Joan H. Lefkow, U.S. District Judge
On September 14, 2012, a group of limited partners in one or more investment funds (collectively, "the Funds")
In addition to their state-law claims for breach of fiduciary duty and legal malpractice, plaintiffs brought a federal claim under § 206(a)(4) of the Investment Advisors Act of 1940 and SEC Rule 206(4)-2. (Id.) On July 22, 2013, this court dismissed plaintiffs' federal claim with prejudice because
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) challenges a complaint for failure to state a claim on which relief may be granted. Fed.R.Civ.P. 12(b)(6). In ruling on a Rule 12(b)(6) motion, the court accepts as true all well-pleaded facts in the plaintiff's complaint and draws all reasonable inferences from those facts in the plaintiff's favor. Active Disposal, Inc. v. City of Darien, 635 F.3d 883, 886 (7th Cir.2011). To survive a Rule 12(b)(6) motion, the complaint must not only provide the defendant with fair notice of a claim's basis but must also establish that the requested relief is plausible on its face. See Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The allegations in the complaint must be "enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555, 127 S.Ct. 1955. At the same time, the plaintiff need not plead legal theories; it is the facts that count. Hatmaker v. Mem'l Med. Ctr., 619 F.3d 741, 743 (7th Cir.2010); see also Johnson v. City of Shelby, 574 U.S. ___, 135 S.Ct. 346, 346, 190 L.Ed.2d 309 (2014) (per curiam) ("Federal pleading rules call for `a short and plain statement of the claim showing the pleader is entitled to relief'.... [T]hey do not countenance dismissal of a complaint for imperfect statement of the legal theory supporting the claim asserted.").
In their motion to dismiss, defendants contend that the amended complaint fails to state a claim because Weiss, Nutmeg, and Barnes & Thornburg are entitled to various immunities. The court addresses each of defendants' arguments in turn.
Defendants first argue that the claims against Weiss and Barnes & Thornburg are absolutely barred because the order appointing Weiss receiver provides that Weiss and Barnes & Thornburg cannot be liable for actions taken in the course of their official duties. Thus, according to defendants, because plaintiffs have not alleged that Weiss or Barnes & Thornburg acted outside the scope of their responsibilities under the appointment order, Weiss and Barnes & Thornburg are absolutely immune from suit.
The appointment order provides, "In no event shall the Receiver or Retained Personnel be liable to anyone (1) with respect to the performance of their duties and responsibilities as Receiver or Retained Personnel, or (2) for any actions taken or omitted by them, except upon a finding by this Court that they acted or failed to act as a result of malfeasance, bad faith, gross negligence, or in reckless disregard of their duties." (Dkt. 13-1 Exh. A ¶ G (emphasis added).) Defendants suggest that the modifying clause beginning "except upon a finding by this Court" applies only to provision (2), thus exempting Weiss and Barnes & Thornburg from any liability whatsoever for actions taken in the course of their duties. But that interpretation is grammatically incorrect and does not comport with common sense. See To-Am Equip. Co. v. Mitsubishi Caterpillar Forklift Am., 913 F.Supp. 1148, 1153 (N.D.Ill.1995) (noting that pursuant to the last antecedent doctrine, modifying words or clauses apply to the immediately preceding phrase alone unless the modifier is preceded by a comma). Because the plain language of the appointment order allows for the imposition of liability on Weiss and Barnes & Thornburg for actions taken during the performance of their duties under certain, albeit narrow, circumstances, defendants' argument that Weiss and Barnes & Thornburg are absolutely immune under the appointment order fails.
Defendants also assert that the appointment order bars any claims against Nutmeg because plaintiffs did not follow the applicable claims process or otherwise obtain leave of court before filing suit. Plaintiffs do not respond to this argument. The appointment order provides,
(Dkt. 13-1 Exh. A ¶ M.) Under the procedure established by Weiss, the opportunity to submit claims against Nutmeg closed on March 9, 2011. (SEC dkt. 269.) Plaintiffs filed this lawsuit well after that date. (See dkt. 1.) Moreover, plaintiffs did not obtain leave of court before filing this suit. Although plaintiffs sought leave in the SEC action to file their original complaint (SEC dkt. 406), the court determined that seeking leave was unnecessary because the Northern District of Illinois constitutes a single court for purposes of the Barton Doctrine.
