Footlick v. Topstep LLC

1

Melissa Footlick; Robin Simkins; Erin Clark; Toby Adamson; Jay Rudman; and Griffin Caprio Plaintiffs, v. Topstep LLC, Topstep Holdings; TopstepTrader LLC, TopstepPeople, Inc.; Patak Holdings, Inc.; and Michael Patak, Defendants.

No. 1:22-CV-6152

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

March 26, 2024

MEMORANDUM OPINION AND ORDER

John Robert Blakey United States District Judge

Plaintiffs Melissa Footlick, Robin Simkins, Erin Clark, Toby Adamson Jay Rudman, and Griffin Caprio bring various claims against Defendants Topstep LLC, Topstep Holdings LLC, TopstepTrader LLC, TopstepPeople Inc., Patak Holdings Inc., and Michael Patak arising from the issuance and valuation of certain incentive units to former employees and advisors of the Defendants. Plaintiffs assert eleven claims against Defendants, [18]; Defendants move to dismiss seven of those claims, in whole or in part, including: Counts V and VI (breach of contract); Count VII (breach of fiduciary duty) Count VIII (piercing the corporate veil); Count IX (negligent misrepresentation); Count X (fraud); and Count XI (Illinois Consumer Fraud and Deceptive Business Practices Act). [31]. As explained below, this Court grants in part, and denies in part, Defendants' motion.

I. Background^[1]

Defendant Michael Patak founded Patak Trading Partners in December 2009. [18] ¶ 47. In 2010, Patak hired Plaintiff Footlick as its Recruitment Manager. Id. ¶ 48. Together, Patak and Footlick founded Defendant TopstepTrader LLC on July 12, 2012. Id. ¶ 49. In 2013, Patak offered Footlick Class B units in TopstepTrader as compensation for her outstanding performance. Id. ¶ 50. On October 1, 2016, Patak and Footlick, entered into an Amended and Restated Operating Agreement for TopstepTrader LLC (the “2016 Operating Agreement”), which outlined the company's repurchase rights for Class B units. Id. ¶ 51.

Defendant Topstep Holdings LLC is the manager of TopstepTrader LLC and Topstep LLC. Patak is the sole owner and manager of Topstep Holdings LLC. Together, the Topstep entities^[2]comprise a financial technology firm that provides training and resources to customers to help them become familiar with day-trading futures and foreign exchange contracts. Id. ¶¶ 41-42. After passing an initial evaluation, customers earn a funded trading account, which they can use to trade future contracts using Topstep's capital. Id. ¶¶ 43-44.

Plaintiffs are former employees or advisors of TopstepTrader LLC or Topstep LLC. Id. ¶¶ 17-22. As part of their compensation, each plaintiff received Incentive Units in TopstepTrader LLC and/or Topstep LLC. Id. ¶ 57. The company described these “Incentive Units” as “profit interests,” meaning once vested the holder would have a right to a percentage of the company's profits. Id. ¶ 58. The Incentive Units have a “profit hurdle” at the time of issuance, above which the interest holder begins to realize a percentage of the company's profit. Id.

On January 1, 2020, TopstepTrader LLC and Topstep LLC underwent a restructuring that caused TopstepTrader LLC's profit interests to be contributed to Topstep LLC. Id. ¶¶ 60-61. Topstep's Accounting Manager and Director of Finance, Melissa Elaguizy, informed members of the restructuring on March 30, 2020 in an email. Id. ¶ 61. According to Ms. Elaguizy, this restructuring would cause no meaningful changes to Incentive Units holders other than tax reporting differences. Id. ¶ 62.

The restructuring added debt and liabilities to the company's balance sheet, which decreased the overall value of the Incentive Units. Id. ¶ 64. Further, the Amended and Restated Limited Liability Company Agreement (the “2020 Operating Agreement”) implemented the following changes, effective January 1, 2020:

• The fair market value of Class B units would be determined solely by the reasonable discretion of the Manager;

• Class B Members' right to independent appraisals and valuations was eliminated; • Nearly all fiduciary duties were removed; and

• If the company terminated the employment of a Class B unit holder, or if a Class B unit holder withdrew from the company without “good cause,” Topstep would have an option to purchase the Class B unit holder's vested units at an aggregated price equal to $1.

Id. ¶ 65.

Each Plaintiff separated from Topstep following the execution of the 2020 Operating Agreement. Id. ¶ 67. Upon separation from Topstep, each Plaintiff received a Notice of Forfeiture of Unvested Units and Repurchase of Vested Units, which Plaintiffs allege deprived them of the fair market value of their Incentive Units contrary to the distribution method outlined in the Incentive Unit Award Agreements. Id. ¶¶ 67-69.

