United States District Court, N.D. Illinois, Eastern Division
MARVIN D. PUTZIER, HOMETOWN HARDWARE, INC. d/b/a HOMETOWN ACE HARDWARE, et al., Plaintiffs,
ACE HARDWARE CORPORATION, Defendant.
MEMORANDUM OPINION AND ORDER
CASTILLO, Chief District Judge.
the Court is Plaintiffs' motion for leave to file a
fourth amended complaint. (R. 110, Mot. for Leave.) The
proposed fourth amended complaint alleges that Defendant Ace
Hardware Corporation ("Ace") fraudulently induced
Plaintiffs to purchase "Vision 21" Ace franchises
and committed fraud when it knowingly provided manipulated
and inflated sales projections and false historic performance
numbers to Plaintiffs. ( See R. 110-1, Fourth Am.
Compl. Â¶Â¶ 3-4.) For the reasons stated below, Plaintiffs'
motion for leave to file a fourth amended complaint is
granted in part and denied in part.
still at the pleadings stage, this case has become a
procedural morass. And, while the Court detailed the factual
and complex procedural background of this lawsuit in
Putzier v. Ace Hardware Corp., 50 F.Supp. 3d 964');">50 F.Supp. 3d 964,
969-71 (N.D. Ill. 2014), for the purposes of the present
motion, it is necessary to discuss a few relevant
developments. Plaintiffs' original complaint, filed in
the U.S. District Court for the Southern District of Florida,
on January 6, 2012, was brought by two named plaintiffs as a
class action. (R. 1, Compl. Â¶Â¶ 9-10, 51-57.) The complaint,
which pled diversity jurisdiction as its basis for
subject-matter jurisdiction pursuant to 28 U.S.C. Â§
1332(d)(2), alleged various fraud claims against Ace and,
specifically, that "Ace provided standardized misleading
information to potential and converting" franchisees in
order to induce "Plaintiffs to enter into franchise
agreements for the establishment and operation of Ace Vision
21 hardware stores." ( Id. Â¶Â¶ 2-3.) On March 1,
2012, Ace filed a separate action to compel arbitration in
the U.S. District Court for the Northern District of Illinois
and, on October 18, 2012, U.S. District Judge John W. Darrah
granted Ace's motion to compel arbitration as to the two
named plaintiffs. Putzier, 50 F.Supp. 3d at 971.
While the motion to compel arbitration was pending, the
district court in Florida stayed the original action.
the arbitration ruling, Plaintiffs moved the district court
in Florida to reopen the case and permit them "to file
an amended complaint naming new class representatives whose
franchise agreements did not include arbitration
provisions." Id. The case was reopened and, on
December 5, 2012, the first amended complaint was filed
identifying six new named plaintiffs. ( Id .; see
also R. 21, First Am. Compl. Â¶Â¶ 10-15.) This amended
complaint alleged violations of the Illinois Franchise
Disclosure Act ("IFDA"), 815 ILL. COMP. STAT.
705/1, et seq., and state law claims for fraudulent
inducement and fraud. (R. 21, First Am. Compl. Â¶Â¶ 95-115.)
Pursuant to Federal Rule of Civil Procedure 12(b)(6), Ace
moved to dismiss the first amended complaint.
Putzier, 50 F.Supp. 3d at 971. Without deciding the
motion to dismiss, the Florida district court transferred the
lawsuit to this Court. Id. Shortly after the
transfer, Plaintiffs filed a motion for class certification,
but, this Court stayed that motion pending a ruling on
Ace's motion to dismiss. Id.
25, 2014, the Court granted Ace's motion to dismiss.
