The opinion of the court was delivered by: Foreman, Chief Judge:
This matter is before the Court on the motions to dismiss of
the following defendants:
2. Centerre Trust Company
3. Hospital Management Associates, Inc. (HMA) and H.M.A.,
4. The Jones, Bird & Howell Partners
5. Jones, Bird & Howell and Peter Wright
7. Jack Hereth; Futra Industries, Inc.; and Hereth Jones,
8. Gallop, Johnson & Neuman and J. Neil Huber
9. Donald Gallop, Allan Johnson, Sanford Newman, Thomas
Lewin, P. Terence Crebs, and Stephen Rovak
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).
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 ...