United States District Court, N.D. Illinois
January 21, 2004.
766347 ONTARIO LTD.; THE JAMES F. BOUGHNER FOUNDATION; ELLEN FRYMIRE; and SALATEEN INTERNATIONAL LTD., Plaintiffs,
ZURICH CAPITAL MARKETS INC., et al., Defendants ZCM MATCHED FUNDING CORP., Counterclaimant, v. 766347 ONTARIO LTD.; THE JAMES F. BOUGHNER FOUNDATION; ELLEN FRYMIRE; and SALATEEN INTERNATIONAL LTD., Counter-Defendants
The opinion of the court was delivered by: AMY J. ST. EVE, District Judge
AMENDED MEMORANDUM OPINION AND ORDER
Plaintiffs/Counter-Defendants have moved to dismiss the counterclaim
of Defendant/Counterclaimant ZCM Matched Funding Corp. ("ZCM MFC")
pursuant to Federal Rule of Civil Procedure I2(b)(6) for failure to state
a claim. For the reasons set forth below, their motion is denied.
ZCM MFC filed a counterclaim against the Plaintiffs/Counter-Defendants
766347 Ontario Ltd., The James F. Boughner Foundation, Ellen
Frymire, and Salateen International Ltd That counterclaim arises from a
contempt judgment against third-party Martin Allamian entered in a
separate but related proceeding still before this Court ("the ZCM
action"). See, e.g., ZCM Asset Holding Co. v. Allamian, 2002 WL
31870162 (N.D. Ill. Dec. 20, 2002) ("ZCM I") The
Counter-Defendants now seek to dismiss that counterclaim for failure to
state a claim.
Asset Allocation Fund, L.P. ("Asset Allocation") is a now-insolvent
Illinois limited partnership and commodity pool that engaged in the
speculative trading of commodity futures contracts and is a defendant in
the ZCM action. Martin James Capital Management, Inc. ("MJCM")
Asset Allocation's general partner and Martin Allamian, who owned
and operated MJCM, are also defendants in the ZCM action. On May 31,
2000, Asset Allocation entered into an "Option Agreement" with
Defendant/Counterclaimant, ZCM MCF. ZCM MFC asserts that Asset Allocation
agreed in the Option Agreement to indemnify ZCM MFC of all losses arising
from the transaction contemplated by the Option Agreement. (R. 50, Def.'s
Counterclaim, ¶ 9.) ZCM MFC alleges that it has incurred losses from
that transaction, and that Asset Allocation is now required to indemnify
it. (Id. at ¶¶ 10-11).
Specifically, ZCM MFC alleges that the Counter-Defendants conspired
with Asset Allocation, MJCM and Martin Allamian, to unlawfully obtain a
return on their investments in
Asset Allocation. (Id. at ¶ 12). It alleges that the
Counter-Defendants obtained this unlawful return through a consent
judgment in the ZCM action. (Id. at ¶ 13). As part of that
consent judgment, ZCM MFC alleges that Martin Allamian, whom the Court
previously held in contempt for violating a preliminary injunction, was
permitted to repay the amount Allamian took in violation of the
preliminary injunction to the Counter-Defendants, not to the limited
partnership. (Id.). In exchange, the Counter-Defendants
dismissed their breach of contract claim asserted against Asset
ZCM MFC alleges that the Counter-Defendants have a duty under the
Illinois Revised Uniform Limited Partnership Act ("IRULPA"), 805 ILCS
210/608 ("Section 608"), to indemnify it to the extent of the payments
that they have received or will receive pursuant to the contempt
judgment. (Id., ¶¶ 13-14.) These payments, ZCM MFC argues,
are "returns" on Plaintiffs' investments in Asset Allocation and
therefore are subject to "clawback" under Section 608 to the extent that
they are necessary to satisfy Asset Allocation's obligations to ZCM MFC.
(Id. at ¶ 14.)
I. Legal Standard
The purpose of a motion to dismiss under Rule 12(b)(6) is to "test the
sufficiency of the complaint, not to decide the merits" of the case.
