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NEUMANN v. JOHN HANCOCK MUT. LIFE INS. CO.

April 30, 1990

WALTER S. NEUMANN and TOBA G. NEUMANN, Plaintiffs,
v.
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a Massachusetts Insurance Corporation, ALAN M. MISALE, JOHN W. JONES, CARL J. SANTOLLI, PROFESCO CORPORATION, a New York Corporation, Defendants



The opinion of the court was delivered by: NORGLE

 CHARLES R. NORGLE, UNITED STATES DISTRICT JUDGE.

 Before the Court are the Magistrate's Report and Recommendation that this Court grant Defendants' Motion to Dismiss Count XI of Plaintiffs' Amended Complaint and grant Plaintiffs' Motion to Substitute, as to Counts I-III, V, VI, VII, VIII, and IX. The respective parties have filed timely objections to the Magistrate's Report and Recommendation as to both motions. Since the Magistrate's recommendation concerns claim dispositive motions, this court reviews the Magistrate's Report and Recommendation de novo, pursuant to Fed. R. Civ. P. 72(b) and 28 U.S.C. § 636 (b)(1)(C).

 MOTION TO DISMISS

 On a motion to dismiss, the allegations of the complaint as well as the reasonable inferences to be drawn from them are taken as true. See Doe v. St. Joseph's Hospital, 788 F.2d 411 (7th Cir. 1986). The plaintiff need not set out in detail the facts upon which the claim is based, but must allege sufficient facts to outline the cause of action. Id. The complaint must state either direct or inferential allegations concerning all of the material elements necessary for recovery under the relevant legal theory. Mescall v. Burrus, 603 F.2d 1266 (7th Cir. 1979). The court is not required to accept legal conclusions either alleged or inferred from pleaded facts. Carl Sandburg Village Condominium Ass'n No. 1 v. First Condominium Development Co., 758 F.2d 203, 307 (7th Cir. 1985). Dismissal under Rule 12(b)(6) is improper unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Papapetropoulous v. Milwaukee Transport Services, Inc., 795 F.2d 591, 594 (7th Cir. 1986).

 These allegations of the complaint are relevant to the motion to dismiss. During the summer of 1982, Alan Misale, an employee of Hancock and an employee of Hancock general agent John W. Jones, offered the plaintiffs this four-component investment:

 
1) a $ 200,000.00 whole life insurance policy (the "New Policy") to be issued by Hancock, having an annual premium of $ 16,744.38;
 
2) one or more variable life annuity contracts (the "Annuity") to be issued by Hancock or one of its wholly owned subsidiaries, which required an investment by plaintiffs of approximately $ 35,500.00;
 
3) a limited partnership interest in Damson Oil and Gas income fund -- 1983 (the "O & G Fund") which required an aggregate investment by plaintiffs of $ 51,000.00; and
 
4) a loan in the amount of $ 50,234.25 (the "Premium Loan") from Profesco Corporation ("Profesco"), an amount equal to the premiums required to be paid on the New Policy during the first three years it was to be issued.

 Plaintiffs' Complaint at 6-7.

 Misale persuaded Walter S. Neumann and Toba G. Neumann to cash in their old life insurance policy in order to make these investments. Misale represented that only an initial investment by plaintiffs was required, since the increase in the cash surrender value of the New Policy, plus the earnings on the Annuity and O & G Fund, would be sufficient to pay all premiums of the New Policy. However, Misale made certain omissions of material facts that caused plaintiffs to purchase the alleged "security," with the knowledge and consent of Hancock, Profesco, and Jones. When the value of the plaintiffs' investments decreased due to market conditions, they brought this suit to recover their losses.

 The plaintiffs' complaint initially alleged claims against defendants, John Hancock Mutual Life Insurance, a Massachusetts Insurance Corporation ("Hancock"), Alan M. Misale, John W. Jones, Carl J. Santolli and Profesco Corporation, for violations of federal and state securities laws, RICO, the Illinois Consumer Fraud Act and Deceptive Trade Practices Act, Ill.Rev.Stat. ch. 121-1/2 paras. 261-282 ("Consumer Fraud Act"), common law fraud and negligent misrepresentation. The Neumanns had also sought to maintain an action on the behalf of a class of persons or entities similarly situated. However, on December 2, 1988, this Court struck the Neumanns' class allegations, as well as dismissed Count IV, which alleged a violation of Section ...


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