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Tsai v. Karlik

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

September 26, 2016

Sandy Tsai, Plaintiff,
v.
Jerry Karlik, Kargil Development Partners, LLC, Keith Giles, Frankel, Giles & Associates, Inc., Jordan Karlik, Picoulas Enterprises Corp., K Giles LLC, Inc., Kargil Blue Island, LLC, and Spiros Picoulas, Defendants.

          MEMORANDUM OPINION AND ORDER

          HONORABLE EDMOND E. CHANG, UNITED STATES DISTRICT JUDGE

         Sandy Tsai brought this action under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq., alleging that the Defendants fraudulently induced her into investing $1.5 million dollars in a phony real estate development project.[1] R. 107, First Am. Compl.[2] After Tsai voluntarily dismissed her case, see R. 119, Pl.'s Sur-Reply to Defs.' Mot. to Dismiss; R. 120, 10/13/15 Minute Entry; R. 127, 11/17/15 Order, the Defendants moved for attorneys' fees and expenses based on an indemnification provision in the parties' investment agreement, see R. 134, Defs.' Mot. for Fees; R. 134-1, Exh. A, Subscription Agreement; see also Fed. R. Civ. P. 54(d)(2). For the reasons explained below, the motion is granted.

         I. Background

         This case arises from a failed business venture. In 2006, Tsai invested $1.5 million dollars in the 15th Street Blue Island LLC project. First Am. Compl. ¶ 2. Tsai gave the funds to the Defendants, who in turn promised to “purchase … real estate … develop the property and construct a multi-unit … condominium building” in southwest Chicago. Id. Instead of actually investing this money in the project, however, Tsai contends that the Defendants looted the funds to line their own pockets. Id. ¶ 4. (Remember, though, that she voluntarily dismissed these claims.)

         In return for her $1.5 million investment, Tsai received a 25% stake in 15th Street Blue Island, LLC, a company set up by two of the Defendants (Jerry Karlik and Keith Giles) to fund the condominium project.[3] First Am. Compl. ¶¶ 2, 20, 37; Subscription Agreement at 1. Tsai executed a Subscription Agreement with the LLC under those terms in September 2006. See Subscription Agreement at 1, 8. By signing that Agreement, Tsai consented to a broad indemnification provision which also operated as a fee-shifting provision if Tsai unsuccessfully sued the LLC or its agents. Id. at 6. (The full text of the provision is quoted later in the Opinion.)

         In 2014, Tsai brought this action alleging that the Defendants operated as a “criminal enterprise” and “misappropriate[d], loot[ed], and embezzle[d] the assets of 15th Street Blue Island, LLC” in violation of 18 U.S.C. § 1962(c). First Am. Compl. ¶¶ 4, 5; see also R. 1, Compl. After the Defendants moved to dismiss the Amended Complaint, R. 108, Defs.' Mot. to Dismiss, Tsai “consent[ed] to the … Motion” and “request[ed] that this Court dismiss her First Amended Complaint in its entirety, ” Pl.'s Sur-Reply to Defs.' Mot. to Dismiss. The Court thereafter dismissed the case without prejudice, concluding that “[Tsai] ha[d] essentially file[d] a notice of voluntary dismissal of the case.”[4] 10/13/15 Minute Entry.

         Now the Defendants move under Federal Rule of Civil Procedure 54(d)(2) to recover attorneys' fees and expenses from this litigation. Defs.' Mot. for Fees; see also Fed. R. Civ. P. 54(d)(2). The Defendants rely on the fee-shifting provision in the Subscription Agreement to support the request for fees. See Defs.' Mot. for Fees; Subscription Agreement at 6. Tsai opposes the motion on the grounds that the provision is unenforceable. R. 135, Pl.'s Resp. Br.

