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LUNDING v. BIOCATALYST RESOURCES

United States District Court, N.D. Illinois


February 9, 2004.

FRANKLIN LUNDING, JR., Plaintiff,
v.
BIOCATALYST RESOURCES, INC., et al., Defendants

The opinion of the court was delivered by: PAUL PLUNKETT, Senior District Judge

MEMORANDUM OPINION AND ORDER

Franklin Funding, Jr. has sued defendants under a variety of theories for their alleged failure to tender certain stock, dividends and other payments to him. Defendants have filed a joint combined motion pursuant to Federal Rules of Civil Procedure ("Rule") 12(b)(1) and 12(b)(6) to dismiss the amended complaint. For the reasons set forth below, the motion is denied.

Facts

  In the early 1980s, Funding, defendant Silverman and others formed The Prozyme Company. (Am. Compl. ¶ 16.) Funding was the president and CFO of Prozyme. (Id.) Sometime later, Silverman left Prozyme and formed PPF, a company that acted as a distributor for Prozyme. (Id. ¶ 17.)

  In the early 1990s, Funding formed a new company, Biocatalyst, to purchase all of the outstanding stock of both Prozyme and PPL. (Id. ¶¶ 19-20.) In early 1993, pursuant to an Page 2 exchange/purchase agreement, Biocatalyst common stock was used lo purchase the stock of both Prozyme and PPL. (Id. ¶ 19; Id., Ex. A, Exchange/Purchase Agreement Ex. B, Common Stock Subscription Agreement.) In addition, Biocatalyst created a series of convertible preferred stock, which was exchanged for the Prozyme and PPL shareholders' agreement to release any claims they had against those companies. (Id. ¶¶ 21, 22; Id., Ex. A, Exchange/Purchase Agreement, Ex. B, Preferred Stock Subscription Agreement.) As a result of the exchange/purchase, Lunding received 325 shares of Biocatalyst convertible preferred stock. (Id., Ex. A. Exchange/Purchase Agreement, Ex. D.)

  Lunding became chairman, president and a director of Biocaalyst and entered into an employment agreement with the company that entitled him to a certain salary, bonus and other benefits throughout the life of the agreement. (Id. ¶ 20; Id., Ex A. Exchange/Purchase Agreement. Ex. F. Employment Agreement.)

  In June 1999, Biocatalyst's shareholders removed Landing as a director and CEO and replaced him with Ron lories. (Id. ¶ 25.)

  In May 2001. Lunding tried to convert 275 of his shares of Biocatalyst preferred stock lo common stock. (Id. ¶ 27.) The conversion rate in the preferred stock certificate of designations ("certificate") was four shares of common stock for each share of preferred. (Id. ¶ 28.) In addition, upon conversion, Lunding was entitled to the unpaid accumulated dividends on his preferred stock, which totaled SI 1,550.00. (Id. ¶ 29.)

  Iorio, who was then the CEO of Biocatalyst, acknowledged receipt of Lunding's preferred stock, directed that it be converted and had the corporate stock ledger changed to reflect the Page 3 conversion, (Id. ¶ 30.) However, the common stock was not issued and no accrued dividends were paid lo Lunding. (Id.)

  On May 14, 2002, Biocatalyst announced that the majority of convertible preferred shareholders had consented to rescind the 1993 issuance of the convertible preferred stock. (Id. ¶ 34.) Despite Landing's demands, Biocatalyst refused to reinstate the convertible preferred stock, issue common stock lo him for the preferred stock he tendered or pay him for the accrued dividends on the preferred stock. (Id. ¶ 40.) Biocatalyst also Sailed lo pay Lunding his annual salary and bonus in accordance with the employment agreement. (Id. ¶ 98.)

  Sometime before June 25, 2003, Lunding initialed an arbitration proceeding over the employment agreement dispute, (Defs.' It. Combined Mot. Dismiss, Ex. A.) Ultimately, the arbitrator upheld Lunding's claim, though not in the amount he had requested. (Id.) Subsequently, the arbitration award was confirmed by the Circuit Court of Cook County. (Id., Ex. C.)

  Discussion

 Subject Matter Jurisdiction

  There are two kinds of Rule 12(h)(1) motions', those that attack the sufficiency of the jurisdictional allegations and those that attack the factual basis for jurisdiction. Facial attacks arc subject to the same standard as motions pursuant to Rule 1 2(b)(d); that is, the Court accepts as true all well-pleaded factual allegations of the complaint, drawing all reasonable inferences in plaintiffs favor. United Phosphorus. Ltd, v. Angus Chem. Co., 322 L.3d 942, 946 (7th Cir. 2002). cert denied, 124 S.Ct. 533 (2003). However, in factual attacks, like this one, the Court may consider affidavits Page 4 and other evidence in deciding the motion. Id. In either case, the burden of proving that jurisdiction exists rests with the plaintiff. Id.

