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ADAIR v. HUNT INTERN. RESOURCES CORP.

June 12, 1981

JEAN AND PATRICIA ADAIR, ET AL., PLAINTIFFS,
v.
HUNT INTERNATIONAL RESOURCES CORPORATION, GREAT WESTERN UNITED CORPORATION, GREAT WESTERN CITIES, INC., COLORADO CITY DEVELOPMENT COMPANY, COLORADO CITY REALTY COMPANY, WILLIAM M. WHITE, JR., W.H. HUNT, AND N.B. HUNT, DEFENDANTS.



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

  MEMORANDUM AND ORDER

This is an action seeking relief on behalf of approximately 1300 individual plaintiffs who allegedly were defrauded into purchasing worthless parcels of land in a planned community development called Colorado City, Colorado. Colorado City was to be developed by defendant, Great Western Cities, Inc. ("GWC") and its related corporate entities, Great Western United Corp. ("GWU"), Hunt International Resources Corp. ("HIRCO"), Colorado City Development Company ("CCDC"), and Colorado City Realty Company ("CCRC"). All of these corporate entities are part of the financial empire of Nelson Bunker Hunt and William Herbert Hunt, who are also named as defendants herein. Presently pending before the court is a barrage of pleading motions filed by the various defendants attacking the procedural and substantive sufficiency of the Second Amended Complaint. That complaint contains six counts, alleging violations of the Organized Crime Control Act ("OCCA"), 18 U.S.C. § 1961 et seq., (Count I); sections 17(a) of the Securities Act of 1933 (the "Securities Act") and 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., (the "Exchange Act"), 15 U.S.C. § 77a et seq., (Count II); section 12(2) of the Securities Act, (Count III); the Interstate Land Sales Full Disclosure Act ("interstate Land Sales Act"), 15 U.S.C. § 1701 et seq., (Counts IV and V); and the Illinois Land Sales Act ("ILSA"), Ill.Rev.Stat. ch. 30, § 371 et seq. (Count VI).

1. Motions to Reconsider Order Granting Leave to File Second
   Amended Complaint and Motions to Dismiss for Improper Venue.

On May 13, 1980, Judge Bua granted plaintiffs leave to file a Second Amended Complaint.*fn2 At the same time, he provided defendants with the opportunity to raise objections to his order in the form of a motion to reconsider. The Great Western defendants have availed themselves of this opportunity, raising three arguments in opposition to the filing of the complaint. They contend that leave to amend should have been denied because the Amendment has been unduly delayed, it will result in substantial prejudice to defendants, and it attempts to join parties for whom venue in this district is improper. None of these arguments has any merit.

Rule 15(a) of the Federal Rules of Civil Procedure states that leave to amend a complaint "shall be freely given when justice so requires." The Supreme Court has noted in this regard that the liberal amendment policy embodied in the Rule is "a mandate to be heeded." Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962). Although the rule gives litigants neither an unqualified right nor the unfettered discretion to expand the scope of an action, the Second Amended Complaint does not result in the degree of prejudice nor is it the product of such undue delay that might warrant denying leave to amend. This supplemental pleading was filed only seven months after the opening of the lawsuit and prior to the initiation of any extensive discovery. It asserts no new legal theories which might cause undue surprise to the defendants but, rather, only adds the individual claims of approximately 675 new plaintiffs, most of whom are Colorado residents (as distinguished from the 700 Illinois residents presently a part of this action).*fn3 That the addition of new individual claimants might marginally lengthen a potential trial is no reason to deny the amendment, particularly where, as here, there is a substantial identity of legal and factual issues between the claims of the "new" and present claimants.*fn4 In short, the only real prejudice resulting from the amendment is defendants' increased exposure to potential liability. This, however, is hardly the type of prejudice which can be considered "undue".

Defendants' final argument — that leave to amend should have been denied because venue over the claims of the Colorado plaintiffs is improper — is similarly without merit.*fn5 Defendants concede that venue is proper in this forum over the claims of the Illinois plaintiffs but point to the fact that the after-added claimants reside in Colorado and probably purchased their lots in that state. While these facts might be relevant to a motion to transfer pursuant to 28 U.S.C. § 1404(a), they lose their significance here where venue is premised on the special venue provisions of the Interstate Land Sales Act and the Securities Laws.

