N.E.2d 23, 27-28. As previously noted, the Member Agreement at issue here contains a detailed
integration clause and makes no reference to the redemption of stock for terminated members.
(Member Agreement, at 5 ] 9.) The Renningers do not allege that the Member Agreement is
ambiguous, and “{i]f no ambiguity exists, the intention of the parties must be determined from the
instrument itself.” C-B Realty and Trading Corp. v. Chicago and North Western Ry. Co., 289 Ill.
App. 3d 892, 899, 682 N.E.2d 1136, 1142 (1st Dist. 1997). Thus, the court will not entertain an
argument that would attempt to incorporate additional terms in the parties’ agreement under a
“course of dealing or performance” theory. The Renningers’ breach of contract claim is dismissed
without prejudice.

Finally, the Renningers’ challenge to TruServ's devaluation of the Class B stock fails for
similar reasons. The Renningers have not identified any specific provision of the Certificate of
incorporation or By-Laws that TruServ breached when it devalued the Class B stock. Accordingly,
despite TruServ's disappointing failure to address the matter specifically, the court concludes that
the Renningers’ allegations are insufficient to state a breach of contract on this issue, as well, and
dismisses any claim regarding devaluation without prejudice.

Count I: Fraud Claim

In Count ll of their Counterclaim, the Renningers allege several fraud claims based on a
number of misrepresentations and omissions of material fact made by officers and board members
of TruServ. The elements of a cause of action for fraudulent misrepresentation are: (1) a false
statement of material fact, (2) known or believed to be false by the party making it, (3) intent to
induce the other party to act, (4) action by the other party in reliance on the truth of the statement;
and (5) damage to the other party resulting from such reliance. Prime Leasing Inc. v. Kendig, 332
Ill. App. 3d 300, 311, 773 N.E.2d 84, 94 (1st Dist. 2002). In contrast to the general liberal pleading
standard, Rule 9 imposes a requirement that any claim of fraud must be pleaded with particularity.

Ackerman v. Northwestern Mutual Life ins. Co., 172 F.3d 467, 468 (7th Cir. 1999); citing Fed. R.

19



DISCUSSION

As identified briefly earlier, TruServ’s Counterclaim asserts five counts of wrongdoing: (1)
that TruServ breached the Member Agreement it entered with the Renningers; (2) that TruServ
officers and board members made false representations and omitted material facts to induce the
Renningers to support TruServ’s corporate actions and to execute personal guaranties, (3) that
TruServ violated the Illinois Securities Act by making false representations regarding the merger
in 1997 that formed TruServ and by supplying misinformation regarding stock redemption while
continuing to issue stock; (4) that TruServ breached the fiduciary duty it owed to the Renningers
in refusing to redeem their stock in the TruServ Corporation; and (5) that the Renningers were
prevented from recouping their investment in TruServ because of TruServ’s refusal to redeem their
stock. TruServ has moved to dismiss all five counts for failure to state a claim for relief and to
strike a number of the affirmative defenses raised by the Renningers.

On a motion to dismiss, this court accepts as true all well-pleaded facts and allegations in
the plaintiff's compliant, and construes the compiaint’s allegations in the light most favorable to the
plaintiff. Bontkowski v. First Nat? Bank of Cicero, 998 F.2d 459, 461 (7th Cir. 1993). To survive a
motion to dismiss, a pleading need "only contain enough to allow the court and the defendant to
understand the gravamen of the plaintiff's complaint." McCormick v. City of Chicago, 230 F.3d 319,
323-24 (7th Cir. 2000) (quoting Payton v. Rush Presbyterian-St. Luke's Med. Ctr., 184 F.3d 623,
627 (7th Cir. 1999)). “Where allegations of a pleading are inconsistent with the terms of a contract
attached as an exhibit, the terms of the latter, fairly construed, must prevail over the averments
differing therefrom.” Graue Mill Dev. Corp. v. Colonial Bank & Trust Co. of Chicago, 927 F.2d 988,
991 (7th Cir. 1991) (citations omitted). The court may not dismiss the Counterclaim unless the
Renningers “can prove no set of facts that wauld entitle [ther] to relief.” Venture Assocs. Corp. v.

Zenith Data Sys, Corp., 987 F.2d 429, 431 (7th Cir. 1993).

13



settlement agreement in Schmidt, the Certificate of Amendment did not expressly contradict the
representations made by TruServ. TruServ would have the court adopt a position that because the
amendment was given to each member to review, members can not reasonably rely on the
representations of officers or anyone else. Members’ access to the draft amendment is a factor
weighing in favor of TruServ on this issue, but it is not dispositive. “{JJustifiable reliance... is a
question of fact. . . to be determined by the finder of fact and not by the trial court as a matter of
law." Schrager v. N. Cmty. Bank, 328 III. App. 3d 696, 709, 767 N.E.2d 376, 386 (1st Dist. 2002).
The amendment removed the requirement that stockholders approve changes to the By-Laws
regarding redemption rights of members. Burns and Kirby advocated for the amendment on the
premise {hat it would allow the Board to redeem nonqualified Class B stock at anytime. Because
the court does not find that the language of the amendment given to the Renningers expressly
contradicted the representations made by Burns and Kirby, it is unwilling to find that the
Renningers’ reliance on those representations was unreasonable as a matter of law. At a
minimum, the fiduciary duties Burns and Kirby owed to TruServ members prohibited them from
misleading those members as to the purpose for the amendment.

An affirmative statement is not always required for a plaintiff to state a claim for fraud.
Washington Courte Condominium Association-Four v. Washington-Golf Corp., 267 Ill. App. 3d 790,
815, 643 N.E.2d 199, 216 (1st Dist. 1994). Illinois law recognizes that “fraud may also consist of
the omission or concealment of a material fact if accompanied by the intent to deceive under
circumstances which create the opportunity and duty to speak,” /d. Although the Renningers have
not alleged a claim of fraudulent omission related to Kirby's and Burns’ statements, their factual
allegations are consistent with the theory that as fiduciaries to the Renningers, Kirby and Burns had
a duty to inform TruServ members regarding the full scope of the proposed amendment.

The court notes, further, that under the federal securities laws, courts have construed the

existence of a fiduciary relationship between the parties as a factor that supports an investor’s

23



Lumber’s request for par value. (/d. ff] 5-6.)
The Merger

In 1996 and 1997, Cotter sought to merge with ServiStar/Coast to Coast, which, like Cotter,
was in the business of supplying hardware stores with services and merchandise. (/d. | 7.) This
merger was approved in 1997 by the Cotter members and resulted in the formation of the TruServ
Corporation.’ (/d.) Before the merger vote, all potential members of the new corporation,
including the Renningers, were provided with a copy of a TruServ Member Agreement and the
TruServ By-Laws.’ (/d. 9.) The Renningers and the other members voting in favor of the merger
were deemed to accept the new agreement and By-Laws, which replaced those of Cotter, and all
Cotter stock was converted to TruServ stock. (/d. ff] 8-9.) The relationship between TruServ
Corporation and its stockholders was to be governed by Delaware general corporate law, TruServ's
amended and restated Certificate of Incorporation, and TruServ’s By-Laws. (/d. 7/8.) The
TruServ Member Agreement provides that it is to be interpreted under the substantive law of
Illinois. (Member Agreement, at 6 71.) The Renningers allege that TruServ and the Board of
Directors owe stockholders, including the Renningers, a fiduciary duty that requires TruServ “to act
in the best interests of [the Renningers] to avoid acts of self-dealing and conflicts on [sic] interest,
and to act with the care that a reasonable director would exercise under similar circumstances.”
(Counterclaim {| 47.)

Under the Member Agreement, TruServ's members are entitled to use the True Value
trademark and to benefit from TruServ's group buying power and group billing procedures.
(Member Agreement, at 1.) Similar to the earlier arrangement between the Renningers and

Cotter, a member in TruServ was required, in addition to signing the Member Agreement, to make

8 The parties do not provide the specific date that members approved the merger.

4

The TruServ Member Agreement and By-Laws are attached to the Counterclaim as
Exhibits A and B.



County Grading Co. of Libertyville, Inc. v. Advance Mechanical Contractors, Inc., 275 Ill. App. 3d.
452, 462, 654 N.E.2d 1109, 1118 (1st Dist. 1995) (set off is "a counterdemand interposed by a
defendant against a plaintiff in a lawsuit, arising out of a transaction extrinsic to plaintiff's cause of
action").

TruServ next argues that because the fraud claims alleged by the Renningers fail as a
matter of law, the court should strike three affirmative defenses relating to fraud. The affirmative
defenses at issue here are: that TruServ's claim is barred because of its fraudulent
misrepresentations and omissions of material fact to induce the Renningers to enter the Member
Agreement and to remain a member of TruServ, that TruServ is barred from pursuing its claims
because of the doctrine of promissory estoppel, and again that TruServ's claims are barred by the
doctrine of unclean hands. (Counterclaim, at 15-16 9] 3, 11, 12.) For the reasons set forth above,
the court strikes the Renninger affirmative defense of unclean hands. In addition, the court will
strike the Renningers' affirmative defense alleging that TruServ made false statements or
omissions to induce the Renningers to enter the Membership Agreement. As noted earlier, the
Renningers have not alleged any misstatements or omitted information by TruServ related to the
Membership Agreement. Because the court denied TruServ’s motion to dismiss the Renningers’
fraud claim, the remaining affirmative defense of promissory estoppel will stand.

