Mongler v. Knight et al
Filing
58
MEMORANDUM Opinion and Order signed by the Honorable Virginia M. Kendall on 11/12/2018. Defendants' Motion to Dismiss 19 is granted. Count II of Plaintiff's Complaint is dismissed without prejudice. Defendants' Joint Motion for Leave to File Counterclaim 23 is granted. Defendants shall file an Amended Answer including the newly added counterclaims and cross claims by 11/30/18.Mailed notice(lk, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
ROBERT MONGLER,
Plaintiff,
v.
BRIAN KNIGHT, STRATEGIC
LENDING SOLUTIONS, LLC, and
KNIGHT ASSET MANAGEMENT, LLC,
Defendants.
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18 C 2585
Hon. Virginia M. Kendall
MEMORANDUM OPINION AND ORDER
Plaintiff Robert Mongler filed suit against Defendants Brian Knight, Strategic Lending
Solutions, LLC (SLC), and Knight Asset Management, LLC (KAM) alleging claims of civil
conspiracy to commit fraud (Count I) and civil conspiracy to commit constructive fraud (Count
II). (Dkt. 1). Defendants filed a Joint Motion to Dismiss Count II (Dkt. 19) and a Joint Motion
for Leave to File Counterclaim. (Dkt. 23). For the reasons stated below, the Court grants both
Motions.
BACKGROUND
The following facts set forth in Plaintiff’s Complaint are accepted as true for the purpose
of reviewing Defendants’ Motion to Dismiss. Heyde v. Pittenger, 633 F.3d 512, 516 (7th Cir.
2011).
Robert Mongler formed RGM Properties, LLC, a Missouri LLC that owned real property
in Ware County, Georgia (“the Georgia Property”) that in 2011 was appraised at a value of more
than $3 million. (Dkt. 1 at ¶ 1). In 2011, Mongler was the sole member of RGM and RGM owned
the Georgia Property free and clear of all liens and encumbrances. (Id.).
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In September 2011, Brian Knight incorporated Capgain Properties, Inc. (called Capgain
Holdings, Inc. as of 2013) (“Capgain”) in Alberta, Canada and established its principal place of
business in Lake in the Hills, Illinois. (Id. at ¶ 20). The Complaint alleges that from October 2011
to March 2012, Knight implemented a scheme whereby he induced sellers of real estate to provide
deeds to Capgain by falsely promising that Capgain would in return issue the seller tradeable
securities following the company’s planned public launch on the Canadian stock exchange and, if
Capgain did not issue the promised securities at the agreed upon value, would return the deeds to
the sellers unencumbered. (Id.).
According to the Complaint, as part of this scheme Knight and Capgain conspired with
other co-conspirators to divest RGM of the Georgia Property and, in turn, divest Mongler of the
value of his membership interest RGM, all for no consideration. Knight’s co-conspirators included
Strategic Lending Solutions (SLS) and Knight Asset Management (KAM), both LLCs owned by
Knight; Illinois attorney Michael Loprieno and LOP Capital LLC, a New Mexico LLC owned by
Loprieno; and Ty Kirkpatrick and Consulting Direct, Inc. (CDI), a Delaware corporation owned
by Kirkpatrick. (Id. at ¶¶ 6–9).
First, in October 2011, Knight and Capgain entered an agreement with Kirkpatrick and
CDI, whereby CDI agreed to deed the Georgia Property to Capgain and Capgain agreed to either
issue tradeable securities or return the deed to CDI. (Id. at ¶ 25). Knight and other co-conspirators
knew that, at the time the agreement was entered into, RGM (not CDI) owned the Georgia Property
and that CDI had no contract to purchase the Georgia Property or to purchase Mongler’s
membership interest in RGM. (Id. at ¶ 25). In fact, Kirkpatrick and CDI did not negotiate
purchasing an interest in RGM with Mongler until the following month in November 2011. (Id.
at ¶ 26).
