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02/24/95 R. RICHARD BASTIAN v. PETREN RESOURCES

February 24, 1995

R. RICHARD BASTIAN, III; B.P. LOUGHRIDGE, M.D., RONALD D. ROTUNDA, MARCIA ROTUNDA, GENERAL SYNERGY INVESTMENTS, AN OKLAHOMA CORPORATION, GABRIEL FERNANDEZ; J. MAHAR, CMF ASSOCIATES, AN ILLINOIS PARTNERSHIP, ALFRED J. HENDRON, JR. AND M.T. DAVISSON, PLAINTIFFS-APPELLANTS,
v.
PETREN RESOURCES CORPORATION, AN ILLINOIS CORPORATION; FAESTEL INVESTMENTS, INC., AN ILLINOIS CORPORATION, DAVID J. FAESTEL, AND MCDERMOTT, WILL & EMERY, A PARTNERSHIP, DEFENDANTS-APPELLEES.



In the Circuit Court of Cook County. Honorable Martin C. Ashman, Judge Presiding.

The Honorable Justice Zwick delivered the opinion of the court: *fn1 McNAMARA, P.j. and Rakowski, J., concur.

The opinion of the court was delivered by: Zwick

JUSTICE ZWICK delivered the opinion of the court: *fn1

This is an appeal from the trial court's dismissal of plaintiffs' Second Amended Complaint Pursuant to section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 1992)). Plaintiffs' appeal is brought pursuant to Supreme Court Rule 301 (134 Ill. 2d R. 301).

Plaintiffs were purchasers of oil and gas limited partnership interests ("the partnerships") and originally brought suit against the defendants in the United States District Court for the Northern District of Illinois. (See Bastian v. Petren Resources Corp. (N.D. Ill. 1988), 681 F. Supp. 530.) In their suit, plaintiffs alleged both Federal and State law claims. The District Court dismissed the plaintiffs' Federal claims but specifically declined to consider plaintiffs' State claims. ( Bastian, 681 F. Supp. at 538.) Plaintiffs subsequently brought their State-law claims in the circuit court of Cook County, which also dismissed the case. Like the Federal District Court, the circuit court determined that the plaintiffs had failed to allege a sufficient causal nexus between defendants' alleged misconduct and the financial failure of the partnerships. The court allowed the plaintiffs the opportunity to amend their complaint by filing a Second Amended Complaint, but the court later dismissed the suit with prejudice after finding plaintiffs' amended allegations to also be insufficient to state a cause of action.

A section 2-615 motion attacks the legal sufficiency of the complaint by asserting that it fails to state a cause of action upon which relief can be granted. It is well settled that when a appellate court reviews a section 2-615 motion, it must accept as true all well-pleaded facts and must draw from those facts all reasonable inferences which may be deemed favorable to the non-moving party. Burdinie v. Glendale Heights (1990), 139 Ill. 2d 501, 504-04, 565 N.E.2d 654, 657, 152 Ill. Dec. 121; Weil, Freiburg & Thomas, P.C. v. Sara Lee Corp. (1991), 218 Ill. App. 3d 383, 388, 577 N.E.2d 1344, 160 Ill. Dec. 773.

Plaintiffs' Second Amended Complaint alleges that the defendants fraudulently induced them to make investments in two oil and gas exploration partnerships by material misrepresentations and omissions contained in the partnerships' offering memoranda. Count I of the Second Amended Complaint seeks damages under the provisions of the Illinois Consumer Fraud Act from the promoters of the partnerships. Count II seeks damages under theories of breach of fiduciary duty against both the promoters of the partnerships and from the law firm of McDermott, Will & Emery (McDermott). McDermott prepared the offering memoranda used by the other defendants to solicit plaintiffs' investments. Count III is based upon common law fraud and is against the promoters of the partnerships. Count IV is a legal malpractice action against McDermott.

