United States District Court, N.D. Illinois, Eastern Division
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For Trinity Industries Leasing Company, Plaintiff: Eric Neal Macey, LEAD ATTORNEY, Novack and Macey, LLP, Chicago, IL; Dorothea L. Vidal, GEARY PORTER & DONOVAN P.C., Addison, TX; Michael Alan Weinberg, Novack & Macey, Chicago, IL; Offer Korin, Katz & Korin, P.C., Indianapolis, IN.
For Midwest Gas Storage, Inc., Deborah O'Malley, J., Putnam Energy LLC, Terrence O'Malley, Defendants: Timothy D. Elliott, LEAD ATTORNEY, PRO HAC VICE, Rathje & Woodward, Wheaton, IL; Gary G. Hanner, HANNER HANNER & HANNER, Rockville, IN; Kaitlyn Anne Wild, Rathje & Woodward, LLC, Wheaton, IL.
MEMORANDUM AND OPINION
REBECCA R. PALLMEYER, United States District Judge.
Plaintiff Trinity Industries Leasing Company (" Trinity" ) filed this action against Defendants Midwest Gas Storage, Inc. (" Midwest Gas" ), Putnam Energy LLC (" Putnam Energy" ), Terrence O'Malley, and his wife Deborah J. O'Malley, alleging a host of claims related to the breach of a 2007 contract for the lease of
railcars between Trinity and Indiana Corn Products, LLC (" Indiana Corn" ). After Indiana Corn failed to make regular monthly payments, Plaintiff terminated the lease and repossessed its railcars in November 2008. Plaintiff then filed suit against Indiana Corn in Texas state court for breach of contract. On August 7, 2009, the Texas court entered a default judgment against Indiana Corn for more than nine million dollars, multiples of the unpaid lease amount. Plaintiff has yet to recover on that judgment.
In the case before this court, Plaintiff claims that, as of September 2006, Indiana Corn was an " empty shell" corporation, which Defendant Mr. O'Malley, as " president and chief executive officer," used to carry out a scheme to defraud Plaintiff. Mr. O'Malley is the thread tying each of the Defendants to Plaintiff's lease with Indiana Corn: both Midwest Gas and Putnam Energy are allegedly " controlled and/or owned in whole or part" by the O'Malleys, and received some of the proceeds from a sublease of the railcars. Seeking to recover on its judgment against Indiana Corn, Plaintiff has asserted an alter ego claim and various state law claims, including fraud or tortious interference against Mr. O'Malley, and has made allegations of fraudulent transfer and equitable " claims" of " money had and received," unjust enrichment, and constructive trust against all Defendants. Defendants move to dismiss the first amended complaint for failure to state a claim. For reasons discussed herein, Defendants' motion  is granted in part and denied in part.
The following alleged facts are drawn from the First Amended Complaint and from the lease and sublease attached to it. The facts are set forth in a light most favorable to Plaintiff.
I. Factual Background
Plaintiff Trinity is " in the business of leasing railcars to meet the freight railcar needs of industry." (Pl.'s First Am. Compl. , hereinafter " Am. Compl.," ¶ 13.) On March 13, 2007, Plaintiff and Indiana Corn, a Delaware limited liability company with its principal office in Illinois, entered into a ten-year lease agreement in which Plaintiff agreed to lease 150 railcars to Indiana Corn in exchange for a monthly payment of $650 per car through October 31, 2008, and $732 per car beginning November 1, 2008. (Trinity Indus. Leasing Co. R.R. Car Lease Agreement, Ex. 1 to Am. Compl., hereinafter " Lease," at 1-2; Rider One (1) to R.R. Car Lease Agreement, Ex. 1 to Am. Compl., hereinafter " Rider," at 1-2.) Plaintiff alleges that Jim Zegar, the chief financial officer of Indiana Corn, acted " at the direction and under the control of [Mr.] O'Malley," when he signed the lease on behalf of Indiana Corn. (Am. Compl. ¶ ¶ 13, 28.) To carry out the lease, Plaintiff purchased 150 new railcars, which " were built and delivered as directed by [Mr.] O'Malley" before June 1, 2007, and Indiana Corn was obligated to begin monthly payments ($97,500 per month) soon thereafter. ( Id. ¶ ¶ 31-32.) Rent for the railcars was pro-rated for the first month and thereafter was due before the first day of the month. (Lease.)
