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GOLDWATER v. ALSTON & BIRD

November 7, 1986

HYMEN P. GOLDWATER, PLAINTIFF,
v.
ALSTON & BIRD, PRICE WATERHOUSE, CENTERRE TRUST COMPANY, CENTERRE BANCORPORATION, HOSPITAL MANAGEMENT ASSOCIATES, INC., (H.M.A.) AND H.M.A., INC., THE JONES, BIRD & HOWELL PARTNERS, JONES, BIRD & HOWELL AND PETER WRIGHT, JACK HERETH, FUTRA INDUSTRIES, INC., AND HERETH JONES, INC., GALLOP, JOHNSON & NEUMAN AND J. NEIL HUBER, DONALD GALLOP, ALLAN JOHNSON, SANFORD, NEUMAN, THOMAS LEWIN, P. TERENCE CREBS, AND STEPHEN ROVAK, MT. VERNON HOSPITAL, INC., JEFFERSON COUNTY HEALTH FACILITIES AUTHORITY, INC., MICHAEL A. ALEXANDER, ROBERT O. KENT, KENNETH MARTIN, JR., WILLIAM D. THACKERY, FLOYD COLLINS AND MAX W. SCHURTZ, PETER ORR, DEFENDANTS.



The opinion of the court was delivered by: Foreman, Chief Judge:

MEMORANDUM AND ORDER

This matter is before the Court on the motions to dismiss of the following defendants:

1. Price Waterhouse

2. Centerre Trust Company

   3. Hospital Management Associates, Inc. (HMA) and H.M.A.,
      Inc.

4. The Jones, Bird & Howell Partners

5. Jones, Bird & Howell and Peter Wright

6. Alston and Bird

   7. Jack Hereth; Futra Industries, Inc.; and Hereth Jones,
      Inc.

8. Gallop, Johnson & Neuman and J. Neil Huber

   9. Donald Gallop, Allan Johnson, Sanford Newman, Thomas
      Lewin, P. Terence Crebs, and Stephen Rovak
  10. Mount Vernon Hospital, Inc.; Jefferson County Health
      Facilities Authority, Inc.; Michael A. Alexander; Robert O.
      Kent; Kenneth Martin, Jr.;

      William D. Thackery; Floyd Collins and Max W. Schurtz.

The case arises from plaintiff's purchase of First Mortgage Medical Facility Revenue Bonds ("the bonds") from the Jefferson County Health Facilities Authority ("the Authority"). The purpose of the bond issue was to acquire an existing health care facility in Mount Vernon, Illinois and to convert it into a combined acute care hospital and nursing home. The bond offering closed on August 19, 1980.

Plaintiff seeks relief on behalf of a class of all persons who purchased the bonds prior to their default in February, 1982. Fifty-one defendants have been named in this suit. Plaintiff alleges, in brief, that defendants engaged in a scheme to market bonds on the tax exempt bond market, that the sale of the bonds constituted a fraud on the tax exempt bond market, and that plaintiff and the class relied upon the integrity of the tax exempt bond market in making their investment decision. (Plaintiff's Complaint ¶¶ 75 & 76). The complaint seeks relief pursuant to section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a); section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5; and the Racketeering Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(a),(b) & (c). Plaintiff's complaint also sets forth pendent state law claims against various defendants for negligence and breach of contract.

There are certain issues that are common to all of the motions to dismiss. Various other issues have been raised only by certain individual defendants. The Court will first address those particular issues raised by individual defendants, and will then discuss those issues common to all of the motions. The Court notes that for purposes of defendants' motions to dismiss, all allegations in the complaint must be accepted as true. The complaint should not be dismissed unless "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King and Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984).

FACTS

According to the complaint, the alleged "scheme" originated with the financial difficulties of a 50-bed hospital known as Jefferson Memorial Hospital Association ("Jefferson Hospital") located in Mount Vernon, Illinois. Jefferson Hospital eventually filed for bankruptcy, and as of November, 1979, the hospital was closed.

Jefferson Hospital, however, had previously obtained a permit from the Illinois Department of Health to relocate to two nearby nursing homes, Hickory Grove Manor and View Manor, with plans to convert those facilities into a combined acute care hospital and nursing home. Art Lewis and Glen Lewis, the promoters of the alleged scheme, arranged an agreement between Jefferson Hospital and two of their corporations, UDE Corporation and UDE, Inc.,*fn1 pursuant to which 1) UDE Corporation would develop the project and secure financing, and 2) UDE, Inc., its wholly owned subsidiary, would be retained as general contractor. UDE Corporation, however, could not obtain sufficient financing for the conversion. Art and Glen Lewis, through the Grove Partnership and the View Partnership, purchased the Hickory Grove Manor and the View Manor facilities. (Art and Glen Lewis were each one of two general partners of Grove Partnership and View Partnership.) The purchase price for the properties was $1,326,000.

Art and Glen Lewis, with the aid of their attorneys, J. Neil Huber and Gallop, Johnson and Neuman, then formed the Jefferson County Health Facilities Authority, Inc. ("the Authority") to issue bonds for the purpose of financing the renovation and conversion of the properties by their construction firm. Art Lewis, with the aid of his attorneys, also formed Mount Vernon Hospital ("the Hospital"), a purported not-for-profit corporation, to lease the facilities from the Authority. The Hospital's lease payments were expected to provide for debt service. The complaint alleges that the Hospital then retained UDE, Inc. as the general construction agent for a contract price of $3,600,000, and UDE Corporation as the design architect for a contract price of $440,000. Plaintiff alleges that neither contract was an arms-length transaction. (Plaintiff's Complaint, ¶¶ 50 & 51).

Mount Vernon Hospital allegedly had no experience in managing health facilities, and as a result, HMA was retained to manage the facility. According to the complaint, UDE, Inc. agreed to pay HMA $180,000 out of bond proceeds and to guarantee $250,000 in working capital. Centerre Trust ...


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