would not have continued its business relationship with G&A Laundry without them. (/d. J 36.)
Giarratano’s representations were falsc, and Giarratano knew them to be false. (/d. 34.)
Giarratano and Ames had disclosed and intended to continue to disclose confidential and customer
information acquired as a result of G&A Laundry’s relationship with Braun for the purpose of giving
Five Star a competitive edge in the commercial laundry business. (Jd. 35.)

On or about June 9, 2000, G&A Laundry executed a promissory note for $300,000 in favor
of Braun, an amount already owed by G&A Laundry to Braun. (Jd. 137.) The note provided that
once G&A Laundry ceased doing business, it would be in default under the note and the debt would
be accelerated. (/d. 138.) Braun would not have extended credit to G&A Laundry had it not been
for the continuing relationship it had with G&A Laundry or Giarratano’s assurances regarding
conflicts of interest and ownership interests in commercial laundries. (Jd. 139.) After execution of
the promissory note, G&A Laundry became indebted to Braun for an additional $7,597.05. G&A
Laundry has acknowledged its debt to Braun in the amount of $307,597.05, but never paid the debt.
(Ud. 98 40, 41.)

Sometime prior to September 20, 2000, G&A Laundry ceased its business operations. The
Distribution and Representative Agreements were terminated and G&A Laundry defaulted under the
note. (/d. | 42.) G&A Laundry filed for bankruptcy and its debts were discharged in bankruptcy
procecdings. (P1.’s Br. Resp. to Mot. to Dismiss at 1.) G&A Laundry did not pay the $307,597.05
it owed to Braun nor did it return to Braun any of the proprietary customer information it acquired
through its relationship with Braun. (Compl. | 44.) Giarratano and Ames continue to make

confidential customer information available to Five Star. (/d. 4 45.)


does the sale at cost by G&A Laundry to Five Star of Braun equipment. Given the standard’
employed on a motion to dismiss, we find the complaint alleges facts sufficient to establish a unity

of interest betwecn Giarratano/Ames and G&A Laundry.

Promotion of Injustice

Braun must also allege facts sufficient to establish that adherence to the fiction of separate
identities would sanction a fraud or promote injustice. Hystro Prod., Inc. v. MNP Corp., 18 F.3d
1384, 1390 (7th Cir. 1994). To do this, Braun must show something more than its inability to collect
onadebt. There must be “[s]ome element of unfairness, something akin to fraud or deception or the
existence of a compelling public interest must be present in order to disregard the corporate fiction.”
Sea-Land Servs., Inc., 94) F.2d at 523 (quoting Pederson v. Paragon Pool Enters.,574N.E.2d 165,
169 (Ill. App. Ct. 1991)). We find that Braun has made the requisite showing.

In this case, Braun has alleged facts sufficient to demonstrate that defendants may have
perpetrated an intentional fraud against Braun. Giarratano and Ames misrepresented their interests
in Five Star so that Braun would continue its relationship with G&A Laundry, providing defendants
with valuable confidential industry information and G&A Laundry with the extension of $300,000

worth of credit. See Dimmitt & Owens Fin., Inc., 196 F. Supp. 2d at 742 (second prong of “piercing

4 Tn their memoranda, defendants focus on the specific allegations that Braun fails to make in its complaint.
To defeat a motion to dismiss, Braun need not have affirmatively alleged all necessary facts in its complaint, Rather,
the complaint need only outline the basis of Braun’s claim and the Count accepts as true all reasonable inferences to be
drawn from Braun’s allegations. Panaras v, Liguid Carbonic Indus, Corp., 74 F.3d 786, 791-92 (7th Cir. 1996), The
“substantial showing” standard advanced by defendant Giarratano is not appropriate for a motion to dismiss. See Tome
Engenharia E Transpoprtes, Lid. vy. Malki, 1996 WL 172286, at *6 (N.D. Ill. April 11, 1996) (noting that at trial “the
party secking to have the corporate entity disregarded must come forward with a substantial showing that the corporation
is really a dummy or a sham for a dominating personality” but that the standard is more relaxed on a motion to dismiss)
(emphasis added) (citing Ted Harrison Oil Co., Inc. v. Dokka, 617 N.E,2d 898, 901 (Ill. App. Ct. 1993)).

