Khanna v. Banks

THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

DEREK KHANNA, individually and )

derivatively on behalf of Shimbly Corporation, )

)

Plaintiff, )

v. )

)

KATELYNN BANKS, ISELLMLS.COM, INC. )

d/b/a CINDY BANKS TEAM, CINDY ) No. 21 C 5752

BANKS, TONY BANKS, PAMELA CARY, )

RICHARD CARY, ERIK SOMERVILLE, ) Judge Virginia M. Kendall

MARYAM HUSSEIN, )

)

Defendants, and )

)

SHIMBLY CORPORATION, a Delaware )

Corporation, )

)

Nominal Defendant. )

MEMORANDUM OPINION AND ORDER

Plaintiff Derek Khanna brings this action against Defendants Katelynn Banks (“Banks”),

ISellMLS.com, Inc. (“Cindy Banks Team”), Cindy Banks, Tony Banks (together with Banks, the

“Banks Defendants”), Shimbly Corporation, Pamela Cary, Richard Cary, Erik Somerville, and

Maryam Hussein. Khanna seeks all manner of legal recourse for what, at is core, is a business

arrangement gone bad. This matter is now before the Court on the Banks Defendants and

Somerville’s respective motions to dismiss. For the reasons below, the Banks Defendants’ motion

[209] and Somerville’s motion [211] are both granted in part and denied in part.

BACKGROUND

I. Factual Background

In July 2019,1 Khanna and Banks began working on a business concept (the “Business

Concept”) that would later serve as the foundation for their startup company, Shimbly Corporation

(“Shimbly”). (Dkt. 186 ¶ 20). Shimbly is a platform designed to help users find, sell, and manage

real estate properties and enable agents to collaborate with users in the process. (Id. ¶ 27). In

January 2020, Khanna and Banks selected Theophile Khayat (“Khayat”) to join them as Shimbly’s

third co-founder and Chief Technology Officer. (Id. ¶ 23). That month, the three co-founders

formally incorporated Shimbly under the laws of Delaware. (Id. ¶¶ 25, 27).

Later, in April, the trio executed Shimbly’s Founders’ Collaboration Agreement (the

“Agreement”) which memorialized each founder’s consent to transfer “his or her right, title, and

interest in” the Business Concept to Shimbly. (Id. ¶¶ 26–28). The Agreement further set forth each

founder’s ownership interest in the company; restricted transfers of ownership interests and the

Business Concept; specified the founders’ rights in the event of a substantive dispute; detailed

provisions governing the expenditure and reimbursement of working capital; and articulated the

parties’ status as fiduciaries of the company. (Id. ¶¶ 30–40). The Agreement also appointed each

founder to the board of directors and assigned the founders’ roles and responsibilities as follows:

Banks was Chief Executive Officer (“CEO”); Khanna was Chief Operations Officer (“COO”),

Chief Strategy Officer (“CSO”), Manager of the Board of Directors, and General Counsel; and

Khayat was Chief Technology Officer (“CTO”). (Id. ¶ 35).

In June 2020, the co-founders executed a revised agreement (the “Revised Agreement”),

meant to supersede the Agreement where the two were in conflict. (Id. ¶ 41–42). The Revised

1 The Complaint states that the parties began working on the Business Concept in July 2020, but the Court assumes

this is a typo and that Plaintiff meant July 2019.

Agreement reflected the co-founders’ consensus that Khayat would “no longer” be a “regularly

active employee with Shimbly in [the] role of [Chief Technology Officer].” (Id. ¶ 43; Dkt. 186-2

at § 3.2). The Revised Agreement struck the former ownership interest agreement and established

a new “share-structure” arrangement. (Dkt. 186 ¶ 44). Under the Revised Agreement, Khanna,

Banks, and Khayat each received common stock and voting rights. (Id. ¶¶ 46–47).

A month later, Banks created a budget line item for $85,000 in working capital expenses

without first seeking approval of the expense from the shareholders, in violation of the Agreement.

(Id. ¶ 58; Dkt. 186-1 § 7.5). The expenditure was for a database for Shimbly, but it was developed

by Banks’ own brokerage company, the Cindy Banks Team, and was owned and operated by

Banks’ family. (Dkt. 186 ¶¶ 9–11, 59). Though Khanna objected to the expense and its presence

on Shimbly’s accounting records, Banks declined to remove the line item from the budget or seek

approval for the expense. (Id. ¶ 61).

In the fall, Banks effectively abandoned her role as CEO, cancelling all meetings and

declining to respond to Khanna’s petitions for her to re-engage with the company, discuss

fundraising ideas, and develop a strategy to launch Shimbly. (Id. ¶¶ 66–67, 73). Around the same

time, Banks made additional unauthorized payments of Shimbly funds. (Id. ¶¶ 63–64). One such

payment went to Khayat for “goods or services,” while another went to Maryam Hussein to secure

her assistance in preparing a report that would later be used to justify terminating Khanna. (Id. ¶

64). None of these unauthorized payments helped Shimbly’s financial condition, which was in

decline. (Id. ¶ 65).

