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Angelopoulos v. Keystone Orthopedic Specialists

United States District Court, Seventh Circuit

January 23, 2014



ROBERT M. DOW, Jr., District Judge.

Before the Court are motions to dismiss [36, 37] Plaintiff's first amended complaint [11] pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), filed by Defendants Keystone Orthopedic Specialists, S.C. ("Keystone"), WACHN, LLC ("WACHN"), and Martin R. Hall, M.D. ("Hall") (collectively, "Hall Defendants") [36], and Ira K. Dubin Ltd. d/b/a Green Dubin & Co. ("Green Dubin") and Ira K. Dubin ("Dubin") (together, "Dubin Defendants") [37], respectively. For the reasons set forth below, the Court denies Defendants' motions to dismiss [36, 37].

I. Background[1]

Dr. Nicholas Angelopoulos ("Angelopoulos") alleges that his former business partner, Dr. Martin Hall ("Hall"), breached two of their business contracts, and then tried to extort the monies rightfully owed to Angelopoulos pursuant to those contracts. According to Angelopoulos, when the extortion attempt failed, Hall and his accountant, Ira Dubin ("Dubin"), filed fraudulent documents with the Internal Revenue Service ("IRS") as a way to exact revenge on Angelopoulos.

Angelopoulos and Hall's business relationship began "in or around late 2002 or early 2003" when Angelopoulos joined Keystone - a medical practice of which Hall served as president and secretary - as an anesthesiologist. According to Angelopoulos, he and Hall (on behalf of Keystone) entered into an implied-in-fact employment contract at that time, the terms of which "are readily inferred from the facts and circumstances." Relevant here, Angelopoulos would pay 26.5 percent of Keystone's reasonable and appropriate expenses and would receive a $25, 000/month salary, plus 25% of other revenues generated by Keystone. If Angelopoulos's revenue from patient care exceeded his 26.5 percent share of expenses, those excess funds would spill into Keystone's cash reserves. Once Angelopoulos' total contribution to Keystone's cash reserves reached $100, 000, any revenue in excess of his 26.5 percent share of Keystone's expenses would be paid to him as a bonus. Finally, if/when Angelopoulos resigned from Keystone, Keystone would repay him the full amount of his contribution to the practice's cash reserves, any monies he invested in the practice's equipment, and any unpaid patient care revenue that he had generated.

"In or around 2004, " Angelopoulos and Hall started a side venture, when they - along with Drs. Daniel Weber ("Weber"), Mark Chang ("Chang"), and Phillip Narcissi - formed WACHN, a real estate company formed to buy properties and collect rental income from tenants. Each of the five doctors owned 20 percent of WACHN and made equal investments in the company, including contributing $110, 000 each towards the purchase of medical condominiums. Although the doctors owned equal shares, Hall was responsible for the company's accounting, rental collection, contract negotiations, and property maintenance. With these responsibilities, Angelopoulos contends, came a number of fiduciary duties that Hall blatantly ignored. Angelopoulos alleges that Hall breached these duties by failing to conduct member meetings, refusing to disclose material company information (such as lease agreements and revenue figures) to WACHN's other members, keeping the company's profits for himself, and generally acting as though he was the sole proprietor of WACHN. Although the WACHN members did not enter into an operating agreement (and, according to Angelopoulos, WACHN should therefore be governed by the default provisions of the Illinois Limited Liability Company Act, 805 ILCS 180/1, et seq. ), Hall allegedly forged Angelopoulos's signature on an operating agreement without Angelopoulos's knowledge.

Throughout this time, Angelopoulos alleges, Hall exploited his position as Keystone's president and secretary, as well. For example, Hall and Dubin (his accountant) mischarged Angelopoulos for a variety of "unreasonable and inappropriate expenses." Specifically, Hall (on behalf of Keystone) contracted with companies that he or his family owned, inflated the costs charged to Keystone, and then passed on those expenses to Angelopoulos and Keystone's other physicians. Further, in the summer of 2007, Hall and Dubin unilaterally and improperly increased Angelopoulos's share of Keystone's expenses from 26.5 percent to 34.8 percent. As he did in his management of WACHN, Hall kept Angelopoulos in the dark with respect to his financial management of Keystone.

In 2007, Angelopoulos's frustrations with Hall came to a head. After Drs. Chang and Weber left the businesses for similar reasons, Angelopoulos resigned from Keystone and disassociated from WACHN, giving notice of both to Hall around October 2007. Upon his resignation, however, Hall refused to pay Angelopoulos any of the monies that Angelopoulos believed he was owed, including his $100, 000 cash reserve contribution to Keystone. Likewise, Hall resisted Angelopoulos's claim to 20% of WACHN. Although the Illinois Limited Liability Company Act, which Angelopoulos contends governs WACHN in the absence of an operating agreement, requires that WACHN buy out a disassociating member, Hall and WACHN disavowed any statutory obligations in that regard. Angelopoulos believes that Keystone and WACHN appropriately compensated Chang and Weber upon their departures.

