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DOUGLAS v. TONIGAN

September 8, 1993

ANDREW J. DOUGLAS, SALLY P. DOUGLAS, KENNETH J. DOUGLAS, and PROFILE PUBLICATIONS, INC., an Illinois Corporation, Plaintiffs,
v.
HENRY C. TONIGAN, Defendant.



The opinion of the court was delivered by: JOHN F. GRADY

 Before the court is defendant's motion to dismiss the amended complaint. The motion is denied.

 On August 30, 1991, defendant Henry C. Tonigan, the sole shareholder of Profile Publications, Inc. ("Old PPI"), sold all of his stock in the corporation for $ 600,000.00 to Profile Acquisition Corporation ("Profile"), which then adopted the name Profile Publications, Inc. ("PPI") and continued Old PPI's business. Plaintiff Andrew Douglas, the president of PPI, signed the agreement on behalf of Profile. At the same time, plaintiff Sally Douglas purchased Old PPI's real property for $ 540,000.00, Tonigan entered into a consulting and non-competition contract with PPI, and plaintiffs Kenneth and Andrew Douglas agreed to guarantee the obligations of PPI under the various agreements. Under the non-competition contract, Tonigan was to receive $ 200,000.00 at closing, $ 216,000.00 one year after closing, and $ 204,000.00 two years after closing. He has not collected the second and third payments.

 Plaintiffs bring this action claiming that Tonigan made various misrepresentations about the expected performance of PPI which induced them to purchase the stock and real property at an inflated price. For purposes of this motion, we accept the allegations of the amended complaint as true: Between October 1990 and early 1991, Tonigan provided Andrew Douglas with written sales projections indicating, on a customer-by-customer basis, that sales could be expected to exceed $ 3 million annually. Stressing that the projections were based on "solid" numbers, Tonigan reaffirmed them just prior to closing. Unbeknownst to plaintiffs, however, the projections were deceptive. They included estimated sales to customers who had never done business with Old PPI, and the corporation's revenues had been steadily decreasing. Tonigan also misrepresented the amount of additional investment needed to keep the business profitable, the condition of Old PPI's property, and certain assets on the balance sheet. Approximately $ 68,000.00 of the $ 123,000.00 in receivables were shown as more than 150 days old when they were in fact well over one year old and uncollectible, and Old PPI's retained earnings had been overestimated by roughly $ 18,000.00.

 In Count I of the amended complaint, plaintiffs assert that Tonigan's actions constitute federal securities fraud under § 10b-5 of the Securities Exchange Act of 1934 and the Securities and Exchange Commission's ("SEC") Rule 10b-5. Counts II through V, respectively, allege common law fraud, and breaches of the stock purchase agreement, the consulting agreement, and the real estate agreement. Count VI seeks a declaration that the guaranty is unenforceable. In his pending motion to dismiss, Tonigan argues that Count I is barred by the statute of limitations, and that the court lacks subject matter jurisdiction over the remaining counts, which are all based on state law. He also contends Counts I and II fail to plead the requisite elements of fraud and urges us to deny declaratory relief under Count VI because Andrew and Kenneth Douglas agreed in the guaranty not to raise the defense of fraud.

 DISCUSSION

 In considering a motion to dismiss, the court must accept all facts alleged in the complaint as true and must draw all reasonable inferences from the pleadings in plaintiff's favor. See Gillman v. Burlington N. R.R. Co., 878 F.2d 1020, 1022 (7th Cir. 1989). Dismissal is appropriate "'only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.'" Kunik v. Racine County, Wis., 946 F.2d 1574, 1579 (7th Cir. 1991) (quoting Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984)).

 The Statute of Limitations for 10b-5 Actions -- Count I

 Recently, the Supreme Court clarified the statute of limitations for claims brought under § 10b-5 of the 1934 Act, 15 U.S.C. § 78j(b), *fn1" and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. *fn2" "Litigation instituted pursuant to § 10b-5 and Rule 10b-5 must be commenced within one year after the discovery of the facts constituting the violation and within three years after such violation." Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 115 L. Ed. 2d 321, 111 S. Ct. 2773, 2782 (1991). Tonigan suggests that, implicit in the phrase "discovery of the facts," is the requirement that plaintiff use due diligence to discover the omission or false statement. *fn3" Tonigan contends Count I is time-barred because due diligence would have put plaintiffs on notice of the alleged fraud more than one year before the filing of this suit. In support of this position, he cites Badger v. Boulevard Bancorp, Inc., 970 F.2d 410, 411 (7th Cir. 1992), which held that, under § 12 of the 1933 Act, 15 U.S.C. § 771, the statute of limitations begins to run when reasonable diligence would have given the plaintiff notice of the fraudulent conduct.

 Badger is inapposite, however, because it applied the limitations period contained in 15 U.S.C. § 77m:

 
No action shall be maintained to enforce any liability created under section 77k of 771(2) of this title unless brought within one year after the discovery of the untrue statement or omission, or after such discovery should have been made by the exercise of reasonable diligence. . . .

 (Emphasis added.) In contrast, the Supreme Court in Lampf, noting the difference in the limitations periods contained in the 1933 and 1934 Acts, expressly adopted 15 U.S.C. § 78i(e) as the limitations provision for 10b-5 actions. See Lampf, 111 S. Ct. at 2782 n.9. That section makes no mention of "reasonable diligence":

 
No action shall be maintained to enforce any liability created under this section, unless brought within one year after the discovery of the facts constituting the violation ...

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