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U.S. Small Business Administration v. McInerney

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

May 3, 2017



          SHARON JOHNSON COLEMAN United States District Judge

         Defendant Joseph McInerney filed an Answer, asserting seventeen affirmative defenses, alleges twelve counterclaims against the employees of plaintiff U.S. Small Business Administration, and three counterclaims against Charles Fulford [17]. Plaintiff U.S. Small Business Administration, as Receiver (“Receiver”) for Cardinal Growth, L.P. (“Cardinal Growth”) moves to strike McInerney's affirmative defenses and to dismiss his counterclaims [19]. For the reasons stated herein, the motion is granted in part and denied in part.


          The U.S. Small Business Administration (“SBA”) runs the Small Business Investment Company (“SBIC”) program. Under this program the SBA licenses and invests in SBICs. The SBIC then invests in small businesses. There are a couple of different versions of the SBIC program. The Debenture program, through which the SBA provides long term loans to SBICs, and the Participating Securities program, which is the relevant one here. The SBA created the Participating Securities program in the 1990s and is in the process of phasing it out. Under this program, SBICs would issue certain securities to the SBA that entitled the SBA to payments to the extent that the underlying small business earned money. The SBA would pool these securities and sell them in the public capital markets through an investment trust. The SBA then guaranteed the trusts' payment of principal and interest.

         The SBA licensed Cardinal Growth as an SBIC. Cardinal Growth LLC (“CGLLC”) was the general partner of Cardinal Growth. CGLLC was managed by Cardinal Growth Corporation (“CGC”). Although McInerney denies the allegation, the Receiver alleges that McInerney was one of the original principals of Cardinal Growth who sought and obtained licensure of Cardinal Growth as an SBIC. (Def.'s Ans., Dkt. 17 at ¶ 8).

         In an action before Chief Judge Castillo, Cardinal Growth was eventually put into receivership through a Consent Order of Receivership entered on June 16, 2011, with the SBA appointed as the Receiver. United States of America v. Cardinal Growth, L.P., No. 11-cv-04071. The Consent Order of Receivership stayed all actions and proceedings involving Cardinal Growth, its assets, and partners. (Id. at Dkt. 6 at ¶ 7). On June 30, 2016, Chief Judge Castillo granted the Receiver's motion to lift the stay “for the limited purpose of permitting the Receiver to pursue its rights and remedies by the commencement of litigation in this Court against Joseph McInerney for the balance of his unfunded capital commitment pursuant to the Limited Partnership Agreement.” (Id. at Dkt. 107). This Court takes judicial notice of these orders.

         The Receiver filed the complaint in the instant case on July 8, 2016, alleging in Count I that McInerney breached the Cardinal Growth Limited Partnership Agreement by failing to contribute certain capital commitments, totaling $245, 000. In Count II, the Receiver alleges McInerney failed to pay the General Partner's capital commitment. The Receiver alleges that McInerney personally obligated himself to pay $42, 500 of the General Partner's capital commitment.

         McInerney filed an Answer denying the allegations in the complaint and asserting seventeen affirmative defenses: (1) statute of limitations; (2) laches; (3) invalid contract; (4) failure to mitigate damages; (5) unjust enrichment; (6) prevention of performance; (7) right of rescission; (8) fraud, deceit, and misrepresentation; (9) failure of condition precedent; (10) right to offset; (11) no damage to plaintiff; (12) unclean hands; (13) bad faith dealings; (14) duress and undue influence; (15) frustration of purpose; (16) no regulatory violation; (17) additional defenses. McInerney also alleges the following counterclaims against plaintiff and certain employees: (1) bad faith and unclean hands; (2) conspiracy to destroy McInerney's reputation and assets; (3) unlawfully repossessing McInerney's assets; (4) committing fraud by not disclosing defects of or fixing the Participating Securities Program; (5) defamation; (6) future unknown claims; (7) tortious interference; (8) intentional infliction of emotional distress; (9) conversion; (10) breach of contract; (11) abuse of legal process and authority; and (12) gross negligence. McInerney further alleges the following counterclaims against Charles Fulford, the Receiver's principal agent: (1) gross mismanagement of assets; (2) colluding and conspiring with certain individuals to destroy McInerney's assets and reputation; and (3) failure to mitigate losses.

