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Toscano v. Koopman

United States District Court, N.D. Illinois

December 7, 2015

Samuel Toscano, Jr., Plaintiff,
Robert Koopman, et al., Defendants

          For Samuel Toscano, Jr., Individually and Derivatively as a shareholder of Precision Dose, Inc. and Cup Pac Packaging, Inc., Plaintiff: Benjamin Guthrie Stewart, LEAD ATTORNEY, Keating Muething & Klekamp PLL, Cincinnati, OH; Erik J. Ives, Fox, Swibel, Levin & Carroll, LLP, Chicago, IL.

         For Robert Koopman, Frank Darnell, Precision Dose Properties, Inc., Defendants: Scott Collins Sullivan, LEAD ATTORNEY, Williams McCarthy LLP, Rockford, IL; Joel M. L. Huotari, Williams McCarthy, Rockford, IL.

         For Precision Dose, Inc., Cup Pac Packaging, Inc., Defendants: William A. Reilly, II, LEAD ATTORNEY, Reilly Law Offices, Rockford, IL.


         FREDERICK J. KAPALA, District Judge.

         Defendants' motion to dismiss for failure to state a claim [22] is granted in part. Plaintiff's complaint is dismissed for failure to comply with the verification requirement of Rule 23.1(b). The individual claims alleged in Counts II, IV, and V are dismissed without prejudice. The motion is denied in all other respects. Plaintiff is granted leave to file a verified amended complaint consistent with the directives in this order within 30 days.


         In this diversity-of-citizenship direct and derivative action, plaintiff, Samuel Toscano, Jr., a minority shareholder in defendants Precision Dose, Inc. (" Precision Dose" ) and Cup Pac Packaging, Inc. (" Cup Pac" ) (collectively " the companies" ), has sued his fellow shareholders, Robert Koopman and Frank Darnell, and the companies, as well as Koopman's and Darnell's company, Precision Dose Properties, Inc. Plaintiff alleges oppression of a minority shareholder, breach of fiduciary duty, breach of contract, unjust enrichment, and seeks an equitable accounting. Before the court is defendants' motion to dismiss pursuant to Federal Rules of Civil Procedure 23.1(b) and 12(b)(6). For the reasons that follow, the motion is granted in part and denied in part.

         I. ALLEGATIONS[1]

         The companies are Illinois corporations that sell specialized medical and food service products. They are owned by Koopman, a citizen of Illinois; Darnell, a citizen of Indiana and Florida; plaintiff, a citizen of New Jersey; Thomas Anderson; and the estate of James E. Kleinheinz. Koopman, the Chief Executive Officer and President of the companies, and Darnell, majority shareholder and Treasurer, are the controlling shareholders of the companies. Plaintiff, Thomas Anderson, and the estate of Kleinheinz are the minority shareholders. Each of the shareholders are parties to the Precision Dose Shareholders Agreement and the Cup Pac Shareholders Agreement which are substantively identical (collectively the " shareholders agreements" ). The Boards of Directors of the companies are Koopman, Darnell, plaintiff, Anderson, and the son of Kleinheinz, as the representative of his estate.

         A. Transfer of Cup Pac's Option to Purchase Real Estate to Precision Dose Properties and its lease of the Real Estate Back to Cup Pac

         Koopman and Darnell are the sole shareholders of Precision Dose Properties, an Illinois corporation. After plaintiff became a shareholder in Precision Dose, and soon after the formation of Cup P. defendants caused Cup Pac to enter into an Industrial Building Lease with Sobo, Inc. (the " Sobo Lease Agreement" ), under which Cup Pac leased real estate for its operations and under which it had an option to purchase that real estate. On March 16, 2010, Koopman executed an assignment transferring Cup Pac's option to Precision Dose Properties for no consideration. Koopman and Darnell took no steps to assure that this transaction, which directly benefitted them at the potential expense of Cup P. was in fact in the interest of Cup P. Cup Pac was not represented by independent counsel in connection with the assignment, and it was not approved by the Board of Directors or the shareholders. Soon thereafter, Precision Dose Properties purchased the real estate under the option in the Sobo Lease Agreement.

