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Mandelstein v. Rukin

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

August 16, 2019

BARBARA MANDELSTEIN and MICHELLE MANDELSTEIN, Plaintiffs,
v.
LINDA RUKIN and MOONSTONE ASSET MANAGEMENT, INC., Defendants.

          MEMORANDUM OPINION AND ORDER

          Robert M. Dow, Jr. United States District Judge.

         Plaintiffs Barbara Mandelstein (“Barbara”) and Michelle Mandelstein (“Michelle”) bring this diversity action against Defendants Linda Rukin (“Rukin”) and Moonstone Asset Management, Inc. (“Moonstone”) for tortious interference (Counts I and III) and unjust enrichment (Counts II and IV). The Court previously denied without prejudice Rukin's motion to dismiss the complaint for failure to state a claim [12] and Moonstone's motion to dismiss the complaint for failure to state a claim [22], pending the final resolution of any appeals from the November 15, 2017 Ruling and Order of the Illinois Circuit Court, Probate Division, in No. 14 P 899. The deadlines to file a petition for rehearing or a petition for leave to appeal to the Illinois Supreme Court have passed, and Plaintiff voluntarily dismissed Defendant Rukin, leaving only Counts I and II against Moonstone. Currently before the Court is Defendant's renewed motion to dismiss for failure to state a claim [54]. Defendant's motion to dismiss [54] is granted, and the Complaint [1] is dismissed with prejudice. Civil case terminated.

         I. Background[1], [2]

         Plaintiffs Barbara, a citizen of Florida, and her daughter Michelle, a citizen of New York, are the direct and only beneficiaries of the estate of Leslie Mandelstein (the “Leslie Estate”). Linda Rukin, a citizen of Illinois, is Leslie's sister and the sole beneficiary of the estate of their father, Lester Mandelstein (the “Lester Estate”).[3]

         Before they died, Lester Mandelstein (“Lester”) and Leslie Mandelstein (“Leslie”) operated three separate successful financial planning businesses with nearly $20, 000, 000 in assets under management. The complaint refers to three businesses that Lester and Leslie operated- Lester's sole proprietorship, Leslie's sole proprietorship, and the Custom Planning Group, LLC (“CPG”)-collectively as the “Business.”

         Leslie died on August 31, 2014. At the time of Leslie's death, his sole proprietorship had 48 clients with approximately $7.5 million in assets under management, Lester had 44 clients with approximately $12.7 million in assets under management, and CPG had 27 clients with approximately $3.9 million in assets under management. At the time of Leslie's death, CPG was worth $72, 693.00, Lester's sole proprietorship was worth $256, 784.64, and Leslie's sole proprietorship was worth $154, 925.88. Plaintiff alleges that within days of Leslie's death, Lester offered Barbara $200, 000 to purchase Leslie's share of the Business, including Leslie's sole proprietorship. Barbara accepted. But Rukin disagreed with the payment because it would reduce the benefit she would receive from a sale of the Business. The transaction was never completed.

         Instead, the complaint alleges, Lester attempted to move all of Leslie's clients to himself and, with the assistance of Rukin, hid client files, and locked Barbara out of the office. Within months, Lester sold “his” clients to Moonstone for cash and future consideration-including an employment contract for Rukin, who also continued to receive 50% of commissions on the accounts transferred to Moonstone. Plaintiffs allege that Lester concealed all of this from the Leslie estate, with Moonstone's assistance.

         In February 2015, Barbara, as Independent Executor of the Leslie Estate, filed the Probate Case against CPG and Lester in Illinois Circuit Court to recover Leslie's interest in CPG. The complaint contained the following counts: demand for accounting to CPG; breach of fiduciary duty against Lester; constructive trust against Lester and CPG; conversion against Lester; and dissociation from LLC/purchase of Decedent's membership interest.

         Lester died during the course of the Probate Case and his estate was substituted as a defendant. Rukin was appointed administrator of the Lester Estate. In July 2015, Paulson Wealth Management (“Paulson”) offered to purchase all of the Business accounts for $500, 000.

