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Freed v. Friedman

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

October 17, 2016

ERIC D. FREED, Plaintiff,
v.
NEIL FRIEDMAN, C.P.A., P.C., d/b/a Michael Silver and Co., Defendant.

          MEMORANDUM OPINION AND ORDER

         Eric Freed brought, then voluntarily dismissed, and then brought again this diversity suit against Neil Friedman, C.P.A., P.C., d/b/a Michael Silver & Co., an accounting firm. Doc. 25; see Freed v. Neil Friedman, C.P.A., P.C., No. 14 C 7241 (N.D. Ill. filed Sept. 17, 2014). Freed alleges that Ronald Weiss, an accountant who worked at Silver, misstated various aspects of Freed's financial dealings with a law firm in which he formerly was a partner, Doc. 25 at ¶¶ 49-63, 91-98; that those misstatements inflated his tax liabilities and otherwise harmed him financially, id. at ¶¶ 64-73, 99-107, 111; and that Silver's negligent supervision of Ronald Weiss makes it liable for those harms, id. at ¶¶ 77-85. Silver has moved the court to stay and abstain from hearing this case under the doctrine set forth in Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), pending resolution of two earlier-filed suits that Freed currently is litigating in Illinois state court. Doc. 31. The motion is granted.

         Background

         This is not Freed's first rodeo-or his second, third, or fourth. He is the plaintiff in two other cases on this court's docket: Freed v. Weiss, Case 12 C 6720, and Freed v. JPMorgan Chase Bank, N.A., Case 12 C 1477, both of which are stayed pursuant to Colorado River. See Freed v. Weiss, 974 F.Supp.2d 1135 (2013) (“Freed I”), aff'd sub nom. Freed v. JPMorgan Chase Bank, N.A., 756 F.3d 1013 (7th Cir. 2014) (“Freed II”). He also is currently litigating at least two Illinois state court cases: Freed v. Weiss, Case 2011 CH 41529 (Cir. Ct. Cook Cnty., Ill.), and Freed v. Quantum Legal LLC, Case 2014 CH 14770 (Cir. Ct. Cook Cnty., Ill.). Docs. 31-1, 31-2. Like this suit, those suits concern grievances stemming from the dissolution of the law firm referenced above. The firm has had various names over the years, such as “Freed & Weiss, LLC, ” “Quantum Legal LLC, ” and “Complex Litigation Group, LLC.” Doc. 31 at ¶ 1; Doc 33 at 1; Freed I, 974 F.Supp.2d at 1139. For simplicity, this opinion will refer to the firm as “the LLC.” The various state and federal cases are referred to by docket number, and all record citations herein are to the docket in this case unless otherwise noted. Because the previous federal cases and one of the state cases (Case 2011 CH 41529) were described in Freed I, 974 F.Supp.2d at 1138-45, and Freed II, 756 F.3d at 1016-18, the court presumes familiarity with those decisions.

         In Case 12 C 6720, Freed sued three defendants: the LLC itself; Freed's former co-managing partner in the LLC, Paul Weiss (“Weiss”); and Weiss's father, the aforementioned Ronald Weiss (“Ronald Weiss”), who provided accounting services to the LLC as an employee and agent of Silver. Freed II, 756 F.3d at 1016; Freed I, 974 F.Supp.2d at 1137-38; Doc. 25 at ¶¶ 16, 19-20. That suit centered on a scheme allegedly concocted and executed by Weiss-with Ronald Weiss's assistance-to freeze Freed out of the LLC and take its assets. Doc. 1 (12 C 6720) at ¶¶ 1-3, 49-55. Freed alleged that he had provided “virtually all of [the LLC's] operating capital through loans in excess of $12 million” and was “entitled to repayment of the loans before [the LLC] could make distributions to other members.” Freed II, 756 F.3d at 1016 (internal quotation marks omitted). Weiss allegedly carried out the scheme by fraudulently transferring the LLC's funds into bank accounts that he controlled, and also by asserting that Freed had withdrawn LLC funds in March 2011 in violation of the partnership agreement and had thereby voluntarily disassociated himself from the LLC and relinquished control over it. Freed I, 974 F.Supp.2d at 1138.

