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Ronald McDonald House Charities of Chicagoland v. Winning Charities Illinois, LLC

United States District Court, Seventh Circuit

November 4, 2013

RONALD MCDONALD HOUSE CHARITIES OF CHICAGOLAND AND NORTHWEST INDIANA, INC., Plaintiff,
v.
WINNING CHARITIES ILLINOIS, LLC, et al., Defendants. WINNING CHARITIES ILLINOIS, LLC, Counter-Plaintiff,
v.
RONALD McDONALD HOUSE CHARITIES OF CHICAGOLAND AND NORTHWEST INDIANA, INC., Counter-Defendant.

MEMORANDUM OPINION AND ORDER

MICHAEL T. MASON, Magistrate Judge.

I. Background

On February 22, 2013, RMHC filed a seven-count complaint [1] against defendants WCI, Winning Charities, Inc., Charity Assurance Group, LLC, and William Bayles. RMHC is a not-for-profit corporation "whose mission is to care for families of children with complex medical needs by providing comfort, compassion and community." (Compl. ¶ 3.) Defendants provide fundraising services to charities. ( Id. ¶ 1.)

According to the allegations of plaintiff's complaint, in August 2011 and February 2012, RMHC and WCI entered into contracts under which WCI was to raise funds for RMHC through a "media intense charity raffle." (Compl. ¶ 14.) Over the course of 2011 and 2012, RMHC fronted funds for the raffle, which was overseen by WCI and likely the other defendants. ( Id. ¶ 15.) Unfortunately, the raffle was unsuccessful, resulting in an alleged loss of approximately $2.8 million to RMHC. ( Id. ¶ 16.) As a result of the loss, RMHC initiated an arbitration proceeding against WCI. ( Id. ¶ 17.)

On November 20, 2012, the parties met to discuss settlement of their dispute involving the unsuccessful raffle. (Compl. ¶ 17.) During that meeting, the parties purportedly reached an agreement whereby (1) defendants would pay RMHC $1, 100, 000 through installment payments; (2) defendants would post specified security; and (3) defendants would provide certified financial statements and representations and warranties regarding litigation. ( Id. ¶ 19.) In the event the defendants missed an installment payment, the entire amount became due in the form of an arbitration award in the amount of $1, 100, 000 less any installment payments made. ( Id. ¶ 20.)

Following the November 20, 2012 meeting, the parties purportedly exchanged e-mails confirming the agreement, as well as drafts of a formal written agreement. (Compl. ¶¶ 21-22; Ex. A.) Then, on December 31, 2012, defendants' counsel called plaintiff's counsel to advise him that "defendants were unilaterally backing out of the contract." ( Id. ¶ 23.) Defendants failed to pay the first two installment payments that were due on January 4, 2013 and February 15, 2013, and further advised plaintiff that they would not be making any payments. ( Id. ¶ 24.) This action followed. Plaintiff's complaint includes claims for breach of contract, specific performance, fraudulent misrepresentation, unjust enrichment, promissory estoppel, promissory fraud, and equitable estoppel.

Defendants moved to dismiss plaintiff's complaint for failure to state a claim [12]. The District Court denied defendants' motion on May 3, 2013 [16]. Defendants then filed their answer to the complaint [23] and defendant WCI filed a counterclaim [24] against RMHC. The allegations of WCI's counterclaim, which are more detailed than the facts alleged in plaintiff's complaint, and which we accept as true for purposes of the motion to dismiss, are as follows. See Reger Dev., LLC v. Nat'l City Bank, 592 F.3d 759, 763 (7th Cir. 2010); see also, e.g., Organ Recovery Sys. v. Preservation Solutions, Inc., No. 11 C 4041, 2012 WL 2577500, at *1 (N.D. Ill. July 4, 2012) (internal citations omitted) ("[T]he Court takes as true the facts alleged by the party whose complaint or counterclaim is challenged.").

