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Axis Hospitality, Inc. v. Hanson

February 1, 2010

AXIS HOSPITALITY, INC., AN ILLINOIS CORPORATION, AND ROLF TWEETEN, AN INDIVIDUAL, PLAINTIFFS,
v.
KEITH HANSON, AN INDIVIDUAL, DEFENDANT.



The opinion of the court was delivered by: Judge Joan H. Lefkow

OPINION AND ORDER

Plaintiffs, Axis Hospitality, Inc. ("Axis Hospitality") and Rolf Tweeten, filed a five-count amended complaint against defendant, Keith Hansen, arising from his allegedly fraudulent conduct in connection with their purchases of membership interests in Alliance Hospitality Management, LLC ("Alliance").*fn1 The amended complaint alleges claims for violation of Section 10(b) of the Exchange Act (Count I); common law fraud (Count II); violation of the Illinois Consumer Fraud and Deceptive Business Practices Act ("CFA") (Count III); breach of fiduciary duty (Count IV); and unjust enrichment (Count V). Hansen moves to dismiss the amended complaint under Federal Rules of Civil Procedure 12(b)(6) and 9(b), or in the alternative, to strike Counts III and IV pursuant to Rule 12(f). For the reasons discussed below, Hansen's motion [37] is denied.

BACKGROUND

Alliance is a hotel management company organized under the laws of Georgia. Hansen served as Alliance's Vice President of Finance, Chief Financial Officer and one of its directors from July 2005 to July 2008. On August 8, 2007, Axis Hospitality purchased a membership interest in Alliance. Tweeten purchased his 29% membership interest in Alliance on February 29, 2008 and currently serves as its chairman.*fn2 Plaintiffs allege that beginning in May 2007 and continuing through July 11, 2008, Hansen "intentionally and wilfully concealed Alliance's true financial condition and manipulated the books and records on a regular and on-going basis . . . . in order to artificially inflate the earnings and value of Alliance." Am. Compl. ¶ 23. Plaintiffs allege that Hansen made material misrepresentations and omissions in connection with the health care expenses of a group of hotels owned by Inland American Real Estate Trust, Inc. ("Inland") and managed by Alliance, referred to as the health care fraud, and in connection with Alliance's liabilities on contracts between it and Celeren Corporation ("Celeren"), referred to as the Celeren contacts fraud.

I. The Alleged Health Care Fraud

Alliance provided a health care plan for employees who worked at a group of hotels owned by Inland. In accordance with its health care plan, Alliance paid a deductible in the amount of the first $75,000 of health care claims for each plan participant. Alliance was then to be reimbursed by Inland. Hansen was responsible for recording those expenses in an account maintained on Inland's books ("the health care account"). Plaintiffs allege that Hansen intentionally and willfully manipulated the balance of the health care account to artificially lower Inland's expenses and increase its profits. By overstating the profitability of Inland, Hansen artificially inflated Alliance's potential for future business from its hotels, and consequently, Alliance's apparent value. The Amended Complaint sets out ten allegedly false ledger entries in Inland's health care account which Hansen directed Laura Petersen, presumably an Alliance employee, to make between May 31, 2007 and June 30, 2008; the date, ledger entry number, amount and method of communication is provided for each entry. See Am. Compl. ¶¶ 26-27. Plaintiffs allege that Hansen concealed these false entries, causing them to significantly overpay for their membership interests.

II. The Alleged Celeren Contracts Fraud

The plaintiffs allege that Hansen, without performing his due diligence,*fn3 caused Alliance to enter into several contracts with Celeren, an energy management company, from August 1, 2007 to December 2007 to reduce energy costs for at least ten of the hotels managed by Alliance. Pursuant to the contracts, Alliance was to pay Celeren in advance for the hotels' estimated energy costs and Celeren was to pay the hotels' actual energy costs directly to the local energy utilities. Plaintiffs allege that Hansen became aware that Celeren was delinquent in paying the energy bill for the Hilton Garden Inn at Albany Airport on October 3, 2007.*fn4 On December 11, 2007, Hansen sent emails to two Celeren employees requesting confirmation that service for the hotel would not be interrupted and that Alliance's credit would not be negatively affected.*fn5

After learning that Celeren was delinquent in paying the energy bill incurred by the Hilton Garden Inn at Albany Airport, plaintiffs contend Hansen either learned that Celeren was delinquent in paying the bills incurred by twelve of Alliance's other hotels or intentionally and willfully refrained from inquiring as to whether Celeren was delinquent. Celeren ultimately filed for bankruptcy in September 2008, leaving Alliance to pay in excess of $500,000 to various utility companies.

Plaintiffs allege that despite his knowledge of Alliance's potential liability for the unpaid energy bills, Hansen concealed and failed to disclose this problem to Alliance's board and to plaintiffs prior to the time they purchased their membership interests. As with the alleged health care fraud, plaintiffs contend that Hansen's conduct artificially inflated the value of Alliance, causing them to overpay for their membership interests. Plaintiffs contend that Hansen's misrepresentations and omissions regarding the alleged Celeren contracts fraud were contained in Alliance's books and records, which they reviewed prior to purchasing their membership interests, and in a series of communications from July 25, 2007 to May 14, 2008 regarding Alliance's finances and budget. See Am. Compl. ¶¶ 40(A)-(J).

LEGAL STANDARD

A motion to dismiss under Rule 12(b)(6) challenges a complaint for failure to state a claim upon which relief may be granted. Fed. R. Civ. P. 12(b)(6); Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir. 1997). For the purposes of a Rule 12(b)(6) motion, the court takes as true all well-pleaded facts in plaintiff's complaint and draws all reasonable inferences in the plaintiff's favor. Jackson v. E.J. Brach Corp., 176 F.3d 971, 977-78 (7th Cir. 1999). Factual allegations must, however, be enough to raise a right to relief above the speculative level. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed. 2d 929 (2007) (citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, at 235-236 (3d ed. 2004)); see also Ashcroft v. Iqbal, --- U.S. ---, 129 S.Ct. 1937, 1953, 173 L.Ed. 2d 868 (2009) (Twombly expounded the pleading standard for all civil actions). Thus, "[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 570). A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Id.

Allegations of fraud, such as those contained in Counts I, II and III of the Amended Complaint, are subject to the heightened pleading standard of Rule 9(b), which requires a plaintiff to "state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). This means that the plaintiff must plead the "who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990). "Rule 9(b) should be applied with an eye toward fulfilling the Rule's underlying purposes: '(1) to inform the defendants of claims against them and to enable them to form an adequate defense; (2) to eliminate the filing of a conclusory complaint as a pretext for using discovery to uncover wrongs; and (3) to protect defendants from unfounded charges of fraud which may injure their reputations.'" Gelco Corp. v. Duval Motor Co., No. 02 C 5613, 2002 WL 31875537, at *6 (N.D. Ill. Dec. 26, 2002) (quoting Fujisawa Pharm. Co., Ltd. v. Katpoor, 814 F. Supp. 720, 726 (N.D. ...


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