         On November 15, 2017, the Probate Court issued its final Ruling and Order in the Probate Case. Plaintiffs attach the Ruling and Order as an exhibit to their complaint. See [1] at 13. The Ruling and Order summarizes Barbara's position in the Probate Case as follows: CPG was a “consolidated” entity that consisted of Lester's clients, Leslie's clients, and CPG's clients. [1] at 18. Pursuant to the Illinois LLC Act, Leslie's estate was entitled to the fair value of 50% of CPG at the time of Leslie's passing, which was $242, 201. Lester owed Leslie a fiduciary duty as a member of CPG, which was breached when Lester “locked the office, hid the files, transferred the clients into his name, and sold the business without paying Leslie's estate anything.” [1] at 20. Barbara requested “in the alternative that if the Court finds that CPG did not include Lester and Leslie's sole proprietorship then 50% of CPG and Leslie's sole proprietorship would total $191, 423.88[.]” Id. at 21.

         The Probate Court summarized the defendants' arguments as follows: There was no consolidated CPG but instead “three separate businesses: the sole proprietorship of Lester, the sole proprietorship of Leslie, and CPG.” [1] at 22. Lester did not owe Leslie any fiduciary duty once Leslie died. Instead, the only duty Lester owed was under the Illinois LLC Act to purchase a distributional interest of the member for its fair value. Leslie's death terminated his relationship with his clients, who were free to choose a new person to service their accounts.

         The Probate Court concluded that the evidence supported the existence of three separate business entities-Lester's sole proprietorship, Leslie's sole proprietorship, and CPG-rather than a consolidated CPG. According to the Probate Court, “[t]his case is about CPG only, nothing has been pled regarding Leslie's Sole Proprietorship.” [1] 25. The Probate Court concluded that the Leslie Estate was entitled to $19, 707 for Leslie's share of CPG, plus $17, 000 for advisory fees earned by Leslie prior to his death. See id. at 30. The Court further concluded that “Lester did not owe Leslie any fiduciary duty as a member of CPG after Leslie died except to buy out Leslie's interest pursuant to statute, ” that “[t]he clients that were CPG's clients could no longer be shared with Leslie after Leslie's death due to the restrictions on receipt of investment advisory fees under the law, ” and that “[a]ll the arguments about Lester stealing Leslie's clients, changing the locks, hiding the files and not involving Barbara in the future sale of the business amount to nothing.” Id. at 27-28. The Probate Court declined to award either party punitive damages, concluding that although “[t]he animosity between Barbara and [Rukin] was evident, ” it did not rise to the level of “an ‘evil motive' or ‘reckless indifference' or other outrageous conduct that would allow for attorney's fees, costs, expenses or punitive damages for the Plaintiff.” Id. at 29.

         Both parties appealed the Probate Court's final Ruling and Order. Additionally, on December 21, 2017, Plaintiffs filed the instant lawsuit against Rukin and Moonstone. In their tortious interference claim against Moonstone (Count I), Plaintiffs allege that Moonstone intentionally interfered with their receiving any value for Leslie's sole proprietorship by intentionally revising the purchase agreement language to conceal that the sale included Leslie's sole proprietorship; purchasing the sole proprietorship without paying full value “by concealing it within the Business”; paying Rukin to facilitate the transfer of Leslie's sole proprietorship; and concealing the purchase of the sole proprietorship from Plaintiffs. In the unjust enrichment claim against Moonstone (Count II), Plaintiffs allege that Moonstone benefitted from receiving Leslie's sole proprietorship “at a steep discount” without paying anything to Leslie's heirs and that it would be inequitable to retain those benefits. [1] at 8. Plaintiffs pled similar claims against Rukin in Counts III and IV.[4] In the tortious interference claim against Moonstone, Plaintiffs allege that they “suffered damages as a result of the loss of [their] inheritance in the amount of $154, 925.88.” [1] at 7.

