12-2071.131-RSK February 21, 2013

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

SIDNEY FERENC, LEGACY RE, LTD., )

ROCK SOLID GELT LIMITED, and 407 )

DEARBORN, LLC, )

)

Plaintiffs, )

)

 v. ) No. 12 C 2071

) 

KAREN BRENNER, FORTUNA ASSET )

MANAGEMENT, LLC, and MICHAEL )

HORRELL, )

)

Defendants. )

MEMORANDUM OPINION

Before the court are: (1) the motion of defendants Karen

Brenner and Fortuna Asset Management, LLC (“FAM”) to compel

arbitration; (2) the plaintiffs’ motion to strike a portion of the

defendants’ reply brief; and (3) defendant Michael Horrell’s motion

to dismiss. For the reasons explained below, we grant the

defendants’ motion to compel arbitration in part and deny it in

part, deny the plaintiffs’ motion to strike, and grant Horrell’s

motion to dismiss.

BACKGROUND

Plaintiffs Sidney Ferenc, Legacy Re, Ltd. (“Legacy Re”), Rock

Solid Gelt Limited (“Rock Solid”), and 407 Dearborn, LLC (“407

Dearborn”) have sued the defendants for breach of fiduciary duty

and RICO fraud. The plaintiffs allege that in 2005 Brenner

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solicited Ferenc (through his company Legacy Re) to make a $2

million investment in Fortuna Stream, L.P. (Compl. ¶ 11.) Brenner

is Fortuna Stream’s general partner, and Legacy Re is a limited

partner. (Id.) Brenner is also the managing member of FAM. (Id.

at ¶ 7.) In 2006, Ferenc, Legacy Re, and Rock Solid (another

company in which Ferenc holds an interest) entered into “Investment

Management Performance Fee Agreements” (hereinafter, “Investment

Management Agreements”) with FAM. (See id. at ¶ 12; see also

Investment Management Agreements, attached as Exs. 1-3 to Decl. of

Karen Brenner.)1 Pursuant to these agreement, FAM agreed to

provide “investment management services and advice” to Ferenc,

Legacy Re, and Rock Solid. (Compl. ¶ 12.) Among other things, FAM

established an account at Bear Stearns, in Ferenc’s name and for

his benefit, over which FAM exercised “discretionary trading

authority.” (Id.)

In 2006, Brenner and FAM advised and encouraged Ferenc to

acquire an interest in a $7.25 million loan that Fortuna Stream had

made to a company called Scattered Corporation (the “Scattered

Loan”). The Scattered Loan was secured in part by mortgages on the

properties commonly known as 407 S. Dearborn, Chicago, Illinois

(the “Dearborn Property”) and 401 S. LaSalle Street, Chicago,

Illinois (the “LaSalle Property.”). (Id. at ¶ 14.) The Dearborn

1/ The terms of the three agreements are virtually identical and each is

dated “as of” June 1, 2006.

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Property was then owned by Old Colony Partners Limited Partnership

(“Old Colony”) and the LaSalle Property was then owned by 401

Properties Limited Partnership (“401 Properties”). (Id. at ¶ 16.) 

The plaintiffs allege on information and belief that defendant

Michael Horrell had a direct or indirect interest in both

properties. (Id. at ¶ 17.) Ferenc (through Legacy Re) purchased

one interest in the loan from Fortuna Stream for $450,000 and

another interest (through Rock Solid) from ACF Property Management,

Inc. for $3.8 million. (Id. at ¶ 15.) The plaintiffs allege on

information and belief that AFC Property Management was owned or

controlled by Alan Fox, another investment client of Brenner and

FAM. (Id.) Scattered Corporation later defaulted on the loan,

precipitating another series of transactions. (Id. at ¶ 18.) 

First, the Dearborn Property was conveyed to a newly-created

entity, plaintiff 407 Dearborn. (Id.) Initially, Rock Solid and

Legacy Re were members of 407 Dearborn along with Fortuna Stream

and affiliates of FAM, and the company was managed and controlled

by Brenner, FAM, “and/or” Horrell (directly or indirectly through

a company called 407 Dearborn Manager, LLC). (Id. at ¶¶ 18-19.) 

In June 2011, Rock Solid acquired all of the interests in 407

Dearborn and an affiliate of Rock Solid and/or Ferenc assumed

control and management of the company. (Id.) Second, 401

Properties executed a new promissory note in the amount of $3.2

million payable to Fortuna Stream (the “401 Note”). (Id. at ¶ 18.) 

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On September 22, 2009, Fortuna Stream assigned to Legacy Re an

undivided 6.206% interest in the 401 Note and assigned to Rock

Solid an undivided 48.276% interest in the 401 Note. (Id.) Legacy

Re and Rock Solid allege that they have “lost all or much of” their

investment in the Scattered Loan and that they are “unlikely” to

recoup their investments through the post-default transactions. 

