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BECHER v. FARKAS

July 21, 1989

EDWIN L. BECHER, WILLIAM O. MADDOCKS, MILICIA MADDOCKS, and IRWIN ZALCBERG, Plaintiffs,
v.
JACOB FARKAS, Defendant



The opinion of the court was delivered by: NORGLE

 CHARLES RONALD NORGLE, UNITED STATES DISTRICT JUDGE

 Before the court is the motion of the defendant, Jacob Farkas, to dismiss, or, alternatively, for summary judgment on plaintiffs', Edwin L. Becher, William O. Maddocks, Milicia Maddocks, and Irwin Zalcberg, three count complaint. For the following reasons, the motion is denied, to the extent it seeks summary judgment, and is granted in part and denied in part, to the extent it seeks dismissal.

 FACTS

 Plaintiffs' complaint alleges that defendant, acting as an agent of American Care Corporation ("American Care"), an Illinois corporation engaged in providing health care services and equipment, and on his own behalf, engaged in a fraudulent course of conduct in connection with American Care's acquisition (the "aquisition") of the stock and assets of AdvaCare, Inc. ("AdvaCare"), AdvaCare of Illinois, Inc. ("AdvaCare of Illinois"), and Total Home Health Care of Chicago, Inc. ("Total"), all Illinois corporations also engaged in providing health care services and equipment.

 Specifically, plaintiffs alleged that, as part of the financing for the acquisition, defendant induced them to purchase shares of the stock of American Care through misrepresentations and omissions of material fact.

 Concerning misrepresentations, plaintiffs allege that defendant represented to them, both individually and collectively on numerous occasions, that, based on his review of all corporate billables, accounts receivable and outstanding rental contracts, an investment of cash for American Care stock would not result in a loss to plaintiffs because even if AdvaCare or AdvaCare of Illinois obtained no new customers and no additional equipment, the income generated by existing rental contracts with present customers of AdvaCare and AdvaCare of Illinois was sufficient to pay all costs of their operation, service existing and proposed debt and pay back the plaintiffs at least their original investment in the event that either AdvaCare, AdvaCare of Illinois, or both became bankrupt. Allegedly, at least one of the meetings at which the alleged misrepresentations were made was initiated by defendant through the use of an intrastate telephone call.

 Plaintiffs allege that in reliance on the statements made to them by the defendant, they purchased a total of 20,000 shares of stock in American Care for a total cash investment of $ 100,000. After they purchased their shares of stock in American Care, plaintiffs allege that they learned that many of the accounts receivables of AdvaCare and AdvaCare of Illinois were "bad" representing improper billings of Medicare and that the Department of Health and Human Services had been investigating AdvaCare and AdvaCare of Illinois, prior to plaintiffs' purchase of their shares, regarding claims for reimbursements submitted by AdvaCare and AdvaCare of Illinois.

 On July 31, 1986, American Care, AdvaCare of Illinois, and Total filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. The confirmed plan of reorganization of American Care provides for the cancellation of all outstanding shares of pre-confirmation stock, including those purchased by plaintiffs. In exchange plaintiffs will receive approximately $ 100,000 for their combined 6% interest in American Care, payable over a one year period commencing in June of 1989, providing that American Care has sufficient funds.

 Based on the foregoing, plaintiffs' complaint alleges, Count I, violation of § 10(b) of the the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5, Count II, violation of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), and Count III, common law fraud.

 SUMMARY JUDGMENT

 Summary judgment is appropriate only where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving parties is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c).

 Defendant seeks summary judgment based upon plaintiffs' execution of certain subscription agreements which defendant argues contain statements precluding plaintiffs from proving reasonable reliance, as pled in all counts. However, summary judgment is inappropriate at this time, as plaintiffs' execution of the subscription agreements does not as a matter of law prevent them from proving reasonable reliance. First, plaintiffs have created a genuine issue by submitting affidavits stating that they executed these subscription agreements subsequent to their purchase of the stock. Second, even if the subscription agreements were executed prior to the purchase and are enforceable, they do not, as a matter of law, prevent plaintiffs from proving reasonable reliance to the extent their claims are based on defendant's alleged omissions to inform them of the ...


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