Massuda v. Panda Express Inc., No. 13-2818 (7th Cir. 2014)
Annotate this Case
Justia Opinion Summary
Want to stay in the know about new opinions from the Seventh Circuit US Court of Appeals?
Sign up for free summaries delivered directly to your inbox. Learn More ›
You already receive new opinion summaries from Seventh Circuit US Court of Appeals. Did you know we offer summary newsletters for even more practice areas and jurisdictions? Explore them here.
Massuda invested $4,000,000 in Concessions, Inc., which was part owner, with Tony Rezko, of a group of Panda Express restaurants. Rezko, who controlled several companies, hoped to expand the business. Rezko was indicted and convicted on federal fraud and bribery charges, for which he received a lengthy prison sentence in 2011. Rezko’s real estate ventures collapsed. Massuda filed suit against Rezko’s corporations and associated people, raising claims of unjust enrichment, fraud, and aiding and abetting a breach of fiduciary duty. The district court concluded that all of Massuda’s claims, except portions of her fraud claim, were derivative, and on that ground dismissed those counts with prejudice for failure to state a claim. Massuda declined to amend her fraud allegations, which were then dismissed. The Seventh Circuit affirmed, rejecting a claim that if the holder of a majority interest acts in a way that helps him and hurts the minority, there is a direct claim. A direct claim exists when a majority shareholder engages in wrongdoing in such a way as to dilute the voting power of the minority shareholders; a dilution of voting power is a direct harm to the shareholders that is not felt by the company.
This opinion or order relates to an opinion or order originally issued on December 26, 2013.
Download PDF
In the United States Court of Appeals For the Seventh Circuit ____________________ No. 13 2818 FORTUNEE MASSUDA, Plaintiff Appellant, v. PANDA EXPRESS, INC., et al., Defendants Appellees. ____________________ Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 12 C 9683 Ronald A. Guzmán, Judge. ____________________ ARGUED JANUARY 22, 2014 DECIDED JULY 21, 2014 ____________________ Before WOOD, Chief Judge, and MANION and WILLIAMS, Circuit Judges. WOOD, Chief Judge. This case concerns an ill fated invest ment that Fortunee Massuda made in a group of Panda Ex press restaurants. In hindsight, Massuda s mistake was to entrust $4,000,000 in 1997 with Tony Rezko, who controlled several companies that owned and operated the restaurants and who hoped to expand the business. Rezko wound up indicted and convicted on federal fraud and bribery charges, 2 No. 13 2818 for which he received a lengthy prison sentence in 2011. See United States v. Rezko, 776 F. Supp. 651, 653 (E.D. Ill. 2011). Along the way, his real estate ventures collapsed, and Mas suda filed this lawsuit against Rezko s corporations and as sociated people. In it, she raised claims of unjust enrichment, fraud, and aiding and abetting a breach of fiduciary duty. (The parties are of diverse citizenship and the amount in controversy requirement of 28 U.S.C. § 1332 is plainly met.) The district court concluded that all of Massuda s claims, ex cept portions of her fraud claim, were derivative, and on that ground dismissed those counts with prejudice for failure to state a claim upon which relief could be granted. See FED. R. CIV. P. 12(b)(6). After Massuda passed up the court s invita tion to amend her fraud allegations, it wrapped up the case by dismissing the fraud claim as well. This appeal followed. Finding no error in the district court s rulings, we affirm its judgment. I Our account of the facts is as generous to Massuda s viewpoint as the complaint will permit, given the fact that her suit was dismissed at the earliest possible stage. From 1993 98, the Rezko Citadel partnership (RC Partnership), a joint venture between Panda Express, Inc. (Panda) and Rez ko Concessions, Inc. (Concessions), owned and operated roughly 50 Panda Express restaurants in the greater Chicago area. Panda and Concessions each had a 50% interest in the RC partnership; Concessions was the general partner and Panda the limited partner. Concessions was also the majority owner of Rezko Enterprises, LLC (Enterprises), another company controlled by Rezko; Enterprises wholly owned and controlled PE Chicago, LLC (PE Chicago), a Delaware No. 13 2818 3 limited liability company. In 1998, PE Chicago replaced Con cessions as the general partner of the RC Partnership. In late 1997 or early 1998, Massuda invested her $4 mil lion in Enterprises, which by then owned and controlled PE Chicago, in exchange for an ownership interest of nearly 11%. As of 2000, the RC Partnership was valued at approxi mately $42.22 million; by 2001, its value had climbed to $56.4 million. Others with a stake in PE Chicago included Rezko himself, who was the managing member, and Semir Sirazi. By 2005 it was clear that Rezko was in significant finan cial and legal trouble. Around April 2006, Massuda went to Panda, informed it of her