Putzier, 50 F.Supp. 3d 964');">50 F.Supp. 3d 964. The Court concluded,
among other things, that: (1) the laws of the Plaintiffs'
home states would apply to Plaintiffs' fraud and
fraudulent inducement claims, id. at 976; (2)
Plaintiffs' IFDA claims would be dismissed as untimely,
id. at 979; (3) "the discovery rule tolled the
statutes of limitations for Plaintiffs' claims of
fraudulent inducement and fraud" and, thus, the Court
would not dismiss those claims as untimely, id. at
981; (4) while two of the Plaintiffs did not have standing to
pursue their claims against Ace, the Court would grant
Plaintiffs "leave to move to substitute the bankruptcy
trustee as a party to any amended complaint Plaintiffs may
file, " id. at 983-85: and (5) Plaintiffs
"failed to meet the heightened pleading requirements
imposed by Rule 9(b)" and, thus, the complaint would be
dismissed, id. at 988. The Court granted Plaintiffs
leave to amend the complaint and replead their fraudulent
inducement and fraud claims "provided they are able to
plead with sufficient specificity to meet the heightened
pleading standard for fraud claims imposed by Rule
October 3, 2014, Plaintiffs filed their second amended
complaint. (R. 90, Second Am. Compl.) In the second amended
complaint, Plaintiffs abandoned their class allegations,
expanded their individual allegations (from 25 pages to
nearly 100 pages), and included at least twenty plaintiffs, (
Id. ) Before Ace could answer or otherwise plead.
Plaintiffs filed a motion for leave to file a third amended
complaint. (R. 94, Mot. for Leave to File Third Am. Compl.)
The proposed third amended complaint totaled nearly 145 pages
and included at least forty plaintiffs. (R. 94-1, Third Am.
Compl.) On November 19, 2014, Ace filed a response to
Plaintiffs' motion for leave to file a third amended
complaint, (R. 98, Opp'n), and on December 19, 2015,
Plaintiffs filed their reply, (R. 105, Reply.).
of this were not enough, Plaintiffs filed a motion for leave
to file a fourth amended complaint, prior to the Court ruling
on Plaintiffs' motion for leave to file a third amended
complaint. (R. 110, Mot. for Leave to File Fourth Am. Compl.)
Pursuant to Rule 15(a). Plaintiffs sought leave to add
additional trustees that represent the bankruptcy estates of
franchisees already included in the proposed third amended
complaint. ( Id. Â¶Â¶ 1, 10.) The proposed fourth
amended complaint is 146 pages long, consists of 747
paragraphs, and includes 44 causes of action. (R. 110-1,
Fourth Am. Compl.)
response to Plaintiffs' motion for leave to file a fourth
amended complaint. Ace states that it will "stand on its
[o]pposition to Plaintiffs' motion for leave to file a
[t]hird [a]mended [c]omplaint." (R. 111, Opp'n to
Mot. for Leave to File Fourth Am. Compl. Â¶ 3.) In that
opposition, Ace argues that Plaintiffs' motion for leave
should be denied because: (1) the shareholder and owner
plaintiffs ("Individual Plaintiffs") lack standing
to sue for any harm their corporate entities suffered as a
result of Ace's alleged fraud, (R. 98, Opp'n at
8-11); (2) fifteen of the Plaintiffs lack standing to pursue
their claims because their claims belong to the bankruptcy
estate trustees, and those trustees are either not pursuing
these claims or have failed to take the necessary steps to
pursue them, ( id. at 2-7); (3) ten of the
Plaintiffs' claims are barred by the doctrine of res
judicata as a result of default judgments previously obtained
by Ace, ( id. at 11-14); (4) at least two Plaintiffs
are obligated to arbitrate their disputes pursuant to
agreements they signed with Ace, ( id. at 14); and
(5) Plaintiffs are improperly pleading their class claims in
the alternative, ( id. at 14-15).
Rule of Civil Procedure 15(a) provides a liberal standard for
amending a complaint. Life Plans, Inc. v. Sec. Life of
Denver Ins. Co., 800 F.3d 343, 357 (7th Cir. 2015).
Specifically, Rule 15(a) states that "[t]he court should
freely give leave when justice so requires, " FED. R.
CIV. P. 15(a)(2), and evinces a policy that a party
"ought to be afforded an opportunity to test his claim
on the merits." Foman v. Davis, 371 U.S. 178,
182 (1962). "The Supreme Court has interpreted this rule
to require a district court to allow amendment unless there
is a good reason - futility, undue delay, undue prejudice, or
bad faith - for denying leave to amend." Life
Plans, 800 F.3d at 357-58 (citing Foman, 371
U.S. 178, 182 (1962)). A district court also may "deny a
proposed amended pleading if... the moving party...
repeatedly fail[s] to cure deficiencies." Gandhi v.