On October 26, 2020, Khanna sent a formal whistleblower notice to Shimbly’s board of

directors and investors, detailing Bank’s improper expenses, among other things. (Id. ¶ 76). The

next day, Banks told Khanna that she could not work with him anymore and gave him three days

to resign or face termination. (Id. ¶ 77). She also disclosed that she received a report, prepared by

Maryam Hussein and Erik Somerville (the “Hussein/Somerville Report”) claiming that Khanna

was the one mismanaging and sabotaging Shimbly. (Id. ¶¶ 77, 81–82). Banks forwarded the report

to Khayat, noting that the report included “a few ‘real examples’ of how [Khanna’s] actions [were]

negatively effecting the culture and organization.” (Id. ¶¶ 78, 84). Shortly thereafter, Banks

terminated Khanna. (Id. ¶¶ 87–88). Banks then proceeded to alter Shimbly’s accounting records,

transfer Shimbly’s trade secrets and intellectual property, and launch a new company using

Shimbly’s assets. (Id. ¶ 91). She also began promoting aspects of the Business Concept as though

they belonged to the Cindy Banks Team, and offered to sell Shimbly shares to investors Richard

Cary and Pamela Cary (“the Carys”) for nominal consideration. (Id. ¶ 92–96). In the end, Shimbly

defaulted on its corporate tax obligations, leading the Secretary of the State of Delaware to declare

Shimbly “inoperative and void.” (Id. ¶ 94; Dkt. 210-1 at 2).

Throughout this saga, Defendants Cindy Banks Team, Cindy Banks, Tony Banks, the

Carys, Somerville, and Hussein (collectively the “Conspiring Defendants”) knew of and assisted

with Banks’ plan to appropriate Shimbly’s assets and use them in furtherance of a new company

that would operate in Shimbly’s place. (Id. ¶ ¶ 102-03).

II. Procedural Background

On October 27, 2021, Khanna initiated this lawsuit, later filing a seventeen-count Amended

Complaint. The claims are as follows: breaches of fiduciary duty (Count I), aiding and abetting

Banks’ breaches of fiduciary duty (Count II), fraudulent concealment (Count III), aiding and

abetting Banks’ fraudulent concealment (Count IV), breaches of contract (Count V), wrongful and

retaliatory discharge (Count VI), violations of the Illinois Trade Secrets Act (Count VII), aiding

and abetting Banks’ violations of the Illinois Trade Secrets Act (Count VIII), conversion (Count

IX), obstruction of justice in violation of the Illinois Whistleblower Act (Count X), defamation

(Counts XI and XII), false light (Counts XIII and XIV), gross negligence (Count XV), intentional

infliction of emotional distress (Count XVI), and derivative claims (XVII). The Banks Defendants

and Somerville respectively moved to dismiss the complaint. (Dkts. 209, 211). The Carys later

joined the Banks Defendants’ motion to dismiss (Dkts. 214, 217).

On April 6, 2022, Magistrate Judge Feinerman ordered the parties to submit to “binding

confidential mediation” on Khanna’s claims for “breach of fiduciary duty (insofar as the claim

arises from his termination), breach of contract (for failure to submit to mediation and for breach

of the salary agreement), wrongful and retaliatory discharge, and violations of the Illinois

Whistleblower Act.” (Dkt. 35). Those claims are stayed and the Court’s opinion will address only

those claims which are not stayed.

LEGAL STANDARD

To survive a motion to dismiss for failure to state a claim, the complaint must contain “a

short and plain statement of the claim showing that the pleader is entitled to relief.” Kaminski v.

Elite Staffing, 23 F.4th 774, 776 (7th Cir. 2022) (quoting Fed. R. Civ. P. 8(a)(2)). Thus, “a plaintiff

must allege ‘enough facts to state a claim that is plausible on its face.’” Allen v. Brown Advisory,

LLC, 41 F.4th 843, 850 (7th Cir. 2022) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570

(2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the

court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

(quoting Ashcroft v. Iqbal, 566 U.S. 662, 678 (2009)). The Court accepts the well-pleaded factual

allegations in the plaintiff's complaint as true, “drawing all reasonable inferences in his favor.” Id.

(citing W. Bend Mut. Ins. Co. v. Schumacher, 844 F.3d 670, 675 (7th Cir. 2016)). Yet,

“[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory

statements” are not enough. Oakland Police & Fire Ret. Sys. v. Mayer Brown, LLP, 861 F.3d 644,

649 (7th Cir. 2017) (quoting Iqbal, 556 U.S. at 678). The complaint’s factual content must “raise

a right to relief above the speculative level.” Kaminski, 23 F.4th at 776 (quoting Twombly, 550

U.S. at 555).

For claims “rest[ing] on allegations of deceptive conduct,” Federal Rule of Civil Procedure

9(b) requires the plaintiff to “plead with particularity the circumstances constituting fraud.” Benson

v. Fannie May Confections Brands, Inc., 944 F.3d 639, 646 (7th Cir. 2019) (quoting Vanzant v.