According to Angelopoulos, Hall and Dubin hatched an illegal scheme designed to allow Keystone and WACHN to keep the monies owed to Angelopoulos. The scheme was quite rudimentary and involved four simple steps: 1) fabricate debts that Angelopoulos supposedly owed to Hall and Keystone, 2) communicate the fake debts to Angelopoulos, 3) offer to call it even ( i.e., forgive these fake debts if Angelopoulos would abandon his claims against Keystone and WACHN), and 4) if Angelopoulos refused the offer, threaten to report forgiveness of the made-up debts to the IRS. Naturally, Angelopoulos - who believed he was entitled, at a minimum, to his $100, 000 cash reserve contribution to Keystone and his $110, 000 equity investment in WACHN - refused to play ball. When he did, Hall and Dubin executed the threat, sending a Form 1099-MISC to the IRS that falsely reported that Angelopoulos earned $159, 577.45 of miscellaneous income in 2007. In turn, the IRS issued a Notice of Deficiency to Angelopoulos on June 7, 2011, alleging that he failed to pay taxes on the income. In September 2011, Angelopoulos fought the Notice by filing a Petition in the Unites States Tax Court. Angelopoulos subpoenaed Hall, Dubin, and Keystone, seeking documentation that proved the reported amount. On August 16, 2012, counsel for Angelopoulos and the IRS met to discuss the produced documentation. A month later, the IRS and Angelopoulos submitted a Joint Status Report to the Tax Court, in which the IRS agreed that "of the total $159, 577.45 in non-employee compensation reported on Keystone's Form 1099-MISC, petitioner did not earn and/or receive non-employee compensation in the amount totaling $121, 657.00 during the 2007 tax year." Angelopoulos seemingly does not contest the $37, 920.45 difference between the amount reported on the 1099-MISC and the amount that the IRS determined to be unsupported. Angelopoulos admits that he received a $38, 045.10 bonus in 2007, and that it was appropriately reported by Hall as part of the $159, 577.45. The complaint does not reconcile the slight difference ($124.65) between the bonus received and the amount recognized by the IRS as actual earned income, but regardless, it appears from the complaint that some portion of the $159, 577.45 was, in fact, legitimate.

After sending two unsuccessful demand letters to Defendants in October and November 2011, respectively, Angelopoulos filed a complaint in this case on July 24, 2012. On October 31, 2012, Angelopoulos filed a five-count first amended complaint, which Defendants' now move to dismiss [36, 37]. Count I alleges the filing of a fraudulent information return with the IRS in violation of 26 U.S.C. § 7434 against Keystone, Hall, Green & Dubin, and Dubin. Count II alleges a breach of Angelopoulos's implied-in-fact employment agreement, resulting both from Hall's mismanagement of Keystone and his refusal to pay Angelopoulos the monies owed to him upon resignation from the company. Count III, pled as an alternative to Count II, alleges that Keystone was unjustly enriched by Angelopoulos, such that it would be inequitable for Keystone to keep the benefits that he bestowed on them. Count IV is a claim against WACHN to enforce the buyout provisions proscribed by 805 ILCS § 180/35-65. Count V alleges breaches of statutory fiduciary duties against Hall, stemming from his failures in his management of WACHN.

II. Legal Standard

Defendants' bring their motions to dismiss pursuant to Rules 12(b)(1) (lack of subject matter jurisdiction) and 12(b)(6) (failure to state a claim). They assert that 12(b)(1) motions permit the court to consider extrinsic evidence, including the affidavits attached to their motions, to determine if subject matter jurisdiction exists. This is not entirely true. There are two types of 12(b)(1) challenges - factual and facial - and they have a "critical difference." Apex Digital Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 443 (7th Cir. 2009). When a defendant argues (as Defendants in this case appear to do) that "the plaintiffs' complaints, even if true, were purportedly insufficient to establish injury-in-fact, " the challenge is a facial one. Id. at 443-44. "Facial challenges require only that the court look to the complaint and see if the plaintiff has sufficiently alleged a basis of subject matter jurisdiction." Id. at 443 (citing Lawrence v. Dunbar, 919 F.2d 1525, 1529 (11th Cir. 1990)). Factual challenges, however, lie "where the complaint is formally sufficient but the contention is that there is in fact no subject matter jurisdiction.'" Id. (citing United Phosphorus, Ltd. v. Angus Chem. Co., 332 F.3d 942, 946 (7th Cir. 2003)). Courts may look beyond the complaint only when a defendant brings a factual attack against jurisdiction, such as claim that a plaintiff lacks standing. Id. This distinction does not matter in this case, however, because Defendants' motion cannot properly be characterized as a 12(b)(1) motion at all.

Defendants contend that the Court lacks subject matter jurisdiction to hear Plaintiff's federal claim, because a Form 1099-MISC does not fall within the definition of "information return" in 26 U.S.C. § 7434. This is not a challenge to the Court's jurisdiction, but an attack on the merits of Plaintiff's case. See Miller v. Herman, 600 F.3d 726, 731 (7th Cir. 2010). In Miller, the Seventh Circuit addressed this very issue, noting that "[t]he conflation of jurisdictional and non-jurisdictional limitations on causes of action is not an uncommon occurrence." Id. There, defendants argued that the district court lacked subject matter jurisdiction because windows installed on a home did not fit within the definition of "consumer products" in the federal Magnuson-Moss Act. Id. The Seventh Circuit determined that this was not a jurisdictional attack; "because [plaintiff] must show that the windows are a consumer product to prevail, and not just to get into federal court... the [defendants'] Rule 12(b)(1) motion was in fact an indirect attack on the merits of Miller's case." Id. Thus, the Seventh Circuit construed the defendants' motion under Rule 12(b)(6), instead of Rule 12(b)(1), which "must be decided solely on the face of the complaint and any attachments that accompanied its filing." Id. at 733.

Here, Angelopoulos must show that a 1099-MISC is an "information return" to prevail, not just to get into federal court. Defendants' motion is therefore an indirect attack on Angelopoulos's case, not a challenge to subject matter jurisdiction. Accordingly, as Miller instructs, the Court will evaluate Defendants' motions under the standards of Rule 12(b)(6) and will ignore all attachments, except for those of which the Court properly may take judicial notice and those attached to Plaintiff's complaint. Adkins v. Vim Recycling, Inc., 644 F.3d 483, 493 (7th Cir. 2011) (noting that courts may take judicial notice of matters within the public record at the 12(b)(6) stage); Reger v. Development LLC v. National City Bank, 592 F.3d 759, 764 (7th ...

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