A federal judge from the Northern District of Illinois has denied in part and granted in part a bank’s motion to dismiss the counterclaim of a professional hockey team, which sought bankruptcy protection after it could not make payments to the bank.
The court denied the motion to dismiss Leafs Hockey Club, Inc.’s breach of contract and equitable accounting claim, while granting the motion to dismiss the conspiracy to defraud claim.
The players in the litigation are plaintiff/counter-defendant UMB Bank and defendant/counter-plaintiff Leafs Hockey Club, Inc. (LHC).
UMB is the successor trustee under the trust indenture between the Illinois Finance Authority and the prior trustee. It alleged that the Illinois Finance Authority (IFA) raised $20 million through the issuing and selling of a series of revenue bonds. The IFA then issued the bonds under the trust indenture and loaned the proceeds to LHC, an Illinois non-profit limited liability company, for the construction and operation of a hockey arena located in West Dundee, IL. Under a guaranty agreement, LHC was the borrower and Leafs Hockey was the guarantor. UMB alleged that LHC failed to make the required payments, and therefore, is in default. Also, UMB alleged that Leafs Hockey, as guarantor, has failed to pay its obligations under the guaranty agreement.
In its Amended Counterclaim, Leafs Hockey alleged that it repeatedly attempted to obtain information from the trustee, the Illinois Finance Authority, LHC, and CSCG, the manager of operations of the hockey arena, about the distribution and use of funds from the $20 million bond proceeds. Despite these repeated attempts, Leafs Hockey was allegedly unable to learn why approximately $6 to $8 million of the bond proceeds were not used to fund the construction of the hockey arena. Leafs Hockey further alleges that in or around February 2007, when the construction of the hockey arena began, it had approximately $500,000 in reserves, but by late 2012 approximately $470,000 of the reserves was missing. In addition, Leafs Hockey asserts that in or about 2012, it began to suspect LHC’s oversight and CSCG’s management of the hockey arena caused the financial irregularities. Leafs Hockey went on to site other instances, which alleged constituted fraudulent actions.
After filing a counter-claim, UMB moved to dismiss.
Reviewing the breach of contract claim first, the court found that Leafs Hockey has “provided sufficient, detailed allegations that the trustee breached the loan agreement and trust indenture.” Among the examples cited by the court was the trustee’s “denial of allowing Leafs Hockey’s request to review the books and records relating to the disbursements made, (which) raises a reasonable inference that the Trustee may not have kept proper books and records under Section 6.2 of the trust indenture.”
The court continued: “Because Leafs Hockey’s allegations state a right to relief above a speculative level, see Bell Atlantic v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007), the court denies the plaintiff’s motion to dismiss Leafs Hockey’s breach of contract claim.”
On the accounting claim, Leafs Hockey alleged that LHC “made use of $12 to $14 million of bond funds for the construction of the hockey arena, but may have used additional bond funds for other purposes. (It) also alleged on information and belief that its computer records and other records were erased or destroyed.” Leafs Hockey suggested that it needs more discovery and the court agreed, denying UMB’s motion to dismiss.
Finally, the court reviewed the conspiracy to defraud claim. “Discovery in this case has been ongoing for nine months and will close at the end of this month,” wrote the court. “As such, Leafs Hockey has had substantial time and opportunity to discover facts to support these allegations. It has failed to do so.”
Wells Fargo Bank, National Association, as Indenture Trustee under Trust Indenture v. Leafs Hockey Club, INC.,; N.D. Ill.; Case No. 13 C 2247, 2014 U.S. Dist. LEXIS 104284; 7/31/14
Attorneys of Record: (for plaintiff) William Pfeiffer Smith, LEAD ATTORNEY, Megan Eileen Thibert Ind, McDermott, Will & Emery LLP (Chicago), Chicago, IL. (for defendant) Elizabeth Ellen Greene, Cohon Raizes & Regal LLP, Chicago, IL.