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Second, Knight and other co-conspirators through Kirkpatrick and CDI induced Mongler
into selling his interest in RGM and, therefore, the Georgia Property for no consideration. On
November 11, 2011, Mongler executed a Purchase and Sale Agreement for 100% of his interest in
RGM to CDI for $3,350,000; Kirkpatrick never executed the Agreement on behalf of CDI. (Id.;
see also Dkt. 1–3). A few months later on January 17, 2012, Kirkpatrick and CDI delivered a
promissory note to Mongler for $3,350,000, secured by a deed on the Georgia Property. (Id. at ¶
31). The Deed to Secure Debt falsely showed that CDI was the fee simple title owner of the
Georgia Property in order to induce Mongler into believing that he in turn controlled a valid first
lien on the Georgia Property. (Id.).
In fact, CDI had no interest in the Georgia Property because after Mongler unilaterally
executed the Purchase and Sale Agreement, Knight and other co-conspirators created and recorded
false deeds to make it appear on the public record as if Capgain (not RGM or CDI) was the fee
simple owner of the Georgia Property. Specifically, on December 8, 2011, Kirkpatrick deeded
100% of the Georgia Property to Capgain (“Capgain Deed”). (Id. at ¶ 27). Kirkpatrick also
delivered conflicting deeds for a one-third interest in the Property to each LOP (“LOP Deed”) and
SLS (“SLS Deed”). (Id.). Kirkpatrick never told Mongler that he had signed the deeds. (Id.). On
January 6, 2012, Knight and KAM created false deeds deeding LOP’s and SLS’s false one-third
interests in the Georgia Property to Capgain (“LOP-Capgain Deed” and “SLS-Capgain Deed”).
(Id.at ¶ 29). Knight and the co-conspirators agreed to withhold recording of any deed until after
CDI delivered the false Deed to Secure Debt to Mongler. (Id. at ¶¶ 28, 32). Then, starting in
February 2012, KAM recorded the deeds: first recording the LOP Deed and SLS Deed so it would
appear on the public record that LOP and SLS were in the chain of title before Capgain and second,
in March 2012, recording the LOP-Capgain Deed, SLS-Capgain Deed and Capgain Deed so it
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would appear Capgain was the fee simple owner of the Georgia Property free and clear of all
claims and liens. (Id. at ¶ 32). In fact, neither LOP, SLS nor Capgain had paid anything for the
Georgia Property or issued any securities in exchange for the deed. (Id. at ¶ 33).
Between March 2012 and January 2013, Knight and Capgain and Big Mojo Capital, Inc.
(the public shell company that filed the securities offering and was later renamed Capital Holdings,
Inc.) relied on the false records to make false representations in a Filing Statement and other
documents filed with TSX Venture Exchange, a public stock exchange in Canada, that Capgain
owned the Georgia Property free and clear of all claims and liens and that LOP and SLS were
entitled to tradeable securities in exchange for the (false) one-third interest each had deeded to
Capgain. (Id. at ¶ 34). Based on the false representations, TSX authorized the exchange of shares
pending a promise to generate an additional $500,000 in revenue or raise an additional $1,000,000
in capital. (Id. at ¶ 35). Capgain failed to do either and eventually in 2018 was de-listed without
its securities ever becoming tradable. (Id. at ¶ 50).
No co-conspirator ever transferred shares or other consideration to RGM or Mongler. (Id.
at ¶¶ 38–39). In April 2013, Knight and other co-conspirators obtained a loan for $1,750,000 in
exchange for a Deed to Secure Debt on the Georgia Property, effectively depriving Kirkpatrick
and CDI from ever returning the Property to RGM and/or Mongler’s membership interest in RGM
to Mongler. (Id. at ¶ 45). Knight and the co-conspirators defaulted on the loan and, following a
lawsuit in Ware County, Georgia, the lender obtained a judgment quieting title and finding RGM
held no interest in the Georgia Property. (Id. at ¶ 48). After appealing the judgment, Mongler
entered into a settlement agreement whereby the Property was re-vested in an LLC controlled by
Mongler subject to a deed to secure debt payable to the lender for $500,000. (Id. at ¶ 49).
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On January 31, 2017, Mongler filed a suit in the Eastern District of Missouri alleging
conspiracy to commit fraud and other counts against Knight, SLS, Loprieno, Kirkpatrick, Capgain,
LOP and CDI; KAM was not a named defendant. See Mongler v. Knight, et al., No. 2:17 C 06
(E.D. Mo.) (Keenan, J.) (“Missouri Litigation”). In July 2017, the district court dismissed Knight
and SLS from the Missouri Case without prejudice for lack of personal jurisdiction. (Id. at Dkt.
