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Semir D. Sirazi and Pe Chicago, LLC v. Panda Express

December 13, 2011

SEMIR D. SIRAZI AND PE CHICAGO, LLC, PLAINTIFFS,
v.
PANDA EXPRESS, INC., PANDA RESTAURANT GROUP, INC.,
CITADEL PANDA EXPRESS, INC., ANDREW CHERNG, AND PEGGY CHERNG, DEFENDANTS.



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

MEMORANDUM OPINION AND ORDER

Semir Sirazi and PE Chicago have sued Panda Express, Panda Restaurant Group (PRG), Citadel Panda Express, Andrew Cherng, and Peggy Cherng. Plaintiffs assert state law claims for fraud and conspiracy to defraud against all defendants and for unjust enrichment, aiding and abetting breach of fiduciary duty, fraudulent transfer, breach of contract, and breach of fiduciary duty against the corporate defendants (collectively Panda Express). PRG asserts a counterclaim for breach of contract involving nonpayment of a promissory note. The Court has jurisdiction based on diversity of citizenship.

Defendants have moved for summary judgment on all claims and on PRG's counterclaim. Plaintiffs have moved for summary judgment on a portion of their fraudulent transfer claim. For the reasons stated below, the Court grants defendant's motion in part and denies it in part and denies plaintiffs' motion.

Background

A. Rezko-Citadel Limited Partnership

Panda Express operates fast food restaurants specializing in Chinese cuisine. In 1993, Panda Express entered into an Illinois limited partnership with Rezko Concessions, Inc. (Concessions). Concessions was controlled by Antoin "Tony" Rezko. Concessions and Panda Express named their partnership Rezko-Citadel Limited Partnership. The partnership's purpose was to open and manage Panda Express restaurants in the Chicago area and across the Midwest. Concessions was the general partner, and Panda Express was the limited partner.

In 1998, Concessions's interest in Rezko-Citadel was transferred to PE Chicago, LLC. PE Chicago became the general partner of Rezko-Citadel. PE Chicago was wholly owned by Rezko Enterprises, LLC (Enterprises). Concessions, in turn, was the majority owner of Enterprises. Tony Rezko still controlled Concessions, Enterprises, and PE Chicago.

Rezko-Citadel was consistently profitable for Rezko and Panda Express, but it did not grow as quickly as anticipated. In 1997, Rezko-Citadel entered into an Area Development Agreement (ADA) with Panda Express. The ADA gave Rezko-Citadel the exclusive right to open Panda Express restaurants in shopping malls in Illinois, Wisconsin, Michigan, Iowa, and Indiana, as long as it met development targets. The development targets required Rezko-Citadel to open eighty stores by December 31, 2002. Rezko-Citadel failed to meet this goal. Sirazi asserts that in June 2006, Rezko-Citadel managed only about fifty restaurants. Sirazi contends that Rezko-Citadel did not expand because Panda Express starved the partnership of capital, used partnership funds to pay debts that were not attributable to PE Chicago, and opened additional restaurants outside the partnership.

The parties agree, however, that Rezko-Citadel did not grow quickly in part because Rezko's finances were stressed by his attempt to operate a number of Papa John's pizza restaurants. The Papa John's restaurants always lost money and distracted Rezko and other management from the profitable Panda Express business. Indeed, Rezko transferred millions from Rezko-Citadel to himself and his companies to fund the Papa John's business. When Panda Express found out about these unauthorized transfers in 2001, it took over as general partner of Rezko-Citadel so it could control the partnership's accounting and finances. Rezko also borrowed funds from Panda Express for the Papa John's business. By 2006, Rezko and his companies owed more than $6 million to Panda Express, much of which was attributable to the failed pizza business. Panda Express obtained a lien on PE Chicago's interest in Rezko-Citadel to secure Rezko's debts, although the parties dispute whether these debts were properly attributable to PE Chicago.

B. Sirazi's investments

Sirazi never had any direct interest in PE Chicago or the Rezko-Citadel partnership. But he did make investments in and loans to Rezko's companies. In August 2000, Sirazi paid $400,000 to purchase warrants in Enterprises. In the same transaction, Sirazi made a $2 million loan to Enterprises. Sirazi could exercise his warrants to obtain an ownership stake in the company, but the warrant agreement also provided that if a "liquidity event" occurred, Enterprises would be required to redeem the shares for a large cash price. Liquidity events included a default on the loan Sirazi had made to Enterprises or a sale by Enterprises or any of its subsidiaries of more than five percent of its assets. At the same time, Sirazi paid $100,000 for similar warrants in Concessions.