All of the venue provisions relied on by plaintiffs essentially parallel each other. That is, they all provide for venue in a particular forum regardless of defendants' or plaintiffs' residence if the defendants "transact business" within the district. 15 U.S.C. § 78aa, 15 U.S.C. § 77v, 15 U.S.C. § 1719.*fn6 Unlike the familiar "minimum contacts" test used to determine personal jurisdiction, these liberal special venue provisions do not require that the activities used to establish venue be "related" or "connected" to the transaction attacked in the complaint. Thus, the fact that Ifuku consummated his purchase in Hawaii or that a Colorado plaintiff bought his land in Colorado does not necessarily defeat venue in Illinois provided that it can be established that the defendants also transact business within this forum.

The facts presented to the court confirm that the defendants do indeed transact business within Illinois. Defendants GWC, GWU, CCDC, and CCRD are licensed to do business in Illinois. Each has obtained a certificate of authority to do business in this state, which have not been revoked either by the corporations themselves or by the State of Illinois. Each of the corporations has filed an Annual Report with the State of Illinois as required by the Foreign Corporations Act. Ill.Rev.Stat. ch. 32, § 157.115. Still further, CCDC, CCRC and GWC all have retained a registered agent authorized to accept service of process for them within the state, and in this case, service was made upon that agent.

Just as persuasive as evidence that the defendants are doing business in Illinois are documents submitted by plaintiffs indicating that the corporations continue to mail into Illinois notices of late payments as well as bills to collect payments from Illinois residents for the property purchased from GWC. To assert, as GWC and its related entities do, that they no longer transact business within the state because they no longer make sales in Chicago and have closed their Chicago office assumes too narrow a characterization of the nature of their business. The Great Western defendants' business cannot realistically be limited solely to the solicitation of sales of Colorado City lots. Rather, their "business" includes both the securing of real estate sales agreements, which was previously actively pursued in this state, and the continuing active pursuit of payment on those sales. To claim that mailing into Illinois in these circumstances constitutes the transaction of business elsewhere, but not in Illinois, is to ignore the economic reality that the collection efforts are a continuation of the sales activities which indisputably took place within Illinois.*fn7

The fact that at least some of the defendants may be said to transact business in Illinois establishes proper venue with respect to all of them. The liberal venue provisions of the federal statutes at issue here are part of a broader legislative framework to prosecute frauds which, more often than not, are national in scope. As the court in In re Penn Central Securities Litigation, 338 F. Supp. 438, 440 (E.D.Pa. 1972), commented:

  It would be difficult, if not impossible to
  accomplish this purpose if, when a complex scheme is
  alleged involving defendants from many states, venue
  for a particular district would have to be
  established as to each alleged participant in the
  illegal plan by proving that his illegal acts in
  furtherance of the fraud were committed in that
  district. An unnecessary multiplicity of suits and
  fragmenting of the issues involved would be the
  result of such a venue requirement. I follow the lead
  of many other courts in reading 15 U.S.C. § 78aa
  providing that venue is proper as to all defendants
  in any district where it is alleged that any one
  defendant has committed acts that are violative of
  the act and in furtherance of the alleged illegal
  scheme. [Citations omitted].

See also, Kogok v. Fields, 448 F. Supp. 197 (E.D.Pa. 1978); Clapp v. Stearns & Co., 229 F. Supp. 305, 307 (S.D.N.Y. 1964); SEC v. National Student Marketing Corp., 360 F. Supp. 284, 292 (D.D.C. 1973).