(Id. at ¶¶ 26, 29.)

The plaintiffs have filed a four-count complaint against the

defendants. In Count I, Legacy Re and Rock Solid allege that

Brenner and FAM breached their fiduciary duty by failing to

disclose the risks associated with the Scattered Loan transaction. 

(Id. at ¶ 23.) They further allege that they were encouraged to

invest in the Scattered Loan in order to reduce the exposure of

Fortuna Stream, Brenner, and other FAM clients, including Alan Fox. 

(Id. at ¶ 24.) In Count II, 407 Dearborn alleges that Brenner,

FAM, and Horrell exercised their control over the company to cause

it to enter into transactions that benefitted the defendants at the

company’s expense. (See id. at ¶¶ 34, 37 (alleging that the

defendants caused the 407 Dearborn to pay excessive and unnecessary

fees to Horrell and his affiliates); 35 (alleging that Brenner,

FAM, and/or Horrell caused the company to accept and repay loans

from the defendants or their affiliates at high interest rates).) 

In Count III, Ferenc alleges that Brenner and FAM breached their

fiduciary duty to him by recommending investments in which they

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(and Horrell) benefitted. (Id. at ¶ 44.) As we read the

complaint, those investments included bonds that FAM traded on

Ferenc’s behalf. (See id. at ¶ 46.) Finally, in Count IV, Ferenc,

Legacy Re, and Rock Solid allege that Brenner and Horrell violated

the civil RICO statute. (Id. at ¶¶ 49-60.)2

DISCUSSION

Brenner and FAM have moved to compel the plaintiffs to submit

their claims to arbitration pursuant to arbitration clauses in the

Investment Management Agreements. Horrell, who is not a party to

the Investment Management Agreements, has moved to dismiss the

claims against him under Rule 12(b)(6).

A. Brenner’s and FAM’s Motion to Compel Arbitration

1. Legal Standard

The arbitration clauses in the Investment Management

Agreements designate Orange County, California as the forum for

arbitration. (See Investment Management Agreement ¶ 20.) We

cannot compel arbitration in a forum outside the Northern District

of Illinois. See Federal Arbitration Act (“FAA”), 9 U.S.C. § 4; 

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Lauer, 49 F.3d 323,

327 (7th Cir. 1995) (“[T]his Circuit has concluded that where the

arbitration agreement contains a forum selection clause, only the

2/ The heading of Count IV does not identify which plaintiffs are joining

the civil RICO claim, but it is apparent from the complaint's allegations that

it is brought by Ferenc, Legacy Re, and Rock Solid. (See Compl. at 16

("WHEREFORE, Ferenc, Legacy Re and Rock Solid pray for entry of judgment in their

favor and against Karen Brenner and Michael Horrell jointly and severally . . .

.").)

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district court in that forum can issue a § 4 order compelling

arbitration.”) (emphasis in original). Neither side has cited

Merrill Lynch or otherwise acknowledged this limitation on our

authority to compel arbitration. Rather than move to compel

arbitration, Brenner and FAM should have moved to dismiss the

claims against them for improper venue under Rule 12(b)(3). See

Continental Cas. Co. v. American Nat. Ins. Co., 417 F.3d 727, 733

(7th Cir. 2005). However, the central question in this case is the

same whether we proceed under § 4 of the FAA or Rule 12(b)(3): did

the plaintiffs agree to arbitrate the claims asserted in their

complaint? See id. (“The central issue in this case is whether

Continental agreed to arbitrate this dispute.”). Therefore, in the

interests of efficiency, we will convert the defendants’ motion to

compel arbitration into a motion to dismiss for improper venue. 

See Fed. R. Civ. P. 12(b)(3). 

Under the FAA, an arbitration clause in a “contract evidencing

a transaction involving commerce . . . shall be valid, irrevocable,

and enforceable, save upon such grounds as exist at law or in

equity for the revocation of any contract.” 9 U.S.C. § 2. Whether

the parties’ dispute in this case is subject to arbitration is a

question of contract interpretation. See Kiefer Specialty

Flooring, Inc. v. Tarkett, Inc., 174 F.3d 907, 909 (7th Cir. 1999). 

However, the Supreme Court has interpreted the FAA to require that

“any doubts concerning the scope of arbitrable issues should be

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resolved in favor of arbitration.” Moses H. Cone Memorial Hosp. v.