-9-


[flirst, there must be such unity of interest and ownership that the separate

personalitics of the corporation and the individual . . . no longer exist; and

second, circumstances must be such that adherence to the fiction of

separate corporate existence would sanction a fraud or promote injustice,
Sea-Land Servs. y. Pepper Source, 94) F.2d 519, 520 (7th Cir. 1991) (quoting Van Dorn Co. v.
Future Chem. & Oil Corp., 753 F.2d 565, 569-70 (7th Cir, 1985)) (other citations omitted). The
doctrine is essentially equitable in nature and so the conditions under which the corporate form will

be disregarded will vary and are dependent on the circumstances of each case. Stap, 379 N.E.2d at

1301,

Unity of Interest

To determine whether the first requirement, unily of interest, is met, Illinois courts look at
a number of factors, including: (1) inadequate capitatization; (2) failure to issue stock; (3) failure to
observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the debtor corporation;
(6) non-functioning of other officers or directors; (7) absence of corporate records; (8) commingling
of funds; (9) diversion of assets from the corporation by or to a shareholder; (10) failure to maintain
arm’s length relationships among related entities; and (11) whether the corporation is a mere facade
for the operation of dominant stockholders. Dimmitt & Owens Fin., Inc. v. Superior Sports Prod.,
Inc., 196 F. Supp, 2d 731, 738 (N.D. TL 2002) (citing Jacobson v. Buffalo Rock Shooters Supply,
Inc., 664 N.E.2d 328, 331 (Ill, App. Ct. 1996).

Defendants argue that Braun’s complaint fails to adequately allege facts sufficient to “pierce
the corporate veil.” Specifically, defendants note that Braun has not alleged that G&A Laundry

“failed to issue stock, maintain adequate corporate records, or observe corporate formalities” or that

6+


Braun filed suit against Giarratano and Ames for common law unfair competition and
deceptive trade practices (Count J), fraud (Count 11), misappropriation of trade secrets (Count it,
default on the promissory note (Count IV) and attomeys’ fees under (he promissory note (Count Vv).

Defendants have filed a Rule 12(b)(6) motion to dismiss counts TV and V.

The Legal Standard
On a Rule 12(b)(6) motion to dismiss, the Court accepts as true all well-pleaded factual
allegations of the complaint, drawing all reasonable inferences in plaintiff’s favor. Forseth v, Village
of Sussex, 199 F.3d 363, 368 (7th Cir. 2000). No claim will be dismissed unless “it is clear that no
relief could be granted under any sct of facts that could be proved consistent with the allegations.”

Hishon v. King & Spalding, 467 U.S. 69, 73 (1984).

Discussion

Braun seeks to hold defendants personally liable on G&A Laundry’s promissory note through
the doctrine of “piercing the corporate veil.” As a general rule, sharcholders, officers and directors
are not liable for the debts and obligations of their corporations because corporations are separate
legal entities. Stap v. Chicago Aces Tennis Team, Inc., 379 N.E.2d 1298, 1301 (Ill. App. Ct. 1978).
Under certain circumstances, however, the corporate form will be disregarded and personal liability
will be imposed on the real party to the transaction - this is commonly known as “piercing the
corporate veil.” Under Illinois law, in order to apply the doctrine of “piercing the corporate veil”,

two requirements must be met:

-5-



G&A Laundry of over $300,000 in revenue, but resulted in Giarratano’s and Ames’s receipt of
additional ownership interests in Five Star. (/d.4["| 70, 71.)

In addition, Braun alleges that in November 1998, G&A Laundry (through Giarratano and
Ames) entered into a lease agreement for commercial property on West Division strect in Chicago.
(Id. 74.) G&A Laundry had no business reason to rent the commercial property and eventually
assigned the leasc to Five Star at no cost to Five Star. (/d./76.) G&A Laundry derived no benefit
from this assignment; the assignment was done to benefit Giarratano and Ames individually as
owners of Five Star. (Jd. 77.)

While Braun has not touched upon all of the enumerated factors of the unity of interest test
listed above, we do not feel it fatal to its claim of individual liability at this stage in the litigation.
The fact that G&A Laundry borrowed $300,000 in June 2000 and then ceased business operations
a mere three months later could suggest inadequate capitalization. The fact that Giarratano and
Ames bound G&A Laundry to various agreements (including a commercial lease for which there was
allegedly no legitimate business reason) suggests the nonfunctioning, or nonexistence, of other
officers or directors, making it easier to imagine that G&A Laundry was used to benefit Giarratano
and Ames personally. The fact that G&A Laundry’s assets were pledged for the benefit of
defendants’ other corporation (and for the benefit of defendants individually) and that no benefit was
received by G&A Laundry itself for this pledge speaks to the diversion of asscts from the corporation
for the personal use by defendants. G&A Laundry’s commercial lease, which was transferred to Five

Star at no cost’ suggests a failure to maintain arm’s length relationships among related entities, as

