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Gas Technology Institute v. Rehmat

November 9, 2007

GAS TECHNOLOGY INSTITUTE, GAS RESEARCH INSTITUTE, AND GRI INTERNATIONAL, INC., ENDESCO SERVICES, INC., AND ENDESCO CLEAN HARBORS, LLC, PLAINTIFFS,
v.
AMIRALI G. REHMAT, ET AL., DEFENDANTS.



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

MEMORANDUM OPINION AND ORDER

Plaintiffs in this action are five related entities involved in the development of certain environmental technologies, referred to here as "Cement-Lock," "ACIMET," and "GasTech" technologies. In short, Plaintiffs claim that their investments in these technologies were misappropriated and misused. In May 2005, Plaintiffs Gas Technology Institute ("GTI"), Gas Research Institute ("GRI"), and Endesco Clean Harbors LLC ("ECH") filed their initial seven-count complaint against dozens of Defendants. Over the course of the next several months, twenty-two Defendants filed motions to dismiss and motions for summary judgment. In December 2006, the court granted those motions in part and denied them in part. GTI, GRI, ECH filed an amended seven-count complaint in January 2007, now joined by GRI International, LLC ("GRI International") and Endesco Services, Inc. ("ESI").*fn1 Plaintiffs' claims against many of the Defendants have been settled or otherwise resolved. Four of the remaining Defendants--Unitel Technologies, Inc. ("Unitel"), UT/GT LLC ("UT/GT"), Surjit Randhava ("Serge"), and Richard Kao (together the "Unitel Defendants")-have moved to dismiss, or in the alternative for summary judgment on, the remaining counts against them. Those counts include: a racketeering conspiracy under 18 U.S.C. §§ 1962(d) and 1964 of the Racketeering Influenced and Corrupt Organizations Act ("RICO") against all Defendants (Count II); breach of fiduciary duties and the duty of loyalty against Defendant Serge (Count III); common law fraud against Defendants Serge and Kao, asserted only by Plaintiff GRI and GRI International (Count V); civil conspiracy to commit fraud against all Defendants (Count VI), and a claim for an equitable accounting against Serge and UT/GT, asserted only by Plaintiff GRI International (Count VII). For the reasons explained below, this Motion to Dismiss Amended Complaint or, in the Alternative, for Summary Judgment is granted in part and denied in part.

BACKGROUND

The facts of this case were detailed in some depth in Gas Technology Institute v. Rehmat, 05 C 2712, 2006 WL 3743576 (N.D. Ill. Dec. 15, 2006) and thus will be repeated here only in brief. As relevant to the Unitel Defendants, the Plaintiffs in this action allege that they were injured by at least two different fraudulent schemes referred to as the "GasTech Fraud" and the "Cement-Lock Fraud." With regard to the GasTech Fraud, Plaintiffs allege that Serge fraudulently induced GRI and GRI International to provide $650,000 in funding for the GasTech venture, and that Defendants misappropriated approximately $300,000 of that funding. (Pls.' Resp. 3.) They claim that Kao prepared a report to make it appear that those funds had been properly spent on GasTech research and development. (Id.) Plaintiffs allege that the Cement-Lock Fraud involved a scheme by which various parties set up sham contractors who were supposed to perform work for Plaintiffs involving the Cement-Lock, ACIMET, and Gas Tech Technologies, but never did so. (Pls.' Resp. 8-10.)

I. The Parties

The individuals and entities involved in this action are heavily interrelated. Plaintiff GTI is an Illinois not-for-profit corporation and the successor in interest to the Institute of Gas Technology. (Pls.' Resp. to Defs.' 56.1 ¶ 1.) Plaintiff GRI is an Illinois not-for-profit corporation. (Id. ¶ 2.) Plaintiff GRI International is a Delaware for-profit corporation and a wholly-owned subsidiary of GRI. (Id. ¶ 3.) Plaintiff ESI is an Illinois for-profit corporation and, according to Plaintiffs, a wholly-owned subsidiary of GTI. (Id. ¶ 4.) All of the managing employees of ESI are also employees of GTI. (Id. ¶ 4.) GRI International and ESI each own a 50% interest in Plaintiff ECH, which is a Delaware for-profit limited liability company. (Id. ¶ 5.)

