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United States District Court, Northern District of Illinois, E.D

April 4, 1984


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


Illinois limited partnerships Caliber Partners, Ltd. ("Caliber") and Stratford Energy Investments-Ohio Shallow ("Stratford") sue Marvin Affeld ("Affeld") and Mary Affeld individually and d/b/a Affeld Oil Company (collectively "Affelds") in a ten-count Complaint alleging:

1. federal statutory violations by Affelds involving:

    (a) Securities Exchange Act of 1934 s 10(b),
  15 U.S.C. § 78j ("Section 10(b)") and related SEC Rule
  10b-5 (Count One);

    (b) Securities Act of 1933 ("1933 Act") § 12(2) and
  17(a), 15 U.S.C. § 77l and 77q ("Section 12(2)" and
  "Section 17(a)") (Count Two); and

    (c) the Racketeer Influenced and Corrupt
  Organization Act ("RICO"), 18 U.S.C. § 1964(c) (Count
  Three); and

    2. state statutory and common law violations by
  Affelds involving:

    (a) the Illinois Securities Law, Ill.Rev.Stat. ch.
  121 1/2, §§ 137.12, 137.13 (Count Four);

    (b) Ohio Securities Act §§ 1707.41, 1707.44
  (Count Five);

    (c) the Illinois Consumer Fraud and Deceptive
  Business Practice Act, Ill.Rev.Stat. ch. 121 1/2, §
  262 (Count Ten);

(d) common law fraud (Count Six);

(e) negligence (Count Seven); and

(f) breach of contract (Counts Eight and Nine).

Affelds now move to dismiss under Fed.R.Civ.P. ("Rule") 12(b)(1) and 12(b)(6). For the reasons stated in this memorandum opinion and order, their motion is granted.


In the spring of 1981 Caliber (acting on behalf of itself and Stratford) conferred with Affeld to obtain information about investing in oil and gas leases on property located in Morrow County, Ohio. Affeld represented (1) he had many years' experience in oil drilling and exploration and (2) he was willing to sell shares in three oil and gas leases on which he was preparing to begin drilling operations. Affeld agreed to sell Caliber a 1/16 interest and Stratford a 6/16 interest in the three leases upon payment of $76,250 for the aggregate 7/16 interest in each lease. Contracts were signed by Caliber*fn2 and Affeld contemporaneously with Caliber's payment of those amounts, and upon completion of two of the wells (the third having been abandoned) Caliber paid the added completion costs of $52,500 for each as the contracts required. Caliber's total investment was $18,750, while Stratford's was $315,000.*fn3

According to Complaint ¶ 18 Affeld knowingly made the following material misrepresentations or omissions:

  (a) About spring 1981, and on several occasions
  thereafter, Affeld stated that he could contribute or
  had already contributed a share of the capital cost
  of drilling and completing each well which was
  roughly equivalent to the sum invested in each well
  by the investors;

  (b) About spring 1981, and on several occasions
  thereafter, Affeld furnished the investors group,
  through Caliber, materially incomplete or false
  information concerning the wells, including, but
  noted [sic] limited to actual costs of drilling,
  completing and operating each well, costs of material
  used, reasons for additional costs, and delays in
  completion of each well;

  (c) About spring 1981, and on several occasions
  thereafter, Affeld stated each well would produce
  substantial quantities of oil, the royalty payments
  for which would be far in excess of operating costs
  of each well, and that there was little risk of
  failure in these ventures. Affeld told Caliber he had
  been "saving these leases for my retirement" and that
  they were certain to produce significant quantities
  of oil;

  (d) Affeld told Caliber, about spring 1981, and
  various times thereafter, that each well would be
  located above the Trempealeau formation, a geological
  structure which had a history of oil and gas
  deposits, and that each well was certain to tap oil
  and gas from this area, since highly successful wells
  previously had been drilled on certain of the
  leaseholds and on adjoining areas.

  (e) About spring 1981, and numerous times thereafter,
  Affeld failed to disclose to the investors, through
  Caliber, material information on the general and

  risks incumbent in oil and gas investments,
  including, but not limited to, the limited
  marketability of oil and gas working interest
  investments, conflicts of interest and self dealing
  by Affeld in connection with drilling each well; the
  speculative nature of the investment; the risk that
  costs of operation would exceed income from each
  well; the risk of loss of equipment during drilling;
  the effect inclement weather created on drilling,
  completion and operation of each well; estimates on
  the amount of commercially marketable oil capable of
  being withdrawn from each well; and the amount of oil
  withdrawn from each well;

  (f) About spring 1981, and numerous times thereafter,
  Affeld failed to disclose that significant amounts of
  money obtained from the plaintiffs were paid to him
  and his company for services and materials used in
  connection with drilling each well.

Plaintiffs relied on those representations in making the investments (Complaint ¶ 20).

Rule 9(b) Requirements

As to the federal securities fraud claims (under Sections 10(b) and 17(a)), Affelds say plaintiffs have not alleged fraud with the requisite particularity. Affelds attack plaintiffs' failure to particularize the time and place of the misrepresentations, why the statements were false and misleading or the facts underlying Affeld's knowledge those statements were false when he made them.

In those respects Affelds misconceive the purpose and effect of Rule 9(b):

  In all averments of fraud or mistake, the
  circumstances constituting fraud or mistake shall be
  stated with particularity. Malice, intent, knowledge,
  and other condition of mind of a person may be
  averred generally.

To plead a cause of action for fraud, plaintiffs need not allege
evidentiary details that will be used to support the claim at a
later date. Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379
(2d Cir. 1974); 2A Moore, Moore's Federal Practice  ¶ 9.03,
at 9-28 to 9-30 and nn. 13-14. They need only set forth the basic
outline of the scheme, who made what misrepresentations and the
general time and place of such misrepresentations. Darling & Co.
v. Klouman, 87 F.R.D. 756, 757-58 (N.D.Ill. 1980) and cases there
cited. Here Affelds have been given sufficient notice of those
matters, who made the representations and the general time period
in which they were made.*fn4

Affelds are also wrong in urging Rule 9(b) requires plaintiffs to allege facts showing Affeld knew he was misleading them. Instead Rule 9(b) specifically permits general allegations of knowledge and intent. To require a plaintiff to plead such matters, which are peculiarly within a defendant's knowledge, would impose an impermissible burden. 2A Moore ¶ 9.03, at 9-36 to 9-38 and nn. 25-28; compare the "clear weight of authority" as exemplified by McGinty v. Beranger Volkswagen, Inc., 633 F.2d 226, 228 (1st Cir. 1980) with the solitary viewpoint expressed in Ross v. A.H. Robins Co., 607 F.2d 545, 558 (2d Cir. 1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980).

Affelds also contend plaintiffs cannot ground an action on promises contrary to the contract terms, in contravention of the contract integration clause. Katz v. Diabetes Association of Greater Chicago, 31 Ill. App.3d 240, 243, 333 N.E.2d 293, 295 (1st Dist. 1975). That argument misses the mark as applied to the Complaint's fraud counts.*fn5 Plaintiffs are there suing for fraud in the inducement of a contract, not to enforce the contract terms. Allegations of representations contrary to the contract terms are properly considered to determine whether Affeld fraudulently induced Caliber and Stratford to enter into these contracts.*fn6 See Ainsworth Corp. v. Cenco, Inc., 107 Ill. App.3d 435, 439, 63 Ill.Dec. 168, 172, 437 N.E.2d 817, 821 (1st Dist. 1982).

Nonetheless Count One and the Section 17(a) claim in Count Two must be stricken. By their very nature a number of the alleged misrepresentations and material omissions recited in Complaint ¶ 18 plainly appear to have been post- rather than pre-contract-signing.*fn7 As such they cannot underpin a fraud-in-the-inducement claim. Affelds cannot fairly be required to parse the Complaint to pick out the allegations that do and do not form part of the cause of action. They are entitled to a more craftsmanlike pleading to which they can prepare an informed answer.

Count Two

Affelds make two separate attacks on Count Two:

    1. Plaintiffs have not affirmatively pleaded
  compliance with the one-year statute of limitations
  applied to Section 12(2) violations.

    2. No private right of action exists under Section

Their first onslaught is successful, and their second need not be confronted at this time.

As to the first point, Affelds are correct: Plaintiffs must affirmatively allege compliance with the one-year statute of limitations contained in 1933 Act § 13, 15 U.S.C. § 77n:

  No action shall be maintained to enforce any
  liability created under section 77k or 77l(2) of this
  title unless brought within one year after the
  discovery of the untrue statement or the omission, or
  after such discovery should have been made by the
  exercise of reasonable diligence, or, if the action
  is to enforce a liability created under section
  77l(1) of this title, unless brought within one year
  after the violation upon which it is based. In no
  event shall any such action be brought to enforce a
  liability created under section 77k or 77l(1) of this
  title more than three years after the security was
  bona fide offered to the public, or under section
  77l(2) of this title more than three years after the

Adair v. Hunt International Resources Corp., 526 F. Supp. 736, 748-49 (N.D.Ill. 1981). Complaint ¶ 21's allegations*fn8 do not at all begin to meet that requirement (and it is of course premature to predict whether any effort to amend would be successful in overcoming the limitations problems posed — at least facially — by the timing outlined in the Complaint). Plaintiff's Section 12(2) claim is also dismissed.

As to the second point, the Courts of Appeals are sharply divided as to whether a private right of action exists under Section 17(a)*fn9 and the Supreme Court has not yet decided the issue.*fn10 Most recently our Court of Appeals has characterized the matter as "an open question in this circuit." Peoria Union Stock Yards Co. v. Penn Mutual Life Insurance Co., 698 F.2d 320, 323 (7th Cir. 1983).*fn11 This Court will take a leaf from the Court of Appeals' book in Peoria Union Stock Yards and treat the Section 17(a) issue as irrelevant — that is, not necessary for decision — unless a substantive distinction between Rule 10b-5 and Section 17(a) develops. This Court therefore defers any current decision as to the independent viability of a Section 17(a) claim.*fn12

Count Three

Affelds contend plaintiffs' RICO count does not allege how Affeld used the mails or wire communications in furtherance of the scheme to defraud. As with all challenges based on the sufficiency of complaints, this Court applies the liberal notice-pleading concepts of Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Nevertheless it will not do for plaintiffs simply to assert Affeld used the mails or wires "in connection with his business enterprise." For aught that appears, there was no causal nexus between that conduct (the asserted "pattern of racketeering activity") and the alleged damage to plaintiffs.*fn13 Though this defect may be readily curable (if the facts justify such a curative pleading), as presently drafted Count Three must fail as well.

Pendent State Law Claims

Finally Affelds urge plaintiffs, as Illinois limited partnerships, have no capacity to bring any of their state law claims*fn14 under Rule 17(b):

  In all other cases capacity to sue or be sued shall
  be determined by the law of the state in which the
  district court is held, except (1) that a partnership
  or other unincorporated association, which has no
  such capacity by the law of such state, may sue or be
  sued in its common name for the purpose of enforcing
  for or against it a substantive right existing under
  the Constitution or laws of the United States. . . .

As the Rule reflects, plaintiffs may sue in their common names to enforce their federal claims, but their capacity to bring state law claims depends on Illinois law.

Illinois applies wholly different rules as to the capacity of a partnership to sue and to be sued in its firm name. By statute (Ill.Rev.Stat. ch. 110, ¶ 2-411) the latter has been made permissible, while the common-law disability still precludes the former (29 I.L.P. Partnership § 172, at 371).*fn15 Accordingly all the pendent state law claims (Counts Five through Ten) are also dismissed.*fn16


Affelds' motion to dismiss the Complaint is granted in its entirety. If an Amended Complaint is filed on or before April 20, 1984, Affelds shall answer or otherwise plead to that Amended Complaint on or before May 6, 1984. If no Amended Complaint is so filed, this action shall be dismissed April 30, 1984.

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