Mercury Const. Corp., 460 U.S. 1, 24-25 (1983); see also Kiefer,

174 F.3d at 909. “[A] court may not deny a party’s request to

arbitrate an issue ‘unless it may be said with positive assurance

that the arbitration clause is not susceptible of an interpretation

that covers the asserted dispute.’” Kiefer, 174 F.3d at 909

(quoting United Steelworkers v. Warrior & Gulf Navigation Co., 363

U.S. 574, 582-83 (1960)).

Each of the Investment Management Agreements contains a broad

arbitration clause: “[t]he parties agree that in the event of a

dispute with respect to this Agreement or their respective

obligations hereunder, such dispute shall be settled by arbitration

in Orange County, California, in accordance with the rules of the

American Arbitration Association.” (See Investment Management

Agreement ¶ 20); see also AT&T Technologies, Inc. v. Communications

Workers of America, 475 U.S. 643, 650 (1986) (describing a similar

provision — “any differences arising with respect to the

interpretation of this contract or the performance of any

obligation hereunder . . .” — as “broad”). Where, as here, the

parties have adopted a broad arbitration clause, we will compel

arbitration unless there is “forceful evidence” that the parties

intended to exclude their grievance from arbitration. Warrior &

Gulf Nav., 363 U.S. at 584-85; see also AT&T Tech., 475 U.S. at 650

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(similar).3 However, the federal policy favoring arbitration does

not supplant the parties’ intent as expressed in their agreement. 

See Stone v. Doerge, 328 F.3d 343, 345-46 (7th Cir. 2003). 

2. Counts I (Legacy Re and Rock Solid — Breach of Fiduciary

Duty) and III (Ferenc — Breach of Fiduciary Duty)

a. Counts I and III Against FAM

The plaintiffs argue that their claims are not disputes “with

respect to” the Investment Management Agreements, relying on the

following provision:

1. Services

(a) Client retains FAM to provide investment

management services and to manage Client’s securities in

Client’s investment account (the “Account”). Subject to

Client’s investment restrictions referred to in Section

3(a)(iii) below, Client grants to FAM full discretion as

to all investment decisions regarding the Account,

including, but not limited to, authority to buy, invest

in, hold for investment, own, assign, transfer, sell

(long or short), exchange, trade in, lend, pledge,

deliver and otherwise deal in (on margin or otherwise)

stocks, bonds, options, repurchase agreements,

commodities and all other securities and intangible

investment instruments and vehicles of every kind and

nature (“Securities”) for the Account, and to exercise,

in FAM’s discretion, all rights, power, privileges and

other incidents of ownership with respect to Securities

in the Account.

[. . .]

(b) FAM may also provide investment advice regarding

other investment opportunities not involving the Account

(“Other Services”). Other Services will primarily be for

3/ Although the cited cases involved labor disputes, the general

principles apply equally to ordinary commercial disputes. See Schacht v. Beacon

Ins. Co., 742 F.2d 386, 390 (7th Cir. 1984) ("While the statutory authority in

the Steelworkers case was section 301(a) of the Labor Management Relations Act

of 1947, 29 U.S.C. § 185(a), we have extended the same presumptions in favor of

arbitration to commercial contracts outside the labor field . . . ."). 

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investment evaluation. The nature and scope of any Other

Services provided to Client by FAM will be determined by

them separately.

(Investment Management Agreement ¶ 1.) According to the

plaintiffs, all of their claims relate to “Other Services,” which

are subject to “separate[]” terms and conditions not including the

Investment Management Agreement’s arbitration clause. (Investment

Management Agreement ¶ 1(b).) The defendants respond that all of

the plaintiffs’ investments were part of the plaintiffs’ “Account.”

(Defs.’ Reply at 2.) Both arguments are problematic. The

defendants have not cited any support for their assertion that the

Scattered Loan was part of the “Account” that FAM managed. And

even assuming that the loan participations constituted “Securities”

as the Investment Management Agreements define that term, there is

no indication in the complaint that FAM exercised its discretionary

authority to acquire them on behalf of Legacy Re, Rock Solid,

and/or Ferenc. Instead, it appears that the plaintiffs, acting on

FAM’s advice, purchased the loan participations on their own

behalf. (See Compl. ¶¶ 14-15.) On its face, then, FAM’s role with

respect to the Scattered Loan transaction appears to have been in

the nature of “investment evaluation.” (Investment Management

Agreement ¶ 1(b).) On the other hand, the plaintiffs’ claims are

not based solely on the Scattered Loan transaction. Ferenc’s claim

against FAM in Count III is based in part on fees that FAM charged

him “for managing a bond portfolio . . . .” (Id. at ¶ 46; see also

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id. at ¶ 12 (“Among other things, an account was established by FAM

at Bear Stearns, in the name of or for the benefit of Ferenc, over

which FAM had discretionary trading authority.”).) The plaintiffs’

other claims also suggest, albeit less explicitly, that they are

based at least in part on “Account” services. In Count I, Legacy

Re and Rock Solid ask us to compel FAM and Brenner to disgorge

“performance” and other fees that they paid to FAM in connection

with the Scattered Loan transaction and “additional investments.” 