TruServ maintains that as a matter of law the Renningers’ reliance on statements or
omissions by TruServ in entering the guaranty agreements was unreasonable. As aresult, TruServ
asks the court to strike the Renningers’ affirmative defense that TruServ’s claims are barred
because its fraudulent misrepresentations and omissions induced the Renningers to enter the
guaranty agreements. (Counterclaim, at 15 4.) As stated previously, the Renningers have not
explained how TruServ's financial condition was material to their decision to enter the guaranty
agreements. For this reason, the court will also strike the affirmative defense (number four) related
to the guaranty agreements.

Lastly, TruServ argues that the fiduciary duty and recoupment claims fail and as a result

34



Civ. P. 9(b)."°

The Renningers have alleged fraud claims that relate to the merger, the amendment to the
Certificate of Incorporation, and the amended By-Laws. First, the Renningers claim that TruServ
and its predecessors made misrepresentations and omissions of material fact to induce them ta
approve the merger of ServiStar/Coast to Coast and Cotter & Company. The Renningers also
allege that Kerry Kirby and Daniel Burns misrepresented the purpose of the amendment to the
Certificate of Incorporation to induce the Renningers to vote in favor of the measure. In addition,
they allege that Diane Nauer misrepresented the purpose and scope of TruServ’s amended By-
Laws. Finally, the Renningers allege that TruServ omitted material facts in order to induce the
Renningers to remain members of TruSery and to execute guaranties for the debts Renninger
Lumber owed to TruServ. TruServ has challenged each set of circumstances as insufficient to
state a claim for fraud. The court examines them in turn.

A. The Merger

The Renningers assert, first, that TruServ and its predecessors, Cotter & Campany and
ServiStar/Coast to Coast, omitted material facts and made false representations regarding the
merger in an effort induce the Renningers to approve the merger. (Counterclaim ff] 28, 35.)
TruServ argues that this claim fails because the Renningers fail to set out the facts with enough
particularity. The court agrees.

The Counterclaim fails to identify any specific representations made by TruServ to induce
the Renningers to support the merger, nor does it state what material information was omitted at
the time of the merger. The Renningers themselves have not offered any argument in reference

to this issue in their memorandum. Thus, this fraud claim related to the merger is dismissed.

Federal Rule of Civil Procedure 9(b) states “all averments of fraud or mistake, the
circumstances constituting fraud or mistake shail be stated with particularity. Malice, intent,
knowledge, and other condition of mind of a person may be averred generally." Fed. R. Civ. P.
9(b).

20



needs of your cooperative. These modifications are consistent with TruServ's custom and
practice.” (Counterclaim, at ff] 29-31.) The Renningers allege that this statement is fraudulent
because the amendment was not consistent with TruServ’s custom and practice and the true
purpose of the amended By-Laws was to allow the Board to place a moratorium on member stock
redemption, contrary to the rights of members.

TruServ argues that the Renningers’ fraud claim based on Nauer's statement fails because
the Renningers have not sufficiently alleged that they relied on the statement. The court agrees.
The statement made by Nauer was part of a September 29, 2000 letter explaining the modifications
to TruServ's By-Laws, which as described above expanded the powers of the Board to deny the
redemption of members’ stock.'* The By-Laws became effective in July 2000 and the moratorium
became effective at the latest in May 2000. (Counterclaim {[17; 2000 By-Laws.) Nauer was
commenting on the previously enacted 2000 By-Laws and the moratorium, which had already been
announced by TruServ, The Renningers can not allege that they relied on Nauer’s statement in
choosing not to seek redemption of their stock; at the time Nauer made her statement the
Renningers already lacked any avenue to seek redemption. Thus, this court will dismiss this fraud
claim without prejudice because the Renningers have failed to allege retiance.

D. Guaranty Agreement

Finally, the Renningers assert that they were induced by TruServ's misrepresentation and
omissions of material fact to provide guaranties for the debts owed by Renninger Lumber Company
to TruServ. TruServ responds that the Renningers’ fraud claim pertaining to the guaranties fails
as a matter of law because in executing the guaranties, the Counterplaintiffs acknowledged that

their obligation was “continuing, absolute, and unconditional" and because the guaranty

“ TruSery argues that the moratorium on stock redemption began on March 17, 2000

when the Board passed a resolution placing a moratorium on member stock redemption. The
court, however, need not resolve exactly when the moratorium began because Nauer’s letter came
after both the resolution and the amendment to the By-Laws.

26



could not reasonably rely on the prediction made by Burns and Kirby that the sole purpose of the
amendment was to allow the Board to redeem the non-qualified Class B Stock.

In support of its first argument, TruServ cites Cozzi fron & Metal Inc. v. U.S. Office
Equipment, inc., 250 F.3d 570 (7th Cir. 2001) and Schmidt v. Landfield, 20 Ill.2d 89, 169 N.E.2d
229 (1960). In Cozzi, plaintiff had signed a two-page form agreement for the lease of several
photocopy machines. /d. at 573. The agreement included language stating that plaintiff was
“UNCONDITIONALLY OBLIGATED TO PAY ALL MINIMUM MONTHLY RENTAL PAYMENTS’ and
had “NOT RELIED ON ANY STATEMENTS OWNER OR OWNER'S EMPLOYEES HAVE MADE.”
fd. In light of those written disclaimers, the court had little difficulty rejecting plaintiff's argument,
made in reliance on an alleged oral representation from the defendant's agent, that plaintiff was
excused from the minimum payment and responsible to pay only for the number of copies it had
actually made. /d, at 573-74, The court determined that the plaintiff's fraud claim should be
dismissed because as a matter of law its reliance on the oral statement of the defendant's
representative was not justified. fd, at 575.

In Schmidt, the parties were joint holders of a purchase-money mortgage on property that
defendant had incorrectly described to plaintiffs as a leasehold. When plaintiffs later learned that
the property at issue was held in fee, they demanded additional money in exchange for
surrendering their interest in the mortgage as part of a settlement of another dispute. /d. at 92, 169
N.E.2d at 231. Dismissing plaintiffs’ fraud claim, the court observed that at the time of the
settlement, plaintiffs did not rely on the representations of the defendant, but instead relied upon
their own knowledge as well as the advice of counsel. /d. The court also made note that the
settlement agreement included a clause which stated that the plaintiffs would not rely on past
representations but on the explanations of their current attorney and their own knowledge. /d.

In this court's view, the Cozzi and Schmidt decisions do not establish that the Renningers’

reliance was unreasonable as a matter of law. Unlike the lease agreement in Cozzi or the

22



the court should strike the Renningers' affirmative defenses that TruServ's claims should be
partially setoff for recoupment. (Counterclaim, at 15 J 10.) The court will not strike this affirmative
defense because the court determined that the Renningers properly stated a claim for a breach of
a fiduciary duty and they may be eligible for a setoff in relation to these claims.
CONCLUSION

For the reasons set forth in this opinion, the court grants TruServ's motion to dismiss (Doc.
No, 24-1) as to Renningers’ Count | (Breach of Contract) and Count V (Recoupment). With respect
to the remaining Counts, Count Il (Fraud), Count III (Illinois Securities Act), and Count IV (Breach
of Fiduciary Duty), the motion is granted in part and denied in part. In addition, the court grants
TruServ’s motion to strike (Doc, No. 24-2) affirmative defenses 1, 2, 3, 4 and 12 but denies the
motion to strike defenses 5, 10, and 11.

ENTER:

Dated: February 3, 2003
CCAR. BAKEMEVE
United States District

36



plaintiff had no right to rely on those by-laws and could not enforce the earlier language. /d. at 111,
129 N.E, at 549. See also Horowitz v. Milk Wagon Drivers’ Union, Local 783, Intl Bhd of
Teamsters, Chauffeurs, Stablemen & Helpers of America, 341 Ill. App. 383, 386, 94 N.E.2d 95, 97
(1st Dist. 1950) (plaintiff did not reasonably rely on a union by-law pertaining to disability benefits
in force at the time he became a union member, where the provision was later amended and
plaintiff was on notice that by-law provisions could be amended)

TruServ argues that here, as in Steen, the parties’ agreement anticipated periodic
amendments to the by-laws and provided that these amendments would automatically modify the
parties’ agreement. Under these circumstances, TruServ urges, the Renningers could not
reasonably have believed that the mandatory redemption provision of the 1997 By-Laws would
never be altered. The Renningers respond only by pointing out that they had enjoyed redemption
rights with Cotter under their previous member agreement and with TruServ itself, prior to issuance
of the redemption moratorium. In light of the language in the Member Agreement expressly stating
that the By-Laws were subject to change, however, the court is unable to infer that the Renningers
had a reasonable expectation that these rights to redemption would never be altered.

