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Gross v. Security Associates International

November 17, 2009

RAYMOND GROSS, AN INDIVIDUAL, AND PAUL LUCKING, AN INDIVIDUAL, PLAINTIFFS,
v.
SECURITY ASSOCIATES INTERNATIONAL, INC., A DELAWARE CORPORATION; CORDELL FUNDING, LLLP, A FLORIDA LIMITED LIABILITY COMPANY; SA SYSTEMS, LLC, A DELAWARE LIMITED LIABILITY COMPANY; CASTLEROCK SECURITY, INC., A DELAWARE CORPORATION; ROBIN RODRIGUEZ, AN INDIVIDUAL; JOHN C. HOWE, AN INDIVIDUAL; AND GARY FROHMAN, AN INDIVIDUAL, DEFENDANTS.



The opinion of the court was delivered by: Judge James B. Zagel

MEMORANDUM OPINION AND ORDER

I. BACKGROUND

Plaintiff employees allege the following counts against Defendant employer, asset purchasers, and individual investors: (1) breach of employment agreement; (2) violation of the Illinois Wage Payment and Collection Act; (3) fraud; (4) oppression; (5) alter ego; and (6) piercing the corporate veil. Defendants Security Associates International Inc., SA Systems, LLC, John Howe and Gary Frohman now move to dismiss certain of the claims against them. For the following reasons, Defendants' motion to dismiss is granted in part and denied in part.

II. STANDARD OF REVIEW

A Motion to Dismiss under Rule 12(b)(6) requires that I analyze the legal sufficiency of the complaint, and not the factual merits of the case. Autry v. Northwest Premium Servs., Inc., 144 F.3d 1037, 1039 (7th Cir.1998). I must take all facts alleged in Plaintiffs' complaint as true and draw all reasonable inferences from those facts in favor of Plaintiffs. Caldwell v. City of Elwood, 959 F.2d 670, 671 (7th Cir.1992). Plaintiffs, for their part, must do more than solely recite the elements for a violation; they must plead with sufficient particularity so that their right to relief is more than a mere conjecture. Bell Atl., Corp. v. Twombly, 550 U.S. 544, 555 (2007). Plaintiffs must plead their facts so that, when accepted as true, they show the plausibility of their claim for relief. Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). Plaintiffs must do more than plead facts that are "consistent with Defendants' liability" because that only shows the possibility, not the plausibility, of their entitlement to relief. Id. (internal quotations omitted).

III. STATEMENT OF FACTS

On August 6, 2001, Plaintiffs Ray Gross ("Gross") and Paul Lucking ("Lucking") entered into an Employment Agreement with Defendant Security Associates International, Inc. ("SAI"), a provider of home security alarms. The agreement provides

The Employer [SAI] shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Employer [SAI] expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Employer [SAI] would have been required to perform it if no such succession had taken place. As used in this Agreement, 'Employer' shall mean both the Employer as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise.

On May 1, 2003, SAI entered into an Amended and Restated Deferred Compensation Agreement ("Deferred Compensation Agreement") with Gross and Lucking, which effectively decreased the amount of Earned Cash Incentive due under the Employment Agreement in order to free up additional operating funds for SAI. This agreement also provides that if "SAI shall fail to perform any of the obligations under the Agreement, Guarantors will, on written demand, promptly perform such obligations and will pay to Recipients, to the extent provided under this Agreement, and all reasonable expenses and reasonable attorney's fees that may be incurred to enforce such obligations of SAI...." Guarantors are defined as "all direct and indirect subsidiaries of SAI... and any additional subsidiaries of SAI that may from time to time become parties to this Amended Agreement."

On May 25, 2004, Gross and Lucking entered into a Subordination Agreement with SAI and Defendant Cordell Funding, LLLP ("Cordell") in its capacity as Agent for the Lender under the Senior Loan Documents. Plaintiffs allege that Cordell, managed by Defendant Robin Rodriguez ("Rodriguez"), was engaged by SAI in 2004 to raise $55 million for refinancing and capital for SAI. After raising only a fraction of this capital, Cordell made loans to SAI for additional capital, taking a senior secured interest in SAI's assets and stock. Under the Subordination Agreement, most of the monies owed to Gross and Lucking under the Deferred Compensation Agreement were subordinated "to the prior satisfaction in full of the Senior Notes... " According to Plaintiffs, Rodriguez "masterminded" the Subordination Agreement in order to ensure that SAI make loan repayments to him prior to making any payments to Gross and Lucking. Plaintiffs allege that in return for the loans made by Cordell, Cordell required Lucking and Gross to forego a portion of Earned Incentive Compensation owed them. According to Plaintiffs, they agreed to a waiver of certain of these funds, and accepted a promissory note from SAI for the remaining. Plaintiffs further allege that "Cordell and others continuously indicated that the amounts represented by the promissory notes would either be paid in the future or converted to equity in any new entity to which SAI's assets might in the future be transferred."

On June 30, 2005, Alarm Funding purchased from SAI consumer alarm contracts.

In late 2006/early 2007, Gross and Lucking were awarded bonuses of approximately $85,000 each to be paid in the first quarter of 2007. Both Plaintiffs agreed to defer the bonus.

In February 2006, in exchange for an additional $1 million loan by Cordell to SAI, Gross and Lucking entered into Service Agreements, which provided that in case of foreclosure, Gross and Lucking would provide transitional services as part of SAI's satisfaction of its obligations to Cordell. These services would be provided for up to 120 days following foreclosure, subject to extension, at contractually defined rates. Plaintiffs allege that in return for signing the agreements they "were promised that they would be paid a premium of 50% above their then base salary for any work performed during a defined time period following a foreclosure..."

On February 28, 2008, Cordell declared a default by SAI under the loan agreements, and subsequently took control of the company. As a result, Rodriguez became SAI's Chairman and Treasurer, Frohman became a director and Chief Operating Officer, and Howe became President as well as a director. Plaintiffs allege that from that point forward, Rodriguez, Frohman and Howe operated for the sole benefit of Cordell and themselves at the expense of SAI, its shareholders, creditors, and employees. Upon completion of a foreclosure sale, SAI's assets and revenue were transferred to SA Systems, LLC ("SAS"), the only member of which is Cordell. Gross and Lucking continued to provide services to SAI.

On July 18, 2008, SAS sold the SAI assets to COPS Monitoring, resulting in a large payout to Cordell, and minimal proceeds to SAI. As part of the deal, SAS and SAI entered into a transition services agreement under which SAI would provide transitional services and SAS would pay employee expenses and other benefits. After Alarm Funding filed suit against SAI, Cordell and others, the parties entered into an Asset Purchase and Settlement Agreement along with CastleRock Security, Inc. ("CastleRock") in which SAS transferred its assets to CastleRock. Plaintiff alleges that "[p]ursuant to the terms of the transaction, SAI was to remain in business in order to provide licensed security monitoring services to customers of CastleRock[,]" as neither CastleRock nor SAS could provide such ...


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