3 We find itreasonable to assume that this means that G&A Laundry continued to make lease payments on this
property,

-8-



F Minute Order Form (06/97)

United States District Court, Northern District of Minois

Pameottmnuettote | Paul E,Plonkett_ | Sn Jute oe

CASE NUMBER 02 C 5679 DATE 9/10/2003
CASE G.A. BRAUN INC. vs. SAMUEI L. GIARRATANO, et al
TITLE

[In the following box (a) indicate the party filing the motion, ¢.g,, plaintiff, defendant, 3rd party plaintiff, and (h) state briefly the nature
of the motion being presented]

MOTION;

DOCKET ENTRY:

qg) q Filed motion of [ use listing in “Motion” box above.]

(2) go Brief in support of motion due

(3) QO Answer brief to motion duc___- Reply to answer briefdue____

(4) go Ruling/Hearingon___setfor_ ss at_

(5) oO Status hearing{held/continued to] [set for/re-set for]on_ set for at

(6) i) Pretrial conference[held/continued to] [set for/re-sct for]on set for at_
(7) Q Trial[set for/re-set for])on, at.

(8) a (Benct/Jury trial) [Hearing] held/continued to at_ i.

(9) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}

COPRCP4(m) OLocal Rule 41.1 CFRCP41(a)(1) CO FRCP41(a)(2).

ao) ff [Other docket entry] ENTER MEMORANDUM OPINION AND ORDER: the defendants’ Rule
12(b)(6) motion to dismiss Counts TV and V of the complaint is denied. Status hearing date of 9/24/03
at 9:30a.m. to stand.

(dl) @f (For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required.

number of tations

Notices mailed by judge’s staff, se 41 203
Notified counsel by telephone.

daty docketed,

cketing il moti , \ "
Y | Docketing to mail notices. thnas tonite
i iat
Mail AO 450 form, 3 docu Nod iia
Copy to judge/ magistrate judge. oho
courtroom chia. date nailed notice
TBK deputy's ae ee
initials
Iate/time received in 7
central Clerk's Office nailing deputy initiaks



corporate veil” test met where defendant misrepresented status as corporate officer). This kind of

deception satisfics the second requirement necessary to “pierce the corporate veil.”

Conclusion
For the reasons stated above, the defendants’ Rule 12(b)(6) motion to dismiss Counts TV and
V of the complaint is denied.

ENTER:

UNITED STATES DISTRICT JUDGE

patep: _9-/0-03

-10-



it was undercapitalized (Def. Giarratano’s Mem. Mot. to Dismiss at 1, 3), not has Braun alleged that
the corporation did not maintain a separate bank account or that the promissory note was not
intended to be a corporate obligation. (Def. Ames’s Mem. Mot to Dismiss at 2-3.) Defendants
imply that without these specific allegations, Braun’s complaint as to counts IV and V is wanting.
We disagrec.

Braun alleges that defendants “exercised complete dominion and control over G&A Laundry
to further their own personal interest and gain, to the detriment of G&A Laundry, G&A Laundry’s
contractual obligations, and G.A. Braun.” (Compl. 4 65.) Braun also alleges that Giarratano and
Ames, “as officers and owners of G&A Laundry, abused the corporate form with respect to their
operation of G&A Laundry, using its assets as if the assets were their own to further their own
personal gain.” (/d. § 78.) These bare legal conclusions alone probably would not be cnough to
withstand defendant’s motion to dismiss. See Essex Real Estate Group, Lid. v. River Works, L.L.C.,
2002 WL 1822913, at *4-5 (N_D. Ill. Aug. 7, 2002). But the complaint contains other factual
allegations relevant to the unity of interest test. Specifically, Braun alleges that in December 1998,
defendants pledged all of G&A Laundry’s assets to Lakeside Bank of Chicago as collateral for more
than $3 million in credit for another entity, Five Star, and that as consideration for the pledge,
Giarratano and Ames each reccived an approximately 25% ownership interest in Five Star. (Compl.
9 66, 67.) G&A Laundry received no benefit from the pledge of its assets to Lakeside Bank of
Chicago. (/d.{ 68.)

Braun also alleges that G&A Laundry sold to Five Star Braun equipment at G&A Laundry’s

cost. (/d.4, 70.) The sale of the equipment to Five Star without any markup resulted. in the loss to



party at any time prior to the amendment’s execution. (Jd. 423.) This representation was false, and
Giarratano knew it to be false. (7d. { 24.) Giarratano and Ames had disclosed confidential customer
information to I'ive Star prior to June 23, 1999. (Id. 45.)