         Freed filed the other federal case, Case 12 C 1477, in Illinois state court against JPMorgan Chase Bank, which removed the suit to this court and then brought third-party claims against Weiss, his wife, Jamie Saltzman Weiss (“Saltzman”), and the LLC. Id. at 1137. In that suit, Freed alleged that Chase committed tortious interference with the partnership agreement between Freed and Weiss by encouraging and assisting Weiss's siphoning of funds from the LLC's accounts at Chase and, additionally, that Chase aided and abetted Weiss's breach of fiduciary duties that he owed to Freed. Id. at 1143. Those claims against Chase required Freed to prove the impropriety of the underlying transactions that Weiss undertook with regard to the LLC. Ibid. Both Case 12 C 6720 and Case 12 C 1477 are currently stayed pursuant to Colorado River, pending the state court's resolution of Case 2011 CH 41529. Freed II, 756 F.3d at 1024.

         In Case 2011 CH 41529, Freed (individually and derivatively on behalf of the LLC) sued Weiss and Saltzman. Freed I, 974 F.Supp.2d at 1137. That suit's factual allegations largely overlap with those in Case 12 C 6720. Id. at 1139. Weiss and the LLC responded with counterclaims against Freed. Id. at 1137, 1139. After the defendants in the federal suits filed abstention motions in this court, the state court granted Freed's motion to voluntarily dismiss his claims. Id. at 1137. Because Weiss and the LLC had filed counterclaims, however, the state court's dismissal of Freed's claims did not end the state case. Ibid. That case remains pending, see Docket, 2011 CH 41529 (Cir. Ct. Cook Cnty., Ill.), https://perma.cc/GVK5-TXNP (last visited Oct. 17, 2016), and both Saltzman and the LLC remain in that litigation, aligned with Weiss. Doc. 31-4 at 2; Freed II, 756 F.3d at 1019 (describing the alignment of the parties in that case).

         The counterclaims in Case 2011 CH 41529 allege that Freed dissociated from the LLC in March 2011 or, in the alternative, that he thereafter engaged in misconduct that should have resulted in his being expelled from the LLC under the Illinois Limited Liability Company Act, 805 ILCS 180/1-1 et seq. Doc. 31-1 at ¶¶ 1, 216-242. The gravamen of the alleged misconduct is that Freed “withheld his services from [the LLC], ” “secretly [took] $1.5 million of [the LLC]'s funds, ” and as a result “was grossly over-paid for his membership interest.” Id. at ¶ 1. The counterclaims seek, among other things, a declaration of the parties' rights and obligations under the partnership agreement, id. at ¶¶ 144-69-including “[a] declaration that, as of the date of Freed's voluntary termination, Freed had been repaid any and all funds that Freed had previously advanced to [the LLC] for the normal and ordinary operations of [the LLC], ” id. at 28 ¶ b; see also id. at 49 ¶ b (seeking the same if Freed is deemed to have dissociated for other reasons)-as well as compensation for Freed's alleged misappropriation of funds to which he was not entitled, id. at 33 ¶ a, 35 ¶¶ a-b, 39 ¶ b, 43 ¶ b. The claims sound principally in contract, fiduciary duty, and partnership law. Doc. 31-1.

         A dispute has arisen in Case 2011 CH 41529 over whether Weiss, Saltzman, and the LLC, on the one hand, and Freed, on the other, entered into a settlement. Doc. 31 at ¶ 19; Doc. 33 at 8-9. In August 2015, Weiss, Saltzman, and the LLC filed a motion to enforce the (alleged) settlement agreement. Doc. 31-4. The parties are in the midst of contesting that motion, with Freed asserting that the alleged settlement agreement was never finalized and does not bind him. Doc. 33-1 at 2-16; Doc. 33-2 at ¶ 4; Doc. 33-3. Freed and Silver nevertheless agree-as Freed confirmed at a hearing on the present motion-that the purported settlement, if valid, contains a third-party release that would foreclose Freed's claims against Silver in this case. Doc. 31 at ¶ 19 (describing the purported settlement agreement and third-party release); Doc. 33 at 8-9 (contesting the validity and enforceability of the purported settlement agreement, but not challenging Silver's assertion that one of its provisions was a third party release that included Silver).

