United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
ROBERT M. DOW, Jr., District Judge.
Plaintiff, an anesthesiologist, alleges that Defendant Dr. Martin Hall defrauded him in connection with two medical businesses, both of which are Defendants in this action: Keystone Orthopedic Specialists, S.C., and WACHN, LLC, a lessor of medical suites. In addition to alleging common law fraud (Count II), Plaintiff alleges the fraudulent filing of an information return in violation of 26 U.S.C. § 7434 (Count I), breach of fiduciary duty (Count III), breach of contract (Counts V and VI), and unjust enrichment (Count VII). He also brings an action under 805 ILCS § 180/35-65 to determine the fair value of his distributional interest in Defendant WACHN, LLC (Count IV). Before the Court is Defendants' motion to dismiss Counts I, II, VI and VII . For the reasons stated below, the Court denies Defendants' motion.
In early 2004, Plaintiff joined Keystone, an orthopedic medical practice including four physician-shareholders: Plaintiff, Hall, Dr. Daniel Weber, and Dr. Martin Chang. Plaintiff alleges that his oral agreement with Keystone paralleled that of every other physician-shareholder. Under these agreements, each physician would pay 25 percent of Keystone's expenses. Each physician would receive revenues generated by his individual patient billings, 25 percent of certain other revenues, and a guaranteed fixed monthly draw of $25, 000. If a physician left Keystone, it would pay the full amount of his contribution toward cash reserves, revenues generated by his patient care, the value of funds invested in any equipment, and any other funds that Keystone owed him.
As secretary and president of Keystone, Hall allegedly engaged in self-dealing and misappropriated corporate funds for his personal benefit. For example, he allegedly caused Keystone to hire MedStaff - a Hall-affiliated business that provided medical staffing and health insurance - at premium rates. He also caused Keystone to rent its MRI machine from Vertical Plus, which Hall owned and managed with his brother-in-law, also at a premium rate. Hall allegedly accepted these arrangements on Keystone's behalf without soliciting bids from competitors, without obtaining the other physicians' approval, and without disclosing the conflicts or the full terms of the agreements. According to Plaintiff, Hall also hid invoices and other billing-related documentation from the other physicians. Hall additionally charged Keystone for expenses incurred by his personal corporation - Martin R. Hall M.D., S.C. - including the salaries and benefits of his wife and brother-in-law. In addition, Hall gave himself and select employees retirement benefits without offering those same benefits to other physicians and staff. In early 2006, Hall requested and received $100, 000 from the three other physicians, falsely representing that a "cash reserve" was necessary to avoid certain unidentified bank fees. He also failed to pay Plaintiff for any of Keystone's 2004 revenues, aside from Plaintiff's own billings, and withheld $150, 000 of Plaintiff's guaranteed draw that year. To hide this conduct and underreport income due to Plaintiff, Hall allegedly produced fraudulent profit and loss ("P&L") statements at the end of every quarter from 2004 to 2007. He allegedly hid documentation of Keystone's actual expenses and altered Keystone's accounting records ("QuickBooks files") to comport with the fraudulent P&L statements.
In 2007, Chang, Weber and then Plaintiff dissociated from Keystone. In order to reduce the amount due to each physician upon his departure, Hall retroactively changed the agreed-upon allocation of income, resulting in a loss to Plaintiff and a significant profit to Hall. Upon, Plaintiff's departure, Keystone also failed to give him the value of his interest in Keystone; his $100, 000 contribution toward Keystone's "cash reserves"; his investment in Keystone's equipment; income accrued through the date of his departure; or accounts receivable from his billings.
Around the time that these physicians formed Keystone, they also formed WACHN, LLC along with Dr. Phillip Narcissi. The name WACHN derives from the first letter of the last names of each member: Weber, Angelopoulos, Chang, Hall and Narcissi. The five physicians formed WACHN with the purpose of purchasing and leasing medical suites - one to Keystone and the remainder to other tenants. Hall allegedly engaged in similar self-dealing in the context of WACHN. He also forged Plaintiff's signature and fabricated an operating agreement so WACHN could borrow money to purchase property. Each partner made contributions toward the down payment and personally guaranteed the entire loan. Despite accepting these equity contributions from each physician and orally agreeing to make them equal shareholders, Hall allegedly filed papers with the Illinois Secretary of State falsely stating that he and his brother-in-law were the only owners. Around October 2007, Plaintiff withdrew from WACHN. Hall and Narcissi allegedly amended the forged operating agreement to cause Plaintiff to forfeit his interest in the business. WACHN then declined to purchase Plaintiff's interest in the business.
C. Fraudulent IRS 1099-MISC
According to Plaintiff, in order to reduce the two businesses' financial obligations to Plaintiff upon dissociation, Hall allegedly fabricated a false set-off. More specifically, he falsely claimed that Plaintiff owed both businesses money and that these debts offset the businesses' financial obligations toward him. See , TAC at ¶¶ 105-107 (detailing examples of false debts). Around late 2007 or early 2008, Hall allegedly attempted to pressure Plaintiff into agreeing that the two businesses owed him nothing based on these fabricated set-offs, but Plaintiff rejected the proposal.
Plaintiff alleges that in retaliation, Hall reported false information to the IRS to increase Plaintiff's tax liability. More specifically, he falsely reported in a 1099-MISC form (submitted on Keystone's behalf) that Plaintiff earned $159, 577.45 in miscellaneous income in 2007 although he had earned only $38, 010.45. Hall allegedly inflated Plaintiff's income by overstating his revenues, understating his expenses, and fabricating a variety of forgiven loans. On June 7, 2011, the IRS issued a Notice of Deficiency to Plaintiff, alleging that he had failed to pay taxes on the $159, 577.45 in miscellaneous income. Plaintiff filed a petition in the U.S. Tax Court, alleging that the miscellaneous income was inflated, and the IRS allegedly agreed. Plaintiff sues to recover accounting and legal fees as well as lost wages due to Hall's alleged misrepresentations in the 1099-MISC.
D. This Action
Plaintiff filed this action on July 24, 2012. Relevant here, Count I alleges that Keystone and Hall fraudulently filed an information return in violation of 26 U.S.C. § 7434. Count II alleges common law fraud against all Defendants. Count VI alleges that Keystone breached its oral agreement with Plaintiff by failing to compensate him or purchase his interest upon dissociation. And Count VII brings an unjust enrichment claim against Keystone, WAHN, and Hall. Plaintiff initially brought this action against not only the current Defendants but also Keystone's accountants, Ira K. Dubin, Ltd. and Ira K. Dubin. On ...