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PETERSON v. BALOUN

June 19, 1989

DAVID W. PETERSON and SUSAN PETERSON, Plaintiffs,
v.
JAMES ALLEN BALOUN and JAMES ALLEN BALOUN & CO., LTD., an Illinois corporation, Defendants



The opinion of the court was delivered by: BUA

 NICHOLAS J. BUA, UNITED STATES DISTRICT JUDGE

 The plaintiffs in this case, David and Susan Peterson ("the Petersons"), filed a seven-count complaint alleging that defendants' fraudulent conduct induced them into investing in a venture in which they lost over $ 50,000. In response to the Petersons' allegations, defendants James Allen Baloun ("Baloun") and James Allen Baloun Company, Ltd. ("Baloun Company") have submitted a "motion to strike" the complaint. Defendants' motion, however, exceeds the proper scope of a motion to strike. Rule 12(f) of the Federal Rules of Civil Procedure provides: "Motion to Strike . . . the court may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent or scandalous matter." Only one of defendants' arguments - their contention that paragraphs eleven and twelve of the complaint should be stricken for being irrelevant and immaterial - concerns matters addressed by Rule 12(f). The remainder of defendants' arguments do not assert that the Petersons' complaint contains any redundant, immaterial, impertinent or scandalous matter. Instead, defendants' arguments attack the merits of the Petersons' claims. Some of these arguments, those which challenge the sufficiency of the allegations in the complaint, should be raised in a motion to dismiss. The rest of defendants' arguments, those which depend on matters outside the pleadings, are more properly raised in a motion for summary judgment. Counsel for defendants, however, throws all of these arguments together in a purported "motion to strike." *fn1" Moreover, defendants' counsel supports his motion with an excessively lengthy brief without having received court permission to do so. The court does not look kindly on counsel's disregard for the Federal Rules or the local rules of this district. Nevertheless, in the interest of judicial economy, this opinion will address all of the arguments raised in defendants' "motion to strike."

 FACTS

 To address defendants' arguments concerning the sufficiency of the complaint, the court must treat defendants' motion as a motion to dismiss. See Professional Asset Management, Inc. v. Penn Square Bank, 566 F. Supp. 134, 136 (W.D. Okla. 1983); Golaris v. Jewel Tea Co., 22 F.R.D. 16, 17 (N.D. Ill. 1958). In doing so, the court is bound to accept as true the following factual allegations made by the Petersons. Gomez v. Illinois State Board of Education, 811 F.2d 1030, 1039 (7th Cir. 1987).

 In February 1986, David Peterson terminated a long-standing business association in which he had been involved and began seeking a new business opportunity. Specifically, Peterson began searching for an opportunity to own his own business. Between May 10 and May 15 in 1986, Peterson met with Baloun on several occasions. Since 1983, the Petersons had employed Baloun as their accountant, tax preparer, and investment adviser. Peterson expressed to Baloun his plans to seek a new business pursuit. In response, Baloun informed Peterson that he could offer Peterson a business opportunity superior to any other which Peterson was considering. Baloun proposed that Peterson invest in a new mortgage company called "Woodfield Mortgage Co." ("Woodfield"). Woodfield was incorporated in Illinois on December 9, 1985. Baloun was an officer and director of Woodfield and its majority shareholder. Baloun proposed that Peterson buy shares in Woodfield and help run the company as vice president.

 The Petersons claim that Baloun intentionally misled them to induce them into investing in Woodfield. Specifically, the Petersons allege that Baloun deceived them by (1) misrepresenting that he had knowledge of the mortgage banking industry by virtue of his "founding" of "one of the most successful start-ups in mortgage banking history," a company called "First Western Mortgage Company;" (2) failing to disclose that he lacked sufficient operational experience in the mortgage banking industry to be the chief executive officer of a mortgage company; (3) exaggerating the amount of his capital contribution to Woodfield by claiming that he had contributed specially adapted computer software systems worth over $ 150,000, when in fact these systems were not specially designed and were worth significantly less than what Baloun claimed; (4) exaggerating the personal financial gain which Peterson could expect from his investment in Woodfield; (5) understating Woodfield's risk of undercapitalization. The Petersons claim that these misrepresentations by Baloun caused them to invest $ 50,000 in Woodfield. They paid $ 10,000 to Baloun Company on June 29, 1986, and $ 40,000 to Woodfield on July 23, 1986. On January 8, 1988, Woodfield filed for bankruptcy and, according to the Petersons, the company is now insolvent. The Petersons claim their interest in the company is now worthless.

 Based on their allegations, the Petersons assert several claims. In Count I of their complaint, the Petersons claim that defendants violated the Securities Act of 1933, 15 U.S.C. § 77a et seq. (1982); the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (1982); and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (1987). In Count II, the Petersons allege that defendants violated § 1962 of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. (1982). Counts III through VII contain pendent state claims. Count III alleges a violation of Illinois' securities laws; Count IV asserts a common law fraud claim; Count V sets forth a claim for breach of trust; Count VI alleges a negligent misrepresentation claim; and Count VII asserts a claim for punitive damages.

 Defendants raise numerous arguments attacking each count of the complaint. This court will address defendants' arguments as if they had been brought in their proper procedural posture.

 DISCUSSION

 I. Motion to Strike

 Paragraphs eleven and twelve of the Petersons' complaint read as follows:

 
11. In June, 1987, Baloun and Woodfield Mortgage were sued for fraud by the Attorney General of Illinois, because of Woodfield's failure to honor loan commitments.
 
12. On January 8, 1988, Woodfield Mortgage Co. filed a Voluntary Petition under Chapter 7 of the Bankruptcy Act. (Case No. 88 B 207, U.S. Bk. Ct., N.D. Ill.). The corporation is now insolvent, ...

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