United States District Court, Northern District of Illinois, E.D
March 30, 1983
DAVID B. DAHL, ET AL., PLAINTIFFS,
RONALD S. ENGLISH. ET AL., DEFENDANTS. KENNETH BOBROW, ET AL., PLAINTIFFS, V. RONALD S. ENGLISH, ET AL., DEFENDANTS.
The opinion of the court was delivered by: McGARR, Chief Judge.
MEMORANDUM OPINION AND ORDER
This consolidated action is before the court on two separate
motions to dismiss. Plaintiffs, in two separate, but virtually
identical, five-count amended complaints, allege violations of
federal and Illinois state securities laws (Counts I and II),
common law fraud (Count III), breach of fiduciary duty (Count
IV), and negligence (Count V) against the defendants.*fn1
The action involves the sale by the defendant corporations to
the individual plaintiffs of original works of art in
lithographic plate form. In addition to the corporate
defendants and their president, Ronald English, the defendants
include two art appraisers, Sigmund Rothschild and F. Peter
Rose,*fn2 and the New York law firm of Burns, Van Kirk,
Greene & Kafer, as well as several individual partners and
associates of the firm.*fn3 The English defendants have
moved to dismiss Counts I-III of the amended complaints on
various grounds. Several of the Burns. Van Kirk defendants have
similarly moved to dismiss Count II.
For purposes of a motion to dismiss, the allegations of
plaintiffs' amended complaints must be taken as true. Grand
Opera Co. v. Twentieth Century-Fox Film Corp., 235 F.2d 303
(7th Cir. 1956). Although the amended complaints include no
exhibits, both plaintiffs and the English defendants have
attached exhibits to their memoranda. Rule 12(b) of the Federal
Rules of Civil Procedure requires that where matters outside
the pleading are presented to and not excluded by the court, a
rule 12(b)(6) motion must be treated as one for summary
judgment. To avoid the effect of this rule, the court has not
considered the exhibits in making its decision on these
Counts I and II
Count I alleges violations of federal securities law, 15 U.S.C. § 77q,
78j(b). and rule 10b-5, while Count II alleges
violations of Illinois securities laws. Ill.Rev.Stat. ch. 121
1/2, § 137.12. In determining whether a violation of the above
provisions exists, the threshold question is whether the
transaction involved the purchase and sale of a "security."
The federal securities acts define a security with a list of
specific commercial transactions as well as a catch-all
classification, "investment contract." See
15 U.S.C. § 77b(1), 78c(a)(10). Since the instant transaction clearly does
not fall within one of the specific transactions, it must be
determined to be an investment contract if the securities
claims alleged in the amended complaints are to survive. The
Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293, 66
S.Ct. 1100, 90 L.Ed. 1244 (1946), set forth the test for
finding an investment contract: "whether the scheme involves an
investment of money in a common enterprise with profits to come
solely from the efforts of others." Id. at 301, 66 S.Ct. at
1104. Because the instant transaction fails at the outset to
meet the "common enterprise" requirement, the court need not
determine whether plaintiffs anticipated profits to come solely
from the efforts of others.
Paragraph 5 of both amended complaints states:
5. Each plaintiff herein purchased certain rights in an
artistic plate or plates, . . . which plate and the
accompanying transactions constitute the purchase of a
security. . . . Defendant Raton
Graphics, Inc. [Western Assets, Inc.] negotiated the various
distribution agreements which plaintiffs entered into with
the distributors. Plaintiffs invested their money with the
defendants with the expectation of earning both an economic
profit and tax benefits from the defendants' efforts.
Although that paragraph specifically alleges an expectation of
profits from efforts of others, neither that paragraph nor the
remainder of the amended complaints contains any allegation of
a common enterprise. Nor do the facts alleged in the amended
complaints indicate that a common enterprise exists.
To meet the common enterprise element, this circuit has held
fast to the requirement of a pooling of investors' resources,
or "horizontal commonality," as first espoused in Milnarik v.
M-S Commodities, Inc., 457 F.2d 274 (7th Cir.), cert.
denied, 409 U.S. 887, 93 S.Ct. 113, 34 L.Ed.2d 144 (1972).
See Frederiksen v. Poloway, 637 F.2d 1147 (7th Cir.), cert.
denied, 451 U.S. 1017, 101 S.Ct. 3006, 69 L.Ed.2d 389 (1981);
Goodman v. Epstein, 582 F.2d 388 (7th Cir. 1978), cert.
denied, 440 U.S. 939, 99 S.Ct. 1289, 59 L.Ed.2d 499 (1979);
Hirk v. Agri-Research Council. Inc., 561 F.2d 96 (7th Cir.
1977); see also Curran v. Merrill Lynch. Pierce, Fenner &
Smith, 622 F.2d 216 (6th Cir. 1980), aff'd on other grounds,
456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982). But see,
e.g., Brodt v. Bache & Co., 595 F.2d 459 (9th Cir. 1978); SEC
v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974).
Although many of the above cases favoring the horizontal
commonality requirement involve discretionary commodities
trading accounts, nothing in those opinions limits that
requirement to that context. as plaintiffs have suggested.
Furthermore, the Seventh Circuit in both Hirk and Milnarik
pointed to the "unitary" nature of the trading accounts as
precluding a pooling of investors' resources. See Hirk, 561
F.2d at 101; Milnarik, 457 F.2d at 277.
