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L.P. v. Kirlin

United States District Court, C.D. Illinois, Springfield Division

April 26, 2017

D'KIDS PARTNERS, LP, individually and on behalf of Kirlins, Inc., and DONALD W. KIRLIN, individually and on behalf of Kirlins, Inc., Plaintiffs,
v.
DALE T. KIRLIN, GARY F. KIRLIN, JAMES A. RAPP, SCHMEIDESKAMP, ROBERTSON, NEU & MITCHELL, LLP, and HUTMACHER & RAPP, P.C., Defendants.

          OPINION AND ORDER

          SUE E. MYERSCOUGH, UNITED STATES DISTRICT JUDGE

         This matter is before the Court on Plaintiffs' Motion for Temporary Restraining Order and Appointment of Interim Receiver (d/e 41), which the Court has treated as also requesting a preliminary injunction. On April 24 and 25, 2017, this Court held a hearing on Plaintiffs' requests for a preliminary injunction and appointment of a receiver. As to the request for a preliminary injunction, Plaintiffs have failed to carry their burden to demonstrate: 1) a probability of success on the merits; 2) inadequacy of legal remedies; and 3) a risk of irreparable harm. Plaintiffs' request for a preliminary injunction is accordingly DENIED. Plaintiff's request for appointment of an interim receiver is similarly lacking support in the record and is DENIED.

         I. BACKGROUND

         Plaintiffs are Donald Kirlin, a director of Kirlins, Inc., and his company, D'Kids Partners, LP, which owns 33, 030.75 voting shares of Kirlins, Inc. Two Defendants are Donald's two brothers, Dale Kirlin, Jr. (hereinafter, Dale Kirlin) and Gary Kirlin, each of whom are directors of Kirlins, Inc. and each of whom owns 33, 031.75 voting shares of Kirlins, Inc. (one share more than Plaintiff Donald's ownership). Dale Kirlin is also the Chairman and Chief Executive Officer of Kirlins, Inc. Gary Kirlin is the President of Kirlins, Inc.

         James Rapp, former external counsel to Kirlins, Inc. and former counsel to Plaintiff Donald Kirlin, is also named as a Defendant, as are his prior law firm, Hutmacher & Rapp, PC, and his current law firm, Schmeideskamp, Robertson, Neu & Mitchell, LLP.

         Plaintiffs bring this suit individually and on behalf of Kirlins, Inc. (hereinafter, the Company). The First Amended Complaint (hereinafter, Complaint) alleges claims for civil RICO (Count I), civil RICO conspiracy (Count II), oppression of a minority shareholder (Count III), breach of fiduciary duty (Count IV), unjust enrichment (Count V), conversion (Count VI), fraudulent concealment (Count VII), equitable accounting (Count VIII), constructive trust (Count IX), interference with prospective economic advantage (Count X), legal malpractice (Count XI), and employment of manipulative and deceptive practices (Count XII).

         Defendants Dale and Gary have filed a Motion to Dismiss Plaintiffs' First Amended Complaint Pursuant to Rules 9(b), 12(b)(6), and 12(b)(1) (d/e 60). James Rapp and his two law firms also named as Defendants have also filed a Motion to Dismiss the Complaint under Rule 12(b)(6) (d/e 67). The Court will address these motions at a later time.

         On March 13, 2017, Plaintiffs filed a Motion for Temporary Restraining Order and Appointment of Interim Receiver. Plaintiffs sought a TRO that: 1) barred Defendants from calling a vote on the proposed resolutions of the Company for 14 days or until further Court order; 2) barred Defendants or Kirlins, Inc. from selling any of its assets for 14 days or until further Court order; and 3) prohibited Dale and Gary from transacting any business on behalf of Kirlins, Inc. until further notice of the Court. Plaintiffs also sought appointment of Rally Management Services, LLC, or another suitable entity, as interim receiver to manage the daily operations of Kirlins, Inc. until further order of the Court.

         On March 14, 2017, the Court denied Plaintiffs' request for an ex parte Temporary Restraining Order. The Court ordered that it intended to consider Plaintiffs' motion as additionally requesting a preliminary injunction and set a hearing on the request for preliminary injunction and receivership. Plaintiffs did not object to such treatment of their motion.

         On March 21, 2017, Plaintiff Donald Kirlin and Defendants Dale and Gary Kirlin participated in a settlement conference with Judge Schanzle-Haskins. On April 19, 2017, Plaintiffs supplemented their Motion for Temporary Restraining Order and Appointment of Interim Receiver. The supplement included notices and materials for an April 26, 2017, special meeting of the shareholders to approve the sale of selected stores. The supplement also included an April 5, 2017, report by Rally Capital Services, which included an analysis of the validity of the decisions to sell stores previously sold and an analysis of the financial position of the Company's remaining stores earmarked for sale in 2017 (d/e 58-3, Plaintiffs' ex. 29). In the report, Rally Capital found that all of management's decisions to close the stores closed from 2014 to the date of the report appeared to be valid. The supplement also included an April 19, 2017, update from Rally Capital encouraging public notice of the proposed sales and/or an open market bidding process.

         A special meeting of the shareholders and board members is scheduled to take place on Wednesday, April 26, 2017. In addition to a proposal to sell several stores to Hallmark Retail LLC, the proposal includes a sale of three stores to Kirlin's 1948, Inc., which is owned by Dale Kirlin's son, Craig Kirlin. These stores are: Store # 101 in the Quincy Mall of Quincy, Illinois, Store # 210 in Columbia, Missouri, and Store # 268 in Kansas City, Missouri.

         On April 24 and 25, 2017, the Court held a hearing on Plaintiffs' requests for a preliminary injunction and appointment of a receiver. Because transcripts of that hearing are not yet available, this order's record cites are only to the pleadings and do not include any testimony given at that hearing.

         II. JURISDICTION

         The Court has subject matter jurisdiction over this lawsuit under federal question and supplemental jurisdiction. See 28 U.S.C. §§ 1331, 1367.

         Under the well-pleaded complaint rule, the federal question forming the basis of the court's jurisdiction must appear in the complaint as part of the plaintiff's claim. Fed.R.Civ.P. 8(a)(1); Louisville & Nashville Railroad Co. v. Mottley, 211 U.S. 149 (1908). Counts I and II of the Complaint arise under the civil provisions of the Racketeer Influenced & Corrupt Organization Act, a federal statute. 18 U.S.C. § 1962. Additionally, Count XII arises under a Security and Exchange Commission regulation prohibiting employment of manipulative and deceptive devices. 17 C.F.R. 240.10b-5. The Complaint therefore establishes the Court's federal question subject matter jurisdiction.

         Further, the Court has supplemental jurisdiction over the remaining state law claims under 28 U.S.C. § 1367. The state law claims form part of the same “case or controversy” as the federal law claims. See id. All of the claims in the Complaint concern Defendants' alleged mismanagement of the Company, and each of the claims relies on the set of facts set forth at paragraphs 22 ...


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