Damian v. Courtright

Melanie E. Damian, as Receiver of Today's Growth Consultant, Inc. d/b/a The Income Store, Plaintiff, v. William Courtright and Courtright Consulting, Inc., Defendants.

No. 21 C 1694

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

July 26, 2021

MEMORANDUM OPINION AND ORDER

Honorable Thomas M. Durkin United States District Judge

Melanie Damian is the court-appointed receiver in an SEC enforcement action in this district (No. 19 C 8454) against a company called Today's Growth Consultant Inc. (“TGC”). R. 1 ¶¶ 1, 7. In accordance with her mandate in the SEC action, the Receiver filed this case against Defendants William Courtright and Courtright Consulting seeking to recoup $2, 266, 429.15 in payments TGC made to Defendants over a ten-year period. Id. ¶¶ 7, 9, 12. Defendants have moved to dismiss for failure to state a claim pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). R. 26. That motion is denied.

Legal Standard

A rule 12(b)(6) motion challenges the “sufficiency of the complaint.” Berger v. Nat. Collegiate Athletic Ass'n., 843 F.3d 283, 289 (7th Cir. 2016). A complaint must provide “a short and plain statement of the claim showing that the pleader is entitled to relief ” Fed.R.Civ.P. 8(a)(2), sufficient to provide defendant with “fair notice” of the claim and the basis for it. Bell. Alt. Corp. v. Twombly, 550 U.S. 544, 555 (2007). This standard “demands more than an unadorned the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While “detailed factual allegations” are not required “labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. The complaint must “contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570). “‘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.'” Boucher v. Fin. Sys. of Green Bay, Inc., 880 F.3d 362, 366 (7th Cir. 2018) (quoting Iqbal, 556 U.S. at 678). In applying this standard, the Court accepts all well-pleaded facts as true and draws all reasonable inferences in favor of the non-moving party. Tobey v. Chibucos, 890 F.3d 634, 646 (7th Cir. 2018).

A party alleging fraud or mistake “must state with particularity the circumstances constituting [the] fraud or mistake.” Fed.R.Civ.P. 9(b). To meet this particularity requirement, “a plaintiff ordinarily must describe the ‘who, what, when, where, and how' of the fraud.” Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. v. Walgreen Co., 631 F.3d 436, 441-442 (7th Cir. 2011) (quoting United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 853 (7th Cir. 2009)). This heightened pleading standard is designed in part to operate “as a screen against spurious fraud claims” and “to minimize the extortionate impact that a baseless claim of fraud can have on a firm or an individual.” Fid. Nat'l Title Ins. Co. of N.Y. v. Intercounty Nat'l Title Ins. Co., 412 F.3d 745, 748-749 (7th Cir. 2005). Nevertheless, the particularity requirements of Rule 9(b) “must be read in conjunction with Rule 8, which requires a short and concise pleading.” PharMerica Chicago, Inc. v. Meisels, 772 F.Supp.2d 938, 955 (N.D. Ill. 2011) (quoting Gelco Corp. v. Duval Motor Co., No. 02 C 5613, 2002 WL 31875537, at *6 (N.D. Ill.Dec. 26, 2002)). Under Rule 9(b), “[m]alice, intent, knowledge and other conditions of a person's mind may be alleged generally.” Fed.R.Civ.P. 9(b); see also Hefferman v. Bass, 467 F.3d 596, 601 (7th Cir. 2006).

Background

The Receiver alleges that TGC raised millions of dollars from investors for its advertising and eCommerce business, promising investors minimum guaranteed rates of return ranging from 13 to 20%. R. 1 ¶¶ 19, 21. TGC's websites did not generate revenue to cover these promises. See Id. ¶ 26. Instead, TGC paid what it owed current investors with money it received from new investments and loans. Id. ¶¶ 24, 33. TGC's payments to investors were annually tens of millions of dollars more than the revenue TGC generated in advertising and product sales revenue. Id. ¶¶ 23, 31-32. Despite this significant shortfall, TGC continued to represent to investors that it was “solvent” and “debt-free.” Id. at ¶¶ 22, 41.

Defendant William Courtright (“Courtright”) was TGC's Business Development Director, and also provided services to TGC through his company Courtright Consulting. Id. ¶¶ 9-10, 12. Courtright's brother was TGC's founder and owner. The Receiver alleges Courtright aided his brother in perpetrating TGC's alleged fraud “by being intimately involved in nearly every operation of [TGC] for an excess of twenty years, including sales and solicitation of investors.” Id. at ¶¶ 9-10, 24, 87, 93. The Receiver further alleges that Courtright was “regularly aware” of his role in the alleged fraud through his position as Business Development Director. Id. at ¶¶ 88, 94.