(Compl. ¶ 28.) This allegation appears to refer to the

“performance fee” set forth in the Investment Management

Agreements. (See Investment Management Agreement § 7 (requiring the

plaintiffs to pay FAM a “performance fee” based upon a percentage

of profits derived from assets in the Account).) The plaintiffs

have not identified any other agreement requiring them to pay a

“performance fee” to FAM. 

Ultimately, we conclude that it is unnecessary to categorize

each of the plaintiffs’ claims — “Account” versus “Other Services”

— against FAM. First, we do not read the “Other Services” section

of the Investment Management Agreements to expressly exclude any

disputes from arbitration. Cf. Warrior & Gulf Nav., 363 U.S. at

584-85 (noting that the parties may expressly provide that

particular disputes are not subject to arbitration). It simply

indicates that the parties will separately determine the “nature

and scope” of those services. They might agree that disputes

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concerning certain services would not be subject to arbitration,

but there is no evidence that they did. See AT&T Tech., 475 U.S.

at 650; Warrior & Gulf Nav. Co., 363 U.S. at 584-85. Second, the

Investment Management Agreements supply an essential term for

“Other Services:” FAM’s fee. (See Investment Management Agreements

at C-1 (“Other services will be compensated at an hourly rate of

$350 plus a 15% nonaccountable overhead charge.”).) In that sense,

a claim based upon FAM’s performance of “Other Services” is a claim

“with respect to” the Investment Management Agreements. The

plaintiffs’ reliance on Rosenblum v. Travelbyus.com Limited, 299

F.3d 657 (7th Cir. 2002) is misplaced. In Rosenblum, the Court

held that an arbitration clause in an employment agreement did not

encompass disputes concerning a related acquisition agreement. Id.

at 663. It was clear from the language of the two contracts that

they concerned separate subjects and that each agreement was

complete in its own right. Id. Here, the Investment Management

Agreements create a general framework for all of the parties’

transactions — “Account” and non-“Account” — and establish the fees

for FAM’s services depending on the nature of the transaction. In

sum, there is no “forceful evidence” indicating that the parties

intended to exclude the plaintiffs’ claims in Counts I and III from

the scope of the arbitration clauses. AT&T Tech., 475 U.S. at 650.

b. Counts I and III Against Brenner and Plaintiffs’ 

 Motion to Strike

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The plaintiffs argue that Brenner cannot compel them to submit

to arbitration because, unlike FAM, she is not a party to the

Investment Management Agreements. She executed the agreements, but

she did so as FAM’s “President.” (See Investment Management

Agreements at 12.) Brenner argues that she is entitled to enforce

the provision under two theories: (1) equitable estoppel, and (2)

agency. Before addressing the substance of Brenner’s arguments, we

note that the parties disagree about the governing law. The

defendants relied on Illinois authorities in their opening brief,

(see Def.’s Mem. at 6), and the plaintiffs followed suit in their

response. (See Pls.’ Resp. at 6-7.) In their reply memorandum,

the defendants argued for the first time that California law is

controlling pursuant to the choice-of-law provision in the

Investment Management Agreements. (See Defs.’ Reply at 7-8; see

also Investment Management Agreement § 27 (providing that the

agreements shall be governed by California law).) The plaintiffs

have moved to strike the defendants’ reply brief insofar as it is

predicated on this new argument. (See Mot. to Strike at 2.) 

According to the plaintiffs, the choice of law is critical because

Brenner’s equitable-estoppel theory is not viable under Illinois

law. (See id.; see also Pls.’ Resp. at 6-7 (citing Ervin v. Nokia,

Inc., 812 N.E.2d 534, 542 (Ill. App. Ct. 2004); Defs.’ Reply at 7

(“Defendants’ concede that under the laws of Illinois, Brenner may

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be unable to compel arbitration pursuant to the principle of

equitable estoppel.”).)

