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Cross v. Batterson

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

June 28, 2017



          Harry D. Leinenweber, Judge

         For the reasons stated herein, Defendant's Partial Motion to Dismiss [ECF No. 9] is granted. Counts II through V of the Complaint are dismissed without prejudice.

         I. BACKGROUND

         This case arises from a contract dispute. In 2005, Plaintiffs Robert Cross and Jonathan Zakin (collectively, the "Plaintiffs") and Defendant Leonard Batterson ("Batterson") executed a contract called the Operating Agreement (the "Operating Agreement"). The Operating Agreement created a Delaware limited liability company, aptly named Batterson Cross and Zakin, LLC ("BCZ"), whose purpose was to "acquire, hold and dispose of Investments" for the benefit of its members. ECF No. 12 (Def.'s Mot. Dismiss), Ex. A (Operating Agreement) ¶ 2.3.

         The Operating Agreement laid out the terms for the management and operation of BCZ. It stipulated that a three-member Board of Managers, consisting of Batterson, Cross, and Zakin, was to run the company. See, Operating Agreement ¶ 6.1. Any decision requiring the approval of the Board needed the votes of at least two board members. Id. Certain decisions, however, required the unanimous consent of all the managers - that is, the approval of Batterson as well as Plaintiffs. Id. ¶ 6.1. Decisions calling for such unanimity included "the acquisition or disposition of any Investment of the Company"; "the purchase or sale of interests in Investment Vehicles"; "the offer of any Units and/or the admission of any additional Members"; and "any amendment or modification of this Agreement." Id. ¶ 6.1(b) (i)-(x) .

         With respect to the admission of new members, the Operating Agreement specified that these members may not contribute more than $500, 000.00 in total to the company. See, Operating Agreement ¶ 3.1. As pleaded in the Complaint, this contract provision ensured that the founding members' ownership in the LLC - and the amount of profits to which they were entitled - never dipped below a certain percentage. See, Compl. ¶ 3. In particular, Plaintiffs allege that they were "each entitled to not less than 21.5 percent of the Company's net revenues." Id. Plaintiffs further allege that this payout was one of the few ways in which members of the LLC could be remunerated since "[u]nder the terms of the BCZ Agreement, no member of the Company is permitted to receive any salary or compensation without the express approval of the Board of Managers." Id. ¶ 14. Moreover, the Board did not "at any time" approve "any form of salary, compensation, or other distribution to be paid to any of its Members, including Batterson." Id. ¶ 15.

         Other provisions of the Operating Agreement imposed affirmative obligations on the Board of Managers. In particular, Article X of the Operating Agreement required the Board to keep and make available to its members certain "books, records, [and] accounting." The provision read,

(a) The Board of Managers shall keep or cause to be kept complete and accurate books and records of the Company and supporting documentation of the transactions with respect to the conduct of the Company's business. The records shall include, but not be limited to, complete and accurate information regarding the state of the business and financial condition of the Company, a copy of the certificate of formation and operating agreement and all amendments to the certificate of formation and operating agreement. . . .
(b) The books and records shall be maintained in accordance with sound accounting practices and shall be available at the Company's principal office for examination by any Member or the Member's duly authorized representative at any and all reasonable times during normal business hours.

Operating Agreement ¶ 10.2.

         The facts recounted thus far are largely undisputed. That is, the parties agree that the Operating Agreement was a valid and enforceable contract when it was executed and that, as long as it was in effect, the Operating Agreement regulated the relationship of Plaintiffs and Batterson. Plaintiffs further acknowledge that their claims arose out of this contract, and Batterson admits that the contract created BCZ and governed its operation for a period of time. See, Compl. ¶ 2 (alleging that "Plaintiffs' claims arise out of the relationship between Defendant Batterson and Plaintiffs Cross and Zakin that was formed by an Agreement between the parties relating to the formation and operation of an entity known as Batterson Cross Zakin, LLC"); ECF No. 8 (Def.'s Answer) ¶ 2 (admitting that "there was an agreement, dated as of September 23, 2005, between Batterson and Plaintiffs that, among other things, 'related to the . . . operation of an entity known as Batterson Cross Zakin, LLC'"); id. ¶ 9 (admitting that "BCZ was at a time governed by . . . [the] Operating Agreement").

