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Ritchie Capital Management, L.L.C. v. Kermath

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

June 1, 2017

RITCHIE CAPITAL MANAGEMENT, L.L.C., Plaintiff,
v.
JOHN KERMATH, Defendant. JOHN KERMATH, Counter-Plaintiff,
v.
RITCHIE CAPITAL MANAGEMENT, L.L.C., AARON ROBERTS THANE RITCHIE, and PLAN ADMINISTRATOR FOR THE RITCHIE CAPITAL MANAGEMENT, L.L.C. BENEFIT PLANS, Counter-Defendants.

          OPINION AND ORDER

          SARA L. ELLIS United States District Judge.

         Ritchie Capital Management, L.L.C. (“Ritchie Capital”), an investment management company, filed suit against John Kermath, its former president, for misappropriating Ritchie Capital's confidential and privileged information. Kermath filed amended counterclaims against Ritchie Capital, the Plan Administrator for the Ritchie Capital Management, L.L.C. Benefit Plans (the “Plan Administrator”), and Ritchie Capital's founder and former chief executive officer, Aaron Roberts Thane Ritchie (“Thane Ritchie, ” and collectively with Ritchie Capital and the Plan Administrator, the “Ritchie Parties”), seeking to recover benefits arising from his alleged misclassification as an independent contractor while working for Ritchie Capital, in addition to outstanding wages, bonuses, and other employment-related compensation he did not receive when he left Ritchie Capital's employment.[1] Kermath brings claims for unjust enrichment, promissory estoppel, and violations of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq., and the Illinois Wage Payment and Collection Act (the “IWPCA”), 820 Ill. Comp. Stat. 115/1 et seq. He also seeks a declaratory judgment that his agreement with Ritchie Capital was void ab initio. The Court previously dismissed Kermath's ERISA and unjust enrichment claims without prejudice and limited his IWPCA claim to unpaid wages and bonuses. See Doc. 74. The Ritchie Parties move for dismissal of the declaratory judgment, ERISA, unjust enrichment, and promissory estoppel claims, and argue in a footnote that Kermath cannot resurrect his IWPCA claim for unused vacation time.

         Because Kermath has adequately alleged that the independent contractor provision in the 2008 professional services agreement (the “2008 PSA”) may offend public policy, the Court allows Kermath to proceed on his claim challenging the enforceability of the 2008 PSA. To the extent the classification portion of the 2008 PSA is invalid, the Court finds it severable, meaning that the waiver of benefits provision remains enforceable. But because Kermath has alleged he did not knowingly and voluntarily waive his right to benefits, which the Court cannot properly determine at this stage, the Court allows Kermath to proceed on his ERISA claim. And because Kermath has adequately pleaded his unjust enrichment and promissory estoppel claims in the alternative to his IWPCA claims, Kermath may pursue those claims, except that the Court dismisses the unjust enrichment claim as to Thane Ritchie, who Kermath does not allege directly retained any benefit. Finally, because Kermath has added allegations to support an IWPCA claim for accrued unused vacation time, Kermath's IWPCA claim now includes his request to recover not only unpaid wages and bonuses but also unused vacation time.

         BACKGROUND[2]

         Ritchie Capital manages investment funds. Although it currently has its headquarters in the Cayman Islands, it also had offices in Illinois. Kermath began working for Ritchie Capital in May 2006 in Illinois.

         At all times, Ritchie Capital treated Kermath as an independent contractor. Ritchie Capital memorialized Kermath's employment arrangement in two professional services agreements, both of which Ritchie Capital drafted. The first one (the “2006 PSA”), which Kermath signed on May 10, 2006, had an initial term of May 6 to June 30, 2006 and was subject to renewal. Kermath continued working for Ritchie Capital beyond June 30, 2006, but no formal renewal of the 2006 PSA occurred after that date. On November 14, 2008, Kermath signed the second professional services agreement (the “2008 PSA”), which explicitly stated that it was retroactive to May 6, 2006. Both the 2006 and the 2008 PSAs provide that Kermath was an independent contractor, that nothing in the PSA “should be construed to create . . . [an] employer-employee relationship, ” and that Kermath “is not the agent of [Ritchie Capital] and is not authorized to make any representation, contract, or commitment on behalf of [Ritchie Capital].” Doc. 76-1 § 3; Doc. 76-2 § 3. Further, both the 2006 and the 2008 PSAs provide that Kermath “will not be entitled to any of the benefits that [Ritchie Capital] may make available to its employees, such as group insurance, profit-sharing, or retirement benefits.” Doc. 76-1 § 3; Doc. 76-2 § 3. Ritchie Capital agreed to pay Kermath “a fee for services rendered under [the respective PSA] as set forth in Exhibit A, ” as well as to reimburse him “for any reasonable expenses incurred in connection with the performance of services under” the PSAs. Doc. 76-1 § 2; Doc. 76-2 § 2. Upon the termination of the PSA, Ritchie Capital was to pay Kermath “fees and expenses on a proportional basis . . . for work which is then in progress, up to and including the effective date of such termination.” Doc. 76-1 § 2; Doc. 76-2 § 2. While the 2006 PSA set out a more detailed payment schedule, Doc. 76-1 at 8, Exhibit A in the 2008 PSA indicated only that Kermath's fee for his services was to be “based on a rate per month as determined from time to time.” Doc. 76-2 at 6. Kermath claims he did not have a sufficient opportunity to consult with an attorney before signing the 2006 or 2008 PSAs and did not understand the benefits he was foregoing by signing those agreements.