However, the law in both jurisdictions supports Brenner’s

alternative theory that she is entitled to enforce the arbitration

clause as FAM’s agent. Under Illinois and California law, “an

agent acting within the scope of his agency is entitled to invoke

an arbitration agreement entered into by [his] principal.” Ellis

v. Coventry Capital I LLC, No. 08 CV 3083, 2008 WL 4396349, *7

(N.D. Ill. Sept. 24, 2008) (applying Illinois law); see also RN

Solution, Inc. v. Catholic Healthcare West, 81 Cal.Rptr.3d 892, 900

(Cal. Ct. App. 2008) (similar). The plaintiffs are suing Brenner

for actions she undertook as FAM’s agent. (See Compl. ¶¶ 13

(“Brenner was a subagent employed by FAM and owed to Ferenc the

same fiduciary duties owed to him by FAM.”); 28 (“Legacy Re and

Rock Solid paid to FAM ‘performance’ or other fees for its services

and advice, which FAM in turn paid over to Brenner, in whole or in

part.”).) Therefore, she is entitled to enforce the arbitration

clause in the Investment Management Agreements under both Illinois

and California law. The plaintiffs’ motion to strike is denied as

effectively moot. 

Finally, the plaintiffs’ reliance on McCarthy v. Azure, 22

F.3d 351, 356-361 (1st Cir. 1994) does not persuade us to reach a

different result. (See Pls.’ Resp. at 8.) The McCarthy court

rejected a non-party agent’s attempt to enforce an arbitration

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clause in a purchase agreement that he executed on his principal’s

behalf. McCarthy, 22 F.3d at 357. First, the court was not

applying Illinois or California law.4 The law in those

jurisdictions is consistent with the authorities that McCarthy

distinguished and/or rejected. See id.; see, e.g., Pritzker v.

Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110, 1121-22

(3d Cir. 1993). Second, the court expressly distinguished cases,

like this one, involving service contracts: “[a] person who enters

into a service contract with a firm contemplates an ongoing

relationship in which the firm’s promises can only be fulfilled by

future (unspecified) acts of its employees or agents stretching

well into an uncertain future. A person who contracts to transfer

assets to a company faces a much different prospect: a one-shot

transaction in which the purchaser’s obligations are specified and

are, essentially, performed in full at the closing, or soon

thereafter. So it is here.” Id. at 357. Unlike the purchase

agreement in McCarthy, the Investment Management Agreements are

service contracts. See CD Partners, LLC v. Grizzle, 424 F.3d 795,

799-800 (8th Cir. 2005) (distinguishing McCarthy on the grounds

that that case involved a “one-shot” transaction); Lamson v. LFG,

LLC, No. 00 C 3094, 2000 WL 33539382, *1 (N.D. Ill. June 22, 2000)

4/ The McCarthy court applied federal common law. See McCarthy, 22 F.3d

at 355. We believe that the Seventh Circuit would apply state law to this

question. See Stone, 328 F.3d at 345 (concluding that state law governed

disputes about the scope and meaning of an arbitration clause, and that federal

law only comes into play if the state has adopted “special rules” for arbitration

inconsistent with federal policy).

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(similar). Brenner’s performance as FAM’s agent over the course of

the parties’ business relationship is at the heart of the

plaintiffs’ complaint. (See Compl. ¶¶ 11-15, 19, 21-25, 28, 44-47

(alleging that “Brenner and FAM” provided dubious investment advice

to the plaintiffs).)

In sum, Counts I and III — asserted by Legacy Re, Rock Solid,

and Ferenc against Brenner and FAM — are subject to arbitration in

their entirety.

3. 407 Dearborn’s Claims as Against Brenner and FAM (Count

II)

 In Count II, 407 Dearborn alleges breach of fiduciary duty by

Brenner, FAM, and Horrell. Brenner and FAM argue that 407

Dearborn, which is not a party to the Investment Management

Agreements, is nevertheless bound by the arbitration clause because

the company was “formed as part of the work-out facilitated by FAM

when the Scattered Loan defaulted.” (Defs.’ Mem. at 5.) However,

they have not cited any relevant authority supporting the

proposition that a non-party may be compelled to arbitrate its

claims simply because it participated in transactions with parties

bound by an arbitration clause. In their reply brief, the

defendants belatedly cite JSM Tuscany, LLC v. Superior Court, 123

Cal.Rptr.3d 429, 443-44 (Cal. Ct. App. 2011) for the proposition

that a non-party plaintiff may be bound by an arbitration clause

under equitable-estoppel principles if it sues for breach of a

contract containing such a clause. But 407 Dearborn’s claims are

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not even loosely based upon the Investment Management Agreements. 

Instead, 407 Dearborn alleges that the defendants enriched

themselves at the company’s expense during the time period when

they controlled the company (March 2009 through June 2011). (See

Compl. ¶¶ 33-40.) We conclude that 407 Dearborn’s claims in Count

II are not subject to arbitration. 