The Renningers emphasize TruServ's alleged abuse of discretion. That word itself does
not appear in the Member Agreement, but the Agreement does grant TruServ the right to modify
the agreement by amending the By-Laws. Where an agreement gives one party discretion, that
party may not exercise discretion in such a way as will thwart the reasonable expectations of the
other contracting party. Beraha, 956 F.2d at 1443-44 (even in the absence of a “best efforts”
clause, duty of good faith and fair dealing required defendant to act reasonably in marketing the
plaintiff's product when defendant’s duty to pay royalties to the plaintiff was not triggered until the
product was marketed and sald); Dayan v. McDonald’s Corp., 125 Ill. App. 3d 972, 990, 466 N.E.2d
958, 971-72 (1st Dist. 1984) (where franchise agreement lacked express terms regarding

termination, duty of good faith and fair dealing required the franchisor to terminate a franchisee

17



powers . without full disclosure of the information known to it at the time of its acts.”
(Counterclaim J 48.)
Guaranty Agreements

A second basis for the Renningers’ fraud claim relates to personal guaranties. The
Renningers allege that on or shortly before February 2000, TruServ made misrepresentations to
the Renningers which induced them to provide personal guaranties for the debts owed by
Renninger Lumber Company to TruServ. (/d. {| 13.) Without identifying any specific
misrepresentations, the counterclaim alleges that TruServ failed to disclose the true financial
condition of the TruServ Corporation prior to the execution of the personal guaranties and failed
to inform the Renningers that the Renninger Lumber Company's stock in TruServ would be
devalued and unredeemable. (/d.) According to the Renningers, TruServ understood that the
representations it made to members were false, knew that its ornissions were misleading, and
acted intentionally to mislead the Renningers by their misrepresentations and omissions. (Id.
71 33, 34.)

Relying on the misrepresentations and omissions of TruServ, the Renningers did execute
the guaranties (the Counterclaim does not say when), and continued to remain a member of
TruServ. (/d. | 35.) Under the circumstances, the Renningers claim their reliance was both
reasonable and justifiable and as a result of their reliance, they incurred and continue to incur
substantial damages. (/d. 1] 37-38.) The Renningers allege that obtaining personal guaranties
from the Renningers without full disclosure of relevant information constituted a breach of TruServ's
fiduciary obligations. (Counterclaim | 48.) Finally, the Renningers assert that TruServ's misleading
conduct was intentional and justifies an award of punitive damages. (/d. 1 38.)

TruServ Loss Reported

On or about March 2000, TruServ informed its members of $131 million in losses the



in TruServ and now they are prevented from redeeming that investment because TruServ will not
redeem their stock. Moreover, as explained earlier, the court has concluded that the Renningers
have not alleged a breach of contract on the part of TruServ. The court is uncertain how these
limited and vague allegations state a claim for recoupment. For these reasons, the Renningers’
recoupment claims is dismissed without prejudice.

Affirmative Defenses

TruServ has also asked the court to strike a number of the affirmative defenses raised by
the Renningers. TruServ has not expressly argued the grounds for striking these counterclaims
but instead has included footnotes which state that its argurnent to dismiss certain counts in the

Counterclaim also support its motion to strike a number of affirmative defenses,

The court will strike affirmative defenses only “when they are insufficient on the face of the
pleadings.” Williams v. Jader Fuel Company, Inc., 944 F.2d 1388, 1400 (7th Cir. 1991) (citations
omitted). A motion to strike is “not favored and will not be granted unless it appears to a certainty
that plaintiffs succeed despite any state of the facts which could be proved in support of the
defense. .. and are inferable from the pleadings” /d. (citations omitted). Ina case in federal court
based on diversity jurisdiction, such as this case, “the legal and factual sufficiency of an affirmative
defense is examined with reference to state law.” /d. (citations omitted). Federal district courts
will grant a motion to strike if the affirmative defense is insufficient as a matter of law or if it fails
to present a question of law or fact. Heller Financial, Inc. v. Midwhey Powder Co., 883 F.2d 1286,
1294 (7th Cir. 1989). Lastly, “[a]ffirmative defenses are pleadings and, therefore, are subject to

all pleading requirements of the Federal Rules of Civil Procedure.” /a.

TruServ argues, first, that because the claim for breach of contract alleged by the
Renningers fails, a number of affirmative defenses must also fail. Specifically, TruServ challenges

the defenses of material breach, anticipatory repudiation, setoff, and unclean hands. (See

32



falsity of the statements made by officers and board members of TruServ until the corporation
announced the redemption moratorium on May 16, 2000. (Counterclaim {[ 17.) If the Renningers
are correct and the limitations period is deemed to run from May 16, 2000, they are not time barred
because they filed their claim on April 8, 2002, well within the three year period. In the
Counterclaim, the Renningers have alleged that they first learned of TruServ's alleged fraud on
May 16, 2000, when the moratorium on stock redemption was announced. The court will take all
of the Renningers’ well pleaded allegations as true and thus finds, for the purposes of this motion,
that the Renningers first learned of the alleged fraud related to the armendment on May 16, 2000

For reasons already explained, the court need not determine when the statute of limitations
began to run in relation to the Renninger's claim involving the merger: the Renningers have not
identified any misstatements of material fact or omitted information that they relied upon in voting
for the merger. In relation to the remaining claim regarding the amendment, TruServ argues that
even if the Renningers first had notice as late as May 16, 2000, the claim still fails because they
were still required to file within the expiration of the original limitations period, See McCool v. Strata
Oil Co., 972 F.2d 1452, 1461 n.8 (7th Cir. 1992) (observing that under Illinois law “the period of
fraudulent concealment does not automatically extend the limitations period: if the plaintiff discovers
her cause of action within a reasonable period before the normal limitations period expires, she
must sue within that period,” while under federal law the plaintiff enjoys the full benefit of the delay
resulting from the defendant's fraudulent concealment); see also Anderson v. Wagner, 79 Ill.2d
295, 322, 402 N.E.2d 560, 573 (1980) (statute of limitations on a medical malpractice action is not
tolled if the plaintiff discovered her claim within a reasonable time before the expiration of the

statutory period).

Although the court is applying Illinois law in this matler, the court does not believe that the
reasoning in McCoo! or Anderson operate as a bar to the Renningers’ claims. McCool addresses
the application of the statute of limitations as a matter of Illinois common law. Statutory language,

however, controls the disposition of the matter in this case. The Illinois Securities Act statute of

29



Corporation shall redeem from the stockholder all of its stockholder’s capital stock
in the Corporation for par value thereof upon the terms and conditions set forth in
section 7 of this Article VIL.

(1997 By-Laws, Exhibit B to Counterclaim, at 7, Article VII § 6(a).) Article VII of the 1997 By-Laws
provides that if funds were not “legally available” at the time of redemption, then the corporation

is bound to redeem the stock when funds became available and before paying any dividends.° (/d.

at 8, Article Vl § 7(c).) Specifically, the 1997 By-Laws state:

LEGAL AVAILABILITY OF FUNDS. Should the funds of the Corporation legally
available for such purpose be insufficient for immediate payment of all or any part
of the redemption price, an agreement for purchase and sale of the stock shall be
executed by the Corporation and the Terminated Stockholder pursuant to which the
Corporation shall unqualifiedly undertake to pay all or the balance, as the case may
be, of the redemption price as soon as funds are legally available for that purpose
and further that no dividends or Patronage Dividends shail be declared and paid or
set apart for payment to Members until after payment of the Terminated
Stockholder of the full purchase price for such stock.

(Id.)
Amendment to TruServ’s Certificate of Incorporation
Until the Spring of 1998, TruServ’s Certificate of Incorporation prohibited the Board of
Directors from amending the By-Laws on matters related to stock redemption without the approval
of the TruServ stockholders. (/d.) Specifically, the TruServ Certificate of Incorporation stated:
The Corporation may be obligated or have the option to purchase or redeem its
stock and stockholders may be obligated or have the right to sell their stock to the
Corporation at par value in such circumstances and upon terms and conditions as
may be specified in the By-Laws from time to time, provided, however, that the
stockholders shall approve any such provision in the By-Laws.

