United States District Court, S.D. Indiana, New Albany Division
ORDER ON DEFENDANTS' MOTIONS TO DISMISS
SARAH EVANS BARKER, District Judge.
This cause is before the Court on separate motions to dismiss filed on August 6, 2014 by Defendants Debra Jo Brown, Melinda Gabbard, Brenda R. Lee, John D. Gay, and Ruthy Large [Docket No. 27] and by Defendants Michael Collier and Meegan Collier [Docket No. 29]. For the reasons set forth below, the motions are GRANTED in part and DENIED in part.
Plaintiff Marquette Bank ("Marquette") is an Illinois bank association headquartered in Orland Park, Illinois. Defendants are family members, employees, or agents of Lester Lee, a citizen of Indiana who at the time controlled a number of business entities, most notably Lees Inns of America, Inc. ("Lees Inns"), which was a regional chain of motels. Other related entities-all alleged to have been controlled by Lester Lee at the time of the events described in the Amended Complaint-were Hotel Capital Partners, LLC ("HCP"); the Lee Group Holding Company, LLC ("the Lee Group"); Lee Holding, Inc.; Lees Inns Investment Management Corporation; and Kankakee Motel Associates, L.P. ("Kankakee"). These entities shared a headquarters, office space, and many of the same personnel, including the Defendants named in the complaint. Defendants Debra Brown, Melinda Gabbard, and Meegan Collier are all daughters of Lester Lee; all three served on the board of directors of Lees Inns and as members of the Lee Group. Defendant Brenda Lee is Lester Lee's wife; she, too, served as a director of Lees Inns and a member of the Lee Group. Defendant Michael Collier is Lester Lee's son-in-law (and Meegan Collier's husband); he was the president of HCP and was allegedly in charge of the day-to-day management of a number of Lester Lee's related entities, including Kankakee. Defendant John Gay, an attorney, served as counsel to all of the Lee entities, with his office inhouse, and was paid for his work by Lees Inns Management Corporation, a Lees Inns subsidiary. Lastly, Defendant Ruthy Large was an employee of the Lee Group, and also worked for the other related entities; according to Plaintiff, Large's title with HCP was "loan manager, " and "[h]er responsibilities included making sure financial reporting requirements were met for mortgages and loan applications and to field questions loan officers might have regarding loans." Am. Compl. ¶ 9.
Marquette's allegations focus primarily on two intertwined transactions undertaken by Kankakee, a limited partnership whose sole general partner was Lees Inns-and was thus allegedly controlled by Lester Lee, acting through the Lees Inns board composed entirely of his wife and daughters.
The first transaction was an agreement to sell the Kankakee Motel, a property owned by Kankakee in Bourbonnais, Illinois, to Youngevity Mineral Spa, LLC ("Youngevity"). Kankakee and Youngevity signed a Purchase and Sale Agreement and Land Sale Contract (the "Land Contract") on October 31, 2007. See Pl.'s Ex. 8. The Land Contract contained the following language regarding Youngevity's down payment for the Kankakee Motel:
Down Payment. The Deposit to be paid by delivery of an executed Option to Purchase a certain tract of real estate located at 66 Soto Land [sic],  Grand Cayman Islands, consisting of approximately 6 acres and the improvements thereon, with consideration of such option being valued at One Dollar U.S. ($1.00). Said Option may be executed at any time within five (5) years.
Pl.'s Ex. 8 at § 2(D)(1). The Land Contract called for the balance of the price, $4.2 million, to be paid in monthly installments. Despite this contract language, however, Plaintiff alleges that the Option never passed to Kankakee. Instead, in a separate contract signed the same day, Youngevity's principal, Joel Wallach, leased the same Cayman Islands property to a different entity controlled by Lester Lee-the Lee Group. See Pl.'s Ex. 10. The lease contained a five-year option to purchase (the "Option") that could be exercised for $1, and it was signed by Wallach and Lester Lee. Id. at 5-6. Several months later, on March 1, 2008, the Lee Group, for consideration of one dollar, assigned this lease and Option to Lester Lee personally; Lester Lee signed the document memorializing the assignment in his capacity as the "manager" of the Lee Group. Pl.'s Ex. 11. The members of the Lee Group-the same group of Lee's wife and daughters constituting the Lees Inns board-formally consented to the transfer. Pl.'s Ex. 12. Plaintiff alleges that the Option was exercised shortly thereafter; as evidence, it attaches a Cayman Islands "transfer of land" document showing that Wallach sold the property at Soto Lane for consideration of $1.3 million on March 6, 2008. Pl.'s Ex. 13.