This court is persuaded that the analysis of the court in the Penn Central case applies here. At a minimum, the result of determining that venue was improper respecting some defendants would be a multiplicity of identical lawsuits in several jurisdictions. The fragmented prosecution by individual purchasers of a complex land fraud suit in several jurisdictions against defendants with substantial resources is, at best, a remote possibility. In short, certain of the defendants transacted business (and continue to do so) within Illinois. These defendants allegedly acted in concert with other individuals and entities in perpetrating a fraud of national scope. The special venue provisions of the Interstate Land Sales Act and the Securities Acts simply do not contemplate that defendants can open up shop in Illinois and other states, sell their "wares", and then retreat elsewhere forcing their buyers, located in several states, to splinter their claims and resources in an attempt to gain redress. Nor do they permit defendants who have participated in such a multi-state fraud, but with that participation outside Illinois, to force defrauded plaintiffs to seek them out in some other forum. Burkhart v. Alison Realty Trust, 363 F. Supp. 1286 (N.D.Ill. 1973). The protection of such defendants against being unfairly dragged into a lawsuit in which they should not be parties rests, in the first instance, upon Rule 9(b), as hereinafter discussed.

2. Motions to Transfer.

The Great Western defendants have moved to transfer this action to the District Court for the District of Colorado, pursuant to 28 U.S.C. § 1404(a). Given the size and complexity of this lawsuit, it is hardly surprising that defendants have been able to marshall facts which lend considerable support to their motion. However, although the question is a close one, for the reasons set forth below the motion is denied.

Congress, in drafting 28 U.S.C. § 1404(a), designated the criteria by which the court is to exercise its discretion with regard to the instant motion. The statute provides, in pertinent part:

  [F]or the convenience of parties and witnesses, in
  the interest of justice, a district court may
  transfer any civil action to any other district where
  it might have been brought.

The resolution of any transfer motion necessarily is dependent largely upon the facts of each particular case. They often dictate which of the factors enumerated above assumes preeminent importance. The court begins its analysis by noting that under § 1404(a) the burden lies with the moving party to establish that a transfer is justified by the balance of conveniences and the interests of justice. "Plaintiff's choice of forum is entitled to deference, and it is defendants' burden to show that another court would better accommodate the parties, witnesses and the interests of justice." Stinnett v. Third National Bank of Hampden County, 443 F. Supp. 1014, 1017 (D.Minn. 1978).

There are now pending in this district at least seven other cases which are in some way related to the instant dispute. Currently on this court's docket is Aaland v. Hunt International Resources Corp., et al., 80 C 5317, a lawsuit concerning Great Western's Cochiti Lake, Nevada development in which the allegations and substantive legal theories parallel those of the instant case. Judicial economy and convenience to the litigants would be materially enhanced if these cases were coordinated with each other. Other related cases currently pending before the court include libel and slander actions filed by representatives of both sides in the current suit against each other. The ultimate outcome of these cases is, at least in part, affected by the primary fraud suits. The same may be said of certain actions filed by Great Western Cities alleging improper solicitation of actions on the part of plaintiffs' representatives and organizations. Many of these cases have been transferred to this district from other states including Colorado, the site suggested by defendants here. Thus, to grant the motion for a transfer would not only occasion a loss in judicial economy, but also deem these cases the "waifs" of the federal judiciary. They would have no one district in which a court finds it appropriate to coordinate discovery and could find no single forum in which the parties jointly wish to litigate their obviously numerous and deep-seated disputes.

Obviously, considerations of judicial economy are not "controlling in and of themselves." Coats Co., Inc. v. Vulcan Equipment Co., Ltd., 459 F. Supp. 654 (N.D.Ill. 1978). However, "as a general proposition, cases should be transferred to the district where related actions are pending." SEC v. First National Finance Corporation, 392 F. Supp. 239, 241 (N.D.Ill. 1975). The converse applies here: this court is loath to transfer a related case from the district in which companion actions are pending, thereby forfeiting the benefits of adjudicating related claims in the same tribunal. See also, Wyndham Associates v. Bintliff, 398 F.2d 614, 619 (2d Cir. 1968); Jacobs v. Tenney, 316 F. Supp. 151, 169 (D.Del. 1970), (where these courts elaborated several factors which strongly suggest that related cases be litigated in the same district).

