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Chatz v. World Wide Wagering, Inc.

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

September 11, 2019

BARRY A. CHATZ, Plaintiff,
WORLD WIDE WAGERING, INC., et al., Defendants.


          John J. Tharp, Jr. United States District Judge.

         Horse racing “has an unsavory, or at least a shadowed, reputation, growing out of a long history of fixing, cheating, doping of horses, illegal gambling, and other corrupt practices.” Dimeo v. Griffin, 943 F.2d 679, 681 (7th Cir. 1991) (en banc). This case does not implicate the integrity of any racing results, but nevertheless involves a series of allegedly corrupt practices engaged in by the directors of two now-defunct horse racing tracks, Balmoral Racing Club, Inc. (“Balmoral”) and Maywood Park Trotting Association, Inc. (“Maywood”). In 2006 and 2008, to assist the struggling horse racing industry, the Illinois legislature passed two statutes that ultimately provided for the distribution of roughly $56 million in funds to Balmoral and Maywood. Yet according to the plaintiff-Barry Chatz, the Trustee of the Balmoral Racing Club, Inc. and Maywood Park Trotting Association, Inc. Creditor Trust-much of this money was misappropriated. The Trustee asserts that the directors of Balmoral and Maywood made a series of illegal payments, totaling approximately $20 million, to enrich themselves and others before the tracks ultimately filed for bankruptcy in December 2014. The defendants, including those directors as well as other individuals and related corporate entities, have moved to dismiss eight of the nine counts listed in the Trustee's amended complaint. They have also moved to strike certain allegations in the complaint under Fed.R.Civ.P. 12(f). The motion to dismiss and the motion to strike are both denied.


         Balmoral and Maywood were two Illinois racetracks, formerly located in Crete and Melrose Park, respectively. In the 1980s, both Balmoral and Maywood were purchased by a group of individuals led by William H. Johnston, Jr. (“Billy Johnston”). See Am. Compl. for Breaches of Fiduciary Duties, Civil Conspiracy, Fraudulent Transfers, Preferential Transfers, Declaratory J. and Turnover (“Am. Compl.”) ¶ 2, 25, ECF No. 24. At the time of the events at issue in this case, the companies that operated the racing tracks were both controlled by a single board of directors.[2]The members of the board included Billy Johnston, his sons John Johnston and William H. Johnston III (“Duke Johnston”), and other associates of the Johnston family, including Steven E. Anton, Phillip Langley, Lester McKeever, and Stephen Swindal. Id. ¶¶ 2-3. All of these directors-except for John Johnston, who has previously settled claims against him-are defendants in this action. See Id. ¶¶ 2-3. Both tracks were owned by a holding company, defendant World Wide Wagering, Inc. (“WWW”), which had no employees and whose sole assets were Balmoral and Maywood. See Id. ¶ 15.

         While horse racing had historically been a popular spectator sport, its popularity declined over time. By 2009, for example, Balmoral and Maywood were each losing approximately $1 million to $2 million each year. See Id. ¶ 26. Many attribute the decline in racing revenues to the advent and growth of casino gambling. Beginning in 2006, the Illinois General Assembly passed two successive statutes that were intended to assist the horse racing industry, which are known as the “Racing Acts.” Both laws required four Illinois casinos to pay 3 percent of their revenues into a fund for redistribution to various horse racing tracks in Illinois, including Balmoral and Maywood. See Id. ¶¶ 27, 34. Each law contained a sunset provision: the first one was enacted in May 2006, remained in effect for two years, and then expired in May 2008. See Id. ¶¶ 28, 32. The second, which was signed into law in December 2008, effectively extended the provisions of the first one. See Id. ¶¶ 32, 34.

         Upon the passage of the first Racing Act, the affected casinos immediately challenged the validity of the law in court; they would later do the same for the second act after it was enacted. As a result, when the first act took effect, and the casinos began complying with it by paying 3 percent of their revenues, these monies were put into a protest fund. See Id. ¶ 30. The funds were not available to the racetracks while the litigation proceeded, but were ultimately disbursed in late 2011. By that time, the casinos had paid about $141.8 million under the Racing Acts, and approximately $56 million of that was released to Balmoral and Maywood. See Id. ¶ 35.

