United States District Court, N.D. Illinois, Eastern Division
SIDNEY R. MILLER, derivatively on behalf of 53rd-Ellis Currency Exchange, Inc., California-Peterson Currency Exchange, Inc., Cicero-Foster Currency Exchange, Inc., Cicero-Armitage Currency Exchange, Inc., Stony-79th-South Chicago Currency Exchange, Inc., Racine & 51st Currency Exchange, Inc., 67th & Champlain Currency Exchange, Inc., Cottage Grove & 43rd Currency Exchange, Inc., Cottage Grove & 51st Currency Exchange, Inc., Drexel & 47th Currency Exchange, Inc., and New Morton Grove Currency Exchange, Inc., Plaintiffs,
MICHAEL E. FRYZEL, BARRY SHACK, ILLINOIS DIVISION OF FINANCIAL INSTITUTIONS, and TERENCE KEENAN, Defendants,
MEMORANDUM OPINION AND ORDER
JOHN Z. LEE, District Judge.
This derivative shareholder suit is but the most recent in a series of cases brought by Plaintiff Sidney Miller ("Miller") on behalf of eleven wholly-owned currency exchange corporations-53rd-Ellis Currency Exchange, Inc., California-Peterson Currency Exchange, Inc., Cicero-Foster Currency Exchange, Inc., Cicero-Armitage Currency Exchange, Inc., Stony-79th-South Chicago Currency Exchange, Inc., Racine & 51st Currency Exchange, Inc., 67th & Champlain Currency Exchange, Inc., Cottage Grove & 43rd Currency Exchange, Inc., Cottage Grove & 51st Currency Exchange, Inc., Drexel & 47th Currency Exchange, Inc., and New Morton Grove Currency Exchange, Inc. (collectively, the "Miller currency exchanges"). Miller alleges that Defendants Michael E. Fryzel ("Fryzel"), Barry Shack ("Shack"), Terrence Keenan ("Keenan"), and the Illinois Division of Financial Institutions ("IDFI") conspired to facilitate the imposition of a receivership on and liquidation of the Miller currency exchanges, in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. Dkt. 35. In the amended complaint, Miller also advances an individual RICO claim against Defendants "as a third-party beneficiary of [the Miller currency exchanges'] contracts." Id. ¶ 4. In addition to opposing Defendants' motions to dismiss, Miller also seeks leave to amend and correct his complaint. Dkt. 77, 82. For the reasons set forth below, the Court grants Defendants' motions to dismiss with prejudice and denies Miller's motions for leave to amend.
In considering the motions to dismiss, the Court assumes the truth of the amended complaint's factual allegations, though not its legal conclusions. See Munson v. Gaetz, 673 F.3d 630, 632 (7th Cir. 2012). In doing so, the Court must consider the amended complaint, along with any "documents attached to the [amended] complaint, documents that are critical to the [amended] complaint and referred to in it, and information that is subject to proper judicial notice, " along with additional facts set forth in Miller's briefs opposing dismissal, so long as those facts "are consistent with the pleadings." Geinosky v. City of Chi., 675 F.3d 743, 745 n.1 (7th Cir. 2012). All reasonable inferences are to be drawn in Miller's favor. See Westmoreland Cnty. Emp. Ret. Sys. v. Parkinson, 727 F.3d 719, 729 (7th Cir. 2013) (when evaluating whether plaintiffs in a derivative suit have adequately pleaded complaint, "any inferences reasonably drawn from the factual allegations of the complaint must be viewed in the light most favorable to the plaintiffs") (quoting In re Abbott Labs. Derivative S'holder Litig., 325 F.3d 795, 803 (7th Cir. 2003)).
