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BURKHART v. ALLSON REALTY TRUST

September 27, 1973

LAWRENCE G. BURKHART ET AL., PLAINTIFFS,
v.
ALLSON REALTY TRUST ET AL., DEFENDANTS.



The opinion of the court was delivered by: Austin, District Judge.

  MEMORANDUM OPINION

This is a class action brought under a four count complaint to recover actual and punitive damages for alleged violations of: (1) the registration requirements of the Securities Act of 1933 [15 U.S.C.A. §§ 77e and 77l]; (2) the antifraud provisions of the Securities Act of 1933 [15 U.S.C.A. §§ 77l(2) and 77q(a)], the Securities Exchange Act of 1934 [15 U.S.C.A. § 78b] and Rule 10B-5 thereunder [17 C.F.R. § 240.10b-5]; (3) the registration requirements and antifraud provisions of the Illinois Securities Law of 1953 [S.H.A. ch. 121 1/2, §§ 137.5, 137.4, subd. G and 137.12, subds. A, B, D, F, G and I]; and (4) for common law fraud. Plaintiffs were the purchasers of shares of a real estate investment trust. Defendants are the issuer, the management company, and various persons connected to the sale of the securities.

On May 11, 1973 defendants' motion to dismiss the complaint was granted, and plaintiffs were given leave to file an amended complaint. This was done on May 18. Four of the eleven defendants filed an answer to the amended complaint; defendants Charles Anderson and William Alles III have yet to respond; and the others renewed their motions to dismiss. Disposition of these motions is the subject of this opinion. Issues which are common to the motions of defendants Wax, Wolk, and Wolk & Company, Inc. shall be dealt with first, followed by miscellaneous matters.

MOTIONS TO DISMISS COUNT I

Count I of the amended complaint basically alleges that defendants sold unregistered securities to plaintiffs, and in so doing, made use of instruments of interstate transportation or communication. Furthermore, it alleges that Wax, Wolk and Wolk & Company, Inc. exerted control over Allson (the alleged issuer and probable seller of the securities) and Eagle (an alleged underwriter). Those three defendants now move to dismiss Count I in that it fails to state a claim against them upon which relief can be granted. For the following reasons, the motions should be denied.

It is unlawful to use instruments of interstate transportation or communication in connection with the sale of an unregistered security. 15 U.S.C.A. § 77e(a)(1). Any person who offers or sells a security in violation of Section 77e may be held liable to the purchaser to the extent of the consideration paid plus interest less income received. 15 U.S.C.A. § 77l(1). Furthermore, joint and several liability attaches to any person who controlled the seller in Section 77l. 15 U.S.C.A. § 77o. Because Count I alleges that the moving defendants controlled the seller of unregistered securities and used instruments of interstate transportation and communication in connection with such control and sale, it states a claim upon which relief may be granted.

In their supporting memoranda, defendants make much of their observation that Count I fails to allege facts showing control over the seller of the securities in question. Such an argument is clearly without merit in the federal courts, since fact pleading is not required. Rather, a complaint is sufficient if it contains "a short and plain statement of the claim showing that the pleader is entitled to relief." F.R.Civ.P. 8(a)(2); 2A J. Moore, Federal Practice ¶ 8.13, at 1695 and 1700, (2d ed. 1972). Moreover, the averments in Count I need not even be pleaded with "particularity", the cause of action presented therein not being founded in fraud. F.R.Civ.P. 9(b). Accordingly, the motions to dismiss Count I of the amended complaint are denied.

MOTIONS TO DISMISS COUNT II

Count II of the amended complaint is based upon the antifraud provisions of the Securities Act of 1933 [15 U.S.C.A. §§ 77l(2), 77q(a)], the Securities Exchange Act of 1934 [15 U.S.C.A. § 78b] and Rule 10B-5 thereunder [17 C.F.R. § 240.10b-5]. In it, plaintiffs allege they relied to their detriment upon various misstatements and omissions of material facts which defendants are collectively alleged to have made in connection with the sale of the securities in question. None of the moving defendants are specified as having participated in any particular violation. Accordingly, they move to dismiss the count. The essence of their motion appears to be plaintiffs' failure to comply with F.R.Civ.P. 9(b), which requires that "circumstances constituting fraud . . . shall be stated with particularity." However, for the following reasons defendants' motions should be denied.

While allegations of fraud must be particularized, F.R.Civ.P. 9(b), they must also be as short, plain, simple, concise and direct as is reasonable under the circumstances. F.R.Civ.P. 8(a). The function of pleadings under the Federal Rules is to give fair notice of the claim asserted so as to enable the adverse party to answer and prepare for trial, to allow for the application of the doctrine of res judicata, and to show the type of case brought, so it may be assigned to the proper form of trial. 2A J.Moore, Federal Practice ¶ 8.13 at 1695 (2d ed. 1972). The test is whether the pleading in question gives notice and states the elements of the claim plainly and succinctly, and not whether as an abstract matter it states "conclusions" or "facts". Federal Practice, supra at 1700.

Viewing Count II as a whole, it is clear that the notice requirement of modern federal pleading has been met. Specific misstatements and omissions of material facts are set forth with particularity in separate subparagraphs, along with the dates and letters in which they were made. Although it is true that none of these misstatements and omissions are attributed to specific defendants, this court is of the opinion that such a high degree of particularity is not required to fulfill the purposes of notice pleading. The defendants have been notified that they are alleged to have made specific misstatements and omissions in connection with the sale of securities in interstate commerce; and the allegations are clear enough to enable defendants to answer them.

Judicial economy would be best served at the present time in this case by permitting defendants to ascertain the facts they seek through the discovery process rather than by requiring a return to "fact" pleading. Accordingly the motions to dismiss Count II of the amended complaint are denied.

MOTIONS TO DISMISS COUNT III


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