Toscano v. Koopman

Citations: 148 F. Supp. 3d 679; 2015 U.S. Dist. LEXIS 166992; 2015 WL 8280492Docket: Case No: 15 C 2197

Court: District Court, N.D. Illinois; December 6, 2015; Federal District Court

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Defendants’ motion to dismiss is granted in part, with the plaintiffs' complaint dismissed for failing to meet the verification requirement of Rule 23.1(b). Individual claims in Counts II, IV, and V are dismissed without prejudice, while the motion is denied regarding other claims. The plaintiff, Samuel Toscano, Jr., a minority shareholder in Precision Dose, Inc. and Cup Pac Packaging, Inc., has brought a lawsuit against fellow shareholders Robert Koopman and Frank Darnell, as well as their associated company, Precision Dose Properties, Inc. The allegations include minority shareholder oppression, breach of fiduciary duty, breach of contract, and unjust enrichment, alongside a request for equitable accounting.

The court identifies that the companies, based in Illinois, are owned by Koopman (CEO and President) and Darnell (majority shareholder), while Toscano, Thomas Anderson, and the estate of James E. Kleinheinz hold minority shares. All shareholders are bound by identical shareholders agreements. Key allegations involve a transfer of Cup Pac’s option to purchase real estate to Precision Dose Properties without consideration, which benefitted Koopman and Darnell at Cup Pac’s expense. This transaction lacked independent legal representation and board approval. Subsequently, Precision Dose Properties purchased the real estate and entered into a lease with Precision Dose and Cup Pac, which was similarly negotiated without proper oversight or disclosure to the companies' boards or shareholders. The plaintiff is permitted to file a verified amended complaint within 30 days.

In 2014, the plaintiff sought information from the companies' counsel regarding the March 16, 2010 assignment and the June 1, 2012 lease agreements. In response to the plaintiff's inquiries and complaints, the defendants agreed to reverse the transactions but failed to take any action. 

Upon the death of Kleinheinz, who held 10,000 shares each in Precision Dose and Cup Pac, his shares were managed by his estate or trust. Under the Shareholders Agreements, the shares were to be valued and transferred by June 26, 2013. The companies were also required to inform other shareholders about the potential transfer and provide them with the option to purchase the shares. However, the Kleinheinz shares were neither purchased nor offered to other shareholders, and the defendants did not fulfill their obligations under the agreements. Instead, representatives from the companies claimed that the obligation to transfer the shares was waived, despite the agreements stipulating that amendments must be in writing and signed by all shareholders, which did not occur.

In November 2014, the plaintiff discovered a consulting agreement between Precision Dose and a company controlled by Darnell, which initially paid Darnell $3,750 monthly, later increased to $11,666.67. Darnell, providing no additional consulting services aside from his director duties, received these payments without board approval, which were characterized as disguised dividend payments that should have been distributed to all shareholders. The defendants failed to disclose this agreement and its payments to shareholders, actively concealing them from financial statements. Despite a formal request from the plaintiff for information about transactions involving shareholders, the companies' counsel did not reveal the consulting agreement. The plaintiff requested the termination of the consulting agreement and cessation of payments to Darnell effective December 1, 2014, but this request was denied by Darnell and Koopman.

In 2012, Precision Dose's valuation was criticized by management, notably Darnell and Koopman, for being lower than its actual worth. In 2013, as Darnell and Koopman were aware of the plaintiff's interest in exiting the companies, the shareholders decided to hire BKD, LLP for an independent valuation, which Darnell and Koopman agreed to cooperate with. However, they failed to fulfill this obligation, providing misleading and incomplete information aimed at achieving a minimal valuation. They did not supply growth projections or disclose related party lease payments and disguised dividends. BKD's initial valuation mirrored the criticized 2012 figure and was further reduced after discussions with Darnell and Koopman. Despite the plaintiff's request for a fair market valuation without discounts, the defendants insisted on applying significant discounts based on the plaintiff's minority shareholder status.

The plaintiff advocated for the companies' sale to accurately reflect shareholder value and prevent further dilution from improper financial practices. Alternatively, he requested the companies to buy his shares, which was rejected by Darnell and Koopman, who claimed that selling was not in the shareholders' best interests. Their refusal was motivated by their personal financial ties to the companies rather than shareholder welfare.

