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TODD v. GATLIN

December 30, 1997

IRENA K. PETRI and JOHN R. TODD, on behalf of themselves and all others similarly situated, Plaintiffs,
v.
T. WAYNE GATLIN, JESSE D. SMITH, JERRY PAJARES, and SANTANNA NATURAL GAS CORPORATION, a Texas corporation, Defendants.



The opinion of the court was delivered by: GRADY

 Before the court are Santanna Natural Gas Corporation's and the individual defendants' motions to dismiss the complaint. For the reasons stated in this opinion, the motions to dismiss are granted in part and denied in part.

 BACKGROUND

 Viewed in the plaintiffs' favor, the relevant facts are as follows. Under a policy known as the Transportation Gas Program, local gas distribution companies ("LDCs") such as Peoples' Gas Light & Coke Company, Illinois Power, and Northern Illinois Gas permit "commercial rate" customers -- multi-unit apartment buildings, hospitals, factories, schools, government entities and the like -- to purchase gas at discount prices from independent third party suppliers. These customers purchase the gas from the independent suppliers instead of obtaining it directly from the LDC. Amended Complaint PP 12, 14, 16. Independent suppliers deliver the purchased gas to the LDCs, and the LDCs in turn deliver the gas to the customers' commercial sites via LDC pipelines. The LDC charges customers for the use of the pipelines, while the independent suppliers charge for the amount of gas actually used by the customers. Id.

 Santanna Natural Gas Corporation ("Santanna"), an independent third party supplier, participates in the Program and thus sells natural gas to "commercial end users" throughout the state of Illinois. Id. P 11. On Santanna's corporate roster (and hereafter referred to as "the individual defendants") are T. Wayne Gatlin, the president, chief executive officer, chairman of the board of directors, and controlling shareholder; Jesse D. Smith, the executive vice president; and Jerry Pajares, the secretary and treasurer. The plaintiffs, Irena K. Petri and John R. Todd, each own one or more multi-unit apartment buildings. Id. P 5. On or about July 20, 1993, Todd agreed to purchase natural gas from Santanna. Pursuant to the agreement, the parties entered into a "Gas Sales Contract" and an "Agency Agreement." Id. PP 31-32. The parties agreed in the Contract and the Agreement to be bound by Texas law. Id. P 32 (referring to § 16.4 of the Contract and § 6.4 of the Agreement). On or about November 11, 1995, Petri reached a similar agreement with Santanna, and likewise entered into a "Gas Sales Contract" and an "Agency Agreement." Id. P 38. The parties agreed in the Contract and the Agreement to be bound by Illinois law. Id. P 38 (referring to § 10.4 of the Contract and § 4.4 of the Agreement). Todd terminated his relationship with Santanna in January 1997, while Petri terminated her relationship with Santanna in December 1996. Id. PP 37, 39.

 The problem, according to the plaintiffs, is that Santanna induced them (and thousands of other consumers) into signing sales contracts by making a series of misrepresentations. Santanna's promotional brochures state that by purchasing natural gas from Santanna instead of an LDC, a customer "can save 15 - 35% on [his] annual heating or processing bill with no investments and no risk !" Id. P 20 (quoting the brochure). The plaintiffs claim that the most a customer can realistically expect to save is 8 to 15 percent per year, and that this fact was well known to the defendants when they disseminated the brochures. Id. PP 21-22. The brochures also state that Santanna "guarantees that our price per therm will never be greater than the utility company [sic]." Id. P 23 (quoting the brochure). *fn1" The Agency Agreements signed by the plaintiffs contain similar language. Id. PP 33, 41. Again, however, the plaintiffs contend that the truth of the matter is that Santanna's prices often exceed those of the LDC. This disparity was also known to the defendants when they disseminated the brochures and signed the Agreements. Id. PP 24-25, 34-36, 42-44. In addition, the standardized Gas Sales Contracts used by Santanna state that "the price per Therm shall be based on the monthly market price then in effect for natural gas delivered to the various natural gas Sales Point(s) into the interstate pipelines." Id. P 40 (quoting § 3.1 of Petri's Gas Sales Contract). The plaintiffs maintain that because gas prices fluctuate on a daily basis, the "monthly market price" as described in the Contracts simply does not exist. Id. P 46. Santanna allegedly exploited this contractual ambiguity by charging higher prices without full disclosure. Id. PP 47-48.