The court finds it difficult to conceive of a transaction with
a more unitary nature than that in the instant case, i.e., the
sale of unique pieces of artwork to individual purchasers at
different prices through different contracts executed at
different times. As the English defendants have noted, the fact
that two purchasers have bought products from the same seller
fails to establish a pooling of funds as required for a common
enterprise. English Reply Mem. at 4. Moreover, plaintiffs'
suggestion that pooling existed because of the number of
investors (Plaintiffs' Mem. at 9) is without merit. A large
number of transactions "merely recognizes the intention of any
seller to transact numerous sales in order to cover total
costs, reduce marginal individual costs and maximize profits."
English Reply Mem. at 4. Most indicative of the unitary nature
of the instant transactions is that each purchaser's success
depends on the marketability and public acceptance of his
particular artwork and not on the success of any other
purchaser's artwork. Indeed, each purchaser was in competition
with every other purchaser for sales of his artwork. See id.
As the amended complaints have failed to allege the requisites
of a common enterprise in the instant transactions, the
transactions do not constitute securities and therefore do not
fall within the protection of the securities acts. Thus, Counts
I and II are dismissed as to all defendants.*fn4
The English defendants have moved to dismiss Count III,
grounded in common law fraud, on the bases that (1) with the
federal securities claim dismissed, the alleged basis of
federal subject matter jurisdiction — the doctrine of pendent
jurisdiction — no longer is warranted; and (2) plaintiffs
failed to plead fraud with the specificity required by rule
9(b) of the Federal Rules of Civil Procedure.
The court agrees that under United Mine Workers v. Gibbs,
383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966), Count III (and
Counts IV and V which are also asserted under pendent
jurisdiction) must be dismissed along with the federal claim.
However, although not alleged in the amended complaints, the
requisites for diversity jurisdiction appear to exist on the
face of the amended complaints. Plaintiffs therefore are given
leave to file a further amended complaint to allege, if they
properly may, jurisdiction for the remaining counts under
The English defendants contend that the amended complaints fail
to plead fraud with particularity as required by rule 9(b) of
the Federal Rules of Civil Procedure. Specifically, the English
defendants claim that (1) plaintiffs' allegations of
misrepresentation and omissions of material facts are too
conclusory to sustain a fraud claim; and (2) plaintiffs'
allegations of material omissions are contradicted by the
documents each plaintiff received before the transactions
One of the primary purposes of rule 9(b) is to give notice to a
defendant of the claim against him and of the facts relied upon
as constituting the fraud charged. Felton v. Walston & Co.,
508 F.2d 577, 581 (2d Cir. 1974). Although mere conclusory
allegations to the effect that a defendant's conduct was
fraudulent are insufficient, rule 9(b) must still be reconciled
with rule 8 which requires a short and plain statement of the
claim. Tomera v. Galt, 511 F.2d 504, 508 (7th Cir. 1975).
Thus, the federal rules do not require that a claimant set out
in detail the facts upon which he bases his claim.
In the instant action, the paragraphs in Count III (or
incorporated by reference in Count III) which set forth the
alleged misrepresentations are as follow:
45. [¶ 48 in 82 C 6090] Defendants . . . made various oral
and written representations to the plaintiffs which were
false and materially misleading and contained untrue
statements of fact, including, but not limited to, the
following untrue statements:
(a) The Memorandum, Selling Documents, Tax Opinion and
English all informed plaintiffs that the Investment
consists of owning and exploiting plates or original works
of art through the production and sale of a limited edition
of original prints made from the plates, posters,
tapestries, greeting cards, plaques, and note paper, all of
which carry the image contained in the plate.
(b) Both expert appraisals for each Investment made by the
plaintiffs [sic] stated that the fair market value of the
Investment is at least equal to the purchase price paid by
(c) The Memorandum, Selling Documents, Tax Opinion and
English all informed plaintiffs that the total amount paid
by each plaintiff for each plate and the rights therein is
attributable to the plate and not to the rights therein.
113. [116.] The aforesaid misrepresentations of material
facts . . . constitute fraud on the plaintiffs.
A fair reading of these paragraphs confirms that Count III
meets the pleading requirements of rules 8 and 9(b). They are
more than mere conclusory allegations of fraudulent conduct and
adequately apprise the defendants of the factual claims against
them in a concise manner.
In paragraph 46  of the amended complaints, plaintiffs list
nine alleged omissions of material facts. The English
defendants contend that, in addition to being
conclusory,*fn5 they are contradicted by documents each
plaintiff received prior to the transactions.*fn6
At issue on this motion is the sufficiency of the allegations
of the amended complaints, and not the truth of those
allegations. Thus, any documents that defendants wish to use to
counter the allegations will be more appropriately raised as
defenses at a proceeding on the merits. Nevertheless, if it
becomes apparent at such a proceeding that plaintiffs have
asserted causes of action to which there are patent defenses of
which they should have been aware, plaintiffs may be subject to
sanctions at that time.
For the foregoing reasons, the English defendants' motion to
dismiss Counts I and II is granted. Counts I and II are
likewise dismissed sua sponte as to all other defendants. The
English defendants' motion to dismiss Count III for lack of
subject matter jurisdiction is granted. Plaintiffs are given
leave to file a further amended complaint within twenty days to
cure the jurisdictional defect.