Jeana K. Reinbold, Not Individually But of the Estate of Sandburg Mall Realty Mgmt. LLC v. Kohansieh (In re Sandburg Mall Realty Mgmt. LLC)

563 B.R. 875

IN RE: SANDBURG MALL REALTY MANAGEMENT LLC, Debtor.

Jeana K. Reinbold, not individually but as Trustee of the estate of Sandburg Mall Realty Management LLC, Plaintiff,

v.Mehran Kohansieh (a/k/a Mike Kohan and/or Mike Kohen, and d/b/a Kohan Retail Investment Group), Michael Khakshoor, Yousef Khakshoor, and North Park Realty Management, LLC Defendants.

Case No. 14–81063

Adv. No. 16–8024

United States Bankruptcy Court, C.D. Illinois.

Signed January 31, 2017

Sumner Bourne, for Debtor.

Patrick Jones, PMJ PLLC, Chicago, IL, for Plaintiff.

Clayton Garrett Kuhn, Sandberg Phoenix & von Gontard, St. Louis, MO, for Defendants.

OPINION

Thomas L. Perkins, United States Bankruptcy Judge

This matter is before the Court on the Defendants' motion to dismiss the Complaint under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. The plaintiff is the chapter 7 Trustee of the estate of the Debtor, Sandburg Mall Realty Management LLC, an Illinois limited liability company that owned a retail shopping mall in Galesburg, Illinois. Initially filed under Chapter 11, the case was converted to Chapter 7 on the motion of the United States Trustee after the automatic stay was modified to permit the holder of the first mortgage to proceed with foreclosure.

According to the Complaint, the Defendant, North Park Realty Management, LLC (North Park) is a Michigan limited liability company that owned real estate located in Southfield, Michigan. The three individual Defendants, Mehran, Michael and Yousef, were members of the Debtor from 2007 until 2012. The fourth and only other member of the Debtor was Sion Noble (Sion) who formed the Debtor in January, 2007.

In February, 2007, the Debtor purchased the Galesburg property, granting a first mortgage to Intervest Mortgage Corporation. At or around this time, Mehran was appointed by Sion as the manager of the Debtor. In June, 2007, Mehran, Michael and Yousef each acquired a membership interest in the Debtor from Sion. Following those acquisitions, the membership interests in the Debtor were as follows:

Sion        38%
Mehran      27%
Michael     25%
Yousef      10%

Mehran, Michael and Yousef were members of North Park, with Mehran and Michael serving as co-managers. The Complaint alleges that in March, 2008, the Debtor borrowed $6.75 million from First Bank and Trust Company of Illinois to purchase the Southfield, Michigan property for the benefit of North Park. Mehran, with the knowledge of Michael and Yousef, caused the Debtor to obligate itself on the loan obtained from First Bank and to grant First Bank a second mortgage on the Galesburg real estate owned by the Debtor. Sion neither knew of, nor consented to, the Debtor's liability for the First Bank loan and mortgage. The Complaint alleges that the First Bank loan rendered the Debtor insolvent.

The allegations of the Complaint imply that Sion first became aware of the Debtor's participation in the First Bank transaction in October, 2010, when he notified First Bank that Mehran was not authorized to obligate the Debtor. As of January 1, 2012, the member interests in the Debtor of Mehran, Michael and Yousef were terminated and Mehran was terminated as the Debtor's manager.

Counts I through IV of the Complaint allege four alternative theories of liability, each seeking a judgment in the amount of $6.75 million as damages for the financial harm suffered by the Debtor and its creditors. Count I, asserting joint and several liability as to the three individual Defendants, alleges a cause of action under Illinois common law for breach of the fiduciary duties of loyalty, good faith and due care the individual Defendants owed to the Debtor and, upon the Debtor's insolvency, to its creditors. Count II, again asserting joint and several liability as to the individual Defendants, alleges a cause of action for common law fraud. Count III, asserting joint and several liability as to all Defendants, alleges a claim for restitution on the equitable theory of unjust enrichment.

Count IV alleges a breach of contract action against Mehran only, relying on a provision in the Debtor's amended operating agreement that prohibits any "sale or refinance" without Sion's consent. It alleges that the Debtor, its members and its creditors, are intended third-party beneficiaries of the amended operating agreement and that the prohibition against "sale or refinance" prohibited Mehran from "entering into any financing transactions, including a mortgage loan transaction, on behalf of the Debtor without the consent" of Sion.

Counts V through IX allege alternative theories of recovery, each seeking to avoid the same twelve prepetition transfers as fraudulent. Counts V and VI assert the avoiding powers granted to trustees under bankruptcy code section 548, while Counts VII, VIII and IX rely on the Illinois Uniform Fraudulent Transfer Act as authorized by bankruptcy code section 544(b)(1).

