Plaintiff Michael K. Desmond ("the Trustee") is the Chapter 7 Trustee for the Bankruptcy Estate of Yellow Cab Affiliation, Inc. ("YCA"), a former Chicago taxicab affiliation. The Trustee has filed sixteen counts against the following Defendants: Taxi Affiliation Services LLC ("TAS"); Michael Levine; Patton R. Corrigan; Evan Tessler; Gary Sakata; John Moberg; Yellow Cab Association, Inc. ("New YCA"); Yellow Group LLC ("Yellow Group"); Yellow Medallion Holdings LLC ("YMH"); CL Medallion Holdings LLC ("CLMH"); Taxi Medallion Management LLC ("TMM"); People Mover, LLC ("People Mover"); and Yellow Cab Partners LLC ("Yellow Cab Partners"). In short, the Trustee claims that Defendants engaged in a scheme to render YCA insolvent, so that it could not pay its creditors, and then established a new company that appropriated YCA's valuable trade dress.
Defendants now move to dismiss the Trustee's claims under Federal Rule of Civil Procedure ("Rule") 12(b)(6). Defendants argue that the Trustee's claims fail to meet the heightened pleading standard of Rule 9(b), which requires that allegations
Background
YCA was a Chicago-based taxicab affiliation from 1996 until 2016, when it dissolved. Compl. ¶ 2, ECF No. 1. It had over 1,600 members who paid it dues pursuant to affiliation agreements. Id. ¶¶ 4-5. Yellow Group, which owned YCA, owned and licensed to YCA the design mark YCA used on its vehicles. Id. ¶¶ 6-7, 99, 159-60. Levine, Corrigan, Sakata, and Tessler ("YCA's officers and directors") were officers and directors of YCA. Id. ¶¶ 35-37, 39, 101-02. Levine was the majority owner of People Mover, which held a majority interest in Yellow Group. Id. ¶ 35. The other 45% of Yellow Group was owned by Yellow Cab Partners, an entity wholly owned by Corrigan. Id. ¶ 36. Levine and Corrigan also owned or managed YMH, CLMH, and TMM. Id. ¶¶ 44-46.
YCA passenger Marc Jacobs was injured while riding in a taxicab in 2005. Id. ¶¶ 8, 55-56. Jacobs filed suit in September 2005 against the driver of the vehicle, as well as the owner of the vehicle who was a YCA member, and YCA was later added as a defendant. Id. ¶ 8.
According to the Complaint, in order to prevent creditors from reaching YCA's assets, YCA's officers and directors established TAS in 2006, and Defendant John Moberg became TAS's president. Id. ¶¶ 10, 38, 57, 59-60, 66. Defendants then engaged in a series of transactions to defraud YCA's creditors and prevent YCA from being able to satisfy a possible future judgment against it in the Jacobs lawsuit. Id. ¶¶ 9-15, 56-66, 203-13. For example, YCA paid TAS approximately $6 million per year pursuant to an unfavorable services agreement that had not been negotiated at arms' length. Id. ¶¶ 10, 12, 69-74, 82. TAS continued to charge and collect these fees from YCA despite a decrease in the scope of services it provided, and YCA's officers and directors did not attempt to renegotiate the agreement. Id. ¶¶ 82-86.
In addition, TAS collected and retained all payments from YCA members pursuant to their affiliation agreements with YCA. Id. ¶¶ 11, 57, 79. TAS then transferred portions of that revenue, disguised as "management fees" and "referral fees," to YCA's officers and directors, Moberg, and affiliated companies, including TMM. Id. ¶¶ 57-58, 62, 64, 87-97, 110-11, 120-26. While YCA was still operating, YCA's officers and directors failed to keep accurate records and commingled YCA and TAS funds. Id. ¶¶ 187-202. Using YCA revenue that had been transferred to them, Levine and Corrigan purchased and sold taxicab medallions, but failed to distribute any of
Jacobs obtained a $26 million judgment against YCA in 2015. Id. ¶ 21. YCA then filed for Chapter 11 bankruptcy, which was converted to a Chapter 7 bankruptcy on November 3, 2016. Id. ¶¶ 21, 24, 53, 127. TAS informed YCA on November 15, 2016, that it would no longer provide services to YCA. Id. ¶¶ 26, 138. This forced YCA to cease business operations almost immediately. Id. ¶¶ 30, 136, 141.
