In re DeMert & Dougherty, Inc.
| Decision Date | 10 August 2001 |
| Docket Number | Bankruptcy No. 98 B 38160.,Adversary No. 00 A 1117. |
| Citation | 271 B.R. 821 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re DeMERT & DOUGHERTY, INC., Debtor. Karen R. Goodman, as Trustee of DeMert & Dougherty, Inc., Plaintiff, v. Phoenix Container, Inc., Joel Schonfeld, Schonfeld & Weinstein, LLP, Kenneth Sokoloff, Thomas Bartkovich and Hollow Brook Holdings, LLC, Defendants. |
David T.B. Audley, Chapman and Cutler, Chicago, IL, for Plaintiff.
Keith A. Shapiro, Matthew T. Gensburg, Greenberg Traurig, Chicago, IL, Daniel J. McMahon, Rebecca M. Rothmann, Jason M. Kuzniar, Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, Chicago, IL, for Defendants.
Karen R. Goodman, Hinshaw & Culbertson, Chicago, IL, trustee.
Trustee Karen Goodman (the "Trustee") brings this adversary proceeding against Defendants Phoenix Container, Inc. ("Phoenix"), Joel Schonfeld ("Schonfeld"), Schonfeld & Weinstein, LLP ("S & W"), Kenneth Sokoloff ("Sokoloff"), Thomas Bartkovich ("Bartkovich"), and Hollow Brook Holdings, LLC ("Hollow Brook"). Defendants move to dismiss, raising both procedural and substantive challenges to the Trustee's suit.
Among the procedural issues raised, Defendants move to dismiss the Trustee's suit for lack of jurisdiction. Alternatively, Defendants ask that the Court either abstain or transfer venue. Addressing the merits, Defendants move under Fed.R.Civ.P. ("Rule") 12(b)(6) and Fed. R. Bankr.P. 7012 to dismiss all counts of the complaint for failure to state a cause of action.
Defendants have submitted 16 exhibits, comprised primarily of pleadings from lawsuits in other forums and pleadings from other matters previously before this Court, along with their motion. As part of her response, the Trustee has submitted 13 exhibits to support the allegations of her complaint.1 Although both sides cite to their exhibits in their arguments on the motion, use of evidentiary materials is limited on a motion of this nature.
Different standards apply in the determinations as to whether Defendants are entitled to the various forms of relief that they seek. A court may consider affidavits and other forms of evidence in ruling on the procedural questions of jurisdiction and whether to abstain or transfer venue. E.g., Remer v. Burlington Area School Dist., 205 F.3d 990, 996 (7th Cir.2000). In contrast, a court generally may not consider materials outside the pleadings in ruling on a motion to dismiss for failure to state a cause of action. E.g., General Electric Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080-81 (7th Cir.1997).
Documents attached to a motion to dismiss are considered part of the pleadings if they are referred to in the complaint, Kaczmarek v. Microsoft Corp., 39 F.Supp.2d 974, 975 (N.D.Ill.1999), and a court may take judicial notice of the existence and filing of papers constituting the record in a case. In re Standfield, 152 B.R. 528, 531 (Bankr.N.D.Ill.1993). Verified schedules and statements filed by bankruptcy debtors also contain evidentiary admissions. Id. However, reference to matters of public record will not defeat a complaint unless the materials unambiguously show that the plaintiff is not entitled to the relief it seeks. See General Electric Capital Corp., 128 F.3d at 1080-81.
In the summary of background facts that follows, there will be some description of other litigation between the parties. However, facts outside the complaint may only be considered in ruling on jurisdiction and in determining whether it is appropriate to transfer venue or to abstain from hearing this matter.
The role of evidentiary materials is very limited in connection with Defendants' arguments under Rule 12(b)(6). Although the pleadings submitted as exhibits are matters of public record, the record from the other lawsuits is not complete, and there has been no judgment in any of those actions. Because isolated allegations from the pleadings in other suits do not unambiguously establish facts foreclosing the relief that the Trustee seeks, they cannot be considered in ruling on the legal sufficiency of the Trustee's causes of action.
The Trustee filed this lawsuit on December 6, 2000, approximately four months after the settlement of an adversary proceeding (the "First Action") that she had brought against Yasar Samarah ("Samarah") and two other parties associated with Samarah (collectively the "Samarah Defendants"). Defendants here were not parties to the First Action.