  Defendants contend that diversity jurisdiction is lacking because: (1) the amount in controversy is dependent on the viability of the tortious interference with contract claim asserted in Count VIII of the amended complaint; and (2) that claim is barred by res judicata. Defendants' argument is based on a misunderstanding of the mechanics of subject mailer jurisdiction. The existence of subject matter jurisdiction is determined at the time a lawsuit is filed, not weeks or months later. Grinnell Mut. Reins. Co. v. Shierk, 121 F.3d 1114, 1116 (7th Cir. 1997). Thus, if the parties are diverse and the requisite amount is in controversy al the inception of the suit, jurisdiction attaches, regardless of the impact of subsequent events, Id. ("[I] the amount in controversy exceeds the jurisdictional amount when a suit is filed in federal court, the fact that subsequent events reduce the total amount in controversy will not divest the court of diversity jurisdiction."). As a result, even if Count VIII is now barred by res judicata or collateral estoppel, its dismissal will not destroy the Court's jurisdiction unless the claim was unfounded at the lime the lawsuit was filed.

  Illinois preclusion principles apply only to final judgments. People ex ref. Burris v. Progressive and Developers, Inc., 602 N.U.2d 820, 824-25 (111. 1992) ("Under the doctrine of res judicata, a final judgment on the merits rendered by a court of competent jurisdiction is conclusive as to the rights of the parties and their privies."); American Family Mut. Ins. Co. Savickas, 739 N.E.2d 445, 451 (Ill. 2000) (stating that a "final judgment on the merits" is a prerequisite for collateral estoppel). The state court order on which defendants' preclusion argument is based was not issued until November 7, 2003, nearly (en months after this suit was filed. (See Defs.' It. Combined Mot. Dismiss, Ex. C.) Given that chronology, stale preclusion principles could not Page 5 possibly have barred Count VIII at the start of this suit.*fn1 Because that claim, and its $700,000.00 damage request, was viable at the lawsuit's inception, the Court's diversity jurisdiction attached when the suit was filed and remains in tact, regardless of the course of subsequent events. Defendants' motion to dismiss for lack of subject matter jurisdiction is, therefore, denied.*fn2

 The Merits

  On a Rule 12(b)(6) motion to dismiss, the Court accepts as true all well-pleaded factual allegations of the complaint, drawing all reasonable inferences in plaintiff's favor. Forseth v. Village of Sussex, 199 F.3d 363, 368 (7th Cir. 2000). No claim will be dismissed unless "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations," Hishon v. King & Spalding, 467 U.S. 69, 73 (1984).

  Even if the Court retains jurisdiction, defendants say that the tortious interference claim must be dismissed because it is barred by preclusion principles. This is the second time defendants have raised this argument. When they did so the first time, they submitted various arbitration-related documents as support and urged the Court to take judicial notice of them. That we declined to do. (See 9/1 9/03 Mem. Op. & Order.) This time, defendants rely on the state court's order confirming Page 6 the arbitration award, a document that is unquestionably subject to judicial notice. See, e.g. Henson v. CSC Credit Servs., 29 F.3d 280, 284 (7th Cir. 1994) (stating that federal court can take judicial notice of state court orders). The only question is whether that order satisfies the elements of res judicata or collateral estoppel under Illinois law.

  The answer is no. Res judicata and collateral estoppel apply only if, among other things, the arbitration that the state court, confirmed finally adjudicated a claim or issue that Lunding is attempting to litigate here. American Family Mill. Ins., 739 N.E.2d at 451 (staling that the "party sought lo be [estopped] must actually have litigated the issue in the first suit and a decision on the issue must have been necessary to the judgment in the first litigation" for collateral estoppel to apply); Progressive Land Developers, 602 N.E.2d at 825 (stating that identical causes of action in the two proceedings is a prerequisite for rex judicata). Unfortunately, we cannot tell from either the state court order, or the arbitration award that it incorporates, which claims and issues were actually decided by the arbitrator. The arbitration award orders Biocatalyst to pay Lunding $346.632,16 "for his claim," as well as various smaller sums for fees and costs, and denies Biocatalyst's counterclaim in its entirety. (Sec Defs.' If. Combined Mot. Dismiss, Ex. A, 6/25/03 Arbitration Award.) The award does not, however, describe the claims and issues that were adjudicated or explain the arbitrator's reasoning for his decision. The state court order is similarly silent on the substance of the issues involved in the proceeding. (See Id. Ex. C, 11/7/03 Order.) Absent some judicially noticeable evidence that establishes exactly what was adjudicated by the arbitration, and defendants have provided none, their motion to dismiss Count VIII on the grounds of res judicata or collateral estoppel is denied. Page 7

  Conclusion

  For the reasons slated above, defendant's joint combined motion pursuant to Rules 12(b)(1) and 12(b)(6) lo dismiss the amended complaint is denied.


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