MEMORANDUM OPINION AND ORDER
SUZANNE B. CONLON, UNITED STATES DISTRICT JUDGE
This is a purported class action instituted by plaintiff Debra R. Greenberg, as Trustee of the Debra R. Greenberg 6/10/86 Revocable Living Trust, ("Greenberg") on behalf of all purchasers of certain municipal mortgage revenue bonds ("the municipal bonds") who held bonds on January 11, 1990. In connection with the bonds' issuance, Greenberg sues various entities for violating the federal securities laws, breach of contract, breach of fiduciary duties and common law fraud. Defendants move to dismiss all charges against them pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. Defendant American National Bank & Trust Company of Chicago ("American National Bank") seeks an order requiring Greenberg to pay its reasonable attorneys' fees and costs incurred in moving to dismiss Greenberg's claims under Fed.R.Civ.P. 11.
On a motion to dismiss, the court accepts as true all the well-pleaded factual allegations of the complaint and inferences reasonably drawn from them. Gomez v. Illinois Bd. of Education, 811 F.2d 1030, 1039 (7th Cir. 1987). In considering the sufficiency of Greenberg's amended complaint on this motion to dismiss, the court is limited to the pleadings. Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1107 (7th Cir. 1984), cert. denied, 470 U.S. 1054, 84 L. Ed. 2d 821, 105 S. Ct. 1758 (1985) ("it is axiomatic that the complaint may not be amended by the briefs in opposition to a motion to dismiss"). Accordingly, the court disregards Greenberg's numerous attempts in her response to buttress the allegations of the amended complaint with additional assertions of fact and new theories of recovery. Only the well-pleaded factual allegations in the amended complaint will be accepted as true in deciding this motion.
A. The Municipal Bond Issue
On December 29, 1982, the Village of Schaumburg, Illinois issued and sold $ 21,905,000 of municipal bonds. Amended Complaint para. 12. Defendant Boettcher & Company ("Boettcher") underwrote the bonds and published the "official statement" describing the bond issue. Id. para. 4. Defendant American National Bank & Trust Company of Chicago ("American National Bank"), on behalf of the Village of Schaumburg, used the proceeds of the bond issue to make a non-recourse mortgage loan to defendants Drovers Bank of Chicago ("Drovers") and Treehouse Venture II ("Treehouse") to finance the acquisition of land and construction of a 480 unit multi-family housing project ("the project") in Schaumburg. Id. paras. 7, 14, 17. Drovers, acting as trustee, owned the project for the benefit of Treehouse, a limited partnership. Id. para. 14.
Under the terms of the official statement, the principal and interest payments on the municipal bonds were to be made out of funds received from Drovers and Treehouse under the mortgage agreement. Ex. A at 4, attached to original complaint and incorporated by reference in amended complaint. See also Amended Complaint para. 15. The non-recourse mortgage was secured by the project itself. Amended Complaint para. 18. In addition, the mortgage was insured by the Federal Housing Authority ("FHA") pursuant to § 221(d)(4) of the National Housing Act of 1934. Id. at para. 19. The official statement provided that in the event Drovers and Treehouse defaulted on their mortgage obligations, American National Bank would assign the mortgage note to the Department of Housing and Urban Development ("HUD") in lieu of foreclosure. Ex. A at 6. In return, American National Bank would receive the mortgage insurance proceeds. Id. American National Bank's receipt of these mortgage insurance proceeds triggered mandatory redemption of the municipal bonds. Id. at 13.
The official statement disclosed the risk of mandatory redemption of the bonds in a section entitled "Redemption." Ex. A at 13. The redemption section stated:
The Bonds are subject to mandatory redemption on any date on or after January 1, 1984 at a redemption price equal to the principal amount thereof, plus accrued interest to the date fixed for redemption, in such manner as may be designated by [American National Bank], as a whole, or in part, (i) if mortgage insurance proceeds are paid to [American National Bank] or (ii) if insurance proceeds received as a result of damage to the Project or condemnations awards are applied to the payment of installments on the [mortgage] Note.
Id. (emphasis added). See also Amended Complaint para. 22. The redemption section listed three other events that could trigger mandatory redemption: (i) following final endorsement of the mortgage note by HUD if the principal amount of the note is reduced upon final endorsement by $ 5,000 or more; (ii) after July 1, 1994, if certain funds are available to redeem the bonds in inverse order of maturity; and (iii) at any time after January 1, 2003, as directed by the Municipal Bond Insurance Association. Amended Complaint para. 23. The official statement also disclosed that the bonds were subject to optional redemption by American National Bank beginning January 1, 1993. Id. para. 24. If the bonds were optionally redeemed between January 1, 1993 and July 1, 1998, bondholders would receive a premium in addition to the principal and accrued interest on the bonds. Id.
B. Purchase and Redemption of the Bonds
Plaintiff Greenberg purchased municipal bonds for $ 22,486.40 in August 1988. Id. para. 9. Greenberg paid a premium over value for her bonds. Id. The municipal bonds were scheduled to mature semi-annually from January 1983 to July 2006. Id. para. 13. However, in January 1990, Drovers and Treehouse defaulted on the mortgage loan "without regard to whether or not sufficient funds were available from the project to pay the principal and interest due under the [mortgage] note. . . ." Id. para. 26. As required by the documents governing the project's financing, American National Bank assigned the mortgage note to HUD in lieu of foreclosure. Id. para. 27. As a result, American National Bank received payment of the mortgage insurance proceeds, thus triggering mandatory redemption as described in the official statement. Id. paras. 27, 28.
