ACT II JEWELRY, LLC, а Delaware Limited Liability Corporation d/b/a Lia Sophia; and KIAM EQUITIES CORPORATION, a Delaware Corporation, Plaintiffs, v. ELIZABETH ANN WOOTEN; ADORNABLE-U, LLC, a Delaware Limited Liability Company; NICOLE MEAD; SHANNON ECKELS; and BECKA DAUN, Defendants. ELIZABETH ANN WOOTEN; ADORNABLE-U, LLC, a Delaware Limited Liability Company; NICOLE MEAD; and SHANNON ECKELS, Counterplaintiffs/ Third-Party Plaintiffs, v. ACT II JEWELRY, LLC, a Delaware Limited Liability Company; and KIAM EQUITIES CORP., a Delaware Corporation; VICTOR K. KIAM III; and ELANA KIAM, Counterdefendants/ Third-Party Defendants.
Case No. 15 C 6950
IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION
Judge Harry D. Leinenweber
Before the Court are two Motions: a Partial Motion to Dismiss Additional Parties [ECF No. 199] brought by Defendants Elizabeth Ann Wooten, Adornable-U, LLC, Nicole Mead, Shannon Eckels, and Becka Daun (collеctively, the “Defendants“) and a Motion for Summary Judgment on the breach of fiduciary duty claim [ECF No. 202] brought by Defendant Elizabeth Ann Wooten (“Wooten“). For the reasons stated herein, Defendants’ Motion to Dismiss Certain Parties [ECF No. 199] is granted with leave to amend and Wooten‘s Partial Motion for Summary Judgment [ECF No. 202] is denied.
I. BACKGROUND
The Court assumes familiarity with the underlying facts of this case as recited in its opinions [ECF Nos. 90, 95] granting in part and denying in part the parties’ respective motions to dismiss the operative complaint and the counterclaims. See, generally, Act II Jewelry, LLC v. Wooten, No. 15 C 6950, 2016 WL 4011233 (N.D. Ill. July 27, 2016) (motion to dismiss the counterclaims); Act II Jewelry, LLC v. Wooten, No. 15 C 6950, 2016 WL 3671451 (N.D. Ill. July 11, 2016) (motion to dismiss the operative complaint). The facts relevant to the Motion to Dismiss were taken from the Third Amended Complaint and the facts relevant to the Motion for Summary judgment were taken from the parties’ 56.1 statements.
On December 1, 2014, Act II announced it would be winding down its direct-selling, party plan jewelry business in the United States and Canada and its sales advisors would be selling its Fall/Winter 2014 collection at discounted prices through December 31, 2014. (Id. ¶ 13.) To ensure an orderly wind down process, Act II entered into a Key Employee Incentive Bonus Agreement (the “Incentive Agreement“) with Wooten, which provided
When Act II decided to close shop, Wooten decided to open her own business in the same industry. (Id. ¶ 78-79.) On October 30, 2014, several months prior to her termination, Wooten incorporated Adornable-U, a direct-selling jewelry business. (Id.) The crux of the dispute is the propriety of Wooten‘s activities from October 2014 to her termination date with Act II on February 9, 2015. (Id. ¶¶ 72-130.) However, we need not delve intо the details of her actions here. The pending Motion to Dismiss revolves around Wooten‘s relationship with KEC and one other company, not her relationship with Act II.
KEC was one of Act II‘s creditors. Following the wind down of Act II‘s business, Act II transferred its inventory and most of its other assets to KEC pursuant to an asset foreclosure. (3d Am. Compl. ¶ 1.) KEC then established K-FIVE LLC (“K-FIVE“) as a Delaware limited liability company to market and license jewelry styles under Act II‘s brand through e-commerce channels. (Id. ¶ 3.) It is unclear exactly what rights were transferred from Act II tо KEC and, similarly, from KEC to K-FIVE.
