Apex Management Corp. v. WSR CORP.
| Decision Date | 31 August 1998 |
| Docket Number | No. 97 C 1301.,97 C 1301. |
| Citation | 225 BR 640 |
| Parties | APEX MANAGEMENT CORPORATION and Cedas Realty, Inc., Plaintiffs, v. WSR CORPORATION, Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
Bruce Robert Meckler, Bates, Meckler, Bulger & Tilson, Chicago, IL, for plaintiffs.
Randall Allan Hack, Michael Yetnikoff, Lord, Bissell & Brook, Chicago, IL, for defendant.
Plaintiffs Apex Management Corporation ("AMC") and Cedas Realty, Inc. ("Cedas") filed suit in this Court alleging that defendant WSR Corporation ("WSR") made misrepresentations and committed fraud in connection with its sale of Whitlock Corporation ("Whitlock") to Apex Automotive Warehouse, L.P. ("Apex"). AMC and Cedas contend in Counts I and III that WSR made misrepresentations — upon which they detrimentally relied — regarding Whitlock's value, condition, and management. In Counts II and IV, AMC and Cedas claim that WSR committed fraud by knowingly providing them false financial information about Whitlock in order to inflate the price of the transaction. WSR has moved to dismiss plaintiffs' complaint with prejudice. For the reasons that follow, we grant WSR's motion.
AMC and Cedas are Illinois corporations which, respectively, are the sole general and limited partners of Apex, an Illinois limited partnership. Complt. ¶¶ 1-2. Cedas owns 99% and AMC owns 1% of Apex. Id. ¶ 8. WSR is a Delaware corporation with its principal place of business in New Jersey. Id. ¶ 3. At all relevant times, Apex, AMC, Cedas, and WSR conducted business in Illinois. Id. ¶ 4.
On December 6, 1994, Apex entered into a stock purchase agreement ("SPA") with WSR to purchase all the outstanding stock of Whitlock, a corporation that sold automotive parts through a distribution warehouse and retail stores. Id. ¶¶ 6, 8. AMC, as the general partner of Apex and a fiduciary of Apex and Cedas, negotiated the transaction on behalf of itself, Apex, and Cedas. Id. ¶ 7. In exchange for Apex's acquisition of Whitlock, the SPA required Apex to pay WSR $22,410,466 at the transaction's closing. Id. ¶ 9. It further provided that WSR was to prepare a balance sheet ("Closing Balance Sheet") to reflect Whitlock's value as of the closing date ("Closing Book Value"). Id. ¶ 10.
The Closing Balance Sheet was to have been audited by Deloitte & Touche, L.L.P. Id. The Closing Book Value was to be calculated in accordance with Schedule 2.4(c) of the SPA. Id. ¶ 11. If the Closing Book Value was less than $20,810,466, the SPA obligated WSR to make a post-closing adjustment and refund to Apex the difference between the Closing Book Value and $20,810,466 within 90 days of the closing. Id. ¶ 12. The post-closing adjustment was to be paid along with specified interest that accrued from the closing date to the date of payment. Id. ¶ 17.
On January 27, 1995, the transaction closed and Apex paid WSR $22,410,466. Id. ¶ 13. Through a series of amendments to the SPA, Apex gave WSR until September 1995 to prepare and deliver the Closing Balance Sheet. Id. ¶ 14. WSR delivered several different unaudited closing balance sheets for Whitlock, but never supplied the agreed-upon audited version. Id. ¶ 15. AMC and Cedas allege that an audited Closing Balance Sheet would have reflected a Closing Book Value at least $6,200,000 less than $20,810,466. Id. ¶ 16. Since the closing date, WSR has paid Apex only $1,000,000 in post-closing adjustments. Id.
Plaintiffs' complaint contains four counts based on the Whitlock transaction. Counts I and III claim that WSR made the following misrepresentations in the SPA and the January 27, 1995 confirming certificate. First, in Schedule 2.4(c) to the SPA, WSR inaccurately described Whitlock's Closing Book Value. Id. ¶ 19a. Second, in Schedule 3.7 to the SPA, WSR inaccurately reported the profits and losses for Whitlock's stores and inaccurately described Whitlock's equity. Id. ¶ 19b. Third, WSR inaccurately represented in the SPA that Whitlock's condition had suffered no material adverse change between September 3, 1994 and January 27, 1995-when its stores actually had suffered a substantial reduction in sales volume during that period. Id. ¶ 19c. Finally, WSR inaccurately represented in the SPA that Whitlock had conducted its business consistent with past management practices between September 3, 1994 and the closing date. According to the plaintiffs, Whitlock had in reality conducted its business in a manner that improperly inflated its Closing Book Value by, inter alia, altering its purchasing strategy to overstate inventory and deliberately leaving some of its stores open. Id. ¶ 19d-e.
