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

June 7, 1996

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

 On May 16, 1992, Ihor Kleban filed suit against numerous defendants. Several defendants subsequently filed various motions to dismiss the complaint. Those motions were granted in part. Mr. Kleban then filed an amended complaint attempting to cure the defects in his previous complaint and adding several new defendants. 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 again filed various motions to dismiss the complaint. Burling Bank, a newly added defendant, also moves to dismiss the suit. For the reasons stated below, the motions of S.Y.S., IDDT, Mr. Sun, Mr. Young, Midwest Properties, Willowbrook, IPC, RDC, Greenscape, and Burling Bank 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, conversion, 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 the amended complaint on behalf of himself, Midwest Properties, Willowbrook, IPC, and RDC. Mr. Singer has filed a motion to dismiss, joining Mr. Terzakis's arguments. Mr. Garrity has filed a motion to dismiss on behalf of himself and Greenscape. S.Y.S., IDDT, and Messrs. Young and Sun (collectively, "the IDDT defendants") have filed a motion to dismiss. Finally, Burling Bank has moved to dismiss the complaint against it.

 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. ("Checkers") 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 Chicago 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 Chicago 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. Although CDDT and IDDT competed for patronage, they did retain some control over each other. For example, they agreed to some joint marketing efforts. They jointly owned the intellectual property of each restaurant. They had certain rights to approve or veto the sites on which restaurants would be developed. Moreover, because the Checkers franchise had been granted to S.Y.S., neither CDDT nor IDDT could communicate directly with Checkers without written consent from S.Y.S.

 Mr. Singer also formed the Southwest Partnership to develop and operate four Checkers restaurants in Chicago. Southwest Partnership had several limited partners, including Mr. Kleban, and a general partner. The general partner of the Southwest Partnership was a limited partnership called Associates which had CDDT as its sole limited partner. In July of 1992, CDDT also became the general partner of Associates. Because CDDT became both the sole limited partner and sole general partner of Associates, Associates was dissolved.

 Defendant Terzakis was an officer and shareholder of CDDT. Mr. Terzakis also "owned, controlled, and/or managed" entities which provided goods and services to Checkers Restaurants. 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. Defendant Greenscape, a corporation owned in part by defendants Singer and Garrity, provided landscaping and maintenance services to CDDT. Finally, Burling Bank was a lender and depository for CDDT and the personal banker for defendants Terzakis, Singer, Tedesco, Thompson, and Garrity. Burling Bank required the individuals to use Burling Bank's services for their personal banking in exchange for lending money to the CDDT Checkers restaurants.

 On November 25, 1991, Mr. Kleban made a $ 100,000 limited partnership investment in Southwest Partnership. On February 1, 1992, defendant James Thompson solicited Mr. Kleban to make an additional investment in Southwest Partnership. Mr. Kleban then made a $ 150,000 additional limited partnership investment. In May of 1992, defendant Thompson solicited yet another investment from Mr. Kleban. This time Mr. Kleban invested only $ 72,000, the amount necessary to complete the funding to build a third Checkers restaurant.

 In August, 1992, based on representations by Messrs. Singer, Terzakis, and Thompson that a fourth Southwest Partnership restaurant would be built in Elmhurst, Illinois, Mr. Kleban made another $ 287,000 limited partnership investment. Mr. Kleban's check was not placed into the Southwest Partnership account, but used by CDDT instead.

 In September of 1993, Mr. Kleban met with Mr. Singer, Mr. Garrity, and other defendants. At this meeting, the defendants present claimed that the imminent sale of CDDT back to the national franchisor would provide Mr. Kleban with an extraordinary return on his investment. They convinced Mr. Kleban to extend the repayment period of a loan he had made in July to CDDT and to loan CDDT an additional $ 100,000.

 Defendants Singer and Garrity also intentionally misled investors about their ownership interest in certain Checkers restaurants and sent false financial statements for Southwest Partnership to the limited partners. They also told Mr. Kleban that Associates and its general partner were controlling Southwest Partnership, rather than CDDT who actually had control. Finally, defendants Singer, Terzakis, and Garrity also repeatedly misstated that Associates contributed one-half of the total capital contribution of Southwest Partnership and did so without encumbering the assets of Southwest Partnership.

 Mr. Kleban also alleges that defendants Terzakis, Singer, and Garrity misrepresented the cost to develop the Southwest Partnership Checkers restaurants and then wrongfully took funds from Southwest Partnership to cover the construction cost overruns. In addition to using Southwest Partnership funds to cover construction cost overruns (for which CDDT was supposed to be responsible), the defendants commingled CDDT funds with those of Southwest Partnership and used Southwest Partnership funds for outside business expenses. The defendants then failed to inform Mr. Kleban that Southwest Partnership funds were being improperly commingled with those of CDDT and instead assured him that proper accounting procedures were being implemented. Burling Bank encouraged the commingling of the partnership accounts and encumbered Southwest Partnership assets with loans it had made to CDDT.

 The improper money management finally took its toll on CDDT, which filed for bankruptcy on December 8, 1994. Subsequently, on May 18, 1995, Mr. Kleban filed this suit.

 Analysis

 I. The Fraud Claims -- Rule 10b-5, the Illinois Securities Act, & Common Law Fraud

 The first three counts of Mr. Kleban's complaint allege federal (Count I) and state (Count II) securities fraud and common law fraud (Count III). Although he did not delineate in his complaint which counts applied to which defendants, Mr. Kleban stated in response to the various motions to dismiss that none of the fraud claims applied to Greenscape, RDC, Midwest Properties, Willowbrook, or IPC. Accordingly, Counts I, II, and III are dismissed against those defendants. Additionally, Mr. Kleban's only fraud claim against Burling Bank is for common law fraud. Counts I and II are therefore dismissed against Burling Bank. Finally, Mr. Kleban's only fraud claim against the IDDT defendants appears to be under Rule 10b-5. Consequently, Counts II and III are dismissed against them.

 A. The Individual Defendants -- Terzakis, Garrity, & Singer

 In Count I of his complaint, Mr. Kleban alleges violations of Rule 10b-5, promulgated under § 10(b) of the 1934 Act. See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. To establish liability under ...


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