42). On April 6, 2018, following a jury trial, the district court in the Missouri Case entered a
judgment of $500,000 for civil conspiracy to commit fraud against all remaining defendants,
including Loprieno, Kirkpatrick, Capgain Properties f/k/a Big Mojo, Capgain Holdings f/k/a
Capgain Properties, LOP and CDI. (Id. at Dkt. 107).
Two days later on April 11, 2018, Mongler filed the present suit against Knight, SLS and
KAM alleging a conspiracy to commit fraud and conspiracy to commit constructive fraud by
fraudulently creating, delivering and recording false deeds to the Georgia Property owned by
RGM. (Dkt. 1). The Complaint alleges unnamed co-conspirators Kirkpatrick and CDI signed the
false deeds, thereby divesting Mongler of his membership interest in RGM and RGM of the
Georgia Property and deeding the property to SLS and unnamed co-conspirators LOP and
Loprieno without any payment of consideration to Mongler. (Id.).
On June 18, 2018, Defendants timely filed a Joint Verified Answer and Affirmative
Defenses and a Joint Motion to Dismiss the claim for conspiracy to commit constructive fraud.
(Dkt. 18). Defendants’ Joint Answer did not state any counterclaims against Plaintiff but on July
3, 2018, Defendants filed a Motion for Leave to File Counterclaim and now seek to add
counterclaims against Plaintiff and cross claims against CDI and Kirkpatrick. (Dkts. 23, 29).
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DISCUSSION
I.
Joint Motion to Dismiss
Defendants seek to dismiss Plaintiff’s claim for civil conspiracy to commit constructive
fraud (Count II) for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6).
To survive a motion to dismiss pursuant to Rule 12(b)(6), the Complaint must “state a claim to
relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A
claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal,
566 U.S. 662, 678 (2009). The factual allegations “must be enough to raise a right to relief above
the speculative level.” McCauley v. City of Chicago, 671 F.3d 611, 616 (7th Cir. 2011) (quoting
Twombly, 550 U.S. at 555). In deciding a motion to dismiss, the Court construes the Complaint in
the light most favorable to the Plaintiff, accepts all well-pleaded facts as true, and draws all
inferences in his favor. Heyde, 633 F.3d at 516. However, “[l]egal conclusions and conclusory
allegations merely reciting the elements of the claim are not entitled to this presumption of truth.”
McCauley, 671 F.3d at 616 (citing Iqbal, 566 U.S. at 678).
To succeed on a claim of civil conspiracy under Illinois law, Plaintiff must establish: “(1)
an agreement between two or more persons for the purpose of 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”—here,
constructive fraud. Borsellino v. Goldman Sachs Grp., Inc., 477 F.3d 502, 509 (7th Cir. 2007)
(citing McClure v. Owens Corning Fiberglas Corp., N.E.2d 242, 258 (Ill. 1999)). Under Illinois
law, “constructive fraud” includes “any act, statement or omission which amounts to positive fraud
or which is construed as a fraud by the courts because of its detrimental effect upon public interests
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and public or private confidence.” Joyce v. Morgan Stanley & Co., 538 F.3d 797, 800 (7th Cir.
2008) (quoting Pottinger v. Pottinger, 605 N.E.2d 1130, 1138 (Ill. App. Ct. 1992)). To establish
constructive fraud, Plaintiff must show that defendant “(1) breached the fiduciary duty he owed to
plaintiff and (2) knew of the breach and accepted the fruits of the fraud.” Id. (quoting Prodromos
v. Everen Secs., Inc., 793 N.E.2d 151, 158 (Ill. App. Ct. 2003)). Therefore, Plaintiff’s constructive
fraud claim “requires the existence of a confidential or fiduciary relationship” between him and at
least one of the alleged co-conspirators. Id.