On November 17, 2016, certain Defendants formed a new taxicab affiliation, Yellow Cab Association, Inc. ("New YCA"), to solicit members away from YCA. Id. ¶¶ 28, 129-30, 132, 145, 151-52. New YCA is wholly owned by Moberg. Id. ¶¶ 38, 150. After its formation, New YCA used mobile data terminals and other taxicab equipment that belonged to YCA. Id. ¶¶ 153-57. In addition, New YCA used the same color scheme and design mark that YCA had used, merely replacing "Affiliation" with "Association." Id. ¶¶ 29, 166, 168. This tricked customers into believing that New YCA and YCA were one and the same. Id. ¶¶ 158-74.
Based on these events, the Trustee brings the following claims: breach of fiduciary duty (Count I); tortious interference with contractual relations (Count II); tortious interference with prospective business advantage (Count III); violations of the Illinois Uniform Fraudulent Transfer Act ("UFTA"), 740 Ill. Comp. Stat. 160/5 and 160/6 (Counts IV through IX); recovery of avoided transfers under
Legal Standard
To survive a motion to dismiss under Rule 12(b)(6), a complaint must "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly ,
Moreover, allegations of fraud must be pleaded in conformance with Rule 9(b). Borsellino v. Goldman Sachs Grp., Inc. ,
Analysis
Defendants move to dismiss all claims under Rule 12(b)(6) and move for sanctions under Rule 11. Defendants argue that the Trustee's claims should be dismissed because they fail to meet the heightened pleading standard of Rule 9(b). The Trustee disagrees, noting that none of the sixteen counts is based in fraud. Defendants also argue that the Trustee's claims are barred by the statutes of limitations and are precluded by prior bankruptcy proceedings. The Trustee, in turn, contends that the claims are not time-barred because tolling may apply and that the bankruptcy judge's findings have no preclusive effect.
I. Statutes of Limitations
First, Defendants seek dismissal of all the Trustee's claims based on the applicable statutes of limitations, which vary in lengths of up to five years. As Defendants point out, some of the Trustee's claims date back to 2006, and this action was filed 11 years later in 2017. The Trustee in turn contends that the claims are not time-barred on their face because tolling may apply.
The Trustee is correct. Dismissal of claims at the pleading stage based on an affirmative defense of a statute of limitations is appropriate only when a plaintiff pleads facts that "affirmatively show that his suit is time-barred." Clark v. City of Braidwood ,
Here, the Trustee contends that, from 2006 to 2016, Defendants had control of YCA and were acting against its interest. That control did not end until the Trustee's appointment in 2016. Compl. ¶ 127. This action was filed exactly one year later. As such, it is possible that the statutes of limitations on the Trustee's claims were tolled until he was appointed in 2016, and so dismissal based on the statutes of limitations is not warranted at the pleading stage.
II. Preclusive Effect of the Bankruptcy Court's Findings
Defendants also contend that the Trustee's Complaint should be dismissed because the claims are precluded by the Bankruptcy Court's findings. Defs.' Mem. Supp. at 10. YCA filed for Chapter 11 bankruptcy in 2015, and the case was converted to a Chapter 7 case in 2016. Prior to the conversion, the creditors committee
For his part, the Trustee contends that neither res judicata nor collateral estoppel applies because denying the appointment of a Chapter 11 trustee is not a "final judgment," a required element of both preclusive doctrines. Pl.'s Mem. Opp. Mot. Dismiss ("Pl.'s Mem. Opp.") at 10-12, ECF No. 33. See Gambino v. Koonce ,
When preclusion is raised, the party asserting it "bears the burden of showing with clarity and certainty what was determined by the prior judgment." Jones v. City of Alton, Ill. ,
III. Whether Rule 9(b) Applies
The parties also disagree as to the pleading standard that should be applied to the Trustee's claims. Defendants argue that the entire Complaint must be pleaded with particularity under Rule 9(b) and that the claims fail to meet that standard. Defs.' Mem. Supp. at 4. In response, the Trustee contends that Rule 9(b) does not apply to all the claims. He also avers that, in any event, the claims satisfy Rule 9(b).
