Khanna v. Banks

1

DEREK KHANNA, individually and derivatively on behalf of Shimbly Corporation, Plaintiff, v. KATELYNN BANKS, ISELLMLS.COM, INC. d/b/a CINDY BANKS TEAM, CINDY BANKS, TONY BANKS, PAMELA CARY, RICHARD CARY, ERIK SOMERVILLE, MARYAM HUSSEIN, Defendants, and SHIMBLY CORPORATION, a Delaware Corporation, Nominal Defendant.

No. 21 C 5752

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

July 9, 2024

MEMORANDUM OPINION AND ORDER

VIRGINIA M. KENDALL UNITED STATES DISTRICT JUDGE

Plaintiff Derek Khanna brings this action against Defendants Katelynn Banks (“Banks”), ISellMLS.com, Inc. (“Cindy Banks Team”), Cindy Banks, Tony Banks (together with Banks, the “Banks Defendants”), Shimbly Corporation, Pamela Cary, Richard Cary, Erik Somerville, and Maryam Hussein. Khanna seeks all manner of legal recourse for what, at is core, is a business arrangement gone bad. This matter is now before the Court on the Banks Defendants and Somerville's respective motions to dismiss. For the reasons below, the Banks Defendants' motion [209] and Somerville's motion [211] are both granted in part and denied in part.

BACKGROUND

I. Factual Background

In July 2019,^[1]Khanna and Banks began working on a business concept (the “Business Concept”) that would later serve as the foundation for their startup company, Shimbly Corporation (“Shimbly”). (Dkt 186 ¶ 20). Shimbly is a platform designed to help users find, sell, and manage real estate properties and enable agents to collaborate with users in the process. (Id. ¶ 27). In January 2020, Khanna and Banks selected Theophile Khayat (“Khayat”) to join them as Shimbly's third co-founder and Chief Technology Officer. (Id. ¶ 23). That month, the three co-founders formally incorporated Shimbly under the laws of Delaware. (Id. ¶¶ 25, 27).

Later, in April, the trio executed Shimbly's Founders' Collaboration Agreement (the “Agreement”) which memorialized each founder's consent to transfer “his or her right, title, and interest in” the Business Concept to Shimbly. (Id. ¶¶ 26-28). The Agreement further set forth each founder's ownership interest in the company; restricted transfers of ownership interests and the Business Concept; specified the founders' rights in the event of a substantive dispute; detailed provisions governing the expenditure and reimbursement of working capital; and articulated the parties' status as fiduciaries of the company. (Id. ¶¶ 30-40). The Agreement also appointed each founder to the board of directors and assigned the founders' roles and responsibilities as follows: Banks was Chief Executive Officer (“CEO”); Khanna was Chief Operations Officer (“COO”), Chief Strategy Officer (“CSO”), Manager of the Board of Directors, and General Counsel; and Khayat was Chief Technology Officer (“CTO”). (Id. ¶ 35).

In June 2020, the co-founders executed a revised agreement (the “Revised Agreement”), meant to supersede the Agreement where the two were in conflict. (Id. ¶ 41-42). The Revised Agreement reflected the co-founders' consensus that Khayat would “no longer” be a “regularly active employee with Shimbly in [the] role of [Chief Technology Officer].” (Id. ¶ 43; Dkt. 186-2 at § 3.2). The Revised Agreement struck the former ownership interest agreement and established a new “share-structure” arrangement. (Dkt. 186 ¶ 44). Under the Revised Agreement, Khanna, Banks, and Khayat each received common stock and voting rights. (Id. ¶¶ 46-47).

A month later, Banks created a budget line item for $85,000 in working capital expenses without first seeking approval of the expense from the shareholders, in violation of the Agreement. (Id. ¶ 58; Dkt. 186-1 § 7.5). The expenditure was for a database for Shimbly, but it was developed by Banks' own brokerage company, the Cindy Banks Team, and was owned and operated by Banks' family. (Dkt. 186 ¶¶ 9-11, 59). Though Khanna objected to the expense and its presence on Shimbly's accounting records, Banks declined to remove the line item from the budget or seek approval for the expense. (Id. ¶ 61).

In the fall, Banks effectively abandoned her role as CEO, cancelling all meetings and declining to respond to Khanna's petitions for her to re-engage with the company, discuss fundraising ideas, and develop a strategy to launch Shimbly. (Id. ¶¶ 66-67, 73). Around the same time, Banks made additional unauthorized payments of Shimbly funds. (Id. ¶¶ 63-64). One such payment went to Khayat for “goods or services,” while another went to Maryam Hussein to secure her assistance in preparing a report that would later be used to justify terminating Khanna. (Id. ¶ 64). None of these unauthorized payments helped Shimbly's financial condition, which was in decline. (Id. ¶ 65).