4. The Plaintiffs’ RICO Claim as Against Brenner (Count IV)

In Count IV, Ferenc, Legacy Re, and Rock Solid allege that

Brenner and Horrell violated 18 U.S.C. § 1962(c) and (d). Insofar

as this claim is brought against Brenner, we conclude that it is

subject to arbitration. The sufficiency of the plaintiffs’

complaint is beyond the scope of the defendants’ motion,5 but Count

IV appears to be yet another instance of a “garden-variety”

business dispute masquerading as a civil RICO claim for treble

damages. Midwest Grinding Co., Inc. v. Spitz, 976 F.2d 1016, 1025

(7th Cir. 1992). (“While it is clear that the scope of civil RICO

extends beyond the prototypical mobster or organized crime

syndicate, it is equally evident that RICO has not federalized

every state common-law cause of action available to remedy business

deals gone sour.”). The complaint does not identify any other

5/ See AT&T Tech., 475 U.S. at 649-50 (“[I]n deciding whether the parties

have agreed to submit a particular grievance to arbitration, a court is not to

rule on the potential merits of the underlying claims. Whether “arguable” or not,

indeed even if it appears to the court to be frivolous, the union's claim that

the employer has violated the collective-bargaining agreement is to be decided,

not by the court asked to order arbitration, but as the parties have agreed, by

the arbitrator.”).

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victims of the alleged RICO conspiracy besides Ferenc and his

companies. And although the complaint vaguely refers to “other

investments,” (Compl. ¶ 54), the only allegations that the

plaintiffs have pled with even minimal detail are the same

allegations underlying Counts I and III.6 Moreover, given the

breadth of the arbitration clause, it seems likely that the “other

investments” are likewise subject to that clause. (See supra.) We

conclude that the plaintiffs’ RICO claim against Brenner is a claim

“with respect to” the Investment Management Agreements and

therefore subject to arbitration. 

Horrell, who is also named as a defendant in Count IV, is

neither a party to the Investment Management Agreements nor an

agent of a party to those agreements. However, we cannot override

Brenner’s right to arbitration because the plaintiffs’ RICO claim

involves a nonparty: “[u]nder the Arbitration Act, an arbitration

agreement must be enforced notwithstanding the presence of other

persons who are parties to the underlying dispute but not to the

arbitration agreement.” Moses H. Cone Memorial Hosp., 460 U.S. at

20; see also Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 217

(1985) (“[T]he Arbitration Act requires district courts to compel

arbitration of pendent arbitrable claims when one of the parties

6/ Ferenc, Legacy Re, and Rock Solid also allege losses stemming from “the

improper transfer of property from 407 Dearborn,” (see Compl. ¶ 59), but they are

not the real parties in interest to such a claim. That claim belongs to 407

Dearborn. See, e.g., Freed v. JPMorgan Chase Bank, N.A., No. 12 C 1477, 2012 WL

6193964, *4 (N.D. Ill. Dec. 12, 2012). 

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files a motion to compel, even where the result would be the

possibly inefficient maintenance of separate proceedings in

different forums.”).

B. Horrell’s Motion to Dismiss

1. Legal Standard

The purpose of a 12(b)(6) motion to dismiss is to test the

sufficiency of the complaint, not to resolve the case on the

merits. 5B Charles Alan Wright & Arthur R. Miller, Federal

Practice and Procedure § 1356, at 354 (3d ed. 2004). To survive

such a motion, “a complaint must contain sufficient factual matter,

accepted as true, to ‘state a claim to relief that is plausible on

its face.’ A claim has facial plausibility when the plaintiff

pleads factual content that allows the court to draw the reasonable

inference that the defendant is liable for the misconduct alleged.” 

Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 570, 556 (2007)). When evaluating

a motion to dismiss a complaint, the court must accept as true all

factual allegations in the complaint. Iqbal, 129 S. Ct. at 1949. 

However, we need not accept as true its legal conclusions;

“[t]hreadbare recitals of the elements of a cause of action,

supported by mere conclusory statements, do not suffice.” Id.

(citing Twombly, 550 U.S. at 555).

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2. 407 Dearborn’s Breach of Fiduciary Duty Claim Against

Horrell (Count II)7

Horrell argues that 407 Dearborn’s breach of fiduciary duty

claim is subject Rule 9(b)’s heightened pleading standard. See

Robinson v. Caster, 356 F.2d 924, 925 (7th Cir. 1966) (“A breach of

fiduciary duty claim premised on fraud is subject to Rule 9(b).”). 