         On June 1, 2012, Precision Dose Properties entered into another Industrial Building Lease, this time with both Precision Dose and Cup P. which included the real estate on which both companies operated, which in turn included the real estate which Precision Dose Properties purchased under the option. Neither Darnell nor Koopman took any steps to protect the interests of the companies in connection with the June 1, 2012 transaction, even though it directly benefitted them at the expense of the companies. The lease agreements were negotiated on behalf of the companies and on behalf of Precision Dose Properties by Darnell and Koopman. The companies were not represented by independent counsel in connection with the lease agreements. Neither lease agreement nor the rents paid under them were disclosed to the Board of Directors or the stockholders of the companies. In 2014, plaintiff requested and received information from counsel for the companies concerning the March 16, 2010 assignment and the June 1, 2012 lease agreements. In response to plaintiff's inquiries and subsequent complaints, defendants committed to unwind the transactions. However, defendants failed to make any effort to do so.

         B. Failure to Sell or Transfer the Kleinheinz Shares

         When Kleinheinz died, he owned 10,000 shares each of Precision Dose and Cup Pac directly and though a trust. After Kleinheinz's death, his shares temporarily were controlled by his estate or a trust. Kleinheinz and his trust were parties to the Shareholders Agreements which required the shares to be transferred after his death. Specifically, pursuant to section 6 of those agreements, the companies and the other shareholders were required to perform a valuation and to sell or transfer the Kleinheinz shares on or before June 26, 2013. Pursuant to section 5 of the agreements, the companies were required to notify all other shareholders about the potential transfer of the Kleinheinz shares and to give all other shareholders the option to purchase some or all of the Kleinheinz shares. Despite repeated requests, the Kleinheinz shares have not been purchased, transferred, or offered to all other shareholders and no effort has been made by defendants to comply with their obligations, or to enforce the obligations on the holders of the Kleinheinz shares to transfer the shares, under the shareholder agreements. Instead, Koopman and Darnell, as well as other representatives of the companies, have informed the holders of the Kleinheinz shares that they do not have any obligation to transfer the shares because the companies have waived their contractual obligations to value and transfer the Kleinheinz shares. However, by their terms, the shareholders agreements may only be amended pursuant to a written agreement signed by all shareholders and no such amendment has taken place.

         C. Dividend Payments to Darnell Disguised as Consulting Payments

         In November 2014, plaintiff learned of a consulting agreement between Precision Dose and a company owned and controlled by Darnell, providing Darnell with $3,750 per month for consulting services. The agreement was later modified to increase the consulting fee to $11,666.67 a month. Darnell does not provide consulting services to Precision Dose apart from his role as a director and officer for which he is separately compensated. Precision Dose does not receive any value in exchange for the payments made to Darnell or his affiliate under the consulting agreement. Neither the consulting agreement nor the modification to the agreement were approved by the Precision Dose Board of Directors and the consulting fees are disguised dividend payments which should have been provided to all shareholders. Defendants not only failed to disclose to all shareholders the consulting agreement, the modification, and the payments made under it but also actively tried to conceal their existence from the shareholders. For example, defendants never caused the consulting agreement or the payments made under it to appear on the financial statements of Precision Dose.

         On October 12, 2012, plaintiff, through counsel, specifically requested that counsel for the companies provide information concerning transactions between the companies and their shareholders, and Koopman and Darnell knew about the request. Nevertheless, counsel for the companies did not disclose the existence of the consulting agreement or the payments made pursuant to it when he responded to plaintiff's inquiry on November 5, 2012. Plaintiff requested that the consulting agreement be terminated and that the payments to Darnell cease effective December 1, 2014, but Darnell and Koopman have refused to do so.

         D. Manipulation of Valuations to Artificially Deflate Plaintiff's Share Value

         A 2012 valuation of Precision Dose by its primary outside accountant was criticized by management, including Darnell and Koopman, as significantly lower than its actual value. In 2013, at a time when Darnell and Koopman knew or should have known that plaintiff was interested in parting ways with the companies, the shareholders determined that it was appropriate for the companies to retain the accounting firm BKD, LLP (" BKD" ), to conduct an independent valuation of the companies and Darnell and Koopman agreed to cooperate with BKD. Despite their fiduciary duties and other obligations to plaintiff and the other shareholders, and despite their commitment to cooperate with BKD, Koopman and Darnell did not cooperate, and instead supplied inaccurate and incomplete information with the intent of achieving the lowest valuation possible. For example, they refused to provide any projections of expected growth, or to disclose lease payments to related companies, and the disguised dividend payments. BKD's initial valuation was similar to the April 2012 valuation, which management, including Koopman and Darnell, had criticized as too low. Then, after a meeting with Koopman and Darnell, BKD lowered the valuation even further. Plaintiff, through counsel, requested that the companies obtain a valuation that reflected the fair market value of his shares, without applying any discount due ...

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