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Blythe Holdings, Inc. v. Flawless Financial Corp.

January 15, 2009

BLYTHE HOLDINGS, INC., ET AL., PLAINTIFFS,
v.
FLAWLESS FINANCIAL CORPORATION, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Judge Robert M. Dow, Jr.

MEMORANDUM OPINION AND ORDER

This matter is before the Court on several motions to dismiss Plaintiffs' first amended complaint, filed by the various Defendants. On May 9, 2008, Defendants Phillip Kupritz, K2 Architects, Inc. and Cion Companies Inc. moved to dismiss or stay proceedings and compel arbitration [164]. On June 9, 2008, Defendant Shirley Coleman moved to dismiss [177]. On June 9, 2008, Defendant John DeAngelis moved to dismiss [182]. And on June 30, 2008, the Brown and Udell Defendants moved to dismiss [188].

For the following reasons, the Court grants in part and denies in part the K2 Defendants' motion to dismiss or stay proceedings and compel arbitration [165], denying the motion as to the request to dismiss but granting the motion to compel arbitration and staying proceedings as to the K2 Defendants. The Court grants in part and denies in part Defendant John DeAngelis' motion to dismiss [182], and the Court also grants in part and denies in part the Brown Udell Defendants' motion to dismiss [188]. In particular, as to the lawyer Defendants, the Court denies the motions on Plaintiffs' unjust enrichment claims and grants the motions on Plaintiffs' legal malpractice and equitable accounting claims. The Court denies Defendant Shirley Coleman's motion to dismiss [177].

I. Factual Background*fn1

In their first amended complaint, Plaintiffs allege that they were victims of a "real estate based scheme to defraud investors" in connection with the redevelopment of vacant lots in the City of Chicago's 16th Ward. The scheme was allegedly devised by Defendant Tracy Williams and implemented through companies controlled by her.*fn2 The first amended complaint alleges that former 16th Ward Alderman Shirley Coleman was a willing and active participant in the fraudulent scheme and that she "controlled" a City community redevelopment program involving the sale of vacant lots in the 16th Ward. According to the allegations, the City of Chicago maintains a redevelopment program called Negotiated Sale of Redevelopment Project Area Properties, under which it sells developers vacant land owned by the city for the purpose of development and offers them assistance in planning, acquisition, zoning, permitting, construction, and resale. These programs are administered by the Department of Planning and Development, but are subject to the approval and control of the City of Chicago, the Chicago City Council, and aldermen in the wards in which the properties are located.

However, before Plaintiffs set forth the allegations involving the City's redevelopment project, Plaintiffs allege that from 2003 to 2005 Defendants engaged in a scheme to harm not only Plaintiffs but other entities not named as parties to this action. The first allegations concern a private business deal that occurred in 2003 between Defendant Williams and an individual named Ali Khounsary. Plaintiffs' allegations concerning the "Khounsary Scheme" include that in late 2003, the Flawless Defendants failed to perform their end of a contract to rehabilitate certain investment property owned by Khounsary and that Khounsary lost money on the deal. Plaintiffs further allege that the Flawless Defendants "converted and diverted Khounsary's money and a substantial amount of his credit to [Williams's] own personal use instead of applying it to the project Khounsary had hired [Williams] for."

Plaintiffs next allege that the Flawless Defendants, as well as others not named as defendants in the instant complaint, committed financial institution fraud against Park Federal Savings Bank in September 2003. Plaintiffs allege that the Flawless Defendants, Florin Burlan, and Mozell Barnes made misrepresentations to Park Federal in connection with the sale of real estate in an effort to defraud Park Federal Savings Bank out of mortgage proceeds. According to the complaint, Park Federal Savings Bank, relying upon false representations made by Williams, Burlan, and Barnes, extended a mortgage loan in excess of the value of property at 932-944 79th Street in Chicago, Illinois. Plaintiffs further claim that Williams, Burlan, and Barnes misrepresented the financial terms "for personal gain and profit." Then, in early 2004, Plaintiffs claim that Williams, Burlan, and Lavoran Blakely once again defrauded Park Federal in connection with a loan on real estate located at 4800-4810 S. Calumet Avenue in Chicago. Plaintiffs allege that the earnest money amount was falsely represented to the financial institution, making it appear that the loan amount sought was a percentage of the sales price.

Plaintiffs next claim that Williams, Flawless, and Burlan engaged in a scheme to defraud a private company, Venture Equities, which made a short term loan to Burlan. Plaintiffs allege that an escrow, with the Flawless Defendants as escrowee, was set up at the closing on certain unidentified property. The purpose of the escrow was to use the funds to make the first three months interest payments on the loan. Plaintiffs claim that the Flawless Defendants converted the escrow funds to their own use and passed them on to Burlan, who then defaulted on the loan.

