Triumph Packaging Grp. v. Ward

TRIUMPH PACKAGING GROUP, an Illinois corporation, Plaintiff,

v.SCOTT WARD, VITAL-X ASSOCIATES, LLC, an Illinois limited liability

corporation, CREATIVE DESIGN PRODUCTS, INC., JOHN DOES, JANE

DOES AND ABC COMPANIES, Defendants.

SCOTT WARD, Counter-claimant and Third Party Plaintiff,

v.TCG PACKAGING SERVICES, LLC d/b/a/ TRIUMPH PACKAGING GROUP,RANDALL CECOLA, DTG SERVICES GROUP, INC., KALLAHAN

MARKETING GROUP, INC., DARWIN TECHNOLOGY, TESORO REALTY

GROUP LLC, and JOHN DOES, JANE DOES, and ABC COMPANIES,

Counterclaim and Third Party Defendants.

Case No. 11 C 7927

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

Date: October 29, 2012

MEMORANDUM OPINION AND ORDER

AMY J. ST. EVE, District Court Judge:

Plaintiff/Counter-Defendant Triumph Packaging Group ("Triumph") and Third-PartyDefendants Randall Cecola ("Cecola"), DTG Services Group, Inc. ("DTG"), Kallahan Marketing Group, Inc. ("KMG"), Darwin Technology ("Darwin"), and Tesoro Realty Group LLC ("Tesoro Realty") (collectively, the "Third-Party Defendants") move to dismiss Defendant/Counter-Plaintiff Scott Ward's ("Ward") First Amended Counterclaim and Third Party Complaint pursuant to Federal Rules of Civil Procedure ("Rule") 12(b)(1) and 12(b)(6). For the following reasons, the Court grants the motion to dismiss as to Counts II, III, IV, and V and denies it as to Counts I, VI and VII.

PROCEDURAL BACKGROUND¹

On November 8, 2011, Triumph filed a seven-count Complaint against Scott Ward, Vital-X Associates, LLC, Creative Design Products, Inc., John Does, Jane Does, and ABC Companies. (R. 1, Compl.) Ward answered the Complaint on January 4, 2012 and filed a Counterclaim and Third-Party Complaint (the "Initial Counterclaim") alleging claims individually and derivatively on behalf of Triumph. (R. 63.) On July 10, 2012, the Court dismissed Ward's derivative claims with prejudice and all of his individual claims, except one, without prejudice. (R. 94.) Ward filed a seven-count First Amended Counterclaim and Third-Party Complaint ("Amended Counterclaim") in his individual capacity on July 27, 2012. (R. 96.) On August 21, 2012, Triumph and the Third-Party Defendants (collectively, the "Counter-Defendants") moved to dismiss the Amended Counterclaim. (R. 102.)

FACTUAL BACKGROUND

In the Previous Opinion, the Court provided a detailed discussion of Ward's lengthy pleadings in the Initial Counterclaim.² See Triumph, 2012 WL 2815594 at *1-3. To the extent Ward's pleadings in the Amended Counterclaim differ from the Initial Counterclaim, the Court will address those differences in its Analysis below.

LEGAL STANDARD

I. Rule 12(b)(1)

Standing to sue is a threshold jurisdictional requirement in every federal action. See Horne v. Flores, 557 U.S. 433, 445, 129 S. Ct. 2579, 174 L. Ed. 2d 406 (2009). Rule 12(b)(1) motions address standing issues, and federal courts "may not grant relief when standing does not exist." Heartland Direct, Inc. v. Chevron U.S.A. Inc., No. 06 C 1029, 2006 WL 2524139, at *2 (N.D. Ill. Aug. 30, 2006). When considering a Rule 12(b)(1) motion challenging the factual basis for subject matter jurisdiction, district courts look beyond the pleadings and consider all competent evidence. Id.; Hay v. Indiana State Bd. of Tax Comm'rs., 312 F.3d 876, 879 (7th Cir. 2002). "[T]he party asserting a right to a federal forum has the burden of proof, regardless of who raises the jurisdictional challenge." Craig v. Ontario Corp., 543 F.3d 872, 876 (7th Cir. 2008).

II. Rule 12(b)(6)

"A motion under Rule 12(b)(6) challenges the sufficiency of the complaint to state aclaim upon which relief may be granted." Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). Under Rule 8(a)(2), a complaint must include "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The short and plain statement under Rule 8(a)(2) must "give the defendant fair notice of what the claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957)). Under the federal notice pleading standards, a plaintiff's "factual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555. Put differently, a "complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) (quoting Twombly, 550 U.S. at 570). "In evaluating the sufficiency of the complaint, [courts] view it in the light most favorable to the plaintiff, taking as true all well-pleaded factual allegations and making all possible inferences from the allegations in the plaintiff's favor." AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th Cir. 2011). A plaintiff may plead himself out of court by alleging facts showing that he has no legal claim. See Peterson v. McGladrey & Pullen, LLP, 676 F.3d 594, 600 (7th Cir. 2012); Atkins v. City of Chi., 631 F.3d 823, 832 (7th Cir. 2011).