Sitara Capital Mgmt., LLC, 721 F.3d 865, 868-69 (7th
granting or denying of a motion for leave to file an amended
complaint is a matter entrusted to the sound discretion of
this Court. Foman, 371 U.S. at 182. Indeed,
"district courts have broad discretion to deny leave to
amend where the amendment would be futile."
Charleston v. Bd. of Trs. of U. of Ill. at Chi., 741
F.3d 769, 777 (7th 2013) (citation and internal quotations
marks omitted); see also Gonzalez-Koeneke v.
West, 791 F.3d 801, 807 (7th Cir. 2015) ("We have
recognized, on many occasions, that a district court does not
abuse its discretion by denying a motion for leave to amend
when the plaintiff fails to establish that the proposed
amendment would cure the deficiencies identified in the
earlier complaint."). Because a proposed amendment is
futile if it would not survive a motion to dismiss, the Court
applies the same standard for leave to amend as on a Rule
12(b)(6) motion to dismiss. Runnion ex rel. Runnion v.
Girl Scouts of Greater Chi. and Nw. Ind., 786 F.3d 510,
524 (7th Cir. 2015) ("[W]hen the basis for denial is
futility, we apply the legal sufficiency standard of Rule
12(b)(6) to determine whether the proposed amended complaint
fails to state a claim."); see also McCoy
v. Iberdrola Renewables, Inc., 760 F.3d 674, 685 (7th
Cir. 2014) ("District courts may refuse to entertain a
proposed amendment on futility grounds when the new pleading
would not survive a motion to dismiss." (citation
survive a motion to dismiss under Rule 12(b)(6), a complaint
must provide "enough facts to state a claim to relief
that is plausible on its face." Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007). Factual allegations
are accepted as true at the pleading stage, but
"allegations in the form of legal conclusions are
insufficient to survive a Rule 12(b)(6) motion."
McReynolds v. Merrill Lynch & Co., Inc., 694 F.3d
873, 885 (7th Cir. 2012). "[T]hreadbare recitals of the
elements of the cause of action, supported by mere conclusory
statements, do not suffice." Id. (quoting
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). In
addition, "[a] claim has facial plausibility when the
plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable
for the misconduct alleged." Aschroft, 556 U.S.
at 678. Finally, in deciding a Rule 12(b)(6) motion, the
Court can consider "allegations set forth in the
complaint itself, documents that are attached to the
complaint, documents that are central to the complaint and
are referred to in it, and information that is properly
subject to judicial notice." Williamson v.
Curran, 714 F.3d 432, 436 (7th Cir. 2013).
argues that "leave to amend should... be denied because
the Individual Plaintiffs do not have standing to bring the
claims asserted in the" proposed fourth amended
complaint. (R. 98, Opp'n at 8.) Specifically, Ace states
that "the Individual Plaintiffs utilized corporate
entities - a corporation or limited liability company - to
enter into their respective Membership and Brand Agreements
with Ace" and, therefore, "only those entities have
standing to sue for any harm suffered as a result of their
allegedly being fraudulently induced by Ace to enter into the
agreements." ( Id. ) In response, Plaintiffs
argue that the "Plaintiff-owners of Ace franchise are
able to pursue claims against Ace... because allegations in
the [amended complaint] establish that Plaintiffs have
injuries based upon individual claims." (R. 105, Reply
at 10.) The shareholder-standing rule and accompanying case
law make clear that the Individual Plaintiffs do not have
standing to pursue their claims against Ace.
shareholder-standing rule "is a prudential limitation on
standing, a strand of the standing doctrine that prohibits
litigants from suing to enforce the rights of third
parties." Nocula v. UGS Corp., 520 F.3d 719,
726 (7th Cir. 2008). In addition, "[a]lthough closely
related to the requirements of constitutional standing,
[courts] have held that the absence of prudential standing is
not jurisdictional in the sense that Article III standing is,
but nevertheless may be raised by the court on its own, even
though the parties have not noticed it." Id.