Defendants next assert that they are entitled to absolute immunity for those counts of the amended complaint that are based on acts performed by defendants pursuant to court order. This analysis begins with the "fundamental principle that judges are entitled to absolute immunity from damages for their judicial conduct." Richman v. Sheahan, 270 F.3d 430, 434 (7th Cir.2001) (citing Mireles v. Waco, 502 U.S. 9, 11-12, 112 S.Ct. 286, 116 L.Ed.2d 9 (1991); Forrester v. White, 484 U.S. 219, 225-29, 108 S.Ct. 538, 98 L.Ed.2d 555 (1988)). Although originally confined to members of the judiciary, judicial immunity has been extended to "quasi-judicial conduct" of "[n]on-judicial officials whose official duties have an integral relationship with the judicial process." Henry v. Farmer City State Bank, 808 F.2d 1228, 1238 (7th Cir.1986) (citation omitted). Parties, including receivers, who execute judicial orders are entitled to absolute immunity. Coleman v. Dunlap, 695 F.3d 650, 652 (7th Cir.2012); In re Berry Pub. Servs., Inc., 231 B.R. 676, 681 (Bankr. N.D.Ill.1999). "But only the ends of the order — not the means used to execute the order — are protected." Coleman, 695 F.3d at 653-54 (citation omitted).
Plaintiffs bring count II of the amended complaint against Weiss for breach of fiduciary duty and violation of the Illinois and Minnesota partnership statutes.
Plaintiffs assert that pursuant to these provisions, Nutmeg, as general partner
The appointment order provides that, as receiver, Weiss "shall oversee all aspects of Nutmeg's operations and business which include, but are not limited to, serving as general partner and investment advisor" to the Funds. (Dkt. 13-1 Exh. A ¶ B.1.) Thus, the court-mandated end of the appointment order is that Weiss assume and retain the position of general partner. As an initial matter, therefore, it is unclear whether the limited partners had a right to elect a new general partner, because that right is triggered under Illinois and Minnesota partnership law only when the limited partnership is left without a general partner, and here, Weiss assumed that position. 805 Ill. Comp. Stat. 215/801 (3)(B)(i)(ii); Minn.Stat. 321.0801 (3)(B)(i)(ii). But even assuming that the limited partners had the right to elect a general partner, Weiss complied with the appointment order in serving in that capacity, and therefore cannot be held liable for failing to give notice.
Plaintiffs parse words in their response and suggest that the appointment order merely requires Weiss to oversee Nutmeg's role as general partner, not to serve as general partner herself. Contrary to plaintiffs' assertions, however, the appointment order required Weiss to serve as general partner. Indeed, the SEC's motion to appoint Weiss as receiver provided that Weiss's duties would "include serving as general partner and investment adviser to" the Funds. (Dkt. 30-1 Exh. A at 1.) Moreover, the motion provides that as receiver, "Weiss would step into the shoes of Nutmeg." (Id. at 6.) The court in the SEC action granted that motion in the appointment order. (See dkt. 13-1 Exh. A.) If the court in the SEC action had intended Weiss's role to be different from that described in the SEC's motion, it would have said so in the appointment order. The court did not, and the appointment order explicitly required Weiss to serve as general partner.
Plaintiffs also assert that, in assuming the position of general partner, Weiss violated the provision of the appointment order permitting her to employ, "as needed,... substitute advisers or general partners for the Funds." (Id. ¶ B.9.) But that provision merely gives Weiss the authority to retain additional professionals to assist her in her duties as receiver. It certainly does not require Weiss to replace herself as general partner, even if one assumes that result is required by state partnership law. In fact, facilitating the election of a new general partner would have contravened the intent of the appointment order. Accordingly, because the appointment order required Weiss to serve as general partner, she is absolutely immune from liability for serving in that capacity and not facilitating the election of a replacement. Count II is dismissed.
