Walls v. VRE Chi. Eleven, LLC

• Decision Date: 25 September 2018
• Docket Number: No. 16-cv-4048,16-cv-4048
• Citation: 344 F.Supp.3d 932
• Parties: Raymond L. and Terryll Ann WALLS, as Co-Trustees of the Raymond L. Walls and Terryll Ann Walls Declaration of Trust Dated May 30, 2002, as Amended July 18, 2013, Plaintiffs, v. VRE CHICAGO ELEVEN, LLC, Verdad Real Estate, Inc., EXP Realty Advisors, Inc., Tartan Realty Group, Inc., Baker Monroe PLLC, B. Jason Keen, Robert J. Moorhead, Russell Smith, Chris Baker, Justin Huston, VPC Chicago11, LLC, Vestapoint Capital II LLC, Aaron Stearns, and Matt Langfield, Defendants. Verdad Real Estate, Inc., and VRE Chicago Eleven, LLC, Third-Party Plaintiffs v. Mark A. Reinsch, Mark A. Reinsch, P.A., DTZ Americas, Inc., Cushman & Wakefield, Inc., and Matthew McNeill, Third-Party Defendants.
• Court: U.S. District Court — Northern District of Illinois

344 F.Supp.3d 932

Raymond L. and Terryll Ann WALLS, as Co-Trustees of the Raymond L. Walls and Terryll Ann Walls Declaration of Trust Dated May 30, 2002, as Amended July 18, 2013, Plaintiffs,

v.VRE CHICAGO ELEVEN, LLC, Verdad Real Estate, Inc., EXP Realty Advisors, Inc., Tartan Realty Group, Inc., Baker Monroe PLLC, B. Jason Keen, Robert J. Moorhead, Russell Smith, Chris Baker, Justin Huston, VPC Chicago11, LLC, Vestapoint Capital II LLC, Aaron Stearns, and Matt Langfield, Defendants.

Verdad Real Estate, Inc., and VRE Chicago Eleven, LLC, Third-Party Plaintiffs

v.Mark A. Reinsch, Mark A. Reinsch, P.A., DTZ Americas, Inc., Cushman & Wakefield, Inc., and Matthew McNeill, Third-Party Defendants.

No. 16-cv-4048

United States District Court, N.D. Illinois, Eastern Division.

Signed September 25, 2018

Gerald P. Greiman, Ryan Christopher Hardy, Spencer Fane Britt & Browne LLP, St. Louis, MO, John Conroy Martin, Sharon Doherty Sirott, Sugar Felsenthal Grais and Helsinger LLP, Chicago, IL, for Plaintiff.

Paige Moray Neel, Michael Vincent Furlong, Rodd E. Elges, Clausen Miller P.C., Chicago, IL, for Third-Party Plaintiffs/Defendants.

James J. Bigoness, Clausen Miller P.C., Justin M. Penn, Lindsey A.L. Conley, Hinshaw & Culbertson LLP, Brian C. Langs, Joseph R. Marconi, Leighann Marie Thomas, Johnson & Bell Ltd., Rita M. Alliss Powers, Symone Danielle Shinton, Caitlyn E. Haller, Greenberg Traurig, LLP., Jeffrey L. Widman, Fox Rothschild LLP, Chicago, IL, Seth T. Goertz, Todd Feltus, Kercsmar & Feltus PLLC, Scottsdale, AZ, for Defendants.

David Alexander Sorensen, Law Office of Edward J. Kozel, Daniel Patrick Jackson, James Vincent Garvey, Vedder Price P.C., Chicago, IL, for Third-Party Defendants.

MEMORANDUM OPINION AND ORDER

Honorable Thomas M. Durkin, United States District JudgeThe Second Amended Complaint (or "complaint") brings ten counts rooted in fraudulent inducement and negligent misrepresentation against several defendants for conduct during the purchase and sale of commercial property located in Cook County, Illinois. R. 89.¹ Two of those defendants, VRE Chicago Eleven, LLC ("VRE") and Verdad Real Estate, Inc. ("Verdad"), brought a Third-Party Complaint for Contribution against five third-parties. R. 93.

Pending before the Court are five motions to dismiss. Defendants Baker Monroe PLLC, Chris Baker, and Justin Huston (collectively the "Baker Monroe defendants") have moved to dismiss the complaint for, inter alia , lack of personal jurisdiction. R. 94. Defendant Matthew Langfield has also moved to dismiss for lack of personal jurisdiction. R. 152. Defendants VPC Chicago11, LLC, Vestapoint Capital II LLC, and Aaron Stearns (collectively, "Vestapoint") have moved to dismiss Count X of the complaint under Fed. R. Civ. P 12(b)(6). R. 129.

Third-party defendants DTZ Americas, Inc., Cushman & Wakefield, Inc., and Matthew McNeill have moved to dismiss the third-party complaint for failure to state a claim. R. 150. Finally, third-party defendants Mark A. Reinsch and Mark A. Reinsch, P.A. have moved to dismiss for failure to state a claim on similar grounds and for lack of personal jurisdiction. R. 166.²

BACKGROUND

A. Acquisition of the Properties and Conversion Side Agreement

Verdad is a large developer of commercial properties, which it leases to single tenants such as fast food restaurants. In March 2014, Verdad and its wholly-owned subsidiary, VRE,³ acquired a group of eleven properties (the "Chicago Eleven Properties") from an entity owned and/or controlled by third-party Jason LeVecke. R. 89 ¶ 22. All eleven properties were leased for use as Kentucky Fried Chicken ("KFC") restaurants, both before and after Verdad purchased the properties. The KFCs were owned and operated by LeVecke entities throughout the relevant period.