Hill’s Pet Nutrition, Inc., 934 F.3d 730, 736 (7th Cir. 2019)); Fed. R. Civ. P. 9(b). This means the

plaintiff “must identify the ‘who, what, when, where, and how’ of the alleged fraud.” Benson, 944

F.3d at 646 (quoting Vanzant, 934 F.3d at 738).

DISCUSSION

Khanna brings derivative and direct shareholder claims alongside a host of tort claims. In

diversity cases, district courts must apply the substantive law of the state in which the court sits.

Van Diest Supply Co. v. Shelby Cnty. State Bank, 425 F.3d 437, 439 (7th Cir. 2005) (citing Erie

R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938)). Thus, Illinois law applies

here. But, in Illinois, derivative claims brought on a corporation’s behalf or individual claims

brought by a corporation’s stockholders are governed by the law of the state of incorporation.

Housman v. Albright, 368 Ill.App.3d 214, 218–19 (Ill.App.Ct. 2006) (citing Spillyards v. Abboud,

278 Ill.App.3d 663, 667 (Ill.App.Ct. 1996)). Because Shimbly is incorporated under the laws of

Delaware, the Court will apply Delaware law to Khanna’s derivative and direct claims.

I. Khanna Fails to State a Shareholder Derivative Claim (Count XVII).

The Banks Defendants argue that Khanna’s derivative claims fail for two reasons. First,

they claim Khanna lacks standing to bring a shareholder derivative action because he is no longer

a Shimbly shareholder. Next, they contend Khanna has not and cannot allege demand futility. The

Court considers each argument in turn.

A. Khanna’s Shareholder Status

Court of Chancery Rule 23.1 and Section 327 of the Delaware General Corporation Law,

taken together, require that a “plaintiff, bringing a derivative suit on behalf of a corporation, must

be a stockholder of the corporation at the time he commences the suit and must maintain that status

throughout the course of the litigation.” Parfi Holding AB v. Mirror Image Internet, Inc., 954 A.2d

911, 935 (Del. Ch. 2008) (internal citations omitted); see also Lewis v. Anderson, 477 A.2d 1040,

1049 (Del. Ch.1984) (a plaintiff who is not a stockholder, or who ceases to be a stockholder during

the pendency of his suit, loses standing to maintain a derivative action). This rule applies to

derivative actions brought in federal court. See e.g., Winters v. Stemberg, 529 F.Supp.2d 237, 245

(D. Mass. 2008) (applying Delaware law); Brambles USA, Inc. V. Blocker, 731 F.Supp. 643, 648

(D. Del. 1990) (applying Delaware law).

The Banks Defendants argue that Khanna is not a Shimbly shareholder, as required,

because Shimbly no longer exists. In support of their position, the Banks Defendants point to a

letter from Delaware’s Secretary of State declaring Shimbly “no longer in existence and good

standing under the laws of … Delaware having become inoperative and void” on March 1, 2022.

(Dkt. 210-1 at 2) (emphasis added).

Under Delaware law, dissolution of a corporation terminates an individual’s status as a

shareholder of the corporation and therefore bars the individual from bringing a derivative action

on behalf of the dissolved corporation. Hale v. China Online, Inc., 2009 WL 2601357, at *2 (N.D.

Ill. Aug. 21, 2009), aff’d sub nom. Hale v. Victor Chu, 614 F.3d 741 (7th Cir. 2010) (citing

Giordano v. Marta, 1998 WL 227888, at *4 (Del. Ch. April 28, 1998)). But courts interpreting

Delaware law have found that dissolution is not the legal equivalent of a corporation being declared

void for non-payment of taxes. See In re Efoora, Inc., 472 B.R. 481, 486 (Bankr. N.D. Ill. 2012)

(“[The company] was not dissolved. It forfeited its certificate of incorporation for failure to pay

franchise taxes, which is not the same.); Board of Managers of Soho Int’l Arts Condo. v. City of

New York, 2005 WL 1153752, at *11 & n. 19 (S.D.N.Y. May 13, 2005) (“[D]issolution of a

corporation “is a specific legal term and is not the legal equivalent of a corporation declared

inactive for non-payment of franchise taxes.”); United States v. Ne. Pharm. & Chem. Co., 810 F.2d

726, 746 (8th Cir. 1986) (“[F]orfeiture of the corporate charter and voluntary dissolution of the

corporation are not legally equivalent.”). While these decisions are not binding, the Court finds

their reasoning persuasive and declines to find that Shimbly’s inoperative status precludes

Khanna’s derivative claims. Nevertheless, Khanna’s derivative claims fail for a separate reason.

B. Demand Futility

The Banks Defendants argue that Khanna has not and cannot plead demand futility for two

reasons, but the first is decisive. Khanna failed to make a demand on the board of the directors and

this failure is not excusable because the Complaint fails to allege with specificity that demand

would be futile.

“To bring a derivative action, a plaintiff shareholder must demonstrate ‘that the

corporation itself [] refused to proceed after suitable demand, unless excused by extraordinary

conditions.’” Hale, 2009 WL 2601357, at *3 (citing Ross v. Bernhard, 396 U.S. 531, 534 (1970)).