Relevant to Wooten‘s Partial summary judgment motion, Wooten was never a member, controlling member, manager, or director of
After a prior ruling which dismissed several counts, four counts remain against Wooten: the breach and default of the Loan Agreement (Count II); the brеach of the Incentive Agreement (Count III); the breach of fiduciary duty (Count IV); and the violation of the Illinois Trade Secrets Act (Count VI). The Third Amended Complaint alleges these same claims, but adds two new parties, KEC and K-FIVE, as well as several counts that were previously dismissed. (See, generally, 3d Am. Compl.) Defendants’ Motion to Dismiss takes issue with the additional parties and Wooten‘s Motion for Summary Judgment deals exclusively with the breach of fiduciary duty claim. The Court takes each in turn.
II. ANALYSIS
A. Motion to Dismiss
1. Standard of Review
To survive a motion to dismiss under
2. Previously dismissed Counts I, V, VII, VIII, and XI
Counts I, V, VII, VIII, and XI were dismissed with prejudice in this Court‘s Memorandum Opinion and Order dated July 11, 2016. (ECF No. 90.) Plaintiffs explained in a footnote that these counts were re-asserted in the Third Amended Complaint to prevent any argument of waiver on appeal. For the reasons expressed in its earlier opinion, Counts I, V, VII, VIII, and XI are dismissed with prejudice. See, Act II Jewelry, LLC v. Wooten, No. 15 C 6950, 2016 WL 3671451 (N.D. Ill. July 11, 2016).
3. Additional parties for Counts II, III, IV, and VI
Defendants move to dismiss KEC and K-FIVE from several of the remaining counts on the basis that they are not real parties in interest under
Defendants argue that KEC and K-FIVE are not the real parties in interest because absent from the Complaint is any allegation that Act II‘s cоntractual or other rights were assigned or transferred to KEC or K-FIVE. Plaintiffs contend that their Third Amended Complaint is sufficient, pointing to its allegations that most of Act II‘s inventory and assets were transferred to KEC and that K-FIVE was established to sell Act II‘s brand through e-commerce channels. (3d Am. Compl. ¶¶ 1, 3.) Plaintiffs rely on an Article III standing case, Alliant Energy Corp. v. Bie, to argue their allegations are sufficient. See, Alliant Energy Corp. v. Bie, 277 F.3d 916, 920 (7th Cir. 2002) (“It is easy to imagine facts consistent with this complaint and affidavits that will show plaintiffs’ standing, and no more is required.“).
Plaintiffs conflate Article III standing with
Plaintiffs claim their allegations are sufficient at this stage and that further information as to exactly who holds what rights is more properly addressed at summary judgment. This is incorrect. The proper time to bring the challenge is on a
Plaintiffs’ answer to that question is, “They might be.” They argue that “K-FIVE would potentially be a real party in interest with resрect to some or all of those claims as a successor-in-interest or assignee of Act II.” (Mem. in Opp‘n Mot. to Dismiss at 7 (emphasis added); Id. at 8 (same argument as to KEC)).
The Court does not here decide if KEC and/or K-FIVE are real parties in interest, only that the Third Amended Complaint has
The Court now addresses the specific counts at issue. Turning to the breach of fiduciary duty claim (Count IV), Defendants argue that Wooten was never employed by KEC or K-FIVE and therefore never owed any fiduciаry duty to either. Accordingly, no allegations exist to support a claim that Wooten owed a fiduciary duty to KEC or K-FIVE. Plaintiffs concede that Wooten had no employment relationship with K-FIVE and alleges no facts to indicate Wooten had an employment relationship with KEC that would create a fiduciary relationship. (Mem. in Opp‘n to Defs.’ Mot. Dismiss at 6-7; see, generally, 3d Am. Compl.) Accordingly, the
Turning to the breach of contract claims (Counts II and III), KEC and K-FIVE are not signatories to the Incentive Agreemеnt in Count III and K-FIVE is not a signatory to the Loan Agreement in Count II. Nor is there any allegation in the Third Amended Complaint that Act II‘s rights under these agreements were assigned to either K-FIVE or KEC or that K-FIVE or KEC operate as a successor-in-interest to Act II. This ends the analysis. “[O]nly a party to a contract or those in privity with him may enforce the contract. . . . The mere fact that a person was injured by a breach of contract or that he acted in reliance on it does not create a right to pursue a claim for breach of contract which he otherwise would not have had.” Sabath v. Mansfield, 377 N.E.2d 161, 168-69 (Ill. App. Ct. 1978) (citations omitted). As to Count II, K-FIVE is dismissed without prejudice. As to Count III, KEC and K-FIVE are also dismissed without prejudice. If certain contract rights were assigned, Plaintiffs must amend their Complaint to say so.
