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KLEBAN v. S.Y.S. RESTAURANT MGMT.

December 20, 1995

IHOR KLEBAN, Plaintiff,
v.
S.Y.S. Restaurant Management, Inc., an Illinois Corporation, International Double Drive-Thru, Inc., an Illinois Corporation, Andrew Sun, John Young, Thomas J. Singer, John D. Terzakis, individually and d/b/a Midwest Properties, James W. Thompson, Jr., individually and d/b/a James Thompson Agency, Joseph Tedesco, individually and d/b/a Tedesco and Associates, John A. Garrity III, Esq., Michael Mullally, St. Louis Double Drive-Thru, Inc., an Illinois Corporation, Willowbrook Restaurant Corporation, an Illinois Corporation, Illinois Petroleum Co. an Illinois corporation, Restaurant Development Corporation, an Illinois corporation, Greenscape Landscaping, Inc., an Illinois corporation, Defendants.



The opinion of the court was delivered by: BUCKLO

 Plaintiff, Ihor Kleban, has filed suit against numerous defendants. Several of these defendants, namely, S.Y.S. Restaurant Management, Inc. ("S.Y.S."), International Double Drive-Thru, Inc. ("IDDT"), Andrew Sun, John Young, Thomas Singer, John Terzakis, Midwest Properties, John Garrity, Willowbrook Restaurant Corp. ("Willowbrook"), Illinois Petroleum Co. ("IPC"), Restaurant Development Corp. ("RDC"), and Greenscape Landscaping, Inc. ("Greenscape"), have filed various motions to dismiss this complaint. For the reasons stated below, the motions of S.Y.S., IDDT, Mr. Sun, Mr. Young, Midwest Properties, Willowbrook, IPC, RDC, and Greenscape are granted. The motions of Messrs. Terzakis, Singer, and Garrity are granted in part and denied in part.

 Background

 Mr. Kleban invested in a limited partnership, Southwest Double Drive-Thru, L.P. ("Southwest Partnership"), which was formed to own and operate Checkers restaurants. Mr. Kleban's investment has lost its value and he blames this loss on the fraud of the defendants. He therefore brought this suit, alleging common law fraud, negligent misrepresentation, and violations of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78j (1981), the Illinois Securities Law of 1953, 815 ILCS 5/1 et seq. ("the Illinois Securities Law") (1993), and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. (1984).

 Mr. Terzakis has filed a motion to dismiss on behalf of himself, Midwest Properties, Willowbrook, IPC, and RDC. Mr. Garrity has filed a motion to dismiss on behalf of himself and Greenscape, joining Mr. Terzakis's arguments. Mr. Singer has also filed a motion to dismiss, joining Mr. Terzakis's arguments. S.Y.S., IDDT, and Messrs. Young and Sun (collectively, "the IDDT defendants") have also filed a motion to dismiss. Mr. Kleban's complaint alleges the following facts, taken as true for purposes of these motions to dismiss. Bane v. Ferguson, 890 F.2d 11 (7th Cir. 1989).

 Checkers Drive-In Restaurants of North America, Inc. is a national franchisor of fast-food restaurants. In November of 1988, it granted the sole and exclusive right to develop, own, and operate Checkers Restaurants in the Chicagoland Area to defendant S.Y.S. S.Y.S. is a corporation owned by defendants Thomas Singer, Andrew Sun, and John Young.

 In May of 1990, the three S.Y.S. shareholders entered into a "Joint Development Agreement," through which they agreed to divide the Chicagoland market into two territories. Messrs. Sun and Young formed defendant IDDT, which obtained the right to develop the southern territory, while Mr. Singer formed Chicago Double Drive-Thru, Inc. ("CDDT"), which obtained the right to develop the northern territory.

 To facilitate his business venture, on August 22, 1991 Mr. Singer formed the Southwest Partnership. Southwest Partnership had a General Partner and several limited partners, including Mr. Kleban. CDDT, the owner of the right to develop Checkers restaurants in the northern territory, also became a partner of the General Partner of Southwest Partnership.

