United States District Court, Northern District of Illinois, E.D
February 14, 1985
LAWRENCE E. MCKEE, ET AL., PLAINTIFFS,
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
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 ¶¶
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.
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 action, a plaintiff need also state "with
particularity" the circumstances constituting the
Id. To determine whether a pleading has satisfied Rule 9(b), the rule's
purposes should be kept in mind:
The rule . . . ensures that the allegations are
specific enough to inform a defendant of the act of
which the plaintiff complains and to enable him to
prepare an effective response and defense. [Citations
omitted.] Second, it eliminates those complaints filed
"as a pretext for discovery of unknown wrongs."
[Citation omitted.] The Second Circuit explained: "A
complaint alleging fraud should be filed only after a
wrong is reasonably believed to have occurred; it
should seek to redress a wrong, not to find one."
[Citation omitted.] . . . Third, Rule 9(b) seeks to
protect defendants from unfounded charges of
wrongdoing which injure their reputations and
goodwill. [Citation omitted.]
In re Commonwealth Oil/Tesoro Petroleum Corporation Securities
Litigation, 467 F. Supp. 227, 250 (W.D.Tex. 1979). See Gross v.
Diversified Mortgage Investors, 431 F. Supp. 1080, 1087 (S.D.N.Y. 1977),
aff'd, 636 F.2d 1201
, 1203, 1206 (2 Cir. 1980); Baselski v. Paine, Webber
Jackson & Curtis, Inc., 514 F. Supp. 535
, 540 (N.D. Ill. 1981) (Rule 9
(b) should allow framing of responsive pleading and evidence "a
reasonable belief on the part of the plaintiff that there is merit to the
Dozens of courts have attempted to prescribe the more detailed pleading
requirements of Rule 9(b), but all have agreed that at the least, a
plaintiff pleading fraud must "specify the time, place and contents of any
alleged false representations, and the full nature of the transaction."
Lincoln National Bank v. Lampe, 414 F. Supp. 1270, 1279 (N.D.Ill. 1976);
see Haroco, 747 F.2d at 405. This should include the identity of the
person making the misrepresentations, the content of the
misrepresentations, and how the misrepresentations were communicated to
plaintiff. Zerman, 735 F.2d at 22.
The identity of those making the misrepresentations is crucial. Courts
have been quick to reject pleadings in which multiple defendants are
"lumped together" and in which
no defendant can determine from the complaint which of
the alleged representations it is specifically charged
with having made, nor the identity of the individual
by whom and to whom the statements were given, nor the
situs and circumstances of the conversation, nor . .
. the date of the utterance.
Lincoln, 414 F. Supp. at 1278. See Adair v. Hunt International Resources
Corp., 526 F. Supp. 736, 745 (N.D.Ill. 1981). In addition, under Rule 9
(b) plaintiffs are expected to allege events from which fraud and other
wrongdoing may be inferred. 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) ("It is reasonable to require that the plaintiffs specifically
plead those events which they assert give rise to a strong inference that
the defendants had knowledge"); Gibbons v. Udaras na Gaeltachta,
549 F. Supp. 1094, 1124 (S.D.N.Y. 1982) ("plaintiff must allege some
facts from which an inference of scienter can be drawn"); Jacobson v.
Peat, Marwick, Mitchell & Co., 445 F. Supp. 518, 522-28 (S.D.N.Y. 1977)
(plaintiffs failed to allege facts from which alleged overstatement of
accounts receivable could be inferred).