Defendant first argues that any claim based on a fiduciary relationship between Plaintiff
and an unnamed co-conspirator (i.e., a named defendant in the Missouri Litigation) is barred by
collateral estoppel. “For collateral estoppel to apply, (1) the issue sought to be precluded must be
the same as that involved in the prior litigation, (2) the issue must have been actually litigated, (3)
the determination of the issue must have been essential to the final judgment, and (4) the party
against whom estoppel is invoked must be fully represented in the prior action.” Matrix IV, Inc.
v. Am. Nat’l Bank & Tr. Co. of Chi., 649 F.3d 539, 547 (7th Cir. 2011) (quotation omitted). During
trial and at the close of Plaintiff’s case in the Missouri Litigation, the district court granted
Defendants’ oral motion for judgment as a matter of law against Mongler and in favor of Loprieno,
Kirkpatrick, Capgain, LOP and CDI on Mongler’s claims for conspiracy to breach a fiduciary duty
and conspiracy to commit constructive fraud under Missouri law. (Dkt. 24 at 3–4; Dkt. 19 at 3;
Dkt. 19-2). The parties provide no record of the court’s specific findings supporting these rulings.
In his Response to Defendant’s Motion to Dismiss, Plaintiff asserts only that according to
Plaintiff’s counsel’s recollection and without reference to any transcript, the court entered
judgment based on its findings that (1) no party owed Mongler a “fiduciary duty” and (2) monetary
damages are not recoverable for constructive fraud under Missouri law. (Dkt. 24 at 4). Plaintiff
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agrees neither of these issues can be re-litigated here but argues the issue before this Court—
whether any co-conspirator had a “confidential or fiduciary relationship” with Plaintiff as required
for a constructive fraud claim under Illinois law—is different. (Id. at 4–9).
Missouri courts typically treat claims for breach of fiduciary duty and claims for
constructive fraud as one in the same. See, e.g., Klemme v. Best, 941 S.W.2d 493, 495 (Mo. 1997)
(en banc) (“A breach of a fiduciary obligation is constructive fraud. Constructive fraud is a longrecognized cause of action. Missouri courts typically label these claims as breach of fiduciary
duty.”) (citations omitted). Both require the plaintiff to show not only the existence of a “fiduciary
or confidential relationship,” Day v. Hupp, 528 S.W.3d 400, 416 (Mo. Ct. App. 2017)
(“[C]onstructive fraud equates to a breach of a fiduciary or confidential relationship.”), but also
other elements including breach, causation and harm. See Brown v. Brown, 530 S.W.3d 35, 41
(Mo. Ct. App. 2017), reh’g and/or transfer denied (July 27, 2017), transfer denied (Oct. 31, 2017)
(“To prevail on a claim of breach of fiduciary duty, a plaintiff must show: (1) the existence of a
fiduciary duty; (2) a breach of that fiduciary duty; (3) causation; and (4) harm.”). The court in the
Missouri Litigation could have entered judgment against Mongler on either claim for failure to
prove any of one of the required elements, including but not necessarily the existence of a fiduciary
or confidential relationship. Therefore, without the record, the Court cannot determine with any
certainty whether the existence of such a relationship between Mongler and any of the unnamed
co-conspirators in this case was in fact an issue “actually litigated” in the Missouri Litigation.
Plaintiff’s counsel’s “recollection” of that court’s findings is insufficient.
The Court notes that if this issue were actually litigated in the Missouri Litigation, any
claim for conspiracy to commit constructive fraud based on a fiduciary or confidential relationship
between Plaintiff and a named defendant in that case would be barred by collateral estoppel here
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because, contrary to Plaintiff’s contention, whether a “confidential or fiduciary relationship” exists
under Illinois law or Missouri law is the same issue. Under both states’ laws, in order to establish
a “confidential or fiduciary relationship” exists, a plaintiff must show that one person placed trust
and confidence in the purported fiduciary and that the purported fiduciary accepted this trust and
responsibility, thereby assuming a position of superiority, dominance and influence over the other.
See Avila v. CitiMortgage, Inc., 801 F.3d 777, 782–83 (7th Cir. 2015) (“A fiduciary relationship
exists when there is a special confidence reposed in one who, in equity and good conscience, is
bound to act in good faith and with due regard to the interest of the one reposing the confidence. .