Then, in 2005, Plaintiffs allege that the Flawless Defendants turned their attention to them. According to the complaint, Defendant Williams advised Stephanie Hill, President of Blythe Holdings, that Coleman had 400 city lots available, all in contiguous parcels,*fn3 in the 16th Ward of Chicago. Plaintiffs allege that Williams advised Hill that Flawless was a licensed mortgage company and that it would provide attractive construction financing as well as mortgages for the ultimate purchases of the new construction. Williams also informed Hill that she had 1,200 pre-qualified and approved clients ready to buy developed property. The complaint further alleges that Coleman told Hill that Blythe would have to enter into an agreement with Flawless to accomplish the project. Williams advised Hill that Flawless would act as a co-developer and consultant, which would permit Coleman to "walk all of the paperwork through" city hall, obtain the necessary permits, and start construction (weather permitting) no later than March 2006. According to the complaint, in October 2005, Hill met with Williams, Coleman, and Willie Miles (an "associate" of Flawless, Williams, and Coleman) at a condominium owned by Williams.

In an agreement dated October 25, 2005, Flawless Financial and Tracy Williams "agreed to deliver up to 400 residential building lots to Blythe Holdings, Inc. or assigns for $1 million or $2,500 per lot in a minimum 6-9 month time frame period." [DE 160, Ex. B]. The agreement required Blythe to enter into a minimum of a six month consulting agreement with Flawless for $20,000 per month. The agreement also provided that Blythe would pay a $50,000 retainer to Flawless Financial upon execution by both parties of the consulting agreement and that Blythe would pay a "bonus payment" of $400,000 ($1,000 per lot) to Flawless as each lot was secured to Blythe or its assigns. The terms also stated that Blythe was to use the architectural firm of Phil Kittredge [sic], recommended by Flawless, and to pay the architect a retainer of $25,000 upon execution of the consulting agreement. Finally, the agreement also required Blythe to use an attorney recommended by Flawless Financial and to pay the attorney a $25,000 retainer upon execution of the consulting agreement. The total deposit of $100,000 (including the retainers for the architect and the attorney as well as the $50,000 retainer for Flawless) was to be wired to Flawless upon execution of the agreement. Both Tracy Williams and Stephanie Hill signed the agreement on October 26, 2005. Id. Accompanying the consulting agreement was a letter from Tracy Williams to Stephanie Hill, describing the agreement and setting forth additional details.

On November 7, 2005, Blythe hand delivered a $50,000 cashier's check to Flawless to satisfy the agreed upon retainer. On November 16, 2005, $150,000 was wired from Blythe's U.S. Bank account to Flawless for use in the acquisition of the 400 lots. According to the complaint, Williams paid Coleman a share of the money wired by Blythe by directing Nancy Villacorta (an "associate" of Flawless and Williams) to send $50,000 to Coleman's church.

On November 28, 2005, John DeAngelis, an attorney with Brown, Udell & Pomerantz, Ltd., sent Hill a letter (on Brown Udell letterhead) regarding "Acquisition of Vacant Lots--Chicago, Illinois." The purpose of the letter was "to provide Blythe Holdings, Inc. ("you") and our firm with a written memorandum of the terms and conditions under which we will undertake to represent you." [DE 160, Ex. D]. The letter set forth, "[a]s we have discussed, we will provide (both directly and through sub-consultants retained by us) such services in connection with the preparation, assembly, review and completion of an Application for Purchase of Property to the City of Chicago Department of Planning and Development * * *." The letter stated that services would be rendered at a flat fee of $50,000. The letter was signed by John A. DeAngelis under the firm name of Brown, Udell & Pomerantz, Ltd.

Plaintiffs allege that DeAngelis and Brown and Udell represented Williams and Flawless in prior dealings. According to the complaint, neither DeAngelis nor anyone else at Brown and Udell told Hill or anyone at Blythe that they had represented Williams and Flawless in the past. According to Plaintiffs, if they had known that DeAngelis and Brown and Udell had a pre-existing attorney-client relationship with Williams and Flawless, they would not have hired them. On December 1, 2005, Blythe paid DeAngelis the $25,000 retainer required by the agreement between Hill and Williams. According to the complaint, DeAngelis sent Williams and Flawless a copy of Blythe's retainer agreement.

Blythe Holdings also "intended" to enter into a standard form architect agreement with "K2."*fn4 [DE 160, Ex. E]. The agreement was signed by Phillip Kupritz, as a registered Illinois architect and Principal for K2. Plaintiffs contend that this agreement is not enforceable because K2 is a "legal nothing." Plaintiffs further allege that neither K2 nor Cion Companies were registered or licensed to practice architecture or deliver architecture services in Illinois at the time the writing was signed by Kupritz.*fn5 Despite Plaintiffs' contention that they did not enter into a written agreement with Kupritz, on December 1, 2005, Blythe paid Kupritz $25,000 as a retainer for the work he was to do in connection with the agreement between Blythe and Williams. Additionally, the agreement contained mediation and arbitration provisions, requiring the parties to first engage in mediation and then arbitration prior to the institution of legal proceedings.

