Seidel v. Byron, 05 C 6698.
| Decision Date | 12 May 2009 |
| Docket Number | No. 05 C 6698.,05 C 6698. |
| Citation | 405 B.R. 277 |
| Court | U.S. District Court — Northern District of Illinois |
| Parties | Scott M. SEIDEL, Chapter 7 trustee for the bankruptcy estate of Mosaic Data Solutions, Inc., Plaintiff, v. Marc BYRON, Ben Kaak, Dominic Ieraci, David Graff and Catherine Barbaro, Defendants. |
Francis Daniel Petro, Petro & Petro PC, Chicago, IL, James F. Adams, Passman & Jones, Dallas, TX, for Plaintiff.
Jay B. Kesten, Seyfarth Shaw LLP, Meghan M. Hart, Robert B. Lovett, Cooley Godward Kronish LLP, Boston, MA, Sara E. Lorber, William Jeffrey Factor, Seyfarth Shaw LLP, Chicago, IL, for Defendants.
Scott M. Seidel ("Plaintiff'), Chapter 7 trustee for the bankruptcy estate of Mosaic Data Solutions, Inc. ("Mosaic Data"), brings this action against Marc Byron, Ben Kaak, Dominic Ieraci, David Graff, and Catherine Barbaro ("Defendants"), the former directors and officers of Mosaic Data, for breach of fiduciary duty, waste, and related claims stemming from their alleged mismanagement of the company leading to its insolvency. (R. 1, Compl.) Presently before the Court is Defendants' motion to dismiss Plaintiffs First Amended Complaint. For the following reasons, the motion is granted in part and denied in part.
Mosaic Data was a Delaware corporation with its principal place of business in Illinois. .) On November 24, 2003, an involuntary bankruptcy petition was filed against Mosaic Data in the Northern District of Texas. (Id.) Plaintiff was appointed to serve as Chapter 7 trustee for Mosaic Data's bankruptcy estate. (Id.)
In November 2005, Plaintiff filed this action alleging that Defendants mismanaged Mosaic Data in violation of their duties under Delaware law, and seeking to avoid an alleged fraudulent transfer of Mosaic Data's assets. (R. 1, Compl.) On September 26, 2008, Judge James B. Moran dismissed Plaintiffs complaint without prejudice, finding that it was "too sketchy to provide defendants with fair notice of the grounds on which the claim[s] rest[ ]."1 (R. 82, Mem. Opinion & Order.) Judge Moran gave Plaintiff an opportunity to replead its claims, and Plaintiff thereafter filed its First Amended Complaint. (R. 83, First Am. Compl.) On April 24, 2008, the case was reassigned to this Court upon the passing of our distinguished colleague Judge Moran. (R. 105, Exec.Comm.Order.)
In the First Amended Complaint, Plaintiff again alleges that Defendants, who are described as "director[s] and/or officer[s]" of Mosaic Data, improperly managed the company, leading to its insolvency. (R. 83, First Am. Compl.) Plaintiff alleges that while acting as directors and/or officers of Mosaic Data, Defendants were also serving as "directors and/or officers of other entities," including Mosaic Group, Inc., Mosaic Sales Solutions, Inc., Mosaic Prepaid Solutions, Inc., and Mosaic Group Partnership (the "Mosaic Group Entities"). (Id. ¶ 12.) Plaintiff alleges that Defendants owed conflicting fiduciary duties to these entities, and that they "operated Mosaic Data from a conflicted perspective as a disposable, undercapitalized business to the detriment of Mosaic Data and its creditors and to the benefit of the Mosaic Group Entities...." (Id. ¶ 13.)
In particular, Plaintiff challenges Defendants' decision in January 2003 to pledge all of Mosaic Data's assets so that the Mosaic Group Entities, which had filed a voluntary petition under Chapter 11 of the Bankruptcy Code a few months earlier, could obtain debtor-in-possession financing ("the Asset Pledge"). (Id. ¶ 15.) Plaintiff alleges that Mosaic Data received no consideration or other benefit in exchange for the Asset Pledge. (Id.) Plaintiff further alleges that Defendants, as officers and/or directors of the Mosaic Group Entities, stood to personally benefit from the Asset Pledge "by, among other things, retaining their lucrative compensation from the Mosaic Group Entities." (Id.) Plaintiff alleges that the Asset Pledge "predictably resulted in substantial harm to Mosaic Data," a once profitable company, and rendered it unable to obtain financing to operate its day-to-day business or pay its creditors. (Id. 17.) Plaintiff alleges that Defendants' "participation in the Asset Pledge was in blatant breach of their fiduciary duties of care and loyalty to Mosaic Data...." (Id. ¶ 18.)
