U.S. Court of Appeals Finds that Claims of an Individual Shareholder are Derivative to the Corporation

Fortunee Massuda was an investor in a group of Panda Express restaurants in Chicago. The restaurants were owned by a joint venture, RC Partnership, made up of Panda Express Inc. and Rezko Concessions Inc. Massuda invested $4 million in the joint venture in exchange for an ownership interest of 11% in the joint venture. The joint venture also owned and controlled PE Chicago, a Delaware LLC. By the year 2001, the value of the RC Partnership was estimated to be $56.4 million.

By 2005, Rezko Concessions’ owner, Tony Rezko, was in deep financial and legal trouble. In April 2006, Massuda went to Panda and informed it of her intent to sue Rezko and asked whether Panda would be interested in buying her 11% share. Panda’s general counsel declined the offer and instead told Massuda that her stake was worthless.

In mid-May 2006, Rezko was urgently in need of money. In order to secure funds, Rezko offered to sell PE Chicago’s interest in RC Partnership to Panda. Panda agreed to pay Rezko $3 million, keep the deal between them secret and grant Rezko personally a buy-back option.

Panda purchased PE Chicago’s interest for $9.7 million in June 2006 and wired $3.25 million to Rezko’s personal account. No money was wired to a PE Chicago account. The terms of the agreement stated that Rezko owed Panda a substantial amount of money, but the debt would be forgiven with the PE Chicago purchase.

Massuda was never told about this transaction, despite her interest in PE Chicago through her 11% ownership of the joint venture. In fact, Rezko chose not to inform any of the joint venture’s members about the Panda deal. Rezko continued to experience financial trouble and in fact was indicted by a federal grand jury in November 2006.

In 2008, Semir Sirazi, another of Rezko’s investors, discovered the details of the Panda-Rezko-PE Chicago deal. Sirazi filed a lawsuit against Panda and several of its executives claiming that they had conspired with Rezko to defraud investors and had aided and abetted Rezko’s breach of his fiduciary duties.

Sirazi later gained control over PE Chicago and added it as a co-plaintiff. In the trial, the defendants were found liable to Sirazi for conspiracy and aiding and abetting and awarded Sirazi $1.1 million in compensatory damages and $2 million in punitive damages. PE Chicago also was awarded $5.14 million on a breach of contract claim against these defendants.

Those judgments were later vacated and the parties reached a settlement. After the settlement, Massada filed her own lawsuit against the Panda defendants. The case was filed in U.S. District Court for the Northern District of Illinois; the court dismissed most of her claims as being derivative and also found that she had not stated a claim for fraud. Massada took this appeal to the U.S. Court of Appeals.

The appellate panel first found that Massada’s unjust enrichment claim was derivative. The court cited Tooley v. Donaldson, Lufkin & Jenrette, Inc., wherein it was stated that the question of whether a claim is derivative is based on who suffered the harm, the corporation or the suing stockholder individually, and who would receive the benefit of the recovery. Under that process, the panel found that Massada’s lawsuit failed because if anyone was unjustly deprived of the true value of PE Chicago’s interest, it was PE Chicago.

As to the fraud count, the appellate court found that Massada had failed to allege that the Panda defendants were under a duty to disclose material facts to her. In addition, the appeals panel found that Massada’s conspiracy to defraud count was also derivative.

Lastly, the panel addressed Massada’s aiding and abetting a breach of fiduciary duty claim. The panel found that Massada’s claim was also derivative to the corporation and took note that Massada had complained only of the wastefulness of the sale itself and not the dilution of her minority voting power. Accordingly, the court of appeals affirmed the district court judge’s decision to dismiss Massada’s lawsuit.

Fortunee Massuda v. Panda Express Inc., et al., No. 13-2818 (U.S. Court of Appeals, 7th Cir., July 21, 2014).

Kreisman Law Offices has been handling business disputes, breach of contract claims, corporation, partnership and proprietorship lawsuits and commercial litigation for individuals, families and businesses for more than 38 years in and around Chicago, Cook County and its surrounding areas, including Wheaton, Winfield, Robbins, Blue Island, Joliet, Waukegan, Oak Lawn, Orland Park, Harvey, Riverdale, Calumet City, Chicago (Garfield Park, Little Village, Lawndale, Back in the Yards, Canaryville, Bridgeport, Bronzeville, Chinatown, Greek Town, Little Italy, Pilsen), Berkeley, Elmhurst, Elmwood Park, River Grove and Des Plaines, Ill.

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