 In April 1997, the plaintiffs filed a multi-count complaint naming Santanna, Gatlin, Smith, and Pajares as defendants. As amended on May 28, 1997, the complaint includes the following six claims. Count I alleges that Santanna breached the plaintiffs' contracts by charging prices "other than the lowest monthly market price" and greater than those charged by The LDC. Id. P 61. Counts II and III allege that Santanna and the individual defendants violated the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA" or "Act") and the Texas Deceptive Trade Practices-Consumer Protection Act ("DTPA" or "Act") by (1) deliberately using ambiguous price terms in standardized contracts and charging prices other than the lowest monthly market rate; (2) guaranteeing that the prices charged would be lower than those charged by the LDC; (3) assuring customers that they could save between 15 and 35 percent per year on their gas bills; (4) acting as agents for customers but failing to disclose that the prices charged were higher than the lowest monthly market price; and (5) acting as agents for customers but failing to disclose that the prices charged were often higher than those charged by the LDC. Id. PP 67, 73. Count IV alleges that Santanna breached a fiduciary duty owed to the plaintiffs by committing the same five acts described in Counts II and III. Id. P 79. Counts V and VI allege that Santanna and the individual defendants *fn2" violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") by engaging in a scheme to defraud consumers. Santanna and the individual defendants purportedly engaged in such a scheme by committing the same five acts described in Counts II, III, and IV. Id. PP 85, 97. Counts V and VI also allege that Santanna and the individual defendants repeatedly used "the mails, interstate carriers, and interstate wire transmissions" in furtherance of their scheme to defraud. Id. PP 86, 98.

 DISCUSSION

 The defendants' arguments revolve around two provisions of the Federal Rules of Civil Procedure: Rule 9(b) and Rule 12(b)(6). The defendants contend that Count I fails to state a claim under Rule 12(b)(6), and that Counts II, III, IV, V, and VI fail to state claims under both 12(b)(6) and 9(b). For the sake of clarity, we will separately analyze the last five counts of the complaint under the rubric of Rule 12(b)(6), and then under the rubric of Rule 9(b). See General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1078 (7th Cir. 1997) (performing a similar analysis). We begin by discussing the standard of review under each of the relevant rules.

 The standard of review under Rule 12(b)(6) is well known. The purpose of a 12(b)(6) motion to dismiss is to test the sufficiency of the complaint, not to resolve the case on the merits. 5A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1356, at 294 (2d ed. 1990). When evaluating such a motion, the court must accept as true all factual allegations in the complaint and draw all reasonable inferences in the plaintiff's favor. Jang v. A.M. Miller & Associates, 122 F.3d 480, 483 (7th Cir. 1997); Travel All Over The World, Inc. v. Kingdom of Saudi Arabia, 73 F.3d 1423, 1429 (7th Cir. 1996). Dismissal is appropriate only if "'it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.'" Ledford v. Sullivan, 105 F.3d 354, 356 (7th Cir. 1997) (quoting Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984)); Jones v. General Elec. Co., 87 F.3d 209, 211 (7th Cir.), cert. denied, 136 L. Ed. 2d 400, 117 S. Ct. 510 (1996).

 The standard of review under Rule 9(b) is more demanding. The rule provides that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Rule 9(b) thus requires a complaint alleging fraud to state "the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated." Uni* Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 924 (7th Cir. 1992) (quoting Bankers Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 683 (7th Cir. 1992)); see also DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990) (stating that Rule 9(b) requires a plaintiff to identify "the who, what, when, where, and how: the first paragraph of any newspaper story"); 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1297, at 608-12 (2d ed. 1990) ("A pleading that simply avers the technical elements of fraud does not have sufficient informational content to satisfy the rule's requirement."). The rule "is said to serve three main purposes: (1) protecting a defendant's reputation from harm; (2) minimizing 'strike suits' and 'fishing expeditions'; and (3) providing notice of the claim to the adverse party." Vicom, Inc. v. Harbridge Merchant Services, Inc., 20 F.3d 771, 777 (7th Cir. 1994).