This requirement is also captured in Federal Rule of Civil Procedure 23.1 which requires a

plaintiff, in a shareholder derivative action, to “allege with particularity the efforts, if any, made

by the plaintiff to obtain the action the plaintiff desires from the directors … and the reasons for

the plaintiff’s failure to obtain the action or for not making the effort.” Fed. R. Civ. P. 23.1. While

Rule 23.1 speaks only to the adequacy of a shareholder plaintiff’s pleadings, the requirement of a

shareholder demand is more than a pleading requirement; it is a substantive right belonging to

shareholders and directors. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 97 (1991). Thus, “to

determine whether the demand requirement may be excused by futility” the Court must look to the

substantive law of the state where Shimbly was incorporated. Id. at 98–99, 104 (whether a

shareholder should be allowed to proceed without making a demand “is based on the application

of the State’s futility doctrine”).

In assessing demand futility, Delaware courts look to three factors on a director-by-director

basis: (i) whether the director received a material personal benefit from the alleged misconduct

that is the subject of the demand; (ii) whether the director would face a substantial likelihood of

liability on any of the claims that are the subject of the litigation demand; and (iii) whether the

director lacks independence from someone who received a material personal benefit from the

alleged misconduct that would be the subject of the litigation demand or who would face a

substantial likelihood of liability on any of the claims that are the subject of the litigation demand.

Lebanon Cnty. Employees’ Ret. Fund v. Collis, 311 A.3d 773, 796 (Del. 2023). “If the answer to

any of these questions is ‘yes’ for at least half of the members of the demand board, then demand

is excused as futile.” Id. (quoting United Food and Com. Workers Union and Participating Food

Indus. Emps. Tri-State Pension Fund v. Zuckerberg, 262 A.3d 1034, 1059 (Del. 2021)).

Here, Khanna was required to make a demand on Shimbly’s board of directors, which had

three members: Khanna, Khayat, and Banks. While the allegations in the Complaint support a

finding of demand futility with respect to Banks, there are no allegations of demand futility with

respect to Khayat.

Khanna insists that demand on Khayat was unnecessary because he was an inactive

member of the board, but this argument is inaccurate and unavailing. The Revised Agreement

specifies that although Khayat was no longer regularly active as Shimbly’s CTO, “he maintained

“[v]oting shares … in accordance with his 3,600 shares of common stock.” (Dkt. 186-2 at 4). On

the face of the Complaint, and the attachments thereto, Khanna himself pleads that Khayat is a

member of the board with voting rights. Because the Complaint does not raise any allegations of

demand futility with respect to Khayat, Khanna fails to plead demand futility. Accordingly, the

shareholder derivative claim fails and Count XVII is dismissed.

II. Khanna Predominately Fails to State Direct Shareholder Claims (Counts I, III, V,

VII, IX, and XV).

The Banks Defendants also seek to dismiss each of the direct shareholder claims brought

against Banks, arguing that Khanna fails to allege any unique harm to himself. To demonstrate a

direct injury, a shareholder plaintiff must demonstrate “that the duty breached was owed to the

[shareholder] and that he or she can prevail without showing an injury to the corporation.” Tooley

v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004). To determine if a claim

is direct or derivative the Court must ask: (1) who suffered the alleged harm (the corporation or

the suing shareholder, individually), and (2) who would receive the benefit of any recovery or

other remedy? Tooley, 845 A.2d at 1033. Courts must look to all the facts alleged in a complaint

to determine whether a direct claim exists. Dieterich v. Harrer, 857 A.2d 1017, 1027 (Del. Ch.

2004). The Court considers each direct claim in turn.

A. Breach of Fiduciary Duty (Count I)

To state a claim under Delaware law for breach of fiduciary duty, a plaintiff must allege

both (1) that the defendant owed the plaintiff a fiduciary duty, and (2) that the defendant breached

it. Est. of Eller v. Bartron, 31 A.3d 895, 897 (Del. 2011). Officers, directors, and managers owe a

company they serve the traditional triad duties of care, loyalty, and good faith. The duty of loyalty

“mandates that the best interests of the corporation and its shareholders takes precedence over any

interest possessed by a director, officer, or controlling shareholder and not shared by stockholders

generally.” In re MultiPlan Corp. S’holders Litig., 268 A.3d 784, 799 (Del. Ch. 2022) (quoting

Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993)). To sufficiently plead a claim for

breach of the duty of loyalty, a plaintiff must “allege facts showing that a self-interested transaction

occurred, and that the transaction was unfair to the [plaintiff].” Artoss, Inc. v. Artoss GmbH, 2022

WL 18462594, at *6 (D. Del. Oct. 14, 2022) (citing Joyce, on Behalf of CTC Mins., Inc. v. Cuccia,

1997 WL 257448, at *5 (Del. Ch. May 14, 1997)).

Though Khanna alleges that Banks breached her fiduciary duty to him in myriad respects,

the allegations which are not subject to the aforementioned stay are obviously about breaches of

fiduciary duties owed to and harms suffered by Shimbly. (See Dkt. 186 at ¶¶ 124–125). For

example, Khanna alleges that Banks engaged in accounting fraud, failed to develop Shimbly’s

business, purposefully bankrupted Shimbly, executed a plan to steal Shimbly’s trade secrets, and

drove down the value of Shimbly stock. (Id. at ¶ 124). Such allegations can only be brought

derivatively, because, at their core, these allegations are about harm to Shimbly. Accordingly,

Count I is dismissed.