(1997 Certificate of Incorporation, Exhibit 1 to TruServ’s Motion to Dismiss, at 4.) (emphasis

added).” In the Spring of 1998, however, at a TruServ annual stockholder meeting, TruServ

8 The parties have not defined the term “legal availability.”

Documents referred to in a plaintiffs cornplaint but not attached that are central to
(continued...)



an initial capital investment in TruServ of $6,000, in exchange for which the member received 60
shares of Class A Common Stock with a par value of $100 per share. (/d. at 216.) Pursuant to
the Member Agreement, TruServ pays patronage dividends to members each year based on “the
volume of and margins applicable to merchandise and services purchased by the Member,” after
deduction of TruServ’s business expenses and “[s]uch reasonable reserves for necessary
corporate purposes as may from time to time be provided by the Board of Directors ....” (/d. at
1915.) The patronage dividends are paid in the form of a combination of cash, Class B TruServ
stock, and promissory notes. (/d, at 2] 2.) °

The Member Agreement contains a detailed integration clause. The clause states:

That this Agreement, and any other agreement which Member signs with the

Company, is the entire and complete Agreement between the Member and the

Company and that there are no prior agreements, representations, promises, or

commitments, oral or written, which are not specifically contained in this Agreement

of any other agreement which Member signs with the Company. That the current

form of the Company Member Agreement shall govern all past and present

relations, actions or claims arising between the Company and the Member.
(Member Agreement, at 5 9.) The Member Agreement does contemplate future amendments
to the By-Laws; it requires that each member “comply with the Company’s [TruServ's] By-Laws as
may be amended from time to time,” (id, at 3 | 2), and further states that “this Agreement shall be
automatically modified upon notice from the Cornpany to the Member of any relevant change in the
Certificate of Incorporation or By-Laws of the Company.” (/d, at 5 | 8.)

TruServ’s 1997 By-Laws, in place at the time of the merger, provided for the redemption
of members’ stock upon their termination fram the Corporation, conditioned only on the “legal

availability” of funds:

MANDATORY REDEMPTION. Upon termination of a Member Agreement . . . for
any reason whatsoever, the stockholder shal! sell to the Corporation and the

5 TruSer’s Class A and Class B stock are both commen stock with a par value of
$100, but the Class A stock is voting stock, while the Class B stock is non-voting stock. (Member
Agreement, at 2 J] 3,6; Counterclaim J 12.)



only for good cause).

As noted earlier, however, more recent cases explain that the implied covenant of good faith
and fair dealing does not by itself create a duty, but instead, “guides the construction of explicit
terms in an agreernent.” Beraha, 956 F.2d at 1443. Here, the Renningers are unable to identify
an explicit provision of the Member Agreement that was breached in bad faith by TruServ; to the
contrary, the By-Laws expressly authorize TruServ to refuse to redeem members’ stock. The
Renningers offer no basis for the court to conclude it was reasonable for them to believe that the
Board would never exercise the discretion provided to it under the By-Laws. Nor do the
Renningers’ allegations suggest that TruServ acted in bad faith when it refused to redeem the
Renningers’ stock. The Renningers allege, instead, that TruServ refused to redeem their stock in
light of the $131 million loss resulting from the merger. (Counterclaim J] 14, 17.) The court
concludes that the implied covenant of good faith and fair dealing does not balster their breach of
contract claim.

The Renningers’ invocation of the parties’ prior course of dealing and performance does
not change the analysis. Specifically, the Renningers suggest that they enjoyed a right of
redemption in their prior relationship with TruServ and Cotter, and that this earlier understanding
creates an obligation on the part of TruServ to redeem the Renningers’ shares. TruServ argues
that this claim fails because the contract was unambiguous and integrated and therefore precludes
the addition of terms not included in the contract.

Illinois law follows the “four-corners” rule in contract interpretation and looks only “to the
language of the contract to determine if it is susceptible to more than one meaning.” Benedict v.
Federal Kemper Life Assur. Co., 325 lll. App. 3d 820, 823, 759 N.E.2d 23, 26 (ist Dist. 2001), citing
Air Safety, Inc. v. Teachers Realty Corp., 185 Ill.2d 457, 706 N.E.2d 882, 885 (1999). In Benedict,
the court refused to consider extrinsic evidence in interpreting an insurance contract because the

plaintiff could not demonstrate that the contract was ambiguous. 328 Ill. App. 3d 820, 824, 759

18



This year, your 1997 year-end Patronage Dividend Statement will indicate that the

year-end B Stock distribution is in “nonqualified” form. The enclosed letter from

Kerry J. Kirby will more fully explain what this means to you. In simple terms, you

will benefit by deferring tax on this B Stock distribution until these shares are

someday redeemed for cash. To facilitate the redemption of the B Stock, you are

being asked to approve an amendment to the Certificate of Incorporation which will

permit the Board of Directors to amend the By-Laws of TruServ to make shares of

nonquatified B stock redeemable at any time by the corporation for cash at the par

value thereof.

{March 3, 1998 Letter from Daniel Burns to TruServ Members, Exhibit 3 to TruServ’s Motion to
Dismiss.) Kerry Kirby, executive vice president and chief financial officer of TruServ, also drafted
a letter in support of the proposed amendment to the Certificate of Incorporation, in which he
explained that the purpose of the amendment was to allow TruServ added flexibility in redeeming
the nonqualified B Stock. (March 3, 1998 Letter from Kirby to TruServ Members, Exhibit 4 to
Memorandum in Opposition.)

[t]o facilitate this redemption policy, you are being asked to approve, either by your

proxy vote, or in person at the Annual Meeting on Apri! 7th, an amendment to

TruServ’s Certificate of Incorporation which will permit the Board of Directors to

amend the By-Laws of TruServ to make shares of nonqualified B stock redeemable

at any time at the Corporation’s option, for cash at par value.

(/d.) Finally, Kirby's letter advised members that “[i]f your membership is terminated, this non-
qualified B Stock will be redeerned at par value, for cash, at the time of termination.” (/d. at 2.)
Neither Burns’ letter nor Kirby's letter explained that the amendment would also permit TruServ to
refuse to redeem members’ stock on demand.

According to the Renningers, TruServ falsely represented that this expanded power was
to be used solely to allow TruServ to redeem “nonqualified" Class B stock for cash at anytime.
(Counterclaim J 10.) The Renningers further allege that they relied on TruServ's representations
explaining the amendment, and did not understand that the amendment to the Certificate of
Incorporation was actually pursued in order to excuse TruServ from the obligation to redeem
members’ TruServ stock. (/d. {J 30, 35.) The Renningers claim in their Counterclaim that

“TruServ breached its fiduciary obligations to [the Renningers] by... procuring expanded Board

8



reliance on a defendant's statement. Rubin v. Schottenstein, Zox & Dunn, 143 F.3d 263, 272 (6th
Cir.1998); Bruschi v. Brown, 876 F.2d 1526, 1529 (11th Cir.1989); Jackvony v. RIHT Financial
Corp. 873 F.2d 411, 416 (1st Cir.1989). Although the Renningers are not invoking the federal
securities law in this lawsuit, the court believes that the fiduciary relationship that existed between
the Renningers and TruServ, at the time of Burns’ and Kirby's statements, is also a factor thal
supports their reliance on these statements and militates against a conclusion that their reliance
was unreasonable as a matter of law.
2. Statements of Fact or Opinion

Next, TruServ argues that the fraud claims fail as a matter of law because the statements
made by both Kirby and Burns are opinions or predictions of future events and thus not actionable
as fraudulent statements. Under Illinois law statements of opinion or future intent will not support
an action for fraud; instead, a misrepresentation must relate to present or pre-existing facts to be
actionable. Prime Leasing, Inc. v, Kendig, 332 Ill. App, 3d 300, 309, 773 N.E.2d 84, 92 (‘1st Dist.
2002) (noting that even a false promise of future conduct is not actionable), Parker v. Arthur
Murray, Inc., 10 lll. App. 3d 1000, 1004, 295 N.E.2d 487, 490 (1st Dist. 1973) (statements that
plaintiff had “exceptional potential” and was a “natural born dancer” were insufficient to support a
fraud clairn); Hurley v. Frontier Ford Motors, inc., 12 lll. App. 3d 905, 912, 299 N.E.2d 387, 392
(2nd Dist. 1973) (buyer of a used car did not have the right to rely on the allegedly fraudulent
statement of the defendant that he would pay for repairs).

In response, the Renningers characterize Kirby’s and Burns’ statements as expressions of
present fact, explanations of the purpose of the amendment at the time it was passed. Even if the
court were to agree with TruServ that the staternents by Kirby and Burns are opinions, however,
dismissal would not be warranted on this basis. Illinois law recognizes an exception to the rule that
opinion statements are not actionable in circumstances where the individual making the statement

is a person with special knowledge. West v. Western Casualty and Surety Co., 846 F.2d 387, 394

24



eo oy
Minuty Order Kean (0677)

United States District Court, Northern District of Mlinois

Name of Assigned Judge
or Magistrate Judge

Rebyeg R. Pallmeyer
N

Sitting Judge if Other
than Assigned Judge

y 02 C1018

CASE NUMBER DATE 2/3/2003
CASE TruServ Corporation vs. Chaska Building Center, Inc., et al
TITLE

[In the following box (a) indicate the party filing the mation, e.g... plaintiff, defendant, 3rd purty plaintifY, und (h) state brielly the nature

of the motion being presented, |

MOTION:

DOCKET ENTRY:

qa) Oo Filed motion of | use listing in “Motion” box above.]