The Receiver's complaint includes five counts: (I) actual fraud in violation of the Illinois Uniform Fraudulent Transfer Act (“IUFTA”); (II) constructive fraud in violation of the IUFTA; (III) unjust enrichment; (IV) aiding and abetting fraud; and (V) aiding and abetting breach of fiduciary duty.

Analysis

I. Counts I and II: Claims under Illinois Uniform Fraudulent Transfer Act (IUFTA)

The Receiver alleges causes of action under both the Illinois Uniform Fraudulent Transfer Act (“IUFTA”) actual fraud and constructive fraud provisions. See Centerpoint Energy Servs., Inc. v. Halim, 743 F.3d 503, 506 (7th Cir. 2014) (describing the actual and constructive fraud elements of the IUFTA). Both actual and constructive fraud claims are subjected to Rule 9(b)'s heightened pleading requirement. See DAN v. Joint Venture III, LP v. Touris, 598 B.R. 430, 447, 442 (N.D. Ill. 2019) (actual fraud); Gen. Elec. Cap. Corp. v. Lease Resol. Corp., 128 F.3d 1074, 1079 (7th Cir. 1997) (constructive fraud).^[1]

A. Count I: IUFTA Actual Fraud

The actual fraud provision of the IUFTA governs fraudulent transfers made “with actual intent to hinder, delay or defraud any creditor of the debtor.” 740 ILCS 160/5(a)(1).^[2] To succeed on an actual fraud claim, Receiver must plead the requisite intent for each transfer she wants to avoid, connecting “the allegations against the Defendants to the Debtor['s] scheme to defraud creditors.” See In re Lancelot Invs. Fund, LP, 451 B.R. 833, 839 (Bankr. N.D.Ill. 2011). A Ponzi scheme is evidence of such requisite intent. See Id. at 841 (finding the complaint's actual fraud claim “plausible” and that “[t]he operation of the Ponzi Scheme by the Debtor . . . adequately alleged intent to hinder and to defraud creditors on the part of the Debtors”). The “law presumes that debtors who engage in Ponzi Schemes are insolvent because by definition a Ponzi Scheme inevitably becomes insolvent at some point.” Id. at 839.

In addition to the alleged operation of a Ponzi scheme, courts consider the factors listed in IUFTA 160/5(b), “known as ‘badges of fraud,' . . . to see whether a sufficient number [give] ‘rise to an inference of presumption of fraud” to determine intent. Wachovia Secs. LLC v. Banco Panamericano, Inc., 674 F.3d 743, 758 (7th Cir. 2012) (citing Lindholm v. Holtz, 581 N.E.2d 860, 863 (Ill. 1991); Steel Co. v. Morgan Marshall Indus., Inc., 662 N.E.2d 595, 602 (Ill. 1996)). These badges include whether “the transfer or obligation was to an insider, ” where “insider” is defined as an “officer of the debtor” or a “relative of a . . . . director, officer, or person in control of the debtor” if the debtor is a corporation; whether “the debtor removed or concealed assets”; whether “the value of consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred”; and whether “the debtor was insolvent or became insolvent shortly after the transfer was made.” See 740 ILCS 160/5(b); 740 ILCS 160/2(g) (defining insider). Courts isolate each transaction between the debtor and defendant to determine if reasonably equivalent value has been exchanged. See Barber v. Golden Seed Co., 129 F.3d 832, 387 (7th Cir. 1997).

This Court finds RBS Citizens v. Gammonley instructive. In that case, the district court refused to dismiss the complaint because it adequately described the parties involved in the case, the property transferred, the exact dates of each transfer, the location of the transfer, and the means of transfer, in addition to several badges of fraud. RBS Citizens v. Gammonley, 2013 WL 5753783, at *4-5, (N.D. Ill. Oct. 23, 2013). The district court rejected a motion to dismiss, holding that “at this early stage [of] the litigation, it [was] sufficient for Plaintiff to allege the ‘who, what, when, where, and how' of Defendant's fraud, along with facts from which the Court can reasonably infer the Defendants acted with actual intent.” Id. at *4.

The Court finds that the Receiver has sufficiently met the heightened pleading standard of Rule 9(b) for the actual fraud prong of the IUFTA, pleading the “who, what, where, when, and how.” The complaint describes (1) who: Defendant Courtright and Defendant Consulting, (2) what: transfers of funds to both Defendants totaling $2, 266, 429.15, (3) where: from a bank in Illinois, (4) when: December 19, 2010, to November 4, 2019, and February 2, 2016, and November 19, 2019, respectively, and (5) how: in general, the Ponzi scheme and Defendant Courtright's role in it. See R. 1 at ¶¶ 8-12, 43-44, 46-53.

Additionally this Court rejects Defendants' argument that the Receiver's actual fraud claim...