Miller is the sole shareholder, owner, director, and officer of the Illinois-based Miller currency exchanges. Dkt. 35 ¶¶ 1, 4. Beginning in 1990, Fryzel, an attorney, provided legal services to Miller and his currency exchanges. Id. ¶ 13. Fryzel entered into service agreements with each of the eleven currency exchange corporations and acted as each corporation's registered agent. Id. ¶¶ 11H, 12. Until 2002, non-party Corus Bank had extended generous amounts of credit to the Miller currency exchanges, allowing the exchanges to overdraw their accounts continuously in order to purchase and operate additional currency exchange stores. Id. ¶ 19. On September 1, 2002, Corus Bank terminated Michael Lynch, the vice president for all currency exchange operations since 1986, who had worked closely with Miller in extending him credit. Id. ¶ 19. Keenan, a longtime Corus Bank mortgage lending officer, was hired as Lynch's replacement. Id. ¶ 20.
On October 31, 2002, Miller met with Fryzel, Keenan, another Corus Bank executive, an accountant, and a trial attorney. Id. ¶ 21. At the meeting, Corus Bank demanded that Miller immediately sell his currency exchanges and repay his loans to Corus Bank. Id. Miller alleges that Corus Bank wanted to expedite recovery of the credit it had extended to Miller in order to "mitigate the threat of its liability for lending under questionable banking practices if exposed during Federal bank examiner inquiries during its annual review or afterward." Id. ¶ 6. On December 12, 2002, Fryzel sent Miller a letter purporting to terminate his legal representation of the currency exchanges. Id. ¶ 14. The letter stated that Fryzel would hold the currency exchange records in his possession until Miller paid the alleged unpaid balance of the fees ($38, 074.73). Id. ¶ 15.
On January 17, 2003, Corus Bank and IDFI held a meeting without Miller's knowledge regarding the currency exchanges. Id. ¶ 22. Shortly thereafter, on February 4, 2003, Corus Bank sent Miller a letter listing the amounts that had been overdrawn with respect to the currency exchange accounts and informing him that it would immediately cease "shipping cash" to the currency exchanges. Id. ¶ 23. Despite Miller's request that he do so, Fryzel did not prepare a response to Corus Bank's letter. Id. ¶ 21. That same day, Corus Bank transferred $1, 260, 000.00 from the Miller currency exchanges' operating accounts-typically used to pay for money order clearings-to "either other Corus accounts for [each] store or to other stores' Corus accounts or to non-store Corus accounts." Id. ¶¶ 23, 31A. These transfers reduced each store's operating account to a value of zero and allegedly "diverted public money order funds held in trust for redemption." Id. ¶ 30A. On February 6, 2003, IDFI examiners conducted a field examination of each of Miller's currency exchanges. Id. ¶ 24. Allegedly, the transfers were part of Corus Bank's scheme "to establish impairment throughout the 11-store Miller chain" at the IDFI examination, which would then justify IDFI's imposition of the receivership and allow Corus Bank to seize control of the Miller currency exchanges' $1, 441, 000.00 aggregate money order surety bond proceeds through the receiver, allegedly with Fryzel's legal assistance. Id. ¶ 31B.
On February 15, 2003, Miller attempted to deposit $125, 000.00 in currency exchange money orders at LaSalle Bank, where Miller's auditing corporation had an account containing emergency cash for store operations. Id. ¶ 25. After speaking to Keenan, a former LaSalle Bank officer, who stated that "questionable practices" were occurring with respect to the Miller currency exchange accounts, LaSalle Bank informed Miller that his account was being closed and that no deposits would be accepted. Id.
On February 24, 2003, Fryzel filed a breach of contract action for the $38, 074.73 unpaid balance against Miller and the currency exchange corporations. Id. ¶¶ 16-17. The next day, on February 25, the IDFI director issued eleven orders placing each of the Miller currency exchanges into receivership pursuant to the Currency Exchange Act, 205 Ill. Comp. Stat. § 405, and appointed Shack as receiver. Id. ¶¶ 4, 16, 27. On February 27, 2003, Shack seized physical control of the stores. Id. ¶ 28. Shortly thereafter, Fryzel was retained as Shack's attorney, though Miller was unaware of this until he reviewed certain documents produced by IDFI in July 2004. Id. ¶¶ 12A, 30. On or about June 20, 2003, Fryzel accepted service at his Chicago office of the Illinois Attorney General's complaint for liquidation of the Miller currency exchanges. Id. ¶ 12A. Despite his role as Shack's attorney, Fryzel continued to serve as the registered agent of the Miller currency exchanges until 2007. Id. ¶ 12.