In September 2002, Sirazi guaranteed a $1 million loan that a bank offered to Rezko. In exchange for his guarantee, Sirazi received cash payments and ownership interests in Enterprises. Sirazi could receive up to a twelve percent stake in Enterprises, depending on how long the guarantee remained in effect and whether Rezko defaulted. At the same time, Abdelhamid Chaib, a business partner of Rezko, pledged the twenty percent of Concessions stock that he owned as a security for Rezko's performance under the Sirazi-Rezko guarantee agreement.

Defendants claim that Sirazi's investments were used to fund Rezko's struggling Papa John's business. Sirazi disputes this, stating that he was unaware of what the loans were to be used for. He further states that he was willing to risk his money because Enterprises received substantial cash flow from PE Chicago's share of the Panda Express partnership.

The Rezko companies eventually defaulted on all of the agreements they had made with Sirazi. In 2006, Enterprises and Concessions would have had to pay more than $50 million just to redeem the warrants. On August 30, 2006, Sirazi exercised the warrants, which otherwise would have expired on August 31, 2006. After litigation and arbitration with Rezko and Chaib, Sirazi now owns ninety percent of Enterprises directly through the warrants and guarantee and indirectly through the majority ownership of Concessions that he acquired from warrants and Chaib's stock pledge.

Using his ninety percent ownership of Enterprises, Sirazi was able to make himself manager of PE Chicago in 2010. The parties dispute whether he complied with the requirements of PE Chicago's operating agreement when doing so.

C. Buyout of PE Chicago

By 2006, Tony Rezko was facing dire legal and financial threats, and Panda Express wanted to be rid of him as a partner. Panda Express did not want to face bad publicity from Rezko's legal problems, and it was concerned that he would be distracted from managing their joint business. Panda Express also feared that it would become involved in Rezko's legal problems; in late 2005 it had been subpoenaed in connection with a criminal investigation involving Rezko. Def. Resp., Ex. 7 at 168--71.

In May 2006, Rezko contacted R. Michael Wilkinson, Panda Express's counsel, to ask for a $3 million loan. Rezko needed the money to pay GE Capital, which was about to foreclose on his home because his businesses had defaulted on loans from GE. Wilkinson brought this request to the Panda Express board, but the board was not interested in loaning more money to Rezko. Instead, Wilkinson and Rezko agreed that Rezko would sell PE Chicago's fifty percent interest in Rezko-Citadel to Panda Express.

Wilkinson drafted the sale contract, and both parties signed it on June 1, 2006. Rezko did not have counsel representing him in the transaction, but the contract contained a statement that he had full opportunity to seek the advice of counsel. Panda Express valued Rezko-Citadel within a day or two by calculating the partnership's earnings before interest, taxes, depreciation, and amortization (EBITDA) and multiplying that figure by six. It calculated that PE Chicago's fifty percent interest was worth $9,764,228. Panda Express intended to distribute this money as follows: $1,875,000 to Manufacturers Bank (MB) to pay off a note signed by PE Chicago and many other Rezko companies and terminate the senior lien associated with the note; $4,687,078 to retire the debt that PE Chicago and the Rezko companies owed to Panda Express; and $3,252,150 to be wired to Rezko's personal bank account. The $3,252,150 was wired to Rezko on June 2, 2006.

Several days later, Panda Express realized it had made two mistakes in calculating the price for PE Chicago's interest in Rezko-Citadel. First, Panda Express found that PE Chicago owed Panda Express about $1.3 million more than it had previously thought, which increased PE Chicago's total debt to Panda Express to $6,010,284. Second, Panda Express discovered that PE Chicago was owed $558,509 in partnership distributions for the first half of 2006. The purchase price of PE Chicago's interest was thus raised to $10,322,737. However, there was insufficient money to cover the cash payment to Rezko, Panda Express's loans, and MB's loan. As a result, Panda Express paid MB only $1,060,303, leaving MB with a lien on Rezko-Citadel for the balance it was owed.

Andrew and Peggy Cherng were co-owners of Panda Express and co-chairs of its board. Although Andrew had been a friend of Rezko since the 1990s, by 2006 both Cherngs wanted to end Panda Express's association with Rezko to protect its brand. Despite this, Andrew wanted to help Rezko if he could, and the Cherngs knew that he needed money. Although neither Cherng negotiated Panda Express's deal with Rezko, Peggy was informed of the deal, reviewed the documentation, and gave final approval.

