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March 30, 1983


The opinion of the court was delivered by: McGARR, Chief Judge.


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 motions.

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:

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. at 7.

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

Count III

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