Rule 9(b) applies not only to claims of fraud but also to those that "sound[ ] in fraud," meaning those "premised upon a course of fraudulent conduct." Borsellino ,
Here, underlying each of the claims is a purported scheme to siphon money from YCA into other entities owned and operated by Defendants, so that YCA would become insolvent and unable to pay its liabilities. As the Trustee puts it, Defendants plotted to "hinder and evade YCA's creditors, while continuing to pay themselves through TAS and a web of affiliated companies." Compl. ¶ 32. The claims, which encompass breach of fiduciary duty, tortious interferences, fraudulent transfers, conversion, and deceptive trade practices, all arise out of this fraudulent scheme. In sum, they all are premised a course of fraudulent conduct, and so Rule 9(b) applies to each of them. The Court will proceed to consider whether each of the claims satisfies that standard.
IV. Breach of Fiduciary Duty (Count I)
In Count I, the Trustee brings a breach of fiduciary claim against YCA's officers and directors Levine, Corrigan, Sakata, and Tessler. Id. ¶¶ 215-37. In addition, the Trustee seeks to hold Moberg liable under a theory of aiding and abetting. Id. ¶ 224. To state a claim for breach of fiduciary duty in Illinois, a plaintiff must plead: "(1) the existence of a fiduciary duty, (2) breach of that duty, and (3) damages to the plaintiff as a result of that breach." Covenant Aviation Sec., LLC v. Berry ,
Illinois law also recognizes aiding-and-abetting liability for breach of fiduciary claims. See Premier Capital Mgmt., LLC v. Cohen , No.
The Trustee claims that YCA's officers and directors (a) transferred YCA revenue to TAS pursuant to an unfavorable services agreement that gave TAS complete control over YCA; (b) used YCA revenue to purchase taxicab medallions, which YCA's officers and directors then sold for their personal gain; (c) solicited YCA members to join other taxicab affiliations, including New YCA; and (d) failed to collect YCA's receivables or keep accurate records. Id. ¶¶ 220-35. The Trustee also contends that Moberg aided in the breach, acting as Sakata's supervisor and giving him direction while he was an officer of YCA. Id. ¶ 103.
V. Tortious Interference with Contractual Relations and Tortious Interference with Prospective Business Advantage (Counts II and III)
In Counts II and III, the Trustee brings claims for tortious interference with contractual relations and tortious interference with prospective business advantage against YCA's officers and directors, Moberg, TAS, and New YCA. Compl. ¶¶ 238-54. In Count II, the Trustee contends that these Defendants intentionally "induced YCA's members to breach their Affiliation Agreements with YCA," causing YCA to lose profits and eventually go out of business. Id. ¶¶ 238-46. In Count III, he alleges that these Defendants "conspired to prevent YCA from forming additional business relationships with current Members and future members," resulting in lost profits. Id. ¶¶ 247-54.
Defendants are correct that these counts fail to satisfy Rule 9(b). The claims state merely that a group of Defendants-consisting of YCA's officers and directors, Moberg, TAS, and New YCA-induced an unspecified amount of YCA members to breach their agreements, at an unspecified time, through unspecified means. And the roles of these Defendants in these activities are left unstated. As such, Counts II and III have not been pleaded with particularity and are dismissed.
VI. UFTA (Counts IV through IX)
In Counts IV through IX, the Trustee brings claims under the UFTA. The UFTA covers two types of fraud: actual and constructive. Cordes & Co., LLC v. Mitchell Cos., LLC ,
Actual fraud occurs "when the debtor has the specific intent to hinder his creditors."
As an initial matter, Defendants argue that the constructive fraud claims (Counts V, VII, and IX) should be dismissed because the Trustee has merely recited the elements of the claims, rather than pleaded facts from which an inference of insolvency can be drawn. See In re Life Fund 5.1 LLC , No.
