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Wells Fargo Bank, National Association v. Leafs Hockey Club, Inc.

United States District Court, N.D. Illinois, Eastern Division

July 31, 2014

WELLS FARGO BANK, NATIONAL ASSOCIATION, as Indenture Trustee under Trust Indenture dated February 1, 2007, Plaintiff/Counter-Defendant,
v.
LEAFS HOCKEY CLUB, INC., Defendant/Counter-Plaintiff,

MEMORANDUM OPINION AND ORDER

AMY J. ST. EVE, District Judge.

After the Court granted Plaintiff/Counter-Defendant UMB Bank's ("UMB" or "Plaintiff") motion to dismiss Defendant/Counter-Plaintiff Leafs Hockey Club, Inc.'s ("Leafs Hockey") Counterclaim without prejudice, [1] Leafs Hockey filed the present Amended Counterclaim on May 28, 2014. In the three-count Amended Counterclaim, Leafs Hockey alleges a breach of contract claim (Count I), an equitable accounting claim (Count II), and a conspiracy to defraud claim (Count III). Before the Court is the UMB's motion to dismiss Leafs Hockey's three-count Counterclaim brought pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). For the following reasons, the Court grants Plaintiff's motion to dismiss Leafs Hockey's conspiracy to defraud claim as alleged in Count III with prejudice. The Court denies the remainder of Plaintiff's motion to dismiss as to Leafs Hockey's breach of contract claim as alleged in Count I and alternative equitable accounting claim in Count II. Plaintiff's Answer to the Amended Counterclaim is due on or before August 14, 2014.

LEGAL STANDARD

I. Federal Rule of Civil Procedure 12(b)(6)

"A motion under Rule 12(b)(6) tests whether the complaint states a claim on which relief may be granted." Richards v. Mitcheff, 696 F.3d 635, 637 (7th Cir. 2012). Under Rule 8(a)(2), a complaint must include "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). The short and plain statement under Rule 8(a)(2) must "give the defendant fair notice of what the claim is and the grounds upon which it rests." Bell Atlantic v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (citation omitted). Under the federal notice pleading standards, a plaintiff's "factual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555. Put differently, a "complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570). "In reviewing the sufficiency of a complaint under the plausibility standard, [courts] accept the well-pleaded facts in the complaint as true, Alam v. Miller Brewing Co., 709 F.3d 662, 665-66 (7th Cir. 2013), and draw "reasonable inferences in favor of the plaintiffs." Teamsters Local Union No. 705 v. Burlington No. Santa Fe, LLC, 741 F.3d 819, 823 (7th Cir. 2014).

II. Federal Rule of Civil Procedure 9(b)

In pleading fraud in federal court, Rule 9(b) imposes a higher pleading standard than that required under Rule 8(a)(2). See Bank of America, N.A. v. Knight, 725 F.3d 815, 818 (7th Cir. 2013); Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 446 (7th Cir. 2011). Specifically, Rule 9(b) requires a pleading to state with particularity the circumstances constituting the alleged fraud, which requires "the who, what, when, where, and how: the first paragraph of any newspaper story." Knight, 725 F.3d at 818 (quotation marks and citation omitted). "[T]he particularity requirement of Rule 9(b) is designed to discourage a sue first, ask questions later' philosophy." Pirelli, 631 F.3d at 441 (citation omitted). "Heightened pleading in the fraud context is required in part because of the potential stigmatic injury that comes with alleging fraud and the concomitant desire to ensure that such fraught allegations are not lightly leveled." Id. at 442.