intent to sue Rezko and Enterprises and asked whether Panda would be interested in buying her interest in Enterprises. Panda s general counsel, R. Michael Wilkinson, replied that Panda was uninterested because her interest was worthless. About a month later, in mid May, Rezko contacted Wil kinson and asked for an urgent $3 million loan, because GE Capital was about to foreclose on his house. Wilkinson con veyed the request to Panda s Board, which turned it down. Rezko then offered to sell PE Chicago s interest in the RC partnership to Panda, if Panda would pay him $3 million immediately, keep the deal secret, and grant Rezko personal ly (not PE Chicago) a buy back option. This time Panda agreed; it purchased PE Chicago s interest in the RC partner ship for $9.7 million on June 1, 2006, and wired approximate ly $3.25 million to Rezko s personal account. No money was ever transferred to a PE Chicago account. Instead, the agreement stated that Rezko (defined to include Rezko Con cessions and its affiliates as well as Rezko himself) owed Panda substantial monies and that those debts were retired 4 No. 13 2818 by the sale. Interestingly, the Purchase Agreement never mentions PE Chicago. As agreed, Rezko and Panda kept the sale secret. Panda acquired PE Chicago s 50% interest in the RC Part nership for significantly less than its fair market value. Mas suda was never told about the transaction, despite her sub stantial interest in PE Chicago through her 11% ownership of Enterprises. She was evidently not alone in this respect: it appears that none of Enterprises s members (other than Rez ko) was informed about the Panda deal. Rezko s fortunes continued to spiral downward. He was indicted by a federal grand jury in November 2006 and at that point leaves our story. It was not until 2008 that Sirazi, another one of Rezko s investors, first discovered the details of the Panda Rezko PE Chicago transaction. He promptly sued Panda, Panda Restaurant Group, Inc., Citadel Panda Express, Inc., and Andrew and Peggy Cherng (the Panda de fendants), claiming that they had conspired with Rezko to defraud investors and had aided and abetted Rezko s breaches of his fiduciary duties to the investors in his busi nesses. Sirazi later gained control over PE Chicago and add ed it as a co plaintiff to his action. A jury found the Panda defendants liable to Sirazi for conspiracy and aiding and abetting a breach of a fiduciary duty, and awarded him $1,100,000 in compensatory damages and $2,000,000 in puni tive damages against each of the three corporate defendants. The court dismissed all of PE Chicago s tort claims, but PE Chicago won $5,140,000 on its breach of contract claim against the Panda defendants. In the end, those judgments were vacated after the parties reached a settlement. (As far as the record shows, Massuda received no benefit from this No. 13 2818 5 settlement other than the indirect effect that filtered up to her from whatever PE Chicago recovered.) After the settlement, Massuda re entered the picture. In the present case, she has advanced essentially the same claims that Sirazi raised against the Panda defendants. As we noted earlier, the district court ultimately dismissed her ac tion, because most of her claims were derivative and she had not stated a claim for fraud. In this court, she argues that the court erred in so finding. She also contends that the district court should have applied judicial estoppel against Panda and that it should have allowed her to pursue her fraud the ory. II The district court dismissed all counts with prejudice; our review is therefore de novo. Stayart v. Google Inc., 710 F.3d 719, 722 (7th Cir. 2013). Because PE Chicago and Enterprises are Delaware limited liability companies, the parties have assumed that Delaware law governs everything but her fraud claim. See Massey v. Merrill Lynch & Co., Inc., 464 F.3d 642, 645 (7th Cir. 2006) (applying law of state of incorpora tion to derivative claim issue). We will follow their lead and assess this case using principles of Delaware corporate law for the two LLCs. At this point, PE Chicago has released all claims arising from this matter through its settlement, and so its interests are no longer at issue. Massuda s complaint can survive only if she alleges direct injury. For ease of exposi tion, we evaluate each of her theories individually. Count I: Unjust Enrichment We begin with Massuda s contention that Defendants unjustly deprived and cheated Plaintiff out of the true and 6 No. 13 2818 proper value of PE Chicago s 50% interest in [the RC Part nership]. In characterizing this as direct or derivative, we look to the Delaware Supreme Court s decision in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), for guidance. Tooley held that [t]he analysis must be based solely on the following questions: Who suffered the alleged harm the corporation or the suing stockholder individual ly and who would receive the benefit of the recovery or other remedy? 