. The dominant party must accept the responsibility, accept the trust of the other party before a
court can find a fiduciary relationship.”) (applying Illinois law) (emphasis in original) (quotations
omitted); Kratky v. Musil, 969 S.W.2d 371, 377, n.1 (Mo. Ct. App. 1998) (A confidential of
fiduciary relationship “extends to instances in which a special confidence is reposed on one side
and there is resulting domination and influence on the other.”) (emphasis in original) (quoting
Chmieleski v. City Products Corp., 660 S.W.2d 275, 293–94 (Mo. Ct. App. 1983)); Arnold v.
Erkmann, 934 S.W.2d 621, 630 (Mo. Ct. App. 1996) (“A fiduciary duty is not created by a
unilateral decision to repose trust and confidence; it derives from the conduct or undertaking of
the purported fiduciary.”) (quotation omitted).
Therefore, a finding that no confidential or
fiduciary relationship existed between Mongler and certain individuals under Missouri law would
preclude any litigation over whether any confidential or fiduciary relationship existed between
Mongler and those same individuals under Illinois law.
Regardless, Plaintiff’s claim for conspiracy to commit constructive fraud must be
dismissed for failure to allege that a confidential or fiduciary relationship existed between Mongler
and any co-conspirator, whether or not named as a defendant in this case. The facts as alleged in
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establish only one relationship between Mongler and any co-conspirator: that between Mongler
and Kirkpatrick/CDI. This is because, according to the Complaint, Knight and the other coconspirators at all times worked through Kirkpatrick and CDI to fraudulently divest Mongler and
RGM of their property interests. The relationship between Mongler and Kirkpatrick/CDI does not
constitute a “fiduciary or confidential relationship.” The Complaint alleges only that Kirkpatrick
and CDI proposed purchasing Mongler’s interest in RGM, led Mongler to believe the parties had
executed a Purchase and Sale Agreement, and provided Mongler with a promissory note secured
by a false deed to the Georgia Property. These facts establish at most a business or contractual
relationship between the parties but are insufficient to give rise to any fiduciary duty. See Crichton
v. Golden Rule Ins. Co., 832 N.E.2d 843, 854 (Ill. App. Ct. 2005) (“The mere fact that business
transactions occurred or that a contractual relationship existed is insufficient to warrant finding a
fiduciary relationship.”) (citation omitted). In particular, Plaintiff alleges no facts that Kirkpatrick
or CDI agreed to take on any extra-contractual duties on behalf of Mongler or RGM. See, e.g.,
Avila v. CitiMortgage, Inc., 801 F.3d 777, 785 (7th Cir. 2015) (affirming dismissal where plaintiff
“ha[d] not plausibly alleged that [defendant] assumed any additional, extra-contractual duties of a
fiduciary nature”); RSK Enterprises, LLC v. Comcast Spectacor, L.P., No. 17 C 2941, 2018 WL
319318, at *6 (N.D. Ill. Jan. 8, 2018) (“Generally, where parties ‘capable of handling their business
affairs deal with each other at arm’s length, and there is no evidence that the alleged fiduciary
agreed to exercise its judgment on behalf of the alleged servient party,’ no fiduciary relationship
exists.”) (quoting R.J. Mgmt. Co. v. SRLB Dev. Corp., 806 N.E. 2d 1074, 1083–84 (Ill. App. Ct.
2004)); Yokel v. Hite, 809 N.E.2d 721, 725 (Ill. App. 2004) (“Where one party to a business
contract trusts the other to do no more than fulfill its obligations under the contract, no fiduciary
duty arises.”).
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Plaintiff argues Kirkpatrick, Knight and Loprieno each knew Kirkpatrick had not in fact
paid Mongler for his interest in RGM and, therefore, had a “duty to speak” to advise Mongler of
the executed but unrecorded deeds as of January 2011. “[A] duty to disclose material facts may
arise out of a situation where plaintiff places trust and confidence in defendant, thereby placing
defendant in a position of influence and superiority over plaintiff.” Cohen v. Am. Sec. Ins. Co.,
735 F.3d 601, 613 (7th Cir. 2013) (quoting Connick v. Suzuki Motor Co., 675 N.E.2d 584, 591 (Ill.
1996)). “This position of superiority may arise by reason of friendship, agency, or experience.”
Id.