(citations and internal quotations marks omitted).
"Under general principles of United States corporate
law, as well as under Illinois law, a stockholder of a
corporation has no personal or individual right of action
against third persons for damages that result indirectly to
the stockholder because of an injury to the
corporation." Twohy v. First Nat'l Bank of
Chi., 758 F.2d 1185, 1194 (7th Cir. 1985); see
also Franchise Tax Bd. of Cal. v. Alcan Aluminum
Ltd., 493 U.S. 331, 336 (1990). The Seventh Circuit
has explained the reasoning for this rule: if the corporation
and the shareholder are allowed to sue for damages arising
out of the same injury, the shareholder's suit would
result in "double counting." Mid-State
Fertilizer Co. v. Exch. Nat'l Bank of Chi., 877 F.2d
1333, 1335 (7th Cir. 1989). Notably for purposes of this
decision, the shareholder-standing rule applies equally to
closely held corporations. See Rawoof v. Texor
Petroleum Co., Inc., 521 F.3d 750, 757 (7th Cir. 2008)
(holding that shareholder-standing rule barred sole
shareholder from bringing suit over his corporation's
loss of a franchise); see also Kush v. Am.
States Ins. Co., 853 F.2d 1380, 1384 (7th Cir. 2000)
("The fact that the company is closely held does not
persuade us to deviate from the general rule.").
are two commonly recognized exceptions to the
shareholder-standing rule. Specifically, a shareholder may
sue for injuries to her corporation: "(1) where there is
a special duty, such as a contractual duty, between the
wrongdoer and the shareholder, and (2) where the shareholder
suffered an injury separate and distinct from that suffered
by other shareholders." 12B William Meade Fletcher,
Fletcher Cyclopedia of the Law of Corporations Â§
5911 (2000): see also Twohy, 758 F.2d at
1194 ("Certain often overlapping exceptions to the
general rule have been recognized such as where a special
contractual duty exists between the wrongdoer and shareholder
or where the shareholder suffers an injury separate and
distinct from that suffered by other shareholders."
(citation and internal quotation marks omitted)). Under the
second exception, "a shareholder [may] pursue an action
originating from an injury to the corporation if he has
suffered a direct, personal injury independent of the
derivative injury common to all shareholders."
Rawoof, 521 F.3d at 757. Neither of these exceptions
applies to the Individual Plaintiffs.
Plaintiffs do not sufficiently allege that a special duty,
such as a separate contract, exists between Ace and the
Individual Plaintiffs. While in some instances Plaintiffs
allege that both the Individual Plaintiffs and the corporate
entity Plaintiffs entered into franchise agreements with Ace,
the actual Brand and Membership Agreements demonstrate
otherwise. In support of its opposition to Plaintiffs'
motion for leave, Ace attached the Brand and Membership
Agreements entered by the parties. (R. 98, Opp'n at 4
n.3; see also R. 98-2-R. 98-21, Exhibits B-U to
Opp'n.) Every single one of these agreements was entered
into between Ace and the corporate entity Plaintiffs. (
See, e.g., R. 98-8, Ace Brand Agreement at 2
("This Agreement is made and entered into by and between
ACE... and Lifestyle Capital Partners, LLC....");
see also R. 98-16, Ace Brand Agreement at 2
("This Agreement is made and entered into by and between
ACE... and Conway Ace Hardware, Inc.").) In addition,
the signatory to all of these agreements is a representative
of the corporate entity. ( See R. 98-8. Ace Brand
Agreement at 9, 19; see also R. 98-16, Ace Brand
Agreement at 9.) "When an exhibit incontrovertibly
contradicts the allegations in the complaint, the exhibit
ordinarily controls, even when considering a motion to
dismiss." Bogie v. Rosenberg, 705 F.3d 603, 609
(7th Cir. 2013). The Brand and Membership Agreements make
clear that the only contractual relationship that exists
between Ace and the parties is between Ace and the corporate
Plaintiffs. Thus, the Individual Plaintiffs cannot bring suit
individually and avail themselves of the independent duty
exception to the shareholder-standing rule.
the Individual Plaintiffs do not allege that they suffered an
injury separate and distinct from the injuries suffered by
other shareholders or by the corporation as a whole. As a
preliminary matter, Plaintiffs make no attempt to
differentiate between the claims asserted by the corporate
entities and the owners of these corporate entities.
