United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
EDMOND E. CHANG, District Judge.
Debtors Vernon Harrison and Kecelia Webber appeal from the bankruptcy court's Order of Default and the Judgment Order Determining Debt Excepted From Discharge. Harrison and Webber assert that the bankruptcy court erred in the following ways: by allowing creditors, Lee Investment Group and Robert E. Lee, to file their amended complaint two days after the bankruptcy court's deadline for doing so; by denying Harrison and Webber's motion to dismiss for Lee Investment Group's purported lack of capacity to sue, failure to state a claim for fraud with sufficient particularity, alleging promissory fraud not recognized under Illinois law, and making contradictory statements in the complaint; by denying Harrison and Webber's motion in limine, motion to vacate the order of default, and motion for relief from the order of default and order denying motion to vacate and motion in limine; by issuing its judgment order; and by setting the amount of judgment stated in its judgment order. R. 14, Appellants' Br. at 3-8. For the reasons stated below, the bankruptcy court's order and judgment are affirmed.
The appellants, Harrison and Webber, entered into a Citgo Gas Station Investment Agreement with the appellees, Lee Investment Group and Robert E. Lee (together, Lee) in May 2003. Pls.' Am. Compl. ¶¶ 10, 20 (Bankr. Dkt. 25). Lee invested $100, 000 in exchange for 15% of First Gas's (the gas station's business name) profits and a guaranteed 10% return on the $100, 000 investment. Id. ¶¶ 11-12. The gas station opened in July 2005. Id. ¶ 15. Harrison and Webber filed for bankruptcy protection in 2011. Appellants' Br. at 8. Lee filed complaints against Harrison and Webber to determine dischargeability of the debts owed by each. Appellants' Br. at 8. These cases have been consolidated on appeal. See R. 9, 2/19/13 Minute Entry.
In the bankruptcy court, Harrison and Webber filed a motion to dismiss Lee's complaint for failure to state a claim. After denying this motion to dismiss, the court nevertheless struck the original complaint and gave Lee until February 23, 2012, to file an amended complaint. Order Mot. Dismiss Adversary Proceeding (Bankr. Dkt. 23). Lee filed the amended complaint two days after the deadline, see Pls.' Am. Compl. at 7 (Bankr. Dkt. 25) (certificate of service dated Feb. 25, 2011), and Harrison and Webber did not (at that time) object to the late filing, see R. 16, Appellees' Br. at 2. The complaint alleged that Harrison and Webber falsely represented that the proceeds from the business operations would be used for corporate purposes, and instead used the money for personal expenses. Pls.' Am. Compl. ¶¶ 30-31. Harrison and Webber filed a motion to dismiss the amended complaint for failure to state a claim and for lack of standing to sue. Def.'s Mot. Dismiss at 1-3 (Bankr. Dkt. 26). Specifically, Harrison and Webber argued that Lee did not plead fraud with sufficient particularity as required by Federal Rule of Civil Procedure 9(b). Id. at 3-5. Harrison and Webber also argued that Lee did not have standing to sue because Lee Investment Group was involuntarily dissolved by the Secretary of State in October 2011. Id. at 2. Lee Investment Group's corporate status was reinstated in 2012 and is currently in good standing. Appellees' Br. at 2. The bankruptcy court rejected both of Harrison and Webber's arguments and denied their motion to dismiss the amended complaint. See 4/17/12 Tr. at 8.
Following this denial, the bankruptcy court issued a Final Pretrial Order requiring that each party submit a list of trial exhibits and witnesses by December 18, 2012. Final Pretrial Order at 1-2 (Bankr. Dkt. 39). The order required that any objections to the exhibits or witnesses be submitted by December 23, 2012, and required each party to file a trial brief by December 28, 2012. Id. at 2-3. The order also set the final pretrial hearing for January 3, 2013. Id. at 4. The order stated that "[f]ailure to comply with the provisions of this order may result in waiver of claims or defenses, dismissal, default, exclusion or admission of evidence or other sanction, as justice may require." Id. at 1. By the first deadline, December 18, 2012, neither party had exchanged lists of exhibits or witnesses. On December 26, 2012, Lee called Harrison and Webber's attorney to let him know that they were sending the exhibit and witness lists. Appellants' Br. at 17-18. Harrison and Webber's attorney informed Lee that he was leaving the country and may not be back in time for the pretrial conference on January 3, 2013. Id. Harrison and Webber assert that because they had received no pretrial documents from Lee, they concluded that Lee would not be able to introduce any exhibits or present witnesses and would, therefore, be unable to prove the allegations in their complaints. Id. at 18.
