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United Central Bank v. Desai

United States District Court, Seventh Circuit

January 21, 2014



ELAINE E. BUCKLO, District Judge.

United Central Bank ("UCB") has sued the guarantors of five commercial loans made to Illinois limited liability companies ("LLCs") that own and operate gas stations. Three of the guarantors-Pritesh Gandhi ("Pgan"), Dinesh Gandhi ("Dgan"), [1] and Subhash Malhotra ("Malhotra")-have asserted breach of fiduciary duty and indemnification and/or contribution cross-claims against co-Defendant and co-guarantor Nrupesh Desai ("Desai"). Before me is Desai's motion to dismiss Pgan's and Dgan's cross-claims. I grant Desai's motion only as to Dgan's cross-claim for breach of fiduciary duty for the reasons stated below.


Mutual Bank in Harvey, Illinois made five separate commercial loans to the following LLCs between November 2006 and December 2007: Elk Grove Petroleum, LLC; Joliet Petroleum, LLC; Orland Park Petroleum, LLC; and Oswego Petroleum, LLC (collectively, "the LLCs"). Compl. at ¶¶ 8-9, 24-25, 38-39, 52-53, 66-67. Defendants Desai, Dgan, and Pgan executed guaranty contracts in connection with the loans made to Elk Grove Petroleum, Orland Park Petroleum, and Oswego Petroleum. Id. at ¶¶ 10, 26, 40. Defendants Desai and Malhotra executed a guaranty for the two loans made to Joliet Petroleum. Id . at ¶¶ 54, 68.

In July 2009, the Federal Deposit Insurance Corporation, acting as receiver for Mutual Bank, sold the LLCs' loans to UCB as part of a Purchase and Assumption Agreement. Id. at ¶¶ 13, 27, 41, 55, 69. In December 2009, each LLC and its corresponding guarantors allegedly executed a Forbearance Agreement acknowledging default on the underlying loan(s) as of September 1, 2009. Id . at ¶¶ 15, 29, 43, 57, 71. The Forbearance Agreements expired in June 2011. Id . With the exception of Oswego Petroleum, the last loan payment each LLC made to UCB was in April 2011. Id . at ¶¶ 16, 30, 58, 72; see also id. at ¶ 44 (alleging that Oswego Petroleum's last loan payment to UCB was in February 2011). The LLCs filed for bankruptcy protection in December 2012 or January 2013. Id . at ¶¶ 17, 31, 44, 59, 72.

In this breach of contract action, UCB has sued the guarantors on each loan Mutual Bank made to the LLCs. Defendants Dgan and Pgan have filed cross-claims against Defendant Desai, who was a seventy five percent member of Elk Grove Petroleum, Orland Park Petroleum, and Oswego Petroleum. Cross-Compl. at ¶ 7. These cross-claims allege that Desai breached the fiduciary duties he owed to (1) Pgan, as the twenty five percent member of the three LLCs referenced above and (2) Pgan, as a co-guarantor of Mutual Bank's loans to the three LLCs. Id . at ¶¶ 10-11. Desai allegedly breached his fiduciary duties by, inter alia , mismanaging the gas stations owned by the three LLCs, failing or refusing to provide Dgan and Pgan with information about the gas stations' day-to-day operations, converting assets, violating labor and tax laws, failing to pay debts, and causing the LLCs to file for bankruptcy. Id . at ¶ 14. Dgan and Pgan also seek indemnification and/or contribution from Desai in the second count of their cross-complaint.


Desai has moved to dismiss the Dgan's and Pgan's cross-claims on five separate grounds, which I address in turn below. In resolving Desai's motion, I must "construe the complaint in the light most favorable to the [Cross-Plaintiffs], accepting as true all well-pleaded facts alleged, and drawing all possible inferences in [their] favor." Tamayo v. Blagojevich , 526 F.3d 1074, 1081 (7th Cir. 2008).


Desai's first argument for dismissal is that only the LLCs he allegedly mismanaged (or a LLC member suing derivatively) may assert breach of fiduciary duty claims against him. With the LLCs currently in bankruptcy, Desai contends that only the bankruptcy trustee may sue him for allegedly breaching his fiduciary duties. See Koch Refining v. Farmers Union Cent. Exchange, Inc. , 831 F.2d 1339, 1343 (7th Cir. 1987) (noting that upon filing of bankruptcy petition, right of action against a corporate officer for breaching fiduciary duties "become[s] property of the [bankruptcy] estate which the trustee alone has the right to pursue").

Desai frames his first argument as both a standing issue and grounds for dismissal under Rule 17(a)'s requirement that "[a]n action must be prosecuted in the name of the real party in interest." The standing component of Desai's argument is based on the well-established principle "that a litigant cannot sue in federal court to enforce the rights of third parties." Rawoof v. Texor Petrol. Co, Inc. , 521 F.3d 750, 757 (7th Cir. 2008). The Seventh Circuit has described "Rule 17's real-party-in-interest requirement as essentially a codification of this nonconstitutional, prudential limitation on standing." Id . Thus, Desai's arguments based on standing and Rule 17(a) are mirror images and can be analyzed together.

The key question under Rule 17(a) is whether "the complaint [is] brought in the name of the party to whom that claim belongs' or the party who according to the governing substantive law, is entitled to enforce the right." Id . at 756 (internal quotation omitted). The LLCs that Desai allegedly mismanaged were organized under Illinois law; therefore, pursuant to the internal affairs doctrine, I must apply Illinois law in resolving the present dispute. See Freed v. JPMorgan Chase Bank, N.A. , No. 12 C 1477, 2012 WL 6193964, at *7 (N.D. Ill.Dec. 12, 2012).

The Illinois Limited Liability Company Act ("LLC Act"), 805 ILCS § 180/15-1 et seq. , provides that a member-manager such as Desai owes fiduciary duties of loyalty and care to the LLC and its other members. 805 ILCS § 180/15-3(a); see also id. at § 180/15-3(b) (setting forth member-manager's specific duties). A LLC's operating agreement may not "eliminate or reduce a member's fiduciary duties." Id . at § 180/15-5(b)(6). The LLC Act further provides that "[a] member may maintain an action against a limited liability company or another member for legal or equitable enforce...the member's rights under this Act." Id . at § 180/15-20(a)(2 (emphasis added).

Thus, under Illinois law, Pgan is entitled to sue Desai for breaching the fiduciary duties owed to him as the twenty five percent member of Elk Grove Petroleum, Orland Park Petroleum, and Oswego Petroleum.[2] This statutory right of action belongs to Pgan personally and need not be asserted by the LLCs or their bankruptcy trustee.[3] Moreover, the LLC Act does not say that Pgan may enforce his statutory rights only to the extent he seeks redress for injuries that are distinct from injuries sustained by the LLCs that Desai allegedly mismanaged. See Freed , 2012 WL 6193964 at *7 (denying motion to dismiss LLC member's aiding and abetting breach of fiduciary duty claim without analyzing whether plaintiff's alleged injuries were distinct from injuries to the LLCs). To the extent Pgan must allege injuries that are unique to him as an LLC member, see McGee v. Dresnick, No. 04 6684, ...

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