B. Gross Negligence (Count XV)

Although Banks does not identify Count XV as a direct claim, it is one. In pleading his

gross negligence claim, Khanna asserts that Banks breached the duty of care owed to him because

of the parties’ relationship as fiduciaries, officers, employees, and shareholders of Shimbly. It is

axiomatic that such allegations amount to a direct shareholder claim.

Moving to the merits, to state a claim for gross negligence, a plaintiff must establish that

he was owed a “standard of care” from which the defendant took an “extreme departure.”

Greenfield as Next Friend for Ford v. Miles, 211 A.3d 1087, 1101 (Del. 2019). Here, Khanna does

not allege that Banks breached her duty of care in a way that uniquely harmed him. Khanna merely

complains that he was harmed when Banks engaged in accounting fraud; executed a plan to steal

Shimbly’s trade secrets; and drove down the value of Shimbly stock. Khanna does not plead any

facts showing Banks’ alleged gross negligence caused him to suffer any harm that was not also

borne by the company. Thus, Count XV is dismissed.

C. Fraudulent Concealment (Count III)

“Fraudulent concealment requires a plaintiff to show that [his] injury was caused by the

defendant’s deliberate concealment of a material fact with intent to induce plaintiff’s reliance.” Tr.

Robin, Inc. v. Tissue Analytics, Inc., 2022 WL 17423728, at *5 (Del. Ch. Dec. 2, 2022) (citing

Nicolet, Inc. v. Nutt, 525 A.2d 146, 149 (Del. 1987)). This cause of action also requires that the

defendant acted with scienter. Id. Here, Khanna alleges that Banks intentionally concealed

information regarding her scheme to terminate Khanna, destroy Shimbly’s value, and steal its trade

secrets. As aforementioned, Khanna can only bring direct claims to the extent that he can

demonstrate an injury distinct from any injury to the corporation. The only allegation at bar that

could support a direct shareholder claim is the allegation that Banks intentionally concealed

material information regarding her scheme to terminate Khanna. The claim still fails because

Khanna does not allege that he relied on Banks’ representation in any way. While Khanna claims

that Banks concealed her scheme with the intention of inducing him to use substantial effort to

develop and build Shimbly’s business, Khanna, as a co-founder and director, was already using

great effort to build up the company. Khanna does not claim to have worked any harder because

he believed Banks would not terminate him. Because Khanna does not identify how he relied on

Banks’ concealment, or how he was injured as a result, he fails to state a claim for fraudulent

concealment. Thus, Count III is dismissed.

D. Breach of Contract (Count V)

To state a claim for breach of contract under Delaware law, a plaintiff must plead: (1) the

existence of a contract; (2) a breach of an obligation imposed by that contract, and (3) resulting

damages. VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003). As with the

breach of fiduciary duty claim, Khanna alleges breaches of contract that patently injured Shimbly.

For example, Khanna claims Banks breached the Agreement by depriving Shimbly of ownership

of the Business Concept and failing to perform her role as CEO. Again, such allegations may only

be pursued in a derivative shareholder action because whatever injury, if any, Khanna sustained

necessarily overlaps with the injury to Shimbly.

That being said, some of Khanna’s allegations describe direct injuries. Khanna complains

that Banks breached the Agreement by failing to procure his consent prior to transferring interests

in the Business Concept to a third party and failing to provide Khanna with a right of first offer

and right of first refusal. (See generally Dkt. 186 at ¶ 141(b)-(d)). The Banks Defendants, having

blanketly argued that Khanna did not allege a direct harm as required, do not challenge the

sufficiency of Khanna’s pleadings on this issue. Accordingly, to the extent Count V is not stayed,

Count V survives insofar as it stems from direct injuries.

E. Violations of the Illinois Trade Secret Act (Count VII) and Conversion

(Count IX)

The Court need not analyze at length Khanna’s claims for conversion and violations of the

Illinois Trade Secrets Act (“ITSA”) because Khanna has not pled that he owns any trade secrets

or other property separate and apart from that belonging to Shimbly. To succeed on an ITSA claim,

a plaintiff must allege that a trade secret was misappropriated, and the misappropriation damaged

the trade secret’s owner. Got Docs, LLC v. Kingsbridge Holdings, LLC, 657 F. Supp. 3d 1034,

1043 (N.D. Ill. 2023) (citing Westrock Co. & Victory Packaging, LP v. Dillon, 2021 WL 6064038,

at *6 (N.D. Ill. Dec. 22, 2021)). Similarly, to state a claim for conversion, a plaintiff must claim to

have a right in the property at issue. Lorenzetti v. Hodges, 62 A.3d 1224 (Del. 2013). The

allegations in the Complaint do not describe any property interest belonging to Khanna that was

infringed. By signing the Agreement, Khanna relinquished his rights to and interests in the

Business Concept and any intellectual property or trade secrets that could have been infringed

upon necessarily belong to Shimbly. Therefore, any damage resulting from the alleged

misappropriation and conversion would necessarily accrue to Shimbly. So, Counts VII and IX are

dismissed.

