United States District Court, Northern District of Illinois, E.D
January 29, 1971
THE MASTAN COMPANY, INCORPORATED, A DELAWARE CORPORATION, PLAINTIFF,
A.L. JACKSON, JR., VERNA M. JACKSON, INDIVIDUALLY AND AS EXECUTOR OF THE ESTATE OF A.L. JACKSON, SR., DECEASED, DEFENDANTS.
The opinion of the court was delivered by: Robson, Chief Judge.
MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO DISMISS
The defendants move to dismiss this action. For the reasons
stated below, this court is of the opinion the motion should be
denied and, further, that these proceedings should be stayed
until the plaintiff's settlement negotiations with the Internal
Revenue Service (I.R.S.) are completed.
Count I of this two-count complaint alleges that the defendants
breached certain warranties concerning the accounting practices
of the A.L. Jackson Company. These warranties were allegedly made
by the defendants pursuant to the sale of assets and stock of
that corporation to the plaintiff's predecessors in interest.
Jurisdiction is based upon diversity of citizenship. Count II
alleges that the foregoing conduct also constituted
misrepresentations of material facts in connection with the sale
of securities, violative of Section 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5
promulgated thereunder. The accounting practices undisclosed
and/or misrepresented by the defendants, providing the bases for
both counts, resulted in a $435,943.37 deficiency assessment by
the I.R.S. against the A.L. Jackson Company for which the
plaintiff is liable. The affidavit of the plaintiff's accountant,
Harvey L. Coustan, states that negotiations between the plaintiff
and the I.R.S. concerning accounting adjustments which might
reduce the deficiency assessment against the A.L. Jackson Company
are currently pending.
The defendants base their motion to dismiss on two grounds.
First, they claim that the plaintiff has not shown that it has
been damaged by their alleged misrepresentations since no
deficiency assessment has yet been paid. However, viewing the
allegations of the complaint as true for the purposes of this
motion, the plaintiff has already sustained a loss of $20,000 for
accounting fees as a result of the undisclosed accounting
irregularity, and will suffer further damages as a consequence of
the deficiency assessment. While the precise amount of the
plaintiff's losses is not presently ascertainable due to the
pending I.R.S. negotiations, which might reduce its damages, it
is certain and not speculative that the plaintiff has been
injured by the defendants' conduct. Cf., Classic Bowl, Inc. v.
A M F Pinspotters, Inc., 403 F.2d 463, 467 (7th Cir. 1968).
Secondly, the defendants contend that this is an action seeking
judgment with respect to federal taxes, and is therefore barred
by 28 U.S.C. § 2201. Although damages in this action will be
directly affected by the ultimate determination of the
plaintiff's tax liability by the I.R.S., this action is one for
breach of warranties and fraud in the sale of securities and
corporate assets. This is not an action to confer tax liability
upon the defendants; the bringing of this suit "* * * is an act
of independent legal significance * * *" which does not fall
within the statutory prohibition. Stern & Company v. State Loan
and Finance Corporation, 205 F. Supp. 702, 706 (D. Del. 1962).
The complaint is therefore legally sufficient and, in the
interests of justice, this court will stay all proceedings in
this matter until the pending settlement negotiations between the
plaintiff and the I.R.S. are completed. Stern & Company v. State
Loan and Finance Corporation, supra.
It is therefore ordered that the motion to dismiss be, and it
is hereby denied.
It is further ordered that these proceedings be, and they are
hereby stayed until further order of this court.
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