Rezko asked that the sale contract contain a confidentiality provision and give him a repurchase option. Peggy was aware that Rezko wanted these terms and was told by Tom Davin, a Panda Express executive, that the provisions made no sense because they defeated the purpose of dissociating from Rezko. Nevertheless, the sale contract ended up containing a nondisclosure provision, and it gave PE Chicago the right to repurchase its interest in Rezko-Citadel until July 31, 2007.

Rezko did not use the funds that he had received from the sale of PE Chicago's interest to pay off GE Capital. Defendants claim that he instead wired $3 million to Samir Financial Services, a creditor of Concessions. Plaintiffs admit that Rezko sent $3 million to Samir but dispute that it was the same $3 million that he had received from Panda Express. Plaintiffs also note that it is unclear what happened to the remaining $250,000 of the amount that Panda Express wired to Rezko. It is undisputed that on June 16, 2006, Rezko borrowed an additional $5 million from Samir.

Panda Express eventually paid off the remaining balance on PE Chicago's note to MB, and in return, MB assigned PE Chicago's promissory note to Panda Express. With interest and attorney's fees, the amount due on the note was $858,327.08 at the time that Panda Express paid it. In response to PE Chicago's claims in the first amended complaint, Panda Express demanded payment of the note by PE Chicago. PE Chicago disputes that it is liable on the note.

A federal grand jury indicted Rezko on October 5, 2006, and a jury convicted him on June 4, 2008 on a variety of criminal charges, including mail and wire fraud, aiding and abetting bribery, and money laundering. United States v. Rezko, No. 05 CR 691, 2008 WL 4890232, at *1 (N.D. Ill. Nov. 12, 2008).

Discussion

On a motion for summary judgment, the Court "view[s] the record in the light most favorable to the non-moving party and draw[s] all reasonable inferences in that party's favor." Trinity Homes LLC v. Ohio Cas. Ins. Co., 629 F.3d 653, 656 (7th Cir. 2010). Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). In other words, a court may grant summary judgment "where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). "[I]n ruling on a motion for summary judgment, the judge must view the evidence presented through the prism of the substantive evidentiary burden." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254 (1986).

Defendants have moved for summary judgment on all eight of plaintiffs' claims:

(1) fraud; (2) conspiracy to defraud; (3) aiding and abetting the breach of a fiduciary duty; (4) actual fraudulent transfer; (5) constructive fraudulent transfer; (6) breach of contract; (7) breach of fiduciary duty; and (8) unjust enrichment. In addition, defendants Andrew and Peggy Cherng have moved separately for summary judgment on the only two claims against them: fraud and conspiracy to defraud. Finally, plaintiffs have moved for summary judgment on their actual fraudulent transfer claim, and defendant PRG has moved for summary judgment on its promissory note claim.

A. Fraud

Plaintiffs contend that defendants committed fraud affirmatively, by stating that the price they were paying for PE Chicago's interest was fair, and by omission, by failing to inform Sirazi and PE Chicago of the sale. Defendants argue that they made no actionable false statement, that they did not conceal anything from PE Chicago, and that they had no duty to disclose anything to Sirazi. In addition, the Cherngs argue that they played no role in any fraud that occurred.

1. False statements to PE Chicago

To establish a claim for fraud, a plaintiff must prove five elements by clear and convincing evidence. Trade Fin. Ptnrs., LLC v. AAR Corp., 573 F.3d 401, 413 (7th Cir. 2009). Defendants contend that plaintiffs cannot establish one of these elements: that "the defendant made a false statement of material fact." Id. PE Chicago contends that the defendants made false statements indicating that the price they were paying for PE Chicago's interest in Rezko-Citadel was a fair one. Defendants argue that they made only a statement of opinion that the price was fair and that statements of opinion are not actionable.

"Ordinarily erroneous statement as to matters of opinion, such as representations of the value of property, do not amount to fraud." Wilkinson v. Appleton, 28 Ill. 2d 184, 188, 190 N.E.2d 727, 720 (1963). Statements of value made by a seller "are not actionable as fraud." Prime Leasing v. Kendig, 332 Ill. App. 3d 300, 309, 773 N.E.2d 84, 92--93 (2002).

