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Paolino v. Bendersky

July 11, 2006


The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer


In a five-count complaint, Plaintiff Louis D. Paolino, Jr. charges Attorney John Franczyk and his law firm with participating with a lender, Argyll Equities, LLC ("Argyll"), in a scheme to defraud Plaintiff of shares he held in Mace Security International, Inc. ("Mace"). Defendants have moved to dismiss the complaint. For the reasons explained here, the motion is granted in part and denied in part.


The complaint alleges the following: Paolino is President and CEO of Mace, a publicly-traded company whose shares are registered with SEC and listed on the NASDAQ. Until 2004, Plaintiff owned 1.19 million shares (having a value in excess of $6 million) of Mace. (Complaint, ¶ 6.) Early in 2004, Paolino alleges he "pledged his stock as collateral for a consumer loan" in the amount of $4.1 million from Argyll. Jeffrey Spanier of AmeriFund Capital Finance LLC ("AmeriFund") negotiated the deal (id. ¶ 9), allegedly with knowledge that Argyll intended immediately to convert the loan collateral. (Id. ¶¶ 9, 11.) Argyll did in fact breach the loan agreement by selling Plaintiff's stock at a significant profit almost immediately, without notice to Paolino and in the absence of any default on his part. (Id. ¶¶ 8, 18.) Franczyk and his firm joined a conspiracy with Argyll by making material misrepresentations concerning Argyll's ownership, in order to deter Paolino from filing suit. Specifically, in a November 5, 2004 letter, Franczyk, acting as Argyll's attorney, offered to "defer [Argyll's] exercise of its rights" in the collateral on the condition that Paolino make past-due payments. This "offer" was false, according to Plaintiff, because Argyll had already sold the shares given in collateral for the loan and because, due to Argyll's failure to provide him with notice of the precise amount due in interest payments, Plaintiff was not in default with respect to his loan obligations at all. (Id. ¶¶ 22, 24,26.) Franczyk negotiated a "standstill" agreement with Paolino; relying on Franczyk's statements and on statements made by "Miceli and McClain, both principals of Argyll . . . that no action would be taken with regard to his Mace stock," Paolino honored that standstill agreement until December 16, 2004, when he sued Argyll in a Texas state court. (Id. ¶ 27, 28, 29.)

Plaintiff alleges that "Defendants Argyll, McClain, Miceli and Spanier" defrauded another borrower in a similar manner in 2003. (Id. ¶ 30-31.) (Argyll, McClain, Miceli and Spanier are not in fact named as Defendants in this case.) He cites a judgment entered by a court in Hong Kong in favor of Siko Venture Limited on July 30, 2004, where, as in this case, Spanier acted as broker for a collateralized loan, and Argyll unlawfully sold shares tendered as collateral for a loan, almost immediately after that loan had been negotiated. (Id. ¶ 31.)


In this lawsuit, Plaintiff asserts claims for unjust enrichment (Count I); civil conspiracy (Count II); fraud (Count III); violations of the Racketeer Influenced Corrupt Organizations Act ("RICO") (Count IV); and conspiracy to violate RICO. (Count V.) Defendants Franczyk and his law firm move to dismiss all five counts with prejudice.

A motion to dismiss pursuant to FED. R. CIV. P. 12(b)(6) challenges the sufficiency of a complaint for failure to state a claim for relief. Johnson v. Rivera, 272 F.3d 519, 520-21 (7th Cir. 2001). In considering such a motion, the court assumes all facts alleged in the complaint are true and views the allegations in the light most favorable to plaintiff. The court is also permitted to consider documents attached as exhibits to the complaint, FED. R. CIV. P. 10(c); Tierney v. Vahle, 304 F.3d 734, 738 (7th Cir. 2002), including, in this case, the loan agreement between Plaintiff and Argyll, and correspondence between Plaintiff and Defendant Franczyk. The court should grant a Rule 12(b)(6) motion only where the plaintiff can prove no set of facts, consistent with his allegations, that would support his claim for relief. Lee v. City of Chicago, 330 F.3d 456, 459 (7th Cir. 2003). The court addresses Plaintiff's claims in light of these standards.