         The Racing Acts required that 40 percent of the funds disbursed to the racetracks be used to improve, maintain, market, and operate the racing facilities, while the other 60 percent was to support prize money for races. Id. ¶ 41. The board that controlled Balmoral, Maywood, and WWW, however, had other plans. Instead, from 2012 to 2014, the board used the Racing Act funds to make a series of payments, totaling roughly $20 million. These payments took various forms. Some went to the directors themselves, including in the form of directors' fees and increased executive compensation. See Id. ¶ 95. Other “distributions” were funneled through WWW, and went to the directors, their families, and related trusts.[3] See Id. ¶¶ 45, 95. Still other payments went to a separate company named Coast to Coast Food Service, Ltd. (“Coast to Coast”), which provided food and beverage services at the tracks; Coast to Coast was controlled by the same board of directors that oversaw WWW, Balmoral, and Maywood. See Id. ¶¶ 2, 16. The complaint alleges that the defendants used a variety of mechanisms to direct profits to Coast to Coast and losses to Balmoral and Maywood.

         Meanwhile, a separate lawsuit was proceeding against John Johnston, Balmoral, and Maywood. In 2008, Johnston, on behalf of Balmoral and Maywood, had agreed to make a $100, 000 contribution to the campaign fund of then-Illinois Governor Rod Blagojevich-in other words, a bribe-to convince Blagojevich to sign the 2008 Racing Act into law.[4] Id. ¶¶ 33-34. The casinos' second lawsuit alleged that Balmoral and Maywood had engaged in a conspiracy to violate the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq., and brought other claims for civil conspiracy and unjust enrichment. That case proceeded to a jury trial in December 2014. The jury ruled in the casinos' favor and awarded $25, 940, 000 in damages, which was trebled under RICO to $77, 820, 000. Empress Casino Joliet Corp. v. Balmoral Racing Club, Inc., 831 F.3d 815, 820 (7th Cir. 2016). The Seventh Circuit would later reduce the damages to $25, 940, 000, concluding that the casinos were entitled to that amount based on the state-law claims, but not to have the damages trebled under RICO. Id.

         The judgment on the jury's $77.8 million verdict was entered on December 10, 2014. Am. Compl. ¶ 39. Two weeks later, on December 24, Balmoral and Maywood each filed for bankruptcy under Chapter 11, automatically initiating proceedings in the bankruptcy court in this district. Id. In August 2016, the bankruptcy court affirmed a joint liquidating plan. The plan created a creditor trust, named Barry Chatz as Trustee, and preserved several causes of actions for the Trustee. In December 2016, the Trustee filed an adversary complaint in the bankruptcy court. Several groups of defendants moved to dismiss that complaint. In May 2017, in an oral ruling, Bankruptcy Judge Cassling dismissed certain of the Trustee's claims without prejudice and with leave to replead, and dismissed others for lack of subject-matter jurisdiction. Shortly after that ruling, the Trustee filed a motion to withdraw the reference, which this Court granted. See generally Order and Statement, ECF No. 20.

         After the Court granted the motion to withdraw the reference, the Trustee filed an amended complaint in this Court. The defendants responded by filing a motion to dismiss, asking this Court to dismiss eight of the nine counts listed in the amended complaint under Fed.R.Civ.P. 12(b)(6). In the same motion, the defendants have also asked the Court to strike certain allegations in the complaint under Rule 12(f). That motion is now before this Court.


         I. Motion to Dismiss

         A. Pleading Requirements

         A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint. Hallinan v. Fraternal Order of Police of Chicago Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). To survive such a motion, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (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.” Id.

         The amended complaint and the motion to dismiss in this case follow a familiar pattern. That is, the complaint sets forth nine “counts, ” and the motion to dismiss responds by addressing eight of the nine counts and attempting to shoot each one down in succession. This approach, while common in litigation, obscures the important difference between claims and counts. A claim is a set of facts that could entitle the plaintiff to relief under some legal theory. Counts, in contrast, “describe legal theories by which those facts purportedly give rise to liability and damages.” Volling v. Antioch Rescue Squad, 999 F.Supp.2d 991, 996 (N.D. Ill. 2013). While pleading in counts is often useful, it is not required unless “doing so would promote clarity” and “each claim [is] founded on a separate transaction or occurrence.” Fed.R.Civ.P. 10(b). Indeed, it is a well-established principle that “complaints need not plead legal theories” at all. Jogi v. Voges, 480 F.3d 822, 826 (7th Cir. 2007). The complaint must simply provide “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2).