WCI's affiliated companies have operated over a period of twenty years to raise money for Canadian charities. (Countercl. ¶ 17.) WCI was created as a separate legal entity with the goal of expanding the affiliated companies' charity fundraising success to the U.S. market. ( Id. ¶ 20.) WCI's first charity fundraiser in the U.S. was with RMHC. ( Id. ¶ 22.)

In August 2011, WCI and RMHC entered into a consultancy contract (the "August 2011 Consultant Contract"), whereby WCI agreed to provide consulting services for four fundraising raffles over a two-year period using its "media intense charity raffle" methodology. (Countercl. ¶¶ 24, 29; Ex 1.) Contemporaneously with the August 2011 Consultant Contract, the parties executed an indemnity contract (the "August 2011 Indemnity Contract"), which protected RMHC from net losses upon completion of the four raffles. ( Id. ¶¶ 4, 30.) The August 2011 Indemnity Contract was eventually superseded in its entirety by the "February 2012 Indemnity Contract." ( Id. ¶¶ 6, 31; Ex. 2.)

The parties understood that "Raffle 1" was an "investment phase" of the four-raffle sequence. (Countercl. ¶ 26.) As such, Raffle 1 was intentionally scaled back financially in order to minimize investment risk, but remain large enough to validate the Canadian fundraising process in the Chicago market. ( Id. ) In advance of and during Raffle 1, WCI provided RMHC market validation studies featuring several successful Canadian raffle programs in order to demonstrate how the "investment phase" operated and to relieve any potential concerns regarding the overall success of the four-raffle sequence. ( Id. ¶ 27.) WCI also provided RMHC with a range of possible Raffle 1 outcomes, ranging from a $1.5 million profit to a potential investment loss of up to $3 million. ( Id. ¶ 28.) According to WCI, its fundraising strategy required utilizing the existing donor list of both RMHC and Children's Memorial Hospital, who planned to share any profits earned. ( Id. )

Raffle 1 was launched in the Fall of 2011 using the methodology provided by WCI. (Countercl. ¶ 32.) Chicago Tribune Direct conducted an independent marketing audit of Raffle 1, which revealed a net investment loss of $2, 839, 376.92. ( Id. ¶¶ 33-34.) That loss included over $900, 000 in media and program expenses paid by WCI on behalf of RMHC, and a consulting fee owed by RMHC to WCI, neither of which have yet been paid to WCI. ( Id. ¶ 36.) As alleged by WCI, Raffle 1 underperformed in part because RMHC and Children's Memorial Hospital failed to provide the agreed-upon list of donors pursuant to the August 2011 Consultant Contract. ( Id. ¶ 35.) In any event, Raffle 1's outcome was still within the range of possible outcomes that WCI provided to RMHC prior to the raffle. ( Id. )

Upon mutual review of the audit, the parties agreed to move forward with the next three raffles. (Countercl. ¶ 37.) It was at this point that the parties executed the aforementioned February 2012 Indemnity Contract. ( Id. ) Charity Assurance Group, which was formed specifically as guarantor against net losses, was added as an additional party to that contract. ( Id. ¶ 38.)

Raffle 2 was scheduled for the Spring of 2012, but RMHC unilaterally cancelled the rollout of Raffle 2 due to issues of timing and branding. (Countercl. ¶ 40.) Prior to the cancellation of Raffle 2, WCI committed resources and declined other economic opportunities in order to consult with RMHC. ( Id. ¶ 41.) As RMHC was made aware, the cancellation of Raffle 2 jeopardized WCI's access to Raffle 2 operational funds because the terms of the funding would now extend beyond WCI's standard 90-day repayment terms with its lender bank. ( Id. ¶ 42.) As a result, WCI started to seek alternative investor financing. ( Id. ¶ 43.)

In February 2012, Doug Porter, a representative of RMHC, authorized the necessary paperwork for WCI to obtain alternative financing from investment group Amerifactors in the way of annual funding up to $12 million and an initial credit line of $4 million to launch Raffle 2. (Countercl. ¶ 44.) However, when a representative from Amerifactors contacted Porter to ...


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