ANALYSIS

The purpose of a Fed.R.Civ.Pro. 12(b)(6) motion to dismiss is to test the sufficiency of the complaint, not to decide the merits. Gibson v. City of Chicago , 910 F.2d 1510, 1520 (7th Cir. 1990). When ruling on a motion to dismiss, the court must accept all well–pleaded factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor. Park v. Indiana University School of Dentistry , 692 F.3d 828, 830 (7th Cir. 2012). Dismissal is proper only when the complaint either lacks a cognizable legal theory or fails to allege sufficient facts under a cognizable theory. Bielskis v. Louisville Ladders Inc. , 2007 WL 2088583 (N.D. Ill.) (citing Graehling v. Village of Lombard , 58 F.3d 295, 297 (7th Cir. 1995) ).

Fed.R.Civ.Pro. 8, providing that the statement of a claim for relief shall be "short and plain," does not require detailed factual allegations, "but it demands more than an unadorned, the–defendant–unlawfully–harmed–me accusation." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The complaint must contain enough facts to state a claim for relief that is plausible on its face. Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 127 S.Ct. 1955, 1964–65, 167 L.Ed.2d 929 (2007). The Seventh Circuit Court of Appeals has interpreted the Supreme Court to be saying that at some point the factual detail in a complaint may be so sketchy that the complaint does not provide the type of notice of the claim to which the defendant is entitled under Rule 8. Airborne Beepers & Video, Inc. v. AT & T Mobility , LLC, 499 F.3d 663, 667 (7th Cir. 2007).

The period of limitations is an affirmative defense. Fed.R.Civ.Pro. 8(c)(1). Since a complaint need not anticipate defenses and attempt to defeat them, Rule 12(b)(6) is not the proper procedural vehicle to adjudicate the merits of affirmative defenses. Richards v. Mitcheff , 696 F.3d 635, 637–38 (7th Cir. 2012). Nevertheless, courts sometimes grant a Rule 12(b)(6) dismissal where a complaint alleges facts that establish an absolute defense, such that the plaintiff has pleaded himself out of court. Massey v. Merrill Lynch & Co., Inc. , 464 F.3d 642 (7th Cir. 2006).

In each of Counts I through IV, the Trustee alleges that the cause of action is brought pursuant to 11 U.S.C. § 544(b)(1). The reference to that inapplicable statute is a most basic error, but an inconsequential one. Those counts plead causes of action that the Debtor and/or its creditors had standing to assert as of the petition date, that became property of the estate by operation of section 541(a)(1). Section 541(a)(1), not section 544(b)(1), gives a trustee standing to bring, for example, a cause of action for damages suffered by a debtor entity against officers and directors for alleged misconduct and breach of fiduciary duties, where those types of claims could have been asserted prepetition by the debtor or on its behalf in a derivative action. In re Think3, Inc. , 529 B.R. 147, 187 (Bankr. W.D. Texas 2015). Of course property of the estate does not include a personal claim for damages caused to one particular creditor or stockholder of a debtor, so a trustee does not have standing to bring such suits. Id.

In contrast, section 544(b)(1) empowers a trustee to use state fraudulent transfer laws to avoid a transfer made or obligation incurred by a debtor with liability and damages determined by section 550 of the bankruptcy code. The causes of action alleged in Counts I through IV are state common law actions, not avoidance actions.

Counts I and II.

As a preliminary matter, section 15–3 of the Illinois Limited Liability Company Act, 805 ILCS 180/15–3, defines the fiduciary duties owed by an LLC's members and managers, drawing a distinction between member-managed companies and manager-managed companies. In a manager-managed company, a member who is not also a manager owes no duties to the company or to the other members solely by reason of being a member. 805 ILCS 180/15–3(g)(1). Although the Defendants do not address the effect of this section in their motion to dismiss, the statutory designation of fiduciary duties should be addressed by the parties in the context of Count I as the litigation proceeds.

The parties agree that the applicable statute of limitations for Counts I and II is the five-year limitations period set forth in section 13–205 of the Illinois Code of Civil Procedure, requiring an action to be "commenced within 5 years next after the cause of action accrued." 735 ILCS 5/13–205. Under the "discovery rule," a cause of action accrues, and the statute starts to run, when the plaintiff knows or reasonably should know both that an injury has occurred and that it was wrongfully caused. Knox College v. Celotex Corp ., 88 Ill.2d 407, 414–16, 58 Ill.Dec. 725, 430 N.E.2d 976 (1981). Where the discovery rule applies, the date that the limitations period begins is often a question of fact to be resolved upon summary judgment or at trial. Id . at 416–17, 58 Ill.Dec. 725, 430 N.E.2d 976 ; Halperin v....