         Freed (again, both individually and derivatively on behalf of the LLC) initiated a second suit in state court, Case 2014 CH 14770, on September 12, 2014-just over two months after the Seventh Circuit affirmed this court's decision to abstain in Cases 12 C 6720 and 12 C 1477, and less than a week before Freed filed his earlier, abortive iteration of this federal suit. Doc. 31-2. The 2014 state suit names Weiss, Saltzman, and the LLC as defendants, and seeks dissolution of the LLC, damages for the defendants' alleged unlawful distributions and failure to repay loans owed to Freed, and an order voiding certain allegedly fraudulent disbursements. Ibid. The complaint alleges that Weiss and Saltzman conspired to make various improper distributions from the LLC for their own benefit and to improperly transfer an interest in the LLC to Saltzman, id. at ¶¶ 1, 16-35, 110-120, 167-174, 184-203, even though the LLC failed to first properly cash out Freed's interest when he voluntarily dissociated on August 21, 2012, id. at ¶¶ 1, 70-82, 106-14. Among Freed's factual allegations are that “Paul Weiss and Saltzman conspired with LLC's accountants to create fraudulent accounting records to help them conceal their illegal conduct, ” id. at ¶ 174, and that “improper financial records maintained on behalf of LLC allowed LLC to disguise loan repayments [made to Freed] as distributions, ” id. at ¶ 215. Freed also alleges that the LLC failed to repay loans and advances that he made to it and seeks damages for that failure. Id. at ¶¶ 2, 233-38. Freed further alleges that determining those damages will require untangling “the illegal manipulation of LLC's financial books and records by Paul Weiss and Saltzman” and “measures undertaken by them and by professionals paid by LLC to conceal the misreporting of LLC's finances.” Id. at ¶ 4. Freed amended the complaint after Weiss was disbarred in November 2015, asserting that Weiss's inability to practice law, combined with the allegedly invalid attempt to transfer ownership to Saltzman, required dissolution of the partnership-with distributions for Freed's still-uncompensated share-and provides an additional basis for permitting Freed to recoup the funds that he believes he is owed. Doc. 31-3. The claims in Case 2014 CH 14770 are premised primarily on violations of Illinois statutes governing LLCs. Doc. 31-2.

         Freed filed this suit in early 2016. The operative complaint, with claims sounding in negligence and negligent misrepresentation, alleges that Silver, acting through Ronald Weiss, Doc. 25 at ¶ 19, “failed to exercise due professional care” in providing accounting services to Freed, both individually and as a partner in the LLC, id. at ¶¶ 16, 23, 31; failed to supervise Ronald Weiss, id. at ¶¶ 77-85; failed to record $1.85 million in loans that Freed made to the LLC and, consequently, misclassified loan repayments as taxable disbursements, id. at ¶¶ 35-36, 41-42 53-57; otherwise maintained inaccurate financial records, id. at ¶¶ 86-116; and took steps to conceal its malfeasance, id. at ¶¶ 43-44, 112; see also id. at ¶ 67 (alleging non-reporting of the LLC's transfers to secret Chase bank accounts). Those accounting failures, the complaint alleges, accrued to Weiss' personal benefit at Freed's expense. Id. at ¶¶ 63, 65, 74. The complaint seeks damages for losses that Freed personally incurred as a consequence of the various accounting failures and misrepresentations, id. at ¶¶ 76, 85, 98, 107, 111, and those damages include compensation for taxes that Freed allegedly overpaid as a result of Silver's failure to record Freed's loans to the LLC and Silver's misclassification of loan repayments, id. at ¶¶ 73, 81.

         Discussion

         A stay is warranted on two independent grounds, Colorado River abstention and the court's inherent authority, which are discussed in turn.

         I. Colorado River Abstention

         The Colorado River doctrine provides that “a federal court may stay or dismiss a suit in federal court when a concurrent state court case is underway, but only under exceptional circumstances and if it would promote ‘wise judicial administration.'” Freed II, 756 F.3d at 1018 (quoting Colorado River, 424 U.S. at 818); see also Caminiti & Iatarola, Ltd. v. Behnke Warehousing, Inc., 962 F.2d 698, 700 (7th Cir. 1992). The Supreme Court “has cautioned that abstention is appropriate only in ‘exceptional circumstances, ' and has also emphasized that federal courts have a ‘virtually unflagging obligation … to exercise the jurisdiction given them.'” AXA Corporate Solutions v. Underwriters Reins. Corp., 347 F.3d 272, 278 (7th Cir. 2003) (alteration in original) (quoting Colorado River, 424 U.S. at 813, 817). In determining whether to abstain, the court's task is “not to find some substantial reason for the exercise of federal jurisdiction by the district court; rather, the task is to ascertain whether there exist exceptional circumstances, the clearest of justifications, that can suffice under Colorado River to justify the surrender of that jurisdiction.” Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25-26 (1983) (internal quotation marks omitted).

         The Colorado River analysis has two steps. First, the court inquires “whether the state and federal court actions are parallel.” Freed II, 756 F.3d at 1018; see also Caminiti, 962 F.2d at 700. If the proceedings are not parallel, Colorado River abstention must be denied. Freed II, 756 F.3d at 1018. If the proceedings are parallel, the court then must weigh ten non-exclusive factors to determine whether abstention is proper. Ibid.