III. Khanna’s Aiding and Abetting Claims Fail (Counts II, IV, and VIII).

Khanna brings claims against the Conspiring Defendants for aiding and abetting Banks’

breaches of fiduciary duties (Count II), fraudulent concealment (Count IV), and violations of the

Illinois Trade Secrets Act (Count VIII). Having determined that Khanna fails to state a claim for

the predicate torts, the Court necessarily finds that his aiding and abetting claims fail as well.

Squires-Cannon v. Forest Pres. Dist. of Cook Cnty., 897 F.3d 797, 806 (7th Cir. 2018) (without

an underlying tort, derivate claims for aiding and abetting fail) (citing Champion Parts, Inc. v.

Oppenheimer & Co., 878 F.2d 1003, 1008 (7th Cir. 1989)). Counts II, IV, and VIII are dismissed.

IV. Khanna’s Defamation and False Light Claims Survive in Part (Counts XI, XII, XIII,

and XIV)

Khanna brings claims of defamation and false light against Banks (Counts XI and XIII),

Hussein and Somerville (Counts XII and XIV). Defamation and false light are similar torts.

Defamation is the publication of any false statement that “tends to cause such harm to the

reputation of another that it lowers that person in the eyes of the community or deters third persons

from associating with [him].” Madison v. Frazier, 539 F.3d 646, 652–53 (7th Cir. 2008) (citing

Seith v. Chicago Sun–Times, Inc., 371 Ill.App.3d 124 (Ill. 2007)). Five types of statements are

defamatory per se, including: (1) those that prejudice a party, or impute a lack of ability, in his

trade, profession, or business; and (2) those that impute an inability to perform or lack of integrity

in the discharge of duties of one’s office or employment. Muzikowski v. Paramount Pictures,

Corp., 322 F.3d 918, 924 (7th Cir. 2003); see also Tuite v. Corbitt, 224 Ill. 2d 490 (2006).

Whether or not a statement falls into one of the defamation per se categories, a false

statement that casts a person in a negative light before the public may provide the basis for a false

light invasion of privacy claim. To state a claim for false light, a plaintiff must allege that (1) he

was placed in a false light before the public as a result of the defendants’ actions, (2) the false light

he was placed in would be highly offensive to a reasonable person, and (3) the defendants acted

with actual malice, “that is, with knowledge that the statements were false or with reckless

disregard for whether the statements were true or false.” Kolegas v. Heftel Broad. Corp., 154 Ill.

2d 1, 17–18 (1992).

A. Claims Stemming from the Somerville Report are Untimely.

Khanna’s claims against Somerville rely, in part, on statements found in a report

Somerville published on October 18, 2020 (“Somerville Report”). Somerville argues that the

claims stemming from this report are time-barred because Khanna is subject to Illinois’ one-year

statute of limitations on defamation and false light claims, and that period lapsed before Khanna

brought this action. Khanna urges the Court to find that his claims are subject to Massachusetts’

three-year statute of limitations and, as such, are timely.

Although “expiration of the statute of limitations is an affirmative defense that may be pled

in an answer pursuant to Rule 8(c), it can be used as a basis for granting a 12(b)(6) motion where

the case is ‘obviously time-barred.’” Ericson v. Conagra Foods, Inc., 559 F. Supp. 3d 705, 711

(N.D. Ill. 2021) (citing Chapman v. Vill. of Hinsdale, 2008 WL 2557465, at *1 (N.D. Ill. June 23,

2008) (quoting Small v. Chao, 398 F.3d 894, 898 (7th Cir. 2005))). “When its jurisdiction is based

on diversity of citizenship, a federal court is obliged to apply the statute of limitation of the state

in which it sits.” Id. (quoting Reinke v. Boden, 45 F.3d 166, 170 (7th Cir. 1995)) (internal

quotations omitted). Accordingly, Somerville contends (and the Court agrees) that the Court must

apply Illinois’ statutes of limitations to Khanna’s claims.

Khanna’s argument that the Court should, instead, apply Illinois’ choice of law rules to

determine the applicable statute of limitations is without merit. But even if the Court were to do

so, the outcome would remain the same. Under Illinois’ choice of law rules, statutes of limitations

are considered procedural in nature. Humanes v. Gen. Elec. Transp. Services, 2000 WL 1029127,

at *2 (N.D. Ill. July 24, 2000) (citing Kalmich v. Bruno, 553 F.2d 549, 553 (7th Cir. 1977)). Thus,

Illinois courts apply their own statutes of limitations, even when the substantive rights of a given

claim are governed by the laws of another state. See e.g., ABF Cap. Corp. v. McLauchlan, 167 F.

