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MCKEE v. POPE BALLARD SHEPARD & FOWLE

February 14, 1985

LAWRENCE E. MCKEE, ET AL., PLAINTIFFS,
v.
POPE BALLARD SHEPARD & FOWLE, LTD., ET AL., DEFENDANTS.



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

MEMORANDUM OPINION AND ORDER

This action is before the court on the motions to dismiss of defendants Pope Ballard Shepard & Fowle, Ltd. ("Pope"), Lindgren, Callihan, Weaver, Van Osdol, Ltd. ("Lindgren"), State Bank of Freeport, Northwest Bancorp, Inc., and Dan Heine. Plaintiffs, members of the McKee family, have brought this action under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961-1968 ("RICO"), and the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) ("Exchange Act"). Plaintiffs also allege a pendent state claim of conversion. As the parties are clearly not of diverse citizenship, the court's subject matter jurisdiction rests on the allegations of fraud under RICO and the Exchange Act.

Allegations

In plaintiffs' amended complaint they seek damages in excess of five million dollars arising from injuries brought about by defendants' alleged fraudulent activity. All defendants were involved in a transaction involving the sale of banks of which plaintiffs were the controlling shareholders and of four parcels of land of which plaintiffs were the owners. The defendants are identified as follows: Pope is a professional corporation of attorneys at law; Northwest Bancorp, Inc. is a corporation holding the capital stock of the Bank of Freeport; the Bank of Freeport is a full service bank; Heine is a president and director of Northwest and/or the Bank of Freeport; and Lindgren is a professional corporation of certified accountants. (First Amended Complaint ¶¶ 6-10.)

Plaintiffs list the property that is the subject of this action at ¶¶ 12-13. This property consists of shares of stock in five banks valued at about four million dollars and four parcels of real estate valued at about one and one-half million dollars. Plaintiffs complain generally of having been fraudulently coerced to enter "agreements" that conveyed all of this property to the Bank of Freeport in exchange for release of "defaulted indebtedness" owed by plaintiffs to that bank and others. (Id. at ¶ 18.)

All of the pertinent factual allegations concerning the fraudulent activities of these five defendant persons and entities are found in ¶¶ 14-29. These allegations may be summed as follows: all defendants, along with other persons, coerced plaintiffs into entering into the above-described agreements. However, none of the plaintiffs' debts was in default and the value of the conveyed property far exceeded plaintiffs' total debt. The Bank of Freeport unlawfully used plaintiffs' bookkeeping information in preparing these agreements. (Id. at ¶ 14.) Plaintiffs were clients of Pope and Lindgren. Pope represented Northwest and the Bank of Freeport in preparing the agreements. (Id. at ¶ 15.) Moreover, Lindgren furnished accounting information to Northwest and the Bank of Freeport in furtherance of the preparation of the agreements. (Id. at ¶ 16.)

The Bank of Freeport has not released the debt. (Id. at ¶ 22.) However, the Bank of Freeport has taken control of three banks, and refuses either to return control or to make an accounting for the assets and operations of these banks. It is further alleged that the Bank of Freeport purchased plaintiffs' debts at a discount, for which it failed to account to plaintiffs. The final allegations are that "defendants" have refused to return the conveyance documents to plaintiffs and to allow plaintiffs to examine the books and records of the conveyed banks.

While these factual allegations are quite broad, the allegations of fraud are broader still. In ¶¶ 30-37, plaintiffs attempt to set forth a claim under the Exchange Act. Each of defendants, alone or together, allegedly contrived a scheme to defraud plaintiffs. (Id. at ¶ 31.) Regarding the agreements, "each of the Defendants made one or more untrue statements of material fact and/or omitted to state other material facts necessary in order to make the statements . . . not misleading. . . ." (Id.) The statements occurred in connection with the Bank of Freeport's and Northwest's recommending the sale of securities. Each misrepresentation was made "with knowledge, participation, cooperation, aid, abetment and assistance of each of the Defendants." (Id. at ¶ 34.) Heine was controlled by the Bank of Freeport and Northwest, which are thus liable jointly and severally with him. (Id. at ¶ 36.)

The RICO allegations are found at ¶¶ 38-45. Plaintiffs allege that
the RICO enterprises are Northwest and the association in fact are
Northwest, Heine, and the Bank of Freeport. (Id. at ¶ 40.) The
predicate acts of mail and wire fraud, 18 U.S.C. § 1341, 1343, are
alleged broadly: "Defendants on two or more occasions used or caused to
be used the United States mails" and "communicated, or caused
communications to be made . . .  by wire . . . two or more times" in
furtherance of the scheme.

(Id. at ¶ 41 (a-b).) Securities fraud is also alleged as underlying
the RICO violations.

Legal Discussion

Defendants move to dismiss this action under Rules 8, 9(b), and 12 (b)(6). The court will address only the arguments under Rule 9(b), as they dispose of the motions to dismiss in full. The court finds that plaintiffs have failed to plead fraud with particularity, as required under Rule 9(b). The first amended complaint is therefore dismissed. Plaintiffs shall file a second amended complaint, following the guidelines set forth in this opinion, by March 15, 1985.

Federal Rule 9(b) requires that in allegations of fraud, "the circumstances constituting fraud or mistake shall be stated with particularity." The violations of the Exchange Act in question here, which are predicated on fraud, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), must comply with this special pleading requirement. Tomera v. Galt, 511 F.2d 504 (7th Cir. 1975); Zerman v. Ball, 735 F.2d 15, 2 (2d Cir. 1984). Similarly, the allegations of fraud underlying a RICO claim must be pled with particularity. Haroco, Inc. v. American National Bank and Trust Company of Chicago, 747 F.2d 384, 405 (7th Cir. 1984), cert. granted, ___ U.S. ___, 105 S.Ct. 902, 83 L.Ed.2d 917 (1985). Here, the predicate acts are mail, wire, and securities fraud and all must therefore be pled in compliance with Rule 9(b).

The Seventh Circuit has made clear that Rule 9(b) should be read together with Rule 8. Tomera, 511 F.2d at 508. The Court described the relationship between these two rules as follows:

  Rule 8 requires that a plaintiff give through his
  pleadings notice to defendant of the nature of his
  claims. [Citations omitted.] It urges the plaintiff to
  make known his claims simply and concisely in short,
  plain statements. With these principles in mind, the
  purpose of rule 9 becomes clear. Rule 9 lists the
  actions in which slightly more is needed for notice.
  In a fraud ...

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