Plaintiff and Indiana Corn's relationship went south almost immediately. Plaintiff alleges that Mr. O'Malley, acting on behalf of Indiana Corn, " never had any intention of paying [Plaintiff]," but rather plotted a " scheme" to " use the corporate form" to lease railcars from Plaintiff, sublease the same railcars to other companies, and then funnel the sublease proceeds to himself personally and other entities in which he
had an interest. (Am. Compl. ¶ 23.) Indiana Corn did sublease the railcars to ConAgra in April 2007, and never made any lease payments to Plaintiff in 2007. ( Id. ¶ ¶ 30, 41.) ConAgra, meantime, made regular monthly payments to Indiana Corn, the proceeds of which Plaintiff alleges were transferred to Mr. O'Malley personally, to Midwest Gas, to Putnam Energy, and to Hartford Bio-Energy (" HBE" ). ( Id. ¶ ¶ 34-39, 41.) These transfers had no legitimate business purpose, Plaintiff contends, and are not properly documented. ( Id. ¶ ¶ 48-49.) After Indiana Corn's board allegedly terminated Mr. O'Malley's " exclusive control" over Indiana Corn's bank account, on March 18, 2008, Indiana Corn finally began making monthly lease payments to Plaintiff, but has not paid the amount past due. ( Id. ¶ ¶ 45, 47.)
A. Negotiating the Lease Agreement: March 2006 - March 2007
In order to carry out his scheme, Plaintiff alleges that Mr. O'Malley induced Plaintiff to enter into the lease by misrepresenting the viability and financial condition of Indiana Corn. In March 2006, Mr. O'Malley, on behalf of Indiana Corn, approached Plaintiff seeking to lease railcars. (Am. Compl. ¶ 13.) As part of the negotiations, Mr. O'Malley represented to Mike Meaney, a " Trinity executive" (Defs.' Reply in Supp. of Am. Mot. to Transfer or Dismiss , at 4), that " Indiana Corn operated two ethanol plants," one in Cloverdale, and another in Hartford City, Indiana, named " Hartford Bio-Energy," each of which " produced 88 million gallons of ethanol from 35 million bushels of corn" annually. (Am. Compl. ¶ 14.) Mr. O'Malley also assured Mr. Meaney, both in person and on the phone, that Indiana Corn was a " fully funded, operational and viable entity," a representation that Mr. O'Malley allegedly " repeated . . . both expressly and through many implications from March 2006 through June 2007." ( Id. )
In reality, Plaintiff claims, at the time that the parties were negotiating this lease, Indiana Corn was in the process of selling its business. On or around September 15, 2006, Indiana Corn " closed a sale that had been in progress for months and was committed to by no later than July 2006," which " disposed of virtually all of [its] assets, including all of its land, permits, and plans" and distributed sales proceeds to its members. ( Id. ¶ 19.) Indiana Corn also " transferred all of its vehicles, computers, and other office equipment to other entities including HBE [Hartford Bio-Energy]." ( Id. ) By November 2006, Indiana Corn allegedly had " no employees," " no assets," and " no operations." ( Id. ¶ ¶ 57(a)-(c).) Furthermore, as part of the sale, Indiana Corn and its owners had signed a non-compete agreement, that Plaintiff asserts, " prevented [Indiana Corn] from realistically engaging in any business whatsoever." ( Id. ¶ 57(e).) Though Indiana Corn initially retained a water pipeline easement used by the Cloverdale plant, Plaintiff claims that this was due to " an oversight by the buyer," corrected on December 18, 2007, when the original buyer purchased that final asset for $600,000. ( Id. ¶ 40.) And, contrary to Mr. O'Malley's representations, Indiana Corn never owned or controlled HBE; instead, Mr. O'Malley was both president and 40% owner of HBE, " a highly speculative venture that was never capitalized sufficiently to enable it to begin any operations at all." ( Id. ¶ ¶ 20, 57(m).)
As to the financial condition of Indiana Corn, on July 24, 2006, Jim Zegar, Indiana Corn's chief financial officer, " at the direction and under the control of [Mr.] O'Malley" allegedly represented to Plaintiff that Indiana Corn expected to make $250,000,000 in future annual sales. ( Id.
¶ 18.) Then, in November 2006, Mr. O'Malley provided Plaintiff with a written statement of Indiana Corn's financial condition as of November 22. ( Id. ¶ 17.) According to that statement, Indiana Corn had: (1) $571,099.45 in " cash or cash equivalents; " (2) " fixed assets in the form of a pipeline, plant construction, vehicles and office equipment worth at least $873,008.41; " (3) " stock worth over $23,000,000 in an entity by the name of 'Altra'; " (4) " less than $300,000" in liabilities " including all of its accounts payable and payroll; " and (5) no outstanding debts to individuals. ( Id. ) Either O'Malley or Zegar also " expressly represented" that " HBE did not have a receivable owed to it from any related or affiliated entities." ( Id. ¶ 55(j).) Had these representations been truthful, Plaintiff contends, they would mean that " Indiana Corn had adequate working capital and assets to operate a business and lease the railcars with a realistic potential of generating much more capital." ( Id. ¶ 18.)