(2) og Brief in support of motion due

(3) a Answer brief to motion duc__-_ Reply to answer brief due

(4) Oo Ruling/Hearing on setfor at

(3) Oo Status hearing[held/continued to] [sct for/re-set for] on setfor at

{6) Qa Pretrial conference[held/continued to] [set for/re-sel or] on setfor_ at

(7) Oo ‘Trial[set for/re-set for] on a a

(8) Qo [Bench/Jury trial!) [Hearing] held/continued to __al

()) 0 This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OOFRCP4(m) CLocal Rule 41.1 C)FRCP41(a)(1) Cl FRCP41(a)(2).

do) [Other docket entry) Enter Memorandum Opinion And Order. TruServ’s motion to dismiss (Doc.

24-1) granted as to Renningers’ Count } and Count V. With respect to the remaining counts, Counts IT,
Count Ill, and Count IV the motion is granted in part and denied in part. In addition, the court grants
TruServ’s motion to strike (Doc. No, 24-2) allirmative defenses 1, 2, 3, 4 and 12 but denies motion to

strike defenses 5, 10, and 11.

ay

[For further detail sce order attached to the original minute order.]

No notices required, advised in open court
4

No notices required s

Dogamient-
Nuniber:

oY | Notices maited by judge's staff

FEB 0 4 2003

Notified counsel by telephone. Alnte dockets

Docketing to mail notices

Mail AO 450 form.

dhackating desis

Copy to judge/magistrate judge

date mnuied noticw
courtroom

deputy’s
initials

CTv RIV

ing ety ents

central Clerk's Office



provide greater discretion to the TruServ Board of Directors regarding the redemption of member
stock, (2000 By-Laws, Exhibit C to Renningers' Opposition to TruServ's Motion to Dismiss
Counterclaims and Strike Affirmative Defenses) (hereinafter, “2000 By-Laws.) The amended By-
Laws became effective on July 15, 2000 and changed the name of the provision formerly called
“MANDATORY REDEMPTION’ to "TERMINATION REDEMPTION’, but did not alter the language
of the provision. (1997 By-Laws, Exhibit B to the Counterclaim, at 7, §6(a), 2000 By-Laws, at 7,
§6(a).) The 2000 By-Laws did, however, effect a material change in Section 7(c) of Article Vil of
the 1997 By-Laws, which governed the scope of possible limitations on the redemption of
terminated members’ stock, Section 7(c) of Article VII in the 2000 By-Laws states:

AVAILABILITY OF FUNDS. Notwithstanding anything to the contrary expressed or
implied herein, should the Board of Directors in its discretion determine that the
funds of the Corporation available for such purpose are insufficient for immediate
payment of all or any part of the redemption price in light of the Corporation's legal
or business requirements, or that immediate payment of all or any part of the
redemption price is otherwise not in the best interests of the Corporation, the
Corporation may delay (without interest) the payment of all or any part of the
redemption price (including the issuance of any promissory note) until such time as
the Board of Directors determines that sufficient funds are available for such
purpose and that it is otherwise in the Corporation’s best interests to recommence
payments for such purpose, at which time the Corporation shall pay to those entitled
thereto, in the chronological order in which such payments were delayed starting
with those whose payment has been longest delayed and continuing until sufficient
funds are no longer available, or through another equitable manner determined by
the Board of Directors, the unpaid redemption price in accordance with Section 7(b),
except that any promissory note shall be dated the date of its issuance.

(Id, at 7, §7(c).)

In a September 29, 2000 letter, Diane Nauer, secretary for TruServ, explained the purpose
for amending the TruServ By-Laws."? (Counterclaim {| 31.) In her letter, Nauer stated
“[aldditionally, the By-Laws were modified to better enable the Board to control the flow of

payments to terminating stockholders in accordance with the legal and business needs of your

" The counterclaim does not identify the person(s) to whom Nauer sent the

September 29, 2000 letter.

11



corporation had recently discovered. (/d. {| 14.) TruServ reported that the losses were the result
of previously undisclosed accounting errors and unknown costs associated with the merger. (/d.)
During March and Apri! 2000, TruServ announced that it was devaluing its members’ Class B stock
by 65 percent as a result of the $131 million loss, (/d. 9] 15-16.) | The Renningers allege this
devaluation violates TruServ’s By-Laws and Certificate of Incorporation, which do not expressly
authorize TruServ to alter the par value of the Class B stock. (/d.) Without identifying any specific
provisions that prohibit this conduct, the Renningers allege that by devaluing the Class B stock,
TruServ violated the By-Laws, the Membership Agreement, and TruServ's fiduciary responsibilities
to the Renningers. (/d. J 16.)

On March 17, 2000, the Board of Directors passed a resolution which imposed a
moratorium on TruServ member stock redemption.” (TruServ Special Meeting of the Board of
Directors Friday, March 17, 2000, Exhibit 5 to TruServ’s Reply in Support of its Motion to Dismiss,
at 8.) Subsequently, on May 16, 2000, TruServ filed a 10-Q-Quarterly report, which reported that
“[iJn view of the prior year financial results, the Company has initiated a moratorium on the
redemption of its stock.” (Counterclaim 17.) This statement also reported that the moratorium
would be revisited by the TruServ Board of Directors depending on the financial status of the
TruServ Corporation." (/d.)

Amended By-Laws
In accordance with the Board’s expanded authority under the amended Certificate of

incorporation, TruServ amended the By-Laws to alter the redemption rights of members and

"0 TruServ Board resolutions modify the agreement between TruServ and its members
in the same manner as an amendment to the By-Laws. (Member Agreement, at 5 {/ 8.)

" TruServ did not provide a specific date upon which the moratorium on stock
redemption would be revisited by the Board of Directors. TruServ stated, instead, in its 10-Q-
Quarterly Report that “[t}he Board of Directors will review the matter from time to time in light of the
then current financial circumstances of the Company.” (/d.)

10



With the exception of the claim related to the quaranty agreements, the court finds that the
Renningers have properly stated a claim for breach of fiduciary duty. As the court stated
previously, the Renningers have not explained how the financial condition of TruServ is relevant
to the Renningers' decision to guaranty the debts of Renninger Lumber. For this reason, the
breach of fiduciary duty claim as it relates to the guaranty agreements is dismissed without

prejudice. TruServ’s motion to dismiss Count IV is otherwise denied.
Count V: Recoupment

In their claim for recoupment, the Renningers allege that they have made substantial
investments as members of TruServ, through both capital investments and their acceptance of
Class B stock as a purchase dividend, in reliance on a continuing relationship with TruServ. The
Renningers further allege that TruSery has prevented them from recouping their investment by

refusing to redeem their stock.

TruServ argues that this claim should be dismissed because it is unreasonable as a matter
of law for Renninger Lumber to expect to continue a business relationship with TruServ when it
failed to pay for the merchandise and services it received. In support of this argument TruServ
references two provisions of the Mernber Agreement that detail a member's obligation to pay for
merchandise and TruServ's authority to terminate.'* (Member Agreement, at 3 7/3, at 5 4/5.)

“Recoupment is in the nature of a cross-action in which a defendant alleges that it has been
injured by a breach by plaintiff of another part of the contract on which the action is founded.” Cox
v, Doctor's Associates, Inc., 245 Ill. App. 3d 186, 199, 613 N.E.2d 1306, 1315 (Sth Dist.1993), The

only allegations that the Renningers assert, however, are that hey made substantial investments

6 As part of the Member Agreement, the member agrees “{t]o pay on the date due all
invoices on accounts receivable statements and any other financial obligations to the Company and
subsidiaries " (Member Agreement, at 3 3.) In addition, under the Member Agreement, the
member and company agree that “[t]he Company shall have the right to immediately terminate this
Agreement by written notice to the Member, . . . [if the Member] breaches any term, condition or
obligation under this Agreement... .” (fd. at 5 75.)

31



limitations expressly allows three years for a plaintiff to bring a lawsuit from the date of sale, unless
the plaintiff did not know or could not discover the violation. In this instance, the limitations period
begins to run from the earlier of the date the plaintiff actually knew or reasonably should have
known of the violation, Drawing every inference in favor of the Renningers, the court finds that they
have properly alleged that it was not possible through reasonabie diligence to discover TruServ's

alleged fraud prior to May 16, 2000.
Count IV: Breach of Fiduciary Duty

Count IV of the Counterclaim alleges a breach of fiduciary duty based on TruSer's failure
to redeem the Renningers’ stock, its misrepresentations regarding the expansion of board
authority, and its omission of facts in procuring the Renningers’ guaranty agreements. In seeking
to dismiss these fiduciary duty claims, TruServ argues that these claims are a mechanical
application of the breach of contract claims and fraud claims previously alleged by TruServ. The
court disagrees. The Renningers have sufficiently alleged a claim for breach of fiduciary duty

pertaining to these claims.