On January 3, 2013, Harrison and Webber did not attend the final pretrial conference. Order of Default (Bankr. Dkt. 41). Furthermore, Harrison and Webber had submitted no pretrial materials. Id. As a consequence, the bankruptcy court entered an order of default against both Harrison and Webber because of their failure to appear and failure to comply with the Final Pretrial Order. Id. Harrison and Webber immediately filed a motion to vacate the order of default and a motion in limine to exclude certain witnesses and evidence, both of which were scheduled to be heard on the same day as the trial and final prove-up: January 9, 2013. Def.'s Mot. Vacate (Bankr. Dkt. 45); Def.'s Mot. in Limine (Bankr. Dkt. 46); see also Appellants' Br. at 9. At the trial, the court denied the motions and allowed Lee to admit affidavits regarding the amount of debt owed. Order on Def.'s Mot. Vacate (Bankr. Dkt. 53); Order on Def.'s Mot. in Limine (Bankr. Dkt. 54); see also Appellants' Br. at 9. Harrison and Webber filed a motion for relief from the order of default and the orders denying the motions to vacate and motions in limine. Defs.' Mot. Relief from Orders (Bankr. Dkt. 55). This motion was also denied, and two days later the court entered a judgment determining that the debts of both Harrison and Webber were exempt from discharge and entered judgment in favor of Lee in the amount of $160, 246.57. Order on Defs.' Mot. Relief from Orders (Bankr. Dkt. 57); Judgment Order (Bankr. Dkt. 58). This amount represents the original $100, 000 investment, a 10% guaranteed return on investment for six years, and interest. Appellants' Br. at 22. Harrison and Weber now appeal.
II. Standard of Review
A federal district court has jurisdiction, under 28 U.S.C. § 158(a), to hear appeals from the rulings of a bankruptcy court. On appeal, the district court reviews the factual findings of the bankruptcy court for clear error and reviews the bankruptcy court's legal findings de novo. Wiese v. Cmty. Bank of Cent. Wis., 552 F.3d 584, 588 (7th Cir. 2009). Decisions left to the discretion of the bankruptcy court, however, are reviewed "only for an abuse of discretion." Id. This is an exacting standard: "a court abuses its discretion when its decision is premised on an incorrect legal principle or a clearly erroneous factual finding, or when the record contains no evidence on which the court rationally could have relied." Corporate Assets, Inc. v. Paloian, 368 F.3d 761, 767 (7th Cir. 2004).
Failure to state a claim is a legal decision, and is therefore reviewed de novo. In re Rose, 585 F.3d 306, 309 (7th Cir. 2009). Denials of a motion to vacate an order of default, or of a motion in limine, on the other hand, are reviewed for abuse of discretion. See Eskridge v. Cook Cnty., 577 F.3d 806, 808-09 (7th Cir. 2009); Von der Ruhr v. Immtech Int'l, Inc., 570 F.3d 858, 862 (7th Cir. 2009); In re Leventhal, 481 B.R. 409, 420 (N.D. Ill. 2012) (applying an abuse-of-discretion standard to a bankruptcy-court determination). Likewise, damage awards are reviewed for abuse of discretion and are only disturbed if the award was plainly excessive. Domanus v. Lewicki, 742 F.3d 290, 303 (7th Cir. 2014).
A. Capacity to Sue
Lee Investment Group, although dissolved at the time, did have the capacity to sue under the relation-back doctrine as codified in the Illinois Business Corporation Act. The relation-back doctrine "permits a reinstated corporation to ratify actions taken on its behalf during a period of dissolution, and gives those actions legal effect from the time they were taken." Dep't of Revenue v. Semenek, 551 N.E.2d 314, 315 (Ill.App.Ct. 1990). Harrison and Webber argue that Lee lacked standing to sue because, in 2011, Lee Investment Group was involuntarily dissolved by the State of Illinois and was not reinstated until after the deadline for filing an Adversary Proceeding had passed. Appellants' Br. at 13-14. In support of this position, Harrison and Weber rely on Jorgensen v. Baker, which held that if a dissolved corporation is not reinstated before the end of the statute-of-limitations period, it cannot file suit. 157 N.E.2d 773, 777 (Ill.App.Ct. 1959). But Jorgensen has been superseded. The Illinois Business Corporation Act, which was passed after Jorgensen, states that:
Upon filing of the application for reinstatement, the corporate existence shall be deemed to have continued without interruption from the date of the issuance of the certificate of dissolution, and the corporation shall stand revived with such powers, duties and obligations as if it had not been dissolved; and all acts and proceedings of its officers, directors and shareholders, acting or purporting to act as ...