Defendant Unitel is an Illinois corporation owned by Serge and others. (Id. ¶ 10.) Defendant UT/GT is a Delaware limited liability company. (Id. ¶ 9.) Serge is an Illinois resident who, at all relevant times, was a manager of Cement Lock Group LLC ("CLG") and the President of GasTech LLC ("GasTech"). (Id. ¶ 11.) CLG is a Delaware limited liability company whose members are ESI, Cement Lock LLC ("CL"), and Richard Mell. (Id. ¶ 6.) GasTech is a Delaware limited liability company owned in equal parts by UT/GT and GRI International. (Id. ¶ 7.) Kao is an Illinois resident who was, at all relevant times, a manager of CLG and a member of CL. (Id. ¶ 12.) CL is an Illinois limited liability company whose members include Serge, Kao, Wayne & Associates, and Jinnet Hemani; CL is also a minority owner of CLG. (Id. ¶ 8.)

II. The GasTech Fraud

GasTech LLC was formed as a Delaware limited liability company by an agreement between GRI International and UT/GT on November 3, 1999. (Limited Liability Agreement of GasTech, L.L.C. ("GasTech LLC Agreement"), Defs.' Ex. D.) GRI International and UT/GT are the only Members of GasTech. (Pls.' Resp. to Defs.' 56.1 ¶ 15.) Under the terms of the GasTech LLC Agreement, GRI made an initial capital contribution of $650,000 to GasTech, and UT/GT contributed all of its right, title, and interest to intellectual property associated with "a new methane adsorption technology that can be used for increasing the output of an ammonia production facility, otherwise commonly known as 'debottlenecking.'" (GasTech LLC Agreement §§ 1.11, 4.1, Defs.' Ex. D.) The parties refer to this methane adsorption technology as the A Process. (Pls.' Resp. to Defs.' 56.1 ¶ 20.) In exchange for these initial capital contributions, the GasTech LLC Agreement provides that GRI International and UT/GT would each receive 6,500 ownership units in the company. (GasTech LLC Agreement §§ 1.20, 4.1, Defs.' Ex. D.)*fn2 Contemporaneous with the GasTech LLC Agreement, GasTech entered into an Investor Rights Agreement with GRI International, by which GRI International purchased a 50% membership interest in GasTech for $650,000. (Pls.' Resp. to Defs.' 56.1 ¶ 19.) It is not clear why this separate agreement was necessary, but it does impose limitations on the GasTech funding. Specifically, the Investor Rights Agreement dictates that the $650,000 is "subject to certain use limitations" including that "the funds invested by GRI in GASTECH . . . shall be used for research, development and demonstration of GasTech's A proprietary technology for methane adsorption in ammonia production plants." (Defs.' Resp. to Pls.' 56.1 ¶ 22.) Serge signed the Investor Rights Agreement on behalf of GasTech. (Id.) In connection with the formation of GasTech, UT/GT contributed its intellectual property relating to the methane adsorption technology. (Pls.' Resp. to Defs.' 56.1 ¶ 20.)

On November 19, 1999, $650,000 was transferred from a bank account owned by GRI to a bank account owned by Unitel. (Pls.' Resp. to Defs.' 56.1 ¶ 27.) S. Peter Barone and Paul Chromek, both of whom were GRI employees, approved the wire transfer. (Id. ¶¶ 22, 27.) The particular allegations against the Unitel Defendants related to this GasTech Fraud will be discussed in greater detail below, but essentially, Plaintiffs GRI and GRI International claim that they were defrauded into making this wire transfer and that the funding was ultimately misappropriated. It is undisputed that a significant portion of this $650,000 was indeed misappropriated and that that sum was eventually distributed to Barone, Lee, and a third party named Shyam Singh, whose relationship to the Core Group has not been explained in the record before the court, all in the form of kickbacks. (Id. ¶ 31; Defs.' Resp. to Pls.' 56.1 ¶¶ 34.) Plaintiffs claim that, as a part of this scheme, Serge fraudulently induced GRI and GRI International to provide the $650,000 in funding, and that he ultimately misappropriated the funding, including $100,000 to himself. (Pls.' Resp. 3.) They allege that Kao participated in attempts to cover up the GasTech Fraud, once it had occurred. (Id.) As a consequence of the GasTech Fraud, GRI and GRI International claim to have lost more than $530,000 of the $650,000 contributed to GasTech. (Verified Am. Compl. [Docket Entry No. 183] ¶ 173.)