Although it is a close question, we conclude that Count II does

sound in fraud. The plaintiffs allege that from March 2009 through

June 2011 407 Dearborn “was controlled and managed by Brenner, FAM

and/or Horrell (directly or indirectly through 407 Dearborn

Manager, LLC).” (Compl. ¶ 19; see also id. at ¶ 33 (“From March,

2009 through June, 2011, 407 Dearborn was controlled and dominated

by Brenner, FAM and Horrell.”).) According to the plaintiffs,

Brenner and FAM caused 407 Dearborn to pay dubious and excessive

management fees to Horrell and/or his affiliates. (Compl. ¶¶ 34,

37.) They also allege that “Brenner, FAM, and/or Horrell” caused

407 Dearborn to accept and repay loans from the defendants’

affiliates at exorbitant interest rates. (Id. at ¶ 35.) In

paragraph 37, 407 Dearborn alleges that the defendants caused it to

make payments to Horrell and his affiliates without disclosing (or

inadequately disclosing) improper mark-ups and other excessive

charges. (See id. at ¶ 37.) Indeed, the complaint indicates that

7/ Although not labeled as such, it is apparent from the complaint and

from the plaintiffs’ response to Horrell’s motion that Count II alleges breach

of fiduciary duty.

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Horrell received some payments without conferring any benefits on

407 Dearborn. (See id.; see also id. at ¶ 34 (indicating that

Horrell received purported “management fees” when, in fact, the

property was managed by another party).) In essence, 407 Dearborn

alleges that the defendants were siphoning money out of the company

on the pretense that the defendants and/or their affiliates were

providing valuable services. We think that 407 Dearborn is

alleging fraud, not simple mismanagement or conflict of interest. 

Our conclusion is buttressed by the fact that the other plaintiffs’

RICO fraud claim is purportedly based in part upon 407 Dearborn’s

losses. (See Compl. ¶ 59 (alleging that the scheme to defraud

caused losses “including but not limited to . . . the improper

transfer of property from 407 Dearborn.”).

Rule 9(b) requires plaintiffs to allege the circumstances

constituting fraud with particularity. Fed. R. Civ. P. 9(b). 

“This means the who, what, when, where, and how: the first

paragraph of any newspaper story.” DiLeo v. Ernst & Young, 901

F.2d 624, 627 (7th Cir. 1990); see also Pirelli Armstrong Tire

Corp. Retiree Medical Benefits Trust v. Walgreen Co., 631 F.3d 436,

442 (7th Cir. 2011) (noting that “the requisite information — what

gets included in that first paragraph — may vary on the facts of a

given case”). Count II is vague concerning nearly all of these

particulars. Some allegations indicate that Horrell exercised

direct control over 407 Dearborn, (see Compl. ¶ 19), but how? Did

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Horrell have an interest in 407 Dearborn? Or 407 Dearborn Manager,

LLC? Other allegations indicate that Horrell was actually an

outsider with personal and/or professional ties to Brenner. (See

id. at ¶¶ 34, 36, 38, 40.) In addition, the time frame for the

alleged improper transfers is overbroad: March 2009 through June

2011. (See id. at ¶ 33.) 407 Dearborn has not identified any

particular improper loan (see id. at ¶ 35), or any particular

invoice containing “mark-ups or other excessive charges . . . .” 

(Id. at ¶ 38.) 407 Dearborn’s vague allegations of impropriety

against Horrell do not pass muster under Rule 9(b). See Pirelli

Armstrong, 631 F.3d at 442 (“Heightened pleading in the fraud

context is required in part because of the potential stigmatic

injury that comes with alleging fraud and the concomitant desire to

ensure that such fraud allegations are not lightly leveled.”). 

Horrell’s motion to dismiss Count II is granted. And because the

defects we have identified apply equally to 407 Dearborn’s claim

against Brenner and FAM, we will dismiss count II against those

defendants as well under Rule 12(b)(6).

3. Civil RICO (Count IV) 

The plaintiffs have filed a RICO conspiracy claim against

Horrell and Brenner. 18 U.S.C. § 1962 states in pertinent part:

(c) It shall be unlawful for any person employed by or

associated with any enterprise engaged in, or the

activities of which affect, interstate or foreign

commerce, to conduct or participate, directly or

indirectly, in the conduct of such enterprise's affairs

through a pattern of racketeering activity ....

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(d) It shall be unlawful for any person to conspire to

violate any of the provisions of subsection (a), (b), or

(c) of this section.

18 U.S.C. § 1962(c) & (d). The elements of a civil RICO claim are: 

“(1) conduct (2) of an enterprise (3) through a pattern (4) of

racketeering activity.” Gamboa v. Velez, 457 F.3d 703, 705 (7th

Cir. 2006). “[A]llegations of fraud in a civil RICO complaint are

subject to the heightened pleading standard of Fed.R.Civ.P. 9(b),

which requires a plaintiff to plead all averments of fraud with

particularity.” Slaney v. The Intern. Amateur Athletic Federation, 

244 F.3d 580, 597 (7th Cir. 2001). 

a. Enterprise

“A RICO complaint must identify the enterprise.” Richmond v.

