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Tcc Historic Tax Credit Fund Vii, L.P v. Levenfeld Pearlstein

November 27, 2012


The opinion of the court was delivered by: Samuel Der-yeghiayan, District Judge


This matter is before the court on Defendant Levenfeld Pearlstein, LLC's (Firm), Defendant Kevin A. Sterling's (Sterling), and Defendant Darryl P. Jacobs' (Jacobs) motion to dismiss. For the reasons stated below, the motion to dismiss is granted in part and denied in part.


Plaintiff TCC Historic Tax Credit Fund VII, L.P. (TCC) alleges that in 2007, it agreed to invest in the development of a hotel (Hotel) being undertaken by WexTrust Equity Partnership, LLC (WexTrust). In exchange for its investment, TCC would allegedly receive tax credits generated by the historic rehabilitation of the Hotel. To facilitate TCC's investment, TCC and WexTrust allegedly agreed to form Gold Coast Master Tenant, LLC (Tenant LLC), which would lease the Hotel and serve as master tenant. Tenant LLC was allegedly not responsible for the rehabilitation of the Hotel, but was allegedly responsible for purchasing furniture, fixtures and equipment for the Hotel and for marketing expenses. Under the terms of the Tenant LLC Operating Agreement (Operating Agreement), TCC was allegedly the "Investor Member" of Tenant LLC, and another company, Gold Coast Master Tenant Manager, LLC (Tenant Manager LLC), was allegedly the "Managing Member" of Tenant LLC. Tenant Manager LLC was allegedly wholly owned and controlled by WexTrust. Sterling and Jacobs, both attorneys at the Firm, allegedly represented Tenant Manager LLC and WexTrust in the transaction relating to the creation of Tenant LLC.

Before the transaction relating to Tenant LLC closed, TCC allegedly reached an agreement with Defendants that TCC would fund its investment in Tenant LLC by depositing $1,062,188.00 (Investment Funds) into the Firm's client trust account via wire transfer. Defendants allegedly acted as escrowees of the Investment Funds, and upon receipt of the wire transfer, Defendants were allegedly required to distribute a portion of the Investment Funds to Tenant LLC, to distribute a portion of the Investment Funds to the title company involved in the transaction, and to distribute a portion of the Investment Funds to the Firm as payment for the Firm's legal services. The alleged agreement relating to the holding and distribution of the Investment Funds was allegedly evinced in a letter from Sterling dated December 21, 2007 (December 2007 Letter) and in a Disbursement Statement signed by the Firm and Tenant Manager LLC (Disbursement Statement). On December 21, 2007, allegedly in reliance on the December 2007 Letter and the Disbursement Statement, TCC wired the Investment Funds to the Firm's client trust account.

According to TCC, none of the Investment Funds were ever distributed to Tenant LLC. Instead, the portion of the Investment Funds that was supposed to be distributed to Tenant LLC was allegedly distributed to some other corporate entity owned and controlled by WexTrust, and such finds were allegedly misappropriated and used for purposes other than operating Tenant LLC. TCC includes in its amended complaint negligence claims (Count I), breach of contract claims (Count II), negligent misrepresentation claims (Count III), breach of fiduciary duty claims (Count IV), tortious interference claims (Count V), promissory estoppel claims (Count VI), and an accounting claim (Count VII). Defendants now move to dismiss all claims.


In ruling on a motion to dismiss brought pursuant to Federal Rule of Civil Procedure 12(b)(6) (Rule 12(b)(6)), the court must draw all reasonable inferences that favor the plaintiff, construe the allegations of the complaint in the light most favorable to the plaintiff, and accept as true all well-pleaded facts and allegations in the complaint. Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 622 (7th Cir. 2012); Thompson v. Ill. Dep't of Prof'l Regulation, 300 F.3d 750, 753 (7th Cir. 2002). A plaintiff is required to include allegations in the complaint that "plausibly suggest that the plaintiff has a right to relief, raising that possibility above a 'speculative level'" and "if they do not, the plaintiff pleads itself out of court."

E.E.O.C. v. Concentra Health Services, Inc., 496 F.3d 773, 776 (7th Cir. 2007)(quoting in part Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007)); see also Morgan Stanley Dean Witter, Inc., 673 F.3d at 622 (stating that "[t]o survive a motion to dismiss, the complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face," and that "[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")(quoting Ashcroft v. Iqbal, 556 U.S. 662 (2009))(internal quotations omitted).