A. UFTA Claims Against TAS (Counts IV and V)
Turning to the counts themselves, in Counts IV and V, the Trustee alleges that, beginning in 2006, Defendants caused YCA to wrongly transfer approximately $5 million per year to TAS under the services agreement. Compl. ¶¶ 255-70. Count IV alleges a claim of actual fraud under the UFTA, pointing to various "badges of fraud" showing Defendants' intent to defraud YCA's creditors. Id. ¶¶ 255-63. Count V is a claim for constructive fraud, alleging that the transfers were given for inadequate consideration and left YCA insolvent. Id. ¶¶ 264-70.
These claims, too, satisfy Rule 9(b). The claims describe the parties involved in the transfers: YCA and TAS. They identify the property involved and the time frame in which the transfers occurred: $5 million per year and on an annual basis since 2006.
B. UFTA Claims Against Moberg and YCA's Officers and Directors (Counts VI and VII)
In Counts VI and VII, the Trustee claims that, beginning in 2006, Levine and Corrigan received "a large portion" of YCA's revenue, disguised as "management fees," from TAS on an annual basis. Id. ¶¶ 271-85. Other officers and directors also received transfers from TAS. Id. ¶¶ 274-82. Count VI is a UFTA actual fraud claim, while Count VII is a UFTA constructive fraud claim.
Like Counts IV and V, these claims also satisfy Rule 9(b). The Trustee alleges that TAS received transfers from YCA that were then distributed to Levine and Corrigan. Id. ¶ 273. The claims identify the amount of the transfers (approximately $1.5 million per year) and the time frame in which they occurred (annually, beginning in 2006). Id. ¶¶ 273, 276. And the Trustee has again identified how the alleged conduct occurred, identifying the same badges of fraud and alleging that the transfers left YCA insolvent. Id. ¶¶ 276, 283-85. As to Levine and Corrigan, therefore, the motion to dismiss Counts VI and VII is denied.
That said, Counts VI and VII cannot stand against the other Defendants. The Complaint fails to state any specific factual basis for the allegations against Sakata, Tessler, and Moberg, stating only that "upon information and belief," they received "similar fees." Id. ¶¶ 274, 282. But "a plaintiff generally cannot satisfy the particularity requirement of Rule 9(b) with a complaint that is filed on information and belief," unless "(1) the facts constituting
Here, the Complaint provides neither an explanation of why the facts concerning the Defendants other than Levine and Corrigan are unavailable, nor grounds for the Trustee's suspicions that the other Defendants received transfers from TAS. As such, Defendants' motion to dismiss Counts VI and VII is granted as to Sakata, Moberg, and Tessler.
C. Claims Against TMM, YMH, CLMH, Yellow Group, People Mover, and Yellow Cab Partners (Counts VIII and IX)
In Counts VIII and IX, the Trustee alleges that, beginning in 2006, TMM collected a $1 million annual referral fee from YCA pursuant to an alleged oral agreement, without providing reasonably equivalent value. Compl. ¶¶ 286-308. The Complaint states that, "upon information and belief," affiliated companies including YMH, CLMH, Yellow Group, People Mover, and Yellow Cab Partners "also received portions of YCA's revenue from TAS in a similar fashion." Id. ¶¶ 292, 301. But the claims do not adequately describe these Defendants' role in the allegedly fraudulent transfers. And, again, mere information and belief is insufficient to satisfy Rule 9(b). And so, Counts VIII and IX are dismissed as to YMH, CLMH, Yellow Group, People Mover, and Yellow Cab Partners.
The allegations against TMM, however, are sufficiently pleaded. Like the other UFTA claims, Counts VIII and IX clearly identify TMM and YCA as the parties involved. Moreover, the claims indicate the amount and timing of the transfers and the oral agreement for "referral fees" with YCA by which TMM received those transfers. Id. ¶¶ 287-89. And, as in the other UFTA claims, the Trustee identifies various badges of fraud that explain how the transfers violated the UFTA's actual fraud provision. Id. ¶ 293. Further, he alleges YCA's insolvency, explaining the UFTA constructive fraud violation. Defendants' motion to dismiss Counts VIII and IX is accordingly denied as to TMM.
