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Sears Home Appliance Showrooms, LLC v. Appliance Alliance, LLC

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

March 3, 2017

SEARS HOME APPLIANCES SHOWROOMS, LLC and SEARS AUTHORIZED HOMETOWN STORES, LLC, Plaintiffs/Counter-Defendants,
v.
APPLIANCE ALLIANCE, LLC, BRENT TURLEY, and MINENA TURLEY, Defendants/Counter-Plaintiffs,
v.
SAMANTHA WILKS, SEARS HOLDING CORPORATION d/b/a SEARS HOMETOWN & OUTLET and SEARS.COM, SEARS, ROEBUCK & CO., JEFFREY SCOTT TUCKER, and 2720 SH 121, LP, Third-Party Defendants.

          MEMORANDUM OPINION AND ORDER

          John Z. Lee United States District Judge

         Sears Home Appliances Showrooms, LLC (“SHAS”) and Sears Authorized Hometown Stores, LLC (“SAHS”) (together, “Plaintiffs”) filed this lawsuit against Brent and Minena Turley (“the Turleys”) and Appliance Alliance, LLC for breaching the parties' franchise agreements. In turn, the Turleys and Appliance Alliance (“Counter-Plaintiffs”) brought counterclaims against SHAS and SAHS, as well as third-party defendants Sears Holding Corporation d/b/a Sears Hometown & Outlet and Sears.com (“Sears Holding”), Sears, Roebuck & Co. (“Sears Roebuck”), Samantha Wilks (“Wilks”), Jeffrey Scott Tucker (“Tucker”), and 2720 SH 121, LP.

         In their First Amended Counterclaim (“FAC”), Counter-Plaintiffs allege breach of contract (Count I), conversion and trespass (Count II), tortious interference with contract and existing and prospective business relations (Count III), defamation, business disparagement, and unfair competition (Count IV), breach of fiduciary duty, economic duress and business coercion, oppressive conduct, and constructive trust (Count V), violations of the Texas Business Opportunity Act and Texas Deceptive Trade Practices Act (Count VI), and fraud (Count VII).

         SHAS, SAHS, Sears Holding, Sears Roebuck, Wilks, and Tucker (“Sears Counter-Defendants”) have moved to dismiss certain counts in the FAC. For the following reasons, the Sears Counter-Defendants' motion to dismiss [57] is granted in part and denied in part.

         Background

         The events giving rise to this dispute began prior to 2010, when the Turleys-recently retired from careers at the National Aeronautics and Space Administration-began exploring investment opportunities. FAC ¶ 10, ECF No. 44. As part of their research, the Turleys reviewed a Sears “Franchise Disclosure Document” that SHAS was circulating. Id. ¶ 11. Based on “representations and assurances” included in the Franchise Disclosure Document and made by Sears, [1]the Turleys elected to purchase four Sears franchises in Texas. Id. ¶¶ 12-13. The Turleys executed the purchase in February 2010 through Appliance Alliance, LLC, which they own and control. Id. ¶ 12.

         The Turleys' investment was initially successful. From 2010 through the beginning of 2012, their franchises were profitable. Id. ¶ 16. Based on their success, their course of dealing with Sears, and their understanding of the franchise relationship based on Sears's representations and franchise documents, the Turleys invested in two additional franchises. Id. ¶¶ 16-17. Shortly after acquiring the two additional franchises, however, the Turleys' relationship with Sears began to deteriorate. Id.

         According to the Turleys, SHAS “split away” from Sears Holding, resulting in “inherent competition[] whereby Sears Holding enjoyed an unfair competitive edge.” Id. ¶ 18. A number of problems then arose relating to their franchise relationship. See Id. ¶ 19 (listing changes). These problems included the following. First, the Turleys allege that, in purchasing their franchises, Sears represented that it would impose territorial restrictions to prevent direct competition with their franchises and thereby protect the Turleys' investment. Id. ¶ 13. “[T]he franchise offering documents” failed to disclose, however, that the Turleys' franchises “would be subjected to price, product, financing, and ancillary services competition, directly from Sears, operating through one or more of its controlled entities or outlets.” Id. Additionally, Sears's “offering circulars” represented that the Turleys would receive a certain minimum average commission as a percentage of merchandise sales, and in finalizing the franchise sales, Sears “encouraged its incoming franchisees to believe” they would receive even larger commissions. Id. ¶ 14. But shortly after the Turleys purchased their fifth and sixth franchises, Sears began reducing commissions below what they were promised. Id. ¶ 19. Similarly, despite promising to pay the Turleys a 2% “marketing fee, ” Sears refused to do so. Id. Finally, the Turleys were under the impression that they would have considerable freedom in dictating the operation of their franchises, but Sears instead exercised “total domination and control, ” fixing prices, hours, and inventory, among other things. Id. ¶ 73. In addition to these problems, Sears took a number of other actions that “operated together to make the continued profitable operations of [the Turleys'] business impossible to maintain.” Id. ¶ 19.