Specifically, most of the causes of action for fraud and
fraudulent inducement are brought jointly by the franchise
entity and its shareholders. ( See, e.g., R. 110-1.
Fourth Am. Compl. at 127 ("Fraudulent Inducement on
Behalf of Plaintiffs Joseph Rasmus and R&H Resources");
id. at 129 ("Fraud on Behalf of Plaintiffs
Joseph Rasmus and R&H Resources").) This conflation in
pleading makes it difficult for this Court to determine which
alleged injuries are unique to the Individual Plaintiffs.
addition, the proposed fourth amended complaint makes clear
that the Individual Plaintiffs' alleged injuries are
identical to any other shareholder's injuries - the loss
of their investment. For example, in support of Plaintiff
West's fraudulent inducement claim, the proposed
amendment alleges that "Mr. West was damaged as a result
of Ace's actions by investing approximately $300, 000...
that he never would have but for Ace's fraud." (
Id. Â¶ 416; see also id. Â¶ 452 (similar
allegation as to Mr. Pitochelli); id. Â¶ 464 (similar
allegation as to Mr. Beam).) In support of Plaintiff Don
West's fraud claim, the proposed amendment alleges that
"[a]s a result of Ace's fraud, Mr. West was damaged
by the amount he invested in reliance on Ace's
statements." ( Id. Â¶ 421, see also id.
Â¶ 457 (similar allegation as to Mr. Pitochelli); see also
id. Â¶ 469 (similar allegation as to Mr. Beam).) The
Individual Plaintiffs' damages boil down to the loss of
their investment and the eventual loss of each of their
corporate franchises. Courts have repeatedly held that
allegations of this type are insufficient to establish a loss
separate and apart from other shareholders. See,
e.g., Massey v. Merrill Lynch & Co., 464 F.3d
642, 646 (7th Cir. 2006) ("Corporate losses are investor
losses as well.... [T]he long-standing rule is that a harm to
a corporation that harms a shareholder only through a
diminution in share price cannot amount to a distinct and
separate injury because all shareholders are essentially
harmed in the same manner." (internal quotation marks
omitted)); Lawson v. BNSF Ry., 2:15-CV-0094-TOR,
2015 WL 6442741, at *6 (E.D. Wash. Oct. 23, 2015) ("A
reduction in [the company's] value would negatively
impact any shareholder of [the company]."); Fiore v.
McDonald's Corp., No. CV-95-2708, 1996 WL 91908, at
*5 (E.D.N.Y. Feb. 23, 1996) ("Because [the shareholders]
assigned their rights as franchisees to their wholly-owned
corporations, any injuries arising out of damage to the value
of the franchises can only be asserted by these
defense of their claims, Plaintiffs argue that the individual
shareholders have standing to pursue their claims because
"they not only lost their investments, but they lost
their homes, and in many instances had to declare personal
bankruptcy." (R. 105. Reply at 11.) More specifically,
Plaintiffs claim that the individuals have suffered losses
"beyond those... [suffered by] the corporate entities,
" such as having to "sign personal guarantees,
" take "out a... home equity loan, " withdraw
money from their retirement accounts, "put up collateral
to secure funding." "incur... credit card debt,
" and spend their "inheritance." (
Id. at 10, 11 n.9 (citing R. 110-1, Fourth Am.
