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People ex rel KGB, Inc. v. Breed-Gambino

November 13, 2009

PEOPLE OF THE STATE OF ILLINOIS, EX REL KGB, INC., AN ILLINOIS CORPORATION, AND MICHAEL J. BOZAN, AS RELATORS AND IN THEIR OWN CAPACITIES, PLAINTIFFS,
v.
KRISTINA BREED-GAMBINO, NICHOLAS JOVANES, JOVANES ENTERPRISES, INC., JOVANES ASSET MANAGEMENT CORPORATION, GLOW TAN, INC., KGI, INC., AND CINDY JOVANES, DEFENDANTS.



The opinion of the court was delivered by: Matthew F. Kennelly, District Judge

MEMORANDUM OPINION AND ORDER

Michael Bozan has sued Nicholas Jovanes, Cindi Jovanes, and Jovanes Asset Management, along with other defendants. Bozan asserts five claims against the Jovanes defendants. Counts 4 and 5 are state law claims against Nicholas Jovanes and (as to Count 4) Jovanes Asset Management for rescission and conspiracy to defraud. Counts 9 and 10 are claims against Nicholas Jovanes under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1962(c) & (d). Count 12 is a claim against Cindi Jovanes for unjust enrichment. The Jovanes defendants have moved for summary judgment on all claims. For the reasons set forth below, the Court denies their motion.

Facts

On a motion for summary judgment, the Court draws "all reasonable inferences from undisputed facts in favor of the nonmoving party and [views] the disputed evidence in the light most favorable to the nonmoving party." Harney v. Speedway Super-America, LLC, 526 F.3d 1099, 1104 (7th Cir. 2008).

Bozan, a Chicago police officer, met Kristina Breed-Gambino (Gambino) in late 2004 or early 2005 through an interpersonal web site. Gambino told Bozan that she owned a tanning salon in Buffalo Grove called Tan Express. In the following months, Bozan told Gambino that he had been thinking about buying a business and that he would finance it with the equity in a home he owned in Las Vegas and the condominium in which he lived in Chicago.

In the early spring of 2005, Gambino phoned Bozan to find out whether he would be interested in opening a tanning salon with her, because she had plans to expand and create a chain of salons in Chicago. Bozan expressed interest, and in early April 2005, they discussed the tanning business. Gambino showed Bozan a manual on the "Trinity" tanning machine, which she said cost $20,000 per machine. Gambino mentioned her friendship with the machine's manufacturer, Nicholas Jovanes, and said she was using the same machines at Tan Express, which made her about $250,000 per year. Gambino suggested Bozan use the equity in his properties to cover the cost of the machines, she would cover the salon's build-out and start-up costs, and they could get a Small Business Administration (SBA) loan to cover remaining costs.

In mid-April 2005, Bozan visited Tan Express and Gambino explained the operation of the salon. Gambino said she was working with Jovanes on her expansion plans because he was knowledgeable about the industry and a prior owner of salons. At Gambino's insistence, Bozan called Jovanes, who confirmed that he was working with Gambino to establish a chain of tanning salons. He said that Tan Express's success proved that their concept worked. The salon featured Jovanes' Trinity tanning machines, which were stand-up models and had several advantages over other machines, which Jovanes detailed. These included the fact that the machines were "high pressure" machines, which would tan customers quicker than traditional tanning machines, allowing the salon to operate more efficiently.

Bozan told Jovanes he was looking for a business to own, and Jovanes stated that the opportunity Gambino offered was better than anything he could find on his own. Jovanes explained that in his and Gambino's experience, a salon could easily make $350,000 to $400,000 per year within the first year or two. The salons they planned to establish would engage in group advertising and group buying to build a reputation and reduce costs. Because the opportunity to establish a major chain of tanning salons in the Chicago area might pass, he and Gambino needed investors who could finance the new salons.

During this and other conversations, Bozan says, Jovanes repeatedly represented that Gambino owned the Tan Express salon, referring to the business as "Kristina's salon" and "her Tan Express." Jovanes also repeated and emphasized the advantages of his Trinity tanning machines.

After his initial conversation with Jovanes, Bozan met with Gambino at Tan Express once or twice more. Gambino showed him the monthly sales records on her computer, which reflected $7,000 to $8,000 per month in auto-drafts under membership contracts, not including daily sales of tanning services and lotions. After one year, Gambino claimed, she had grossed $350,000 to $400,000 and kept $250,000 in profits.

Bozan continued discussing the possible business relationship with Gambino by phone in April and May. On June 10, 2005, Gambino and Bozan met James Stolt, a Comerica Bank loan officer, to discuss the possibility of an SBA-guaranteed loan. Gambino represented that she was the owner and operator of the Tan Express salon. Bozan then learned that Stolt was already aware of Gambino's experience and plans to expand because, in addition to opening a salon with him, Gambino was opening a salon with her grandfather in Naperville under the corporate name KGI, Inc. Based on her experience with Tan Express, Gambino informed Stolt that she expected her proposed salons to cost $600,000 each.

Stolt expressed interest in financing the salon but said there were several preconditions to a loan. Comerica and the SBA would require Bozan and Gambino to make a cash investment in the business amounting to thirty percent of the cost of establishing the business. Comerica would verify the investment before disbursing the funds. Comerica also expected Gambino and Bozan to personally guarantee the loan and secure it with business and personal assets. In addition to the salon's business assets, Comerica would require mortgages on Bozan's home in Las Vegas and his condominium in Chicago. Bozan said that he was concerned about staking what he owned on the tanning salon's success and that he was not ready to make a commitment. Stolt and Gambino said that if Bozan decided to proceed, they would make all the arrangements for processing the loan.