         Legal Standard

         Affirmative defenses are pleadings and, as such, are subject to all the same pleading requirements applicable to complaints. Heller Fin., Inc. v. Midwhey Powder Co., Inc., 883 F.2d 1286, 1294 (7th Cir.1989).Thus, affirmative defenses must set forth a “short and plain statement” of the basis for the defense. Fed.R.Civ.P. 8(a); Heller, 883 F.2d at 1294. Federal Rule of Civil Procedure 12(f) governs motions to strike affirmative defenses. Rule 12(f) permits a district court to “order stricken from any pleading any insufficient defense or any redundant ... matter.” Fed.R.Civ.P. 12(f); Riemer v. Chase Bank, N.A., 275 F.R.D. 492, 493 (N.D. Ill. 2011) (Cole, J.). “A court enjoys substantial discretion under Rule 12(f). That discretion, however, must take note of the overarching principle that striking a defense is a ‘drastic remedy, ' which is disfavored and seldom granted.” Reimer, 275 F.R.D. at 494 (citing William Z. Salcer, Panfeld, Edelman v. Envicon Equities Corp., 744 F.2d 935, 939 (2nd Cir.1984), rev'd on other grounds, 478 U.S. 1015, 106 S.Ct. 3324, 92 L.Ed.2d 731 (1986)).

         A motion to dismiss brought pursuant to Rule 12(b)(6) challenges the legal sufficiency of the pleading. Rule 8(a) applies to most claims and requires a short and plain statement of the claim upon which relief can be granted. To survive dismissal, the counterclaims must state a facially plausible claim that puts the defending party, the Receiver, on notice of the basis of the claims against it. See Swanson v. Citibank, N.A., 614 F.3d 400, 403-404 (7th Cir.2010). The Seventh Circuit has explained that “plausibility” means, that “the plaintiff [or counterplaintiff] must give enough details about the subject-matter of the case to present a story that holds together. In other words, the court will ask itself could these things have happened, not did they happen.” Id. at 404 (emphasis in original). In determining the sufficiency of a counterclaim, the Court accepts as true all well-pleaded factual allegations and draws all reasonable inferences in favor of the non-moving party. Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 555 (7th Cir. 2012) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

         Rule 9(b) requires a party alleging fraud to “state with particularity the circumstances constituting fraud.” Fed.R.Civ.P. 9(b). This “ordinarily requires describing the ‘who, what, when, where, and how' of the fraud, although the exact level of particularity that is required will necessarily differ based on the facts of the case.” AnchorBank, FSB v. Hofer, 649 F.3d 610, 615 (7th Cir. 2011) (quoting Pirelli Armstrong Tire Corp. Retiree Medical Benefits Trust v. Walgreen Co., 631 F.3d 436, 441-42 (7th Cir.2011)). “A claim that ‘sounds in fraud'-in other words, one that is premised upon a course of fraudulent conduct-can implicate Rule 9(b)'s heightened pleading requirements.” Borsellino v. Goldman Sachs Grp., Inc., 477 F.3d 502, 507 (7th Cir. 2007).


         As an initial matter, the Court notes that McInerney filed a thirty-two page response in opposition to the Receiver's motion to strike affirmative defenses and to dismiss counterclaims. The docket does not show that McInerney sought and was granted leave to file an oversized brief. Local Rule 7.1 stipulates that briefs exceeding fifteen pages in length without prior leave of court may be stricken. The Court could strike the brief as a violation of the local rules. Since briefing of this motion occurred prior to reassignment, the Court will allow the oversized ...

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