Damian v. Heartland Bank & Tr. Co.
| Decision Date | 15 December 2021 |
| Docket Number | 20 C 7819 |
| Parties | MELANIE DAMIAN, as Receiver of Today's Growth Consultant, Inc. dba The Income Store, Plaintiff, v. HEARTLAND BANK AND TRUST COMPANY and PNC BANK N.A., Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
The U.S. Securities and Exchange Commission (“SEC”) filed a case against Today's Growth Consultant Inc. (“TGC”), alleging that TGC and its owner, Kenneth D. Courtright III, engaged in a Ponzi scheme that defrauded investors. In connection with those proceedings, the court appointed Melanie Damian as TGC's Receiver, authorizing her to bring lawsuits to recover assets of the Receivership Estate. The Receiver then filed this action against two banks with which TGC and Courtright had accounts, Defendants Heartland Bank and Trust Company (“Heartland”) and PNC Bank N.A. (“PNC”). In her amended complaint, the Receiver alleges that Heartland and PNC violated their obligations under the Illinois Fiduciary Obligations Act (“FOA”), 760 Ill. Comp. Stat 65/1 et seq., breached their fiduciary duties, and aided and abetted Courtright's breaches of fiduciary duty. The Receiver also claims that Heartland violated the Illinois Uniform Fraudulent Transfer Act (“IUFTA”), 740 Ill. Comp. Stat. 160/1 et seq., and was unjustly enriched by its receipt of payments from TGC for Courtright's home mortgage. Heartland and PNC have filed motions to dismiss the amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6).[1] Because the Receiver's allegations do not support an inference that PNC allowed Courtright to misappropriate investor funds with actual knowledge or in bad faith, the Court dismisses all claims against PNC with prejudice. But because the Receiver has sufficiently alleged bases to hold Heartland liable for its actions in facilitating Courtright's wrongful conduct the Receiver may proceed against Heartland on her affirmative FOA claim, as well as the aiding and abetting claim with respect to Heartland's actions on or after September 10 2018, when Heartland learned of the Ponzi scheme. The Receiver also has sufficiently pleaded her IUFTA claims against Heartland, but she has not set forth a sufficient basis for the unjust enrichment claim.
BACKGROUND[2]
TGC, also known as The Income Store, claimed it would provide investors with a guaranteed rate of return through revenues it generated from websites it built and acquired. Courtright served as TGC's principal and president, with controlling authority over TGC.
TGC advertised its investment opportunities by touting its expertise in monetizing websites. Interested investors entered into Consulting Performance Agreements (“CPAs”) with TGC. Between January 2017 through October 2019, TGC raised at least $87 million from over 500 investors. Pursuant to the CPAs, investors paid an upfront fee that TGC would use “exclusively for the purchase, hosting, maintenance and marketing of the revenue generating website.” Doc. 29 ¶ 24. In exchange, TGC guaranteed investors a minimum rate of return in perpetuity on the revenue TGC generated from those websites. Typically, the return, paid monthly, was the greater of up to 20% of an investor's initial investment or 50% of the investor's designated website's revenue. TGC retained discretionary authority on how to invest the investors' money. In the CPAs, TGC also represented that it was in “satisfactory financial condition, solvent, able to pay its bills when due and financially able to perform its contractual duties, ” as well as that it was “debt-free . . . with no accounts payable or loans outstanding.” Id. ¶ 25.
Although TGC had much success generating investments, its advertised business model proved unsuccessful, with TGC failing to timely purchase and build the promised websites and generate the amount of revenue it had promised to investors. In addition to this revenue shortfall, TGC used investor funds to pay Courtright's personal expenses. Consequently, to cover the guaranteed returns and remain in business, all while funding Courtright's personal expenses, beginning at the latest in March 2015, TGC turned to a Ponzi scheme, paying early investors with money TGC raised from later investors. For example, between January 2017 and October 2019, TGC paid investors at least $30 million, but because investor websites generated only approximately $9 million in advertising and product sales revenue during that time period, TGC funded the shortfall through new investments. TGC also used loans from Heartland and distressed lending companies to help make up the difference. In December 2019, TGC placed a moratorium on investor payments. Ultimately, the majority of investors received less than they had invested or nothing at all.