VII. Recovery of Avoided Transfers Under
In Count X, the Trustee seeks to recover from all Defendants the allegedly fraudulent transfers that are the subject of Counts IV through IX. Under § 550 of the Bankruptcy Code, a trustee can recover fraudulent transfers against certain entities, including the initial transferee or the entity or entities for whose benefit the transfer was made, or a transferee of an initial transferee.
VIII. Conversion (Counts XI and XII)
In Counts XI and XII, the Trustee brings two conversion claims against all
A. Conversion of YCA Revenue (Count XI)
In Count XI, the Trustee contends that Defendants have wrongfully assumed control of YCA's revenue. In Illinois, a plaintiff stating a claim for conversion must allege: "1) an unauthorized and wrongful assumption of control, dominion or ownership by defendant over plaintiff's personalty; 2) plaintiff's right to the property; 3) plaintiff's right to immediate possession of the property, absolutely and unconditionally; and 4) a demand for possession of the property." Suburban Buick, Inc. v. Gargo , No.
Defendants are correct that the Trustee's conversion claim fails to satisfy Rule 9(b), because the Complaint does not even meet the requirements for a claim for conversion of money under Illinois law. In particular, Count XI fails to identify specific funds or money. The Trustee alleges that the converted funds are "money [YCA] was entitled to under the Affiliation Agreements" and that TAS "has taken all of YCA's revenue since 2006." Compl. ¶¶ 310-11. The Trustee does not, however, allege a specific amount owed to YCA, nor which Defendants have what amounts. Additionally, the Complaint states that YCA's funds were commingled with other money paid to TAS and other Defendants. Id. ¶¶ 210-11; see Indep. Tr. Corp. ,
B. Conversion of YCA Receivables and Equipment (Count XII)
In Count XII, the Trustee contends that Defendants are in possession of cash receivables and taxicab equipment belonging to YCA. As an initial matter, Count XII must be dismissed as to all Defendants except TAS, because the Complaint alleges that Plaintiff has demanded possession of the property only from TAS. Compl. ¶ 319. See Suburban Buick, Inc. ,
Additionally, the Trustee alleges that YCA demanded the return of its "front of cab" equipment (such as mobile data terminals) from TAS, id. ¶ 319, but the Complaint also indicates that this equipment is in fact in the possession and control of New YCA. Id. ¶ 153. Because the Trustee alleges that New YCA has the property, he cannot state a claim for conversion by pleading that he has sought its return from TAS. The Trustee thus fails to state a colorable claim for conversion as to TAS, and Defendants' motion to dismiss is granted as to Count XII.
IX. Lanham Act and Related Claims (Counts XIII through XVI)
In Counts XIII through XVI, the Trustee brings claims under the Lanham Act,
The Complaint alleges that from 1996 and 2016, YCA was the only Chicago taxicab affiliation operating yellow taxicabs,
A. Lanham Act (Count XIII)
In Count XIII, the Trustee contends that the conduct described above violated the Lanham Act,
Applying Rule 9(b) to the allegations in Count XIII, the Court finds that they are sufficiently particular as to New YCA to meet the heightened pleading standard. To state a Lanham Act claim for false advertising, a plaintiff must allege: "(1) that the defendant made a false statement
As to the other Defendants named in Count XIII, however, the Trustee has not met his Rule 9(b) pleading burden. Count XIII references only New YCA and states specifically that YCA is injured "by reason of New YCA's acts." Compl. ¶ 328 (emphasis added). The Trustee's brief does little to clarify the other Defendants' roles, merely stating that the Lanham Act violation is attributable to "New YCA, through the Officers and Directors controlling [it]." Pl.'s Mem. Opp. at 6-7. Because the allegations are insufficient as to TAS, Yellow Group, Moberg, and YCA's officers and directors, the Court grants Defendants' motion on Count XIII as to those Defendants.
