Bi3 Inc. An Illinois Corp. v. Hamor, Case No. 08 CV 2384

BI3, INC. an Illinois Corporation, and KENNETH TOLA, Jr., Plaintiffs,

v. ALAN B. HAMOR, WK NETWORKS, Inc. a Delaware Corporation,and CAMPAIGNLOCAL, Inc., a Delaware Corporation, Defendants.

Case No. 08 CV 2384

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

October 20, 2011

Magistrate Judge Young B. Kim

MEMORANDUM OPINION and ORDER

Plaintiffs Kenneth Tola, Jr. and BI3, Inc. (together, "the plaintiffs"), then citizens of Illinois, brought multiple state law claims against Defendants Alan Hamor, WK Networks, Inc., and Campaign Local, Inc. (collectively, "the defendants"), all citizens of New Jersey and/or Delaware, and alleged that the court had diversity jurisdiction over those claims. During the course of the litigation, the plaintiffs moved to New Jersey and became citizens of that state. A year later, the plaintiffs filed an amended complaint that explicitly incorporated every allegation and claim asserted in the original complaint and asserted new claims. Discovery continued, and at Tola's June 2009 deposition, the defendants learned that he had moved to New Jersey. Despite their awareness of Tola's change in citizenship, the defendants continued to litigate the case for over two years. Just days before trial was scheduled to begin, the defendants moved to dismiss the amended complaint pursuant toFederal Rules of Civil Procedure 12(b)(1) and 12(h)(3) for lack of subject matter jurisdiction. For the following reasons, the motion is denied:

Procedural History

The plaintiffs initiated this case in April 2008 by filing a complaint for damages and for equitable and declaratory relief. The complaint alleged that Kenneth Tola was a resident and citizen of Illinois, (R. 1, Compl. ¶ 1), and that BI3, Inc. ("BI3") a corporation owned by Tola, was organized under Illinois law and had its principal place of business in Illinois, (R. 1 ¶¶ 3,4). Regarding the citizenship of the defendants, the complaint alleged that Alan Hamor was a citizen of New Jersey, (R.1 ¶ 5), and that WK Networks, Inc. ("WK Networks") and CampaignLocal, Inc. ("CampaignLocal") were both Delaware corporations with principal place of business in New Jersey. The defendants admitted these allegations in their answer. (R.11, Ans. ¶¶ 5-6, 8.) The plaintiffs alleged that "[s]ubject matter jurisdiction exists by virtue of 28 U.S.C. § 1332, diversity jurisdiction, in that this is an action between citizens of different states and the amount in controversy, exclusive of interest and costs, exceeds $75,000." (R.1, Compl. ¶ 14.)

The defendants responded in May 2008 with an answer, affirmative defenses, and state-law counterclaims against the plaintiffs. (R. 11.) The defendants also asserted that federal jurisdiction over their counterclaims was proper based upon diversity jurisdiction. (R. 11, Counterclaim ¶ 10.) The parties consented to the jurisdiction of Magistrate Judge Keys, see 28 U.S.C. 636(c), and began the discovery process.

In December 2008 Tola moved to New Jersey. Five months later, BI3 qualified to do business in New Jersey. Shortly thereafter, in May 2009, the plaintiffs filed an amended complaint explicitly incorporating by reference every allegation and claim asserted in the original complaint, (R. 51, Am. Compl. ¶¶ 207, 223, 238), asserting additional state law claims, and also asserting one federal claim under the Stored Wire and Electronics Act, 18 U.S.C. § 2701.¹ The amended complaint did not mention the plaintiffs' change of citizenship nor did it assert new jurisdictional allegations. The defendants, however, learned of the plaintiffs' change of citizenship a month later in June 2009 during their deposition of Tola. The defendants did not challenge the court's subject-matter jurisdiction at that time.

In May 2010 this case was reassigned to this court. (R. 107.) Since then, this court has resolved Defendants' Motion to Dismiss Counts IV-IX, dismissing counts four through eight of the amended complaint. (R. 137-39.) On the parties' cross-motions for summary judgment, this court ruled that the defendants were entitled to summary judgment in their favor on counts three and nine of the amended complaint and that the plaintiffs were entitled to summary judgment in their favor on counts two through seven of the counterclaims. (R. 140.) After the final pretrial conference, and just four days before trial was scheduledto begin, the defendants moved to dismiss the plaintiffs' amended complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(h)(3) for lack of subject matter jurisdiction.

Facts

The facts relevant to the current motion are those relating to the citizenship of the parties and the filing of pleadings, discussed above, and facts relating to the nature of the relationship between Tola and Hamor. In considering a motion to dismiss for lack of subject matter jurisdiction, the court "must accept as true all well-pleaded factual allegations and draw all reasonable inferences in favor of the plaintiff." St. John's United Church of Christ v. City of Chicago, 502 F.3d 616, 625 (7th Cir. 2007) (citations omitted).