Compl.).) However, courts have repeatedly held that the
execution of a personal guarantee or a personal financial
loss is not necessarily an injury distinct from those of
other shareholders or the corporation. See, e.g.,
Lawson, 2015 WL 6442741, at *6 ("While Plaintiffs
have arguably shown, at least on the pleadings, they suffered
personal economic loss as a result of [the defendant's]
conduct, this is insufficient because their personal loss
merely derives from their employment at and ownership of Rail
Logistics."); Cent. Jersey Freightliner, Inc.
v. Freightliner Corp., 987 F.Supp. 289, 301 (D.N.J. 1997)
(concluding that the sole shareholder did not have standing
to maintain an action against the defendant despite the fact
that the sole shareholder "was a guarantor of the
financing transactions and was injured by misrepresentations
made by defendant"); Lui Ciro, Inc. v. Ciro,
Inc., 895 F.Supp. 1365, 1381 (D. Hi. 1995) (concluding
that the individual shareholders did not have standing to sue
even though they had alleged that they had "risked their
wealth, including their house, through their
guarantees"); Hengel, Inc. v. Hot N Now. Inc.,
825 F.Supp. 1311, 1318 (N.D. Ill. 1993)
("[P]laintiffs' assertions of personal guarantees
are insufficient to show that [individual plaintiffs]... have
a private cause of action for their remaining claims.").
Simply put, the Individual Plaintiffs' assertions of
personal losses are insufficient to show that they have a
right to pursue their claims individually against Ace.
rely on two cases in support of their argument that they have
"more than adequately demonstrated that they, in
addition to their individual businesses, suffered substantial
injuries." (R. 105, Reply at 11-12.) However, neither
one of these cases persuades the Court. In Eden v.
Miller, 37 F.2d 8 (2d Cir. 1930), an out of Circuit case
from almost 90 years ago, the U.S. Court of Appeals for the
Second Circuit permitted the individual plaintiffs'
breach of contract claims because it was these individual
plaintiffs who had "entered into an oral agreement with
the defendant, " and "the fact that the formation
of a corporation was one of the things that the plaintiffs
agreed to" did not change the outcome. Id. at
8-9. In addition, the court explicitly stated that the
"corporation... was not a party" to the contract.
Id. at 9. The facts of Eden demonstrate one
of the exceptions to the shareholder-standing rule - a
separate contractual relationship between the defendant and
the individual shareholder. This Court has already determined
that Plaintiffs have not pled that a separate contractual
relationship exists between the Individual Plaintiffs and
Ace, and thus Eden does not apply.
also rely upon Zokoych v. Spalding, 344 N.E.2d 805
(Ill.App.Ct. 1976), but that case is factually
distinguishable. In Zokoych, the plaintiff - the
former president and a shareholder of a corporation - brought
suit against other shareholders of the same corporation
alleging that they had "wrongfully and unlawfully
conspired and agreed upon a plan to defraud plaintiff by
forcing plaintiff out as an officer and director of [the
corporation], by appropriating and converting... [for another
shareholder's] use plaintiff's entire stock ownership
in [the corporation], and by appropriating and converting the
assets...." Id. at 658. The plaintiff also
alleged that "his ownership has been totally lost and
destroyed, " that "[h]is business reputation and
good will have been irreparably destroyed, and that [h]is
salary and other benefits were denied'" to him.
Id. at 659. In light of these allegations, the
Illinois Court of Appeals concluded that these actions
"caused injury both to the corporation and to plaintiff
individually as a stockholder, " but that the
"gravamen of the complaint is an injury to the
plaintiff." Id. at 663-64. As such,
Zokoych is factually distinguishable from the
instant lawsuit because the Zokoych allegations made
clear that the individual plaintiff suffered an injury (i.e.,
damage to his reputation) separate and distinct from the
Court recognizes that the Individual Plaintiffs have suffered
catastrophic financial injuries - oftentimes the loss of
their entire wealth and resultant bankruptcy - and that
precluding their claims against Ace appears to be a harsh
outcome. However, it is their wholly owned corporations that
entered into the franchise agreements with Ace. These very
same corporations are the ones that suffered the injury. All
of the shareholders suffered the same injury - the loss of
their investment. As such, the shareholder-standing rule
prevents the Individual Plaintiffs from pursuing these
claims. However, this holding does not preclude the
corporations from attempting to recover for their losses, and
for any recovery to be directed straight to the Individual
Plaintiffs as shareholders and owners.
proposed fourth amended complaint, as alleged, demonstrates
that the Individual Plaintiffs lack prudential standing.
