Demurrer and motion for judgment on the pleadings by defendants J. Scott Riggs, KRT, and Delta Communications, LLC dba Clearwave Communications as to the Second Amended Complaint of Plaintiff Ronald F. Trinchitella

I. Demurrer

A. Second Cause of Action: “Breach of Fiduciary Duty – KRT – Derivative Claim Asserted by Plaintiff against Riggs”

Defendants contend that Plaintiff cannot assert a derivative claim on behalf of the partnership against Riggs. Citing to Delaware authority that no derivative litigation can be brought against a general partnership because everyone has a right to manage the affairs of the business, Defendants believe that Illinois law similarly excludes such an action. (See Defendants’ Demurrer at p. 5:13-18 [citing In re Walt Disney Co. Deriv. Litig. 1998 Del. Ch. LEXIS 186, *82-83 (Oct. 7, 1998), and quoting 805 ILCS 206/401(f), 805 ILCS 206/405(b).) These Illinois statutes, however, do not specifically state that a derivative action cannot be brought against a partnership. Defendants otherwise fail to show that Delaware law applies to this claim. Defendants also cite to the 1994 Revised Uniform Partnership Act (“RUPA”) to support its contention that derivative actions are not permitted, but they fail to explain why RUPA controls the partnership or otherwise is applicable to this cause of action. Additionally, Defendants maintain that Plaintiff already has stated a claim against Riggs for breach of fiduciary duty so there is no need for a suit on KRT’s behalf. This argument lacks merit as Plaintiff is entitled to plead alternative theories of relief.

Defendants’ demurrer to the second cause of action is OVERRULED.

B. Sixth Cause of Action: “Breach of Fiduciary Duty – Delta – Derivative Claim Asserted by Plaintiff against Riggs”
Eighth Cause of Action: “Breach of Delta Operating Agreement – Derivative Claim Asserted by Plaintiff against Riggs”
Tenth Cause of Action: “Unjust Enrichment – Derivative Claim Asserted by Plaintiff against Riggs”

Where a derivative plaintiff makes a demand upon the board that is refused, for the lawsuit to go forward, the plaintiff must allege with particularity facts that create a reasonable doubt that the corporation’s board of directors wrongfully refused the demand. (See Scattered Corp. v. Chicago Stock Exch. (Del. 1997) 701 A.2d 70, 73 [overruled on other grounds in Brehm v. Eisner (Del. Sup. 2000) 746 A.2d 244]; 805 ILCS 180/40-10 [Illinois law provides that, “[i]n a derivative action, the complaint shall set forth with particularity the effort of the plaintiff to secure ignition of the action by the limited liability company or the reasons for not making the effort.”].) In determining whether a demand was wrongly refused, courts review the board’s decision under traditional business judgment rule standards, which are the board’s disinterest and independence and the good faith and reasonableness of its investigation. (Scattered Corp., supra, 701 A.2d at p. 73 [overruled on other grounds in Brehm, supra, 746 A.2d 244].) “By making a demand, a shareholder-plaintiff tacitly concedes the disinterest and independence of the board. . . . Therefore, in that particular context the only issues to be decided are the good faith and reasonableness of the board’s investigation of the claims articulated in the demand.” (Id.) Defendants acknowledge that Plaintiff pled “extensive allegations regarding the demands he made on Delta.” (Defendant’s Demurrer at p. 10:18; see Second Amended Complaint (“SAC”), ¶ 64.) Plaintiff, however, has not adequately pled an exception to the business judgment rule. (See SAC, ¶ 65.)

Defendants also argue that Plaintiff waived his right to claim demand futility by making Delta and its managers aware of the allegations set forth in the SAC, demanding that they take corrective action, and confirming his demands in a September 15, 2011 letter. In opposition, Plaintiff asserts that when the board added new members, this action created a different board, and any demands to this new board would have been futile. Plaintiff has not pled allegations supporting this theory (i.e., adding new board members allows him to allege demand futility even though a demand previously was made to the same board, albeit with different members), or provided any authority to support it. (See Scattered Corp., supra, 701 A.2d at pp. 73-74 [overruled on other grounds in Brehm, supra, 746 A.2d 244] [“If the stockholders make a demand, as in this case, they are deemed to have waived any claim they might otherwise have had that the board cannot independently act on the demand.”]; see also Furman v. Walton, 2007 U.S. Dist. LEXIS 39618 (N.D. Cal. May 16, 2007) (“[I]t is settled law in Delaware that a shareholder who makes a demand concedes the disinterestedness and independence of a majority of the board to respond to the demand and waives any claim that demand is excused.”)