Kenneth Tola is the president and sole shareholder of BI3. (R. 1, Compl. ¶ 4.) Alan Hamor is the Chairman and CEO of WK Networks and CampaignLocal and maintains control over the affairs of both corporations. (R. 11, Ans. ¶¶ 7, 9.) In 2006 the plaintiffs began providing consulting services to WK Networks on a project known as AutomoAds. (R. 1, Compl. ¶¶ 21, 24, 36.) BI3 provided the consulting services pursuant to a written Consulting Agreement that Tola executed on behalf of BI3 and that Hamor executed on behalf of WK Networks. (Id. at ¶¶ 40, 41.) The Consulting Agreement states that BI3 would be compensated for work performed for WK Networks. (Id. at ¶ 45.) In November 2006 Hamor requested that Tola cease work on the AutomoAds project. (Id. at ¶ 49.) Later, Hamor represented that WK Networks had decided to build a new Search Engine Marketing management platform to be called CampaignLocal and that WK Networks would ownCampaignLocal. (Id. at ¶¶ 50, 51.) BI3 began work on the CampaignLocal efforts with the understanding that it would be compensated pursuant to the terms in the Consulting Agreement. (Id. at ¶ 53.) BI3 received sporadic payments for its work under the Consulting Agreement but was owed $39,125 by the end of December 2006. (Id. at ¶¶ 55, 58.) Because of this outstanding balance and non-payment, Tola advised Hamor that BI3 would cease all work for WK Networks. (Id. at ¶ 59.)

Hamor and Tola modified their contract the following month in January 2007 so that BI3 would continue working for WK Networks. (Id. at ¶¶ 60, 63-4.) Specifically, they agreed that WK Networks would pay BI3 the fees past due as well as an annual fee of $250,000 for 2007 and that Hamor would grant Tola a 20% interest in CampaignLocal. (Id. at ¶ 64.) BI3 continued working on the CampaignLocal projects during the first quarter of 2007 based on this agreement. (Id. at ¶ 71.) In April 2007 WK Networks made a partial payment to BI3 and provided Tola a "'CAP Chart' ostensibly showing a 17.1% ownership interest in CampaignLocal for Tola." (Id. at ¶ 73.) Hamor then failed to make a payment to BI3 in May 2007 claiming that WK Networks did not have funds available (Id. at ¶ 83), but BI3 continued to work on projects for WK Networks anyway and completed its work for WK Networks in August 2007, (Id. at ¶ 89).

Tola and BI3 initiated this lawsuit against Hamor, WK Networks, and CampaignLocal in April 2008. The complaint alleged that WK Networks owed BI3 $271,125 for work performed pursuant to the Consulting Agreement and January 2007 contract modification.(Id. at ¶ 94). The complaint asserted numerous claims against WK Networks and CampaignLocal for failure to pay BI3 for its services, including claims for breach of contract and quantum meruit (id. at ¶¶ 103-11; Count I) and unjust enrichment (id. at ¶¶ 112-119; Count II).

The complaint also alleged that in February 2007 Tola and non-party Earl Grant-Lawrence developed an idea for website tracking technology that they called "Data Trender." (Id. ¶ 133.) Hamor represented to Tola and Grant-Lawrence that he could arrange for a sale or license of the Data Trender invention. (Id. ¶ 140.) Hamor convinced them to sign a document entitled "Assignment" so that CampaignLocal could file a Provisional Patent Application for the invention; Hamor assured them that the document did not actually relinquish their rights as inventors to Data Trender. (Id. ¶¶ 148, 151, 156.) Hamor then inserted his name on the Provisional Patent Application as the primary inventor, unbeknownst to Tola and Grant-Lawrence. (Id. ¶ 162.) Hamor may have caused the Provisional Patent Application to expire in April 2008. (Id. ¶ 170.) The complaint asserts numerous claims arising from these facts, including fraud (Id. ¶¶ 132-174; Count IV), rescission (Id. ¶¶ 175,176; Count V), failure of consideration (Id. ¶¶ 177-181; Count VI), breach of duty (id. ¶¶ 182-186; Count VII), and conversion (id. ¶¶ 187-192; Count VIII). The complaint also alleged, in the alternative to the rescission claim, that if Data Trender is an asset of CampaignLocal, then Hamor breached his fiduciary duty to CampaignLocal by wasting its assets by failing to preserve the provisional patent for Data Trender (id. ¶¶ 193-200; Count IX) and that CampaignLocal was unjustly enriched because it failed to pay for the Data Trender prototype (id. ¶¶ 201-206; Count X). The allegations in the amended complaint further outlined the deterioration of the business relationship between Tola and Hamor. Namely, Count XI claims that Hamor redirected business opportunities belonging to CampaignLocal, the entity partially owned by Tola, to Adworthy, Inc., another company owned by Hamor or WK Networks. (R. 51, Am. Compl. ¶¶ 207-222.) Count XII claims that Hamor disregarded corporate formalities and pilfered the funds of CampaignLocal and WK Networks for his own benefit, such...