Thus, to the extent the shareholder and owner Plaintiffs
bring individual claims on behalf of their Ace franchises,
the Court denies Plaintiffs' motion for leave to amend
the complaint as futile. See, e.g., Hollywood
Mobile Estates Ltd. v. Seminole Tribe of Fl., 641 F.3d
1259. 1262 (11th Cir. 2011) ("Because we also conclude
that [the plaintiffs] lacked prudential standing to sue the
Secretary, we affirm the denial of the motion for leave to
amend the complaint as futile."): United States v.
All Funds on Deposit with R.J. O'Brien & Assocs., 11
C 4175, 2012 WL 1032904, at *8 (N.D. Ill. May 9, 2014)
(denying motion for leave to amend because, even after
amendment, the insurance company would still "lack
statutory and prudential standing" and, thus, the
"proposed amendment would be futile").
next argument is that many of the Plaintiffs lack prudential
standing because it is the trustees of their respective
bankruptcy estates that are the real parties in
interest. (R. 98, Opp'n at 4-7.) In its
original motion to dismiss, Ace argued that Plaintiffs
Douglas Lorenz and Arvada Ace "did not have standing to
pursue [the] claims in their own names" because Lorenz
had filed for Chapter 7 bankruptcy protection on September
22, 2010, and "did not schedule any claim against Ace as
an asset in his bankruptcy petition, " nor did "the
bankruptcy trustee administer such a claim."
Putzier, 50 F.Supp. 3d at 981 (citation and internal
quotation marks omitted). In the prior opinion, the Court
explained that "Ace's argument that this action
belongs to Lorenz's bankruptcy estate presents a
prudential question of who is the real party in interest'
under Rule 17(a)." Id. at 982, Specifically,
"[f]iling a Chapter 7 bankruptcy petition creates a
bankruptcy estate comprised of all legal or equitable
interests of the debtor in property as of the commencement of
the case.'" Id. (quoting 11 U.S.C. Â§
541(a)(1)). "[V]irtually all property of the debtor at
the time he files for bankruptcy - including any causes of
action - becomes property of the bankruptcy
estate.'" Id. (citation and internal
quotation marks omitted). In addition, "[t]he trustee
appointed in Chapter 7 bankruptcy alone has authority to
administer and dispose of property" - including the
right to pursue pre-petition causes of action. Id.
considering the allegations contained in Plaintiff
Lorenz's claims, the Court concluded that Lorenz's
"interest in this cause of action against Ace remains
with the bankruptcy estate" and that "[t]he
bankruptcy trustee, rather than Lorenz or Arvada Ace, is the
real party in interest under Rule 17(a), and only the
bankruptcy trustee appointed to Lorenz's Chapter 7 case
is entitled to bring these claims." Id. at 983.
However, in the interest of justice and fairness to the
bankruptcy estate, the Court declined to dismiss Lorenz and
Arvada Ace's claims due to their lack of prudential
standing and, instead, granted Plaintiffs leave to "move
to substitute the bankruptcy trustee as a party to any
amended complaint Plaintiffs may file." Id. at
984-85. The Court also cautioned Plaintiffs that "[i]f
the trustee does not seek to substitute into this action or
ratify Lorenz's and Arvada Ace's claims, those claims
will be dismissed." Id. at 985. Ace's
present opposition to the motion for leave makes similar
arguments regarding a slew of additional Plaintiffs, but with
slight variations. (R. 98, Opp'n at 4-7.) The Court
addresses these arguments in turn.
Plaintiffs Who Have Filed Bankruptcy but Have not Named the
Trustees as Parties in the Fourth Amended Complaint
George Martin filed for Chapter 7 bankruptcy protection on
January 5, 2010, in the U.S. Bankruptcy Court for the Western
District of North Carolina, and he did not schedule any claim
against Ace as an asset in his petition. R. 1, In re
Martin, 10-30017 (Bankr. W.D. N.C. ). Likewise,
Plaintiff Edward Pitochelli filed for Chapter 7 bankruptcy
protection on July 7, 2012, in the U.S. Bankruptcy Court for
the District of Connecticut, and he did not schedule any
claim against Ace as an asset in his petition. R. 1, In
re Pitochelli, 12-21730 (Bankr. D. Conn.). Ace argues
that Plaintiffs Martin and Pitochelli are named as plaintiffs
in the fourth amended complaint; however, because they filed
for bankruptcy "after the closure of their Ace stores,
" their claims "belong to their estates, and they
have no right to pursue them in their own names." (R.
