Grayson v. Shanahan

CourtDistrict Court, N.D. Illinois
DecidedMarch 16, 2018
Docket1:16-cv-01297
StatusUnknown

This text of Grayson v. Shanahan (Grayson v. Shanahan) is published on Counsel Stack Legal Research, covering District Court, N.D. Illinois primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Grayson v. Shanahan, (N.D. Ill. 2018).

Opinion

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

) DENVER R. GRAYSON and ) DENVER, INC., ) ) Plaintiffs, ) 16 C 1297 ) v. ) Judge John Z. Lee ) MICHAEL J. KORST, P.C., and ) MICHAEL J. KORST, ) ) Defendants. )

MEMORANDUM OPINION AND ORDER Plaintiff Denver Grayson, the sole shareholder of Plaintiff Denver, Inc. (collectively, “Grayson”), previously owned a Domino’s Pizza franchise, together with a partner, Daniel Shanahan. When Shanahan and Grayson sold the franchise, they were both represented by the same attorney, Defendants Michael Korst and Michael J. Korst, P.C. (collectively, “Korst”). Grayson’s claims against Shanahan have been dismissed,1 and one count of legal malpractice and breach of fiduciary duty against Korst remains. Grayson and Korst have cross-moved for summary judgment. For the reasons that follow, the Court denies Grayson’s motion and grants Korst’s motion.

1 The Court granted Daniel Shanahan’s motion to dismiss the unjust enrichment claim against him. See Grayson v. Shanahan, No. 16-CV-1297, 2016 WL 6962827, at *4 (N.D. Ill. Nov. 29, 2016). Background2 I. Agreement to Purchase 51% of Milwaukee Dominos In July 2000, Denver Grayson began working as a General Manager at a

Milwaukee-area Domino’s Pizza franchise owned by Daniel Shanahan. Defs.’ LR 56.1(a)(3) Stmt. ¶ 5, ECF No. 39; Defs.’ LR 56.1(a)(3) Stmt. Ex. B, Grayson Dep. at 12:10–14, 18:9–19:1, ECF No. 39-2. From 2003 to 2004, Grayson left to run his own pizza store, which he subsequently sold. Grayson Dep. at 19:7–20:11. He then returned to work for Shanahan at the same Domino’s Pizza. Id. at 20:7–17. Shanahan owned multiple franchises, some of which he owned through an

entity called DDS. Defs.’ LR 56.1(a)(3) Stmt. Ex. G, Shanahan Dep. at 9:4–22, ECF No. 39-7, 10:22–11:14. In 2006, Grayson and Shanahan began taking steps for Grayson to buy an ownership interest in the Domino’s Pizza store. First, in October 2006, Grayson incorporated Denver, Inc. Grayson Dep. at 22:20–24. Denver, Inc. and DDS then entered into an operating agreement for DJ’s Pizza, LLC, in which Denver, Inc. was allocated 51% interest and DDS was allocated 49% interest. Pls.’ Mot. Summ. J.., Ex. Operating Agreement of DJ’s Pizza (“Operating Agreement”), at

4, ECF No. 36-7; id. at Ex. 1. In March 2007, Grayson and Shanahan executed a Shareholder Agreement and a Sale Contribution and Guarantee Agreement, by which DDS agreed to transfer its ownership of the store to DJ’s Pizza and Grayson

2 The following facts are undisputed or deemed admitted unless otherwise noted. Grayson did not respond to Korst’s LR 56.1(a)(1)(3) statement of facts as required by Local Rule 56.1. All of Korst’s facts are thus deemed admitted for the purposes of this motion. See 56.1(b)(3)(C); Cracco v. Vitran Exp., Inc., 559 F.3d 625, 632 (7th Cir. 2009). agreed to pay DDS $354,450.3 Defs.’ LR 56.1(a)(3) Stmt. Ex. C, Sale, Contribution and Guaranty Agreement, ECF No. 39-3. The result was that Grayson held a 51% interest and Shanahan retained a 49% interest in the store. Defs.’ LR 56.1(a)(3)

