MJK Partners, LLC v. Husman

877 F.Supp.2d 596

MJK PARTNERS, LLC, F. Paul Ohadi, F. Paul Ohadi, as Trustee of the F. Paul Ohadi Family Trust, and James Mann, as Trustee of the Mann 1994 Family Trust, Plaintiffs,

v.David HUSMAN, Defendant.

Case No. 10 C 87.

United States District Court,

N.D. Illinois,

Eastern Division.

July 1, 2012.

Andrew Robert Greene, Daniel Louis Lis, Iain D. Johnston, Johnston & Greene, LLC, Chicago, IL, for Plaintiffs.

Gregory Adam Adamski, Karen L. Beverly, Karen Conti, Adamski & Conti, James Donehoo Wilson, Daniel Reza Saeedi, Michael P. Sheehan, Shefsky & Froelich Ltd., Steven Ackerman, Attorney at Law, Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

MATTHEW F. KENNELLY, District Judge.

Plaintiffs MJK Partners, LLC, F. Paul Ohadi, individually and as trustee of the F. Paul Ohadi Family Trust (Ohadi Trust), and James Mann, as trustee of the Mann 1994 Family Trust (Mann Trust), have sued David Husman. Plaintiffs assert a claim for violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), as well as state law claims for breach of fiduciary duty, breach of contract, and unjust enrichment. Husman has moved for summary judgment on all claims. For the reasons stated below, the Court grants defendant's motion in part and denies it in part.

Background

Plaintiffs invested money in various projects through Husman, the founder of Equibase Capital Corporation. They claim that Husman misappropriated from each of the investments funds that should have gone to them.

A. Shaw Investments

In 1995, Dan K. Shaw obtained various oil and gas leases in the Flat Rock Field in Utah, which he operated through a company called Shaw Resources Limited LLC, d/b/a Orion (Orion). Shaw sought the help of Husman to raise money to exploit the oil field.

As vehicles for investment, Shaw and Husman created Pegasus Resources, LLC; Scorpio Energy Resources, LLC; Aquarius Energy Resources, LLC; and Sagittarius Energy Resources, LLC. Plaintiffs invested in these companies. Ohadi, the Ohadi Trust, MJK, and Mann Investment Partners, LP (whose assets were later distributed in part to the Mann Trust) all purchased membership interests in at least one of Scorpio, Aquarius, or Sagittarius in 1999 or 2001. Plaintiffs' investment in Pegasus operated differently. A number of investors, including the Ohadi Trust and non-plaintiff Clarence Mann, contributed a total of $5 million to Husman to be loaned to Shaw. Shaw pledged a number of his assets as collateral for the loan. The loan was later turned into equity as membership interests in Pegasus. Shaw was the manager of all of these entities, in addition to Orion.

To develop the oil fields, a pipeline was needed to transport natural gas away from the fields. Comet Resources LLC, an entity controlled by Shaw, built the pipeline. Husman loaned Shaw more than $5 million to build the pipeline and eventually received equity in Comet for the loan. The parties dispute the origins of the money loaned to Shaw. In the promissory note Shaw gave Husman in return for the loan, Husman is described as an “agent,” but the note does not say for whom Husman was an agent. Pl. Ex. 8 at 4298. Plaintiffs claim that the money came in part from them, while Husman claimed in his deposition that all of the money came from his personal bank account. Pl. Ex. 1 at 212–13.

In addition to the six oil and gas entities, Shaw also ran a Nevada casino through a company called VSS Enterprises, LLC. It is undisputed that Husman loaned Shaw personally at least $1.75 million for his casino, and Shaw stated in his deposition that Husman provided between $10 and $13 million. Pl. Ex. 4 at 70. Shaw claimed that Husman's money indirectly funded VSS, although Husman did not directly invest in VSS because he did not want to be subject to the disclosure requirements imposed on casinos in Nevada. Id. at 70–72. In return for his loans, Shaw paid Husman a twelve percent return. Id. at 73. Husman did not want to take an equity stake in VSS, so Shaw instead provided him additional equity in the oil and gas business in exchange for the casino loans. Id. at 72–73.