In order to properly state such a claim, the plaintiff must allege: (1) that a fiduciary duty
exists; (2) this duty was breached; and (3) that the breach proximately caused the injury to the
plaintiff. Prime Leasing, inc. v. Kendig, 332 Ill. App. 3d 300, 313, 773 N.E.2d 84, 96 (1st Dist.
2002). Here, the Renningers have alleged that TruServ owed them a fiduciary duty as
stockholders, which required them to act in the best interest of TruServ members. Illinois law
recognizes that officers and board members have a fiduciary duty to both the corporation and the
shareholders. Anest v. Audino, 332 Ill App. 3d 468, 476, 773 N.E.2d 202, 209 (2nd Dist. 2002),
Second, the Renningers have alleged that this duty was breached when TruServ: pursued
expanded powers for the Board; failed to fully disclose the cooperative's financial condition prior
to the Renningers’ execution of the guaranty agreements; and failed to redeem the Renningers’
stock. Finally, the Renningers have alleged that the breach of fiduciary duty has prevented them

from redeeming their TruServ stock.

30



managers advocated a change to the Certificate of Incorporation that would provide the TruServ
Board of Directors with expanded powers, including the right to amend the By-Laws regarding
matters related to the redemption rights, without the approval of a majority of the members.*
(Counterclaim | 10.) The proposed amendment to the Certificate of Incorporation would have
removed from the Certificate of incorporation the language stating “provided, however, that the
stockholder shail approve any such provision in the By-Laws.” (Certificate of Amendment of
Certificate of Incorporation, Exhibit 2 to TruServ’s Motion to Dismiss, at 1.) As described below,
however, letters from TruServ officers to members, urging passage of the armmendment, made no
mention of this change. There was no other change in the language of the certificate, but the
Renningers nevertheless allege that they understood the sole purpose of the amendment was to
allow TruServ to redeem newly-issued “nonqualified” Class B stock, which was not immediately
taxable as income, at anytime.’ (Counterclaim {[ 10.) The amendment was put to a member vote
and passed; the Renningers voted for the amendment. (/d. {1 35.)

On March 3, 1998, Daniel Burns, secretary of TruServ, addressed a letter to members in
support of the proposed amendment to the Certificate of Incorporation. (Counterclaim Jf] 29- 30.)

In this letter, Burns stated:

7(...continued)
the plaintiff's claim, may be considered by the court in deciding a Rule 12(b)(6) motion, if those
documents are attached to the defendant’s motion to dismiss. Duferco Steel, inc. v. M/V Kalisti,
121 F.3d 321, 324 n.3 (7th Cir. 1997).

8 The Renningers do not identify the date on which this amendment to the Certificate
of Incorporation was proposed or approved.

‘ The term nonqualified is defined in the Internal Revenue Code and applies to
cooperatives and its members. (March 3, 1998 Letter from Kerry Kirby to TruServ Members,
Exhibit 4 to TruServ’s Motion to Dismiss, at 1.) The nonqualified Class B stock was not taxed until
it was ultimately redeemed for cash. (/d.) This nonqualified Class B stock was issued by TruServ
for the first time as part of the 1997 year-end patronage dividend. (/d.) Kirby announced the
issuance of nonqualified Class B stock in the same letter he requested members’ support for the
proposed amendment. As described infra, Kirby's letter explained that the amendment would allow
this new nonqualified Class B stock to be redeemed at anytime at TruServ’s option. (/d.)

7



B. Statements by Kirby and Burns

Second, the Renningers allege that Kirby and Burns made misleading statements
concerning TruServ's proposed amendment to the Certificate of Incorporation, the amendment that
eliminated the need for member approval before altering redemption rights. As described above,
Kirby’s March 3, 1998 letter to members stated, “[i]f your membership is terminated, this non-
qualified B stock will be redeemed at par value, for cash, at the time of termination. . . . To facilitate
this redemption policy . . . you are being asked to approve .. . an amendment to TruServ's
Certificate of Incorporation which will permit the Board of Directors to amend the By-Laws of
TruServ to make shares of nonqualified B stock redeemable at any time at the Corporation's
option, for cash at par value.” (March 3, 1998 Letter from Kirby to members, Exhibit 4 to TruServ's
Motion to Dismiss.) Similarly, Daniel Burns’ March 3, 1998 letter to members stated, “[t]o facilitate
the redemption of this B stock, you are being asked to approve an amendment to the Certificate
of Incorporation which will permit the Board of Directors to amend these By-Laws of TruServ to
make shares of non-quatified B stock redeemable at anytime by the corporation for cash at the par
value thereof.” (March 3, 1998 Letter from Daniel Burns to TruServ Members, Exhibit 3 to
TruServ’s Motion to Dismiss.) The Renningers allege that these statements were misleading
because they falsely represented that the sole purpose of the amendment related to the “non-
qualified” Class 8 stock. (Counterclaim {J 10.)

In response, TruServ agues that (1) it was unreasonable as a matter of law for the
Renningers to rely on these statements, and (2) that the Renningers have not alleged that the
statements were false.

1. Reasonable Reliance

TruServ argues that these fraud claims fail because the Renningers could not reasonably

rely on Kirby's and Burns’ statements when the language of the amendment, provided to the

Renningers, clearly indicated its function. In the alternative, TruServ argues that the Renningers

21



agreements also included an integration clause. (Motion to Dismiss at 27.) TruServ argues, further,

that the Renninger's fraud claims related to the guaranties lacks specificity sufficient to state a
claim of fraud. The court finds this argument dispositive.

As TruServ notes, the Renningers have failed to allege any representations that induced
them to enter into the guaranty agreement. Instead, the Renningers focus on their allegation that
TruServ omitted material facts, specifically, that TruServ failed to inform the Renningers of
TruServ's poor financial condition prior to their agreeing to guaranty the debts of Renninger
Lumber.

In order for the Renningers to properly allege a material omission, Illinois law provides that
“[tihe concealment may not be a passive omission of facts during a business transaction but must
have been done with the intent to deceive under circumstances creating an opportunity and duty
to speak.” Farm Credit Bank of St. Louis v. tsringhausen, 210 Ill. App. 3d 724, 731, 569 N.E.2d
235, 240 (1991). Even assuming that TruServ had a duty to speak in the circumstances provided
here, the court notes that the Renningers have not explained how TruServ’s omission was material
to their decision to enter the guaranty agreements. In connection with executing the guaranties
with TruServ, the Renningers were taking personal responsibility for the goods and services
provided by TruServ to Renninger Lumber. Renninger Lumber’s solvency was presumably relevant
to the Renningers' decision to execute personal guaranties, but the Renningers do not explain how
TruServ's financial condition had any bearing on that decision. Finally, if TruServ's financial
soundness were relevant to the Renningers’ willingness to execute guaranties, their failure to
identify with specificity the dates and times of any misrepresentations about these matters, or even
the dates on which the guaranties were executed, would defeat their fraud claim which, as noted,
carries heightened pleading requirements. Thus, the court dismisses the fraud claims related to

the guaranties without prejudice.

27



Defenses and Counterclaims of Renninger Lumber Company, Inc., Donald W. Renninger, Michael
J. Renninger, Gloria R. Long and Susan J. McKinney {ff 1-2) (hereinafter, “Counterclaim.”)
TruServ Corporation, Counter-Defendant here, is a Delaware corporation with its principal place
of business in Chicago, Illinois. TruServ, a national cooperative, acts as a wholesaler for True
Value hardware stores, marketing its merchandise and services exclusively to its members,
including the Renningers. (/d. {| 1; Renningers' Memorandum in Opposition to TruServ’s Motion
to Dismiss Counterclaims and Strike Affirmative Defenses (hereinafter, “Memorandum in
Opposition,”) at 1, 4.) True Value Hardware store owners seeking membership in the TruServ
cooperative must sign a contract or Membership Agreement that governs the relationship between
the cooperative and its members. (Retail Member Agreement with TruServ Corporation
(hereinafter, "Member Agreement"), Exhibit 1 to Counterclaim, at 1-2.) Pursuant to the Agreement,
TruServ members own stock in TruServ and benefit from the group billing and purchasing ability
of the TruServ cooperative. (/d.) The Renningers became a member of TruServ in 1997 when
Cotter and Company (‘Cotter") and ServiStar/Coast to Coast, both suppliers of hardware
merchandise, merged to form TruServ Corporation. (Counterclaim {] 7.)

Prior to 1997, the Renningers were members of Cotter, a Delaware corporation which was
a predecessor to TruServ and which, like TruServ, was a cooperative, marketing its merchandise
and services to member stores pursuant to a membership agreement. The Cotter membership
agreement (a) required members to purchase Class A stock as an initial investment from Cotter,
and (b) provided that members would receive dividends from their purchases of merchandise in
the form of Class B stock.” (/d. If] 4-6.) The member agreement between Renninger Lumber and

Cotter required Cotter to redeem Renninger Lumber's Class A and Class B stock at Renninger

2 The differences between TruServ Class A and Class B stock are described infra,
but the parties offer no explanation of the characteristics of Cotter Class A and Class B stock
beyond identifying these two classes of stock.