 I. Count I (Breach of Contract)

 The ground rules for Count I of the complaint are straightforward. To prevail on a breach of contract claim under Illinois law, a plaintiff must establish (1) the existence of a valid and enforceable contract, (2) his own performance under the terms of the contract, (3) a breach of the contract by the defendant, and (4) an injury suffered as a result of the defendant's breach. Chandler v. Southwest Jeep-Eagle, Inc., 162 F.R.D. 302, 311 (N.D. Ill. 1995); Aardvark Art, Inc. v. Lehigh/Steck-Warlick, Inc., 284 Ill. App. 3d 627, 672 N.E.2d 1271, 1275, 220 Ill. Dec. 259 (Ill. App. Ct. 1996) (quoting Mannion v. Stallings & Co., Inc., 204 Ill. App. 3d 179, 561 N.E.2d 1134, 1138, 149 Ill. Dec. 438 (Ill. App. Ct. 1990)). A plaintiff asserting a claim for breach of contract under Texas law must make a similar showing. Perez v. Alcoa Fujikura, Ltd., 969 F. Supp. 991, 1012 (W.D. Tex. 1997); Elf Exploration, Inc. v. Cameron Offshore Boats, Inc., 863 F. Supp. 386, 390 (E.D. Tex. 1994); Hussong v. Schwan's Sales Enterprises, Inc., 896 S.W.2d 320, 326 (Tex. App. 1995).

 Not so straightforward is the degree of specificity with which a plaintiff must plead a breach of contract claim in order to survive a motion to dismiss in a diversity case. Illinois courts adhere to the rule that "to plead properly a cause of action in breach of contract a plaintiff must allege the essential elements of the cause of action." Nielsen v. United Services Auto. Ass'n, 244 Ill. App. 3d 658, 612 N.E.2d 526, 529, 183 Ill. Dec. 874 (Ill. App. Ct. 1993); accord Barille v. Sears Roebuck and Co., 289 Ill. App. 3d 171, 682 N.E.2d 118, 121, 224 Ill. Dec. 557 (Ill. App. Ct. 1997); Nuccio v. Chicago Commodities, Inc., 257 Ill. App. 3d 437, 628 N.E.2d 1134, 1139, 195 Ill. Dec. 670 (Ill. App. Ct. 1993); see generally Ontap Premium Quality Waters, Inc. v. Bank of N. Ill., N.A., 262 Ill. App. 3d 254, 634 N.E.2d 425, 429, 199 Ill. Dec. 586 (Ill. App. Ct. 1994) (holding that "in the absence of supporting facts," general allegations regarding contract formation "may not be admitted as true by a motion to dismiss"). That comes as no surprise, since Illinois has long been a "fact pleading" (rather than "notice pleading") state. See People v. $ 1,124,905 U.S. Currency and One 1988 Chevrolet Astro Van, 177 Ill. 2d 314, 1997 WL 576334, at *12 (Ill. 1997) (slip copy); Anderson v. Vanden Dorpel, 172 Ill. 2d 399, 667 N.E.2d 1296, 1300, 217 Ill. Dec. 720 (Ill. 1996); see also Richco Plastic Co. v. IMS Co., 288 Ill. App. 3d 782, 681 N.E.2d 56, 58, 224 Ill. Dec. 74 (Ill. App. Ct. 1997) ("Unlike some jurisdictions that permit notice pleading, Illinois is a fact pleading jurisdiction. In order to set forth a good and sufficient claim or defense, a pleading must allege ultimate facts sufficient to satisfy each element of the cause of action or affirmative defense pled.") (citation omitted); Lempa v. Finkel, 278 Ill. App. 3d 417, 663 N.E.2d 158, 163, 215 Ill. Dec. 408 (Ill. App. Ct. 1996) ("Illinois requires fact pleading, not notice pleading."). Citing the four-part test for a breach of contract claim, some federal courts have also implied that a plaintiff must allege facts supporting each of the four elements. See Servpro Indus., Inc. v. Schmidt, 905 F. Supp. 475, 479 (N.D. Ill. 1995) (dismissing a breach of contract claim on a 12(b)(6) basis and stating that "a conclusory allegation of a breach is insufficient; [a plaintiff] must state the facts underlying the breach"); accord Carl v. Galuska, 785 F. Supp. 1283, 1289 (N.D. Ill. 1992). Cognizant of these decisions, Santanna argues that Count I of the complaint should be dismissed because (1) the plaintiffs have alleged neither "the requisite elements of the existence of a contract" nor their own performance of all contractual terms, see Defendant Santanna Natural Gas Corporation's Memorandum Of Law In Support Of Its Motion To Dismiss ("Santanna Memorandum") at 18; Defendant Santanna Natural Gas Corporation's Reply Memorandum In Further Support Of Its Motion To Dismiss ("Santanna Reply") at 15-17; and (2) the sales agreement between Petri and Santanna "does not contain any requirement that Santanna charge her or anyone else 'the lowest monthly market price for natural gas.'" Santanna Memorandum at 18; Santanna Reply at 17.

