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Flynn v. Merrick

decided: August 7, 1989.

GERALD T. FLYNN, JOHN ANDERSON, DAVID MILLIGAN AND MAGDELINE MISKULIN, ALL INDIVIDUALLY AND FOR THE USE OF OTHERS SIMILARLY SITUATED, JOHN KAYON, PRECISION FLEXMOLD, INC., A WISCONSIN CORPORATION, PLAINTIFFS-APPELLANTS,
v.
STEPHEN M. MERRICK AND FISHMAN, MERRICK & PERLMAN, P.C., AN ILLINOIS LEGAL CORPORATION, FLEXMOLD, INC., AN ILLINOIS CORPORATION LOCATED IN ADDISON, ILLINOIS, DR. F.J.L. BLASINGAME, JOHN C. BLASINGAME, RICHARD CHRISTENSEN, ALLEN BUHLER, JUDITH HARTIG AND BEATRICE BLIWAS, DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Eastern District of Wisconsin. No. 82 C 793 -- Thomas J. Curran, Judge.

Cummings, Wood, Jr., and Ripple, Circuit Judges.

Author: Wood

WOOD, JR., Circuit Judge

Plaintiffs-appellants Gerald T. Flynn, John Anderson, David Milligan, Magdeline Miskulin, and John Kayon ("Flynn Group") were minority shareholders and debenture holders in Precision Flexmold, Inc., a Wisconsin corporation ("Precision"). Precision was formed to develop and exploit a flexible molding process used in industrial applications. The Flynn Group invested heavily in Precision but with no success, and losses mounted. The Flynn Group and Precision sought relief for their lost investments from a number of parties in many different courts and through multiple complaints.

In this particular case, the Flynn Group and Precision filed various actions against the defendants-appellants, who are collectively known as the "Chicago Takeover Group" for their involvement in the acquisition of Precision's patents by Flexmold, Inc., an Illinois corporation ("Flexmold"). The Flynn Group and Precision alleged violations of due process and the Racketeer Influenced Corrupt Organizations Act ("RICO").*fn1 The district court dismissed all the members of the Flynn Group due to lack of standing and also found that they had failed to raise all the necessary elements of a RICO claim. The Flynn Group appeals that decision.

The district court had jurisdiction over this case under 28 U.S.C. § 1331 for causes of action arising under 18 U.S.C. § 1964 and 42 U.S.C. §§ 1983, 1985(3), and 1988, as well as any pendant state claims under United Mine Workers v. Gibbs, 383 U.S. 715, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966). The Flynn Group appeals from the district court's order of August 16, 1985, which became a final judgment following the entry of judgment by the district court on December 8, 1987.*fn2 We review this case under 28 U.S.C. § 1291.

I. FACTUAL BACKGROUND

This long and confusing saga began when Raymond Putzer developed and secured patents on a flexible molding process for use in industry. Putzer, an original defendant in this case who was later dismissed, formed Precision to oversee the development of improvements in the process and to license the process to others. In 1974, Putzer needed additional funds to operate Precision. He contacted Gerald Flynn, who claims to have raised approximately $500,000 through the sale of personal debentures to investors. Much of that money was invested in Precision, but by 1975 Precision apparently needed more money. Flynn bought more shares and sold more debentures. Despite this new infusion of capital, Precision ran out of funds in 1976 and essentially ceased operations.

Litigation arising out of this situation commenced in 1977 when the Wisconsin Securities Commission began a securities fraud investigation into the sale of the Flynn Group debentures. A settlement was reached in that case, and the Flynn Group itself mounted a shareholders' derivative action in Wisconsin state court alleging fraud on the part of Putzer, claiming he had misrepresented the commercial value of the molding process. This suit was later settled through an assignment of royalty income. A receiver was appointed to manage the affairs of the moribund Precision.

This case derives from the court-approved sale of Precision's assets, including its patents, to Flexmold. The Flynn Group claims that Precision's assets were sold at an unfair price, rendering its interest in Precision valueless and ending Precision's ability to continue as a going concern. The Flynn Group filed this lawsuit in federal district court against the so-called Chicago Takeover Group, which was composed of the business people who purchased Precision's assets and the attorneys who represented them. In an extended and tortuous complaint, the Flynn Group appears to claim that the Chicago Takeover Group conspired to purchase Precision's assets unfairly, to the injury of the Flynn Group.

Although it is the Second Amended Complaint that is the subject of this lawsuit, the Flynn Group has remained incapable of clarifying exactly what is at issue in this suit. After slogging through the morass of accusations and assertions that make up this complaint, we can identify three conspiracies that appear to be the objects of the Flynn Group's enigmatic claims. First, the Flynn Group alleges that the original directors of Precision conspired to use fraud and misrepresentation to induce the Flynn Group's investment in the company. Second, it claims that the receiver appointed to manage Precision and the Wisconsin state judge who supervised Precision conspired with some members of the Chicago Takeover Group to deprive the Flynn Group of the relief it deserved in state court, violating its right to due process of law. Finally, the Flynn Group claims that the Chicago Takeover Group conspired to acquire the assets of Precision with inadequate consideration in violation of RICO.

The district court dismissed all the members of the Flynn Group due to lack of standing. Precision remained in the lawsuit. The district court also dismissed the Flynn Group's due process claims against all the defendants and the RICO claim against all the defendants except Richard Christensen and Beatrice Bliwas. The two remaining defendants were also the majority stockholders of Precision. The district court granted their motion to dismiss the entire lawsuit with prejudice and this appeal followed.

II. DISCUSSION

As an initial matter, we now address Count I of the Flynn Group's complaint and ask whether, apart from the alleged violations of RICO, the Flynn Group has made out a case that the defendants used fraud and misrepresentation to get the group's members to invest in the company. First, the vague allegations of fraud laid out in Count I of the complaint do not meet the standard set out in Rule 9(b) of the Federal Rules of Civil Procedure which requires that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The cryptic statements found in the complaint do not establish fraud to the degree of particularity required under Rule 9(b). "[Mere] allegations of fraud, corruption or conspiracy, averments to conditions of mind, or referrals to plans and schemes are too conclusional to satisfy the particularity requirement, no matter how many times such accusations are repeated." Hayduk v Lanna, 775 F.2d 441, 444 (1st Cir. 1985). Even if the repetitious claims found in Count I did satisfy the demands of Rule 9(b), Count I seems ...


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