Miller further alleges that Shack and Corus Bank devised a "bifurcation scheme" in which the Miller currency exchanges' operating accounts were divided into a "receivership account" and the "old operating account"; the old operating account was used only to clear money orders, while the funds used to pay for clearing those money orders were transferred from the receivership account to the old operating account in large amounts twice a month, "and not daily so as to cover the money order clearings dollar-for-dollar during the prior half month." Id. ¶¶ 32B-32C. Corus Bank retained the net amount not transferred in the receivership account for other uses, "[p]resumably... includ[ing] re-imbursement for its claimed losses." Id. ¶ 32E. The alleged purpose of this "scheme" was for "Corus... to report to the Comptroller that the Receivership account was positive and that the old operating account negative balance was no worse, and would be cured, perhaps when the stores were sold and fresh cash was applied to cure the negative balance." Id. ¶ 32C. However, the scheme was undermined by policies instituted by Shack, such as the elimination of fees associated with the issuance of money orders and the requirement that longtime customers re-apply, which resulted in a decrease in old operating account balances. Id. ¶ 32D.
In a letter dated September 20, 2003, Corus Bank gave Shack instructions for recovering store cash after the termination of cash shipments and credit to the Miller currency exchanges. Id. ¶ 33A. On September 24, 2003, Miller and three attorneys (not including Fryzel), met with IDFI's and Corus Bank's counsel and an assistant attorney general to discuss the September 20 letter. Id. ¶ 33. Corus Bank offered to continue cash shipments to the Miller currency exchanges "if Miller would agree to promptly convey [his] ownership to Corus" for compensation in the amount of 25% of the profits of sale. Id. ¶ 33D. Fryzel allegedly conspired with Corus Bank "by failing to oppose Corus['s] intention to clean out the store.'" Id. ¶ 33G.
On October 4, 2003, Shack closed seven Miller currency exchanges (California-Peterson Currency Exchange, Inc., Cicero-Foster Currency Exchange, Inc., Stony-79th-South Chicago Currency Exchange, Inc., Racine & 51st Currency Exchange, Inc., Cottage Grove & 43rd Currency Exchange, Inc., Cottage Grove & 51st Currency Exchange, Inc., and New Morton Grove Currency Exchange, Inc.), and discharged fifteen employees. Id. ¶ 34. On or about December 22, 2003, Continental Casualty Company ("CCC") issued $1, 441, 000.00 in IDFI-endorsed checks to Corus Bank, allegedly "in settlement of Corus Bank's March 20 claim for the Miller currency exchange Surety Bond proceeds." Id. ¶¶ 35, 35A. Corus Bank claimed that it lost more than $5 million as a result of paying the daily Miller currency exchanges' money order clearings between February 7, 2003 and March 15, 2003. Id. ¶ 35A.
Around January 31, 2005, CCC filed suit in Cook County Circuit Court seeking indemnification from Miller personally for the $1, 441, 000.00 amount. Id. ¶¶ 35E, 35H. On March 2, 2005, the Cook County Circuit Court ordered the statutory liquidation of nine of the currency exchanges. Id. ¶¶ 4, 35Q. At the time the amended complaint was filed, all eleven of the Miller currency exchange corporations had been administratively dissolved for failure to pay franchise taxes to the Illinois Secretary of State. Id. ¶ 11E.
In 2007, Fryzel closed his Chicago law practice without providing notice to Miller or the Secretary of State. Id. ¶ 12C. Prior to the imposition of the receivership in 2003, Fryzel would regularly pass along annual Illinois Franchise Tax Report forms to Miller for him to complete and mail to the Secretary of State along with his payment. Id. ¶ 12F. After 2003, Miller did not receive any tax forms from Fryzel and presumed that the receivership had assumed responsibility for the remittances. Ibid. In 2010, however, Miller discovered that the receiver had ceased paying franchise tax fees for the currency exchange corporations, resulting in their liquidation as well as their standing to file pending check collection actions in Illinois. Ibid. Fryzel's defunct law ...