In the Trustee's First Action she complained that Samarah, the former CEO of Debtor DeMert & Dougherty, Inc. (the "Debtor"), had used $100,000 of the Debtor's funds as earnest money for the purchase of the Pail Division of U.S. Can Company ( ). As part of that transaction (the "Phoenix Transaction"), Samarah received 50 percent of the shares of the stock of Defendant Phoenix Container, Inc. ("Phoenix"), the entity that now holds the Pail Division assets. The Trustee further alleged that after the Phoenix Transaction, Samarah conducted certain aspects of Phoenix's business from the Debtor's place of business and used an additional $50,000 of the Debtor's funds in Phoenix's operations. The Trustee characterized the Phoenix Transaction as a corporate opportunity that had been usurped by Samarah, in breach of his fiduciary duties to the Debtor.
Although alleging in her complaint in the First Action that $75,000 had been repaid to the Debtor, the Trustee stated her belief that Samarah's use of the Debtor's funds was not appropriately characterized as a loan to Samarah. Asserting that the Debtor was the rightful owner of Samarah's Phoenix shares, the Trustee sought an order directing that the Samarah Defendants turn over to her the Phoenix shares for which the Debtor had provided the seed money. In addition, she sought an accounting of the Debtor's assets that had been used to buy Samarah's shares. As part of her request for injunctive relief, the Trustee averred that she had been informed that the Phoenix shares had substantial value and were unique and irreplaceable. The Trustee filed the First Action on March 2, 1999.
In or around the beginning of August 2000, the Trustee and the Samarah Defendants reached a settlement (the "Samarah Settlement") to which other Samarah-related entities2 were also parties. While incorporating a compromise of the First Action, the Samarah Settlement also reflects certain events adverse to Samarah that took place after the Phoenix Transaction. Among those events, U.S. Can apparently was not paid $900,000 of the purchase price of the Pail Division assets. As a consequence, in May 1999, U.S. Can sold 250 shares of Phoenix stock that Samarah had pledged to secure payment of the purchase price. The buyer at the auction sale was American Equities Group, Inc. ("AEG"), the Debtor's secured lender.
As part of the compromise of the Trustee's First Action, the Samarah Settlement assigned certain of Samarah's rights against Defendants to the Trustee. Under the terms of the agreement, the Samarah Parties transferred those 250 shares of Phoenix stock still within their possession and control to the Trustee. In addition, the Samarah Parties assigned to the Trustee "any and all rights and causes of action for dilution of the Phoenix stock held by any of the Samarah Parties, and all rights and causes of action against the Schonfeld Defendants and Other Defendants." However, the settlement contained a provision excepting the following causes of action from the assignment:
all rights and causes of action (i) against the Schonfeld Defendants arising out of or relating to the Schonfeld Defendants' legal representation of any of the Samarah Parties, as alleged in the Legal Malpractice Lawsuit, but not arising out of the Schonfeld Defendants' legal representation of the Debtor; (ii) against the Phoenix Parties, for employee benefits and compensation due from Phoenix, against the Phoenix Parties (other than Phoenix) for breach of fiduciary duties, and against Ken Sokoloff for defamation, all as previously set forth in Cook County Circuit Court Cause No. 99 L 2065; (iii) against Phoenix for indemnity for the cost of defense in the lawsuit captioned Phoenix Container, Inc. v. Yasar Samarah, et al., No. 99 CV 812 and pending in the United States District Court, District of New Jersey (the "New Jersey Lawsuit"), as well as any and all available defenses in the New Jersey Lawsuit; and (iv) the claims for declaratory judgment and damages asserted in consolidated Cook County Cause Nos. 99 L 2064 and 99 CH 3125.
Around the time of the Samarah Settlement, the Trustee also entered into a settlement agreement with AEG (the "AEG Settlement"). Under the terms of the AEG Settlement, AEG transferred to the Trustee the 250 shares of Phoenix stock that it had purchased from U.S. Can. At the same time, the Trustee agreed that AEG's liens extended to the proceeds of liquidation or disposition of the Phoenix stock. However, to the extent proceeds would exceed two million dollars, there was a carve-out of five percent for creditors of the Debtor's estate. Through the Samarah Settlement and the AEG Settlement, the Trustee asserts ownership rights to all 500 shares of Phoenix Stock that Samarah allegedly purchased with the Debtor's funds.
Turning to the assignment provisions in the Samarah Settlement, at the time of the agreement there were four lawsuits between Samarah and other parties to the Phoenix Transaction (the "Samarah Lawsuits") pending in the Circuit Court of Cook County, Illinois (the "Illinois State Court"). The plaintiffs in the...
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