Stmt. ¶¶ 5, 6. The Operating Agreement for DJ’s Pizza designated Grayson as the manager of the company and store manager of record with Domino’s Pizza LLC. Operating Agreement §§ 1, 5.1, 5.3(h)(2). It further dictated that: Grayson’s compensation was set at 8% of Annual Royalty Sales of the restaurant, id. § 6.3; DDS earned 4% of Annual Royalty Sales, id. § 6.4; and net profits and losses were also to be allocated

to Denver, Inc., id. § 9.1. The Agreement provided that, if the Company were liquidated, “distributions would be made in accordance with the positive capital account balances of the Members and assignees.” Id. § 8.3. It also granted Denver, Inc. the option to purchase DDS’s membership interest at the price of at least4 $6,950 per 1% interest. Id. § 12.1. Only “the unanimous written agreement of all the Members” could amend the agreement. Id. § 13.2. Grayson took out a loan to cover the full amount of his $354,450 contribution.

Grayson Dep. at 32:15–21. Both Grayson and Shanahan served as personal

3 Grayson testified that he and Shanahan followed Domino’s “standard practice” for evaluating the value of the store, which was to multiply the store’s EBITDA, “[e]arnings before interest, depreciation, taxes and amortization,” Grayson Dep. at 105:16–20, by a factor of four, id. at 128:21–129:21. That yielded a store value of approximately $700,000, and 51% of that figure was $354,000. Id. at 129:15–21. 4 The option price was set at the higher of $6,950 per 1% interest or “the prior twelve month’s EBITDA of the Company as determined by normal Domino’s Pizza, Inc. practice multiplied by 39.55 for each one percent 1% interest.” Operating Agreement § 12.1. guarantors of the loan. Id. at 21:11–16. The loan was fully paid off around March 2014. 5 Id. at 32:2–7. II. Events Leading Up to the Sale

For the next seven years, Grayson operated the Domino’s franchise. In 2014, Grayson started considering the possibility of selling the store. Dominoes had informed Grayson that he was in default of the Franchise Agreement for various reasons, and that, even if he could cure those defaults, he needed to remodel the store by November or his franchise agreement would be terminated. Defs.’ LR 56.1(a)(3) Stmt. ¶ 10.

Grayson testified that he looked into getting a loan to finance the remodeling of the store, but his requests for loans were denied. Grayson Dep. at 53:16–54:6. And according to Grayson, if he did not remodel the store, he faced being terminated as a franchisee. Id. at 54:11 to 55:8. Moreover, due to a non-compete agreement, being terminated would also have barred him from working locally in the pizza industry. Id. At the same time, Grayson was going through a divorce. Defs.’ LR 56.1(a)(3)

Stmt. ¶ 12; Grayson Dep. at 145:11–15. According to Grayson, the value of his interest in the store was at issue in his divorce. Grayson Dep. at 63:15–64:5. In Grayson’s financial disclosure statements filed in his divorce case in January 2014,

5 At his deposition, Grayson testified inconsistently about who paid off the loan. On the one hand, he stated that he repaid the loan through the income that was allocated to Denver, Inc., Grayson Dep. at 187:4–19, and claimed that Shanahan did not contribute in any way to paying off the bank loan. Id. at 33:15–21. But Grayson elsewhere acknowledged that he did not recall if the loan was actually issued to DJ’s Pizza, and that if it were, because he was only 51% owner, he was not certain if Shanahan might have contributed to paying back the loan. Id. at 34:1–9. Grayson represented that his net financial interest in the store was zero dollars. Defs.’ LR 56.1(a)(3) Stmt. ¶ 14. In February 2014, Grayson emailed Shanahan, stating that he was

considering selling the store and asking “what [Shanahan’s] buyout would be” in the event of a sale. Grayson Dep. at 102:1–23. In the email, Grayson mentioned that he was going through a divorce, and if he kept the store, he would owe his spouse half of his income from the store for the next five to seven years. On the other hand, if he sold the store, he would split the proceeds with her “and possibly owe her nothing more.” Id.

At the time of this email, and at every other time during 2014, Grayson appeared to have been under the impression that, to sell the store, he needed to “buy out” Shanahan’s 49% portion of the store. Grayson testified that, by May 13, 2014, Grayson and Shanahan were already in agreement that Grayson would need to pay Shanahan $340,550 for the 49% in order to sell the entire store to a third- party. Id. at 109:17–110:10; see also id. at 112:19–24.

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