Mosholu, Inc. et al v. Gavin et al

Filing 20

MEMORANDUM Opinion and Order. Defendants' motion to dismiss for lack of jurisdiction 8 is denied. (See order for further detail.) Status hearing set for 7/26/2018 at 09:00 AM. Signed by the Honorable Thomas M. Durkin on 7/19/2018:Mailed notice(srn, )

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
MOSHOLU, INC., MICHAEL MARGULES,
and EDWARD AMARAL, as assignees of
JOHN BECKSTEDT,

No. 18 C 2721

Plaintiffs,

Judge Thomas M. Durkin

v.
SEAN GAVIN and MALCOM HERZOG,
Defendants.
MEMORANDUM OPINION AND ORDER
Plaintiffs Mosholu, Inc., Michael Margules, and Edward Amaral, as Assignees
of John Beckstedt, sued defendants Sean Gavin and Malcolm Herzog for breach of
contract and unjust enrichment. Defendants move to dismiss plaintiffs’ complaint
pursuant to Federal Rule of Civil Procedure 12(b)(1), contending that the Court lacks
subject matter jurisdiction because this case is ancillary to a collection proceeding
pending in the Circuit Court of Cook County. R. 8. For the following reasons, the
Court denies defendants’ motion to dismiss.
Standard
Rule 12(b)(1) authorizes the Court to dismiss any claim for which the Court
lacks subject matter jurisdiction. Article III, Section 2 of the U.S. Constitution defines
the outer bounds of the Court’s subject matter jurisdiction; generally, a federal court’s
jurisdiction in a civil case arises from a federal question or diversity among the
parties. See 28 U.S.C. §§ 1331, 1332; see also Rabe v. United Air Lines, Inc., 636 F.3d
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866, 872 (7th Cir. 2010). The plaintiff bears the burden of establishing the Court’s
subject matter jurisdiction once a defendant challenges it. Lujan v. Defenders of
Wildlife, 504 U.S. 555, 561 (1992). When deciding a Rule 12(b)(1) motion, the Court
must “accept as true all well-pleaded factual allegations and draw all reasonable
inferences in favor of the plaintiff.” St. John’s United Church of Christ v. City of Chi.,
502 F.3d 616, 625 (7th Cir. 2007).
Background
In 2012, defendants Gavin and Herzog each agreed to pay Beckstedt
$1,050,000 in exchange for a transfer of 25% ownership interest in When 2 Trade
Group, LLC (“W2TG”). R. 1 ¶¶ 8-10, 17-18, 23-24. It is undisputed that neither
defendant paid Beckstedt. Id. ¶¶ 12-13; R. 13 at 4-5. Defendants claim they did not
pay because Beckstedt never transferred the W2TG interests to them. R. 13 at 3-4.
On January 31, 2017, the same plaintiffs who later brought this lawsuit filed
a petition to register a $1,675,000 California state court judgment against Beckstedt
in Cook County Circuit Court. Margules v. Beckstedt, No. 17 L 050107 (Ill. Cir. Ct.).
After registering the judgment, plaintiffs initiated garnishment proceedings in Cook
County Circuit Court against Beckstedt and W2TG. Id. Those proceedings are
ongoing. See id.
On January 11, 2018, the Cook County Circuit Court entered an order
documenting an agreement between the parties. Beckstedt (as judgment debtor)
agreed to assign to plaintiffs (the judgment creditors) “all of [Beckstedt’s] right, title
and interest in . . . all claims by Beckstedt against Sean Gavin related to the transfer

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of membership interest in [W2TG]; and . . . all claims by Beckstedt against Malcom
Herzog related to the transfer of membership interest in [W2TG].” R. 8-1.1 The order
provides that “[a]ny recovery obtained by the Judgment Creditors from either Gavin
or Herzog, when received, shall be applied towards satisfaction of the judgment
entered against Beckstedt.” Id. On January 22, 2018, Beckstedt executed the
assignments described in the January 11, 2018 order. R. 1-1; R. 1-2.
On April 16, 2018, plaintiffs filed this case. R. 1. They seek $1,050,000 from
each defendant under breach of contract and unjust enrichment theories for failing
to compensate Beckstedt for the interests in W2TG defendants allegedly received in
2012. R. 1 ¶¶ 12-13. Plaintiffs say this Court has diversity jurisdiction under 28
U.S.C. § 1332 because plaintiffs are citizens of California and defendants are citizens
of Illinois, and the amount in controversy exceeds $75,000. Id. ¶¶ 1-6.
Analysis
Defendants’ motion to dismiss argues that this case is an ancillary
garnishment action that must proceed in the Cook County Circuit Court. In support,
defendants rely primarily on Pinellas Cty. v. Great Am. Mgmt., & Inv., Inc., 762 F.
Supp. 221 (N.D. Ill. 1991). In Pinellas, Pinellas County registered a Florida state
court judgment in Cook County Circuit Court. Id. at 222. In the underlying
proceeding, Pinellas County had sued various defendants for engineering failures in
a water pipeline system. See id. Pinellas County then filed an action in federal court