 The other defendants include Mr. Terzakis, an officer and shareholder of CDDT. Mr. Terzakis also "owned, controlled, and/or managed" entities which provided goods and services to CDDT. These entities include the defendants Willowbrook, IPC, RDC, and Midwest Properties. Defendant Garrity was counsel for CDDT and "represented and/or managed" aspects of the Checkers operation. Additionally, both Messrs. Garrity and Terzakis acted as "promoter[s] and marketing agent[s]" of the Checkers operation. Finally, defendant Greenscape, a corporation owned in part by defendant Singer, provided landscaping and maintenance services to the Checkers operation.

 Mr. Kleban's involvement with the Checkers operation began in November of 1991 when he received a copy of the Southwest Partnership Private Placement Memorandum ("PPM"). The PPM explains that the Southwest Partnership "was formed to develop, equip, operate, and possibly sell between 1 and 4" Checkers restaurants. The PPM explained the Joint Development Agreement and the fact that IDDT competed with CDDT.

 Shortly thereafter, Mr. Kleban began meeting with Mr. Singer, Mr. Terzakis, and others to discuss investment in the Southwest Partnership. At these meetings Messrs. Singer and Terzakis made various misrepresentations to Mr. Kleban regarding the costs associated with building the restaurants, the General Partner's contribution to those costs, and the profit distribution. Additionally, Messrs. Singer and Terzakis promised that the General Partner would not mismanage, misappropriate, or divert partnership funds. In reliance on the representations made in these meetings, on November 25, 1991 Mr. Kleban made a $ 100,000 limited partnership investment in Southwest Partnership.

 Between November 25, 1991 and February 1, 1992, Mr. Kleban received continued assurances from Mr. Singer, Mr. Terzakis, and other defendants that Southwest Partnership was performing well. On February 1, 1992, Mr. Kleban met with Mr. Singer and other defendants. The defendants boasted about the success of the first Checkers Restaurant and the prospects for the entire Checkers operation. Relying on these statements, Mr. Kleban made another investment in Southwest Partnership in the amount of $ 150,000.

 On approximately February 24, 1992, Mr. Kleban again met with Messrs. Terzakis and Singer. These defendants boasted about the success of the Partnership and assured Mr. Kleban that the Checkers restaurants were being developed in accordance with their prior oral representations. On this day, Mr. Kleban made a $ 287,500 loan to CDDT with an option of converting the loan into a limited partnership interest in Southwest Partnership. Mr. Kleban elected to make this conversion on August 5, 1992.

 Between March and July of 1992, Mr. Kleban had further conversations with defendants Singer and Terzakis in which they blamed the partnership's decline on the economy and fierce competition. They again boasted about the success of the operation and reassured Mr. Kleban that the Southwest Partnership was functioning in accordance with the defendants' prior oral representations. On May 21, 1992, Mr. Kleban made another $ 72,000 limited partnership investment.

 In July of 1992, Mr. Kleban met with Mr. Singer, Mr. Garrity, and other defendants. At that meeting, the defendants boasted about the prospects of the Checkers operation and stated that a loan from Mr. Kleban would ensure its continued success and a great return for him. In reliance on those representations, Mr. Kleban loaned CDDT $ 200,000.

 In September of 1993, Mr. Kleban again met with Mr. Singer, Mr. Garrity, and other defendants. At this meeting, the defendants claimed that the imminent sale of CDDT back to the national franchisor would provide Mr. Kleban with an extraordinary return on his investment. They also convinced Mr. Kleban to extend the repayment period of his July, 1992 loan by promising incentives, which were never delivered. Mr. Kleban not only extended the loan repayment, but loaned CDDT an additional $ 100,000.

 Throughout this period, CDDT and Southwest Partnership were improperly managing their money. For example, CDDT was repaying loans made to it and servicing its own leases using Southwest Partnership funds. Additionally, CDDT incurred cost overruns in constructing Checkers restaurants for which it was responsible. Southwest Partnership funds, however, paid those overruns. More generally, the defendants caused Southwest Partnership funds to be mingled with other unrelated business entities, diverted to other accounts, and misappropriated for unrelated expenditures.

 Between July and September of 1994, Mr. Kleban demanded several times to examine the corporate books of the Southwest Partnership. Because he was denied access to these books, Mr. Kleban filed suit in the Circuit Court of Cook County on September 19, 1994, seeking mandamus to review the books and records of CDDT. On December ...


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