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Shah v. Sheth

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

August 21, 2019




         Plaintiffs Haresh Shah and Rilwala Property Management, LLC bring this purported derivative suit against Defendant Nishant Sheth and nominal Defendant Madeira Boulevard Investments, LLC. Defendants move to dismiss on the grounds that Plaintiffs lack standing. For the reasons stated herein, Defendants' Motion to Dismiss (Dkt. No. 12) is granted.

         I. BACKGROUND

         Two Plaintiffs bring this case: Haresh Shah, an individual, and Rilwala Property Management (“Rilwala”), an Illinois limited liability company (LLC). (Am. Compl. ¶¶ 1-2, Dkt. No. 11.) Plaintiffs are suing Defendants Nishant Sheth, an individual, and Madeira Boulevard Investments (“Madeira”), a Delaware LLC. (Am. Compl. ¶ 4.) Haresh Shah has a limited power of attorney for Suresh Shah. (Am. Compl. ¶ 6; Amended Limited Power of Attorney for Real Estate and Legal Proceedings (“POA”), Ex. B to Am. Compl., Dkt. No. 11-2.) As these two individuals share a last name, the Court will refer to them as “Haresh” and “Suresh.”

         Suresh and Sheth are the sole members of Madeira. (Am. Compl. ¶ 6.) Sheth owns a 60% interest in Madeira; Suresh owns 40%. (Id.) Voting rights in Madeira are divided 50-50 between Sheth and Suresh. (Id.) Madeira owns only one material asset: a parcel of land and a house, located at 121 N. Madeira Beach Boulevard, Kissimmee, Florida (the “House”). (Am. Compl. ¶16.) Rilwala is Madeira's principal creditor. (Am. Compl. ¶ 14.) Madeira owes Rilwala over $250, 000. (Id.) Haresh is the principal member and manager of Rilwala. (Am. Compl. ¶ 15.)

         Plaintiffs contend that on September 20, 2018, Sheth conveyed the House to himself, without any consideration paid to Madeira. (Am. Compl. ¶ 18.) This transfer rendered Madeira insolvent and unable to pay its creditors. (Am. Compl. ¶ 19.) Plaintiffs allege that Sheth conveyed the House to himself without Suresh's consent and in violation of Rilwala's rights as Madeira's principal creditor. Thus, Plaintiffs contend, Sheth unjustly enriched himself and breached his fiduciary duty to Madeira and its creditors.

         Plaintiffs seek the following remedies: (1) declaratory judgment that Sheth, or any entity Sheth controls, holds the House solely as a trustee of Madeira and its creditors; (2) removal of Sheth as Madeira's manager; and (3) damages in an amount equal to the value of the House, in the event that the House is not re-conveyed to Madeira free and clear of any lien or encumbrance. Defendants now move to dismiss the Amended Complaint on the basis that neither Haresh nor Rilwala have standing to bring a shareholder's derivative action against Madeira.


         In the first sentence of their Motion to Dismiss, Defendants state that they bring the motion under Federal Rule of Civil Procedure 12(b)(1), 12(b)(6), and 17(a)(1). However, despite this brief reference to Rules 12(b)(6) and 17(a)(1), Defendants' motion primarily challenges standing and thus falls under Rule 12(b)(1). Regardless, for purposes of a motion to dismiss under both Rules 12(b)(1) and 12(b)(6), a court accepts all well-pleaded allegations contained in the complaint as true and draws all reasonable inferences in favor of the plaintiff. Scanlan v. Eisenberg, 669 F.3d 838, 841 (7th Cir. 2012); McReynolds v. Merrill Lynch & Co., Inc., 694 F.3d 873, 879 (7th Cir. 2012). Under Rule 12(b)(1), the plaintiff bears the burden of establishing that the court has jurisdiction over its claims. United Phosphorous, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir. 2003) (en banc). The court may consider matters outside of the complaint in ruling on a motion to dismiss for lack of subject-matter jurisdiction. Ezekiel v. Michel, 66 F.3d 894, 897 (7th Cir. 1995).

         A Rule 12(b)(6) motion to dismiss tests the legal sufficiency of the complaint and not the merits of the case. McReynolds, 694 F.3d at 878. The allegations in a complaint must set forth a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). A plaintiff need not provide detailed factual allegations and merely must provide enough factual support to raise his right to relief above a speculative level. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). A claim must be facially plausible, meaning that the pleadings must allow the court to draw the reasonable inference that the defendant is liable for the purported misconduct. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).


         A. LLC Derivative Suit

         In a derivative suit, an individual shareholder sues to enforce the corporation's right to proceed against officers, directors, and third parties. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991). Defendants initially argue that a derivative action is for corporations and shareholders only; thus, because Madeira is an LLC and has “members” rather than “shareholders, ” this case cannot state a claim. (See Defs.' Mot. at 2, Dkt. No. 12 (“Obviously, with no shareholders there can be no shareholder derivative lawsuit.”).) Because Madeira is incorporated in Delaware, Delaware law controls this issue. See Westmoreland Cty. Employee Ret. Sys. v. Parkinson, 727 F.3d 719, 725 (7th Cir. 2013).

         However, within the same motion to dismiss, Defendants concede that Delaware law provides for derivative actions by LLC members. See Del. Limited Liability Company Act (the “LLC Act”), 6 Del. C. § 18-1001 (“A member or an assignee of a limited liability company interest may bring an action in the Court of Chancery in the right of a limited liability company to recover a judgment. . .”); see also Kroupa v. Garbus, 583 F.Supp.2d 949, 952 (N.D. Ill. 2008) (“Delaware law explicitly allows for LLC members to bring derivative claims.”). It is unclear why Defendants raised this argument only to immediately concede it, other than perhaps to point out Plaintiffs were wrong to label their complaint a “shareholder” derivative suit; regardless, it is ...

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