         After taking these actions, Sears allegedly “began manufacturing purported breaches and noncompliance with its required operations procedures.” Id. ¶ 20. Sears then used these breaches and acts of noncompliance as grounds for threatening to hold the Turleys in default of their franchise agreements. Id. As part of this course of conduct, Sears assigned one of its employees, Wilks, to oversee the Turleys' stores. Id. ¶ 22. According to the Turleys, Wilks “was focused upon circumventing [the Turleys'] relationship with their employees[] and taking over the operations of the stores by usurping [the Turleys'] authority over their own employees.” Id.

         Ultimately, in April 2015, Sears declared the Turleys in default of their franchise agreements and ordered them to turn over the keys to their stores. Id. ¶ 25. Tucker, a district sales manager for Sears, took the keys to one of their stores and instructed the landlord to change the locks. Id. ¶ 26. Wilks called employees at the Turleys' other stores and told them to open the stores only “under her direction.” Id. ¶ 28. According to the Turleys, Sears took control of all inventory at their stores and locked them out. Id. ¶ 29. Plaintiffs' action before this Court, and Counter-Plaintiffs' counterclaims in response, soon followed.

         Legal Standard

          To survive a motion to dismiss pursuant to Rule 12(b)(6), a complaint or counterclaim must “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); accord Cozzi Iron & Metal, Inc. v. U.S. Office Equipment, Inc., 250 F.3d 570, 574 (7th Cir. 2001) (applying the same standard in reviewing a motion to dismiss a counterclaim as with a motion to dismiss a complaint). “A claim has facial plausibility when the [counter-plaintiff] pleads factual content that allows the court to draw the reasonable inference that the [counter-defendant] is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Additionally, when considering motions to dismiss, the Court accepts “all well-pleaded factual allegations as true and view[s] them in the light most favorable to the [counter-claimant].” Lavalais v. Vill. of Melrose Park, 734 F.3d 629, 632 (7th Cir. 2013) (citing Luevano v. Wal-Mart Stores, Inc., 722 F.3d 1014, 1027 (7th Cir. 2013)). At the same time, “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) (citing Iqbal, 556 U.S. at 678). As such, “[t]hreadbare recitals of the elements of the cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678.

         Analysis

          The number of parties and claims involved in the case invites confusion. In the interests of clarity, the Court will proceed as follows. First, the Court will address the Sears Counter-Defendants' motion to dismiss Counts I, II, III, and IV of the FAC as against Sears Holding and Sears Roebuck. Second, the Court will address the Sears Counter-Defendants' motion to dismiss Counts I, VI, and VII as against Wilks. And finally, the Court will address the remaining grounds on which the Sears Counter-Defendants seek to dismiss Counts I, III, IV, V, VI, and VII.

         One preliminary piece of housekeeping: The Sears Counter-Defendants have also moved to dismiss all claims against Tucker. In their response, Counter-Plaintiffs state that “Jeffrey Tucker is not a Counter-Defendant identified as a party in the Counterclaim, so any motion to dismiss him should be denied as moot.” Counter-Pls.' Resp. 8 n.3, ECF No. 64. The Sears Counter-Defendants interpreted this as an acknowledgement that Counter-Plaintiffs do not wish to pursue any claims against Tucker and requested that all claims against him be dismissed with prejudice. Counter-Defs.' Reply 5 n.3, ECF No. 69. The Court agrees and dismisses all claims against Tucker with prejudice.

         I. Counts I, II, III, and IV as Against Sears Holding and Sears Roebuck

          The Sears Counter-Defendants move to dismiss Counts I, II, III, and IV as against Sears Holding and Sears Roebuck. In regard to Count I, they argue that Sears Holding and Sears Roebuck were not parties to the franchise agreements underlying Counter-Plaintiffs' breach of contract claim and thus cannot be liable for breach of contract. Counter-Defs.' Mot. Dismiss 3, ECF No. 57. In regard to Counts II, III, and IV, they argue that Sears Holding and Sears Roebuck likewise cannot be liable, on the ground that they are separate corporate entities from SHAS and SHOS, and Counter-Plaintiffs do not allege Sears Holding and Sears Roebuck were involved in the actions alleged under those counts. Id. at 4.

