Ferenc v. Brenner

• Decision Date: 21 February 2013
• Docket Number: No. 12 C 2071.,12 C 2071.
• Parties: Sidney FERENC, Legacy Re, Ltd., Rock Solid Gelt Limited, and 407 Dearborn, LLC, Plaintiffs, v. Karen BRENNER, Fortuna Asset Management, LLC, and Michael Horrell, Defendants.
• Court: U.S. District Court — Northern District of Illinois

927 F.Supp.2d 537

Sidney FERENC, Legacy Re, Ltd., Rock Solid Gelt Limited, and 407 Dearborn, LLC, Plaintiffs,

v.Karen BRENNER, Fortuna Asset Management, LLC, and Michael Horrell, Defendants.

No. 12 C 2071.

United States District Court,

N.D. Illinois,

Eastern Division.

Feb. 21, 2013.

Lawrence Mitchell Benjamin, Neal, Gerber & Eisenberg, Chicago, IL, for Plaintiffs.

Lawrence W. Byrne, Pedersen & Houpt, Daniel I. Schlade, Arnstein & Lehr, LLP, Chicago, IL, Scott Wellman, Wellman & Warren, Laguna Hills, CA, for Defendants.

MEMORANDUM OPINION

JOHN F. GRADY, District Judge.

Before the court are: (1) the motion of defendants Karen Brenner and Fortuna Asset Management, LLC (“FAM”) to compel arbitration; (2) the plaintiffs' motion to strike a portion of the defendants' reply brief; and (3) defendant Michael Horrell's motion to dismiss. For the reasons explained below, we grant the defendants' motion to compel arbitration in part and deny it in part, deny the plaintiffs' motion to strike, and grant Horrell's motion to dismiss.

BACKGROUND

Plaintiffs Sidney Ferenc, Legacy Re, Ltd. (“Legacy Re”), Rock Solid Gelt Limited (“Rock Solid”), and 407 Dearborn, LLC (“407 Dearborn”) have sued the defendants for breach of fiduciary duty and RICO fraud. The plaintiffs allege that in 2005 Brenner solicited Ferenc (through his company Legacy Re) to make a $2 million investment in Fortuna Stream, L.P. (Compl. ¶ 11.) Brenner is Fortuna Stream's general partner, and Legacy Re is a limited partner. ( Id.) Brenner is also the managing member of FAM. ( Id. at ¶ 7.) In 2006, Ferenc, Legacy Re, and Rock Solid (another company in which Ferenc holds an interest) entered into “Investment Management Performance Fee Agreements” (hereinafter, “Investment Management Agreements”) with FAM. (See id. at ¶ 12; see also Investment Management Agreements, attached as Exs. 1–3 to Decl. of Karen Brenner.) ¹ Pursuant to these agreement, FAM agreed to provide “investment management services and advice” to Ferenc, Legacy Re, and Rock Solid. (Compl. ¶ 12.) Among other things, FAM established an account at Bear Stearns, in Ferenc's name and for his benefit, over which FAM exercised “discretionary trading authority.” ( Id.)

In 2006, Brenner and FAM advised and encouraged Ferenc to acquire an interest in a $7.25 million loan that Fortuna Stream had made to a company called Scattered Corporation (the “Scattered Loan”). The Scattered Loan was secured in part by mortgages on the properties commonly known as 407 S. Dearborn, Chicago, Illinois (the “Dearborn Property”) and 401 S. LaSalle Street, Chicago, Illinois (the “LaSalle Property.”). ( Id. at ¶ 14.) The Dearborn Property was then owned by Old Colony Partners Limited Partnership (“Old Colony”) and the LaSalle Property was then owned by 401 Properties Limited Partnership (“401 Properties”). ( Id. at ¶ 16.) The plaintiffs allege on information and belief that defendant Michael Horrell had a direct or indirect interest in both properties. ( Id. at ¶ 17.) Ferenc (through Legacy Re) purchased one interest in the loan from Fortuna Stream for $450,000 and another interest (through Rock Solid) from ACF Property Management, Inc. for $3.8 million. ( Id. at ¶ 15.) The plaintiffs allege on information and belief that AFC Property Management was owned or controlled by Alan Fox, another investment client of Brenner and FAM. ( Id.) Scattered Corporation later defaulted on the loan, precipitating another series of transactions. ( Id. at ¶ 18.) First, the Dearborn Property was conveyed to a newly-created entity, plaintiff 407 Dearborn. ( Id.) Initially, Rock Solid and Legacy Re were members of 407 Dearborn along with Fortuna Stream and affiliates of FAM, and the company was managed and controlled by Brenner, FAM, “and/or” Horrell (directly or indirectly through a company called 407 Dearborn Manager, LLC). ( Id. at ¶¶ 18–19.) In June 2011, Rock Solid acquired all of the interests in 407 Dearborn and an affiliate of Rock Solid and/or Ferenc assumed control and management of the company. ( Id.) Second, 401 Properties executed a new promissory note in the amount of $3.2 million payable to Fortuna Stream (the “401 Note”). ( Id. at ¶ 18.) On September 22, 2009, Fortuna Stream assigned to Legacy Re an undivided 6.206% interest in the 401 Note and assigned to Rock Solid an undivided 48.276% interest in the 401 Note. ( Id.) Legacy Re and Rock Solid allege that they have “lost all or much of” their investment in the Scattered Loan and that they are “unlikely” to recoup their investments through the post-default transactions. ( Id. at ¶¶ 26, 29.)