The misrepresentation counts also allege that WSR owed a duty to both AMC and Cedas because WSR knew and reasonably could foresee at the time of the SPA's negotiation and closing that both AMC, as Apex's general partner and fiduciary to Apex and Cedas, and Cedas would rely on WSR's representations. Id. ¶¶ 21-22, 38-39. Further, plaintiffs allege that AMC did reasonably rely on WSR's representations. Id. ¶¶ 23, 40. As a direct result of WSR's alleged misrepresentations, Apex allegedly overpaid WSR for Whitlock and WSR's agreement not to compete. Id. ¶¶ 25-26, 42-43. Moreover, WSR's misrepresentations allegedly caused Apex to file for bankruptcy, damaged plaintiffs' financial condition, damaged plaintiffs' interest in Apex, and caused plaintiffs to lose business and profits and suffer harm to their reputation, diminishing their value to essentially nothing. Id. ¶¶ 27, 44.
Counts II and IV claim that WSR committed fraud in connection with the Whitlock transaction. Plaintiffs allege that during the negotiations, WSR provided false, misleading financial information to AMC, and to Cedas and Apex through AMC, in order to induce Apex to pay an inflated amount for Whitlock and the non-compete agreement. Id. ¶¶ 30, 47. Specifically, plaintiffs claim that WSR knowingly provided financial information that systematically overvalued certain assets and undervalued certain liabilities, materially increasing Whitlock's apparent value. Id.
The fraud counts also allege that WSR continued to provide Apex erroneous financial information after the closing in order to minimize the post-closing adjustment and to keep Apex's inflated payment. Id. ¶¶ 32-34, 49-51. Additionally, plaintiffs claim that WSR insisted on using Whitlock's general ledger rather than its perpetual inventory system to prepare the balance sheets, despite the fact that the general ledger had never been provided to Apex and did not contain the information needed to prepare the Closing Balance Sheet. Id. ¶¶ 33, 50. Plaintiffs allegedly reasonably relied on this information, as WSR allegedly knew they would. Id. ¶¶ 30, 35, 47, 52.
Apex filed a complaint against WSR in the United States District Court for the Northern District of Illinois in October 1995. That complaint claimed breaches of contract and fraud arising from the Whitlock sale. In February 1996, Apex and Whitlock declared bankruptcy. The Bankruptcy Court entered an order confirming a plan of reorganization for Apex and Whitlock ("Plan") on September 24, 1996. Shortly thereafter, Apex filed an amended complaint against WSR, and pursuant to an agreement between Apex and WSR, the Apex lawsuit was referred to the Bankruptcy Court as an adversary proceeding related to Apex and Whitlock's bankruptcy cases.
Plaintiffs' complaint, which we have summarized above, was filed in Illinois state court on January 27, 1997. It was removed to this Court on February 25, 1997. Thereafter, WSR filed two motions: WSR's Motion to Dismiss Complaint and WSR's Motion to Refer Action to the Bankruptcy Court. On May 20, 1997, this Court denied WSR's motion to dismiss without prejudice and granted WSR's motion to refer the case to the Bankruptcy Court. We specifically requested the Bankruptcy Court to determine whether this action is barred by res judicata to the extent it directly relates to the confirmed plan of reorganization in the Apex case and Apex's prior complaint against WSR.
On November 10, 1997, the Bankruptcy Court declined this Court's request. The Bankruptcy Court held that it lacked subject matter jurisdiction because a court cannot decide the preclusive effects of its own judgments; rather, another court must determine the effect that the first judgment has on its determinations. Based on these developments, this Court reinstated plaintiffs' complaint on November 25, 1997.
A few weeks later, WSR renewed its motion to dismiss. With the Court's permission, plaintiffs refiled pleadings previously submitted to this Court and the Bankruptcy Court to serve as their response to WSR's renewed motion to dismiss.
WSR has moved to dismiss plaintiffs' complaint under Fed.R.Civ.P. 12(b)(6)-(7). Dismissal under these provisions is proper only if "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations" in the complaint. Cushing v. City of Chicago, 3 F.3d 1156, 1159 (7th Cir.1993) (quotations and citations omitted). In deciding whether to grant a motion to dismiss, a court must consider the factual allegations in the pleading to be true and draw all reasonable inferences in favor of the non-moving party. Id.
WSR presents three arguments in support of dismissal: (1) this action is barred under the doctrine of res judicata because the Bankruptcy Court's order confirming the Reorganization Plan precludes it; (2) plaintiffs lack standing to sue; and (3) plaintiffs' complaint fails to name a necessary party. Because we resolve this motion on res judicata1 grounds, we need not address the other two issues.
"The doctrine of res judicata bars relitigation of claims that were or could have been asserted in an earlier proceeding." D & K Properties Crystal Lake v. Mutual Life Ins., 112 F.3d 257, 259 (7th Cir.1997...
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