On December 27, 2019, the SEC filed suit against TGC and Courtright, seeking to terminate the Ponzi scheme and freeze their assets. SEC v. Today's Growth Consultant Inc., No. 19 C 8454 (N.D. Ill.). The court entered an order freezing assets, appointing the Receiver, and staying claims against TGC on December 30, 2019. The Receiver analyzed TGC's books and records. She found that, in 2018, TGC had under $2 million in website revenue but made approximately $12.7 million in payments to investors, with a total loss that year of $5.7 million. This trend continued in 2019, with TGC website revenue under $4 million, investor payouts of $16.5 million, and a $7.5 million loss.
In February 2020, the government filed a criminal complaint against Courtright, charging him with wire fraud. United States v. Courtright, No. 20 CR 77 (N.D. Ill.). Also in February 2020, several investors filed a putative class action complaint against Heartland and PNC, alleging violations of the FOA and related claims. PLB Investments LLC v. Heartland Bank & Tr. Co. (the “PLB Action”), No. 20 C 1023 (N.D. Ill.). The PLB Action is pending before this Court.
TGC had business bank accounts at Heartland, on which Courtright was an authorized signatory. Courtright also had a personal banking relationship with Heartland, and Heartland held a mortgage on his main residence.
Thomas Kentner served as the Heartland loan officer on all of Heartland's loans to TGC and Courtright. Kentner reviewed copies of CPAs, which indicated that investors provided funds solely for the purchase, development, and management of websites and that TGC guaranteed payments to the investors in return. Kentner also reviewed TGC's and Courtright's financial statements. In at least one February 2014 personal financial statement that Courtright provided to Heartland, Courtright claimed ownership of the websites as a personal asset. The TGC statements Heartland reviewed demonstrated that TGC included pending investor payments in its accounts receivable and that investor payments outpaced advertising revenue.
Heartland also knew that Courtright paid his home mortgage with funds from TGC's bank account because Courtright established an automatic transfer from TGC's account to his loan account. Courtright also had asked Kentner about making payments beyond his monthly mortgage payments to pay down his personal debt and establish collateral in the house. Between January 2017 and October 2018, TGC transferred over $323, 000 to pay down the mortgage on Courtright's personal residence, making weekly payments of $3, 000 to the loan account despite the loan requiring monthly principal and interest payments of only $2, 729. Courtright then used the equity in his personal residence as collateral for loans TGC received from Heartland to address its cash flow issues. Courtright also used TGC funds to pay personal expenditures, including school tuition and department store credit cards, with the September 30, 2016 ACH agreement TGC entered with Heartland listing Courtright's children's school, Macy's, and Nordstrom as authorized payees from TGC's account.
Heartland provided TGC with loans and lines of credit beginning in March 2015. In connection with extending financing, Kentner reviewed TGC's loan applications and analyzed its financial statements. In March 2015, Heartland extended a thirty-day loan to TGC for $66, 886 to cover a cash flow deficit. In June 2015, Heartland approved a $90, 000 thirty-day loan to TGC to cover another cash flow deficit. The following month, Heartland extended to TGC a $200, 000 revolving line of credit to fund its accounts receivable, which Heartland renewed in July 2016.
In April 2017, having drawn down $180, 000 of its existing line of credit, Courtright indicated he wanted to increase the line of credit to $500, 000.
When the line of credit matured in August 2017, TGC sought its renewal and provided Heartland with its current financial statements. These financial statements showed that most of TGC's operating income came from investor fees, not revenue from the websites, and that the majority of its accounts receivable were investor payments. Heartland also learned in August 2017 from Courtright that TGC had recently switched accountants for performance-related issues and that the new accountants were in the process of updating TGC's 2016 and 2017 financial statements. Because Heartland “was not comfortable” extending TGC's line of credit for a full year without reviewing TGC's updated financials and future business plans, it extended TGC's line of credit for only three months. Doc. 29 ¶ 66. Heartland proceeded to renew the line of credit in three-month increments three more times while TGC updated its financial statements. Courtright provided TGC with updated CPAs, which reflected that...
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