Plaintiff raises seven claims in the First Amended Complaint: In Count I, Plaintiff alleges a claim under Delaware law for breach of trust fund duties owed to Mosaic Data's creditors; in Count II, Plaintiff alleges a claim under Delaware law for breach of fiduciary duties owed to Mosaic Data; in Count III, Plaintiff alleges a claim under Delaware law for waste of corporate assets; in Counts IV and V, Plaintiff seeks to avoid the Asset Pledge as a fraudulent transfer under the Bankruptcy Code, 11 U.S.C. § 548, and the Illinois Uniform Fraudulent Transfer Act ("IUFTA"), 740 ILCS 160/1; in Count VI, Plaintiff asserts a claim for "exemplary damages"; and in Count VII, Plaintiff seeks attorneys fees. Defendants move to dismiss, arguing that the First Amended Complaint is still too vague and fails as a matter of law for numerous reasons.
In determining whether to grant a motion to dismiss, the Court assumes all well-pleaded allegations in the complaint to be true and draws all inferences in the light most favorable to the plaintiff. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); Killingsworth v. HSBC Bank, 507 F.3d 614, 618 (7th Cir.2007). To survive a motion to dismiss, the complaint must overcome "two clear, easy hurdles": (1) "the complaint must describe the claim in sufficient detail to give the defendant fair notice of what the claim is and the grounds on which it rests;" and (2) "its allegations must actually suggest that the plaintiff has a right to relief, by providing allegations that raise a right to relief above the `speculative level.'" Tamayo v. Blagojevich, 526 F.3d 1074, 1084 (7th Cir.2008).
When the plaintiff is alleging fraud, the pleading standard is more stringent. Borsellino v. Goldman Sachs Grp., Inc., 477 F.3d 502, 507 (7th Cir.2007). Rule 9(b) of the Federal Rules of Civil Procedure provides: "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed.R.Civ.P. 9(b). This heightened pleading requirement is a response to the "great harm to the reputation of a business firm or other enterprise a fraud claim can do." Borsellino, 477 F.3d at 507. Thus, "[a] plaintiff claiming fraud or mistake must do more pre-complaint investigation to assure that the claim is responsible and supported, rather than defamatory and extortionate." Id. A complaint alleging fraud must provide "the who, what, when, where, and how" of the fraud. Id. Some courts have recognized that in cases where a bankruptcy trustee pleads fraud, greater liberality should be afforded, since the trustee often must plead fraud based on secondhand knowledge, or may find the debtor's records in disarray. See Seidel v. Byron, No. 05-6698, 2008 WL 4411541, at *2 (N.D.Ill. Sept.26, 2008) (citing cases).
As an initial matter, the Court must determine whether documents submitted by Defendants can be considered in deciding the motion to dismiss. Specifically, Defendants have submitted the following documents along with their motion: (1) Mosaic Data's short form prospectus filed with the SEC; (2) public filings in the Mosaic Group Entities' Chapter 11 bankruptcy case; and (3) Mosaic Data's certificate of incorporation. Mem. in Supp. of Mot. to Dismiss ( ), Exs. A-F.) Plaintiff objects generally to the Court's consideration of any outside documents. (R. 94, PL's Resp. to Defs.' Mot. to Dismiss ("PL's Resp.") at 1-2.) Plaintiff is correct that as a general matter, the Court is precluded from considering documents outside the pleadings in deciding a motion to dismiss, unless the Court converts the motion into one for summary judgment. Fed.R.Civ.P. 12(d). Like most rules, however, there are exceptions. Where a document is referenced in the plaintiffs complaint and is central to the plaintiffs claims, it may be considered in deciding a motion to dismiss. See Hecker v. Deere & Co., 556 F.3d 575, 582 (7th Cir.2009). Matters within the public record also may be considered. Doss v. Clearwater Title Co., 551 F.3d 634, 640 (7th Cir.2008); Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir.1997).
Based on these exceptions, the Court can consider the SEC filing, the bankruptcy court records, and the certificate of incorporation in deciding the motion to dismiss. See, e.g., In re Abbott Labs. Deriv. S'holders Litig., 325 F.3d 795, 810 (7th Cir.2003) (); Bronstein v. Austin, No. 07-3984, 2008 WL 4735230, at *4 n. 3 (); LeClercq v. Lockformer Co., No. 00-7164, 2002 WL 31269491, at *2 (N.D.Ill. Oct.9, 2002) (); Abrams v. Van Kampen Funds, Inc., No. 01-7538, 2002 WL 1160171, at *2 (); In re Newell Rubbermaid Inc., No. 99-6853, 2000 WL 1705279, at *3 n. 2 (N.D.Ill. Nov.14, 2000) (). The Court takes judicial notice of all of these documents, and will consider them in ruling on the motion to dismiss.
Defendants first argue that all of Plaintiff...
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