The second transaction at issue is a loan from Marquette to Kankakee intended to facilitate the refinancing of the same Kankakee Motel property. Plaintiff asserts that Defendant Michael Collier was Kankakee's point person in negotiating the loan with Marquette, and that these negotiations began in October 2007 with a meeting in which Lester Lee and Michael Collier were present. During this meeting, Collier allegedly represented to Marquette officials that Youngevity had agreed in principle to buy the motel property for a total price of $5.9 million, with a down payment consisting of the Cayman Islands Option-valued at $1.3 million-and the balance to be paid monthly. Kankakee followed up by emailing Marquette a copy of the Land Contract on November 8, 2007. Pl.'s Ex. 9. On November 14, 2007, Marquette's Loan Committee approved the loan to Kankakee in the amount of $3.575 million. See Pl.'s Ex. 31. The approval was subject to an independent appraisal of the value of the Kankakee motel. In December 2007, the independent appraiser interviewed Michael Collier, who represented to him that the total consideration paid by Youngevity for the property in the Land Contract was "approximately $6 million, " and that this price included the value of the Option for the Cayman Islands property which was "currently being marketed for an asking price of $1.75 million." See Pl.'s Ex. 32 at 6.
On February 6, 2008, the Marquette Loan Committee modified the terms of its approval, adjusting the maximum loan amount down to $3.5 million. The Committee's continued approval of the loan was allegedly based, at least in part, on a memorandum prepared by Marquette officer Mikal Christopherson, in which he stated that he was "comfortable" with the amount in question because of "[t]he conservative nature of the appraised value in relation to the contract sale price [i.e. the $5.9 million value quoted by Michael Collier], " and "[t]he personal financial strength of Lester Lee and his experience in the industry, " among other factors. Pl.'s Ex. 33. The next day, Marquette sent a Loan Agreement notifying Lee and his affiliated entities of the loan's modified approval; the Agreement stated that the deal was subject to several conditions or "covenants, " including the following:
a. The Borrower [Kankakee] represents and warrants that all financial statements and data submitted to the Bank [Marquette] are true and accurate and that no litigation is currently pending against the Borrower or the Guarantors which has not been disclosed to the Bank.
b. The Borrower agrees to immediately notify the Bank in the event of any significant or material change in their financial structure, statements, or undertakings.
c. Assignment of the sales contract between the owner of the borrower and Mr. Joel Wallach.
Pl.'s Ex. 5 at 3.
The board of Lees Inns-its general partner-having given its written consent to the loan, see Pl.'s Ex. 35, Kankakee on April 11, 2008 executed a promissory note evidencing indebtedness of $3.5 million for the loan which was to mature on April 10, 2013. Pl.'s Ex. 1. On the same day, Kankakee executed an "Assignment of Contract, " which included the following recitals:
C. Secured Party [Marquette] requires as a condition precedent to its making the Loan that Borrower [Kankakee] enter into this Assignment and Borrower wishes to grant to Secured Party a security interest, mortgage, lien, encumbrance and charge upon the collateral more particularly hereinafter described.
D. Borrower has entered into Purchase & Sale Agreement and Land Sale Contract dated October 31, 2007 with Youngevity Mineral Spa, LLC, an Illinois limited liability company, as purchaser ("Land Sale Contract").
Pl.'s Ex. 18, at ¶¶ C, D. In light of these recitals, Kankakee stated in the Assignment that:
As further security for the payment of the Loan and performance of all Borrower obligations, Borrower hereby assigns, transfers, pledges, sets over and grants a security interest to Secured Party, in and to all of Borrower's right, title and interest in the Land Sale Contract, to all funds and monies deposited with Borrower or any of its affiliates or agents in connection with the Land Sale Contract, all extensions, renewals, modifications and substitutions therefor or thereof, and all proceeds thereof (all of which constitute the Pledged Collateral hereunder).
This Assignment creates, and Borrower hereby grants unto Secured Party, a security interest in the Pledged Collateral and the proceeds (cash and non-cash) thereof and all interest thereon, if any, and constitutes a security agreement from Borrower to Secured Party under the Uniform Commercial Code of the State of Illinois.
Pl.'s Ex. 18, at ¶¶ 1, 4. The Assignment further stated that Kankakee had no authority to enter into any modifications or amendments of the Land Contract, and that it would not "pledge, assign, or transfer or attempt to pledge, ...