I. Exhibits Attached to Defendants' Motion

TCC objects to Defendants' inclusion of the Operating Agreement and documents relating to receivership proceedings involving WesTrust (Receivership Proceedings) as exhibits to Defendants' memorandum in support of their motion to dismiss, contending that Defendants are not entitled to argue their version of the facts at the motion to dismiss stage of the proceedings. Defendants argue that the court may take judicial notice of the documents that TCC has objected to, and thus consider the documents without converting the instant motion into a motion for summary judgment. Pursuant to Federal Rule of Civil Procedure 12(d) (Rule 12(d)), if the court considers matters outside the pleadings presented in a motion to dismiss brought pursuant to Rule 12(b), the motion "must be treated as one for summary judgment under Rule 56," and "[a]ll parties must be given a reasonable opportunity to present all the material that is pertinent to the motion." Fed. R. Civ. P. 12(d). Documents "are not 'matters outside the pleadings' within the meaning of Rule 12(d) if [they are] documents to which the Complaint had referred, [that are] concededly authentic, [and that are] central to the plaintiffs' claim," and therefore the court may consider such documents when ruling on a 12(b) motion without converting the motion to a motion for summary judgment. Santana v. Cook County Bd. of Review, 679 F.3d 614, 619 (7th Cir. 2012)(quoting Hecker v. Deere & Co., 556 F.3d 575, 582 (7th Cir. 2009)); see also Albany Bank & Trust Co. v. Exxon Mobil Corp., 310 F.3d 969, 971 (7th Cir. 2002)(stating that "the converse is also true: documents that are neither included in the plaintiff's complaint nor central to the claim should not be considered on a motion to dismiss"). In addition, at the motion to dismiss stage, the court may take "judicial notice of matters of public record," or in other words, "of facts that are (1) not subject to reasonable dispute and (2) either generally known within the territorial jurisdiction or capable of accurate and ready determination through sources whose accuracy cannot be questioned." Ennenga v. Starns,677 F.3d 766, 773-74 (7th Cir. 2012)(citing Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1081 (7th Cir. 1997)).

With respect to the Operating Agreement, TCC argues that it is not central to TCC's claim "because TCC is not suing about anyone's failure to perform under it." (Resp. 3). Based on Seventh Circuit precedent, the court declines to take such a narrow view of the rule relating to documents that are central to the complaint. See Hecker, 556 F.3d at 582 (discussing the Court's liberal approach to the rule defining matters that fall outside the complaint). TCC alleges that "as a direct and proximate result of Defendant's [sic] actions, TCC never received any tax credits and was left holding a majority membership interest in a limited liability company having neither cash not tangible property derived from TCC's investment," thus preventing TCC from recovering any of its investment. (Compl. Par. 15). Based on TCC's allegations, not only does the Operating Agreement set the backdrop for the claims alleged, it is central to TCC's claims because it establishes the basis of the alleged damages in this case. Therefore, the court can consider the Operating Agreement in ruling on the instant motion without converting it to a motion for summary judgment.

With respect to the documents relating to the Receivership Proceedings, the court may take judicial notice of the fact that on September 11, 2008, the Hotel became part of a receivership estate, and the fact that on July 23, 2009, the Hotel was removed from the receivership estate based on the judge's findings in that case that the Hotel was "of no or inconsequential value to the receivership estate," and that "continued ownership of the [Hotel would] result in continued expenses to the receivership estate without any source of reimbursement." (Memo. Ex. 1, 5). Such facts indicate that, at least as of July 23, 2009, development of the Hotel was no longer viable. However, the court may not take judicial notice of the facts asserted in the Receiver's motion to relinquish interest in the Hotel (Receiver's Motion), even if the Receiver's Motion was unopposed in the underlying case, without converting the instant motion into a motion for summary judgment. The court declines to convert the instant motion, and therefore, at this juncture, the court will not consider the evidence presented by Defendants relating to the reasons that development of the Hotel was no longer a viable option as of July 23, 2009. The court notes that at the summary judgment state of the proceedings, if Defendants are able to present sufficient evidence that their actions were not the proximate cause of WexTrust's failure to develop the Hotel, TCC will be foreclosed ...

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