 Even if a complaint is deficient in a "fact pleading" jurisdiction, however, its insufficiency in a "notice pleading" jurisdiction is not a foregone conclusion. As the Seventh Circuit recently observed in Albiero v. City of Kankakee, 122 F.3d 417 (7th Cir. 1997), while a plaintiff in state court might be required to allege all of the facts essential to recovery under his chosen legal theory, that is not the case in federal court. Id. at 419; see also Redfield v. Continental Cas. Corp., 818 F.2d 596, 605 (7th Cir. 1987) (highlighting the differences between fact pleading and notice pleading and stating that "a plaintiff in federal court need not set out in detail the facts upon which his claim is based"); Resolution Trust Corp. v. Fortunato, 1994 U.S. Dist. LEXIS 12326, No. 94 C 2090, 1994 WL 478616, at *3 (N.D. Ill. Sept. 1, 1994) (recognizing that a complaint which "would likely fail under the rigorous fact pleading standards of the Illinois state courts" is not automatically deficient under the "more liberal standard" of the Federal Rules); Ganton Technologies, Inc. v. Quadion Corp., 755 F. Supp. 203, 207 (N.D. Ill. 1990) ("In a diversity action, the court is to assess the adequacy of the pleadings under federal law, rather than the stricter requirements of Illinois law."); see generally American Nurses' Ass'n v. Illinois, 783 F.2d 716, 727 (7th Cir. 1986) ("[A] complaint is not required to allege all, or any, of the facts logically entailed by the claim."); Abdoh v. City of Chicago, 930 F. Supp. 311, 313 (N.D. Ill. 1996) ("It is well settled that a plaintiff in federal court is not required to allege detailed facts in support of his claim."). Indeed, under the liberal system of notice pleading envisioned by Federal Rule of Civil Procedure 8, *fn4"

 
complaints need not contain elaborate factual recitations. They are supposed to be succinct. . . . Any need to plead facts that, if true, establish each element of a "cause of action" was abolished by the Rules of Civil Procedure in 1938, which to signify the radical change from code pleading also replaced "cause of action" with "claim for relief." One pleads a "claim for relief" by briefly describing the events. At this stage the plaintiff receives the benefit of imagination, so long as the hypotheses are consistent with the complaint.

 Sanjuan v. American Bd. of Psychiatry & Neurology, Inc., 40 F.3d 247, 251 (7th Cir. 1994) (citations omitted), cert. denied, 516 U.S. 1159, 134 L. Ed. 2d 191, 116 S. Ct. 1044 (1996). In short, once it arrives in federal court, "[a] suit should not be dismissed if it is possible to hypothesize facts, consistent with the complaint, that would make out a claim." Graehling v. Village of Lombard, Ill., 58 F.3d 295, 297 (7th Cir. 1995).

 With these principles in mind, we reject the defendants' first argument and hold that the plaintiffs have sufficiently alleged breaches of the Agency Agreements. The plaintiffs have at least generally alleged the existence of contractual agreements, see Amended Complaint PP 32, 38 (referring to, among other things, the Agency Agreements); the defendants' breaches of those contracts, see id. PP 35-36, 42-43, 61 (describing the breaches); and damages resulting from the defendants' breaches. See id. PP 35-36, 43-44, 62 (comparing prices charged by the defendants with LDC prices). As the defendants point out, the plaintiffs have not specifically alleged their own compliance with each contractual term. *fn5" But as the foregoing paragraph makes clear, the Federal Rules do not require a plaintiff to allege specific facts which "establish" each element of a claim for relief. Rather, the complaint need only inform a defendant of the charge against him by concisely narrating the incident or incidents in question. The complaint in this case unquestionably provides adequate notice to the defendants of the nature of the plaintiffs' breach of contract claim, and the hypothesis that the plaintiffs fulfilled their contractual obligations is certainly consistent with the allegations in the complaint. A line-by-line review of the relevant contracts, accompanied by "specific facts" demonstrating the plaintiffs' compliance with each and every provision of those contracts, is simply not necessary at this stage of the proceedings.