Triad Associates, Inc. v. Chicago Housing Auth., 892 F.2d 583,
586 (7th Cir. 1989). When deciding a motion to dismiss pursuant to
Rule 12(b)(6), the Court views "the complaint in the light most favorable to
the plaintiff, taking as true all well-pleaded factual allegations and
making all possible inferences from those allegations in his or her
favor." Lee v. City of Chicago, 330 F.3d 456, 459 (7th Cir.
2003) (citations omitted).
In order to state a claim under Section 608, ZCM MFC need only satisfy
the notice pleading requirements of Federal Rule of Civil Procedure 8.
"All the complaint need do to withstand a motion to dismiss for failure
to state a claim is `outline or adumbrate' a violation of the statute or
constitutional provision upon which the plaintiff relies." Brawnlee
v. Conine, 957 F.2d 353, 354 (7th Cir. 1992).
II. The Section 608 Indemnification Claim
Under Section 608 of the IRULPA, a limited partner who receives a
"return of any part of his or her contribution" is liable to the limited
partnership for the amount of the return, but only to the extent that it
is necessary to discharge the limited partnership's liabilities to
creditors. 805 ILCS 210/608. Section 608 defines a return of a partner's
contribution as "a distribution to him or her [that] reduces his or her
share of the fair value of the net assets of the limited partnership
below the value . . . of his or her contribution which has not been
distributed to him or her." 805 ILCS 210/608(c). The duration of a
partner's liability to the limited partnership depends on whether the
return was made with or without "violation of the certificate of limited
partnership, the partnership agreement or [IRULPA]." The minimum duration
is one year. 805 ILCS 210/608(a),(b).
The Counter-Defendants do not challenge ZCM MFC's standing to assert a
Section 608 claim.*fn2 They further do not contest the allegation that
Asset Allocation has insufficient assets with which to discharge any
liability to ZCM MFC. Instead, the Counter-Defendants contend that ZCM
MFC has failed to state a clawback claim because it has failed to allege
(1) that each
Counter-Defendant has received a return of his or her contribution
and (2) "whether or not, and if so how, any un-alleged return of
contribution was made with or without `violation of the certificate of
limited partnership, the partnership agreement or this Act." The Court
A. Return of Contribution
ZCM MCF alleges that the payments that Counter-Defendants have received
and will receive pursuant to the contempt judgment in the ZCM action
constitute returns of their investments in Asset Allocation. ZCM MCF
alleges that Asset Allocation purposefully conspired with Allamian, MJCM,
and the Counter-Defendants to grant the Counter-Defendants a return on
their investment. It alleges that Martin Allamian exchanged funds which
had been taken from Asset Allocation and should have been returned to
Asset Allocation, in exchange for the Counter-Defendants' abandonment of
their claims against Asset Allocation. These allegations sufficiently
allege that the Counter-Defendants have received or will receive a return
on their contributions to Asset Allocation.
If this Court were to adopt Counter-Defendants' position that transfers
from third parties to limited partners cannot constitute returns of
investments, it would render the clawback provision of Section 608 void.
Partnerships and limited partners could avoid the statute's dictates
through sham transactions that interposed a third party between the
partnership and partner or, as is alleged to have happened here,
through the general partner's misappropriation of funds.
B. Violation of the Partnership Agreement
Counter-Defendants also argue that ZCM MCF has failed to allege whether
the returns of investments were made with or without violation of
applicable partnership rules. Whether or not
returns are made illicitly is important under Section 608 only in
determining the duration of a partner's liability to the partnership. 805
ILCS 210/608(a), (b). If the partner receives the return without
violation of the certificate of limited partnership, the partnership
agreement or the IRULPA, the partner's liability is one year.
Id. (a). If a partner receives the return in violation of the
certificate of limited partnership, the partnership agreement or the
IRULPA, the partner's liability is extended to a six year period.
Id. (b). Such allegations are not essential to state a claim
under Section 608.
ZCM MFC alleges that the Counter-Defendants unlawfully sought to obtain
a return on their contributions "in violation of their limited
partnership agreements and Illinois law." (R. 50-1, Def.'s Counterclaim,
¶ 12.) This is sufficient to extend the limited partners' liability
to six years.
The Plaintiffs/Counter-Defendants' Motion to Dismiss Counterclaim is