B. Common Law Unfair Competition, UDTPA, and ICFA (Counts XIV through XVI)
Count XIV is an Illinois common law unfair competition claim. In Illinois, however, common law claims for unfair competition have been codified in the UDTPA. Therefore, because the Trustee has also brought a UDTPA claim, the Court need not address the Trustee's common law unfair competition claim separately. Desmond v. Chi. Boxed Beef Distribs., Inc. ,
In Counts XV and XVI, the Trustee brings claims under the UDTPA and ICFA. Because these claims are based on the same factual allegations as the Lanham Act claim, they are analyzed under the same standard. See Desmond ,
Because the Court concludes that the Trustee has sufficiently pleaded a Lanham Act false advertising claim against New YCA, the Court also finds that Counts XV through XVI of the Complaint state claims against New YCA under the UDTPA and ICFA. Because the Lanham Act claim fails
X. Defendants' Motion for Sanctions
Defendants have also filed a motion for sanctions pursuant to Rule 11. The sanctions motion echoes the arguments Defendants offered in their motion to dismiss. They contend that the Complaint contains false statements of fact, asserts claims precluded by the bankruptcy proceedings and barred by the statutes of limitations, and fails to comply with the requirements of Rule 9(b). Defs.' Mem. Supp. Sanctions at 5-15, ECF No. 37.
Under Rule 11(b)(1), a court may impose sanctions if a plaintiff makes legally frivolous arguments or fails to make a proper prefiling inquiry of the facts. See Hernandez v. Joliet Police Dep't,
As to the actual truth or falsity of the Complaint's allegations, the Court will not impose sanctions on that basis at this stage of the proceedings. On a motion to dismiss, the Court accepts as true all of the allegations contained in the plaintiff's Complaint. Iqbal ,
Conclusion
For the reasons provided herein, the Court grants in part and denies in part Defendants' motion to dismiss pursuant to Rule 12(b)(6) [22]. Defendants' motion for sanctions [36] is denied.
The Court grants the Defendants' motion to dismiss Counts II, III, XI, and XII. Additionally, the Court grants the Defendants' motion to dismiss Counts VI and VII as to Moberg, Tessler, and Sakata; Counts VIII and IX as to YMH, CLMH, Yellow Group, People Mover, and Yellow Cab Partners; Count X as to Moberg, Sakata, Tessler, YMH, CLMH, Yellow Group, People Mover, Yellow Cab Partners, and New YCA; and Counts XIII through XVI as to TAS, Yellow Group, Levine, Corrigan, Sakata, Moberg, and Tessler. Accordingly, all claims pending against Yellow Group, YMH, CLMH, People Mover, and Yellow Cab Partners are dismissed.
Defendants' motion to dismiss is denied as to Count I, and Counts IV and V. Additionally, the Court denies Defendants' motion to dismiss Counts VI and VII as to Levine and Corrigan; Counts VIII and IX as to TMM; Count X as to TAS, TMM, Levine, and Corrigan; and Counts XIII through XVI as to New YCA.
In the event that the Trustee wishes to file an amended complaint, he should file a motion seeking leave to file an amended
IT IS SO ORDERED.
Notes
The following facts are taken from the Trustee's Complaint and are accepted as true at the motion to dismiss stage. See Tamayo v. Blagojevich ,
Defendants correctly point out that YCA was added as a defendant in the Jacobs case in August 2007 and was served in January 2008. Defs.' Mem. Supp. Mot. Dismiss ("Defs.' Mem. Supp.") at 5, ECF No. 23. The Trustee admits that a reference in the Complaint to YCA being a party to the lawsuit in 2005 is an error. Pl.'s Mem. Opp. Mot. Sanctions at 7, ECF No. 45.
Although the Complaint does not identify the specific date of each transfer, the allegations comply with Rule 9(b). Requiring a plaintiff to plead the specific dates of transactions is not necessary where he has already provided enough information for a defendant to respond specifically, and courts recognize a relaxed rule of pleading when the alleged conduct spans a significant time period or involves numerous occurrences. See, e.g., In re Yotis ,
The Complaint refers to the Lanham Act claim as one for "unfair competition and false designation of origin." Compl. 58.
Defendants' motion for sanctions seeks to impose sanctions in part based on the Trustee's Complaint misstating that Marc Jacobs sued YCA in 2005, when in fact YCA was added as a defendant in that lawsuit in 2007. See supra note 2. The Court acknowledges the error but declines to impose sanctions on that basis. As the Trustee points out, the allegations in the Complaint do not depend on YCA being a defendant in the Jacobs case in 2005. Pl.'s Mem. Opp. Sanctions at 6-8.