         II. Standard

         Illinois follows the American Rule, which presumes that “the prevailing party in a lawsuit must bear the costs of litigation … .”[5] Brundidge v. Glendale Fed. Bank, F.S.B., 659 N.E.2d 909, 911 (Ill. 1995); accord Rissman v. Rissman, 229 F.3d 586, 588 (7th Cir. 2000) (applying Illinois law and noting that under the American Rule, the presumption is that “parties bear their own legal expenses.”). That presumption, however, may be overcome where “an agreement between the parties allows the successful litigant to recover attorney fees and the expenses of suit.” Brundidge, 659 N.E.2d at 911; see also Grossinger Motor Corp., Inc. v. Am. Nat'l Bank and Trust Co., 607 N.E.2d 1337, 1347 (Ill.App.Ct. 1992) (“An exception … is when a contract provides for the award of such fees … .”). This type of agreement (referred to as an indemnification or fee-shifting provision) is “generally regarded as valid and enforceable.” Hader v. St. Louis Sw. Ry. Co., 566 N.E.2d 736, 742 (Ill.App.Ct. 1991).

         That said, indemnification provisions are disfavored in Illinois and are strictly construed against the indemnitee. Blackshare v. Banfield, 857 N.E.2d 743, 746 (Ill.App.Ct. 2006) (reasoning that “indemnity contracts are to be strictly construed, and any ambiguity in the agreement is to be construed most strongly against the indemnitee.”); see also Grossinger, 607 N.E.2d at 753 (“[C]ontractual provisions for attorney fees must be strictly construed … .”). Strictly construing these provisions not only “provides certainty in the law, ” but also gives parties “notice to include precise language on attorney fees when negotiating a contract.” Downs v. Rosenthal Collins Grp., LLC, 895 N.E.2d 1057, 1061 (Ill.App.Ct. 2008). Thus, Illinois courts will only permit fee-shifting where “specific language” in the agreement provides that “‘attorney fees' are recoverable.” Negro Nest, LLC v. Mid-N. Mgmt., Inc., 839 N.E.2d 1083, 1085 (Ill.App.Ct. 2005); see also Qazi v. Ismail, 364 N.E.2d 595, 597 (Ill.App.Ct. 1977) (“[A] court may not award attorney's fees as a matter of contractual construction in the absence of specific language.”); accord JPMorgan Chase Bank, N.A. v. Asia Pulp & Paper Co., 707 F.3d 853, 867 (7th Cir. 2013) (“Illinois requires that contractual fee-shifting provisions be clear and specific.”). Finally, because fee-shifting so often “depends upon the particular language used and the factual setting of the case, ” courts routinely find that “it serve[s] no useful purpose to attempt to analyze or reconcile the numerous cases interpreting indemnity clauses.” Zadak v. Cannon, 319 N.E.2d 469, 471 (Ill. 1974); see also Buenz v. Frontline Transp. Co., 882 N.E.2d 525, 530 (Ill. 2008).

         III. Analysis

         The Defendants move under Rule 54(d)(2) to recover attorneys' fees and expenses based on the indemnification provision in the Subscription Agreement. See Defs.' Mot. for Fees; Subscription Agreement at 6; see also Fed. R. Civ. P. 54(d)(2). This dispute over fees, they contend, is nothing but “a straightforward matter of contract interpretation.”[6] Defs.' Mot. for Fees at 3. They assert that the provision's plain language clearly and unambiguously supports shifting their attorneys' fees and expenses onto Tsai. Id.; see also R. 136, Defs.' Reply Br. at 1, 4. To support their argument, the Defendants point to this language in the indemnification provision:

The undersigned [Tsai] hereby agrees to indemnify and hold harmless the Company and the Manager, and their respective employees and agents and their respective successors and assigns (the “Indemnified Parties”) … in any action, suit or proceeding brought by the undersigned against any Indemnified Parties in which the undersigned does not prevail.

         Subscription Agreement at 6 (emphasis added); see also Defs.' Mot. for Fees at 2-3; Defs.' Reply Br. at 4, 7. They maintain that language encompasses Tsai's voluntarily dismissed RICO action. Defs.' Mot. for Fees at 3; Defs.' Reply Br. at 4, 7.

         Tsai does not challenge this plain language interpretation; instead, she asserts that the Defendants are not entitled to attorneys' fees and expenses for three other reasons: first, the indemnification provision is void as against public policy. Pl.'s Resp. Br. at 1, 4-6. Second, the indemnification provision is illogical and overbroad. Id. at 1, 6-7. And finally, four of the nine defendants are not actually “Indemnified ...


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