Trinity Indus. Leasing Co. v. Midwest Gas Storage, Inc.
| Decision Date | 21 March 2014 |
| Docket Number | No. 13 C 439,13 C 439 |
| Citation | 33 F.Supp.3d 947 |
| Parties | Trinity Industries Leasing Company, Plaintiff, v. Midwest Gas Storage, Inc., Putnam Energy LLC, Terrence O'Malley, and Deborah J. O'Malley, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
Eric Neal Macey, Michael Alan Weinberg, Novack and Macey, LLP, Chicago, IL, Dorothea L. Vidal, Geary Porter & Donovan P.C., Addison, TX, Offer Korin, Katz & Korin, P.C., Indianapolis, IN, for Plaintiff.
Gary G. Hanner, Hanner Hanner & Hanner, Rockville, IN, Timothy D. Elliott, Kaitlyn Anne Wild, Rathje & Woodward, LLC, Wheaton, IL, for Defendants.
Plaintiff Trinity Industries Leasing Company (“Trinity”) filed this action against Defendants Midwest Gas Storage, Inc. (“Midwest Gas”), Putnam Energy LLC (“Putnam Energy”), Terrence O'Malley, and his wife Deborah J. O'Malley, alleging a host of claims related to the breach of a 2007 contract for the lease of railcars between Trinity and Indiana Corn Products, LLC (“Indiana Corn”). After Indiana Corn failed to make regular monthly payments, Plaintiff terminated the lease and repossessed its railcars in November 2008. Plaintiff then filed suit against Indiana Corn in Texas state court for breach of contract. On August 7, 2009, the Texas court entered a default judgment against Indiana Corn for more than nine million dollars, multiples of the unpaid lease amount. Plaintiff has yet to recover on that judgment.
In the case before this court, Plaintiff claims that, as of September 2006, Indiana Corn was an “empty shell” corporation, which Defendant Mr. O'Malley, as “president and chief executive officer,” used to carry out a scheme to defraud Plaintiff. Mr. O'Malley is the thread tying each of the Defendants to Plaintiff's lease with Indiana Corn: both Midwest Gas and Putnam Energy are allegedly “controlled and/or owned in whole or part” by the O'Malleys, and received some of the proceeds from a sublease of the railcars. Seeking to recover on its judgment against Indiana Corn, Plaintiff has asserted an alter ego claim and various state law claims, including fraud or tortious interference against Mr. O'Malley, and has made allegations of fraudulent transfer and equitable “claims” of “money had and received,” unjust enrichment, and constructive trust against all Defendants. Defendants move to dismiss the first amended complaint for failure to state a claim. For reasons discussed herein, Defendants' motion [94] is granted in part and denied in part.
The following alleged facts are drawn from the First Amended Complaint and from the lease and sublease attached to it. The facts are set forth in a light most favorable to Plaintiff.
Plaintiff Trinity is “in the business of leasing railcars to meet the freight railcar needs of industry.” (Pl.'s First Am. Compl. [92], hereinafter “Am. Compl.,” ¶ 13.) On March 13, 2007, Plaintiff and Indiana Corn, a Delaware limited liability company with its principal office in Illinois, entered into a ten-year lease agreement in which Plaintiff agreed to lease 150 railcars to Indiana Corn in exchange for a monthly payment of $650 per car through October 31, 2008, and $732 per car beginning November 1, 2008. (Trinity Indus. Leasing Co. R.R. Car Lease Agreement, Ex. 1 to Am. Compl., hereinafter “Lease,” at 1–2; Rider One (1) to R.R. Car Lease Agreement, Ex. 1 to Am. Compl., hereinafter “Rider,” at 1–2.) Plaintiff alleges that Jim Zegar, the chief financial officer of Indiana Corn, acted “at the direction and under the control of [Mr.] O'Malley,” when he signed the lease on behalf of Indiana Corn. (Am.Compl.¶¶ 13, 28.) To carry out the lease, Plaintiff purchased 150 new railcars, which “were built and delivered as directed by [Mr.] O'Malley” before June 1, 2007, and Indiana Corn was obligated to begin monthly payments ($97,500 per month) soon thereafter. (Id. ¶¶ 31–32.) Rent for the railcars was pro-rated for the first month and thereafter was due before the first day of the month. (Lease.)
Plaintiff and Indiana Corn's relationship went south almost immediately. Plaintiff alleges that Mr. O'Malley, acting on behalf of Indiana Corn, “never had any intention of paying [Plaintiff],” but rather plotted a “scheme” to “use the corporate form” to lease railcars from Plaintiff, sublease the same railcars to other companies, and then funnel the sublease proceeds to himself personally and other entities in which he had an interest. (Am.Compl.¶ 23.) Indiana Corn did sublease the railcars to ConAgra in April 2007, and never made any lease payments to Plaintiff in 2007. (Id. ¶¶ 30, 41.) ConAgra, meantime, made regular monthly payments to Indiana Corn, the proceeds of which Plaintiff alleges were transferred to Mr. O'Malley personally, to Midwest Gas, to Putnam Energy, and to Hartford Bio–Energy (“HBE”). (Id. ¶¶ 34–39, 41.) These transfers had no legitimate business purpose, Plaintiff contends, and are not properly documented. (Id. ¶¶ 48–49.) After Indiana Corn's board allegedly terminated Mr. O'Malley's “exclusive control” over Indiana Corn's bank account, on March 18, 2008, Indiana Corn finally began making monthly lease payments to Plaintiff, but has not paid the amount past due. (Id. ¶¶ 45, 47.)