In fact, as of November 22, 2006, Indiana Corn allegedly had " less than $140,000" in available cash. ( Id. ¶ 19.) Furthermore, Plaintiff claims, Indiana Corn never owned $23,000,000 in Altra stock; rather, Mr. O'Malley and other Indiana Corn members received Altra stock " personally" as part of the September 15 sale. ( Id. ¶ 21.) Neither O'Malley nor Zegar disclosed the September 15 sale or its impact on Indiana Corn's financial condition to Plaintiff. ( Id. ¶ 22.)
After providing Plaintiff with the false financial statement, on November 30, Mr. O'Malley and Mr. Zegar " began systematically transferring any cash that Indiana Corn had in its bank account" to Mr. O'Malley and entities in which he had an interest, including Putnam Energy, Midwest Gas, and HBE. ( Id. ¶ 24.) Specifically, Plaintiff alleges, Indiana Corn made the following transfers without receiving any consideration in return: (1) $100,000 to Putnam Energy, noted as a personal transfer to Mr. O'Malley, on November 30; (2) $30,000 to HBE, on November 30; and, after receiving additional funds for sale of its assets, (3) $200,000 to HBE on December 22. Finally, between January and April 2007, Plaintiff asserts that Indiana Corn spent $191,535.06 " on professional fees, travel and entertainment, and activities for a right of way" on behalf of Putnam Energy and Midwest Gas. ( Id. ¶ ¶ 24-27.)
B. Indiana Corn's Delinquency: June 2007 - March 2008
After delivery of the railcars in June 2007, Indiana Corn failed to make a single payment until March 2008. ( Id. ¶ ¶ 41, 45, 47.) When Plaintiff questioned Indiana Corn about its failure to pay rent, Mr. O'Malley allegedly explained that " Indiana Corn was having some financial difficulties because some of its investment funding was 'tied up'" ( Id. ¶ 41), but he expected the " already committed" money within one to two months. ( Id. ¶ 55(m).) In reality, Plaintiff claims, Indiana Corn had sold most of its assets by September 2006. ( Id. ¶ 19.)
Though Indiana Corn was paying nothing for the railcars, the railcars were generating revenue for Indiana Corn. Not even one month after executing the lease with Plaintiff, in an agreement dated April 2, 2007, Indiana Corn agreed to sublease all the railcars to ConAgra through April 30, 2009. (Am. Compl. ¶ 30; Railcar Sublease Agreement, Ex. 2 to Am. Compl., hereinafter " Sublease," at 1). ConAgra began making regular monthly payments to Indiana Corn after delivery of the railcars in June 2007 and continuing through November of that year. On June 8, 2007,
Plaintiff asserts, Indiana Corn issued its first two invoices to ConAgra for subletting the railcars, one for $146,250 and another for $97,500, which ConAgra promptly paid on June 22 and July 16 or 17, respectively. (Am. Compl. ¶ ¶ 33-35.) After making these first two payments, ConAgra continued to make regular monthly payments to Indiana Corn: $97,500 on August 7, $97,500 on September 7, $97,508.69 on October 9, and $97,617.07 on November 5. ( Id. ¶ ¶ 34-39, 41.)