In count III, plaintiffs allege that Weiss breached her fiduciary duties in failing to hire a qualified investment advisor. According to plaintiffs, Weiss had no experience with "PIPE" transactions specifically, or as an investment advisor more generally, and should have hired a trained investment advisor with the appropriate background and training. Defendants contend that Weiss is entitled to absolute immunity because the appointment order expressly designated Weiss as investment advisor to the Funds. As with Count II, the court finds that Weiss is absolutely immune from liability.
The appointment order provides that Weiss must "oversee all aspects of Nutmeg's operations and business" including "serving as general partner and investment advisor to" the Funds. (Id. ¶ B.1.) Therefore, the court appointed Weiss investment advisor to the Funds, and she is absolutely immune from liability for serving in that capacity. And while the appointment order authorized Weiss to "engage and employ ... as needed ... possible substitute advisers" (id. ¶ B.9), it did not require her to do so. Although plaintiffs maintain that Weiss lacked the experience necessary to serve as investment advisor, Weiss's qualifications were explained to the court in the SEC action (see dkt. 30-1 ¶ 7), and the court nevertheless decided to appoint her investment advisor of the Funds. Accordingly, Weiss is immune from suit for serving in that position. Count III is dismissed.
Plaintiffs allege in count IV that Weiss breached her fiduciary duties in paying Crowe Horwath, LLP ("Crowe"), the court-appointed accountant for Nutmeg and the Funds, fees in excess of the $150,000 fee cap set by the court in the SEC action.
Count IX alleges that Weiss breached her fiduciary duties by terminating a transaction with INverso Corp. that was advantageous to some of the Funds. Defendants assert that Weiss is absolutely immune from liability for terminating the transaction because the court in the SEC action approved Weiss's decision. Plaintiffs do not dispute that the court approved Weiss's decision, and instead argue that the court did so after, rather than before, Weiss terminated the transaction, thus precluding a finding of quasi-judicial immunity.
In the SEC's motion to appoint a receiver, the SEC flagged the INverso transaction and asserted that a receiver was "needed to review the transaction and determine whether it actually benefits Nutmeg" and the Funds. (SEC dkt. 48 ¶ 5.C.)
Subsequently, the SEC filed a motion for a rule to show cause against Goulding for violating the court's preliminary injunction order (SEC dkt. 68), which prohibited Goulding from transferring or otherwise disposing of Nutmeg's and the Funds' assets. According to the SEC, Goulding had assisted third parties in seizing control of INverso in order to sell INverso shares over Weiss's objections. (SEC dkt. 129.) According to the Funds, "[w]hen the transaction was nearly complete, Weiss announced her opposition to it, causing Hartman and Felder to repudiate." (Dkt. 22 at 11.) Under these descriptions, it is not entirely clear that Weiss's announcement of her opposition was a termination of the transaction as much as information the participants used to decide not to go forward. Moreover, the parties do not address how, in these circumstances, the "termination" could have been approved by the court beforehand.
In any event, at a hearing on the show cause motion on January 19, 2010, the judge stated, "After the Court had a hearing, was advised by the receiver that that was not prudent action in the receiver's mind, the Court approved the receiver's decision for that acquisition not to take place." (Dkt. 13-2 Exh. G at 3.) Weiss relies on this statement and the court's further statement that Goulding's actions were intended "to make an end run around the receiver's objection and the Court's acquiescence in the receiver's decision" in order to "complete this transaction which the Court had quite specifically indicated should not take place based upon the receiver's suggestion." (Id.)
