148 F. Supp. 3d 679
N.D. Ill.2015Background
- Minority shareholder Samuel Toscano sued majority shareholders Robert Koopman and Frank Darnell, Precision Dose, Cup Pac, and Precision Dose Properties for minority oppression, breach of fiduciary duty, breach of contract, unjust enrichment, and an equitable accounting.
- Alleged misconduct includes: Koopman and Darnell assigning Cup Pac’s purchase option to Precision Dose Properties (their entity) and leasing the property back without board/shareholder approval; concealing a consulting agreement that funneled payments to Darnell; manipulating valuations to depress Toscano’s share value; and failing to effect required transfer/repurchase of decedent Kleinheinz’s shares under the shareholders agreements.
- Toscano alleges he demanded corporate action via several letters (dated Dec. 17, 2013; Feb. 17, 2014; Nov. 12, 2014; Nov. 26, 2014) and that the boards refused; he also alleges demand would be futile because board members are aligned with Koopman/Darnell.
- Defendants moved to dismiss under Fed. R. Civ. P. 23.1(b) (verification and derivative-demand particularity), Rule 9(b) (fraud particularity), and Rule 12(b)(6) (failure to state claims). Toscano initially did not verify the derivative claims but submitted an affidavit after filing.
- The court (Kapala, J.) granted dismissal in part: required a verified amended complaint and dismissed Toscano’s individual claims in Counts II, IV, and V for failure to allege a distinct personal injury; denied dismissal in all other respects and allowed leave to amend within 30 days.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1) Verification of derivative claims under Rule 23.1(b) | Toscano acknowledged omission and submitted an affidavit verifying allegations; offers to file a verified amended complaint if required | Derivatives must be verified; post-filing affidavit may be insufficient absent Seventh Circuit authority | Court required Toscano to file a verified amended complaint (dismissed unverified derivative claims unless verified) |
| 2) Particularity of demand/demand futility under Rule 23.1(b)(3) and fraud under Rule 9(b) | Toscano alleged five specific wrongful incidents, dates/letters demanding relief, locations, and refusal by boards; pleaded demand futility facts | Defendants argued letters not attached/quoted, insufficient who/what/when/where/how, and some allegations are "on information and belief" | Court found allegations meet the who/what/when/where/how standard; pleaded demand futility adequately; Rule 9(b) heightened pleading (if applicable) also satisfied |
| 3) Standing to bring individual claims (Counts I, II, IV, V) | Toscano contends §12.56 affords individual relief for minority oppression and that fiduciary breaches harmed him as shareholder | Defendants argue Toscano lacks standing for individual claims because he alleged only injuries to the corporation (no distinct injury) | Court allowed Count I (§12.56) to proceed as an individual claim; dismissed individual claims in Counts II, IV, and V for failure to allege a distinct personal injury (without prejudice to repleading) |
| 4) Failure to state claims (Counts III, IV, V) | Toscano alleges shareholders agreements required valuation/transfer of Kleinheinz shares; Lease/assignment and concealed payments caused unjust enrichment and warrant accounting | Defendants argued no contractual duty to force sale/transfer, unjust enrichment lacks relation between enrichment and impoverishment, and claims repackaged fiduciary claims | Court held Count III (breach of contract) plausibly alleges contractual duties to effect transfer; unjust enrichment and accounting claims adequately pleaded (may be alternative theories); claims not dismissed at this stage |
Key Cases Cited
- Recchion ex rel. Westinghouse Elec. Corp. v. Kirby, 637 F. Supp. 1309 (W.D. Pa. 1986) (post‑filing affidavit verifying an unverified derivative complaint can satisfy Rule 23.1)
- DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir. 1990) (fraud pleading requires who, what, when, where, and how)
- Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (U.S. 1991) (Rule 23.1 contemplates demand requirement and circumstances excusing demand)
- In re Abbott Labs. Derivative Shareholders Litigation, 325 F.3d 795 (7th Cir. 2003) (allegations creating reasonable doubt about directors’ business judgment can excuse demand)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (Rule 12(b)(6) pleadings must state a plausible claim)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (plausibility standard for pleadings)
- Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d 436 (7th Cir. 2011) (limitations on pleading fraud ‘‘on information and belief’’)