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ONESTI v. THOMSON MCKINNON SECURITIES

October 7, 1985

JOSEPH ONESTI, ANNA ONESTI, AND J. ONESTI & SONS, INC., AN ILLINOIS CORPORATION, PLAINTIFFS,
v.
THOMSON MCKINNON SECURITIES, INC., RICHARD M. HARRIS AND TOUCHE ROSS & CO., DEFENDANTS.



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

MEMORANDUM ORDER

Before the Court is defendants' motion to dismiss plaintiffs' complaint for compensatory damages. Plaintiffs allege numerous theories of recovery, including violations of the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1962(c); the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the 1934 Act); the Securities Act of 1933 (the 1933 Act), 15 U.S.C. § 77q(a); and the Illinois Consumer Fraud and Deceptive Practices Act, 121 1/2 Ill.Rev.Stat. § 262 (1985). Plaintiffs also allege common law fraud and breach of fiduciary duty.

This Court's jurisdiction is based on 28 U.S.C. § 1331, 18 U.S.C. § 1964, 15 U.S.C. § 77v, 15 U.S.C. § 78aa, and on principles of pendent jurisdiction. For the reasons stated herein, the Court denies defendants' motion to dismiss in part. The Court, however, grants defendant Touche Ross' motion to dismiss Count VI, grants TMS' motion to dismiss TMS from Count I, and grants defendants TMS and Harris' motion to dismiss Count IV.

FACTS

The following facts are alleged in plaintiffs' complaint. For purposes of this order they are considered to be true.

During the course of managing plaintiffs' accounts, TMS and Harris charged excessive commission fees. In addition, they materially misrepresented stock investments as suitable to plaintiffs' investive goals and objectives when they were not. TMS and Harris also recommended investments without adequately investigating the tax consequences to plaintiffs. Along these lines, defendant Touche Ross wrongfully conveyed tax information that induced plaintiffs to accept TMS and Harris' investment recommendations. Plaintiffs apparently sustained losses and this litigation ensued.

Count I of the complaint alleges a § 1962(c) RICO violation. Counts II and III set forth securities fraud violations of § 10(b) of the 1934 Act and § 17(a) of the 1933 Act. Count IV alleges common law fraud, while Counts V and VI allege breach of fiduciary duty. Count VII pleads an action under the Illinois Consumer Fraud and Deceptive Business Practices Act.

DISCUSSION

I.  Touche Ross' Motion to Dismiss for Lack of Subject Matter
    Jurisdiction

Touche Ross is named only in the breach of fiduciary duty allegations in Count VI. Since Count VI lacks an independent basis for original federal jurisdiction, Touche Ross is joined as a pendent party defendant. Touche Ross therefore moves to dismiss plaintiffs' complaint for lack of subject matter jurisdiction.

A pendent party defendant is not a party to a jurisdictionally sufficient main claim, but is only a party to a related state law claim. The Supreme Court has never expressly acknowledged the legitimacy of pendent party jurisdiction. Knudsen v. D.C.B., Inc., 592 F. Supp. 1232, 1235 (N.D.Ill. 1984). In the Seventh Circuit, such jurisdiction has been generally met with disfavor. Thomas v. Shelton, 740 F.2d 478, 487 (7th Cir. 1984). However, pendent party jurisdiction is not dead. A few opinions have approved pendent party jurisdiction, see Moore v. The Marketplace Restaurant, Inc., 754 F.2d 1336, 1353 (7th Cir. 1985) (separate opinion by Posner, J.), suggesting that the exercise of such jurisdiction is within the trial court's sound discretion. Musikiwamba v. ESSI, Inc., 760 F.2d 740, 754 (7th Cir. 1985).

Courts allowing pendent party jurisdiction require the federal and state claims to arise from a common nucleus of operative facts such that a plaintiff would ordinarily be expected to try his claims in one judicial proceeding. Moore v. Marketplace Restaurant, Inc., 754 F.2d 1336, 1353 (7th Cir. 1985). Moreover, the valid pendent claim must be based on the same facts as the main claim for the two claims to be considered part of a single case. Bernstein v. Lind-Waldock & Co., 738 F.2d 179, 187 (7th Cir. 1984).

Plaintiffs' claims against TMS and Harris and claim against Touche Ross are related, but the claims do not arise from a common nucleus of operative fact and cannot be considered part of the same case. TMS and Harris had a contractual relationship with plaintiffs, whereas Touche Ross did not. In addition, TMS and Harris repeatedly misrepresented the liquidity and suitability of numerous investments to plaintiffs' known investment objectives. Touche Ross' misrepresentation was limited to tax advice regarding a single investment given without knowledge of plaintiffs' investment goals. Plaintiffs' pendent party claim against Touche Ross should not be joined with plaintiffs' other federal claims since pendent ...


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