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DONOHOE v. CONSOLIDATED OPERATING & PROD. CORP.

September 28, 1993

TERENCE DONOHOE, et al., Plaintiffs,
v.
CONSOLIDATED OPERATING & PRODUCTION CORPORATION, et al., Defendants.



The opinion of the court was delivered by: MILTON I. SHADUR

 This drama has already had a longer run than this particular critic's reviews would originally have called for. With less than one act remaining--the single scene that is based on Securities Exchange Act of 1934 § 20(a), 15 U.S.C. § 78t(a) ("Section 20(a)")--remaining defendants Jack Nortman ("Nortman") and Morrando Berrettini ("Berrettini") and the partnership in which they were principals (Consolidated Operating & Production Corporation, "COPCO") have moved for summary judgment on that claim. For the reasons stated in this memorandum opinion and order, their motion is granted and the final curtain rings down on this entire action.

 Background

 Because this action has already occupied a good deal of space in the West Reporter system--this Court's opinions reported at 736 F. Supp. 845 (N.D. Ill. 1990) ("Opinion I") and at 763 F. Supp. 315 (N.D. Ill. 1991) ("Opinion II") and our Court of Appeals' opinion reported at 982 F.2d 1130 (7th Cir. 1992) ("Opinion III") *fn1" --there is really no need to repeat the statements of fact that have been set out at length in those opinions. Despite this Court's normal preference for producing self-contained opinions, this opinion will simply assume the reader's total familiarity with the earlier published opinions, setting out the facts only as required in the course of the substantive discussion. And along the same lines, this opinion will employ the defined terms that were used in its earlier opinions. In that respect:

 
1. Because Nortman, Berrettini and COPCO are the only remaining defendants (Opinion I at 846 & n.1), they will continue to be referred to collectively as "defendants," without reference to the other defendants who are out of the case.
 
2. Terrence Donohoe and his fellow disgruntled investors will of course continue to be termed "plaintiffs."
 
3. Even though other actors referred to here are among those who have been identified by last name or other short description in earlier opinions, to avoid sounding too cryptic this opinion will use their full names when they first come up in the discussion (but will eschew any repetition of the description of their respective roles).

 Prior Proceedings and the Surviving Claim

 Originally plaintiffs sued Dennis Bridges ("Bridges," the active culprit in this oil development partnership debacle) along with Nortman, Berrettini, COPCO and Bridges' wholly owned operating corporations Ona Drilling Corporation ("Ona") and Onshore Rig Corporation ("Onshore"). Plaintiffs asserted a host of claims, summarized in Opinion I at 846 as "several violations of the federal securities laws' anti-fraud provisions and registration requirements, violation of Illinois state securities laws, common law fraud, breach of fiduciary duty and two types of RICO violations."

 Opinion I granted summary judgment against plaintiffs on virtually all of those claims, in large part because plaintiffs had failed to present any material issue of fact as to the necessary element of an intent to defraud, but also because there was no issue of material fact suggesting recklessness on the part of Nortman or Berrettini either. Next Opinion II addressed the single securities law count that was not contingent on any element of scienter or its equivalent--a claim under Securities Act of 1933 § 12(2), 15 U.S.C. § 77l(2)--and granted summary judgment on statute of limitations grounds in that respect, so that the entire action was then dismissed with prejudice.

 On appeal this Court's determinations were affirmed in their entirety, with the limited exception of the remand of the Section 20(a) claim. Writing for the Court of Appeals in Opinion III, Judge Cudahy gave this Court more than its due en route to explaining why the Section 20(a) issue had to be addressed on remand (Opinion III at 1138):

 
It is difficult to believe that a distinguished district court judge, with a well-earned reputation for writing meticulous, scholarly opinions, could dedicate 96 manuscript pages to a complaint without addressing every significant claim.

 In that respect there seem to be two possibilities. One would be to disclaim the flattering characterization, the other to provide an explanation as to what the Court of Appeals viewed as an omission on this Court's part. This opinion will do both. Although the first possibility requires no more than a blushing thank-you and demurrer, the second calls for a bit more elaboration.

 Here is what Opinion III at 1138 (footnote omitted) said about plaintiffs' preservation of the Section 20(a) issue:

 
Although the plaintiffs have approached the outer limits of waiver, we do not believe that they in fact waived their claim. First, control person liability is plainly and expressly alleged in the plaintiffs' complaint. Complaint P 5.7 (R. 66 at 3). Second, although the investors devoted only one sentence to control person liability in their memorandum in opposition to the motion for summary judgment (R. 164 at 25), the issue of control person liability did not get much attention in the motion to which they were responding. (R. 153, passim).

 And here is what the cited pleading (Complaint P 5.7 *fn2" ) had alleged:

 
Defendants Bridges, Berrettini and Nortman controlled Copco within the meaning of Section 20(a) of the Exchange Act and Section 15 of the Securities Act. Defendant Bridges controlled defendants Ona and Onshore within the meaning of Section 20(a) of the Exchange Act and Section 15 of the Securities Act.

 What is troublesome, and will be elaborated on a bit later, is that Opinion III at 1138-39 preserved plaintiffs' Section 20(a) claim only on the basis that there was sufficient evidence that Nortman and Berrettini controlled Bridges (the real culprit) within the meaning of that statute. But the plain reading of Complaint P 5.7 shows that no such allegation was contained there. *fn3" Indeed, in the course of the current briefing P. Mem. 8-9 urges that "Plaintiffs are Entitled to Amend the Complaint To Plead That COPCO, Nortman and Berrettini Controlled Bridges and Ona"--and plaintiffs relatedly point out (id. at 9 n.5) that defendants have acknowledged "that they were aware of plaintiffs' theory at least during the appeal" (emphasis added). Not a word is said (quite understandably) to suggest that either defendants or this Court were--or could have been--aware of a theory that plaintiffs never put forward at any time during the pendency of this action at the district court level. This Court's short suit is mindreading, and it must be said that plaintiffs clearly did not ever advance before this Court, prior to the appeal, what is now their only surviving claim.

 Still another factor tells why this Court could not have perceived that plaintiffs had purportedly inserted the presently-stated Section 20(a) needle into the huge haystack that they tendered in response to defendants' summary judgment motion that produced Opinion I. *fn4" As the quoted language from Opinion III indicates, the one sentence (!) in that entire paper haystack that spoke to the issue of Section 20(a) liability at all was not in their pleading or in their evidentiary submissions, but in one of their legal memoranda in response to defendants' summary judgment motion. And of course it is established Seventh Circuit law (as it is everywhere) that parties' memoranda are not part of the pleadings, let alone evidence, and that such memoranda cannot be used to supply missing ingredients in that respect ( Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1107 (7th Cir. 1984)). And the clincher is ...


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