As to the Illinois Trade Secrets claim (Count IV), the Third Amended Complaint alleges only that Act II, and not KEC or K-FIVE, owned the trade secrets at issue. (3d Am. Compl. ¶¶ 15-19.) Further, the Third Amended Complaint also fails to allege that Act II‘s trade secrets were transferred to either K-FIVE or KEC.
The Complaint‘s most recent amendment seems to have been motivated by Plaintiff‘s fear of losing their claims. Although Plaintiffs acknowledge that K-FIVE was not a signatory and that
Accordingly, Defendants’ Motion to Dismiss is granted without prejudice as to K-Five for Counts II, III, IV, and VI and as to KEC for Counts III, IV, and VI. Counts I, V, VII, VIII, and IX are also dismissed with prejudice, consistent with this Court‘s earlier ruling.
1. Standard of Review
Wooten moves for summary judgment on Act II‘s breach of fiduciary duty claim. Summary judgment is appropriate when the admissible evidence reveals no genuine issue of any material fact and the movant is entitled to judgment as a mаtter of law.
2. What law applies?
Before deciding the question, the Court must first determine what law to apply. Wooten argues that Delaware law applies here because Illinois has adopted the internal affairs doctrine which applies the law of the state of incorporation to a breach of fiduciary claim (Act II was incorporated in Delaware). On the other hand, Plaintiffs argue that the internal affairs doctrine does not apply because the breach of fiduciary duty alleged here is not related to Act II‘s internal affairs and thus Illinois’ general choice of law rules apply, which strongly favor Illinois law.
A federal court exercising diversity jurisdiction applies the choice-of-law rules in the forum in which it sits—here, Illinois law. CDX Liquidating Trust v. Venrock Assocs., 640 F.3d 209, 212
The “internal affairs” doctrine 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, 640 F.3d at 212 (quoting Edgar v. MITE Corp., 457 U.S. 624, 645 (1982)) (citations omitted).
Wooten starts off strong with recent Seventh Circuit authority that seems to be dispositive of the issue: Illinois choice of law principles “make the law applicable to a suit . . . for breach of fiduciary duty that оf the state of incorporation.” (Def.‘s Mem. in Supp. Mot. Summ. J. at 2 (quoting CDX Liquidating Trust v. Venrock Assocs., 640 F.3d 209, 212 (7th Cir. 2011))). To the Court‘s dismay, however, Wooten removed three key words from this quotation and replaced them with ellipses. These words are: “against a director.” Undisputedly, Wooten is not a director. To imply that CDX always commands courts to use the law of the state of incorporation for all breach of fiduciary claims overstates the law. Hopefully, although not explicitly addressed, this alteration was made to reflect the trend of this district, discussed further below. Regardless, the internal
Plaintiffs argue that this case escapes the internal affairs doctrine because the doctrine only applies to suits involving corporate governance or “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders.” CDX Liquidating Tr. v. Venrock Assocs., 640 F.3d 209, 212 (7th Cir. 2011) (quoting Edgar, 457 U.S. at 645). This suit, according to Plaintiffs, does not fall within that realm. They distinguish Wooten‘s case law by pointing out that each of her cases involves corporate governance. See, CDX, 640 F.3d at 212 (alleging breach of fiduciary duty claims against several former directors); Northbound Group, Inc. v. Norvax, Inc., 5 F. Supp.3d 956, 979 (N.D. Ill. 2013) (dispute between various companies and directors largely involving an asset purchase agreement), aff‘d on other grounds, 795 F.3d 647 (7th Cir. 2015); Newell Co. v. Peterson, 758 N.E.2d 903, 924 (Ill. App. Ct. 2001) (shareholder dispute). In support, Plaintiffs point to several cases that decline to apply the internal affairs doctrine where the issues do not involve corporate governance. See, Edgar, 457 U.S. at 645 (finding the internal affairs doctrine did not apply where the suit concerned transfers of stock by shareholders to a third-party); LaPlant v. Nw. Mut. Life Ins. Co., 701 F.3d 1137, 1140 (7th Cir. 2012) (refusing to apply the internal affairs
