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React Presents Inc. v. Sillerman

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

August 25, 2016

REACT PRESENTS, INC., an Illinois Corporation, CLUBTIX, INC., an Illinois Corporation, LUCAS KING, and JEFFREY CALLAHAN, Plaintiffs,



         Plaintiffs React Presents, Inc., Clubtix, Inc., Lucas King, and Jeffrey Callahan (collectively, “React”) filed their one-count Complaint in this diversity action on March 29, 2016, alleging breach of a Guaranty executed by Defendant Robert Sillerman. See Dkt. 1. Sillerman filed his Answer, Affirmative Defense, and Counterclaim on May 27, 2016, alleging “that the React Parties fraudulently manipulated the financial information upon which the Gross Earn-Out Payment, ” which ultimately triggered Sillerman's Guaranty, “was calculated.” See Dkt. 13-1, at 8-12. Now before the Court is React's Motion to Strike Affirmative Defense and Dismiss Counterclaim, contending that Sillerman's Guaranty and a “Reaffirmation” thereof “foreclosed Sillerman's ability to raise any fraud-based defense.” See Dkt. 22, at 2. For the reasons below, React's Motion to Strike and Dismiss is denied, and React is granted 21 days to answer Sillerman's now-amended Counterclaim.


         As required for a motion under Fed.R.Civ.P. 12(b)(6), the Court assumes the following allegations in Sillerman's Counterclaim to be true. The Counterclaim explains that Sillerman's Guaranty evolved out of an acquisition of the operations of Plaintiff React Presents, Inc. (the “React Business”) by two non-party entities, SFX Entertainment, Inc. and SFX-React Operating LLC (collectively referred to herein as “SFX”). See Dkt. 13-1, at ¶¶ 19, 38. This transaction was effected by an Asset Purchase Agreement dated February 18, 2004, by and among SFX, the React Business, and the remaining Plaintiffs in this action-Clubtix, Inc., Lucas King, and Jeffrey Callahan. Id. at ¶ 19.

         According to Sillerman's Counterclaim, the React/SFX Asset Purchase Agreement provided for SFX to acquire the React Business for $12, 216, 903 in cash and stock, “plus a ‘Gross Earn-Out Payment' of 6.25 times the difference between the Proportionate Adjusted EBITDA for 2014 and the Proportionate Adjusted EBITDA for 2012, as defined and set forth in Section 2.8 of the React Purchase Agreement.” Id. Pursuant to this Agreement, in April 2015, an “Earn-Out Statement” was provided to React which showed a “proposed Gross Earn-Out Payment” in excess of $14 million. Id. at ¶ 22. Then on July 7, 2015, React and SFX “agreed to a Gross Earn-Out Payment amount of $14, 732, 665.13, of which $11, 829, 353.13 was payable in cash with the balance in SFX stock, ” and a “payment schedule was also specified for the cash portion of the outstanding amount, ” since “SFX had already paid $1 million of that amount, leaving $10, 829, 353.13 purportedly outstanding.” Id.

         Also on July 7, 2015, SFX executed a “Subordinated Note” in the principal amount of this alleged balance ($10, 829, 353.13), and Sillerman simultaneously executed and delivered to React a personal Guaranty “of all amounts due under the Note, including interest and enforcement costs, up to a maximum of $7, 000, 000.” See Dkt. 13-1, at 3, ¶¶ 8-9. This Note required SFX to pay React $1 million by July 21, 2015; $2 million by September 1, 2015; $2 million by November 2, 2015; and $3 million by January 4, 2016. Id. at 4, ¶ 11. But on November 4, 2015, due to certain “cash flow problems at SFX, ” SFX, Sillerman, and React “entered into an Amendment and Reaffirmation of Guaranty and Promissory Note (‘Reaffirmation Agreement'), which extended the due date of the third installment of the Note from November 2, 2105 to December 1, 2015, and increased Sillerman's liability under the Guaranty from $7, 000.000.00 to $7, 829, 353.13.” Id. at ¶ 12, and 8, ¶ 24.

         React alleges in its Complaint in this action (and Sillerman does not dispute) that SFX “failed to make the $3, 000, 000 Note payment due on January 4, 2016, ” id. at 4, ¶ 13, and that on January 13, 2016, the React parties therefore sought and obtained a judgment against SFX in the Circuit Court of Cook County, Illinois “for all amounts due under the Note, but have not received payment on said judgment.” Id. at 4-5, ¶ 14. And React further alleges (and Sillerman again does not dispute) that, given this default, “the React Parties have demanded that Sillerman immediately pay all amounts due under the Note in accordance with Sillerman's obligations under the Guaranty and the Reaffirmation Agreement, ” id. at ¶ 15; but “Sillerman has failed and refused to pay the amounts due pursuant to the Guaranty.” Id. at ¶ 16.