 The defendants' second argument -- that the plaintiffs' claim that Santanna breached Petri's Gas Sales Contract is contradicted by the language of the agreements *fn6" -- is more persuasive. Focusing on § 3.1 of that contract, which provides that "the price per Therm shall be based on the monthly market price then in effect for natural gas delivered to the various natural gas Sales Point(s) into the interstate pipelines," the plaintiffs assert that Santanna breached the agreement by "charging prices other than the lowest monthly market price for natural gas." Amended Complaint P 61. But as the passage quoted above clearly reveals, § 3.1 of the contract did not obligate Santanna to charge the lowest monthly market price. The verb "base" means "to use as a base or basis for," see Webster's Third New International Dictionary 180 (1971); see also id. 181 ("BASE now usu. applies to what underlies a belief, a system of thought, a judgment, a hope, and so on . . . based on prospective earnings>"); The Random House Dictionary of the English Language 172 (2d ed. 1987) (stating that the verb "base" means "to place or establish on a base or basis; ground; found (usually fol. by on or upon)"), and the noun "base" is typically defined as a "foundation," or "that on which something rests or stands." Webster's Third New International Dictionary 180 (1971); see also The Random House Dictionary of the English Language 172 (2d ed. 1987); Black's Law Dictionary 151 (6th ed. 1990) (both containing a similar definitions). By requiring Santanna to charge rates which were based on the monthly market price, § 3.1 of the Gas Sales Contract obliged Santanna only to charge rates which bore some relation to the monthly market price, not to charge rates that were identical to the lowest monthly market price. Of course, Santanna may have breached the contract by charging rates that were altogether divorced from the monthly market price; to date, however, the plaintiffs have not made such a claim. Accordingly, insofar as it is premised on an alleged breach of Petri's Gas Sales Contract, Count I is dismissed.

 II. Counts II (Illinois Consumer Fraud and Deceptive Business Practices Act) and III (Texas Deceptive Trade Practices-Consumer Protection Act)

 A. Rule 12(b)(6)

 1. Count II

 The Illinois Consumer Fraud and Deceptive Business Practices Act prohibits "unfair methods of competition and unfair or deceptive acts or practices." 815 ILCS 505/2 (West 1993). *fn7" The Act is designed "to eradicate 'all forms of deceptive and unfair business practices and to grant appropriate remedies to defrauded consumers,'" Lee v. Nationwide Cassel, L.P., 277 Ill. App. 3d 511, 660 N.E.2d 94, 100, 213 Ill. Dec. 837 (Ill. App. Ct. 1995) (quoting Warren v. LeMay, 142 Ill. App. 3d 550, 491 N.E.2d 464, 471, 96 Ill. Dec. 418 (Ill. App. Ct. 1986)), rev'd in part, 174 Ill. 2d 540, 675 N.E.2d 599, 221 Ill. Dec. 404 (Ill. 1996); see also Lyne v. Arthur Andersen & Co., 772 F. Supp. 1064, 1067-68 (N.D. Ill. 1991); Law Offices of William J. Stogsdill v. Cragin Fed. Bank for Sav., 268 Ill. App. 3d 433, 645 N.E.2d 564, 565, 206 Ill. Dec. 559 (Ill. App. Ct. 1995) (both explaining that the aim of the Act is to protect "consumers, borrowers and businessmen" against fraud, acts of deception, and unfair competitive practices), and thus "provides broader consumer protection than an action for common law fraud." Moore v. Fidelity Fin. Services, Inc., 949 F. Supp. 673, 679 (N.D. Ill. 1997); accord Barille, 682 N.E.2d at 124; Perona v. Volkswagen of Am., Inc., 292 Ill. App. 3d 59, 225 Ill. Dec. 868, 684 N.E.2d 859, 864 (Ill. App. Ct. 1997). To establish a violation of the ICFA, a plaintiff must show that (1) the defendant committed a deceptive act, such as the misrepresentation or concealment of a material fact; (2) the defendant intended to induce the plaintiff's reliance on the deception; and (3) the deception occurred in a course of ...


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