In 2003, Shaw's casino business was failing. Plaintiffs claim that, in particular, Shaw was having trouble paying the twelve percent return Husman's loans required. Shaw began to take money out of the oil businesses to support VSS. VSS filed for bankruptcy in June 2003. In July, Husman forced Shaw to resign as manager of the oil businesses and appointed Emergency Management Services (EMS), of which Husman was president, as manager of the oil businesses. After Husman removed Shaw from management, Shaw reached an agreement with EMS, which was acting as a collections agent for the six oil and gas entities. Shaw agreed that his liability to the companies was $22 million, subject to later adjustment, and he agreed to pledge much of his property as security for the debt to the companies. Pl. Ex. 3 at 2366; Pl. Ex. 27 at 29704–05. Among other property, Shaw pledged his equity interests in several of the oil and gas entities, some of the assets he had previously pledged as collateral for the Pegasus loan, and a promissory note made by VSS to Shaw for more than twenty-two million. Id. at 29770. One asset that Shaw did not turn over to the oil and gas entities was his thirty percent interest in Comet, which he instead assigned directly to Husman.

In September 2003, Husman sent a letter to Ohadi and MJK, whose managing member was Mann. The letter discussed Sagittarius, in which the Ohadi Trust and MJK were members. Husman stated that Shaw was no longer manager of any of the oil and gas entities because he had been using company funds personally and had commingled assets from Sagittarius with assets of the other entities. The letter informed Sagittarius members that EMS had retained outside counsel and forensic accountants to investigate the companies and pursue any funds that had been diverted outside the oil and gas entities. The letter did not mention Shaw's casino business directly or that Husman had contributed funds to it and was a major creditor of Shaw.

In 2004, Husman sent a memorandum, through EMS, to all of the investors in the oil and gas entities except Comet, proposingto combine the five other oil and gas entities. Under Husman's plan, all investors would give their ownership interests in the oil and gas entities to Chicago Energy Associates, LLC (CEA) and would receive in return proportionate membership interests in CEA. Subsequently, the oil and gas entities would transfer all of their assets to CEA, and EMS would contribute any assets it had recovered while acting as a collection agent for the oil and gas entities. Husman stated that the restructuring was necessary to eliminate operating inefficiencies and risks associated with running so many separate entities. The memorandum mentioned that Comet had constructed a pipeline used by the other oil and gas entities, but it described Comet only as “a Nevada limited liability company which[ ] is owned by certain Members [of the oil and gas entities].” Def. Ex. 12–A at 29109.

The five oil and gas entities became part of CEA, and the plaintiffs became members of it. Comet remained a separate company. Subsequently, CEA and Comet negotiated a deal in which Comet, represented by Husman, agreed to carry CEA gas in its pipeline in exchange for a fee. Comet's assets were sold in 2008 for $35 million. None of the proceeds of that sale went to plaintiffs or other investors in CEA.

In addition to taking Comet's assets, plaintiffs also contend that Husman kept property of Shaw's that should have gone to CEA. One of the assets Shaw transferred to EMS in 2003, as collection agent for the oil and gas entities, was his interest in a real estate development called Grand Plaza Apartments. Pl. Ex. 27 at 29770. Husman signed the agreement transferring Grand Plaza as president of EMS. Husman now claims, however, that Shaw's interest in Grand Plaza had in fact been transferred to him personally two years earlier, as consideration for his assumption of a loan that Shaw had obtained from MB Financial Bank. Pl. Ex. 28 at 4037–39. Plaintiffs claim that Husman received a distribution of more than $10 million in 2004, when Grand Plaza was sold. Pl. Ex. 36. Plaintiffs also contend that Husman personally received $1.8 million after the sale of Red Bluffs Office Park in 2007, another property that Shaw transferred to EMS. Pl. Ex. 37 at 2938; Pl. Ex. 38 at 81–85.

B. Plaza Square investment

Plaza Square Apartments was a large housing development in St. Louis owned and operated by Plaza Square Partners, LLC. Husman, through Equibase, organized a group of investors who purchased fifty percent of Plaza Square for $4 million in February 1999. In return, they received a guarantee of their investment from Ed Carlson, the manager of Plaza Square. Carlson also pledged his personal property as collateral for the guarantee.

The original investors that Husman recruited had the right to request that Husman buy them out, and they did so later in 1999. To obtain funds to pay back the original investors, Husman sought funds from Ohadi. In August 1999, Ohadi provided Husman with $3 million. Ohadi wrote two checks: a $1 million check from himself and a $2 million check from his company, Paul D. Metals Products, Inc. The parties agree, for the purposes of resolving this summary judgment motion only, that Husman and Ohadi orally agreed that Ohadi's money was a three-year loan to Husman personally. Husman then used Ohadi's $3 million, along with $1 million of his own money, to replace the initial investors in Plaza Square. Pl. Ex. 1 at 308–10. Despite the fact that Ohadi was loaning money to Husman, Husman acted as Ohadi's lawyer on the transaction.

Although Husman concedes for the purposes of this motion that the money he received was a loan from Ohadi, at times in the past, including at his deposition, Husman has claimed that the money was not a loan but an equity...