After the meeting, Gambino called Bozan a couple of times to ask if he had made up his mind about the loan. Bozan continued to express concern about risking what he owned on the salon. Gambino suggested Bozan meet Jovanes and inspect the tanning machines' manufacturing facilities. Bozan agreed, and Gambino arranged the meeting. In mid-June 2005, Bozan met Jovanes and Gambino at his manufacturing facilities in Glen Ellyn and Niles, Illinois. At the Niles facility, Bozan observed at least sixty assembled tanning machines. Jovanes said that some of them had been set aside for Gambino and that he was giving her a volume discount. Jovanes told Bozan that if he invested with Gambino, he would benefit from the same discount. Jovanes continued to represent that he would provide "high pressure" tanning machines.

At the Niles plant, Jovanes stated that he and Gambino had learned from experience that the tanning business had seasonal cycles but that over time the peaks were higher and the dips were not as low. Jovanes illustrated these cycles in graph form on a sheet of paper. Jovanes said that Bozan would be able to leave the police department within two years and that after opening his first salon, Bozan would want to do as Gambino was doing and open a second salon with the cash flow from the first. In that way, Bozan could leverage his investment to a string of tanning salons with a cash flow of $1,000,000 per year.

When Bozan asked Jovanes about the cost of building out the salons, he replied that it varied but could range between $40,000 to $160,000. Jovanes also encouraged Bozan to take out the Comerica loan. In response to concerns Bozan expressed about pledging everything he owned to the bank, Jovanes said, "Loans are a fact of life," and "That's how business is done." Jovanes assured Bozan that if anything went wrong, he would be able to cover the loan by selling the tanning machines, because he would be buying them at a discount, and their actual value was greater than the amount of the loan.

Jovanes told Bozan that the new salon would fail only if Bozan did not follow his and Gambino's directions. He assured Bozan that he and Gambino had already gone through the process of building a tanning business, making mistakes, and learning from them. Jovanes also said that he expected Bozan to be loyal to them and did not want Bozan to open any salons independently or to buy anyone else's machines, because this would harm the network they planned to create.

By the end of the meeting, Bozan had agreed to move forward with the investment. He agreed to take out a home equity loan on his property in Las Vegas to pay for the deposit on the tanning machines, and he told Gambino to arrange the loan with Comerica.

In mid-July 2005, Bozan obtained from LaSalle Bank a home equity loan on his Las Vegas property. Gambino asked to have the cashier's check drawn to the order of Glow Tan, Inc. and delivered to her, telling Bozan that this was the corporate name she was using for her salons. She promised to deliver the money to Jovanes as a deposit on the tanning machines. Bozan obtained a cashier's check for $181,729.66 and delivered it to Gambino on July 18, 2005.

On August 26, 2005, Bozan met with Gambino to sign Comerica's formal loan proposal letter. Attached to the letter was a checklist of items Comerica needed to move forward with the loan, including evidence of capital injection in the business. Gambino stated she would deliver these items to the bank. Also in August 2005, the loan for Gambino's Naperville salon closed, with a $372,000 disbursement to Jovanes Asset Management.

When Bozan could not reach Gambino in September 2005, he contacted Jovanes to find out what he had heard from her. Jovanes said the Comerica loan was on track and that Gambino was busy setting up her salon in Naperville. Gambino called Bozan shortly after his conversation with Jovanes. Gambino reported that the Comerica loan was progressing but that she could not reach agreement on a lease with the landlord of the North Aurora location they wanted for the salon.

In October 2005, Gambino and Bozan met and he signed the formal SBA loan application for KGB, Inc., the corporation Gambino formed for their salon. Bozan says that later that same month he learned, to his surprise, that Gambino had entered into a lease for a salon in Romeoville, contrary to their plan to open up shop at a location in North Aurora. Gambino said she was unable to get a satisfactory lease at the North Aurora location and that Jovanes had picked a new location.

In late November 2006, the SBA authorized Comerica's loan. Before authorizing disbursement of the loan proceeds, Comerica required a cash injection into KGB, Inc. of $194,700. Bozan was required to personally guarantee the loan. Gambino submitted documents to Comerica to prove investment in the business and improvements to the premises in Romeoville. Bozan provided confirmation to Stolt that he had invested $191,700 in the project. The loan closed on December 2, 2005, and $390,000 of the proceeds were disbursed to Jovanes Asset Management.

In late January 2006, Bozan learned that Gambino had not made the first payment to Comerica and that the loan was in default. On February 8, 2006, Gambino admitted that she had not made the payment and that she did not have money to make the payment. She asked Bozan to make the payment to avoid a default. When Bozan asked about the loan proceeds, Gambino said she had reimbursed herself for the down payment on the tanning machines and spent the rest on the salon's build-out. Bozan asked to see receipts for the work on the salon, but Gambino said she had given all the documentation to the bank. By the end of their meeting, Bozan agreed to ask his mother for money, because he had none to contribute. When Bozan asked to see the salon, Gambino said she could not give him the key because her key was the master key to all of her salons. A day or ...


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