Verdad and LeVecke agreed to a sale/leaseback deal in which LeVecke purchased the properties from an unrelated party for $1 million each, and then immediately sold them to Verdad for $1.9 million each. Id. ¶¶ 27-28. After the closing in March 2014, Verdad and LeVecke entered into new leases for $171,000 in annual rent, doubling the amount of rent paid by each KFC for the same operation. (Before the scheme, each KFC paid about $76,000 in annual rent.) The parties each profited from the scheme—LeVecke made just under $1 million for each property he immediately flipped to Verdad. Verdad made short-term profits by selling the properties above Verdad's purchase price through the higher cap rates achieved by the higher rents. Id. ¶ 32.

The deal also contemplated conversion of the Chicago Eleven Properties from KFCs to Hardee's restaurants. $400,000 per store was built into the price paid by Verdad for this purpose. Id. ¶ 38. LeVecke was to renovate and convert each property with the $400,000, and the increased rent amount represented repayment of those costs. Id.

In early 2015, the conversion plans were abandoned. But Verdad already had paid the $400,000 per store in conversion costs to LeVecke. To account for the change, Verdad and LeVecke entered into new leases in February 2015. Id. ¶ 43. Those leases removed the language requiring conversion, but the rent remained the same. Notably, the new leases Verdad entered into were with a different LeVecke entity, MJC Holdings 123, LLC ("MJC"). Id. The leases were guaranteed by yet another LeVecke entity, Frontier Star 1, LLC ("FS1"), as well as by LeVecke personally. Id. ¶ 37. Verdad also entered into a side agreement with LeVecke to account for the conversion costs. In that side agreement, Verdad and LeVecke agreed that if Verdad could obtain high enough sale prices for the properties, it would allow LeVecke to keep each $400,000 without having to spend the money on the properties or otherwise account for it. If Verdad could not sell the properties for what it wanted, LeVecke would have to repay the money in exchange for a rent reduction, or make $400,000 of improvements to each property. Id. ¶ 45. The side agreement was omitted from the February 2015 leases. Id. ¶ 46.

B. Sale of the Properties

In February 2015, Verdad offered the Chicago Eleven Properties for sale. One of those properties was eventually purchased by Plaintiffs (the "Property"). Verdad listed the Property for 30 percent more than it had paid for it, marketing it largely on the basis that it would generate rental income of $171,000 per year. Id. ¶¶ 53-54. Verdad also touted the fact that the February 2015 lease was guaranteed by FS1, and circulated false financial information that, as of 2014, FS1 had a net worth of $70 million and an annual income of $15 million. Id. ¶ 55. The marketing materials also misrepresented the identity of the tenant of the properties, claiming it was Frontier Star, LLC (another LeVecke entity) when, in fact, it was MJC. Id. ¶ 56. And the materials misrepresented that MJC was part of the FS1 hierarchy of companies and operated 200 restaurants. Id.

When Plaintiffs sought financial statements and sales data related to the Property to verify these claims, defendants EXP and Tartan, acting as the sales and marketing agents for the Property, told Plaintiffs that doing so would violate the tenant's franchise agreement. Id. ¶ 61. During negotiations, EXP and Tartan also represented that Verdad had considered converting the KFC to a Hardee's restaurant, but since the Property was doing so well as a KFC, Verdad decided to continue to operate the Property as a KFC. Id. ¶ 65.

On March 24, 2015, Plaintiffs and VRE entered into a Purchase and Sale Agreement, under which Plaintiffs agreed to purchase the Property for $2,443,000. The sale closed on May 15, 2015. Id. ¶ 67. In connection with the closing, defendant Baker Monroe prepared an Estoppel Certificate and Subordination, Non-Disturbance and Attornment Agreement ("SNDA"), which represented that the February 2015 lease constituted the sole agreement between the landlord and the tenant of the Property. Id. ¶¶ 68-69.

Three months later, on July 27, 2015, Frontier Star filed for bankruptcy. In August, MJC fell behind in its rent payments. Id. ¶ 72. On August 29, 2015, LeVecke wrote Plaintiffs that, because of the financial distress of his various entities, MJC could not pay more than $70,000 in annual rent for the Property. Id. ¶¶ 74-75. FS1 filed for bankruptcy in November 2015. Finally, LeVecke filed for bankruptcy in January 2016. Id. ¶ 76.

Plaintiffs allege Verdad had a close and ongoing business relationship with LeVecke and his various entities. They allege Verdad knew of LeVecke's precarious financial position and potential bankruptcy before VRE and Plaintiffs closed on the sale of the Property. Id. ¶ 73. After LeVecke defaulted, Plaintiffs re-leased the Property, but the new tenant pays substantially lower rent than Plaintiffs expected under the February 2015 lease. Id. ¶ 77.

Plaintiffs filed suit against defendants VRE, Verdad, EXP, and Tartan on April 5, 2016, and added the remaining defendants in subsequent complaints. The Second Amended Complaint alleges that Plaintiffs were fraudulently induced into purchasing the Property by various misrepresentations and omissions of defendants, and that the defendants conspired with and aided and abetted each other in the fraud. The role of each defendant relevant to this opinion will be discussed in detail below.

ANALYSIS

I. Defendants' Motions to Dismiss

A. The Baker Monroe Defendants' Motion (R. 94)

Defendants Chris Baker and Justin Huston, through the law firm Baker Monroe PLLC, represented VRE in connection with the sale of the Property. Plaintiffs allege Baker and Huston played a key role in the side agreement regarding the $400,000 payments made to LeVecke for the conversion of the KFCs to Hardee's stores. Baker Monroe ultimately took the lead in implementing the plan by drafting and obtaining the execution of the side agreement. R. 89 ¶¶ 46-47, 49. Plaintiffs also allege that Baker wrote in an email to defendant Matt Langfield (LeVecke's employee) that the side agreement had to be terminable on...