Supp. 2d 1011, 1014 (N.D. Ill. 2001) (applying the Illinois statute of limitations in a contract case

despite the parties’ choice-of-law provision that New York law applies to the contract).

Accordingly, Khanna had one year from October 18, 2020, when his cause of action

accrued, to bring his defamation and false light claims. 735 Ill. Comp. Stat. Ann. 5/13-201. See

Ciolino v. Simon, 2020 IL App (1st) 190181, ¶ 42, aff’d, 2021 IL 126024, ¶ 42 (Ill. 2021) (causes

of action for defamation and false light “accrue[] on the date that … [the] statement is published”).

Because Khanna did not initiate this action until October 27, 2021, his claims against Somerville,

inasmuch as they pertain to the Somerville report, are dismissed with prejudice as untimely.

B. Khanna states a colorable claim of defamation per se (Counts XI and XII).

To the extent Khanna seeks to state a claim for defamation per se, he need not allege special

damages because the false statement’s defamatory character must be so “obvious and apparent on

its face” that “injury to [his] reputation may be presumed.” Tuite, 224 Ill. 2d at 501. “Statements

that have been deemed defamatory per se by Illinois courts” in the categories at issue here “have

always been related to job performance; to succeed, the plaintiff must have been accused of lacking

ability in his trade or doing something bad in the course of carrying out his job.” McGurren v.

Hubbard Radio Chicago, LLC, 2022 WL 602467, at *2 (N.D. Ill. Mar. 1, 2022), appeal dismissed,

2022 WL 18493433 (7th Cir. Aug. 16, 2022) (emphasis in original) (internal quotations omitted)

(quoting Cody v. Harris, 409 F.3d 853, 857 (7th Cir. 2005)).

The test for determining whether a statement is protected from defamation claims under

the first amendment is whether it can reasonably be interpreted as stating actual fact. Imperial

Apparel, Ltd. v. Cosmo’s Designer Direct, Inc., 227 Ill. 2d 381, 386 (2008). In applying this test,

courts consider (1) whether the statement has a precise and readily understood meaning, (2)

whether the statement is verifiable, and (3) whether the statement’s literary or social context

signals that it has factual content. Id. The statement is evaluated from the perspective of an ordinary

reader. Id. at 398. Whether or not a statement is a factual assertion that could give rise to a

defamation claim is a question of law for the court. Id.

Khanna claims that Somerville and Hussein defamed him by publishing the following

statements in the Hussein/Somerville Report: (1) “Derek’s design and functionality contributions

cheapen[ed] the brand that Katy envisioned;” (2) he engaged in “mismanagement;” and (3) “Derek

was sabotaging the company.” While the first statement is clearly an expression of opinion, and as

such is not actionable, the second and third statements are actionable because they can reasonably

be interpreted as stating an actual fact. Both statements imply that Khanna did something bad in

carrying out his job. Both statements are arguably verifiable because evidence can establish

whether Khanna managed Shimbly within the parameters of Shimbly’s policies and whether

Khanna deliberately damaged the company. And both statements were made in response to an

inquiry from Shimbly’s CEO. Such a serious professional context signals that these statements are

not opinions, but instead are factual and true. Accordingly, Khanna states a claim of defamation

per se against Somerville and Hussein.

Khanna also states a claim of defamation per se against Banks who republished the

Hussein/Somerville Report and told Khayat and the Carys that Khanna was “improperly making

payments” on behalf of Shimbly; was responsible for financial mismanagement; harmed Shimbly

through improper budgeting and general mismanagement; and misled her about his legal education

and experience. First, “[t]he republisher of a defamatory statement [originally] made by another is

himself liable for defamation even if he gives the originator’s name.” Brennan v. Kadner, 351

Ill.App.3d 963, 970 (2004) (citing Owens v. CBS Inc., 173 Ill.App.3d 977, 994 (1988)). Banks

seems to think she is excused from liability because she merely forwarded the report to others. But

Banks does not cite any precedential authority in support of this position.

Second, the statements Banks allegedly made to Khayat and the Carys are independent

bases for Khanna’s defamation per se claims. The statements imply that Khanna not only lacked

ability in his roles as COO, CSO, and General Counsel, but also that he engaged in bad acts while

working in these capacities. Also, the statements are verifiable. It can be proven whether Khanna

made unauthorized payments on behalf of Shimbly, made false representations about his legal

education and experience, or conducted his duties in a manner that is inconsistent with Shimbly’s

policies. Further the context of these statements, a company’s CEO informing a board member

and investors about another senior executive’s malfeasance, signals that these statements are

factual. Accordingly, Khanna states a claim of defamation per se against Banks.