         This distinction has significant implications. For one thing, because a claim consists of a set of facts, “[o]ne set of facts producing one injury creates one claim for relief, no matter how many laws the deeds violate.” NAACP v. Am. Family Mut. Ins. Co., 978 F.2d 287, 292 (7th Cir. 1992). However many counts a plaintiff may plead, they constitute a single claim to the extent that they are premised on the same facts. Another consequence follows from the fact that Rule 12(b)(6) does not allow for “piecemeal dismissals of parts of claims.” BBL, Inc. v. City of Angola, 809 F.3d 317, 325 (7th Cir. 2015) (emphasis in original). A Rule 12(b)(6) motion should therefore be granted only when the facts in the complaint, taken as true, do not state a plausible claim under any recognized legal theory. Volling, 999 F.Supp.2d at 996; see also Richards v. Mitcheff, 696 F.3d 635, 638 (7th Cir. 2012). The Federal Rules of Civil Procedure allow for dismissal of a complaint for failure to state a claim, but they provide no basis “for striking individual legal theories.” Zidek v. Analgesic Healthcare, Inc., No. 13 C 7742, 2014 WL 2566527, at *2 (N.D. Ill. June 6, 2014). Thus, if there is any identifiable legal theory that supports a given claim, that claim survives, and the Court has no need-or authority-to “dismiss” alternative legal theories presented in support of that claim at this stage of the litigation.

         B. The Trustee's Claims

         The Trustee's amended complaint lists nine counts.[5] The defendants have asked the Court to dismiss all of them except for Count VI. As each “count” is properly understood as a legal theory rather than a claim, the Court's first task is to determine how many claims are advanced in the complaint and the claims to which each count applies. As the Court reads the complaint, it puts forward three claims. The first and most important one is that the director defendants made a series of payments from Balmoral and Maywood to themselves and others. These payments took various forms, such as distributions, increased executive compensation, directors' fees, and “pre-paid” expenses to Coast to Coast. But the essence of the claim is that all of these payments, which added up to approximately $20 million, were unlawful. These payments form the basis for Count I, which charges that they represented a breach of the defendants' fiduciary duties as directors of Balmoral and Maywood.

         In addition, these payments are also the basis for Counts III, IV, and V. In those three counts, the Trustee invokes 11 U.S.C. § 548, which provides a mechanism for a trustee to “avoid” transfers made by debtors under certain circumstances. The complaint separates the payments out based on who the recipient was: Count III covers the directors; Count IV covers the Johnston family and related trusts; and Count V covers Coast to Coast. All of the transfers that the Trustee seeks to avoid in these counts, however, appear to consist of the same payments made by the director defendants in Count I. Compare Am. Compl. ¶ 95, with Am. Compl. ¶¶ 114, 125, 131. In short, breach of fiduciary duty and avoidance are simply alternative legal theories that, according to the complaint, allow the Trustee to recover for the same underlying payments.[6]

         The Court similarly concludes that the payments are also the basis for Count VII, for unjust enrichment. One might argue, to the contrary, that Count VII is a distinct claim, because the conduct at issue in that count is the act of retaining the payments, not making them. See Id. ¶ 146 (asserting that the defendants “have each retained improper distributions, executive compensation, directors' fees, ‘pre-paid expenses' and fraudulent transfers made to them”). The problem with this approach, however, is that the charge of unjust enrichment presumes that the payments were unlawful. See Id. (“For them to retain this money, obtained in violation of the law, while Balmoral and Maywood's actual creditors go unpaid, violates fundamental principles of justice, equity, and good conscience.”) (emphasis added). That is, the only reason why the defendants' “enrichment” would be “unjust” is if the payments were made in violation of the law. Thus, at its core, Count VII is premised on the same conduct as Counts I, III, IV, and V.

         The second claim is that the directors entered into a conspiracy among themselves. This is the essence of Count II, for civil conspiracy. The object of the conspiracy was to make the same $20 million in payments. But the conduct encompassed by the claim is the agreement among the directors to use the Racing Act funds for that purpose. The complaint alleges that the agreement began as early as May 2009. See Id. ΒΆ 102. It further alleges that the director defendants took a series of steps in furtherance of this conspiracy. These included not just making the payments themselves but also misleading regulators at the Illinois Racing Board in order to obscure the fact ...

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