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People Ex Rel. Scott v. Cardet International

DECEMBER 5, 1974.

THE PEOPLE EX REL. WILLIAM J. SCOTT, ATTORNEY GENERAL, PLAINTIFF-APPELLANT,

v.

CARDET INTERNATIONAL, INC., ET AL., DEFENDANTS-APPELLEES.



APPEAL from the Circuit Court of Cook County; the Hon. CHARLES R. BARRETT, Judge, presiding.

MR. JUSTICE MEJDA DELIVERED THE OPINION OF THE COURT:

Plaintiff, People of the State of Illinois ex rel. William J. Scott, Attorney General of the State of Illinois, filed a complaint against Cardet International, Inc. (Cardet), Sheldon Serlin, its president, Al Schwarz, its executive vice-president, and M.L.C. Corporation, Inc. (MLC), alleging violations and a conspiracy to violate the Illinois Consumer Fraud Act (Ill. Rev. Stat. 1971, ch. 121 1/2, par. 261 et seq.). The violation allegedly arose out of the sale and financing of marketing franchises in Cardet. An order was entered on motion of defendant MLC to dismiss the complaint against it. A further order was entered denying plaintiff's motion to modify the dismissal order by deleting the finding that there was no just reason to delay enforcement or appeal (Illinois Supreme Court Rule 304(a)) and for leave to file an amended complaint. Plaintiff appeals from both orders.

On appeal, plaintiff contends that:

"1) The sale of distributorships by a marketing franchiser constitutes the sale of "merchandise" under the Illinois Consumer Fraud Act;

2) The trial court erred in holding that the sale of distributorships and the loans extended to finance the purchase thereof were business transactions and outside the scope of the Illinois Consumer Fraud Act;

3) The Illinois Consumer Fraud Act is applicable to a loan company which commits fraud in connection with the sale of "merchandise" by a third party;

4) The trial court erred in denying plaintiff's motion for leave to file an amended complaint."

• 1 The allegations of the complaint which were admitted for the purposes of the motion to dismiss set forth the following facts. Cardet represented itself as being in the marketing of household and personal items and offered the sale of franchises on two levels — distributors and area managers. As to the first, upon the payment of $5,000, a buyer could become a distributor and receive an exclusive territory of 2500 residences in which he could sell Cardet products by distributing catalogs to the homes, and the public would send orders directly to Cardet. The merchandise would then be delivered to the distributor for delivery to the customer. Distributors were to receive a 25% sales commission.

The second level of franchises was that of area manager. Upon payment of $5,000, the area manager would receive an exclusive territory of 50,000 residences from which he was to recruit new distributors. The area managers were to receive from Cardet a graduated fee for each distributor and also a 5% commission on all merchandise orders obtained by each distributor in their territory.

The complaint consisted of three counts, the first of which alleged that Cardet, Serlin and Schwarz made certain misrepresentations of fact to induce the purchase of Cardet franchises which included alleged misrepresentation concerning the organization of Cardet; the affiliation of Dick Butkus (a prominent football player) with Cardet; the financial success of previous distributors and area managers; and Cardet's policy concerning the repurchase of franchises from dissatisfied buyers.

Count II of the complaint was directed against all of the defendants, including MLC, described as an independent loan company which financed the purchase for 47 of the (approximately) 80 franchises sold by Cardet. Defendant MLC allegedly made misrepresentations of fact and concealed other material facts in connection with the making of purchase loans to the buyers of Cardet franchises. The alleged misrepresentations included statements as to the past financial success of Cardet franchisees which enabled early repayment of their loans; the early repayments enabled MLC to reduce the monthly payments required on new loans; the only collateral required to secure a purchase loan was the Cardet franchise itself; and MLC was a subsidiary of a bank through which the financing could be handled. The material facts allegedly concealed by defendant MLC included the existence of an agreement between MLC and Cardet by which Serlin and Schwarz would receive money for each loan made to a Cardet prospect in sums varying from $200 to $825 for at least 19 of the loans made by MLC, which payments were added to the total cost of the loans. It was further alleged that MLC concealed the nature of the documents executed to obtain the loans and that the loan from MLC would be secured in part by a mortgage on the home of the Cardet prospect.

Count III of the complaint alleged that all of the defendants conspired to violate the Illinois Consumer Fraud Act. Defendant MLC made a motion to dismiss the complaint for failing to state a cause of action against it and that the Attorney General lacked standing to sue and bring the action. The trial court granted the motion to dismiss on the ground that the Illinois Consumer Fraud Act does not apply to business loans utilized in the purchase of a franchise or business. Thereafter, the trial court denied plaintiff's motion for leave to file an amended complaint. At the hearing, plaintiff did not present a proposed amended complaint but stated that in part its amended complaint would allege that the facts set forth in the original complaint as to MLC constituted a violation of the Illinois Securities Law of 1953 (Ill. Rev. Stat. 1971, ch. 121 1/2, par. 137.1 et seq.). Plaintiff appeals from these orders which concern only Counts II and III of the complaint and involve only defendant MLC.

• 2, 3 Plaintiff first contends that the sale of distributorships and area managerships by Cardet constituted the sale of "merchandise" under the Illinois Consumer Fraud Act. Merchandise is defined as "any objects, wares, goods, commodities, intangibles, real estate situated outside the State of Illinois, or services." (Ill. Rev. Stat. 1971, ch. 121 1/2, par. 261 (b).) Although the term "intangibles" has not been previously construed within this statutory definition, it must be assumed that the legislature intended it to be understood in its ordinary sense. "Intangible" has been defined as property which has no intrinsic value but which is representative or evidence of value, such as certificates of stocks, bonds, promissory notes and franchises (In re Estate of Berman (1963), 39 Ill. App.2d 175, 179, 187 N.E.2d 541.) Cardet's licensing agreements provided that the buyers of distributor and area manager positions acquired the right to use the Cardet trade name, the good will of Cardet, and certain operational services to facilitate the carrying on of whichever type of franchise was purchased. Clearly, the operational services which a buyer was to receive from Cardet are expressly included within the definition of "merchandise" in section 1(b) of the statute (Ill. Rev. Stat. 1971, ch. 121 1/2, par. 261(b)). Good will and the right to the use of a trade name each constitute property. (United States Ozone Co. v. United States Ozone Co. (7th Cir. 1932), 62 F.2d 881.) Moreover, each is property which has no intrinsic value of its own but only evidences value. As the sale of Cardet distributorships and area managerships consisted of the acquisition of both services and intangibles, these franchises did constitute "merchandise" under the Illinois Consumer Fraud Act.

Plaintiff next contends that the trial court erred in holding that the Illinois Consumer Fraud Act was inapplicable to the business loans used for the purchase of a franchise. Plaintiff argues that the trial court's construction of the statute is contrary to the express provisions of the statute itself, the legislative intent, and the case law authority. We disagree. The allegations against defendant MLC contained in Counts II and III of the complaint charged violations of section 2 of the Illinois Consumer ...


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