Although defendants vigorously assert that Colorado is significantly more convenient a forum for them, the court is hard-pressed to discover any merit in this claim. Of the Great Western corporate defendants, none seems to have its principal place of business in Colorado.*fn8 GWU is incorporated in Delaware with its principal place of business in Los Angeles. Great Western Cities is a California corporation and CCRC and CCDC have their corporate headquarters in Los Angeles. In addition, few past or present directors or officers of these entities reside in Colorado. All this suggests that neither Colorado nor Illinois is a totally convenient forum for defendants to litigate this matter. The marginal increase in inconvenience to the defendants created by keeping this case in the Northern District of Illinois cannot be given great weight.

What can be given strong consideration, however, is the great inconvenience a transfer would create for the over 700 individual plaintiffs who bought their property in Illinois and reside in the Chicago metropolitan area. It cannot be ignored that defendants are better equipped economically to bear the burden of litigating the case in a distant forum than are plaintiffs, who primarily are individuals of limited means. This disparity in the financial capabilities of the parties is a significant factor in the court's analysis. In General Portland Cement Co. v. Perry, 204 F.2d 316, 320 (7th Cir. 1953), the defendant's greater ability to bear the expense of transporting witnesses was considered by the Seventh Circuit in concluding that a transfer would not be in "the interests of justice." Similarly, the court in Kane v. Hallmark Insurance Co., 409 F. Supp. 467, 468 (S.D.Fla. 1976), viewed as significant the fact that a transfer might "prove prohibitive to plaintiff's ability to prosecute her cause of action" when it denied defendants' transfer motion. See also, Aamco Automatic Transmissions, Inc. v. Bosemer, 374 F. Supp. 754, 757 (E.D.Pa. 1974); Lanier Business Products v. Graymar Company, 355 F. Supp. 524, 528 (D.Md. 1973); Goldstein v. Rusen Industries, Inc., 351 F. Supp. 1314, 1318 (E.D.N.Y. 1972). The comparative economic resources of the parties is relevant here as well.*fn9

Were the convenience of non-party witnesses and their accessibility to compulsory process the only factors in the 1404(a) calculus, this case would be heard in Colorado. Defendants, in several detailed affidavits, have demonstrated that the convenience of many material witnesses would be enhanced by a transfer. For example, the complaint puts at issue the fact that adequate water and other utilities could not economically be delivered to Colorado City and that defendants knew this was the case. Obviously, the testimony of officials of entities such as the Colorado City Metropolitan District (formerly the Colorado City Water and Sanitation District) and the Colorado City Metropolitan Recreation District would be relevant on this point. Most of these officials, past and present, reside in Colorado. Similarly, potential witnesses such as the engineers involved in supervising the development of Colorado City and local tax assessors could provide relevant testimony as to the feasibility of defendants' Colorado City visions and the current value of these lots. This live testimony would be more easily secured if the case was transferred. Coats Company, Inc. v. Vulcan Equipment Co., Ltd., 459 F. Supp. 654, 656 (N.D.Ill. 1978); Delay & Daniels v. Campbell Co., 71 F.R.D. 368 (D.S.C. 1976).*fn10

The location of those witnesses in Colorado is by far the most persuasive argument for transfer. It must, however, be weighed against the convenience to plaintiffs of this forum and the interests of justice in resolving these intertwined disputes in one court. This court concludes that the considerations against transfer prevail, and the motion is denied.

3. Failure to Plead Fraud with Particularity.

In contrast to the relatively liberal (and minimal) notice pleading requirements of Rule 8(a) of the Federal Rules of Civil Procedure, Rule 9(b) provides that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The Rule's demand for greater specificity serves three purposes.

  The first is to inhibit the filing of a complaint as
  a pretext for discovery of unknown wrongs. . . . The
  second aim is to protect potential defendants from
  the harm that comes to their reputations when they
  are charged with the commission of acts involving
  moral turpitude. . . . Finally, Rule 9(b) serves to
  ensure that allegations of fraud are concrete and
  particularized enough to give notice to the
  defendants of ...

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