         A. Whether the Federal and State Cases Are Parallel

         State and federal suits need not be identical to be parallel. See Adkins v. VIM Recycling, Inc., 644 F.3d 483, 498-99 (7th Cir. 2011) (“[F]or Colorado River purposes … [p]recisely formal symmetry is unnecessary.”); Interstate Material Corp. v. City of Chicago, 847 F.2d 1285, 1288 (7th Cir. 1988) (“Interstate is correct in its assertion that differences exist. However, the requirement is of parallel suits, not identical suits.”). Rather, suits are parallel when “substantially the same parties are contemporaneously litigating substantially the same issues in another forum.” Freed II, 756 F.3d at 1019. Put another way, “[t]he question is not whether the suits are formally symmetrical, but whether there is a substantial likelihood that the [state] litigation will dispose of all claims presented in the federal case.” AAR Int'l, Inc. v. Nimelias Enters. S.A., 250 F.3d 510, 518 (7th Cir. 2001) (internal quotation marks omitted); see also Huon v. Johnson & Bell, Ltd., 657 F.3d 641, 646 (7th Cir. 2011) (same). “Any doubt regarding the parallel nature of the [state] suit should be resolved in favor of exercising jurisdiction.” Adkins, 644 F.3d at 499 (alteration in original) (internal quotation marks omitted). This suit clears the parallelism bar for two independent reasons.

         First, the issues and parties in the state cases and this case are substantially the same. Freed argues that the issues are not parallel because “[t]his action solely puts at issue accounting malpractice” and “[t]here are no accounting malpractice claims in the state actions.” Doc. 33 at 2; see also Id. at 9-10. True, Freed's claims here are styled as “negligence” and “negligent misrepresentation, ” which differ from the contract, partnership, and other causes of action in the state cases. But the underlying factual disputes overlap considerably. See Freed II, 756 F.3d at 1019 (instructing district courts to “examine whether the cases raise the same legal allegations or arise from the same set of facts” in evaluating parallelism). Specifically, both this case and the state cases arise from the same disputed series of financial transactions involving the LLC and Freed-when and whether payments between Freed and the LLC occurred, and how to classify them-and thus the claims in this suit and many of the claims in the state cases “will be resolved largely by reference to the same evidence.” Tyrer v. City of S. Beloit, 456 F.3d 744, 752-53 (7th Cir. 2006); see also Vulcan Chem. Techs., Inc. v. Barker, 297 F.3d 332, 341 (4th Cir. 2002) (holding that Colorado River abstention was proper where the federal court would otherwise “consider[] the same evidence and arguments” as did the state court).

         The state court has already been asked to adjudicate the nature and extent of the LLC's obligations to Freed. Doc. 31-1 at 28 ¶ b, 49 ¶ b; Doc. 31-2 ¶¶ 4, 233-38. The accuracy or inaccuracy of Silver's accounting turns on the nature and extent of the LLC's obligations to Freed. Doc. 25 at ¶¶ 36-37, 39, 69-73, 81. Were this court to resolve those claims, it would risk either duplicating effort with the state court or issuing rulings that conflict with the state court's rulings. Conversely, abstaining and awaiting the state court's decision would provide clarification of Freed's financial entitlements as to the LLC that could entirely dispose of the claims here. See Freed II, 756 F.3d at 1020 (“The federal court cannot determine the value of Freed's distributional interest until the claims brought in state court are resolved.”); id. at 1021 (“Only after the state court resolves whether Weiss violated obligations to Freed can Freed try to hold Chase liable for assisting in that wrongdoing.”).

         Principles of res judicata provide another lens through which it is clear that Freed's claims here are parallel to the issues being litigated in state court. If Freed loses in state court based on a finding that he was “grossly over-paid for his membership interest [in the LLC], ” Doc. 31-1 ¶ 1, and the state court issues a “declaration that … Freed [has] been repaid any and all funds that Freed had previously advanced to [the LLC], ” id. at 28 ¶ b, 49 ¶ b, preclusion almost certainly would provide Silver an immediate victory in this case. See Havoco of Am., Ltd. v. Freeman, Atkins & Coleman, Ltd., 58 F.3d 303, 308 n.9 (7th Cir. 1995) (discussing defensive non-mutual collateral estoppel under Illinois law); In re Owens, 532 N.E.2d 248, 251 (Ill. 1988) (“Defensive use of collateral estoppel precludes a plaintiff from relitigating issues by switching adversaries, and thus gives a plaintiff an incentive to try and join all defendants in the first action.”). True, if Freed prevails in state court, he may be unable to use that victory offensively against Silver due to a lack of privity between Silver, on the one hand, and Weiss and the LLC, on the other. See Congregation of the Passion, Holy Cross Province v. Touche Ross & Co., 636 N.E.2d 503, 510 (Ill. 1994) (“Three factors are necessary for the application of collateral estoppel, ” including “(3) the party against whom the estoppel is asserted must be a party, or in privity with a party, to the prior adjudication.”); Havoco, 58 F.3d at 308 n.9 (same). But parallelism under Colorado River requires only that there be “a substantial likelihood, ” not a certainty, “that the [state court] litigation will dispose of all claims presented in the federal case.” AAR Int'l, 250 F.3d at 518 (internal quotation marks omitted).