In a letter dated November 21, 2005, Coleman thanked Blythe for its interest in the 16th Ward and wrote that Flawless was "an excellent consultant and well proficient in all areas associated with project development." She further wrote that attorney John DeAngelis and architect Phil Kupritz were held "in high regard with the City of Chicago." In a letter to Blythe dated December 12, 2005, Coleman confirmed and approved the agreement between Flawless and Blythe and enclosed a list of 100 lots that had been "reserved" in the first phase of the plan. Plaintiffs contend that these 100 lots had already been reserved for a developer named "Hobbs" and that, unbeknownst to Plaintiffs, Hobbs also was working with Coleman, DeAngelis, and Kupritz.

On December 8, 2005, Blythe wired $15,000 to Flawless. On December 20, Blythe wired $250,000 in two separate transfers (one for $100,000 and one for $150,000) to the client trust account of DeAngelis and Brown and Udell. According to the complaint, the funds were to be held by DeAngelis and Brown and Udell until the City of Chicago delivered deeds or other suitable documents of title for the property to the 100 lots. On December 21, DeAngelis and Brown and Udell wired the money to Flawless, but instead of using the money to pay for the acquisition of the lots, Plaintiffs allege that Williams began spending the money on personal items and matters unrelated to Blythe's transaction.

In January 2006, Hill and one of Blythe's investors traveled to Chicago to view the remaining 300 lots that were offered for development. According to Plaintiffs, the 300 lots shown to Hill and the investor were unsuitable for development and were not the lots that had been promised to Blythe by Coleman and Flawless the previous fall. On February 17, 2006, Flawless sent a letter of termination to Blythe, citing Plaintiffs' inability to secure funding for the remaining 300 lots. Flawless confirmed its outstanding obligation with respect to the first phase of 100 lots.

From this point on, the allegations are particularly difficult to follow. In February 2006, John Jones, Plaintiffs' financial consultant and a principal in Blythe, sent a letter to DeAngelis, demanding performance from all parties upon threat of litigation. DeAngelis responded with a letter reassuring Blythe that all fees associated with the acquisition had been paid. However, Plaintiffs contend that there were no fees that needed to be paid. In late February 2006, DeAngelis and Williams advised Blythe to form a new Illinois corporation, Chicago 100, Inc. According to the complaint, DeAngelis and Williams claimed that this was necessary to complete the acquisition of the lots and move the project forward. DeAngelis incorporated Chicago 100, Inc. on March 15, 2006. According to Plaintiffs, it was only after the "threat of litigation" that DeAngelis applied for lots on behalf of Chicago 100, Inc.*fn6 Plaintiffs also allege that DeAngelis assured them that Chicago 100, Inc. succeeded in interest to the rights of Blythe in connection with the lot acquisition application. Plaintiffs contend that none of the Defendants ever applied for any lots on behalf of Blythe.

The complaint alleges that on February 23, 2006, Kupritz sold to Hobbs the original drawings that Blythe paid Kupritz to render. Plaintiffs contend that Hobbs submitted these plans with his application to the City of Chicago's Department of Planning and Development. On March 28, 2006, DeAngelis and Kupritz met with Michelle Nolan, the Community Development Division--South Region Project Manager for the City of Chicago's Department of Planning and Development, on behalf of Hobbs. However, during that meeting they presented a proposal on behalf of Chicago 100 to acquire and develop 100 lots. On April 19, 2006, Kupritz faxed Plaintiffs a revised timetable for the application process, indicating that the lots would not be ready until August and that the $40,000 tax incentive originally promised to the developer would be provided to the homeowners.

On May 4, 2006, Hill wrote to Coleman to confirm that payment for the lots had been received and that the lots were to be deeded upon completion of the application, which was to be submitted by DeAngelis on or before May 15, 2006. On May 5, 2006, Kupritz provided Plaintiffs with a second parcel map of 100 lots. Plaintiffs allege that lots reserved for Hobbs had been removed from the list of available lots and that the lots on this second map were unsuitable. On May 18, Plaintiffs again wrote to Coleman, explaining in detail the difficulties in working with Flawless and requesting a meeting to resolve outstanding issues. Coleman did not respond to either letter.

On May 23, 2006, Michelle Nolan met with Jacquanette Johnson, an independent "project manager" retained by Plaintiffs, and provided her with a new list of possible lots. According to Plaintiffs, Nolan informed them that none of the 400 lots promised to them had been reserved or paid for. She also informed them of the "real steps" to apply for property through the program.

Plaintiffs claim that they have suffered millions of dollars in damages. Plaintiffs have paid $465,000 to Flawless and $25,000 each to DeAngelis/Brown and Udell and Kupritz, for a total of $515,000 to Defendants. Plaintiffs also claim to have lost millions of ...


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