845 A.2d at 1035. Under that test, Massuda fails at step one: if anyone was unjustly deprived of the true value of PE Chicago s interest, it was PE Chicago. Massuda was two steps away: she owned an interest in Enterprises, which owned PE Chicago, which had a 50% interest in the RC Partnership. Indeed, Massuda recognizes in her com plaint that the [d]efendants unjustly deprived and cheated Plaintiff out of the true and proper value of PE Chicago s 50% interest in [the RC Partnership]. It was PE Chicago that had the 50% interest in the RC Partnership and thus PE Chicago that was harmed directly. Massuda s claim is derivative. Count II: Fraud Massuda offers four theories to support her fraud allega tions: (1) the Panda defendants intentionally defrauded her, PE Chicago, and Enterprises out of the fair market value of PE Chicago s 50% interest by paying Rezko personally for PE Chicago s 50% interest in the RC Partnership instead of pay ing PE Chicago itself; (2) the defendants falsely represented that the purchase price Panda offered for PE Chicago s 50% interest represented the fair market value; (3) the defendants made material omissions by failing to inform interested third parties, including Massuda, of the transaction, even though they knew of her interest; and (4) the defendants No. 13 2818 7 falsely and misleadingly represented to Massuda just before the purchase of PE Chicago that her interest in Enterprises (and indirectly PE Chicago) was worthless. Massuda argues that the Panda defendants should be es topped from arguing that her fraud claims are derivative, because they successfully argued in the Sirazi litigation that PE Chicago could not succeed on the same fraud claims. The district court correctly rejected this argument. In the earlier case, the Panda defendants did not challenge PE Chicago s standing to bring the fraud claims. They argued instead that those claims failed on the merits. The question whether the claims were barred as derivative did not come up. Judicial estoppel is designed to prevent parties from obtaining an unfair advantage by taking a present position that is incon sistent with one successfully taken in the past. See Matter of Cassidy, 892 F.2d 637, 641 (7th Cir. 1990). It does not prevent a party from turning to an entirely new theory. Since there is no inconsistency here, we move to the merits. Massuda s first argument is that the Panda defendants defrauded her and others out of the fair market value of PE Chicago s interest. For the same straightforward reason we mentioned earlier, this is derivative. PE Chicago was the immediate party injured; any recovery would go to PE Chi cago first, and its members second. See Tooley, 845 A.2d at 1035. She next contends that the Panda defendants falsely stat ed the purchase price was for fair market value. We can dis miss this argument because she has not developed it on ap peal. See United States v. Berkowitz, 927 F.2d 1376, 1384 (7th Cir. 1991) ( We repeatedly have made clear that perfunctory and undeveloped arguments, and arguments that are un 8 No. 13 2818 supported by pertinent authority, are waived ). Even if we stretched to find it preserved, she would be no better off. A claim of common law fraud under Illinois law requires proof of five elements: (1) a false statement of material fact; (2) defendant s knowledge that the statement was false; (3) de fendant s intent that the statement induce the plaintiff to act; (4) plaintiff s reliance upon the truth of the statement; and (5) plaintiff s damages resulting from the reliance on the state ment. Tricontinental Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 841 (7th Cir. 2007) (internal quotation marks omitted). Massuda never alleged that the Panda de fendants intended to induce her to act based on its state ment, nor that she did rely to her detriment. This claim was properly dismissed with prejudice. Massuda s next allegation is that the Panda defendants omitted material information by failing to notify her when Panda acquired PE Chicago s interest in the RC Partnership, even though they knew of her interest. See, e.g., Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 571 (7th Cir. 2012) (rec ognizing that under Illinois law a plaintiff s fraudulent con cealment claims must allege that the defendant intentional ly omitted or concealed a material fact that it was under a duty to disclose to the plaintiff. ). This is the closest she came to alleging a direct claim, but as the district court properly concluded, she fell short. The key element missing from Massuda s complaint was an allegation, supported by facts, that the defendants were under a duty to disclose material facts to her. That is so even though we have noted that Illinois courts have found a lack of good faith where the transferee knew of a pending law suit against the transferor and accepted the transfer without No. 13 2818 9 informing the plaintiff. For Your Ease Only, Inc. v. Calgon Carbon Corp., 560 F.3d 717, 721 (7th Cir. 2009) (citing Kennedy v. Four Boys Labor Service, 279 Ill. App.3d 361 (1996)). One could deduce from this that Panda