         Despite the PSA's formalization of his status as an independent contractor, Kermath's day-to-day activities suggested an employer-employee relationship: he used Ritchie Capital's email, phone, and computer systems, office space, and business equipment; he had a Ritchie Capital email address; Ritchie Capital provided Kermath with a company-issued Blackberry and paid for the data charges; he routinely worked five days a week from Ritchie Capital's Illinois offices; he used a corporate credit card for business-related expenses; and he reported to one or more superiors and supervised other employees. Additionally, Ritchie Capital paid Kermath bonuses tied in part to his work performance and he received deferred compensation amounts based on the performance of Ritchie Capital managed funds.

         In September 2007, Ritchie Capital promoted Kermath to president of the company, with Thane Ritchie remaining as chief executive officer. Kermath began signing documents on Ritchie Capital's behalf and had access to almost all aspects of the business. His job duties included asset management, staffing and supervision of employees, oversight of the accounting department, audit management, valuations, and litigation strategy. Kermath also determined bonus payments and salaries for other Ritchie Capital employees, subject to Thane Ritchie's final approval. When Thane Ritchie moved out of the country, Kermath effectively became the de facto chief executive officer as well, with certain Ritchie Capital regulatory filings even identifying him as such.

         Although Thane Ritchie always remained involved in Ritchie Capital and oversaw Kermath's work there, on March 17, 2015, Thane Ritchie reasserted day-to-day operational control over Ritchie Capital and demoted Kermath to vice president. He then reappointed Kermath as president in April 2015. This did not last long, however, as Thane Ritchie again demoted Kermath to vice president on May 8. Kermath resigned from Ritchie Capital on August 7, 2015. When he left, he did not receive his outstanding compensation from Ritchie Capital. This included a base $30, 000 monthly payment for the months of July and August 2015, an amount he had been receiving since 2007 regardless of whether he was sick, vacationing, or otherwise not working for all or part of any month. Additionally, Kermath did not receive $160, 000 of his 2014 bonus, which Ritchie Capital had agreed in writing to pay him no later than September 30, 2015. Finally, Kermath did not receive payment for 3.5 days of accrued and unused vacation time under Ritchie Capital's written vacation policy, which provided that, upon termination, employees would receive a lump sum payment for vacation days that had been accrued but not taken during the current vacation year.

         LEGAL STANDARD

         A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint, not its merits. Fed.R.Civ.P. 12(b)(6); Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). In considering a Rule 12(b)(6) motion to dismiss, the Court accepts as true all well-pleaded facts in the plaintiff's complaint and draws all reasonable inferences from those facts in the plaintiff's favor. AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th Cir. 2011). To survive a Rule 12(b)(6) motion, the complaint must not only provide the defendant with fair notice of a claim's basis but must also be facially plausible. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); see also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678.

         ANALYSIS

         I. Declaratory Judgment and ERISA Claims (Counts I and II)

         Kermath claims that Ritchie Capital misclassified him as an independent contractor and consequently, wrongfully excluded him from coverage under its employer-sponsored benefit plans during his employment. He asks that the Court declare the 2008 PSA void ab initio entirely or at least with respect to those provisions that designate Kermath as an independent contractor and define the effects of the misclassification, including his exclusion from employer-provided benefits. Kermath also seeks to recover all benefits allegedly due him under these benefit plans and to clarify his rights to future benefits, if any. To state a claim for these benefits under ERISA, Kermath must allege that (1) he qualifies as an employee, and (2) he was eligible to receive benefits under the terms of Ritchie Capital's benefit plans. Estate of Suskovich v. Anthem Health Plans ...


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