In order to carry out his scheme, Plaintiff alleges that Mr. O'Malley induced Plaintiff to enter into the lease by misrepresenting the viability and financial condition of Indiana Corn. In March 2006, Mr. O'Malley, on behalf of Indiana Corn, approached Plaintiff seeking to lease railcars. (Am.Compl.¶ 13.) As part of the negotiations, Mr. O'Malley represented to Mike Meaney, a “Trinity executive” (Defs.' Reply in Supp. of Am. Mot. to Transfer or Dismiss [65], at 4), that “Indiana Corn operated two ethanol plants,” one in Cloverdale, and another in Hartford City, Indiana, named “Hartford Bio–Energy,” each of which “produced 88 million gallons of ethanol from 35 million bushels of corn” annually. (Am.Compl.¶ 14.) Mr. O'Malley also assured Mr. Meaney, both in person and on the phone, that Indiana Corn was a “fully funded, operational and viable entity,” a representation that Mr. O'Malley allegedly “repeated ... both expressly and through many implications from March 2006 through June 2007.” (Id. )
In reality, Plaintiff claims, at the time that the parties were negotiating this lease, Indiana Corn was in the process of selling its business. On or around September 15, 2006, Indiana Corn “closed a sale that had been in progress for months and was committed to by no later than July 2006,” which “disposed of virtually all of [its] assets, including all of its land, permits, and plans” and distributed sales proceeds to its members. (Id. ¶ 19.) Indiana Corn also “transferred all of its vehicles, computers, and other office equipment to other entities including HBE [Hartford Bio–Energy].” (Id. ) By November 2006, Indiana Corn allegedly had “no employees,” “no assets,” and “no operations.” (Id. ¶¶ 57(a)–(c).) Furthermore, as part of the sale, Indiana Corn and its owners had signed a non-compete agreement, that Plaintiff asserts, “prevented [Indiana Corn] from realistically engaging in any business whatsoever.” (Id. ¶ 57(e).) Though Indiana Corn initially retained a water pipeline easement used by the Cloverdale plant, Plaintiff claims that this was due to “an oversight by the buyer,” corrected on December 18, 2007, when the original buyer purchased that final asset for $600,000. (Id. ¶ 40.) And, contrary to Mr. O'Malley's representations, Indiana Corn never owned or controlled HBE; instead, Mr. O'Malley was both president and 40% owner of HBE, “a highly speculative venture that was never capitalized sufficiently to enable it to begin any operations at all.” (Id. ¶¶ 20, 57(m).)
As to the financial condition of Indiana Corn, on July 24, 2006, Jim Zegar, Indiana Corn's chief financial officer, “at the direction and under the control of [Mr.] O'Malley” allegedly represented to Plaintiff that Indiana Corn expected to make $250,000,000 in future annual sales. (Id.¶ 18.) Then, in November 2006, Mr. O'Malley provided Plaintiff with a written statement of Indiana Corn's financial condition as of November 22. (Id. ¶ 17.) According to that statement, Indiana Corn had: (1) $571,099.45 in “cash or cash equivalents;” (2) “fixed assets in the form of a pipeline, plant construction, vehicles and office equipment worth at least $873,008.41;” (3) “stock worth over $23,000,000 in an entity by the name of ‘Altra’;” (4) “less than $300,000” in liabilities “including all of its accounts payable and payroll;” and (5) no outstanding debts to individuals. (Id. ) Either O'Malley or Zegar also “expressly represented” that “HBE did not have a receivable owed to it from any related or affiliated entities.” (Id. ¶ 55(j).) Had these representations been truthful, Plaintiff contends, they would mean that “Indiana Corn had adequate working capital and assets to operate a business and lease the railcars with a realistic potential of generating much more capital.” (Id. ¶ 18.)
In fact, as of November 22, 2006, Indiana Corn allegedly had “less than $140,000” in available cash. (Id. ¶ 19.) Furthermore, Plaintiff claims, Indiana Corn never owned $23,000,000 in Altra stock; rather, Mr. O'Malley and other Indiana Corn members received Altra stock “personally” as part of the September 15 sale. (Id. ¶ 21.) Neither O'Malley nor Zegar disclosed the September 15 sale or its impact on Indiana Corn's financial condition to Plaintiff. (Id. ¶ 22.)
After providing Plaintiff with the false financial statement, on November 30, Mr. O'Malley and Mr. Zegar “began systematically transferring any cash that Indiana Corn had in its bank account” to Mr. O'Malley and entities in which he had an interest, including Putnam Energy, Midwest Gas, and HBE. (Id. ¶ 24.) Specifically, Plaintiff alleges, Indiana Corn made the following...
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