         On January 18, 2018, Rukin filed a motion to dismiss the complaint. Rukin argued that the doctrines of res judicata and collateral estoppel barred Plaintiffs' claims and that Plaintiffs failed to allege all the essential elements of their tortious interference and unjust enrichment claims. On March 5, 2018, Moonstone filed its own motion to dismiss the complaint, arguing that Plaintiffs' claims against it are barred by collateral estoppel and fail to plead all essential elements.

         On April 10, 2018, Barbara filed her brief in her appeal from the Probate Court's final Ruling and Order. The Court takes judicial notice of the appellate brief. See [38]. In her “Statement of the Case, ” Barbara summarizes the parties' dispute as follows:

Lester[] and Leslie[], both now deceased, were equal members of a successful financial planning business with nearly $20, 000, 000 in assets under management, [CPG] and two sole proprietorships operating under the same roof with shared expenses. Leslie died on August 31, 2014 and Lester continued with the three business and eventually sold all three, without making any distribution to Leslie's Estate, instead giving the proceeds to [] Rukin.
Sadly, as was made clear at trial, rather than distributing Leslie's share of the business to Leslie's widow, [Barbara], immediately following Leslie's death, Lester greedily attempted to move all the clients to himself from both Leslie's sole proprietorship and Leslie's clients in CPG. Lester literally hid client files and physically locked Barbara out of the office when Leslie became gravely ill in order to achieve the transition of Leslie's clients to Lester.
Mere months later, after finagling CPG's and Leslie's accounts, Lester sold “his” clients to [Moonstone] for cash and future consideration including, apparently, lucrative employment for his dependent daughter Rukin who also continues to receive 50% of commissions on the accounts transferred to Moonstone through Lester's Trust. Further, Lester concealed his negotiations and eventual sale to Moonstone from Leslie's Estate. As a result of Lester's treachery, Leslie's wife and daughter were left with nothing from Leslie's business while Lester and Rukin took the full benefit. ***

[26-1] at 5-6. Barbara also argued in her appellate brief that the Probate Court erred as a matter of law by holding that Leslie's sole proprietorship was not at issue in the pleadings in the case. See id. at 3, 30-32. According to Barbara, the Circuit Court “erred in rigidly construing the pleadings and not at least finding the construction of the pleadings was waived, ” given that “Plaintiff's expert was allowed to opine without objection as to the value of Leslie's sole proprietorship” and “Plaintiff's pre-trial and post-trial briefs *** argued the value of Leslie's sole proprietorship.” Id. at 32.

         On August 31, 2018, the Illinois Appellate Court issued an order affirming the Probate Court. The Appellate Court specifically held that (1) the Probate Court did not abuse its discretion in denying the Leslie Estate's motion for leave to file a jury demand; (2) the Probate Court did not err as a matter of law in finding that Lester and CPG did not owe a fiduciary duty to the Leslie Estate; (3) the Probate Court did not abuse its discretion in denying the Leslie Estate's request for expenses pursuant to section 35-65(d) of the Limited Liability Company Act; and (4) the Probate Court did not err as a matter of law in concluding that the Leslie Estate failed to plead a cause of action for recovery of the value of Leslie's sole proprietorship. On September 14, 2018, this Court denied without prejudice Rukin's motion to dismiss the complaint for failure to state a claim [12] and Moonstone's motion to dismiss the complaint for failure to state a claim [22]. See [41]. Although the Illinois Appellate Court issued its ruling on August 31, the Leslie Estate's time to file a petition for rehearing or a petition for leave to appeal to the Illinois Supreme Court had not yet expired. The Court noted a split in Illinois authority on the question of whether an order is final for purposes of res judicata when an appeal is pending and, following the “prudent course” urged by the Seventh Circuit, stayed the case until the appeals had concluded. See Rogers v. Desiderio, 58 F.3d 299, 302 (7th Cir. 1995).

         The Leslie Estate did not file a petition for rehearing or a petition for leave to appeal to the Illinois Supreme Court within the respective deadlines. See [42]. Plaintiffs then voluntarily dismissed the claims against Rukin. See [43] and [47]. Counts I and II against Moonstone remain pending, [5] and on ...


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