But again, mere knowledge of the unrecorded deeds is insufficient to establish such
relationship of trust. In fact, as the Complaint shows, Plaintiff need not be aware of, let alone trust,
any individual for that individual to know about the executed but unrecorded deeds.
Accordingly, Plaintiff’s claim for conspiracy to commit constructive fraud (Count II) is
dismissed without prejudice for failure to sufficiently allege a fiduciary or confidential relationship
existed between Mongler and any alleged co-conspirator.
II.
Joint Motion for Leave to File Counterclaim
In their Joint Motion for Leave to File Counterclaim, Defendants seek leave to amend their
Answer to add counterclaims against the Plaintiff, pursuant to Federal Rule of Civil Procedure 15.
(Dkt. 23 at ¶¶ 2, 5–6). Defendants assert that they do not seek leave to amend in bad faith or in an
effort to cause undue delay (id. at ¶ 7) and that allowing them to amend while the case is still in its
initial stages would be reasonable, in the interest of justice and cause no undue delay to Plaintiff.
(Id. at ¶¶ 4, 7).
Defendants do not provide any description whatsoever of the proposed
counterclaims in the Motion itself.
However, in their Reply brief and at the July 24, 2018 hearing before this Court, Defendants
explained that they in fact intend to add both counterclaims against Plaintiff and cross claims
11
against Kirkpatrick and CDI. (See Dkt. 29). Specifically, it appears based on the Defendants’
representations to this Court to date that they intend to allege the following in their counterclaims
and cross claims, if permitted: that Kirkpatrick/CDI owed Defendants a debt in 2010, delivered
the deed for the Georgia Property to Defendants in 2011 in exchange for Defendants’ release of
their claims against them, and then subsequently conspired with Plaintiff to fraudulently void that
deed by filing a Deed to Secure Debt on the Georgia Property and clouding title to the property
after Kirkpatrick had deeded the property to Defendants. (See, e.g., Dkt. 29 at 3). Defendants fail
to provide any further argument as to why they should be allowed to add these claims now under
the applicable rules.
Rule 15 governs the amendment of pleadings before trial and allows a party to amend its
pleading once as a matter of course within 21 days of serving it. Fed. R. Civ. P. 15(a)(1)(A). After
the 21-day period has passed, a party must seek the opposing party’s written consent or leave from
the court to amend its pleading. Fed. R. Civ. P. 15(a)(2). Here, Defendants filed their Answer on
June 18, 2018 and filed their Motion for Leave to File Counterclaim 15 days later on July 3, 2018.
Pursuant to Rule 15(a)(1)(A), Defendants could have instead filed an amended Answer as a matter
of course on July 3 but for whatever reason chose not to do so. Fed. R. Civ. P. 15(a)(1)(A) (“A
party may amend its pleading once as a matter of course within . . . 21 days after serving it.”). The
21-day window has since passed and the Defendants must now seek leave from the Court to file
an amended Answer.
Rule 15 instructs the court to grant leave to amend “when justice so requires.” Fed. R. Civ.
P. 15(a). “Although leave to amend should be freely given, that does not mean it must always be
given.” Hukic v. Aurora Loan Servs., 588 F.3d 420, 432 (7th Cir. 2009) (citing Fed. R. Civ. P.
15(a)). The Court need not allow an amendment when there is undue delay, bad faith, dilatory
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motive, or undue prejudice to the opposing party. Bethany Pharmacal Co. v. QVC, Inc., 241 F.3d
854, 860–61 (7th Cir. 2001) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)). Leave should
also be denied if the amendment would be futile, for example, if the proposed claim could not
withstand a motion to dismiss. Vargas-Harrison v. Racine Unified Sch. Dist., 272 F.3d 964, 974
(7th Cir. 2001) (citing Foman, 371 U.S. at 182).
Although not addressed in either party’s briefs, Defendants’ request is also subject to Rules
13 and 20 governing counterclaims and cross claims, respectfully. Rule 13(a) requires that
Defendants file a counterclaim against Mongler “if the claim arises out of the transaction or
occurrence that is the subject matter of [Mongler’s] claim” and “does not require adding another
party over whom the court cannot acquire jurisdiction.” Fed. R. Civ. P. 13(a)(1). The proposed
conspiracy counterclaim as described by Defendants relates to the same transaction, i.e. the Deed
to Secure Debt issued by Kirkpatrick/CDI to Mongler, and the same property that are the subject
matter of the claims in Plaintiff’s Complaint and Defendants need not add any other party to allege
the claim against Mongler. Therefore, the counterclaim appears to be compulsory.