Count I: Unjust Enrichment

To state a claim for unjust enrichment under Illinois law,*fn1 plaintiff must allege that the defendant has unjustly retained a benefit to plaintiff's detriment and that the defendant's retention of that benefit violates fundamental principles of justice, equity, and good conscience. In the most straightforward case, the plaintiff seeks to recover payment for services he rendered that benefitted the defendant. See, for example, Williams v. National Housing Exchange, Inc., 949 F. Supp. 650, 652 (N.D. Ill. 1996) (denying motion to dismiss where the claimant had provided services in connection with managing a mortgage portfolio that benefitted the counterdefendant, but for which the counterdefendant had refused to pay). The Illinois Supreme Court has recognized three situations in which an unjust enrichment claim arises where the benefit the plaintiff is seeking to recover did not "proceed[] directly from him to the defendant," but instead reached the defendant via a third party: (1) where the third party mistakenly gave the benefit, intended for plaintiff, to the defendant; (2) where the defendant procured a benefit from the third party through some type of wrongful conduct; or (3) where the plaintiff for some other reason has a better claim to the benefit than does defendant. HPI Health Care Servs. Inc. v. Mt. Vernon Hosp., Inc., 131 Ill.2d 135, 161-62, 545 N.E.2d 672, 679 (1989).

The court is uncertain how this theory applies to the circumstances alleged here. Certainly Plaintiff has not suggested that he rendered services to Defendant Franczyk and is entitled to be paid for them. Instead, Plaintiff alleges without elaboration that Franczyk and his firm have been unjustly enriched "by the amount of consideration they received from their participation in the scheme to defraud Paolino." (Complaint ¶ 37.) The court presumes that Franczyk, who was allegedly acting as Argyll's lawyer when he corresponded with Plaintiff, was paid by Argyll for his services. But whatever hourly rate Argyll may have paid Mr. Franczyk bears no relationship to the loss Plaintiff allegedly suffered as a result of Franczyk's misdeeds. Plaintiff may believe that Franczyk shared in the profits he claims Argyll enjoyed from the sale of the Mace shares. If so, Mr. Franczyk is properly charged with conspiracy to commit the tort of conversion, not unjust enrichment.

Count I for Unjust Enrichment is Dismissed Without Prejudice. Count II: Civil Conspiracy

Defendant argues that Count II must be dismissed because "Illinois law does not recognize a tort of conspiracy to commit a tort." (Defendant John Franczyk's Motion to Dismiss and Memorandum [hereinafter, "Franczyk Memo"], at 7.) There is some case law that supports this assertion, see Heritage/Remediation Engineering, Inc. v. Wendnagel, No. 89 C 413, 1989 WL 153373, *9 (N.D. Ill. Nov. 9, 1989) (citing Cenco, Inc.v. Seidman & Seidman, 686 F.2d 449, 453 (7th Cir. 1982) ("If there is a conspiracy and it fails, there is no injury and hence no tort liability; if it succeeds, the damages are fully recoverable in an action on the underlying tort")); compare Real Colors, Inc. v. Patel, 974 F. Supp. 645, 651 (N.D. Ill. 1997) (granting 12(b)(6) motion, but observing that "[c]onspiracy alleging a tort as the underlying wrongful act is actionable, as long as it includes additional defendants or new facts not already pled in the underlying tort.")

A civil conspiracy, under Illinois law, is no more than the agreement of two or more people to commit an unlawful act, or to inflict a wrong on another person, and an overt act that causes harm. Old Sec. Life Ins. Co. v. Continental Ill. Nat. Bank & Trust Co. of Chicago, 740 F.2d 1384 (7th Cir. 1984) (citing Lenard v. Argento, 699 F.2d 874 (7th Cir.), cert. denied, 464 U.S. 815 (1983)); Zokoych v. Spalding, 36 Ill. App. 3d 654, 667-68, 344 N.E.2d 805, 816-17 (1st Dist.1976); Reel v. City of Freeport, 61 Ill. App. 2d 448, 453-54, 209 N.E.2d 675, 677-78 (2d Dist.1965). As this court understands Paolino's complaint, in Count II he seeks to impose liability on Defendant Franczyk for acts performed by Argyll and its agents; that is, Plaintiff contends that Franczyk is liable not only for the harm caused by his own alleged misrepresentations (his statements that Argyll would forbear from selling shares it had already in fact sold), but also for the harm caused by the sale itself. Notably, the complaint makes no mention of any involvement Franczyk had with ...

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