Nationwide Cassel L.P., 52 F.3d 640, 645 (7th Cir. 1995). “The

hallmark of an enterprise is a structure.” Richmond v. Nationwide

Cassel L.P., 52 F.3d 640, 645 (7th Cir. 1995) (citation and internal

quotation marks omitted). “An enterprise is distinct, separate, and

apart from a pattern of racketeering activity: although a pattern of

racketeering activity may be the means through which the enterprise

interacts with society, it is not itself the enterprise, for an

enterprise is defined by what it is, not what it does.” Jennings

v. Emry, 910 F.2d 1434, 1440 (7th Cir. 1990).

The plaintiffs purport to allege an association-in-fact

enterprise consisting of “FAM, Fortuna Stream, and other entities in

which Brenner and Horrell held or controlled the interests.” 

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(Compl. ¶ 51.) This “nebulous” collection of named and unnamed

entities is insufficient to state a civil RICO violation. See

Richmond, 52 F.3d at 645 (rejecting a similar allegation as too

“nebulous” and “open ended” to addequately plead an association-infact). Also, there is no suggestion of any structure or hierarchy. 

Limestone Development Corp. v. Village of Lemont, Ill., 520 F.3d

797, 804-05 (7th Cir. 2008) (“Nowhere in the complaint does one find

anything to indicate a structure of any kind. There is no reference

to a system of governance, an administrative hierarchy, a joint

planning committee, a board, a manager, a staff, headquarters,

personnel having differentiated functions, a budget, records, or any

other indicator of a legal or illegal enterprise.”). Instead, the

complaint merely describes a loose confederation of entities that

“solicit from investors monies to be used by and for the benefit of

various entities and/or projects in which Brenner and Horrell have

an interest, and from which they receive fees and profits.” (Compl.

¶ 52); cf. Jennings, 910 F.2d at 1440 (“[A]n enterprise is defined

by what it is, not what it does.”). We conclude that the plaintiffs

have failed to adequately allege a RICO enterprise. 

b. Pattern of Racketeering Activity

“[A] pattern of racketeering activity consists, at a minimum,

of two predicate acts of racketeering (committed within a ten-year

time period).” Slaney, 244 F.3d at 598-99. Here, the plaintiffs

allege that the defendants committed multiple acts of mail fraud. 

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Therefore, with respect to at least two such acts, they “must allege

the identity of the person who made the representation, the time,

place and content of the misrepresentation, and the method by which

the misrepresentation was communicated to the plaintiff.” Id. at

599. The complaint contains a table listing 21 letters that

“Brenner and FAM mailed to Ferenc, Legacy Re, and/or Rock Solid.” 

(Compl. ¶ 54.) The complaint does not specify which plaintiffs

received which letters from which defendants. Most of the

communications — 16 of 21 — are described as “cover letters”

enclosing financial statements for Fortuna Stream. (Id.) The

plaintiffs do not explain why they believe that the letters and/or

the financial statements furthered the alleged scheme. The same

goes for the three invoices for consulting and performance fees. 

(Id.) Finally, two communications are described only as “Letter

dated __,” (id.), which is plainly insufficient under Rule 9(b). 

As we indicated earlier in connection with Brenner’s and FAM’s

motion to compel arbitration, we take a dim view of the plaintiffs’

RICO claim. Although the plaintiffs vaguely allude to “other

investments,” (Compl. ¶ 54; see also id. at ¶ 44), their complaint

is largely predicated on the fallout from one bad business deal. 

This is a flimsy basis for seeking treble damages under the civil

RICO statute. See Midwest Grinding, 976 F.2d at 1025. Horrell’s

motion is granted as to Count IV. 

CONCLUSION

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The plaintiffs’ motion to strike [29] is denied. Because the

arbitration provision in the Investment Management Agreements

designates an arbitral forum outside this district, we will convert

Brenner’s and FAM’s motion to compel arbitration [21] into a motion

to dismiss for improper venue. That motion [21] is granted in part

and denied in part. We conclude that the plaintiffs’ claims against

Brenner and FAM in Counts I, III, and IV of the complaint are

subject to arbitration in Orange County, California. Accordingly,

we dismiss those claims against Brenner and FAM for improper venue

pursuant to Rule 12(b)(3), without prejudice to the plaintiffs

refiling those claims in the appropriate forum. We conclude that

Count II is not subject to arbitration. However, Count II is

dismissed as to all the defendants, without prejudice, pursuant to

Rule 12(b)(6). Finally, Count IV against Horrell is dismissed

without prejudice pursuant to Rule 12(b)(6). A status hearing is

set for March 6, 2013 at 11:00 a.m. 

DATE: February 21, 2013

ENTER: ___________________________________________

John F. Grady, United States District Judge

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