## Facts

- Prime Group Realty Trust (PGRT) was a Maryland real estate investment trust that issued common stock and Series B preferred stock.
- PGRT’s articles of incorporation entitled preferred shareholders to fixed quarterly dividends and prohibited PGRT from paying dividends on common shares unless all preferred dividends due had been paid.
- Dean Konstand acquired PGRT Series B preferred shares in October 2004 and later sued derivatively on PGRT’s behalf.
- In July 2005, Prime Office Company, LLC (Prime Office), a wholly owned subsidiary of The Lightstone Group, LLC (Lightstone), acquired all of PGRT’s common shares.
- Around that time, PGRT reportedly held about $70 million in cash, and its board included PGRT’s president, three Lightstone officers, and three directors characterized as independent.
- PGRT made three common-dividend distributions to Prime Office:
  - approximately $30 million in July 2005;
  - approximately $76 million in February 2006, after PGRT obtained about $113 million in loans in January 2006; and
  - approximately $15 million in 2008.
- Konstand alleged the dividend payments were a breach of fiduciary duty because they constituted corporate waste and bad faith, pointing to later SEC filings describing Lightstone’s control, alleged lack of board independence, and PGRT’s operating losses and cash constraints.
- Defendants moved to dismiss under 735 ILCS 5/2-615 for failure to state a claim. After Konstand amended, the circuit court dismissed the amended complaint with prejudice, finding the pleading did not allege sufficient facts that the dividends made PGRT insolvent under Maryland’s distribution statute.
- Konstand appealed, arguing the dividends could constitute waste and bad faith even if he had not adequately pleaded a statutory insolvency violation.

## Issues

1. Whether the amended complaint alleged sufficient, nonconclusory facts that PGRT’s common-dividend distributions violated Maryland law governing distributions (including the statutory insolvency limitations).
2. Whether the amended complaint stated a claim for breach of fiduciary duty based on corporate waste or bad faith in approving the dividends.
3. Whether the derivative action could proceed on a demand-futility theory where the complaint failed to plead an actionable underlying breach.

## Decision

- The appellate court affirmed the circuit court’s dismissal with prejudice.
- The court held the complaint did not plead facts showing the dividend payments were unlawful under Maryland’s distribution statute, including facts showing that PGRT was rendered insolvent or unable to pay debts as they came due because of the payments.
- The court held Konstand’s allegations of corporate waste and bad faith were largely conclusory and did not plead facts sufficient to overcome deference to board decisionmaking.
- Because the amended complaint failed to state an underlying claim, the derivative pleading did not survive based on demand-futility allegations alone.

## Legal Principles

- On a motion to dismiss under 735 ILCS 5/2-615, a complaint must plead well-pleaded facts; labels and legal conclusions are not enough.
- A derivative plaintiff challenging dividends by a Maryland REIT must plead facts showing a violation of Maryland’s statutory limits on distributions, including facts supporting a plausible inference of insolvency at the time of the challenged payments.
- Corporate waste requires particularized facts showing an exchange so one-sided that no rational decisionmaker could view it as a proper use of the entity’s assets.
- Bad-faith fiduciary-breach allegations require factual content supporting more than disagreement with the wisdom of a board decision; conclusory assertions of control or non-independence do not, by themselves, state a claim.
- Demand futility does not save a derivative complaint that fails to plead a substantive breach of fiduciary duty.

## Conclusion

The Illinois Appellate Court affirmed dismissal of Konstand’s derivative suit because the amended complaint did not allege concrete facts that PGRT’s common-dividend payments to its controlling common shareholder violated Maryland distribution law or otherwise amounted to corporate waste or bad faith, and conclusory allegations about control and losses were insufficient to state a claim.


Konstand v. Prime Group Realty Trust, 2011 Ill. App. Unpub. LEXIS 2356 (2011)