III. The Cement-Lock Fraud

Plaintiffs also claim that Defendants are implicated in a fraud related to the Cement-Lock Technology. Plaintiffs have identified the "Core Group" of perpetrators of this (and other) schemes to defraud and steal millions of dollars from Plaintiffs: S. Peter Barone, Amirali Rehmat, and Anthony Lee. (Verified Am. Compl. ¶¶ 25-28.) The parties do not explain the mechanics of this fraud in great depth here. Rehmat, Lee, Serge, Kao, Wayne and Associates, Hemani, and others formed CL in 1996. (Id. ¶ 57.) Plaintiffs allege that Kathreen Jones and her husband Charles Wayne Jones, Lee's daughter and son-in-law, respectively, set up sham entities called Homatex and Wayne and Associates. (Id. ¶ 90.) They assert that Lee directed that these entities be set up, that Lee at all times controlled the funds deposited into and withdrawn from these sham entities' accounts (id.), and that Wayne and Associates, in fact, held an ownership interest in CL on behalf of Lee. (Pls.' 56.1 ¶ 1.) Plaintiffs further assert that Hemani was Rehmat's sister-in-law and the mere alter ego of Rehmat. (Verified Am. Compl. ¶¶ 30, 187.) In 1996 and 1997, Rehmat, Lee, Serge, Kao, and others filed patent applications in the United States and abroad, for processes to which Plaintiffs claim they had no proprietary rights. (Id. ¶¶ 57-59.) A dispute regarding patent rights arose, and Plaintiffs assert that CLG was formed in 1997 to attempt to resolve it. (Id. ¶ 60.) CL became a minority owner of CLG. (Pls.' Resp. to Defs.' 56.1 ¶ 8.) According to Plaintiffs, Rehmat and Lee had a financial and ownership interest in CL (and thus CLG), which they concealed from their employers: GTI and GRI. (Id. ¶ 61.) Those interests would have created a conflict of interest; if disclosed, Plaintiffs allege, the conflict would have led to Rehmat's and Lee's termination. (Id.)

And in fact, it is agreed by all parties to this action that Rehmat and Lee, with Barone, did perpetrate a fraud related to the Cement-Lock Technology. Plaintiffs allege that the CLG (a limited liability company of which CL is a member) licensed the Cement-Lock Technology to ECH. (Verified Am. Compl. ¶ 65.) Barone, Rehmat, and Lee prepared and executed subcontracts with various outside entities, some of which actually did develop the Cement-Lock Technology, and others of which merely purported to. (Id. ¶ 69.) Plaintiffs allege that at least ten of these outside contractors were shams. (Id.) As a consequence of this scheme, Plaintiffs claim to have lost over $4.3 million. (Id. ¶ 104.) Plaintiffs assert that Serge willfully concealed and did not disclose Rehmat's and Lee's interest in CL, and thereby in CLG, which makes him an active participant in their fraud. (Id. ¶ 63.)

Defendants Unitel, UT/GT, Serge, and Kao (together, the "Unitel Defendants") now move the court to dismiss or grant summary judgment in their favor on all of the claims brought against them: Counts II (racketeering conspiracy), III (breach of fiduciary duty), V (common law fraud), VI (civil conspiracy to commit fraud), and VII (accounting).

DISCUSSION

I. Jurisdiction

The court has federal question jurisdiction over this civil action because there are causes of action arising under section 1964 of RICO. 28 U.S.C. § 1331 (2000). The court has supplemental jurisdiction over Plaintiffs' state law claims pursuant to 28 U.S.C. § 1367.

II. Legal Standard

Summary judgment should be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c). Summary judgment is not appropriate if the "evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). As the moving parties, the Defendants bear the initial burden of proving that there is no genuine issue of material fact and that they are entitled to judgment as a matter of law. Hicks v. Midwest Transit, Inc., 500 F.3d 647, 651 (7th Cir. 2007). The Plaintiffs retain the burden of producing evidence sufficient to support a reasonable jury verdict in their favor. Id.

III. Claims Relating to GasTech

A. Standing

The Unitel Defendants challenge Plaintiffs' standing, arguing that only GasTech has standing to bring claims related to the GasTech Fraud. (Defs.' Mem. 6.) They concede that, as a Member of GasTech, GRI International might have derivative standing to bring this lawsuit on GasTech's behalf but point out that GRI International has not met the pleading requirements necessary to bring a derivative claim. (Defs.' Mem. 6-7.) As a threshold matter, then, the court must determine whether Plaintiffs GRI and GRI International bring their claims related to the GasTech fraud based on direct or derivative standing. A member of a limited liability company may "bring a derivative action to enforce a right that the corporation or association may properly assert but has failed to enforce." FED. R. CIV. P. 23.1(a). The question here is whether the right being asserted properly belongs to GasTech or to any of the Plaintiffs in ...


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