Plaintiffs also allege that Michael Patak, who effectively controls, owns, and operates each of the Topstep entities, disregarded the entities' organizational separateness by:

• Failing to adequately capitalize Topstep;

• Commingling resources between Patak Holdings and Topstep, resulting in inaccurate accounting for both companies;

• Knowingly misrepresenting the fair market value of the companies and Plaintiffs' incentive shares;

• Diverting Topstep resources and membership distributions to fund a separate company of his; • Informally taking more than $5 million in personal distributions without reciprocal distributions or notice to all members;

• Transferring Topstep funds into accounts for himself and/or his own entities to reflect increased liquidity for obtaining loan approval;

• Using inappropriate Topstep distributions to purchase a home in Aspen, Colorado;

• Misappropriating Topstep funds for his own use; and

• Adding non-employee family members to Topstep's payroll to allow them to receive payments and benefits.

Id. ¶¶ 73-81.

II. Legal Standard

To survive a motion to dismiss under Rule 12(b)(6), a complaint must provide a “short and plain statement of the claim” showing that the pleader merits relief, Fed.R.Civ.P. 8(a)(2), so the defendant has “fair notice” of the claim “and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). A complaint must also contain “sufficient factual matter” to state a facially plausible claim to relief-one that “allows the court to draw the reasonable inference” that the defendant committed the alleged misconduct. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). In analyzing a motion to dismiss, the Court will construe the complaint in the light most favorable to the plaintiff, accept all well-pled allegations as true, and draw all reasonable inferences in a plaintiff's favor. See Iqbal, 556 U.S. at 678; Bilek v. Fed. Ins. Co., 8 F.4th 581, 584 (7^th Cir. 2021).

III. Analysis

A. Count VIII - Corporate Veil Piercing

The Court first considers Plaintiffs' claim that it should pierce the corporate veil and disregard the corporate separateness of Defendant Topstep LLC.^[3]

Illinois courts^[4] follow the internal affairs doctrine for all claims related to improper corporate governance, including claims for piercing the corporate veil. Keller Systems, Inc. v. Transport Intern. Pool, Inc., 172 F.Supp.2d 992, 999 (N.D. Ill. 2001) (citing Klaxon Co. v. Stentor Electric Manufacturing Co., Inc., 313 U.S. 487, 496 (1941)). The internal affairs doctrine states that the law of an entity's state of incorporation or organization governs. Id. (citing Bagdon v. Bridgestone/Firestone, Inc., 916 F.2d 379, 382-83 (7th Cir. 1990)). Because Topstep LLC is organized under the laws of Delaware, [18] ¶ 11, the Court applies Delaware law to Plaintiffs' veil piercing claim.

In Delaware, to state a claim for veil piercing, Plaintiffs must allege facts “supporting an inference that the corporation, through its alter-ego, has created a sham entity designed to defraud investors and creditors.” Crosse v. BCBSD, Inc., 836 A.3d 492, 497 (Del. 2003); see also Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P. v. Wood, 752 A.3d 1175, 1184 (finding that to pierce its corporate veil, “the corporation must be a sham and exist for no other purpose than as a vehicle for fraud”). But courts “will disregard the corporate form only in the exceptional case.” Eagle Air Transport, Inc. v. National Aerotech Aviation Delaware, Inc., 75 F.Supp.3d 883, 896 (N.D. Ill. 2014) (quoting Winner Acceptance Corp. v. Return on Capital Corp., No. 3088-VCP, 2008 WL 5352063, at *5 (Del. Ch. Dec. 23, 2008)).

Delaware employs a two-prong test to determine whether to pierce the corporate veil: (1) the parent and the subsidiary operated as a single economic entity; and (2) some overall element of injustice or unfairness is present. Quantum Loyalty Sys., Inc. v. TPG Rewards, Inc., 2009 WL 5184350, at *7 (D. Del. Dec. 23, 2009). To determine whether two entities acted as a single economic entity, courts consider the following factors: “(1) whether the company was adequately capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether the dominant shareholder siphoned company funds; and (5) whether, in general, the company simply functioned as a facade for the dominant shareholder.” Manichaean Capital, LLC v. Exela Tech., Inc., 251 A.3d 694, 706 (Del. Ch. 2021) (quoting Doberstein v. G-P Indus., Inc., 2015 WL 6606484, at *4 (Del. Ch. Oct. 30, 2015)). Further, there must be some evidence of “fraud or injustice in the ‘use of the corporate form.'” Id. (quoting Trevino v. Merscorp, Inc., 583 F.Supp.2d 521, 530 (D. Del. 2008)).

Plaintiffs allege that Patak disregarded Topstep LLC's corporate form and unfairly utilized Topstep LLC to enrich himself at the expense of Topstep LLC's investors. First, Plaintiffs allege that Topstep LLC was...