The plaintiff has made multiple demands to the Boards of Directors for various forms of relief, including: unwinding lease transactions involving Precision Dose Properties, repurchasing Kleinheinz Shares as per shareholder agreements, canceling a consulting agreement with Darnell, conducting a fair valuation, and either buying his shares or selling the companies' assets. All these requests have been met with refusals.

The Boards of Directors have declined to act on Mr. Toscano's demands, leading the plaintiff to assert that additional requests would be futile due to personal connections between board members and individuals involved in the alleged misconduct. The plaintiff claims minority shareholder oppression under the Illinois Business Corporation Act against Koopman, Darnell, and the companies (Count I); breaches of fiduciary duty and contract (Counts II and III) against Koopman and Darnell; unjust enrichment against Koopman, Darnell, and Precision Dose Properties (Count IV); and seeks an equitable accounting against these parties (Count V). 

In response, the defendants present four arguments for dismissal: 

1. The derivative claims in Counts II-V lack verification as mandated by Rule 23.1(b)(3).
2. The plaintiff lacks standing for individual claims in Counts I, II, IV, and V.
3. Counts I, II, IV, and V do not meet the particularity requirement of Rule 9(b).
4. Counts III, IV, and V fail to state a valid claim.

Regarding the derivative claims, the plaintiff acknowledges the verification issue and has since submitted an affidavit affirming the truth of the complaint's allegations. He argues that a subsequent affidavit may satisfy Rule 23.1(b)’s requirements, referencing a previous ruling which supports this view. However, the court requires a verified amended complaint due to the absence of Seventh Circuit authority. Defendants also assert that the derivative claims lack the required particularity, as the complaint does not specify attempts to secure action from directors or shareholders nor does it provide details on the alleged demands, wrongdoers, or the specific misconduct and resulting harm. The defendants argue that vague assertions of refusal by the Boards lack necessary context regarding the timing and communication of these refusals.

Pleading with particularity requires a plaintiff to detail the fundamental elements of the claim, akin to a news story's lead. In this case, the plaintiff has outlined five specific instances of alleged wrongdoing by defendants Koopman and Darnell: (1) unlawfully usurping Cup Pac’s property purchase option and subsequently leasing it back for their benefit; (2) asserting that the Kleinheinz shares were waived from sale to other shareholders; (3) mischaracterizing monthly dividends as consulting fees while hiding the agreement from the plaintiff; (4) obstructing fair company valuations; and (5) refusing to buy the plaintiff’s shares or sell the companies at fair value. The plaintiff seeks both individual and derivative relief, including an injunction against the defendants' actions and an accounting of benefits derived from these transactions.

The plaintiff claims to have made five demands to the companies' Boards of Directors for the relief sought, detailing these requests in specific letters dated between late 2013 and 2014. The defendants have not provided legal authority necessitating the attachment or quotation of these letters in the complaint. Additionally, the plaintiff has specified the companies' locations, involved persons, agreements, and assets, asserting that the Boards have ignored his demands. The court finds that these allegations meet the particularity standard required under Rule 23.1(b)(3). The defendants argue that the plaintiff's allegations lack sufficient particularity regarding the five incidents. Their objections include claims about the lease's fairness, the ability to compel the sale of shares, reasons for not terminating the consulting agreement, demands for appraisals, and buyout rights under the shareholders’ agreements.

All counts in the complaint, except for the breach of contract claim in Count III, are based on five alleged incidents of fraudulent misconduct, where at least one incident meets the required particularity standard for fraud claims. The court emphasizes that a fraud claim must include at least one allegation of a false statement or concealment of a material fact. Specifically, the plaintiff alleges that defendants fraudulently deprived Cup Pac of its purchase option for property they currently rent, along with concealing the related lease. The defendants' argument regarding the rent being too high is dismissed as irrelevant to the fraud claim. Additionally, the sham consulting agreement is adequately detailed, and the lack of action from certain parties does not undermine this allegation, especially given the Boards of Directors' inaction.

Count III alleges breach of contract due to failure to enforce shareholder agreement provisions regarding the transfer of Kleinheinz shares. The defendants contend that the demand requirement for this derivative claim lacks particularity, but the court finds sufficient allegations supporting the defendants' obligation to enforce the transfer. The defendants also argue that claims of futility in demanding action from the Boards of Directors are inadequate; however, if a demand is adequately pleaded, futility does not need to be established. The court notes that even if the plaintiff failed to plead demands with particularity, the allegations create reasonable doubt regarding the directors' actions and their protection under the business judgment rule. For instance, mischaracterizing dividend payments as consulting fees, without actual consulting services, falls outside reasonable business judgment. Consequently, the court will not dismiss the plaintiff's derivative claims under Rule 23.1(b)(3).