Courts may take judicial notice of public court documents like this one when
deciding a motion to dismiss. E.g., Henson v. CSC Credit Serv., 29 F.3d 280, 284 (7th
Cir. 1994).
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asserting diversity jurisdiction and alleging that an Illinois-based management
company possessed two promissory notes payable on demand to one of the defendants
in the Florida action. Id. Pinellas County sought to satisfy the judgment registered
in Cook County Circuit Court by garnishing the management company’s notes
pursuant to the Illinois garnishment statute, 735 ILCS 5/12-701. Id. The district
court dismissed Pinellas County’s action for lack of subject matter jurisdiction,
holding that a “plain reading” of 735 ILCS 5/12-701 suggested that garnishment
actions are “post-judgment proceeding[s] in which jurisdiction is retained by the court
which entered the judgment.” Id. at 223. Additionally, the Pinellas court explained,
“[n]othing in the language or history” of the Illinois Uniform Enforcement of Foreign
Judgments Act (“UEFJA”) indicated that the district court could “transmute a foreign
state court judgment into [a] federal court judgment for the purposes of collection.”
Id. at 224.
Defendants say this case is just like Pinellas. The Court disagrees. The
plaintiffs in this case do not seek relief under the Illinois garnishment statute to
collect on a foreign state court judgment. See R. 1. They seek judgments against
defendants for breach of defendants’ 2012 agreements with Beckstedt and for unjust
enrichment. See id.
It is true that plaintiffs likely could have sought the same relief in a
garnishment proceeding pursuant to 735 ILCS 5/2-1402(c)(6), which “applies when
[a] third party may be indebted to the debtor and allows the judgment creditor to
maintain a separate action on that basis.” Rizvi v. Allstate Corp., 833 F.3d 724, 726

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(7th Cir. 2016) (emphasis in original). Defendants—third-parties to the Circuit Court
action—may be indebted to Beckstedt, the judgment debtor in Circuit Court, and
plaintiffs as judgment creditors could have sued defendants under 735 ILCS 5/21402(c)(6) to try to collect that debt.
But the fact that plaintiffs could have brought a garnishment proceeding
instead of a breach of contract and unjust enrichment action does not mean they had
to do so, or that they had to do so in Cook County Circuit Court. To the contrary, the
Seventh Circuit has held that a garnishment proceeding pursuant to 735 ILCS 5/21402(c)(6) is a removable, “independent” action properly adjudicated by a federal
court where there is a basis for subject matter jurisdiction and the action “brings in
a new party and raises new and distinct disputed issues.” Travelers Prop. Cas. v.
Good, 689 F.3d 714, 725 (7th Cir. 2012)2; accord Rizvi v. Alikhan, 2015 WL 3906031,
at *3 (N.D. Ill. June 24, 2015), aff’d sub nom. Rizvi, 833 F.3d 724 (“Since the
garnishment action involves a new party and new issues, it is an action independent
from the underlying action” under Travelers); see Hairrell v. Winterville Marine
Servs., Inc., 2004 WL 2931273, at *1 (N.D. Ill. Dec. 16, 2004) (same, and citing
Pinellas disfavorably).
Even if this case had been brought as a garnishment action under 735 ILCS
5/2-1402(c)(6), it would satisfy the standard set forth by the Seventh Circuit in

Defendants rely on principles from Eclipse Mfg. Co. v. U.S. Compliance Co.,
2006 WL 42395, at *3 (N.D. Ill. Jan. 4, 2006), regarding when a garnishment action
under 735 ILCS 5/2-1402(c)(6) may be adjudicated in federal court. R. 19 at 2. But
the Seventh Circuit in Travelers overruled Eclipse. See Travelers, 689 F.3d at 726
(“We believe the Eclipse Manufacturing court erred.”).
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Travelers. This case involves new parties—i.e., defendants, who are not parties in the
Cook County Circuit Court case. And it raises new and distinct issues. Namely, it
raises breach of contract and unjust enrichment claims regarding the 2012
agreements, as well as defenses to those claims, including defendants’ denial that
they ever obtained an interest in W2TG. See R. 1; R. 13 at 4. These determinations
have not been made by the Circuit Court, nor will they be part of the current state
proceedings, which solely pertain to discovery of Beckstedt’s assets. See Margules v.
Beckstedt, No. 17 L 050107 (Ill. Cir. Ct.). The Circuit Court’s January 11, 2018 agreed
order does nothing to change this conclusion. That order, and the corresponding
assignments, simply govern what will happen to any recovery obtained by plaintiffs
on their claims against defendants. See R. 8-1; R. 1-1; R. 1-2. They do not specify
where those claims must or will be adjudicated.
In sum, this case is “independent” from the Circuit Court proceedings and
properly adjudicated in federal court as long as the requirements for diversity
jurisdiction are satisfied. See Travelers, 689 F.3d at 725. And those requirements are
undisputedly satisfied here. There is complete diversity because plaintiffs are citizens
of California and defendants are citizens of Illinois (R. 1 ¶¶ 1-5), and the amount in
controversy ($1,050,000 for each defendant) well exceeds the $75,000 threshold (id.
¶¶ 21, 27). See 28 U.S.C. § 1332. This Court therefore has subject matter jurisdiction
over this case.
Conclusion
For the foregoing reasons, the Court denies defendants’ motion to dismiss [8].

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ENTERED:
______________________________
Honorable Thomas M. Durkin
United States District Judge
Dated: July 19, 2018

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