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JOHNSTONE v. FIRST BANK SYS.

November 21, 1996

ROBERT JOHNSTONE, derivatively on behalf of NATIONAL INCOME REALTY TRUST, a California business trust, and JOHN PEDJOE, derivateively on behalf of TRANSCONTINENTAL REALTY INVESTORS, INC., a Nevada Corporation, Plaintiffs,
v.
FIRST BANK SYSTEM, INC., a bank holding company; FIRST BANK NATIONAL ASSOCIATION, a national banking association; FIRST BANK (N.A.), a business entity; and FBS BUSINESS FINANCE CORPORATION, a business entity; and DAVID J. WABICK, an individual, Defendants, and NATIONAL INCOME REALTY TRUST, a California business trust; and TRANSCONTINENTAL REALTY INVESTORS, INC., a Nevada Corporation, Nominal Defendants.



The opinion of the court was delivered by: WILLIAMS

MEMORANDUM OPINION AND ORDER

 Plaintiffs Robert Johstone, on behalf of National Income Realty Trust ("NIRT"), and John Pedjoe, on behalf of Transcontinental Realty Investors, Inc. ("TCI"), bring this action against Defendants, First Bank System, Inc., First Bank National Association, First Bank, and FBS Business Finance Corporation ("FBS Entities") and David J. Wabick alleging violations of the anti-tying provisions of the Bank Holding Company Act ("BHCA"), 12 U.S.C. § 1972, (Count I) and various state-law claims (Counts II - IV).

 The FBS Entities move this court to dismiss the First Amended Verified Derivative Complaint ("amended complaint") for failure to state a claim upon which relief may be granted. See Fed. R. Civ. P. 12(b)(6). In the alternative, the FBS Entities move for dismissal of Counts II - IV for failure to satisfy the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure.

 Background

 For purposes of this motion, all well-pleaded facts in the amended complaint are taken as true. ITC Financial Services, Ltd. v. Interstate Bank of Oak Forest, 1993 U.S. Dist. LEXIS 16137, 93 C 3799, 1993 WL 469926 *2 (N.D. Ill. Nov. 10, 1993) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)).

 By the Fall of 1991, Gene E. Phillips ("Phillips") and William S. Friedman ("Friedman"), who managed and controlled NIRT and TRI ("the Trusts") directly or indirectly, were facing severe financial demands. American Realty Trust ("ART"), then the largest shareholder of the Trusts and two sister trusts controlled by Phillips and Friedman, was facing financial crisis of monumental dimension. ART was being pressured by First City, its main lender, to repay approximately $ 30 million it had borrowed under a line of credit. Other Phillips-Friedman affiliates also owed millions of dollars to First City.

 Also by the Fall of 1991, Milwaukee developer Frank P. Crivello's organization was in a severe financial crisis. It had begun to experience severe cash shortages. By late 1991, more than 30 foreclosure suits had been commenced against Crivello or related entities and more than 100 other lawsuits were commenced against them by unpaid subcontractors and other creditors. Am. Compl. at P 20. First Bank held notes that were due from the Crivello organization. Am. Compl. at P 26. First Bank then assigned the notes to David Wabick ("Wabick"). Am. Compl. at P 28.

 On December 13, 1991, the Trusts purchased eleven properties from the Crivello organization. The total purchase price was approximately $ 21 million, which included the payment of $ 11 million and the assumption by the Trusts of about $ 10 million in existing debt on the properties. Am. Compl. at P 27. The $ 11 million paid in cash was paid as follows: (a) NIRT purchased "at face value" from David Wabick, who was then both a First Bank assignee and a partner of Phillips and Friedman, about $ 6.6 million in obligations owed by Crivello entities to each of the First Bank defendants (the "Notes"); and (b) NIRT and TCI paid the remaining amount, i.e. about $ 4.3 million, in cash to the sellers. Am. Compl. at P 28. At this time TCI did not have the funds necessary to participate in the December 1991 property purchase. Simultaneously, First Bank loaned $ 3.5 million to a wholly-owned subsidiary of TCI, South Cochran. This loan, separately guaranteed by TCI, was then used in part to allow TCI to engage in the note purchase/loan transaction. Am. Compl. at P 35. The properties acquired by NIRT and TCI in connection with the December 13, 1991 transaction were distressed and overvalued. Am. Compl. at P 30.

 On or about Monday December 16, 1991, as a quid pro quo for the benefits FBNA received in connection with the December 13 property purchases, FBNA made loans totalling approximately $ 30 million to three Illinois limited partnerships formed by Wabick and owned and controlled by Phillips and Friedman. The loans were made on the condition or requirement that the Trusts, directly or indirectly, purchase the defaulted Crivello notes. Am. Compl. at P 40.

 The proceeds from the loans by First Bank to the Illinois partnerships were eventually used in substantial part to help Phillips' and Friedman's affiliates, mainly ART, pay off their obligations to First City. Am. Compl. at P 43.

 Finally, in February 1992, TCI paid $ 1.3 million for three Crivello notes held by FB and secured by two buildings and land. Am. Compl. at P 45. The purchase of these three notes was linked to the December 1991 transactions. Am. Compl. at P 46.

 Motion to Dismiss

 A motion to dismiss tests the sufficiency of the complaint, not the merits of the suit. Demitropoulos v. Bank One Milwaukee, N.A., 915 F. Supp. 1399, 1406 (N.D. Ill. 1996) (citing Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990); Therefore, the court accepts as true all well-pleaded factual allegations and draws all reasonable inferences in favor of the plaintiff. Zinermon v. Burch, 494 U.S. 113, 118, 108 L. Ed. 2d 100, 110 S. Ct. 975 (1990); Colfax Corp. v. Illinois State Toll Highway Auth., 79 F.3d 631, 632 (7th Cir. 1996) (citation omitted). The court will dismiss a claim only if "it appears beyond doubt that [the plaintiff] can prove no set of facts in support of his claim which would entitle him to relief. Colfax, 79 F.3d at 632 (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)).

 Discussion

 I. Bank Holding ...


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