         Freed argues that a state court finding “that Freed is owed no money” would not necessarily resolve this case, since it is at least theoretically possible that Freed was repaid in full but that Silver nevertheless misclassified certain disbursements made to him. Doc. 33 at 10. But Freed points to no allegation in any of the cases indicating that such a resolution is at all probable; to the contrary, his litigating stance in state court tightly links Silver's alleged inattentiveness and Weiss's alleged duplicity by contending that Silver's accounting inaccuracies masked and enabled the LLC's failure (at Weiss's behest) to pay him his due. Doc 31-2 at ¶¶ 4, 174, 215. The two go hand-in-hand-a point the very next sentence of Freed's brief underscores. Doc. 33 at 10 (“Further, where Freed made loans to the LLC that were never recorded, to the extent that they were repaid, they were repaid as taxable income and increased his tax liability.”). Thus, the determination sought in state court concerning the LLC's obligations to Freed will almost certainly resolve what accounting accuracies, if any, existed in the first place, and, if there were none, there likely can be no liability here against Silver for accounting failures that never occurred. See Freed II, 756 F.3d at 1020 (“If the state court were to determine that Weiss did not violate the partnership agreement or breach fiduciary duties owed to Freed, then Ronald Weiss could not be held responsible for assisting Weiss in those offenses.”).

         So the issues are substantially the same here and in the state cases. The parties are substantially the same as well. It is true, as Freed stresses, that Silver is not a party in state court; nor, for that matter, is Ronald Weiss. Doc. 33 at 3. But “[o]ne way that parties in separate actions are considered substantially the same under the Colorado River doctrine is when they have nearly identical interests.” Freed II, 756 F.3d at 1019 (internal quotation marks omitted); see also Lumen Constr., Inc. v. Brant Constr. Co., 780 F.2d 691, 695 (7th Cir. 1985) (“The only apparent basis for the Villasenors' claim is their status as the sole shareholders and owners of Lumen. Their interest in the outcome of the law suit is the same as that of their company.”); Jimenez v. Rodriguez-Pagan, 597 F.3d 18, 22-23 (1st Cir. 2010) (abstaining under Colorado River where two parties in a Puerto Rico case were heirs to an estate on whose behalf the federal case was brought, even though the heirs were not parties in the federal case); Romine v. Compuserve Corp., 160 F.3d 337, 340 (6th Cir. 1998) (“Exact parallelism is not required. … This principle is especially apposite in the instant matter, where the interests of both the named plaintiffs … are congruent, notwithstanding the nonidentity of the named parties.”) (internal quotation marks omitted). Silver shares an interest with Weiss and his fellow counterclaimants (in Case 2011 CH 41529) and defendants (in Case 2014 CH 14770) in the state court cases in securing a ruling that the LLC's obligations to Freed have been satisfied and that the accounting entries that indicate as much are above-board and accurate.

         Accordingly, although the state and federal cases do not involve identical parties, they do involve “substantially the same parties.” Tyrer, 456 F.3d at 752; see also Freed II, 756 F.3d at 1019 (“Moreover, while the various defendants are not identical in the two cases, their interests are nearly identical: to show that neither fiduciary duties nor the partnership agreement were breached and to have the court determine that Freed dissociated from CLG in March 2011, or in the alternative, to dissolve CLG and distribute its assets accordingly. The parties' interests are substantially the same.”). What this court said when staying Freed's earlier suit against Ronald Weiss holds true for this action against Silver, which is, after all, Ronald Weiss's employer:

Ronald Weiss is a defendant only in the federal suit. But Freed's claim against Ronald Weiss is derivative of his claim against Weiss, in that Freed claims that Ronald Weiss breached duties owed to Freed when Weiss received the help of his father Ronald Weiss, the LLC's accountant, to create false accounting records that concealed Weiss's theft from Freed. If Weiss is not liable for any theft or other ...

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