Although PE Chicago notes that defendants were buyers here and not sellers, that fact does not change the analysis. PE Chicago knew that defendants were on the opposite side of the transaction and had an incentive to get a price that was favorable to them. If defendants had made a "misrepresentation relate[d] to some specific extrinsic fact materially affecting value," Wilkinson, 28 Ill. 2d at 188--89; 190 N.E.2d at 720, that might have been sufficient for fraud, but PE Chicago does not offer evidence that they did. Rather, PE Chicago contends only that its expert's opinion demonstrates that defendants underpaid by millions of dollars. Pl. Resp., Ex. P at 1. The fact that PE Chicago's expert's opinion differs from Panda Express's valuation of PE Chicago's interest, however, does not make Panda Express's valuation a statement of fact.

PE Chicago also argues that it was entitled to rely on Panda Express's statement regarding the value of Rezko-Citadel because Panda Express was "uniquely situated to examine and determine the valuation of PE Chicago's interest." Pl. Resp. Br. at 10. But PE Chicago was equally a partner in Rezko-Citadel and could have valued its interest; plaintiffs offer no evidence otherwise. Additionally, as stated above, PE Chicago was on the opposite side of the sale from Panda Express and was aware that their interests were adverse.

PE Chicago contends, finally, "that a contract procured by misrepresentation or concealment is especially vulnerable to attack where the party accused of fraud has a confidential relationship toward the injured party." Wilkinson, 28 Ill. 2d at 188; 190 N.E.2d at 720. As will be discussed below, however, defendants did not owe PE Chicago a fiduciary duty at the time of the sale.

In sum, defendants are entitled to summary judgment on this claim to the extent it is based on a contention that defendants made false statements of fact to PE Chicago.

2. Concealment of the sale from PE Chicago

Although the first amended complaint does not clearly make the claim, in its response brief PE Chicago contends that defendants concealed the sale of PE Chicago's interest in Rezko-Citadel. PE Chicago makes this contention despite the fact that it signed the sale contract. It states that at the time of the sale, PE Chicago was improperly controlled by Tony Rezko, who caused the company to agree to the sale.

Only after Sirazi gained control of PE Chicago was it truly aware of the sale, PE Chicago contends.

PE Chicago bases its argument upon Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995). In that case, Douglas used three corporations to run a Ponzi scheme. Id. at 752. After the fraud was discovered, Scholes, the receiver for the corporations, attempted to recover money for creditors that the corporations had given to the defendants. Id. at 753. Scholes argued that the transactions were fraudulent conveyances. As a receiver, Scholes could only sue on behalf of the corporations. The defendants argued that the corporations could not seek to unwind the fraudulent conveyances because they themselves had made the conveyances. Id. at 753--54. The Seventh Circuit reasoned that Douglas had harmed the corporations by removing money from them and not using it for proper corporate purposes. Id. at 754. The corporations were not able to complain about this, however, until Douglas had been ousted from control and a receiver had been appointed. Id. The court also recognized that unwinding the fraudulent conveyances would benefit creditors, and not Douglas, because a receiver had been appointed. Id. Thus, the court concluded, there was no need to apply the rule that the makers of fraudulent conveyances cannot unwind them. Id. For these reasons, the court held that Scholes had standing to bring fraudulent conveyance claims on behalf of the corporations. Id. at 753--54.

Here, PE Chicago attempts to use Scholes's decision on standing to argue that it need not meet the concealment requirement of a fraudulent concealment claim. PE Chicago essentially argues that even though PE Chicago as an entity indisputably knew of the sale at the time, that knowledge does not count, because it is now under new management and its current management did not know of the sale. But Scholes does not stand for the proposition that all actions taken by any former management of a company have no effect once new management is in place. Nor does it stand for the proposition that then-unknown future management of a company must be made aware of all current transactions.

In sum, no reasonable jury could find actionable concealment of the sale from PE Chicago, because it was a party to the transaction.

3. Concealment from Sirazi

Sirazi contends that defendants concealed the sale of PE Chicago's interest from him even though they were aware of his investments in Concessions and Enterprises. Defendants argue that the failure to inform Sirazi of the sale cannot support a fraud claim because they had no duty to tell him. "In Illinois, in order to prove fraud by the intentional concealment of a material fact, it is necessary to show the existence of a special or fiduciary relationship, which would raise a duty to speak." Neptuno Treuhand-Und Verwaltungsgesellschaft MBH v. Arbor, 295 Ill. App. 3d 567, 573, 692 N.E.2d 812, 817 (1998).

Sirazi argues that there can be a fiduciary relationship between creditor and debtor that gives rise to a duty to disclose. Generally a debtor-creditor relationship is not a fiduciary relationship, but it can be in certain circumstances. See Magna Bank of Madison v. Jameson, 237 Ill. App. 3d 614, 618, 604 N.E.2d 541, ...


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