         At some point, however, the two sides' stories diverge. As is crucial to their lawsuit, Plaintiffs allege that they "[n]ever resigned their respective position as Managing Principals of BCZ." Compl. ¶ 17. Plaintiffs thus maintain that they "remain Managing Principals of BCZ" and that they " [n] ever signed or consented to any amendments to the BCZ Agreement." Compl. ¶¶ 17-18. Batterson denies these allegations. Def.'s Answer ¶¶ 17-18. Nonetheless, because the allegations are accepted as true at this stage of the litigation, Batterson stands accused of breaching the Operating Agreement for taking actions that were never approved by his fellow managers.

         Specifically, Batterson is alleged to have violated the Operating Agreement by engaging in the following conduct. First, he "unilaterally caused the BCZ Agreement to be 'amended' in January 2010, " something he did "without permission and without notice to Cross or Zakin, and without authority or consent of the BCZ Board of Managers." Compl. ¶ 23. Second, he changed BCZ's name to Batterson Venture, LLC. Id. ¶ 22. Third, he sold "interests in BCZ to third parties in such a manner" that "Cross and Zakin's respective ownership interests in [the putative new company] were [reduced to] only approximately 1 percent each." Id. Finally, Batterson used the money raised from the third parties "to pay himself compensation, salary, or other distributions that were not authorized by BCZ's Board of Managers." Id. ¶ 24.

         Plaintiffs further allege that they did not discover these breaches to the Operating Agreement until late 2015, or about a decade after the contract was executed and five years after the purported amendment to it took place. See, Compl. ¶ 21. The impetus for Plaintiffs' discovery was the sale of one of BCZ's investments to IBM for a handsome sum. As Plaintiffs state, "BCZ was and is the manager for another entity, BVC-Cleversafe, LLC, " which "made direct investment in a company named Cleversafe." Id. ¶ 19. On "information and belief, " Plaintiffs further state that "Cleversafe was acquired by IBM at the end of 2015 or during 2016." Id. Upon the same information and belief, Plaintiffs allege that the transaction generated substantial revenues that should have accrued to them. Id. ¶¶ 19-20 ("Upon information and belief, at least $6 million of the money paid by IBM to BVC-Cleversafe . . . BCZ is entitled [to] . Cross and Zakin are each entitled to not less than 21.25 percent of any management fees paid by BVC-Cleversafe, LLC") .

         After learning of the acquisition of Cleversafe by IBM, Cross and Zakin "contacted Batterson to confirm how much money each would be receiving." Compl. ¶ 21. This was when Batterson told them the unwelcome news that due to what he had done, Plaintiffs were not entitled to any money (or not as much as they thought) . The information, dismaying as it may have been, came "belatedly" and only after "repeated efforts to obtain additional information from Batterson." Id. ¶ 24.

         On the strength of these allegations, Plaintiffs bring a five-count Complaint. In addition to the breach of contract claim (Count I), Plaintiffs bring four other causes of action that are the subject of this motion to dismiss. They are: breach of the implied covenant of good faith and fair dealing (Count II), "fraud by/fraudulent concealment" (Count III), unjust enrichment (Count IV), and accounting (Count V).

         For the reasons explained herein, the Court grants Batterson's Motion to Dismiss these four counts.

         II. ANALYSIS

         As an initial matter, the parties agree that Delaware contract law applies to the present action. The Court thus adopts that choice of law without further comment. The Court also acknowledges that, due to the state residences of the parties and the amount in controversy, it has diversity jurisdiction in this case. See, 28 U.S.C. § 1332; Compl. ¶¶ 3-6.

         Batterson moves under Rule 12(b)(6) to dismiss all but the breach of contract claim. In ruling on his Motion, the Court freely consults the Operating Agreement, even though that document was only referenced in but not attached to Plaintiffs' Complaint. See, Grabianski v. Bally Total Fitness Holding Corp., .891 F.Supp.2d 1036, 1042-43 (N.D. Ill. 2012) (citing authorities to support the proposition that ...

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