C. Khanna states a claim for false light (Counts XIII and XIV).

To state a claim for false light under Illinois law, Khanna must allege that (1) he was

“placed in a false light before the public as a result of [Defendants] actions,” (2) that false light

“would be highly offensive to a reasonable person,” and (3) the Defendants “acted with actual

malice.” Kolegas v. Heftel Broad. Corp., 154 Ill.2d 1, 180 Ill.Dec. 307, 607 N.E.2d 201, 209

(1992). Banks and Somerville challenge the false light allegations solely on the basis that the

statements are not defamatory and are subject to innocent construction.

“The so-called ‘innocent construction rule’ in Illinois requires a court to consider the

statement in context and give the words of the statement, and any implications arising from them,

their natural and obvious meaning.” Madison 539 F.3d at 653–54 (quoting Solaia Tech., LLC v.

Speciality Publ’g Co., 221 Ill.2d 558 (2006)). “While this rule favors a defendant because a tougher

standard is warranted where damages are presumed, it ‘does not require courts to strain to find an

unnatural innocent meaning for a statement when a defamatory meaning is far more reasonable.’”

Id. (quoting Tuite, 224 Ill.2d at 504–05). The allegations at issue go beyond mere critiques of

Khanna’s performance as an employee and board member. Indeed, the alleged statements imply

that Khanna breached his fiduciary duties to the company, lacked the education required to serve

as General Counsel, and altogether failed to execute the duties of his multiple offices. Such

statements are not protected by the innocent construction rule. Having already found that Khanna

states a colorable claim of defamation, Counts XIII and XIV survive.

V. Khanna Fails to State a Claim for Intentional Infliction of Emotional Distress

(“IIED”) (Count XVI).

To state a cause of action for IIED under Illinois law, a plaintiff must allege that (1) the

defendant’s conduct was extreme and outrageous; (2) the defendant intended to inflict severe

emotional distress or knew that there was at least a high probability that her conduct would inflict

severe emotional distress; and (3) the defendant’s conduct did cause severe emotional distress. Sun

v. Xu, 99 F.4th 1007, 1013 (7th Cir. 2024). To “qualify as outrageous, the nature of the defendant’s

conduct must be so extreme as to go beyond all possible bounds of decency and be regarded as

intolerable in a civilized society.” Richards v. U.S. Steel, 869 F.3d 557, 566 (7th Cir. 2017)

(quoting Feltmeier v. Feltmeier, 798 N.E.2d 75, 83 (Ill. 2003)).

It follows, then, that “mere insults, indignities, threats, annoyances, petty oppressions, or

other trivialities do not amount to extreme and outrageous conduct, nor does conduct characterized

by malice or a degree of aggravation which would entitle the plaintiff to punitive damages for

another tort.” Id. at 566–67 (quoting Van Stan v. Fancy Colours & Co., 125 F.3d 563, 567 (7th

Cir. 1997) (quoting Pub. Fin. Corp. v. Davis, 360 N.E.2d 765, 767 (Ill. 1976))) (internal quotation

marks omitted). Liability attaches only when “the conduct has been so outrageous in character,

and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as

atrocious, and utterly intolerable in a civilized community.” Sun, 99 F.4th at 1013 (quoting

McGrath v. Fahey, 126 Ill.2d 78 (1988) (quoting Restatement (Second) of Torts § 46 cmt. d

(1965)). “[T]o avoid imposing liability for idiosyncratic and individualized reactions, ‘[w]hether

conduct is extreme and outrageous is judged on an objective standard based on all the facts and

circumstances of a particular case.’” Richards, 869 F.3d at 567 (quoting Franciski v. Univ. of Chi.

Hosps., 338 F.3d 765, 769 (7th Cir. 2003)).

Liability for IIED is even more constrained in the employment context. Indeed, there is

general hesitation “to find [IIED] in the workplace because, if everyday job stresses resulting from

discipline, personality conflicts, job transfers or even terminations could give rise to a cause of

action for [IIED], nearly every employee would have a cause of action.” Id. (quoting Naeem v.

McKesson Drug Co., 444 F.3d 593, 606 (7th Cir. 2006)) (internal quotation marks omitted). As a

result, “Illinois courts have limited recovery to cases in which the employer’s conduct has been

truly egregious.” Id. (quoting Van Stan, 125 F.3d at 568).

Under those governing legal principles, the misconduct that Khanna advances as the

premise of the emotional-distress claim does not qualify as “extreme and outrageous,” even when

viewed in the light most favorable to him. Khanna claims that Banks, his partner and co-founder,

devised and executed a scheme to force him out of a company they created together. That is all.

While, such a breakdown in a business relationships is regrettable, it simply does not rise to the

level required to state a claim for intentional infliction of emotional distress. Moreover, as Banks

points out, Khanna’s allegations lack specificity as to the specific emotional distress Khanna

suffered and Banks’ intent to cause his distress. The pleading standard for IIED is high and

Khanna’s pleadings do not meet it. Therefore, Count XVI is dismissed.

CONCLUSION

For the reasons set forth above, the Banks Defendants’ motion [209] and Somerville’s

motion [211] are both granted in part and denied in part.

cD Co

picin(n fadett

ginia M. Kendall

UniteY States District Judge

Date: July 9, 2024

22