These statements indicate that the court in the SEC case approved Weiss's decision to halt the transaction, but Weiss has not provided the court with the transcript of this prior hearing such that the court can verify that it occurred before she acted. If the allegation that she acted before approval is accepted as true, and if it is
In count XX, plaintiffs allege that Weiss breached her fiduciary duty and usurped an opportunity available to the Funds by seeking to convert debentures owned by Nutmeg into stock in Gold Coast Mining Corp. ("Gold Coast"), while simultaneously declining to convert debentures held by the Funds. Defendants assert that Weiss is immune from liability because on June 1, 2012, the court in the SEC action granted Weiss's motion to employ counsel on a contingency basis to pursue collection against Gold Coast on behalf of Nutmeg. (See dkt. 13-2.) Defendants do not dispute, however, that Weiss issued a notice of conversion to Gold Coast on behalf of Nutmeg in February 2012, well before the court granted Weiss's motion. It is this notice of conversion that plaintiffs challenge. Therefore, because Weiss did not act pursuant to a court order in issuing the notice of conversion, she is not entitled to quasi-judicial immunity for her conduct in this instance. See Coleman, 695 F.3d at 653-54.
Defendants assert that the remaining counts must be dismissed because plaintiffs have not alleged that Weiss and Barnes & Thornburg willfully and deliberately breached their fiduciary duties. A receiver "may be held personally liable only for a willful and deliberate violation of his fiduciary duties."
The willful and deliberate standard finds its origin in the Supreme Court's decision in Mosser v. Darrow, 341 U.S. 267, 71 S.Ct. 680, 95 L.Ed. 927 (1951). There, the Court considered the personal liability of a reorganization trustee who "permitted key employees to profit from trading in securities of the debtors' subsidiaries." Id. at 268, 71 S.Ct. 680. In finding the trustee personally liable, the Court explained,
Id. at 272, 71 S.Ct. 680. Following Mosser, a circuit split developed on the question of the proper standard of care to which a trustee or receiver should be held. Compare Ford Motor Credit Corp. v. Weaver, 680 F.2d 451, 462 (6th Cir.1982) (willful and deliberate), and Sherr v. Winkler, 552 F.2d 1367, 1375 (10th Cir. 1977) (same), with In re Smyth, 207 F.3d 758, 762 (5th Cir.2000) (gross negligence), and In re Cochise College Park, Inc., 703 F.2d 1339, 1357 (9th Cir.1983) (negligence). As noted above, the Seventh Circuit has adopted the willful and deliberate standard; thus, in this circuit, a trustee or receiver "may be held personally liable only for a willful and deliberate violation of his fiduciary duties." In re Chi. Pac. Corp., 773 F.2d at 915 (citations omitted). For the reasons stated below, the court interprets this standard to mean that a receiver must intend to breach her fiduciary duties for personal liability to attach.
First, the words "willful and deliberate" modify the word "violation" in the standard. In Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998), the Supreme Court interpreted the phrase "willful and malicious injury" found in section 523(a)(6) of the Bankruptcy Code, which precludes discharge of a debt "for willful and malicious injury by the debtor to another." Id. at 59, 118 S.Ct. 974 (citation omitted). The Court explained that the word "willful" modified the word "injury," thus "indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury." Id. at 61, 118 S.Ct. 974 (emphasis in original). Had Congress intended "to exempt debts resulting from unintentionally inflicted injuries," the Court reasoned, "it might have described instead `willful acts that cause injury.'" Id. Similarly here, the phrase "willful and deliberate" modifies "violation," indicating that personal liability requires a willful and deliberate violation of a receiver's duties, rather than a willful and deliberate act that results in harm.
Second, interpreting "willful and deliberate violation" in this manner complies with other courts' characterization of the Seventh Circuit's standard as "intentional." See, e.g., In re Smyth, 207 F.3d at 761 ("A number of Circuit Courts of Appeals have adopted the intentional and deliberate standard." (emphasis added) (citations omitted)); In re Cochise, 703 F.2d at 1357 n. 26 (We reject the approach ... that a bankruptcy or reorganization trustee may be held personally liable for damages only for injuries arising from intentional — as opposed to negligent — conduct." (emphasis added) (citations omitted)); In re Kids Creek Partners, L.P., 248 B.R. 554, 560 (Bankr.N.D.Ill.2000) (noting that injured parties can "recover from the trustee when the trustee intentionally acts in clear contravention of duty" (emphasis added)); see also In re San Juan Hotel Corp., 847 F.2d 931, 937 n. 5 (1st Cir.1988) (declining to "reach the issue of whether negligent acts also give rise to personal liability" because "the district court ... found that [the trustee] acted intentionally" (emphasis added)). Further, in In re Smyth, the Fifth Circuit rejected the willful and deliberate standard and adopted a gross negligence approach, which it defined as "[t]he intentional failure to perform a manifest duty in reckless disregard of the consequences."
