Midwest Update - Kaplum v. Edgebrook Acquisition 2, LLC

Kaplum v. Edgebrook Acquisition 2, LLC, 2016 WL 4493534 (N.D. Ill. Aug. 25, 2016)

In an action against bank agents of a failed bank, an Illinois federal court (the “District Court”) has held that (i) only the Federal Deposit Insurance Corporation receiver (“FDIC‑R”) has standing to sue bank agents for derivative claims of unlawful dissolution or breach of fiduciary duty and (ii) an individual must allege harm to himself in order to have standing. 

Edgebrook Acquisition 2, LLC, an Illinois limited liability company (“EA2”), owned an interest in Edgebrook Bancorp, an Illinois commercial bank (“Edgebrook”).  Prior to March 7, 2013, Bernard Glavin Jr. (“Glavin”) was a managing member and the president of EA2, John B. Ptak (“Ptak”) was a managing member, vice president and chief financial officer of EA2 and Robert Stejskal (“Stejskal”; together with Glavin and Ptak, the “EA Officers”) was a member of EA2.

Prior to March 7, 2013, EA Officers represented to Mike Kaplun (“Kaplun”) that purchasing EA2 stock was a prerequisite to obtaining loans or financing from EA2. Based on that representation, Kaplum purchased 2 units of EA2 stock for $30,000 (the “Funds”) on March 7, 2013. Edgebrook subsequently failed and was taken over by the FDIC‑R.  The failure of Edgebrook also caused EA2 to become insolvent rendering Kaplum’s shares in EA2 worthless.  Subsequently, Kaplum sued the EA2 Officers claiming that: (i) EA2 breached its operating agreement by unlawfully dissolving and thereby causing the loss of Kaplum’s investment (“Count I”), (ii) the EA2 Officers breached their fiduciary duty to Kaplum (“Count 2”) and EA2 and (iii) the EA2 Officers defrauded Kaplum (“Count III”).  The FDIC-R as receiver of Edgebrook, removed the action to the District Court and moved to dismiss the case for lack of subject matter jurisdiction arguing that Kaplum’s claims lacked standing since they property belong to the FDIC‑R.  The FDIC-R argued that the Financial Institution Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) permits the FDIC to act as a receiver of a failed bank and once the FDIC is appointed as a receiver of a failed bank, FIRREA grants the FDIC “all rights, titles, powers, and privileges of the Bank, and of any stockholder, … of such bank with respect to the bank and the assets of the bank” 12 U.S.C. §1821(d)(2)(A).  The FDIC‑R argued that under FIRREA, not only did the closed banks’ rights belong to the FDIC, but so did any claims investors might assert derivatively.

The District Court stated that under Illinois law, a shareholder’s claim against a corporation may be either direct, in which the shareholder individually brings the action against the corporation for an injury personally suffered by the shareholder, or derivative, in which the shareholder steps into the shoes of the corporation to seek restitution for a common injury to the corporation and that she, as a shareholder, would be unable to pursue directly.

With respect to Count I, Kaplum conceded that Count I was a derivative claim and that only the FDIC‑R has standing to assert Count I.  Regarding Count II and Count III, Kaplum argued that they are not derivative actions because they concern an individual injury distinguishable from the devaluation of EA2’s stock.  Kaplum argued that the injury (i.e. the loss of Funds) was adversely affecting his attempts to obtain loans or other financing. 

With respect to Count II for breach of the operating agreement which improperly and unlawfully dissolved EA2, Kaplum alleged that the EA2 Officers, in their individual capacities as officers and members (i) were fiduciaries of Edgebrook and Kaplum and (ii) breached their fiduciary duties to the individual members of Edgebrook and specifically toward Kaplum.  The Court held that because Count II alleged no breach of fiduciary duty beyond that alleged in Count I and Kaplum had already conceded that his claim for breach of the operating agreement in Count I was derivative in nature, then Count II was also derivative in nature.  Accordingly, only the FDIC‑R has standing to bring the claims alleged in Count II.

With respect to Count III for fraud, Kaplum alleged that the EA2 Officers defrauded him by representing to him that in order to receive loans or financing from Edgebrook, Kaplum had to purchase units of EA2 stock.  The Court held that because the alleged fraudulent misrepresentations were made only to Kaplum, the harm alleged in Count III was not universal to EA2’s shareholders and therefore constituted a direct claim that Kaplum had standing to assert under section 1821(d)(2)(A) of FIRREA.