Finally, Defendants contend that the sixth cause of action for “Breach of Fiduciary Duty – Delta – Derivative Claim Asserted by Plaintiff against Riggs” fails because Riggs owed no fiduciary duty to Delta as “Riggs had no authority of a manager pursuant to the terms of the Operating Agreement”, attached as Exhibit A to the SAC. (Defendants’ Demurrer at pp. 6:7-8, 7:11-13.) This contention fails. Although “a member of a manager-managed LLC ‘who is not also a manager owes no duties to the company or to the other members solely by reason of being a member,’” a member is subject to fiduciary duties if he “exercises some of or all of the authority of a manager” pursuant to the LLC’s operating agreement. (Katris v. Carroll (Ill. App. Ct. 2005) 362 Ill. App. 3d 1140, 1144-45, quoting 805 ILCS 180/15-3(g)(1) and 805 ILCS 180/15-3(g)(3).) Here, Plaintiff alleges that Riggs was Delta’s president and managing member and a majority equity holder. (SAC, ¶¶ 4, 38-39.) Plaintiff also incorporates Delta’s Operating Agreement to demonstrate the fiduciary duties Riggs owed to Delta and to its members. (Id., ¶¶ 11, 40, Ex. A, sections 1.01, 5.01, 5.03.) Thus, for purposes of this demurrer, Plaintiff alleges that Riggs is subject to fiduciary duties as a member who executed the managerial functions as outlined in the Delta Operating Agreement.

Defendants’ demurrer to the sixth, eighth and tenth causes of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

II. Judgment on the Pleadings

A. First Cause of Action: “Breach of Fiduciary Duty – KRT – Derivative Claim Asserted by Plaintiff against Riggs, KRT”
Fifth Cause of Action: “Breach of Fiduciary Duty – Delta – Asserted by Plaintiff against Delta”

Defendants argue that under Delaware law, “Plaintiff cannot meet the threshold requirement to establish the existence of a fiduciary duty on behalf of KRT or Delta because a corporate entity owes no fiduciary duty.” (Defendants’ Demurrer at p. 4:8-9 [citing In re Wayport, Inc. Litig. (Del. Ch. 2013) 76 A.3d 296, 323-24; Gavin v. AT&T Corp. (N.D. Ill. 2008) 543 F. Supp. 2d 885 [applying New York law]; Arnold v. Society For Sav. Bancorp, Inc. (Del. 1996) 678 A.2d 533, 539-40].) According to Defendants, the general rule that the directors, and not the corporation itself, owe a fiduciary duty also is true for a partnership or LLC in that a partnership or LLC owes no fiduciary duty to its partners or members. Defendants, however, fail to show that Illinois law follows Delaware law on this issue. (See Cal. Rules of Court, rule 3.1113(a)-(b).) Indeed, as Plaintiff correctly notes in his opposition, statutory law in Illinois supports the notion that an LLC or partnership can be held liable to those it harms even when the wrongful acts are done by those in charge of the entity. (See 805 ILCS 180/13-10 [“A limited liability company is liable for loss or injury caused to a person . . . as a result of a wrongful act or omission, or other actionable conduct, of a member or manager acting in the ordinary course of business of the company or with authority of the company.”; see also 805 ILCS 206/405 [partnership].)

Defendants’ motion for judgment on the pleadings as to the first and fifth causes of action is DENIED.

B. Seventh Cause of Action: “Breach of Delta Operating Agreement – Asserted by Plaintiff against Delta”

Defendants assert that Plaintiff attached two Operating Agreements to the SAC and fails to allege which contract forms the basis of this claim. This assertion is not well taken. The defined term, “Delta Operating Agreement,” which is attached as Exhibit A, is the contract at issue. (See SAC, ¶ 6 [“A true and correct copy of the operating agreement for Delta (‘Delta Operating Agreement’) . . . is attached hereto as Exhibit A . . . .”]; see also id., ¶¶ 44-49 [presenting the term “Delta Operating Agreement” repeatedly with the allegations for this claim].) Moreover, contrary to Defendants’ belief, Plaintiff alleges damages. (See id., ¶ 49 [alleging damages of at least $3,000,000].) However, although Plaintiff alleges how the contract was breached (see id., ¶¶ 10 [“Delta breached its contractual and fiduciary duties by [listing breaches]”]; see also id., ¶ 11, 43, 46, 48, Ex. A), Plaintiff does not allege what specific provisions of the Delta Operating Agreement were breached. (See Sherman v. Ryan (2009) 392 Ill. App. 3d 712, 732, quoting Kalkounos v. Four K’s, Inc. (1981) 94 Ill. App. 3d 1011, 1012 [“The law is clear in Illinois that it is essential in pleading the existence of a valid contract for the pleader to allege facts sufficient to indicate the terms of the contract.”].) Plaintiff presents a list of provisions in his opposition that supposedly were breached, but these provisions are not pled in the SAC. (See Plaintiff’s Opposition at pp. 10:16-11:12.)

Defendants’ motion for judgment on the pleadings as to the seventh cause of action is GRANTED WITH 10 DAYS’ LEAVE TO AMEND.

B. Ninth Cause of Action: Unjust Enrichment

Defendants proffer that this claim rises or falls with the fifth and seventh causes of action. As noted, the fifth cause of action survives the motion for judgment on the pleadings so this claim also necessarily survives.
Defendants’ motion for judgment on the pleadings as to the ninth cause of action for unjust enrichment against Delta is DENIED.

III. Future Dates

The March 12, 2014 settlement conference and the March 17, 2014 trial are vacated. A trial setting conference is set on April 29, 2014, at 11:00 a.m. in Department 2.