Rule 13(g) permits parties to an action to file cross claims against a co-party “if the claim
arises out of the transaction or occurrence that is the subject matter of the original action” or “if
the claim relates to any property that is the subject matter of the original action.” Fed. R. Civ. P.
13(g). Rule 20 governs the addition of non-parties to the case through a cross claim, see Fed. R.
Civ. P. 13(h), and provides that parties may be joined as defendants to an action through a cross
claim if “any right to relief is asserted against them jointly, severally, or in the alternative with
respect to or arising out of the same transaction, occurrence, or series of transactions or
occurrences” and “any question of law or fact common to all defendants will arise in the action.”
Fed. R. Civ. P. 20(a)(2). The proposed cross claim as explained by Defendants would assert
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liability for the same civil conspiracy jointly or in the alternative against Kirkpatrick/CDI and
Plaintiff and give rise to question of law and fact common to all alleged co-conspirators.
Therefore, if leave to amend is granted and barring any issues with personal jurisdiction, the
purported cross claim would be permissible under Rules 13 and 20.
Plaintiff does not dispute that the proposed additional claims would be permissible under
these Rules or argue that the Court should deny the Motion under Rule 15 on the grounds of undue
delay, bad faith, dilatory motive, or undue prejudice. Plaintiff argues the claims should be
prohibited on the following grounds: (1) the Court will not have personal jurisdiction over the
cross-claim defendants; (2) the proposed claims allege damages to Capgain (not Defendants) and
Defendants have no standing to raise claims on behalf of Capgain; (3) the proposed cross claim is
barred by claim and issue preclusion because it constituted a compulsory counterclaim against
Capgain in the Missouri litigation and Defendants failed to raise it there; and (4) Plaintiff should
be barred from filing any claim in this Court because he has failed to pay sanctions issued against
him by another court in the Northern District of Illinois. (See Dkt. 27).
With regard to the first argument, Defendants have not yet filed the proposed cross claims
or supporting jurisdictional statements. The Court cannot make jurisdictional determinations in a
vacuum and, therefore, such arguments are better left for a Rule 12 motion brought by the party of
interest (which would be Kirkpatrick and CDI, not Plaintiff) after the claim is filed, if at all. See
Purdue Research Found. v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003) (Once
challenged, plaintiff bears the burden of demonstrating personal jurisdiction exists and may submit
affidavits and other written materials to make such showing.). Plaintiff’s second and third
arguments are moot as Defendants have since clarified that they seek to state cross claims against
Kirkpatrick and CDI, not Capgain.
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Finally, Defendants seek to bar filing of any claims by Plaintiff for failure to pay sanctions
in a case before Judge Kennelly, CapGain Properties, Inc. et al. v. Landmaster Partners, LLC,
No. 15 C 9234 (N.D. Ill). In that case, Capgain and Brian Knight filed suit against Landmaster
Partners, LLC for breach of contract related to Capgain’s acquisition of oil and gas leases held by
Landmaster. (Id. at Dkt. 1). At one point in the case, Landmaster moved to dismiss the complaint
and for sanctions against Capgain and Knight for failure to prosecute their case and to comply with
the Federal Rules of Civil Procedure, including failure to respond to defendant’s requests for
admissions. (Id. at Dkt. 52). The court denied the motion to dismiss but granted the motion for
sanctions, ordering Capgain and Knight to pay $3,850 in attorney’s fees incurred by Landmaster
in preparing and briefing its motion. (Id. at Dkts. 60, 71). The court ordered the sanctions to be
paid within 21 days of its Order. (Id.). Plaintiffs failed to timely pay the court-imposed monetary
sanction. (Id. at Dkt. 93).
Landmaster then filed a motion for summary judgment relying primarily on the deemed
admissions (id. at Dkt. 61), and Capgain and Knight moved to reopen the time to respond to the
requests for admissions and to withdraw the deemed admission. (Id. at Dkt. 72). The court ordered
that as a condition for withdrawal of the deemed admissions, Capgain and Knight must pay $5,425
to Defendant by April 28, 2017. (Id. at Dkts. 88, 99). Capgain and Knight failed to pay the $5,425.
