United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
D. Leinenweber, Judge
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.
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.
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) .
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.
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.
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
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.
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.
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") .
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.
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).
reasons explained herein, the Court grants Batterson's
Motion to Dismiss these four counts.
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.
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 ...