This discussion demonstrates that the first amended complaint is
fatally deficient. A review of the allegations reveals that Pope
represented Northwest and the Bank of Freeport in the transaction in
question. Plaintiffs are allegedly Pope's clients, but it is not clear
that Pope represented plaintiffs in this transaction. Certainly, there
are no allegations that Pope had a conflict of interest or divided
loyalties in its work on the transaction. Plaintiffs allege that Lindgren
is plaintiffs' accountant and that it delivered documents to Northwest
and the Bank of Freeport. The rest of the allegations concern the other
defendants. Regarding the banking defendants, they are alleged to have
overvalued the extent of plaintiffs' debt, if any, and received
plaintiffs' property in release of that debt. They then refused to open
the conveyed entities' records to plaintiffs or make an accounting to
plaintiffs of those entities' operating records. In addition, the banking
defendants have not disclosed the conveyance documents. These allegations
are inadequate to state claims of fraud under Rule 9(b) against any
First, the pleading fails to identify any activities by Pope and
Lindgren that lead to the inference of their participation in fraudulent
activity. Their acts, professional representation and the conveyance of
documents, are neutral on their face. They may have been totally
unrelated to the fraud in question: the overvaluing of the amount of
plaintiffs' alleged debt, the failure to discharge the debt, and the
refusal to disclose records of the conveyed corporations. Not a single
representation or omission is attributed to these defendants, much less a
date on which the representation or omission occurred. Second, the
defendants are grouped together indiscriminately, with an inference that
each defendant is responsible for the acts of the others. However, there
is no support in law for such a finding in a case such as this where
scienter is an element of both federal claims and the defendants are
apparently not connected by any agency or other relationship. See Adair,
526 F. Supp. at 745 (insufficient to group defendants together as liable
for each others' acts). As to the banking defendants, there is perhaps
more reason to suspect wrongdoing; concealment of documents may be
interpreted as an act in furtherance of a fraudulent scheme. However,
there is still no indication supporting the inference of overvaluing
which is the basis of the fraud. The plaintiffs do not describe a single
event on which they allegedly relied. The court must have some
description of the times, dates, parties, and contents of
misrepresentations which underlie the alleged fraudulent scheme. This is
especially true in a
RICO action, in which two predicate acts must be alleged.
Plaintiffs urge repeatedly that the transaction in question was an
important event for all parties involved, and thus "it is inconceivable
that any of the Defendants involved in this conspiracy would not be aware
of the charges or the nature of their alleged participation in such
scheme." (Plaintiffs' Response to Lindgren, filed 12/7/84, p. 7.) They
indicate that discovery will reveal the finer elements of the scheme.
Both arguments are unavailing. To say that a defendant knows the nature
of the alleged fraud by having been involved in the underlying
transaction proves far too much; any defendant with individual contacts
to a plaintiff would have such knowledge. To allow a plaintiff to plead
simply, "defendants know what they did," would render superfluous even
the liberal requirements of Rule 8. In any case, such an argument does
not satisfy other purposes behind Rule 9(b), namely, that complaints
should not be filed as a pretext for discovery and that defendants'
reputations be protected from unfounded charges of fraud.
The suggestion that discovery will cure the evils of an impermissibly
vague complaint has likewise been rejected. The court in Lincoln National
Bank commented that "[s]urely plaintiff does not require discovery to
learn the time, place, circumstances and contents of conversations to
which it was a party." 414 F. Supp. at 1279. The court continued, quoting
from Trussell v. United States Underwriters, Ltd., 228 F. Supp. 757, 774
It is obvious that a plaintiff may not be privy to the
workings of a group of defendants who have acted in
concert to defraud him, but he can at least identify
the particular defendants who allegedly dealt with
him, and he can describe the circumstances under which
particular defendants dealt directly with him.
414 F. Supp. at 1279. The requirements of Rule 9(b) are directed in part
to preventing use of the liberal discovery procedures as a method for
determining whether a fraud occurred at all.
Hence, while plaintiffs repeatedly claim that they have described the
"bare bones of a fraudulent scheme," (Plaintiffs' Response to Pope
Motion, filed 12/7/84, pp. 4, 7; Plaintiffs' Response to Lindgren
Motion, supra, at 4), the court finds that they have not. The first
amended complaint fails properly to allege fraud against defendants, and
must be dismissed.
The court therefore dismisses this complaint as inadequate under Rule 9
(b). Plaintiffs are directed to file a second amended complaint by March
15, 1985, following the standards set forth in this opinion for the
pleading of fraud.
It is so ordered.
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