had a duty to inform Massuda about the sale because she informed Panda a month before the acquisition that she was suing Rezko and others. That is not, however, the theory that Massuda pre sented. Instead, up until her reply brief in this court, she as serted that the duty to avoid misleading omissions was root ed in her status as a minority member. That was a mistake on her part. And while we generally would be inclined to remand with a suggestion that plaintiff be allowed to re plead, since parties are not obligated to plead legal theories, such a move would be pointless here. Massuda already has turned down a chance to sharpen her fraud pleadings, which must meet the specificity require ments of Federal Rule of Civil Procedure 9(b). We see no rea son to give her a third chance. See Int l Mktg., Ltd. v. Archer Daniels Midland Co., 192 F.3d 724, 727 (7th Cir. 1999) (holding that when a plaintiff decide[s] to forgo [her] opportunity to amend the complaint and instead to pursue an immediate appeal, she makes a strategic decision [that] mean[s] that [her] case can be resuscitated only if [she] is able to convince this court that [she] had in fact properly stated [her fraud] claim[] in the form [it] took before the district court in the unamended complaint ). The same analysis applies to the allegation that the Panda defendants falsely and misleadingly represented to Massuda that her interest in Enterprise and PE Chicago was worth less. In dismissing, the district court found that she failed to state a claim because she failed to point to any facts to sup 10 No. 13 2818 port her assertion that the defendants made the statement with the intention that it would induce her to act, that she relied on the truth of the statement, or that she suffered any damages as a result of the allegedly fraudulent statement. The district court also thought that she had not pleaded the claim with particularity, as required by Rule 9(b), because she did not adequately explain who made the statement, or where and how it was made. On appeal, the Panda defend ants also argue that even assuming they did say her interest was worthless, that was a matter of opinion and not actiona bly false. The latter ground does not strike us as appropriate for dismissal on the complaint. At this point, we do not know whether the statements made to Massuda were non actionable opinions. Giving her the benefit of the doubt, it is at least debatable that Panda valued her interest at zero at the time of their conversation: Panda was then a 50% owner in the RC Partnership and thus would have had a very good idea about the partnership s worth. The adequacy of her allegations of fraud, however, is an other matter. In her complaint, Massuda explains that she called Panda s general counsel, said that she was suing Rez ko, and wanted to know if Panda was interested in buying her interest in the company. At that point, she alleges, The Defendants falsely and misleadingly represented to [plain tiff] that her interest in Enterprises and PE Chicago was worthless, when Defendants instead paid millions to Rezko personally for his supposed interest in said companies. This statement, no matter how generously read, says nothing about whether (1) the defendants intended her to act on the basis of the false statement; (2) she actually relied on the No. 13 2818 11 truth of the statement; or (3) she was damaged as a result of her reliance. While the district court gave plaintiff leave to amend her complaint she chose not to do so. Because Mas suda cannot show an injury [that is] independent of any alleged injury to the corporation, Tooley, 845 A.2d at 1039, her injury is derivative and barred by the settlement; dismis sal with prejudice was proper. Count III: Conspiracy to Defraud In this count, Massuda alleged that the Panda defendants and Rezko conspired to defraud PE Chicago and Enterpris es, and those with interests in [the same] through the sale of the RC Partnership interest at a price well below fair market value. This claim is derivative. Once again, the entity that suffered from the depressed price was PE Chicago. Massu da s injury was derivative. Count IV: Aiding and Abetting a Breach of Fiduciary Duty Count IV alleges that the Panda defendants were aware of Rezko s duties as an officer of PE Chicago and Enterprises and yet knowingly participated, assisted, and benefited from his breach of these duties via the secretive sale of the RC Partnership interest. Massuda believes that the case of Gen tile v. Rossette, 906 A.2d 91 (Del. 2006), gets her over the de rivative injury hurdle for this theory, at least. It is no stretch to say Rezko breached many fiduciary du ties, including duties to the other members of the firm. He deliberately circumvented what should have been a manda tory vote of the members. The sale of PE Chicago s interest in the RC Partnership disposed of the only asset PE Chicago had, and thus may have made that sale a fundamental cor porate change. See 8 Del.C. § 271(a). By conducting the sale 12 No. 13 2818 without a