On October 26, 2020, Khanna sent a formal whistleblower notice to Shimbly's board of directors and investors, detailing Bank's improper expenses, among other things. (Id. ¶ 76). The next day, Banks told Khanna that she could not work with him anymore and gave him three days to resign or face termination. (Id. ¶ 77). She also disclosed that she received a report, prepared by Maryam Hussein and Erik Somerville (the “Hussein/Somerville Report”) claiming that Khanna was the one mismanaging and sabotaging Shimbly. (Id. ¶¶ 77, 81-82). Banks forwarded the report to Khayat, noting that the report included “a few ‘real examples' of how [Khanna's] actions [were] negatively effecting the culture and organization.” (Id. ¶¶ 78, 84). Shortly thereafter, Banks terminated Khanna. (Id. ¶¶ 87-88). Banks then proceeded to alter Shimbly's accounting records, transfer Shimbly's trade secrets and intellectual property, and launch a new company using Shimbly's assets. (Id. ¶ 91). She also began promoting aspects of the Business Concept as though they belonged to the Cindy Banks Team, and offered to sell Shimbly shares to investors Richard Cary and Pamela Cary (“the Carys”) for nominal consideration. (Id. ¶ 92-96). In the end, Shimbly defaulted on its corporate tax obligations, leading the Secretary of the State of Delaware to declare Shimbly “inoperative and void.” (Id. ¶ 94; Dkt. 210-1 at 2).

Throughout this saga, Defendants Cindy Banks Team, Cindy Banks, Tony Banks, the Carys, Somerville, and Hussein (collectively the “Conspiring Defendants”) knew of and assisted with Banks' plan to appropriate Shimbly's assets and use them in furtherance of a new company that would operate in Shimbly's place. (Id. ¶ ¶ 102-03).

II. Procedural Background

On October 27, 2021, Khanna initiated this lawsuit, later filing a seventeen-count Amended Complaint. The claims are as follows: breaches of fiduciary duty (Count I), aiding and abetting Banks' breaches of fiduciary duty (Count II), fraudulent concealment (Count III), aiding and abetting Banks' fraudulent concealment (Count IV), breaches of contract (Count V), wrongful and retaliatory discharge (Count VI), violations of the Illinois Trade Secrets Act (Count VII), aiding and abetting Banks' violations of the Illinois Trade Secrets Act (Count VIII), conversion (Count IX), obstruction of justice in violation of the Illinois Whistleblower Act (Count X), defamation (Counts XI and XII), false light (Counts XIII and XIV), gross negligence (Count XV), intentional infliction of emotional distress (Count XVI), and derivative claims (XVII). The Banks Defendants and Somerville respectively moved to dismiss the complaint. (Dkts. 209, 211). The Carys later joined the Banks Defendants' motion to dismiss (Dkts. 214, 217).

On April 6, 2022, Magistrate Judge Feinerman ordered the parties to submit to “binding confidential mediation” on Khanna's claims for “breach of fiduciary duty (insofar as the claim arises from his termination), breach of contract (for failure to submit to mediation and for breach of the salary agreement), wrongful and retaliatory discharge, and violations of the Illinois Whistleblower Act.” (Dkt. 35). Those claims are stayed and the Court's opinion will address only those claims which are not stayed.

LEGAL STANDARD

To survive a motion to dismiss for failure to state a claim, the complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Kaminski v. Elite Staffing, 23 F.4th 774, 776 (7th Cir. 2022) (quoting Fed.R.Civ.P. 8(a)(2)). Thus, “a plaintiff must allege ‘enough facts to state a claim that is plausible on its face.'” Allen v. Brown Advisory, LLC, 41 F.4th 843, 850 (7th Cir. 2022) (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. (quoting Ashcroft v. Iqbal, 566 U.S. 662, 678 (2009)). The Court accepts the well-pleaded factual allegations in the plaintiff's complaint as true “drawing all reasonable inferences in his favor.” Id. (citing W. Bend Mut. Ins. Co. v. Schumacher, 844 F.3d 670, 675 (7th Cir. 2016)). Yet, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements” are not enough. Oakland Police & Fire Ret. Sys. v. Mayer Brown, LLP, 861 F.3d 644, 649 (7th Cir. 2017) (quoting Iqbal, 556 U.S. at 678). The complaint's factual content must “raise a right to relief above the speculative level.” Kaminski, 23 F.4th at 776 (quoting Twombly, 550 U.S. at 555).

For claims “rest[ing] on allegations of deceptive conduct,” Federal Rule of Civil Procedure 9(b) requires the plaintiff to “plead with particularity the circumstances constituting fraud.” Benson v. Fannie May Confections Brands, Inc., 944 F.3d 639, 646 (7th Cir. 2019) (quoting Vanzant v. Hill's Pet Nutrition Inc., 934 F.3d 730, 736 (7th Cir. 2019)); Fed.R.Civ.P. 9(b). This means the plaintiff “must identify the ‘who,...