With these standards in mind, the court addresses each of the Renningers’ claims in turn.
Count I: Breach of Contract Claim

The Renningers allege that the express and implied terms of the Member Agreement
between the Renningers and TruServy, the course of dealing and performance between the parties,
and the implied duty of good faith in contract performance required TruServ to redeem the Class
A and Class B stock held by the Renningers. By refusing to redeem this stock, the Renningers
claim, TruServ breached its contractual obligations. (Counterclaim §] 24.) The Renningers also
allege that TruServ violated the agreement between the parties by devaluing the Class B stock and
imposing a moratorium on redemption. (Counterclaim {] 25.)

In asking the court to dismiss this breach of contract claim, TruServ argues that: (1) the
claim fails because the Member Agreement contains no redemption requirements, (2) Illinois law
does not recognize a cause of action for breach of an implied covenant of good faith and fair
dealing, and (3) TruServ’s By-Laws do not confer any contractual rights because they are subject
to unilateral modification by the Board of Directors.

The Renningers do not challenge TruServ's observation that the Member Agreement is
silent regarding redemption rights. They argue instead that the By-Laws, which did include a
provision regarding stock redemption, were incorporated into the Member Agreement by reference
See Wilson v. Wilson, 217 tll. App. 3d 844, 853, 577 N.E.2d 1323, 1329 (1st Dist. 1991) (an
instrument may incorporate another instrument by reference); Providence Federal Sav. and Loan
Ass'n. v. Realty Centre, Ltd., 97 Ill. 2d 187, 192-93, 454 N.E.2d 249, 261 (1983) (an instrument
may incorporate another instrument by reference). Even accepting this argument , however, the
court concludes that the Renningers have not alleged a breach of the By-Laws.

Any claim that rests on the enforceability of the By-Laws is undermined by the language of

the relevant By-Laws themselves. Section 7(c) of the 2000 By-Laws provides that TruServ’s Board

14



however, does not provide for an independent cause of action for an alleged breach of an implied
duty of good faith and fair dealing. Voyles v. Sanida Mortgage Corp., 196 Ill. 2d 288, 293-94, 751
N.E.2d 1126, 1130-31 (2001); APS Sports Collectibles, Inc. v. Sports Time, Inc., 299 F.3d 624, 628
(7th Cir. 2002). Instead, as the Renningers correctly note, the duty of good faith and fair dealing
is “in aid and furtherance of other terms of the agreement of the parties” and is not an independent
source of duties assumed by the parties. Williams, 944 F.2d at 1394 (quoting Gordon v, Matthew
Bender & Co,, 562 F.Supp. 1286, 1290 (N_D. IIl.1983)).

TruServ argues, first, that the Renningers’ factual allegations do not support an inference
of bad faith on the part of TruServ. The court agrees. The Renningers have alleged that the
change to the By-Laws and the Board decision to issue a moratorium on stock redemption was in
response to TruServ's $131 million loss the previous year. (Counterclaim § 14.) Imposing a
moratorium in these circumstances does not demonstrate bad faith, to the contrary, such a decision
may very well demonstrate that TruServ acted in good faith to protect the best interest of the
corporation and its members.

In addition, TruServ argues that the Renningers could not reasonably have expected that
the By-Laws would remain unchanged. TruServ cites Steen v. Modern Woodmen of America, 296
lll. 104, 129 N.E. 546 (1921), an early but instructive case holding that a party does not have the
right to presume that by-laws will remain unchanged when explicit language permits the
organization to amend or change the by-laws. /d. at 111, 129 N.E. at 549. In Steen, the by-laws
of a fraternal benefit society were amended after plaintiffs husband had purchased a death
benefits certificate to provide that the disappearance of a member, without actual proof of death,
is nota basis for recovery under the policy. /d. at 106-107, 129 N.E2d. at 548. After her husband
disappeared and was presumed dead, the plaintiff challenged this amendment as an unreasonable
alteration of the parties’ agreement, but the court was not persuaded. Where the agreement

between the parties provided the society with a clear and express right to amend the by-laws,

16



Michael Renninger, Long, and McKinney, TruServ alleges that these Defendants are liable on
personal guaranties they gave to TruServ for Renninger Lumber's debts. On April 8, 2002, the
Renningers filed an answer to TruServ's complaint in which they raised several affirmative
defenses and a five-count counterctaim arising out of TruServ's failure to redeem Defendants’
stock in the TruServ Corporation.

in their counterclaim, the Renningers allege that TruServ's dealings constituted (1) breach
of contract; (2) fraud; (3) a violation of the Illinois securities laws; (4) breach of fiduciary duty; and
(5) a violation of the Renningers’ right of recoupment. TruServ has moved to dismiss each of these
counterclaims under Rule 12(b)(6). In addition, TruServ moves to strike eight of the Renningers’
thirteen affirmative defenses, including the following: (1) TruServ materially breached the
Membership Agreement with Renninger Lumber, (2) TruServ's claims are barred by its anticipatory
repudiation of the Membership Agreement, (3) TruServ's fraudulent statements and omissions
induced Renninger Lumber to enter the Membership Agreement with TruServ and to remain a
member; (4) TruServ's fraudulent misrepresentations and omissions induced the Renningers to
enter into the personal guaranty agreements; (5) TruServ's claims must be reduced by amounts
TruServ owes Renninger Lumber under the Membership Agreement; (10) TruServ’s claims are
partially barred by Renninger Lumber's claim for recoupment; (11) estoppel; and (12) unclean
hands. For the reasons set forth here, TruServ's motion to dismiss is granted in part and denied
in part, Its motion to strike the Renningers’ affirmative defenses is also granted in part and denied
in part.

FACTUAL BACKGROUND

Renninger Lumber Company, a Pennsylvania corporation, is owned by Donald W.
Renninger, Michael J. Renninger, Gloria R. Long and Susan J. McKinney, and operates a True

Value Hardware Store located in Mill Hall, Pennsylvania, (Joint and Separate Answer, Affirmative



(7th Cir. 1988) (statement that plaintiff had no right to recover for a work related injury except for
workers’ compensation held to be a statement of fact when made by employer's workers’
compensation carrier). In this case, the statements were made by officers of the corporation
advocating for an amendment that gave TruServ greater authority over the redemption of stock.
It is reasonable, at this point in the litigation, to believe that these individuals had special knowledge
regarding the amendment because of their role as TruServ officers and advocates for this
amendment, Thus, the court will not dismiss the claims as a matter of law because they represent
opinions.

Finally, TruServ arques that the Renningers have not alleged that the statements are false.
In their Counterclaim, however, the Renningers alleged that the statements are false because
TruServ did not in fact redeem their Class B Stock in 2001, (Counterclaim J] 18.) More importantly,
as stated previously, the Renningers assert that the challenged statements were incomplete and
misleading; the Renningers allegedly believed that the amendment to the Certificate of
Incorporation was to be used solely to allow the Board to amend the By-Laws to redeem
nonqualified Class B stock at anytime (Counterclaim {[ 10), when in reality it was also intended to
prohibit the Renningers from demanding redemption of their own stock. The question presented
here is a close one. The only change in the Certificate was elimination of language requiring
member approval before any change in stock redemption procedures, yet the Renningers argue
that TruServ officials concealed this change from them. Nevertheless, in light of Kirby's and
Burke's responsibility to be forthcoming with members and what appears to be a deliberate effort
to divert members’ attention, the court declines to dismiss this claim at the pleading stage.

c. Nauer’s Statement

The Renningers' third claim of fraud rests on Diane Nauer’s statement in her letter dated
September 29, 2000 that “[a]dditionally, the By-Laws were modified to better enable the Board to

control the flow of payments to terminating stockholders in accordance with the legal and business

25



UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

TRUSERV CORPORATION,
Plaintiff,

v. No. 02 C 1018
CHASKA BUILDING CENTER, INC.,

JOHN D, KLINGELHUTZ, RENNINGER
LUMBER COMPANY, INC., DONALD W.
RENNINGER, MICHAEL J. RENNINGER,
GLORIA R. LONG, SUSAN J. McKINNEY,
CARTER TRUE VALUE HARDWARE, INC.,
CRAIG W. CARTER, KIMBERLEY 8S.
CARTER, and DANIEL G. STEINACKER
dib/a STEINACKER & SONS TRUE VALUE,

Judge Rebecca R. Pallmeyer

fed

FEB 04 2003

Defendants.
MEMORANDUM OPINION AND ORDER

On February 12, 2002, TruServ Corporation filed this lawsuit against Renninger Lumber
Company, Inc., Donald W. Renninger, Michael J. Renninger, Gloria Long, and Susan McKinney,
(hereinafter collectively “Renningers”) and other Defendants, claiming breach of contract and
breach of guaranty.’ TruServ, a cooperative, alleges that Renninger Lumber, a member of the
cooperative, has committed a breach of contract by failing to pay for merchandise and services
provided by TruServ to Renninger Lumber. TruServ has also alleged a claim for “account stated”

based on TruServ’s failure to pay for merchandise and services. As against Donald Renninger,

' TruServ is a corporation organized under the laws of the state of Delaware and has

its principal place of business in Chicago, Illinois. TruServ functions as a cooperative and
wholesaler for its members, owners of True Value hardware stores, The Renningers operate a True
Value hardware store in Pennsylvania, which is a member of the TruServ Corporation. Renninger
Lumber is a corporation organized under the laws of Pennsylvania with its principal place of
business in Mill Hall, Pennsylvania and Donald Renninger, Michael Renninger, Long and McKinney
are citizens of Pennsylvania. TruServ has claimed that the Renningers breached their obligations
under the agreement with TruServ by failing to pay $151,494.70 that it owes TruServ for
merchandise and services. The court has jurisdiction in this matter under 28 U.S.C, § 1332(a),
because this lawsuit involves a dispute between citizens of different states and TruServ has a good

faith basis for alleging that the amount in controversy exceeds $75,000.