On January 11, 1990, American National Bank mailed to Greenberg and other bondholders notice that the bonds were to be redeemed. Id. para. 28. Greenberg sold her bonds for a redemption price of $ 22,384.22. Id. para. 9. On the same day that American National Bank completed redemption of the bonds, American National Bank financed a new mortgage loan to Drovers and Treehouse by issuing new bonds on behalf of the Village of Schaumburg at rates of interest "advantageous" to Drovers and Treehouse. Id. para. 29. According to the amended complaint, all of the named defendants except Boettcher collaborated in a scheme to refinance the project at lower rates of interest than those set forth in the original bonds. Id. para. 29.
C. Procedural History
In July 1990, Greenberg initiated this suit against Boettcher, Drovers, Treehouse, American National Bank and the Village of Schaumburg, Illinois.
In count I, Greenberg claims that all defendants violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Greenberg bases her securities fraud claim on alleged misrepresentations and omissions in the official statement issued with the municipal bonds in 1982. In count II, Greenberg charges Drovers, Treehouse and American National Bank with breach of contract, interference with contract, breach of implied duty of good faith, and common law fraud. Count III further asserts that American National Bank breached fiduciary duties to Greenberg and the purported class of bondholders on January 11, 1990.
On October 16, 1990, all defendants moved to dismiss Greenberg's complaint. After receiving defendants' motions to dismiss, Greenberg amended her complaint on October 30, 1990. Defendants now move to dismiss Greenberg's amended complaint pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. Defendant American National Bank also requests that the court order Greenberg to pay its reasonable attorneys' fees and costs incurred in moving to dismiss Greenberg's claims.
I. Motion to Dismiss Under Rule 12(b)(6)
Generally, the federal system of notice pleading does not favor dismissal for failure to state a claim. Gray v. Dane County, 854 F.2d 179, 182 (7th Cir. 1988). However, dismissal is proper if it appears beyond doubt that the plaintiff can prove no set of facts in support of her claim that would entitle her to the relief requested. Illinois Health Care Ass'n v. Illinois Dep't of Public Health, 879 F.2d 286, 288 (7th Cir. 1989), citing Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). Similarly, dismissal is in order if the complaint fails to allege a necessary element required to obtain relief. R.J.R. Services, Inc. v. Aetna Casualty and Sur. Co., 895 F.2d 279, 281 (7th Cir. 1989).
A. Securities Fraud Liability Under Rule 10b-5
Count I of the amended complaint charges all defendants, by virtue of their involvement in the municipal bond offering, with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Greenberg asserts primary liability against Boettcher, Drovers and Treehouse; American National Bank is charged with aiding and abetting liability. To establish a primary violation of § 10(b) and Rule 10b-5, Greenberg must demonstrate that the defendants:
(1) in connection with a securities transaction, (2) made an untrue statement of material fact or omitted a material fact that rendered the statements made misleading, (3) with the intent to mislead, and (4) which caused [Greenberg]'s loss.
Schlifke v. Seafirst Corp., 866 F.2d 935, 943 (7th Cir. 1989). Greenberg contends that the disclosures in the official statement regarding mandatory and optional redemption, when read together and in context, are inadequate, misleading and deceptive in three ways.
First, Greenberg alleges that the official statement failed to fully disclose that the bonds were subject to mandatory redemption without a premium if, for any reason, Drovers and Treehouse defaulted on their mortgage payments. Amended Complaint para. 25a. Second, Greenberg alleges that the official statement misleadingly omitted information which would have enabled investors to evaluate the risk of premature redemption caused by a "material adverse change in economic conditions" affecting the project's ability to generate income. Id. para. 25b. Third, Greenberg claims the disclosures in the official statement regarding the premiums to be paid upon optional redemption created a false impression that the bondholders were protected against the "reinvestment risk" resulting from an early call in the event of a decline in interest rates. Id. para. 25c.
1. Reliance and Causation
Defendants Boettcher, Drovers and Treehouse argue that, regardless whether the official statement contained any material misrepresentations or omissions, Greenberg cannot recover under Rule 10b-5 because her complaint lacks the elements of reliance and causation. As the Seventh Circuit explained in Rowe v. Maremont Corp., 850 F.2d 1226, 1233 (7th Cir. 1988), in order to recover under Rule 10b-5, a plaintiff must show a causal connection between her decision to buy a security and the defendants' alleged misstatements or omissions. See also Latigo Ventures v. Laventhol & Horwath, 876 F.2d 1322, 1325 (7th Cir. 1989) ("[a] fraud that does not affect the decision to make the investment in which the loss complained of is incurred is not actionable under Rule 10b-5"). A plaintiff may establish this causal link by showing that she relied on a defendant's misconduct in selling the security. Id., citing Basic, Inc. v. Levinson, 485 U.S. 224, 243, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988).
Defendants Boettcher, Drovers and Treehouse urge dismissal because Greenberg has not alleged direct or indirect reliance on any misrepresentations or omissions. See Latigo, 876 F.2d at 1326 (if plaintiff in fraud case does not rely directly or indirectly on misrepresentations or omissions, plaintiff is not harmed by the fraud).
Greenberg does not claim that she ever received or read the official statement issued in 1982. Thus, she has not alleged direct reliance.
Instead, Greenberg alleges that the misrepresentations and omissions in the official statement created a fraud on the market for municipal bonds, causing investors to overvalue the bonds. Amended Complaint para. 35. Greenberg claims that because of the misleading official statement, she paid too much for the bonds she purchased in 1988.
In certain circumstances, the fraud on the market theory may give rise to a presumption of indirect reliance by the plaintiff. Basic, 485 U.S. at 247. As the Supreme Court explained:
the fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and its business. . . . Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements . . .