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MILLER v. AFFILIATED FINANCIAL CORP.

November 6, 1984

WAYNE M. MILLER AND EUNICE E. MILLER, PLAINTIFFS,
v.
AFFILIATED FINANCIAL CORPORATION, ET AL., DEFENDANTS.



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

MEMORANDUM OPINION AND ORDER

Wayne ("Wayne") and Eunice ("Eunice") Miller (collectively "Millers") have filed an eight-count complaint (the "Complaint") against Delaware corporation Affiliated Financial Corporation ("Affiliated"), Illinois corporation Credit-Pak Corporation of Illinois ("Credit-Pak"), Stephen J. Smith ("Stephen"), Jack D. Smith ("Jack") and Joann Smith ("Joann," apparently Jack's wife). Millers seek damages and equitable relief under federal securities and antiracketeering statutes, Illinois securities and consumer fraud statutes and the common law, charging harm suffered as a result of having entered into a limited partnership agreement devised and promoted by defendants. Defendants have now moved under Fed.R.Civ.P. ("Rule") 12(b)(6) to dismiss all eight counts of the Complaint. For the reasons stated in this memorandum opinion and order, their motion is denied in principal part.

Facts*fn1

In July 1982 Wayne responded to an advertisement in the Prairie Farmer by Credit-Pak, representing itself as an organization equipped to help financially straitened farmers in resolving their money woes. On July 29 and on several occasions in August, Wayne met with Stephen, Vice President of Credit-Pak and Affiliated, to discuss ways in which Wayne might resolve his own money problems. In conjunction with those discussions Stephen undertook a review of Wayne's affairs. On September 1 he wrote Wayne, noting "we are continuing to work on your matter on a best efforts basis" and including an invoice for $4,821.08 for services rendered to date.

Defendants having expended no further efforts on his behalf, in the spring of 1983 Wayne sought the return of documents and papers he had delivered to Stephen the previous summer. During the course of their conversation, Stephen told Wayne it still might be possible to arrange a "creative financing" plan to alleviate Wayne's financial worries. Over the course of further conversations Stephen described the plan as involving a sale and repurchase of land (the "Land") owned by Wayne's mother Eunice, having a fair market value of $700,000 and subject to a first mortgage of some $100,000. Repurchase would take place five years after sale, though it would be subject to extension for an additional five years at Wayne's option, and would involve an increase in the indebtedness on the Land of about $100,000. There would be a $25,000 fee for arranging the financing, payable at the end of the original five-year repurchase period. Defendants also required immediate payment of $8,500 to cover legal and accounting fees associated with preparing the financing plan documents. Eunice paid the required $8,500 to defendants in November 1983.

On December 19 Stephen telephoned Wayne to say a "creative financing" agreement (the "Agreement") had been prepared and had to be signed by the end of the day because the lender would not be accepting loan applications thereafter. Later that day Stephen met with Wayne and spent three to five minutes outlining the Agreement's contents. Stephen repeated his previous representations about the five-year term of the Agreement, the renewal option, the increase in debt on the Land and the $25,000 fee. Under the terms of the Agreement, he explained, Credit-Pak would in effect purchase a portion of the Land, which Wayne would have a right to repurchase over a five-year period. Most importantly, Stephen said the proceeds of the sale to Credit-Pak would be turned over to Wayne so he could pay his debts. Wayne asked whether he could have his lawyer review the Agreement. Stephen discouraged him from doing so, saying a lawyer would not understand a "creative" arrangement of the sort contemplated by the Agreement.*fn2 Wayne then signed the Agreement. Stephen and Wayne proceeded immediately to Eunice's house where, after Stephen had repeated the explanation and representations previously made to Wayne, Eunice too signed the Agreement. Stephen signed the Agreement in his capacity as Vice President of Affiliated.

In fact the Agreement turned out to be a limited partnership agreement*fn3 designating Affiliated as sole general partner and Wayne and Eunice as sole limited partners of the Miller Farm Partnership (the "Partnership"). It required Eunice and Wayne to make capital contributions to the Partnership: Eunice, the Land subject to the existing mortgage; Wayne, certain farm machinery and equipment.*fn4 In exchange Eunice was to receive a 45% interest and Wayne a 25% interest in the annual net profits or losses of the Partnership. Affiliated, which was to contribute only its services as general partner, received the remaining 30% interest. Other terms of the Agreement included:

    1. authorization for Affiliated to obtain on behalf
  of the Partnership a $400,000 mortgage loan on the
  Land (the "Mortgage");
    2. a $75,000 fee (payable from the Mortgage
  proceeds) to Affiliated for services rendered as
  general partner;
    3. a lease agreement, in effect obligating Wayne to
  lease the Land and certain farm equipment from the
  Partnership;
    4. a purchase agreement, in effect obligating Wayne
  to purchase the Land from the partnership within five
  years for $900,000;
    5. assignment by Wayne of one-half his partnership
  interest to Affiliated to secure his obligations
  under the Lease and Land purchase provision; and
    6. authorization for Affiliated, at its option, to
  borrow from the Partnership any surplus proceeds of
  the Mortgage on an interest-free demand-note basis.

There was however no renewal option covering Wayne's repurchase obligation.

After the Agreement was signed the authorized $400,000 Mortgage was consummated, increasing the encumbrance on the Land and yielding $300,000 in net proceeds after paying off the pre-existing mortgage. But contrary to Stephen's representations, little of that sum has been distributed to Millers:

    1. Eunice's $8,500 advance to cover expenses
  incurred in forming the Partnership has been
  reimbursed.
    2. Two interest-bearing demand loans aggregating
  $27,000 have been extended to Wayne.

Pointing to those and other discrepancies between the terms of the Agreement and Stephen's description of those terms (upon which plaintiffs had relied in signing),*fn5 Wayne and Eunice filed this action May 18, 1984.

Count I

Count I alleges violations of Securities Exchange Act of 1934 ("1934 Act") § 10(b) ("Section 10(b)") and SEC Rule 10b-5 ("Rule 10b-5"*fn6). Defendants urge the Complaint lacks any allegation of the use of an instrumentality of interstate commerce, necessary to confer jurisdiction under the statute:

    1. All the asserted misrepresentations occurred in
  wholly intrastate telephone communications.
    2. All the mail communications alleged to satisfy
  the interstate commerce requirement were not causally
  related to the securities fraud.

Neither argument succeeds, but before this opinion turns to an explanation of why they do not, it must pause over an ...


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