The plaintiffs have filed a four-count complaint against the defendants. In Count I, Legacy Re and Rock Solid allege that Brenner and FAM breached their fiduciary duty by failing to disclose the risks associated with the Scattered Loan transaction. ( Id. at ¶ 23.) They further allege that they were encouraged to invest in the Scattered Loan in order to reduce the exposure of Fortuna Stream, Brenner, and other FAM clients, including Alan Fox. ( Id. at ¶ 24.) In Count II, 407 Dearborn alleges that Brenner, FAM, and Horrell exercised their control over the company to cause it to enter into transactions that benefitted the defendants at the company's expense. (See id. at ¶¶ 34, 37 (alleging that the defendants caused the 407 Dearborn to pay excessive and unnecessary fees to Horrell and his affiliates); 35 (alleging that Brenner, FAM, and/or Horrell caused the company to accept and repay loans from the defendants or their affiliates at high interest rates).) In Count III, Ferenc alleges that Brenner and FAM breached their fiduciary duty to him by recommending investments in which they (and Horrell) benefitted. ( Id. at ¶ 44.) As we read the complaint, those investments included bonds that FAM traded on Ferenc's behalf. (See id. at ¶ 46.) Finally, in Count IV, Ferenc, Legacy Re, and Rock Solid allege that Brenner and Horrell violated the civil RICO statute. ( Id. at ¶¶ 49–60.) ²

DISCUSSION

Brenner and FAM have moved to compel the plaintiffs to submit their claims to arbitration pursuant to arbitration clauses in the Investment Management Agreements. Horrell, who is not a party to the Investment Management Agreements, has moved to dismiss the claims against him under Rule 12(b)(6).

A. Brenner's and FAM's Motion to Compel Arbitration1. Legal Standard

The arbitration clauses in the Investment Management Agreements designate Orange County, California as the forum for arbitration. ( See Investment Management Agreement ¶ 20.) We cannot compel arbitration in a forum outside the Northern District of Illinois. See Federal Arbitration Act (“FAA”), 9 U.S.C. § 4; Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Lauer, 49 F.3d 323, 327 (7th Cir.1995) (“[T]his Circuit has concluded that where the arbitration agreement contains a forum selection clause, only the district court in that forum can issue a § 4 order compelling arbitration.”) (emphasis in original). Neither side has cited Merrill Lynch or otherwise acknowledged this limitation on our authority to compel arbitration. Rather than move to compel arbitration, Brenner and FAM should have moved to dismiss the claims against them for improper venue under Rule 12(b)(3). See Continental Cas. Co. v. American Nat. Ins. Co., 417 F.3d 727, 733 (7th Cir.2005). However, the central question in this case is the same whether we proceed under § 4 of the FAA or Rule 12(b)(3): did the plaintiffs agree to arbitrate the claims asserted in their complaint? See id. (“The central issue in this case is whether Continental agreed to arbitrate this dispute.”). Therefore, in the interests of efficiency, we will convert the defendants' motion to compel arbitration into a motion to dismiss for improper venue. SeeFed.R.Civ.P. 12(b)(3).

Under the FAA, an arbitration clause in a “contract evidencing a transaction involving commerce ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Whether the parties' dispute in this case is subject to arbitration is a question of contract interpretation. See Kiefer Specialty Flooring, Inc. v. Tarkett, Inc., 174 F.3d 907, 909 (7th Cir.1999). However, the Supreme Court has interpreted the FAA to require that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24–25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983); see also Kiefer, 174 F.3d at 909. “[A] court may not deny a party' s request to arbitrate an issue ‘unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.’ ” Kiefer, 174 F.3d at 909 (quoting United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582–83, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960)).

Each of the Investment Management Agreements contains a broad arbitration clause: “[t]he parties agree that in the event of a dispute with respect to this Agreement or their respective obligations hereunder, such dispute shall be settled by arbitration in Orange County, California, in accordance with the rules of the American Arbitration Association.” (See Investment Management Agreement ¶ 20); see also AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 650, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986) (describing a similar provision—“any differences arising with respect to the interpretation of this contract or the performance of any obligation hereunder ...”—as “broad”). Where, as here, the parties have adopted a broad arbitration clause, we will compel arbitration unless there is “forceful evidence” that the parties intended to exclude their grievance from arbitration. Warrior & Gulf Nav., 363 U.S. at 584–85, 80 S.Ct. 1347;see also AT & T Tech., 475 U.S. at 650, 106 S.Ct. 1415 (similar). ³ However, the federal policy...