BACKGROUND

I. First Amended Complaint

Plaintiff, the successor trustee under the Trust Indenture between the Illinois Finance Authority and the prior trustee ("Trustee") dated February 1, 2007, alleges that the Illinois Finance Authority raised $20 million through the issuing and selling of a series of revenue bonds. (R. 13, First Am. Compl. ¶¶ 7, 8.) The Illinois Finance Authority issued the bonds under the Trust Indenture and loaned the proceeds to LHC, LLC ("LHC"), an Illinois non-profit limited liability company, for the construction and operation of a hockey arena located in West Dundee, Illinois. ( Id. ¶ 1.) Pursuant to the February 1, 2007 Loan Agreement ("Loan Agreement") and Guaranty Agreement ("Guaranty Agreement"), LHC was the borrower and Defendant Leafs Hockey was the guarantor. ( Id. ) Plaintiff further alleges that LHC has failed to make the required payments, and therefore, is in default. ( Id. ¶ 2.) Also, Plaintiff asserts that Leafs Hockey, as guarantor, has failed to pay its obligations under the Guaranty Agreement. ( Id. )

II. Leafs Hockey's Amended Counterclaim

In its Amended Counterclaim, Leafs Hockey alleges that it repeatedly attempted to obtain information from the Trustee, the Illinois Finance Authority, LHC, and CSCG, the manager of operations at the hockey arena, about the distribution and use of funds from the $20 million bond proceeds. (R. 93, Am. Countercl. ¶ 28.) Despite these repeated attempts, Leafs Hockey was unable to learn why approximately $6 to $8 million of the bond proceeds were not used to fund the construction of the hockey arena ( Id. ) Leafs Hockey further alleges that in or around February 2007, when the construction of the hockey arena began, it had approximately $500, 000 in reserves, but by late 2012 approximately $470, 000 of the reserves was missing. ( Id. ¶¶ 30, 31.) In addition, Leafs Hockey asserts that in or about 2012, it began to suspect LHC's oversight and CSCG's management of the hockey arena caused the financial irregularities. ( Id. ¶ 32.)

Furthermore, Leafs Hockey alleges that on December 11, 2012, it replaced the entire board of directors of LHC, which included Don LaPato, John Willett, and Michael Durkin. ( Id. ¶¶ 33, 34.) According to Leafs Hockey, within days, CSCG removed all physical records, including all accounting records, from the hockey arena and deleted Leafs Hockey's emails and computer records. ( Id. ¶¶ 36, 37.) After Leafs Hockey terminated CSCG as manager, Leafs Hockey also discovered a remote server at the hockey arena that enabled CSCG access to electronic business activity on a going-forward basis. ( Id. ¶ 40.) The rink had chronic unrepaired gas links, the rink's HVAC equipment was in disrepair, and the hockey arena had other construction defects. ( Id. ¶¶ 43, 46, 49.) Moreover, Leafs Hockey alleges that it uncovered advertising, vending, and restaurant revenue that was uncollected or not recorded in the books and records. ( Id. ¶¶ 51, 52, 54.) Leafs Hockey also asserts that family members of CSCG were on the payroll for no valid business purpose. ( Id. ¶¶ 56, 57.) According to Leafs Hockey, CSCG also transferred money and supplies from the hockey arena to North Shore Ice Arena that CSCG also managed. ( Id. ¶¶ 63, 64.)

In early 2012, CSCG sought to extend its contract to manage the hockey rink for six more years. ( Id. ¶ 74.) Leafs Hockey's President Danielle Gulli expressed her concern to a Vice President at Plaintiff's predecessor in interest, Wells Fargo Bank, Virginia Housum, about LaPato's conflict with renegotiating CSCG's contract because LaPato owned CSCG and also served as a board member of LHC. ( Id. ¶ 78.) In addition, Gulli told Housum that no bids had been sought or obtained from other management companies and that the length of the contract extension sought by CSCG was imprudent in light of LHC's financial problems. ( Id. ) Leafs Hockey further alleges that Housum then advised Gulli that if the management contract was not renewed, the Indenture Trustee, at that time Wells Fargo, had the ability to exercise its legal rights with regard to the guaranty executed by Leafs Hockey. ( Id. ¶ 79.) Housman also advised Gulli that failure to agree to CSCG's contract extension could result in personal liability for members of Leafs Hockey's board members. ( Id. ¶ 80.) Moreover, Leafs ...


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