facts or circumstances reasonably indicating that he
may have a claim for relief in respect to conduct governed by this Act.” 815 ILCS
705/27.
6
30
add an entirely new party, Sears Hometown and Outlet Stores, Inc. (“SHOS”), and
an entirely new RICO counterclaim without referring to those additions anywhere
in their opening motion to amend. (R. 59, Pls.’ Resp. at 2-3.) Defendants’ motion
addresses only the addition of the IFDA Section 6 claim, and yet the amended
counterclaims attached to the motion include these significant substantive changes.
This court will not attempt to address those changes without any argument in the
motion as to why they should be allowed. Instead, because the proposed amended
counterclaims include new allegations and parties discussed nowhere in the motion
to amend instanter, and because requiring Defendants to conform any amended
counterclaims to the rulings here is the most efficient way to proceed, the court
denies the motion without prejudice to filing a new motion to amend the
counterclaims to the extent that they believe they can amend the counterclaims
consistent with this opinion.
Conclusion
For the foregoing reasons, Plaintiffs’ motion to dismiss is granted with
prejudice with respect to counts five, eight, ten, and eleven. The motion is granted
without prejudice with respect to counts six and seven. As for counts one through
four, the motion is granted with prejudice to the extent that the breach of contract
claims are brought by the individual Defendants or against Sears Outlet, but
granted without prejudice to the extent they are brought by Defendant LLCs
against SHAS. Finally, count nine is dismissed with prejudice to the extent that it
seeks to state a claim under Section 15 of the IFDA, but without prejudice to the
31
extent that it seeks relief under IFDA Section 6. Second, Plaintiffs’ motion to strike
is denied. Third, Defendants’ motion to amend their counterclaims instanter is
denied without prejudice in that Defendants may file a new motion seeking leave to
file a new set of amended counterclaims that are consistent with this opinion.
ENTER:
____________________________________
Young B. Kim
United States Magistrate Judge
32
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