Among the allegations contained in their complaint, plaintiffs claim that the defendants: (1) fraudulently concealed pending litigation against the management of the partnerships; (2) failed to prepare audited financial statements as promised in the offering memoranda; (3) indicated that McDermott was counsel to the partnership when, in fact, McDermott served only as counsel to the managers of the partnership; (4) failed to disclose that one of the general partners ofthe oil and gas partnerships was nothing more than an "undercapitalized shell corporation" and (5) obtained financing from Penn Square Bank when defendants knew or should have known it was about to fail. Plaintiffs also argue that they were falsely led to believe the partnership would be managed by an experienced, competent and qualified management team. Plaintiffs claim that had the defendants been truthful in describing the dishonesty and incompetence of the partnerships' management, they would not have invested in the ventures.

Defendants respond, even if the allegations of the complaint are taken as true, that plaintiffs have failed to allege a legally sufficient causal connection between their acts and the ultimate failure of the oil and gas partnerships. They argue that none of the substantive claims in the complaint relate to the experience, competency or qualifications of the management team at the time the memoranda were circulated. They also point out that nearly identical arguments were raised and argued unsuccessfully in both the Federal District Court and the 7th Circuit Court of Appeals with regard to the causation necessary to bring RICO and Federal securities violations claims. See Bastian Resources Corp. (1988 N. D. Ill.), 699 F. Supp. 161, affirmed, Bastian v. Petren Resources Corp. (1990 7th Cir.), 892 F.2d 680.

In Rosengard v. McDonald (1990), 205 Ill. App. 3d 208, 562 N.E.2d 583, 150 Ill. Dec. 53, a plaintiff/investor claimed that negligence by a defendant/broker resulted in the plaintiff being approved as a loan guarantor by a lender. Had the defendant accurately filled out certain paperwork, plaintiff claimed, plaintiff would not have been approved as a guarantor by the lender and would have thereby avoided suffering any financial loss. Like the defendants in this case, the defendant in Rosengard argued that the plaintiff's complaint failed to allege the necessary causal connection between the defendant's negligence and the plaintiff's alleged injury. In resolving the issue, the court agreed that the plaintiffs' complaint was defective, noting that a distinction can be made between "the proximate cause of an injury" and a "condition which provides an opportunity for the causal agency to act." ( Rosengard, 205 Ill. App. 3d at 208.) The court discussed the rule applied in Federal litigation requiring a plaintiff to allege both "transaction causation" and "loss causation" in order to state a cause of action for securities fraud. ( Rosengard, 205 Ill. App. 3d at 208.) The former "proves that defendant's conduct caused Plaintiff to enter into the transaction" while the latter "touches upon the reasons for the investment's decline in value." ( Rosengard, 205 Ill. App. 3d at 216, citing, LHLC Corp. v. Cluett, Peabody & Co. (7th Cir. 1988), 842 F.2d 928.) The court stated: "where plaintiff is induced to purchasesecurities in reliance on conduct which, however deceitful, is immaterial to the operative reasons for the pecuniary loss, he has failed to prove the requisite loss causation." Rosengard, 205 Ill. App. 3d at 216, citing Currie v. Cayman Resources Corp. (11th Cir. 1988), 835 F.2d 780, 785.

In Bastian v. Petren Resources Corp. (1990 7th Cir.), 892 F.2d 680, the 7th Circuit Court of Appeals determined that "loss causation" was simply another name for the common law fraud rule of "proximate cause." ( Bastian, 892 F.2d at 683.) The Bastian court determined that the plaintiffs now before this court had not, in their Federal complaint at least, sufficiently connected the alleged misconduct of the defendants to the their loss. In analyzing the same issue as now before this court, the 7th Circuit court wrote:

"The plaintiffs alleged that they invested in the defendants' limited partnerships because of the defendants' misrepresentations, and that their investment was wiped out. But they suggest no reason why the investment was wiped out. They have alleged the cause of their entering into the transaction in which they lost money but not the cause of the transaction's turning out to be a losing one."

Bastian, 892 F.2d at 684. (Emphasis in original.)

For Support of their position, defendants rely principally upon three Illinois Appellate Court decisions, Spiegel v. Sharp Electronics Corp. (1984), 125 Ill. App. 3d 897, 466 N.E.2d 1040, 81 Ill. Dec. 238, Doll v. Bernard (1991), 218 Ill. App. 3d 719, 578 N.E.2d 1053, 161 Ill. Dec. 407 and Meenehan v. Rosenfield (1925), 236 Ill. App. 4. In each of these cases the plaintiff's ...


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