Defendants contend that the plaintiff lacks standing to pursue individual claims in Counts I, II, IV, and V, arguing that he has failed to demonstrate a distinct injury separate from the generalized harm experienced by all shareholders. Under Illinois law, a shareholder can only bring an individual claim if they allege an injury beyond that suffered by the corporation as a whole. The plaintiff asserts that Count I is a minority shareholder claim under Section 12.56 of the Illinois Business Corporation Act, which allows individual shareholders to seek relief for harm caused by the corporation's directors. Defendants counter that the crux of the issue lies in whether the claimed injury affects the corporation overall. They reference Hamilton v. Conley, where a claim under 12.56 was dismissed for failing to show a distinct injury. However, the plaintiff's argument is supported by statutory language allowing individual shareholder remedies for wrongful actions by corporate directors.

Regarding Count II, the plaintiff claims violations of fiduciary duties by directors to both the corporation and shareholders. While directors indeed owe fiduciary duties, the plaintiff must demonstrate a distinct injury to maintain a direct action, which he has not done. Consequently, Count II is dismissed. For Counts IV and V, although the plaintiff argues he can plead these claims alternatively, the lack of a distinct injury remains a fatal flaw, leading to their dismissal as well. The plaintiff has been granted leave to amend his complaint, allowing him to replead Counts II, IV, and V with the necessary factual specificity, including distinct injury allegations, in compliance with Rule 11 obligations.

Defendants seek dismissal of Counts I, II, IV, and V, claiming they fail to meet the heightened pleading standard for fraud under Rule 9(b). The court will not address whether this standard applies to all claims, but assumes it does and finds that the plaintiffs have met it, as the allegations of fraud and misconduct are sufficiently detailed. Regarding Counts III, IV, and V, defendants argue for dismissal under Rule 12(b)(6) for failure to state a claim. The court must accept all well-pleaded allegations as true and draw reasonable inferences in favor of the plaintiff, adhering to the standard that requires only a plausible claim for relief. 

In Count III, the plaintiff alleges that shareholders' agreements mandate actions to value and transfer shares after Mr. Kleinheinz's death, which defendants have allegedly ignored, thus stating a breach of duty. The court finds that the language of the agreements supports this interpretation. In Count IV, defendants assert that the plaintiff has not shown a lack of legal remedy required for unjust enrichment. The plaintiff counters that unjust enrichment can be pleaded as an alternative claim. The court agrees with this stance, allowing the claim to proceed. Defendants also contest the sufficiency of the unjust enrichment claim's allegations regarding the relationship between enrichment and impoverishment. However, the plaintiff claims that the loss of the option to buy the property has impoverished Cup Pac while enriching Precision Dose Properties and the defendants, satisfying the necessary elements of the claim. Thus, unjust enrichment is adequately pleaded.

Defendants claim that the unjust enrichment and accounting claims in Counts IV and V are simply restatements of the breach of fiduciary duty and corporate waste claims in Counts I and II. While this assertion may hold true, it does not justify the dismissal of Counts IV and V at this stage. The court partially grants and partially denies the defendants' motion to dismiss. Specifically, Counts II, IV, and V are dismissed without prejudice, while the motion is denied concerning other aspects. The plaintiff is allowed to file an amended complaint within 30 days, adhering to the court's directives. The court emphasizes that, given the motion to dismiss context, the facts presented in the plaintiff's complaint are taken as true and viewed favorably toward the plaintiff.

Defendants argue that the plaintiff's demands were made to the boards' counsel rather than directly to board members, which they claim undermines the allegations. However, the plaintiff asserts he directly requested relief from the Boards of Directors of Precision Dose Inc. and Cup Pac, which they refused. The plaintiff documented these requests in four letters sent between December 2013 and November 2014. The court notes that even if those letters were directed to counsel, the defendants failed to demonstrate that such a demand is insufficient based on the case they cited. Additionally, while some of the plaintiff's allegations are made "on information and belief," which typically does not satisfy the specificity required for fraud claims under Rule 9(b), the core fraud allegations are sufficiently detailed to meet the rule’s requirements. For instance, the key assertion regarding the unauthorized assignment of Cup Pac’s option to Precision Dose Properties is made without qualifying language, satisfying the necessary specificity.