vote, we can assume that Rezko deprived the members of their voting power and that this amounted to a harm felt directly by the members. In Gentile, the corporation s CEO was also its main source of capital. As consideration for his loans, the CEO received promissory notes that were convertible into shares of com pany common stock. An agreement provided that the origi nal conversion rate was $1.33 of debt per share; later it was reduced to $.75, and then $.50. Eventually the CEO thought that the company s debt to him was deterring outside in vestment, and so he converted two thirds of his debt into equity. In the debt conversion, however, the CEO and anoth er officer decided to lower the conversion rate substantially, to $.05 of debt per share. All told, the CEO received 44 mil lion shares, significantly more than he would have received under the contractual conversion rate in place at the time ($.50). The conversion had the effect of increasing the CEO s eq uity holdings from 61.9% to 93.49% of the total. The minority shareholders thus experienced a dilution of their interest from 38.81% to 6.51%. Two months after the conversion, the company, led by the CEO, negotiated a merger whereby the company s shareholders would receive approximately .49 shares of the acquirer s shares for each of its shares. The ac quiring company also offered the CEO side benefits, includ ing a put agreement whereby it would repurchase 360,000 shares of the stock the CEO received in the merger at $5 a share one year later. Neither the CEO s original conversion of his debt into undervalued stock nor the side perks were mentioned in the Information Statement sent to shareholders about the merger. The merger was approved. Later, minority No. 13 2818 13 shareholders brought suit claiming that their shares had been diluted improperly by the issuance of excessive stock to the CEO. Ultimately, after losing in the lower court (which thought that their claims were derivative), the minority stockholders prevailed in the Delaware Supreme Court. That court ruled that the debt conversion claim was both derivative and di rect. 906 A.3d at 99. It said that the debt conversion was a self dealing corporate transaction with a significant stock holder, that increased the voting power and economic value of that significant stockholder s interest in [the company], at the expense and to the corresponding detriment of the mi nority shareholders. Id. While the court found injury to the company from the overpayment for debt, it recognized that the minority stockholders independently lost a significant portion of the cash value and the voting power of their minori ty stock interest. Those separate harms resulted from the same transaction, yet they are independent of each other. Id. (emphasis added). The Court recognized a particular trans actional paradigm a species of corporate overpayment claim that is both derivative and direct. Id. That is, [a] breach of fiduciary duty claim having this dual character arises where: (1) a stockholder having majority or effective control causes the corporation to issue excessive shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and (2) the exchange causes an in crease in the percentage of the outstanding shares owned by the controlling stockholder, and a corresponding decrease in the share percentage owned by the public (minority) share holders. Id. at 99 100. In such cases, the minority stock holder s direct injury arises [b]ecause the shares represent ing the overpayment embody both economic value and vot 14 No. 13 2818 ing power, the end result of this type of transaction is an im proper transfer or expropriation of economic value and voting power from the public shareholders to the majority or controlling stockholder. Id. at 100. Massuda argues that Gentile stands for the proposition that every time the holder of a majority interest acts in a way that helps him and hurts the minority, there is a direct claim. We do not read it so broadly, as doing so would wholly swal low Tooley. Instead, we understand it to stand for the more modest proposition that when a majority shareholder en gages in wrongdoing in such a way as to dilute the voting power of the minority shareholders, minority shareholders can bring a direct suit for voting power dilution. This makes sense because a dilution of voting power is a direct harm to the shareholders that is not felt by the company. If Massuda had alleged that Panda aided and abetted Rezko s unlawful dilution of member voting power, she would have stated a claim for a direct injury. But, at least un til she filed her reply brief, which was too late, she did not. Instead, she has complained of the improvidence and waste fulness of the sale itself. But the only party directly harmed by the sale was PE Chicago. The district court properly found that Massuda cannot recover for her derivative inju ries, and that she failed to state a claim for fraud. We therefore AFFIRM the judgment of the district court.
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