ANALYSIS

Ward's Amended Counterclaim contains seven counts: Count I - Fraudulent Inducement (against Triumph and Cecola); Count II - Violation of Racketeering Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq (against all Defendants); Count III - Breach of Fiduciary Duty (against Cecola); Count IV - Civil Conspiracy (against AllDefendants); Count V - Conversion (against All Defendants); Count VI - Unjust Enrichment (against Third-Party Defendants); and Count VII - Unjust Enrichment (against Triumph). Counter-Defendants move to dismiss all seven of these counts. Counter-Defendants argue that Ward has not alleged a personal injury sufficient to bring Counts I, II, III, and IV and that Ward has failed to state a claim in Counts II, IV, V, VI and VII.³

The Court will not consider Counter-Defendants' arguments regarding Count I, fraudulent inducement, because the Court previously determined that the allegations in the Initial Counterclaim, which Wards repeats in the Amended Counterclaim, were sufficient to state a claim. See Triumph, 2012 WL 2815594 at *17; see also (R. 107, Resp. at 3 ("The First Amended Counterclaim did not remove any allegations relative to the Fraudulent Inducement claim.").) Specifically, the Court found that Ward's allegations that his reliance on Cecola's false statements deprived him of an equal partnership provide a sufficient basis to infer, at this stage, that he suffered damage as a result of his reliance on Cecola's false statements. Id. at *16. The Court, therefore, denies Counter-Defendants' motion as to Count I.

Standing is a threshold requirement imposed by Article III of the Constitution which limits federal subject matter jurisdiction to claims that present an actual case or controversy in which a plaintiff has a "personal stake." Salazar v. Buono, 130 S. Ct. 1803, 1814, 176 L. Ed. 2d 634 (2010) ("To demonstrate standing, a plaintiff must have alleged such a personal stake in the outcome of the controversy as to warrant his invocation of federal-court jurisdiction) (internalquotations omitted). The Court thus begins its analysis with Counter-Defendants' motion to dismiss under Rule 12(b)(1).⁴

I. Whether Ward Has Alleged Sufficient Personal Injury to Individually Pursue Claims for RICO Violations, Civil Conspiracy and Breach of Fiduciary Duty

Counter-Defendants argue that the Court should dismiss Counts II, III and IV because Ward fails to allege any direct personal harm as opposed to harm to Triumph. (Defs.' Mem. at 3.) "Under Illinois law, an action for harm to the corporation must be brought in the corporate name as a derivative action unless an investor has suffered a distinct personal injury."⁵ Ching v. Porada, 560 F. Supp. 2d 675, 678 (N.D. Ill. 2008) (internal quotations omitted); see also Davis v. Dyson, 387 Ill. App. 3d 676, 689-90, 326 Ill. Dec. 801, 900 N.E.2d 698 (Ill. App. Ct. 2008) ("for a shareholder to have standing to bring an individual claim, the shareholder must allege an injury that is 'separate and distinct from that suffered by other shareholders' or an injury thatinvolves a contractual right that exists independently of any corporate right") (quoting Caparos v. Morton, 364 Ill. App. 3d 159, 167, 300 Ill. Dec. 884, 845 N. E. 2d 773 (Ill. App. Ct. 2006)). "Examples of distinct personal injuries include a shareholder who alleges that board members have refused to return stock pledged to secure a debt after the loan has been paid, or a shareholder-employee who contests his discharge from employment, or a unique contract between the shareholder and the company that was dishonored." Id.

Here, Ward alleges the following injuries: (1) he lost additional compensation and ownership interest that he would have received if Triumph reached certain EBITDA⁶ benchmarks, which were not reached because Cecola and Third-Party Defendants diverted funds (Amend. Counter. ¶¶ 232-38); (2) he lost his share of the money that Counter-Defendants diverted from Triumph, which would have flown directly to him as one of two shareholders in the company (Id. ¶¶ 378, 389, 398); (3) he gave Triumph a $50,000 loan, for which he received no interest and on which he paid taxes because Cecola repaid him through payroll (Id. ¶¶ 203, 206-08); and (4) he paid $49,000 of tax liability, based on his position as a shareholder in the S Corporation, though he did not receive any corresponding income or benefit. (Id. ¶¶ 19-21, 319-22.) All of these alleged injuries are corporate harms that only indirectly injure Ward, and therefore cannot form the basis of individual RICO, civil conspiracy or breach of fiduciary duty claims.

With regards to harms (1) and (2), Ward alleges financial harm he suffered as a result of harm the company suffered, namely a loss of assets that Counter-Defendants allegedly...