The representation madc in the amendment, along with the representations by Giarratano and
Ames that they had no ownership intercst in Five Star, were made with the specific intent to induce
Braun to continue its distribution contract with G&A Laundry and execute the Distribution
Agreement amendment. (Jd. 425.) Giarratano and Ames used their positions as principals of G&A
Laundry to acquire from Braun sensitive customer information about commercial laundry businesses
that competed with Five Star. (dd. 26.) Braun relied on Giarratano’s and Ames’s representations,
and had Braun known that either defendant had any ownership interest in Five Star or that G&A
Laundry was using customer information to compete with Braun's other customers, Braun would
have terminated the Distribution Agreement immediately. (/d. 4 27.)

On or about June 1, 2000, Braun and G&A Laundry executed another agreement, a
Manufacturer’s Representative Agreement (“Representative Agreement”), pursuant to which G&A.
Laundry agreed to promote and sell products manufactured and sold by Braun. The Representative
Agrcement was limited to a particular geographic territory. (/d. {9 29, 30.) Again, in conjunction
with the exccution of the Representative Agreement, Giarratano represented that G&A Laundry did
not have any conflict of interest and that neither G&A Laundry nor any ofits principals had disclosed
confidential or customer information to any third party prior to signing the agreement. In addition,
Giarratano agreed that G&A Laundry would not disclose any confidential or customer information
to third parties and would use that information only in furtherance of Braun’s interests. (/d. Jf 31-

33.) Braun relied on these representations when entering into the Representative Agreement, and

3.


commercial laundry equipment. (/d. {f 11, 43.) On or about January 1, 1998, Braun and G&A
Laundry executed a Distribution Agreement, pursuant to which G&A Laundry became an
independent distributor of Braun products to commercial laundries in parts of the Midwest. (Id. {|
13, 14.)

At all times relevant to Braun’s claims, Five Star Laundry, Inc. (“Five Star”) was in the
business of operating a commercial laundry business. (/d. § 12.) Both Giarratano and Ames had
ownership interests in Five Star. (Ud. § 16.) However, twice, on May 25 and June 1, 1999,
Giarratano prepared and sent correspondence to Stephen Bregande, Braun’s president, representing
that neither Giarratano nor Ames “‘ha[s] any ownership interest in Five Star, Inc., a newly formed
commercial laundry in Chicago, Illinois.” (Jd. 4 15.) Giarratano knew this representation was false,
(id. § 16.) Jn addition, Giarratano and Ames both made oral representations to Braun
contemporancous with the June 1 correspondence that neither had any ownership interest in Five
Star. (/d. {| 17, 19.) These oral representations were false and both defendants knew them to be
false. (Id. $9 18, 20.)

The Distribution Agreement was amended on or about June 23, 1999. (id. 4 21.) The
amendment added a confidentiality provision whereby G&A Laundry, as distributor, agreed that it
would not disclose certain confidential information (as defined in the amendment) to third parties
and would hold in confidence, and not use for its own benefit, customer information.’ In the
amendment, Giarratano represented on behalf of G&A Laundry that neither G&A Laundry nor any

of its principals had disclosed any confidential information or customer information to any third

? “Customer information” is defined in the amendment, but generally includes information acquired from Braun
about Braun’s products, customers and pricing practices,

2-


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

G.A. BRAUN, INC. )
)
Plaintiff, )
)
v. ) No. 02 C5679
y Paul E. Plunkett, Senior Judge
SAMUEL L. GIARRATANO & ) yg
THOMAS J. AMES ) wr 9
) a\ rn)
Defendants. )

MEMORANDUM OPINION AND ORDER
G.A. Braun, Inc. (“Braun”) bas brought this diversity suit against defendants Samuel L.
Giarratano and Thomas J, Ames for various common law violations and to recover on a promissory
note. Defendants have filed a Federal Rule of Civil Procedure (“Rule”) 12(b)(6) motion to dismiss

the two counts relating to the promissory note. For the reasons set forth below, the motion is denied.

Facts

The relevant facts as alleged in plaintiff s Second Amended Complaint are as follows. Braun
is a New York corporation in the business of manufacturing and selling commercial laundry
equipment. (Compl. ff 1, 9.)' Giarratano and Ames are residents of Illinois and both were officers
and shareholders of G&A Laundry Systems, Inc. (“G&A Laundry”). (Zd. 442, 3, 10.) Until the time

it ceased doing business in mid-September 2000, G&A Laundry was in the business of distributing

' All citations to “Compl.” and references thereto refer to Braun’s Second Amended Complaint.