Finally, interpreting "willful and deliberate" to require an intentional violation of a receiver's fiduciary duties is consistent with the purpose behind the immunity standard. Receivers, like bankruptcy trustees, provide valuable work for the court that appointed them. If a receiver "is burdened with having to defend against suits by litigants disappointed by his actions on the court's behalf, his work for the court will be impeded," and it may be harder "to find competent people to appoint" as receivers. In re Linton, 136 F.3d 544, 545 (7th Cir.1998). "Thus, the use of a stringent standard, the willful and deliberate breach requirement, strikes an appropriate balance limiting the occasions in which a trustee may be personally liable, but allowing injured parties to recover from the trustee when the trustee intentionally acts in clear contravention of duty." In re Kids Creek, 248 B.R. at 560.
The amended complaint brings ten claims against Weiss and eleven claims against Barnes & Thornburg for legal malpractice.
As noted above, plaintiffs assert in Count IV that Weiss breached her fiduciary duties in paying Crowe fees in excess of the court-approved fee cap without prior approval. Defendants assert that even if one assumes that Weiss was not authorized to make payments to Crowe in excess of the fee cap, such conduct could not have been willful and deliberate because Weiss disclosed all payments to the court in the
In counts V-IX, XI, XII, XIII, XV, XVI, and XVII, plaintiffs allege that Weiss breached her fiduciary duties in failing to pursue opportunities beneficial to the Funds, despite the fact that Goulding had explicitly notified Weiss of these profitable possibilities. For example, with regard to Count V, Goulding allegedly notified Weiss that two of the Funds held enforceable judgments against RMD Entertainment. Despite this express notification, plaintiffs allege that Weiss willfully and deliberately breached her duties by declining to collect on the judgment or otherwise settle the case. Similarly, with regard to Count VII, plaintiffs allege that Weiss breached her fiduciary duties in failing to pursue a Fund's claims against Sanswire Corp. Goulding allegedly notified Weiss of this opportunity in a letter. Counts VI, VIII, IX, XI, XII, XIII, XV, XVI and XVII contain similar allegations.
Taking the facts in the amended complaint as true and drawing all inferences in plaintiffs' favor, plaintiffs have adequately alleged that Weiss intentionally breached her fiduciary duties with respect to these counts. Indeed, plaintiffs' allegations indicate that Weiss intentionally declined to pursue advantageous opportunities. While it may be that plaintiffs will be unable to prove that Weiss's rejection of Goulding's suggestions was anything more than a good faith exercise of her business judgment, the court cannot say at this stage that plaintiffs' allegations fail to state a claim.
Plaintiffs allege in counts X, XIV, and XVIII that Weiss breached her fiduciary duties in failing to pursue certain litigation and in filing a time-barred lawsuit. Defendants maintain that Weiss's conduct was not willful and deliberate because she was entitled to exercise her business judgment in deciding which lawsuits to pursue. Plaintiffs' allegations plausibly suggest, however, that Weiss intentionally breached her fiduciary duties to the Funds. With regard to counts X and XIV, the facts contained in the amended complaint indicate that while Weiss knew that pursuing certain claims was in the best interest of the Funds, she intentionally declined to do so. Similarly, with regard to count XVIII, plaintiffs adequately allege that Weiss knowingly decided to pursue a frivolous lawsuit that was barred by the applicable statute of limitations. The facts alleged in the amended complaint are sufficient to state a claim at this stage.