Plaintiff never received any payments from Indiana Corn in 2007. Instead, ConAgra's sublease payments " were transferred out of Indiana Corn to [Mr.] O'Malley personally and into the other entities owned or controlled by [the O'Malleys] . . . including Putnam Energy and Midwest Gas." (Am. Compl. ¶ 23.) Nor did Indiana Corn receive any consideration in exchange for at least some of these transfers. ( Id. ¶ ¶ 34, 35, 39.) Between June 22, 2007, when Indiana Corn received its first sublease payment from ConAgra, and November 26, 2007, Plaintiff alleges that Indiana Corn " at [Mr.] O'Malley's direction" ( id. ¶ ¶ 34-39) made the following transfers and payments:
o $40,000 to HBE on June 28, 2007 ( id. ¶ 34);
o $100,000 to HBE on July 2, 2007 ( id. );
o $40,292 on July 26, 2007 to Allen and Terri Grayson, who allegedly " were performing work for a right of way for Putnam Energy" ( id. ¶ 35);
o $20,000 to HBE on July 30, 2007 ( id. );
o $40,000 to Union Pacific and BNSF Railroads on July 30, 2007 in two checks signed by Mr. O'Malley, allegedly for delivery of railcars to ConAgra ( id. );
o $6,000 to S & S Construction on July 31, 2007 in a check signed by Mr. O'Malley, allegedly for construction work performed for Putnam Energy and Midwest Gas ( id. );
o $40,000 to HBE on or around August 8, 2007 ( id. ¶ 36);
o $56,823.87 to BNSF, Norfolk Southern and Union Pacific Railroads on August 13, 2007 in checks drafted and signed by Mr. O'Malley, allegedly for " rail transportation costs," which the court presumes were from Indiana Corn's account ( id. );
o $2,500 to Richard Moore, a Midwest Gas employee, on or around August 15, 2007 in a check signed by Mr. O'Malley, and subsequently, five other similar payments ( id. );
o $10,000 to HBE on or around September 7, 2007 ( id. ¶ 37);
o $15,000 to HBE on or around September 19, 2007 ( id. );
o $10,000 to HBE on or around October 11, 2007 ( id. ¶ 38);
o $10,000 to HBE on or around October 16, 2007 ( id. );
o $10,000 to HBE on or around October 17, 2007 ( id. );
o $10,000 to HBE on or around October 18, 2007 ( id. );
o $5,000 to HBE on October 31, 2007 ( id. );
o $5,000 to HBE on or around November 2, 2007 ( id. ¶ 39);
o $5,000 to HBE on or around November 9, 2007 ( id. );
o $22,000 to HBE on or around November 22, 2007 ( id. );
o $50,000 to Mr. O'Malley on or around November 26, 2007 ( id. ); and
o $19,435 for insurance on an unspecified date, when Indiana Corn allegedly " had no property, and no operations to insure." ( Id. ¶ 37).
HBE then allegedly transferred the money that it received from Indiana Corn to Defendants Mr. O'Malley, Putnam Energy, and Midwest Gas (Am. Compl. ¶ 95) through the following payments:
o Personal expenses, including " credit card bills, electricity bills, lawn care expenses, and Direct T.V. expenses," of Mr. O'Malley by check in October 2007 ( id. ¶ ¶ 38, 95);
o $29,403.34 for real estate taxes on property owned by Mr. O'Malley on February 14, 2008 ( id. ¶ 97); and
o $69,648.42 for payroll for Midwest Gas and Putnam Energy on November 30, December 14, December 26, December 28, 2007, and January 11, January 12, January 23, January 25, February 1, February 9, March 9, April 1, and May 1, 2008. ( Id. )
Even after receiving additional income from the sale of the Cloverdale plant's water pipeline easement to the original buyer from the September 2006 sale, Indiana Corn paid no rent until March 2008. On December 18, 2007, Indiana Corn sold the easement for $600,000 and deposited $485,218.21 into its bank account. ( Id. ¶ 40.) Plaintiff does not know what happened to the difference ($114,781.79), but notes that " [i]n the following three months" Indiana Corn transferred over $330,000 " in cash" to HBE. ( Id. ¶ ¶ 40-41.)
C. Indiana Corn as Alter Ego of Mr. O'Malley Through March 2008
Until Indiana Corn's board removed Mr. O'Malley from sole control over Indiana Corn's financial accounts in March 2008, Plaintiff asserts, O'Malley operated Indiana Corn as his alter ego. Indiana Corn allegedly did not maintain corporate formalities, and has failed to comply with subpoenas requesting organizational meeting minutes, articles of organization, or " other fundamental records." (Am. Compl. ¶ 72.) Nor did Indiana Corn keep its finances in order: Plaintiff alleges that Indiana Corn did not maintain accurate financial records, " timely and properly file tax returns; " keep an accurate account of its members' capital contributions; or " declare a dividend or proper distributions." ( Id. ¶ 73.) And, Plaintiff asserts, Indiana Corn's board of directors did not approve the lease or appear to have any budget or business plan related to the lease. ( Id. ¶ 72.) In fact, Plaintiff alleges, Indiana Corn was undercapitalized from its inception, as the ethanol plant that it sought to run " was never fully developed or operable." ( Id. ¶ 71.) By March 2007, Indiana Corn was insolvent; it had sold most of its assets in September 2006, and had debts and liabilities that exceeded its assets. ( Id. ¶ ¶ 46, 74.) And, between June 2007 and March 2008, Indiana Corn was not making any regular lease payments to Plaintiff. ( Id. ¶ 74.)
During this period, Mr. O'Malley allegedly " controlled and ...