Kravetz v. Bridge to Life, Ltd., Case No. 16 CV 9194

LAWRENCE KRAVETZ, JONATHAN KRAVETZ, CARRIE KRAVETZ,and STEVEN BROOKS, Plaintiffs, v. BRIDGE TO LIFE, LTD., a Wyoming corporation,STEVEN SCHWEIGHARDT, THOMAS KELLER, JEROME LISS,JOEL SEGAL, RICHARD BIRCH, MICHAEL HOLICK,and SHAWN RICE, in their capacities as Directors of BRIDGE TO LIFE, LTD., Defendants.

Case No. 16 CV 9194

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

September 14, 2017

OPINION AND ORDER

Lawrence Kravetz, Jonathan Kravetz, Carrie Kravetz, and Steven Brooks filed suit against Bridge to Life, Ltd. (BTL) and its board of directors, including Steven Schweighardt, Thomas Keller, Jerome Liss, Joel Segal, Richard Birch, Michael Holick, and Shawn Rice, for breach of contract (count I), promissory estoppel (count II), unjust enrichment (count III), breach of fiduciary duty (count IV), breach of the implied covenant of good faith and fair dealing (count V), conversion (count VI), and declaratory judgment (count VII). Defendants have moved to dismiss all counts against the directors as well as counts V, VI, and VII against BTL under Federal Rule of Civil Procedure 12(b)(6).¹ (Dkt. 21.) On August 18, 2017, the court issued an Opinion and Order as to the claims brought by Lawrence Kravetz (Order). (Dkt. 37.) For thereasons stated below, the motion is granted in part and denied in part as to Jonathan Kravetz, Carrie Kravetz, and Steven Brooks.

ANALYSIS

The court described the factual background in its Order and will not repeat it here.

I. Res Judicata

A. Jonathan Kravetz and Carrie Kravetz

In its Order, the court held that all claims brought by Lawrence Kravetz against the directors and counts V and VI brought by Lawrence Kravetz against BTL were barred by res judicata based on the Delaware litigation. Because Jonathan and Carrie brought the same claims and were parties to the same Delaware litigation, the same reasoning applies. Accordingly, all of their claims against the directors as well as counts V and VI against BTL are dismissed with prejudice.

B. Stephen Brooks

Although Brooks was not a party to the Delaware suit, defendants argue that his claims are also barred by res judicata because he was in privity with the Kravetzes. This argument fails. "The concept of privity pertains to the relationship between a party to a suit and a person who was not a party but whose interest in the action was such that he [or she] will be bound by the final judgment as if he [or she] were a party." Bradley v. Div. of Child Support Enf't ex rel. Patterson, 582 A.2d 478, 480 (Del. 1990) (citation omitted and brackets in original). "Parties are in privity for res judicata when their interests are identical or closely aligned such that they were actively and adequately represented in the first suit. Aveta Inc. v. Cavallieri, 23 A.3d 157, 180 (Del. Ch. 2010). Defendants argue that because Brooks, like the Kravetzes, seeks shares of stock, their interests are aligned. But here, each plaintiff, including Brooks, has a different legalinterest: his or her own unique shares. Brooks seeks his 25,000 undiluted shares, which are separate and independent from those sought by the Kravetzes. Nor did Brooks have a pre-existing legal relationship with the Kravetzes. See Kohls v. Kenetech Corp., 791 A.2d 763, 769 (Del. Ch. 2000), aff'd, 794 A.2d 1160 (Del. 2002) ("An individual stockholder is not, solely because of potentially aligned interests, presumed to act in the place of (and with the power to bind) the other stockholders."). Accordingly, none of Brooks's claims is barred by res judicata.

II. Breach of the Implied Covenant of Good Faith and Fair Dealing (Count V)

Defendants argue that count V should be dismissed because Illinois law does not recognize an independent cause of action for breach of the implied covenant of good faith and fair dealing. Brooks, however, invokes the internal affairs doctrine and claims that Wyoming law—which does recognize an independent cause of action—applies.

The internal affairs doctrine, recognized by Illinois, is "a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands." CDX Liquidating Tr. v. Venrock Assocs., 640 F.3d 209, 212 (7th Cir. 2011) (quoting Edgar v. MITE Corp., 457 U.S. 624, 645, 102 S. Ct. 2629, 73 L. Ed. 269 (1982)); see also 805 Ill. Comp. Stat. Ann. 5/13.05 (prohibiting Illinois from regulating foreign corporations' internal affairs). Defendants respond that, because common law claims for contract damages "do not look inward to determine how a corporation should govern itself," the internal affairs doctrine does not apply. (Dkt. 32 at 10.)