In a Response to the court’s order to show cause as to the delayed payment of sanctions,
Capgain and Knight explained that they were unable to pay either the $3,850 or $5,425 courtordered sanction due to “immense financial strain” caused by Defendants’ actions leading to
Plaintiff’s cause of action. (Id. at Dkt. 97). The court denied Capgain and Knight’s motion to
withdraw the deemed admissions for failure to pay the $5,425 court-imposed fee sanction. (Id. at
Dkt. 106). Capgain and Knight then appealed the court’s ruling on summary judgment and the
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Seventh Circuit dismissed the appeal for lack of jurisdiction because the defendant’s counterclaims
had been dismissed without prejudice and could, therefore, still be re-filed. (Id. at Dkt. 120). It
appears from the docket in that case that the first sanction for $3,850 in attorney’s fees remains
unpaid.
Plaintiff cites no case law to support his position that Defendants must be prohibited from
filing any claim in this district due to Knight’s failure to pay the sanctions imposed against him by
Judge Kennelly. As recognized in Support Systems International, Inc. v. Mack, courts are
permitted to enjoin litigants from filing any civil motions, except those necessary to protect him
from confinement, without leave of the court unless and until that litigant pays in full the
sanction(s) imposed against him. 45 F.3d 185, 186 (7th Cir. 1995); see also Alexander v. United
States, 121 F.3d 312, 316 (7th Cir. 1997) (imposing fine and Mack order against litigant who
repeatedly filed frivolous claims, directing the clerk of the court to return as unfiled any papers
tendered in civil litigation until he paid the fee); In re City of Chicago, 500 F.3d 582, 585 (7th Cir.
2007) (Mack orders, which require a litigant to do no more than “meet the financial obligations
that he has incurred by virtue of his past litigation,” are “consistent with the Constitution.”).
However, as recognized in Mack, any sanction imposed by a federal court for abuse of process,
including a no-filings order, must be tailored to the abuse at issue and courts generally permit
exceptions to the no-filing order where the litigant is financially unable to pay the sanctions
imposed against him. See Mack, 45 F.3d at 187 (A “possible exception to the no-filings order
would be for proof of indigency.”); see also, e.g., Dallas v. Gamble, 448 F. Supp. 2d 1020, 1023
(W.D. Wis. 2006) (“It would be unreasonable to hold that a litigant subject to a Mack order is
precluded from communicating to the court valid concerns he might have about his ability to
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satisfy the sanctions imposed upon him. . . .[F]iling bars such as those imposed in Mack are to be
designed to curb the particular abuse at issue.”).
Here, Defendants are not currently subject to a Mack order but Plaintiff’s motion
essentially seeks for this Court to impose one. As an initial matter, Judge Kennelly imposed
sanctions against Knight, not against either SLS or LOP. Additionally, Knight represents that he
has failed to pay the sanction because he is financially unable to do so. Mack specifically
recognized a possible exception to a bar on filings where the litigant failed to pay the sanctions
ordered due to indigency. Finally, prohibiting Knight from filing the claims would, in effect,
expand the sanctions imposed by Judge Kennelly beyond the $3,850 fee and denied request to
withdraw his deemed admissions in that case to also foreclose him from ever filing what appears
to be a potentially compulsory counterclaim against Mongler in this case. For these reasons, the
Court will not bar Defendants from filing the proposed counterclaim and cross claims here based
on Knight’s failure to pay the $3,850 sanction imposed in another case.
Defendants’ Joint Motion for Leave to File Counterclaim (Dkt. 23) is granted.
CONCLUSION
For the reasons stated above, Defendants’ Motion to Dismiss (Dkt. 19) is granted. Count
II of Plaintiff’s Complaint is dismissed without prejudice. Defendants’ Joint Motion for Leave to
File Counterclaim (Dkt. 23) is granted. Defendants shall file an Amended Answer including the
newly added counterclaims and cross claims by 11/30/18.
____________________________________
Hon, Virginia M. Kendall
United States District Judge
Date: November 12, 2018
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