         As a starting point, Counter-Plaintiffs acknowledge that SHAS, SHOS, Sears Holding, and Sears Roebuck are separate corporate entities. In the FAC, Counter-Plaintiffs identify SHAS, Sears Holding, and Sears Roebuck as distinct entities, FAC ¶¶ 4, 6-7. Additionally, Counter-Plaintiffs do not allege at any point in the FAC that they dealt or communicated with any corporate entity other than SHAS.[2]Rather, Counter-Plaintiffs allege merely that SHAS, “[o]n information and belief . . . is owned and/or controlled ultimately by” Sears Roebuck, and “[t]herefore, any judgment solely against this Counter-Defendant would be useless without joint and several liability of” Sears Roebuck. FAC ¶ 4. They further claim that Sears Roebuck

has created a network of affiliated corporate entities which it ultimately owns and controls, and operates the same as a single enterprise for its own benefit and profit. Although assets and business relationships may have been transferred or assigned from one Sears entity to another, ultimately [Sears Roebuck], on information and belief, directs and controls all of them and causes them to act for its own overall good and benefit.

Id. ¶ 7. The FAC therefore uses “Sears” to refer to what it alleges is a collective entity. Id.

         While Counter-Plaintiffs do not expressly invoke the doctrine, the Court construes the FAC as seeking to pierce the corporate veil separating the various Sears entities it identifies. Under basic principles of corporate law, [3] corporations are entities of limited liability, and one corporation is legally distinct from another corporation, even if the two are affiliated. Van Dorn Co. v. Future Chem. & Oil Corp., 753 F.2d 565, 569 (7th Cir. 1985) (citing Main Bank of Chi. v. Baker, 427 N.E.2d 94, 101 (Ill. 1981)). Thus, a cause of action against one corporation will not give rise to liability against another corporation unless a court pierces the veil of the first to reach the second, or treats the first as an “alter ego” of the second. Id. at 569-70.

         To impose liability under the alter ego doctrine, a party must first demonstrate that one corporation “‘is so controlled and its affairs so conducted that it is a mere instrumentality of another.'” Id. at 570 (quoting Main Bank of Chi., 427 N.E.2d at 101). A party must further demonstrate that “‘observance of the fiction of separate existence would, under the circumstances, sanction a fraud or promote injustice.'” Id. (quoting Main Bank of Chi., 427 N.E.2d at 101). These requirements apply to causes of action in both contract and tort, although more stringently to claims of breach of contract. Northbound Grp., Inc. v. Norvax, Inc., 795 F.3d 647, 652-53 (7th Cir. 2015) (citing Tower Investors, LLC v. 111 East Chestnut Consultants, Inc., 371864 N.E.2d 927, 941 (Ill.App.Ct. 2007)).

         Based on these principles, insofar as Counter-Plaintiffs seek to hold Sears Roebuck (and for that matter, Sears Holding) liable for SHAS's actions, they must allege facts giving rise to a reasonable inference both that SHAS is a mere instrumentality controlled by Sears Roebuck and that recognizing SHAS's separate existence from Sears Roebuck would sanction a fraud or promote injustice. Counter-Plaintiffs' allegations are sufficient to satisfy the first element, even though they rest “on information and belief.” Such pleading is permissible, particularly in light of the reality that any details about Sears Roebuck's oversight of the various Sears entities are unavailable to Counter-Plaintiffs at this stage. See Huon v. Denton, 841 F.3d 733, 743 (7th Cir. 2016) (quoting Brown v. Budz, 398 F.3d 904, 914 (7th Cir. 2005)).

         But Counter-Plaintiffs' allegations fail to allege any fraud or injustice that would be occasioned by respecting the Sears corporations' separate existences. Rather, Counter-Plaintiffs' stated intention in pursing claims against Sears Roebuck is to recover damages from funds or assets owned by Sears Roebuck, claiming that any judgment solely against SHAS would be “useless” simply because Sears Roebuck “own[s] and/or control[s]” SHAS. FAC ¶ 7. Mere allegations of a desire to recover from another corporation's assets, without more, are insufficient to demonstrate fraud or injustice. Sea-Land Servs., Inc. v. Pepper Source, 941 F.2d 519, 524 (7th Cir. 1991) (concluding that allegations of injustice must consist of “some ‘wrong' beyond a [party's] inability to collect” on a judgment); Julin v. Advanced Equities, Inc., No. 13 C 9075, 2014 WL 5617001, at *4 (N.D. Ill. Nov. 4, 2014) ...


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