The internal affairs doctrine "is recognized throughout the states, and by the Supreme Court as well." Resolution Tr. Corp. v. Chapman, 29 F.3d 1120, 1122 (7th Cir. 1994), overruledon other grounds by Atherton v. FDIC, 519 U.S. 213, 117 S. Ct. 666, L. Ed. 656 (1997).² "With respect to stock issues, the local law of the state of incorporation has nearly always been applied."³ RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 302 rptr. n.1 (1971). Here, the breach of contract claim relates to the issuance of stock, clearly a matter "peculiar to the relationship[] . . . between the corporation . . . and shareholders." CDX Liquidating, 640 F.3d at 212 (quotation omitted); see also Kimmel v. Wirtz, 793 F. Supp. 818, 820 (N.D. Ill. 1992) (noting that the Illinois Supreme Court has considered suits to compel the issuance of stock to affect a corporation's internal affairs); Patriot Sci. Corp. v. Korodi, 504 F. Supp. 2d 952, 957 (S.D. Cal. 2007) (applying internal affairs doctrine to breach of contract claim regarding stock dispute). Accordingly, Brooks's claim for breach of the implied covenant of good faith and fair dealing is governed by Wyoming law, BTL's state of incorporation.

The Wyoming Supreme Court has recognized that "parties to a commercial contract may bring a claim for breach of the implied covenant of good faith and fair dealing based on a contract theory." Scherer Const., LLC v. Hedquist Const., Inc., 2001 WY 23, ¶ 24, 18 P.3d 645, 655 (Wyo. 2001) (adopting § 205 of the RESTATEMENT (SECOND) OF CONTRACTS). In short, "[t]he implied covenant of good faith and fair dealing requires that neither party commit an act that would injure the rights of the other party to receive the benefit of their agreement," such as to interfere or fail to cooperate in the other party's performance. Id. at ¶ 19, 18 P.3d at 653. In Scherer Const., a landowner imposed an overnight deadline on a contractor to complete a "punch list." The contractor could not have performed on such short notice, and the landownerengaged another contractor to finish the work (as the contract allowed). Although the court only remanded for further proceedings, the case implies that an unreasonable deadline could be a breach of the landowner's promise of good faith and fair dealing. The illustrations set out in the RESTATEMENT (SECOND) OF CONTRACTS similarly suggest that one party must have done something dishonest or evasive that defeated the other's ability to perform or undermined the other party's benefit of the bargain. See RESTATEMENT (SECOND) OF CONTRACTS, supra, cmt. d.

Brooks alleges that the defendants' bad faith and self-interested dealing defeated his reasonable expectations that Wyoming shares would be issued promptly, in an equal number, and undiluted. On the face of it, Brooks has pleaded a straightforward breach of contract, which means he has no need to prove breach of the covenant of good faith in order to prove his claimed breach of contract. Nonetheless, the court in Scherer Const. stated that whether there has been a breach of the duty "is a factual inquiry that focuses on the contract and what the parties agreed to." Id. at 654. Thus, the motion will be denied to allow the facts to be more fully developed.

III. Conversion (Count VI)

Defendants claim that count VI is barred by the Moorman doctrine⁴ because the losses Brooks seeks to recover are based on defendants' alleged breach of contract.⁵ The Moorman doctrine prevents recovery for most tort claims when the damages are purely economic. See Moorman Mfg. Co. v. Nat'l Tank Co., 435 N.E.2d 443, 453, 91 Ill. 2d 69, 61 Ill. Dec. 746 (Ill. 1982); Fireman's Fund Ins. Co. v. SEC Donohue, Inc., 679 N.E.2d 1197, 1199, 176 Ill. 2d 160,223 Ill. Dec. 424 (Ill. 1997). Brooks seems to argue that his claim falls within an exception to the Moorman doctrine, which permits recovery in tort where a duty arises outside the contract.⁶

Among other exceptions, the Illinois Supreme Court has recognized that, "[w]here a duty arises outside of the contract, the economic loss doctrine does not prohibit recovery in tort for the negligent breach of that duty." Congregation of the Passion, Holy Cross Province v. Touche Ross & Co., 636 N.E.2d 503, 514, 159 Ill. 2d 137, 164, 201 Ill. Dec. 71 (Ill. 1994).⁷ "[The] exceptions have in common the existence of an extra-contractual duty between the parties, giving rise to a cause of action in tort separate from one based on the contract itself." Catalan v. GMAC Mortg. Corp., 629 F.3d 676, 693 (7th Cir. 2011).

"To recover in tort under the economic loss doctrine, a party must show harm above and beyond a party's contractual or commercial expectations." Am. United Logistics, Inc. v. Catellus Dev. Corp., 319 F.3d 921, 926 (7th Cir. 2003), as amended on denial of reh'g (Apr. 3, 2003) (citing In re Chicago Flood Litigation, 680 N.E.2d 265, 276, 176 Ill. 2d 179, 223 Ill. Dec. 532 (1997)). Indeed, the Illinois Supreme Court has emphasized that "[s]imply characterizing a breach of contract as 'wilful and wanton' does not change the fact that plaintiffs are only seeking recovery for harm to a contract-like...