         React's Complaint in this action seeks payment from Sillerman under this Guaranty. See Dkt. 1. Sillerman's Affirmative Defense and Counterclaim, in turn, allege fraud in connection with the Earn-Out Statement and resulting determination of the Gross Earn-Out Payment on which SFX defaulted, and which ultimately triggered Sillerman's liability under the Guaranty. Specifically, Sillerman alleges that the Earn-Out Statement from which the Gross Earn-Out Payment figure was initially derived was “calculated in reliance on the financial information provided to SFX by the React Parties (since King and Callahan supervised the preparation of those financial records and controlled the financial activities of the React businesses).” Counterclaim, Dkt. 13-1, at 7, ¶ 22. According to Sillerman, “[a]t the time the Gross Earn-Out Payment amount was agreed by SFX, it had done only a high level review of the Earn-Out claim and had not undertaken a forensic audit because it had no reason to believe that the financial data provided by the React Parties from records controlled by King and Callahan was materially misleading or inaccurate, much less fraudulent.” Id. at 8, ¶ 23. But, Sillerman alleges, “[h]ad it known that, as now appears, those financial results had been manipulated by King and Callahan, SFX would never have agreed to the Earn-Out payment amount nor entered into the Note. Nor would Mr. Sillerman have agreed to the Guaranty.” Id.

         “Now that additional financial data for the React businesses is available for 2015, ” Sillerman contends “it is apparent that the React Parties fraudulently manipulated the financial information upon which the Gross Earn-Out Payment was calculated.” Id. at ¶ 26. According to Sillerman, “millions of dollars of expenses that should have been recorded in 2014 were instead deferred into 2015, thereby artificially inflating the profitability of the React business - and the Earn-Out - for 2014.” Id. at 8-9, ¶ 26. For instance, according to the Counterclaim, “React's Earn-Out claim is premised on supposedly beating industry profitability by between 35% and nearly 200%, ” id. at 10, ¶ 29; but it “now appears that the React business reported such [an] extraordinary result by pushing millions of dollars of expenses from 2014 into 2015, thus driving up the 2014 earnings to achieve a large Earn-Out payment and correspondingly causing 2015 results to come crashing down, loaded with enormous expenses that were an overhang from the prior year.” Id. at ¶ 30. “But for these fraudulent manipulations, ” Sillerman says, the Gross Earn-Out Payment would have been zero or close to zero, rather than the almost $15 million (including $11 million cash) that the React Parties claim.” Id. at 9, ¶ 26. Thus, according to Sillerman, he “was fraudulently induced to enter into the Guaranty and Reaffirmation Agreement on the basis of the false financial information provided to SFX, and the Guaranty and Reaffirmation Agreement are accordingly invalid and unenforceable.” Id. at ¶ 27.

         React now moves to strike Sillerman's fraud-based Affirmative Defense and dismiss his Counterclaim on three grounds: (1) that both are precluded by a purported “binding judicial admission” made by Sillerman's counsel during a status hearing before this Court; (2) that both are “foreclosed” by Sillerman's Reaffirmation Agreement; and (3) that both are inadequately pled, specifically the requisite element of reliance, and for failure to allege fraud with particularity as required by Fed.R.Civ.P. 9(b). See Dkt. 22. The Court addresses each argument, in turn.


         I. Asserted Judicial Admission

         React's first challenge of Sillerman's fraud-based Affirmative Defense and Counterclaim seizes upon a sentence uttered by his counsel during a status hearing before this Court. React argues that “Sillerman is bound by the judicial admission made by his counsel at the June 7 hearing where he stated that there is ‘not a question of fraud in the inducement of the underlying contract.'” Dkt. 22, at 2 n.1, 7 (citing Dkt. 22-1, at 16). Citing Soo Line R.R. v. St. Louis S.W. Ry., 125 F.3d (7th Cir. 1997), React argues that this “constitutes a binding judicial admission by Sillerman, ” id. at n.1; and “[o]n this basis alone, Sillerman's Affirmative Defense and Counterclaim should be stricken and dismissed, with prejudice.” Id. at 7. The Court disagrees.

         Contrary to React's assertions, Soo Line R.R. merely followed the “well-settled rule that a party is bound by what it states in its pleadings, ” to hold that the plaintiff's complaint contained binding admissions entitling the defendant to summary judgment. 125 F.3d at 483. As the court explained: “Judicial admissions are formal concessions in the pleadings, or stipulations by a party or its counsel, that are binding upon the party making them, ” particularly on summary judgment, which “is proper ‘if the pleadings, depositions, answers to interrogatories, and admissions on file together with the affidavits' show that one party is entitled to a judgment as a matter of law.” Id. (emphasis in original, ...

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