98. Opp'n at 6.) Plaintiffs' reply does not
specifically address these two plaintiffs. The Court's
reasoning in its original motion to dismiss is on point.
Putzier, 50 F.Supp. 3d at 981-85.
alleged fraudulent transactions upon which Plaintiffs Martin
and Pitochelli base their claims - the purchase of their
franchise and signing of the Brand and Membership Agreements
- occurred prior to the filing of their bankruptcy cases in
2010 and 2012, respectively. (R. 110-1. Fourth Am. Compl. Â¶Â¶
134-154, 284-302.) Therefore, and Plaintiffs do not dispute,
Plaintiffs Martin and Pitochelli's claims are
"sufficiently rooted in the prebankruptcy past" and
are, thus, "property of the bankruptcy estate[s]."
Putzier, 50 F.Supp. 3d at 983. Because Plaintiffs
Martin and Pitochelli's claims are property of the
bankruptcy estates, the bankruptcy trustees & mdash; rather
than Martin or Pitochelli - are the real parties in interest
under Rule 17(a), and only the bankruptcy trustees are
entitled to bring these claims. Id.
next question is "whether the Court should dismiss
[Martin and Pitochelli's] claims due to their lack of
prudential standing." Id. Plaintiffs'
standard response throughout this litigation has been to
request more time to cure these deficiencies. Id. at
983 ("Plaintiffs argue that... the Court should grant
time for the bankruptcy trustee appointed to Lorenz's
case to consider whether to pursue this claim[.]");
see also R. 105, Reply at 9. Plaintiffs'
requests can go no further. This Court has given Plaintiffs
ample time to identify and name the proper parties in this
lawsuit. In fact, the Court directed Plaintiffs to name the
proper parties in this lawsuit nearly two years ago.
Putzier, 50 F.Supp. 3d at 985. In addition, Ace
pointed out these deficiencies as they relate specifically to
Plaintiffs Pitochelli and Martin in its opposition to
Plaintiffs' motion for leave to file a third amended
complaint, (R. 98, Opp'n at 6); however, Plaintiffs did
not cure these deficiencies when they sought leave to file
their fourth amended complaint, (R. 110-1, Fourth Am. Compl.
Â¶Â¶ 17, 34). Despite having abundant notice of the problem,
Plaintiffs continually fail to properly name, join, ratify,
or substitute these real parties in interest.
Court explained in its first order, "[i]f the trustee
does not seek to substitute into this action or ratify [the
plaintiffs']... claims, those claims will be
dismissed." Putzier, 50 F.Supp. 3d at 985. As
such, because Plaintiffs Martin and Pitochelli lack
prudential standing, Plaintiffs' motion for leave to file
an amended complaint as to these Plaintiffs' claims is
denied. See, e.g., Nationwide Acceptance Corp.
v. Markoff, Krasny, Goldman, Grant, 99 C 5632, 2000 WL
1230434, at *4 (N.D. Ill. Aug. 23, 2000) (granting motion to
dismiss after the counter-claimant was informed of the
"issue of improper standing, " but "[s]even
months later, the court is not satisfied that [the
counter-claimant's] claim was properly abandoned, and the
court has not received notice that the trustee ratified [the
counter-claimant's] commencement of this case"):
Davis v. Avco Fin., 158 B.R. 1000, 1003-04 (N.D.
Ind. 1993) (dismissing complaint and sanctioning counsel
after debtor plaintiffs were advised that the trustee was the
real party in interest to bring the lawsuit at a pre-trial
conference and were "given sufficient time to correct
the procedural error, but... failed to do so").
Whether Some of the Plaintiffs' Bankruptcy Estates Have
Abandoned These Claims, thus Permitting ...