Count XIX alleges that Weiss and Barnes & Thornburg violated their fiduciary duties and wasted the Funds' assets by filing a rule to show cause against Goulding to force him to provide certain documents that Weiss already had in her possession. Defendants point to the court's February 12, 2013 order in the SEC action and assert that plaintiffs' allegations support, at most, a claim for negligence. In that order, the court denied Goulding's motion for sanctions against Weiss and found that while Weiss had been in possession of the documents she sought from
Count XX alleges that Weiss breached her duties by converting debentures owned by Nutmeg while declining to convert debentures owned by the Funds. Defendants argue that plaintiffs merely disagree with Weiss's business decision, but at this stage, plaintiffs have adequately alleged that Weiss intentionally usurped an advantageous opportunity available to the Funds in violation of her fiduciary duties.
Counts XV and XX bring claims for breach of fiduciary duty against Weiss.
Count XV alleges that Weiss breached her fiduciary duties when she failed to respond to an objection by the SEC to a reorganization plan proposed by Nutmeg and other creditors of Tropical Beverage, Inc. (subsequently renamed Vivicells). Defendants assert that plaintiffs have not pleaded causation and support their argument by pointing to plaintiffs' allegation that had Weiss responded to the SEC, "[I]t is likely that a plan of reorganization that benefitted Mercury and Tropical would have been achieved." (Compl. ¶ 256; dkt. 13 at 16.) According to defendants, "likely" is not enough. But defendants ignore plaintiffs' additional allegations regarding causation. Plaintiffs allege that "a compromise and satisfaction of the SEC objection would have been achieved" if Weiss had responded to the SEC's objection and that "a reorganization beneficial to Mercury Fund and Michael Fund would have" occurred if Weiss had "actively pursued a plan of reorganization in the Vivicells bankruptcy." (Compl. ¶¶ 428-29.) Moreover, plaintiffs explain that Weiss could have addressed the SEC's concerns because (1) the SEC had tentatively approved the plan of reorganization, (2) the SEC's original concerns already had been addressed, and (3) Nutmeg could have agreed to receive fewer shares to improve the terms of the plan. (Id. ¶ 254.) Plaintiffs' allegations move their theory of causation "across the line from conceivable to plausible." See Twombly, 550 U.S. at 570, 127 S.Ct. 1955; see also Flint v. Belvidere, No. 11 C 50255, 2012 WL 470113, at *4 (N.D.Ill. Feb. 13, 2012).
In count XXI, plaintiffs allege that Barnes & Thornburg is vicariously liable for Weiss's breaches of fiduciary duty under the doctrine of respondeat superior
Under the doctrine of respondeat superior, "an employer can be liable for the torts of his employee when those torts are committed within the scope of the employment," and an employer's vicarious liability under the doctrine extends "to the negligent, willful, malicious or even criminal acts of its employees." Adames v. Sheahan, 909 N.E.2d 742, 755, 233 Ill.2d 276, 330 Ill.Dec. 720 (2009) (citation omitted). Defendants assert that Barnes & Thornburg cannot be vicariously liable for Weiss's conduct because Weiss's role as receiver meant that she was not acting as a Barnes & Thornburg employee. The court agrees. The appointment order provides, "The Receiver shall be the agent of this Court and solely the agent of this Court in acting as Receiver under this Order." (Dkt. 13-1 ¶ A.) Thus, when acting as receiver, Weiss acted solely as an agent of the court and therefore necessarily outside the scope of her employment with Barnes & Thornburg. Accordingly, Barnes & Thornburg cannot be held vicariously liable under respondeat superior for Weiss's conduct.
To state a claim for aiding and abetting liability under Illinois law, a plaintiff
For the foregoing reasons, defendants' motion to dismiss the amended complaint (dkt. 11) is granted in part and denied in part. Counts II, III, and XXI are dismissed with prejudice. All claims against Nutmeg are dismissed without prejudice, and all legal malpractice claims against Weiss and Barnes & Thornburg are dismissed with prejudice. All claims against Barnes & Thornburg for aiding and abetting or vicarious liability are also dismissed with prejudice. Defendants' request to strike plaintiffs' claims for punitive damages is denied as moot. The remaining claims in this suit are the breach of fiduciary duty claims against Weiss contained in counts IV-XX and the breach of fiduciary duty claim against Barnes & Thornburg contained in count XIX.