In any event, none of Plaintiffs’ cases involve an analogous breach of fiduciary duty claim and none of Wooten‘s cases involve a defendant outside the corporatе governance structure. Thus, the parties speak past each other. Notably, two other courts in the Northern District have applied the internal affairs doctrine in such a case. In Automated Concepts Inc. v. Weaver, No. 99 C 7599, 2000 WL 1134541, at *5 (N.D. Ill. Aug. 9, 2000), a court from this district applied the internal affairs doctrine to an employer‘s breach of fiduciary claim, reasoning:
At least one court has applied the doctrine to an employer‘s breach of fiduciary duty claims against employees regardless of whether they hold a director or officer рosition. Regal–Beloit Corp. v. Drecoll, 955 F. Supp. 849, 857–58 (N.D. Ill. 1996). The Court finds no plausible reason for distinguishing between an officer or director and an employee, and ACI provides none. After all, the application of a predictable rule of law with regard to mid-level employees is equally beneficial—especially where, as here, the employer does business in different states, i.e., Illinois, New Jersey, and New York.
This Court has reservations as to whether the purpose of the internal affairs doctrine supports the expansion of this doctrine.
3. Under Delaware law, did Wooten owe a fiduciary duty to Act II?
As such, Wooten wins the choice-of-law battle, but not the war. Wooten relies on the rule that “only controlling members and managers of an LLC who are named as such in the LLC‘s operating
Certainly, it is true that Delaware has a default rule concerning the fiduciary duties imposed on members and managers and that Delaware also allows those default rules to be modified by contract, but that does not mean that principles of agency do not apply. Under Delaware law, “key managerial personnel” owe fiduciary duties to the company based on fundamental principles of agency law. Sci. Accessories Corp. v. Summagraphics Corp., 425
Wooten argues that the principles of those cases apply only to corporations and not LLCs. However numerous cases find employees of LLCs owe fiduciary duties to their employer. See, e.g., Wayman Fire Prot., Inc. v Premium Fire & Sec., LLC, 2014 WL 897223, at *20 (Del. Ch. 2014) (reasoning that the defendant did not owe general fiduciary duties to the company, but did owe duties to the company under рrinciples of agency law); Triton Const., 2009 WL 1387115, at *10 (holding that former employee breached fiduciary duty under agency law, applying Delaware law); Aquent LLC v. Stapleton, 65 F. Supp.3d 1339, 1349 (M.D. Fla. 2014) (applying Delaware law and holding that a former employee of an LLC—who was not a manager—owed fiduciary duties to the LLC).
Eventbrite misguidedly relies on Delaware law regarding, for instance, when a member or manager of an LLC (or an officer or director of a corporation) owes a fiduciary duty to the company, as opposed to when an agent or employee owes such duties. Thus, the case law cited by Eventbrite addressing issues such as whether non-controlling minority members of an LLC owe fiduciary duties to the LLC is inapposite.
Wantickets, No. 654277, 2017 N.Y. Misc. LEXIS 2780, at *9 n.6 (emphasis added).
These cases stand for the proposition that minority members of an LLC do not owe a fiduciary duty to other members when they are neither managers nor controlling members. None of the cases cited, however, contains the facts presented here—allegations that Third Party Defendants took actiоns not simply as minority members, but as directors of the company, funneling money to themselves and depriving Digital of its rightful disbursements.
Dancesport Videos Ltd. Liab. Co. v. Kunitz, No. CV11-1850, 2012 U.S. Dist. LEXIS 156624, at *11 (D. Ariz. Nov. 1, 2012) (emphasis added) (internal citations omitted). Thus, Wooten may owe
IV. CONCLUSION
For the reasons stated herein, Defendants’ Motion to Dismiss [ECF No. 199] is granted. Wooten‘s Partial Motion for Summary Judgment [ECF No. 202] is denied.
IT IS SO ORDERED.
Harry D. Leinenweber, Judge
United States District Court
Dated: 3/14/2018