Counterclaim, at 14-15 9] 1, 2, 5, 12.)

For the reasons set forth above, the court concludes that Renningers have not alleged a
breach of contract claim against TruServ as part of their Counterclaim. For this reason, the court
strikes the affirmative defenses related to TruServ’s material breach and anticipatory repudiation.
At this point, the Renningers have been unable to allege any breach by TruServ. “An anticipatory
repudiation is a definite statement by one contracting party to the other that it will not perform its
contractual duties, unless such statement is justified.” Curtis Casket Co. v. D.A. Brown & Co., 259
ll. App. 3d 800, 806 (1st Dist. 1994), The Renningers have not alleged any statement or act on
the part of TruServ demonstrating its intent not to perform under the terms of the Member
Agreement. The court strikes these claims without prejudice

In addition, the court strikes the affirmative defense of unclean hands. “The equitable
doctrine of unclean hands provides that a party seeking equitable relief cannot take advantage of
his own wrong.” Northern Trust Co. v. Vill South Michigan, 276 Ill. App. 3d 355, 368, 657 N.E.2d
1095, 1105 (1st Dist. 1995). “For a court to invoke the ‘unclean hands’ doctrine, such conduct must
be directly involved in the very transaction at issue before the court." Yugosiav-American Cultural
Center, Inc. v. Parkway Bank and Trust Co., 327 Ill. App. 3d 143, 152, 763 N.E.2d 360, 398 (‘1st
Dist. 2001). The transaction at issue in TruServ’s complaint relates to the Member Agreement and
whether the Renningers are obligated to pay for merchandise and services received from TruServ
pursuant to that agreement. Because the Renningers allege unclean hands in relation to the
amendment to the Certificate of Incorporation, not the Member Agreement, the court dismisses this
affirmative defense without prejudice.

The court declines to strike the affirmative defenses of setoff. The Renningers have
requested a setoff of the damages they allegedly owe TruSery as a result of their breach. The
court will not strike this affirmative defense as it is possible that if the Renningers prevail on their

fraud claim that they may be entitled to a setoff for the amounts they invested in TruServ. Lake

33



Count HI; Iflinois Securities Act

in Count Ill of the Counterclaim, the Renningers allege that TruServ violated the Illinois
Securities Act by misrepresenting material facts and omitting material facts in connection with
encouraging the Renningers to approve the merger of ServiStar/Coast to Coast and Cotter in 1997,
to approve the change in board powers in 1998, and to execute personal guaranties in 2000. In
addition, the Renningers claim that TruServ made misrepresentations in issuing Class B stock
throughout 2000 and 2001 as if the stock would be redeerned promptly upon request.
(Counterclaim 7 43.) TruServ does not challenge the sufficiency of this count. TruServ does
argue that the claim is time-barred under the Illinois Securities Act. The statute provides that:

No action shall be brought for relief under this Section or upon or because of any

of the matters for which relief is granted by this Section after 3 years from the date

of sale; provided, that if the party bringing the action neither knew nor in the

exercise of reasonable diligence should have known of any alleged violation of

subsection E, F, G, H, | or J of Section 12 of this Act which is the basis for the

action, the 3 year period provided herein shall begin to run upon the earlier of:

(1) the date upon which the party bringing the action has actual knowledge of the

alleged violation of this Act; or

(2) the date upon which the party bringing the action has notice of facts which in the

exercise of reasonable diligence would lead to actual knowledge of the alleged

violation of this Act; but in no event shall the period of limitation so extended be
more than 2 years beyond the expiration of the 3 year period otherwise applicable.

815 ILCS 5/13 (D).

Both parties recognize that this statute of limitations is also applicable to all of the
Renningers’ fraud and fiduciary duty claims that relate to the merger and amendment to Certificate
of Incorporation. See Tregenza v. Lehman Brothers, Inc., 287 Il. App. 3d 108, 110, 678 N.E.2d 14,
15 (1st Dist. 1997) (Illinois Securities Act's statute of limitations bars not only statutory claims but

also common law actions arising out of securities transactions).

The dispute here relates to the date on which the limitations period should start to run.
TruServ argues that the limitations period began to run in 1997 when the merger took place, for
the claims relaled to the merger, and in 1998 when the amendment was passed, for the claims

related to the amendment. The Renningers, however, argue that they did not have notice of the

28



cooperative. These modifications are consistent with TruServ’s custom and practice.” (/d.) The
Renningers allege that Nauer misrepresented the purpose of the amended By-Laws; the true
purpose of the amended By-Laws, the Renningers urge, was to allow the Board to put an end to
stock redemption, precisely contrary to TruServ’s custom and practice. (/d.)

Without identifying a specific date or triggering event, the Renningers allege that “in 2001,”
TruServ refused to redeem the Renningers’ Class A or Class B stock. (Counterclaim ] 18.) The
Renningers allege this refusal was a breach of the Member Agreement entered into by TruServ
with the Renningers and a breach of TruServ’s duties to the Renningers as stockholders,
(Counterclaim {| 18.) Specifically, the Renningers allege, “TruServ breached its fiduciary
obligations to {the Renningers] by their refusal to redeem Renninger Lumber’s Class A and Class
B stock at full par value... ." (Counterclaim {] 48.)

According to the Renningers, TruServ's By-Laws and Certificate of Incorporation do not
authorize TruServ to impose any moratorium on the redemption of members’ stock. (/d. {] 19.)
Instead, the Renningers allege, even under the language of the By-Laws and Certificate of
Incorporation as TruServ improperly reworked them, TruServ is required to redeem stock unless
its Board of Directors determines that the corporation has insufficient funds available to pay for
redemptions. (/d.) Having failed to cite insufficient funds as the reason for failing to redeem
Renninger Lumber's stock, the Renningers argue, TruServ is not free to refuse redemption. (/d.
4 20.) The Renningers allege that TruServ failed to cite insufficient funds even though the
moratorium on stock redemption was issued in response to a recently discovered $131 million loss
fram the 1997 merger. (/d. Jf] 14, 17.)

The counterclaim alleges that TruServ’s actions resulted in direct and proximate damages
to the Renningers in excess of $75,000, which includes the Renningers’ loss of par value of Class

A and Class B TruServ stock. (/d. ] 21.)

12



of Directors has the discretion over whether or not to redeem members stock based on the
availability of corporate funds and the best interests of TruServ. (2000 By-Laws, at 7, §7(c)).
Presumably to avoid this language, the Renningers invoke the 1997 By-Laws, but those By-Laws
were not effective in 2001, when the Renningers allege TruServ denied redemption. The 2000 By-
Laws, effective in July 2000, expressly permit TruServ to temporarily postpone stock redemption
if it was in the best interest of the Corporation. (2000 By-Laws, at 7 §7(c).) The Renningers have
challenged the validity of the amendments to the By-Laws, but that challenge forms the basis for
their fraud claims and does not support a breach of contract claim,

For their second argument in support of the breach of contract claim, the Renningers urge
that TruServ violated the duty of good faith and fair dealing. The Member Agreement states that
“this agreement shail be automatically modified upon notice from the Company to the Member of
any relevant change in the Certificate of Incorporation or By-Laws of the Company.” (Member
Agreement at 5, 8.) The Renningers acknowledge that this term in the Member Agreement
provides TruServ with the right to amend the By-Laws and thus modify the agreement between the
parties. They allege that TruServ breached the duty of good faith and fair dealing by amending the
By-Laws in such a manner as to thwart the reasonable expectations of the Renningers that they
would retain the right to demand that TruServ redeem their stock. TruServ argues that this claim
should be dismissed because the Renningers failed to allege that it acted in bad faith or that the
moratorium on stock redemption was contrary to their reasonable expectations.

Under Illinois law, “[e)very contract implies good faith and fair dealing between the parties
to it." Williams v. Jader Fuel Co., 944 F.2d 1388, 1394 (7th Cir. 1991) (citations omitted). The
party granted discretion to act under the contract is limited by the covenant of good faith and may
only exercise its discretion reasonably, in good faith, and in a manner consistent with both parties’
expectations. Beraha v, Baxter Health Care Corp., 956 F.2d 1436, 1443-44 (7th Cir. 1992);

Dayan v. McDonala’s, 125 Ill. App, 3d 972, 990, 466 N.E.2d 958, 972 (1st Dist. 1984). Illinois law,

15