Name of Assigned Judge Sitting Judge if Other or Magistrate Judge John A. Nordberg than Assigned Judge
Defendant's Combined Motion for Summary Judgment and Motion to Dismiss the Complaint is denied. A status hearing is set for April 4, 2012. The parties should prepare a proposed preliminary pretrial scheduling order and submit it to chambers a day before the hearing.
O[ For further details see text below.] Docketing to mail notices.
This case arises out of a failed business relationship between plaintiff John Zimmers and defendant Robert Berger. Before the Court is defendants' motion to dismiss several counts in the seven-count complaint.
The following facts are taken from the complaint and assumed true for purposes of this motion. Beginning in 2004, Berger tried to convince Zimmers to leave his current job and to come work for Berger's real estate company -- Berger Realty Group, LLC ("BRG"). Zimmers declined the offer. In 2006, Berger tried again, offering Zimmers the job of property manager and promising him a 20% ownership stake in BRG. But Zimmers did not want to leave his current job unless he had long-term security. So, Berger promised to give Zimmers job security "for life" by putting BRG's assets in a "500 year perpetual trust with instructions for BRG to manage them permanently." (Cmplt. ¶ 9.) Berger later agreed he would obtain Zimmers' consent before making any important decisions for BRG. Based on these promises, which were set forth in a two-page letter agreement signed by both men (attached as Exhibit A to the complaint), Zimmers began working for BRG. Thereafter, Berger allegedly charged personal expenses such as holiday gifts and personal legal fees to the company; and he unilaterally lowered management fees charged to other entities Berger owned, thereby personally enriching himself while hurting BRG. When Zimmers complained, Berger agreed to increase Zimmers' ownership share from 20% to 35%. This promise was set forth in a second letter agreement, signed by both men in early 2009. See Cmplt. Ex. B. In February 2010, Berger told Zimmers he was dissolving BRG, which meant that Zimmers was fired from his job. Berger gave Zimmers a check purporting to be his 35% share of the value of BRG upon dissolution. Zimmers asked for a formal accounting but Berger refused. Zimmers now alleges he was fired because he refused to carry out Berger's discriminatory instructions to fire employees who were Hispanic, gay, elderly, or had children. Thereafter, Berger allegedly defamed Zimmers by refusing to pay BRG vendors unless they agreed to falsely say that Zimmers had taken bribes.
Zimmers filed a seven-count complaint, asserting claims for breach of fiduciary duties (Count I); breach of contract (Count II); violation of the Illinois Limited Liability Company Act (Count III); fraudulent misrepresentation (Count IV); defamation (Count V); retaliation under Title VII (Count VI); and retaliation under the Age Discrimination in Employment Act (Count VII).
In their motion and opening brief, defendants advanced three arguments. The first one was that the two discrimination claims are not actionable because defendants did not employ enough employees to meet the Title VII and the ADEA statutory thresholds. During the course of briefing and through the exchange of some preliminary discovery materials, the defendants agreed to drop this argument because the facts are not yet clear. See Docket # 27. This leaves two arguments. First, defendants argue the breach of fiduciary duty claim (Count I) is barred as a derivative claim. Second, defendants argue the fraud claim (Count IV) is not plead with sufficient particularity.
Count I -- Derivative or Personal? Count I is a claim for breach of fiduciary duties in violation of the Illinois Limited Liability Company Act. It is directed at both BRG and Berger. Paragraph 33 lists five specific actions: (a) charging Berger's personal expenses to BRG; (b) unilaterally lowering management fees to personally benefit Berger; (c) refusing to pay Zimmers his share of BRG profits from 2007 to 2010; (d) failing to give Zimmers a formal accounting when his ownership interest was terminated; and (e) falsely representing that BRG would "shut down" when it never did.
Defendants argue that Count I should be dismissed because it seeks recovery for losses incurred by BRG only and not for losses uniquely suffered by Zimmers. If so, then Count I is a derivative claim, and Zimmers must comply with the pleading requirements of Fed. R. Civ. P. 23.1 and Section 40-10 of the Illinois Limited Liability Company Act. Specifically, Zimmers must plead with particularity the efforts made to cause BRG to initiate the action itself or the reasons why he made no such effort. It is undisputed that Zimmers has not met this pleading requirement.
Zimmers raises several arguments in response. His main one is to ask this Court to relax the derivative requirements because BRG was operating more like a partnership than a corporation. He claims that courts "time and again" have held that derivative actions do not make sense where, as here, there is a two-person LLC. (Pl. Resp. at 7.) He relies heavily on Gas Technology Institute v. Rehmat, 524 F.Supp.2d 1058, 1066-67 (N.D. Ill. 2007) ("the more different an entity is from a corporation, the more flexible courts should be in applying rules regarding derivative actions"). We are not persuaded by this argument. Although Zimmers suggests numerous courts have created a judge-made exception, he only cites to one case, a district court decision. While this case does contain some general language about the problems of applying the normal derivative rules to small corporate entities, the decision goes on to say (as defendants here point out) that the claims there were directed at unique personal injuries and as such were not derivative claims but instead were direct claims. In any event, the Seventh Circuit in an earlier case has explicitly rejected the argument Zimmers is now making. Frank v. Hadesman and Frank, Inc., 83 F.3d 158, 161 (7th Cir. 1996). While acknowledging that legitimate arguments exist for relaxing the derivative requirements, the Seventh Circuit nevertheless held that it had no authority for creating a "special rule" for close corporations: "None of the Illinois cases we have found establishes, or even hints at, any discretionary power to treat a derivative injury as if it were direct." Id. at 162. Thus, as between these cases, we are obligated to follow Frank, which rejects the argument now being made by Zimmers.
Zimmers' next argument is that Count I is directed at individual rather than corporate injuries -- i.e. it is not a derivative claim after all. This argument is partly correct. On this question, the parties' briefs are ships passing in the night. Defendants focus entirely on the first two subsections of Paragraph 33 while Zimmers focuses on the latter three. If the analysis is limited to the first two, then defendants are correct. Subsection (a) states that Berger charged personal expenses to BRG. Defendants argue this is a "looting" claim which courts have held to be a classic example of a derivative claim. (Defs. Br. at 8, quoting Domanus v. Lewicki, 645 F.Supp.2d 697, 703 (N.D. Ill. 2009).) We agree. As for subsection (b), which concerns the unilateral lowering of management fees, defendants point out that the complaint itself explicitly states that this action harmed BRG but helped Berger. See ¶ 33(b) ("Berger benefitted personally, while BRG suffered significant financial losses, totaling over $73,000"). Zimmers does not offer any argument in response.
However, as to the latter three subsections, defendants offer no argument. As Zimmers correctly points out in his response brief, these allegations concern injuries that are unique to him and different from those incurred by BRG. For example, in subsection (c), Zimmers alleges that BRG failed to fully pay his partnership profits from 2007 to 2010. If true, this failure to pay would harm only Zimmers and would actually benefit BRG by lowering its costs. A similar analysis applies to subsections (d) and (e). Thus, with ...