United States District Court, Northern District of Illinois
July 30, 2003
JAMES DUGGAN, VERSUSLAW DUGGAN, J. DUGGAN 1500 LLC, J. DUGGAN PARKSIDE LLC, JAMES G. DUGGAN TRUST, AND VERSUSLAW DUGGAN, PLAINTIFF'S,
JOHN TERZAKIS, ET AL., DEFENDANTS
The opinion of the court was delivered by: Amy J. St. Eve, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff's assert that John Terzakis, Rudy Mulder, Roxanne Gardner, and the entities they owned and controlled "masterminded an illegal scheme to defraud elderly individuals, including James and Lois Duggan, of their life savings" by convincing them to sell their real estate and purchase Defendants' commercial real estate at overvalued prices. (R. 1-1, Compl. ¶¶ 2-3, 6.) Defendants promoted these actions as a way for elderly investors to exit property management without adverse tax consequences. (Id. at ¶ 5.) Plaintiff's filed a six-count Complaint against Defendants asserting violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") (Counts I-III) and the Illinois Consumer Fraud Act ("ICFA") (Count IV), civil conspiracy (Count V), and common law fraud (Count VI).*fn1 Centerpoint moves to dismiss Counts IV-VI of Plaintiffs' Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Defendants contend that only Plaintiff James Duggan has standing to sue Centerpoint, and that Plaintiff's have failed to plead Counts IV and VI with Rule 9(b) particularity. For the reasons [ Page 2]
stated herein, the Court grants Centerpoint's motion to dismiss with respect to Lois Duggan, J. Duggan Parkside LLC, James G. Duggan Trust, and Lois S. Duggan Trust,*fn2 and denies the motion with respect to James Duggan and J. Duggan 1500 LLC.
Plaintiff's allege that "Terzakis, Mulder, Gardner, TDS and others" advertised that TDS could provide investment solutions to property owners in compliance with Section 1031 of the Internal Revenue Code. (R, 1-1, Compl. at ¶ 40.) Terzakis, Mulder, Gardner, and TDS mailed these advertisements on multiple occasions and ran them in the Wall Street Journal at least six times. (Id.) The advertisements stated that clients would have to sell their existing real estate and create special purpose entities to hold their new property interests in order to qualify for the purported tax benefits. (Id. at ¶ 42.) Although TDS would act as the clients' real estate broker in these transactions, the clients did not know it. (Id. at ¶¶ 41, 43.) Defendants sent the clients a list of properties in which they could invest, including the Honeywell Building. (Id. at ¶ 44.) Defendants also sent the clients prospectuses omitting purportedly material information including UITs 50% ownership of TDS, Terzakis' 45% ownership of UIT, Mulder's 45% ownership of UIT, and Gardner's 10% ownership of UIT. (Id. at ¶¶ 43-46.) Centerpoint's role in Defendants' scheme relates to the sale and purchase of the Honeywell Building.
Plaintiff's allege that Defendants, including Centerpoint, entered into a fraudulent real estate transaction. (Id. at ¶ 47.) In order to induce investment in Defendants' venture at inflated prices, Centerpoint purportedly sold the Honeywell Building, located in Arlington Heights, Illinois, to its purchasers*fn4 for substantially more than the property's fair market value in [ Page 3]
September 2000. (Id. at ¶¶ 38, 48, 55(d), 55(e).) Centerpoint allegedly kicked-back part of the excess profits to the purchasers through a three-year lease entered into on June 9, 2000. This lease provided the purchasers with the security they needed to obtain a loan for buying the building in the first place. (Id. at ¶¶ 38, 55(d).)
Centerpoint's lease covered four vacant blocks. (Id. at ¶¶ 138, 53, 55(d).) Centerpoint, which began paying rent on September 6, 2000, only used or intended to use a small fraction of the purportedly leased space. (Id. at ¶¶ 38, 55(d).) This ghost lease inflated the building's occupancy to investors. (Id. at ¶¶ 38, 55(d), 55(i), 56.) This inflation would only begin affecting investors once the lease's expired. (Id. at ¶ 53.)
Centerpoint's participation in Defendants' scheme did not end there. Centerpoint also agreed to furnish UIT and the other defendants with a fraudulent rent roll for the property, which "UIT, TDS and other defendants"*fn5 sent to investors as part of an offering memorandum in April 2000. (Id. at ¶¶ 49, 51, 55(a).) The rent roll listed non-existing tenants, including Invensys. (Id. at ¶¶ 50, 55(h).) In fact, Centerpoint was the entity that was leasing the purported Invensys space. (Id.) The rent roll also represented that this was a ten-year lease when it, in reality, only covered a three-year period. (Id.) Finally, Centerpoint paid the purchasers more than two-million dollars of the investors' money to be released from the lease once the investors purchased all of the buildings' shares. (Id. at ¶¶ 55(g), 55(h), 57.)
I. Rule 12(b)(6) Standards
A Rule 12(b)(6) motion to dismiss tests the legal sufficiency of a complaint, not the merits of a claim. Triad Assoc., Inc. v. Chicago Hous. Auth., 892 F.2d 583, 586 (7th Cir. 1989). In evaluating a 12(b)(6) motion, a court examines the facts alleged in the complaint and draws all [ Page 4]
reasonable inferences from those facts in the Plaintiff's favor. Stachon v. United Consumers Club, Inc., 229 F.3d 673, 675 (7th Cir. 2000). Dismissal is appropriate only when "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spaulding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984). While a complaint ordinarily need not set out in detail the facts upon which a plaintiff bases his claim, Benson v. Cady, 761 F.2d 335, 338 (7th Cir. 1985), a plaintiff may not simply attach bare legal conclusions to narrated facts to satisfy federal pleading requirements. Strauss v. City of Chicago, 760 F.2d 765, 768 (7th Cir. 1985).
II. Rule 9(b) Standards
When Plaintiff's allege fraud, Federal Rule of Civil Procedure 9(b) imposes the additional requirement that "the circumstances constituting the fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). Particularity requires Plaintiff's "to plead in detail the `who, what, when, where, and how' of the circumstances constituting the fraud." See Cumis Ins. Soc'y, Inc. v. Peters, 983 F. Supp. 787, 792 (N.D. Ill. 1997) (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)). That is, Plaintiff's must plead "the identity of the person who made the misrepresentation, the time, place and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff." Id. (quoting General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1082-83 (7th Cir. 1997)). Plaintiff's, however, need not plead information "uniquely within the defendant's knowledge." Vicom, Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771, 778 n. 5 (7th Cir. 1994). This particularity requirement applies to Plaintiffs' ICFA claim, see also DeLeon v. Beneficial Constr. Co., 55 F. Supp.2d 819, 825 (N.D. Ill. 1999), as well as their common law fraud cause of action. See Fed.R. Civ. P. 9(b); Boyd Mach. & Repair Co., Inc. v. American Intern. Homes, Ltd., 100 F. Supp.2d 898, 900 (N.D. Ill. 2000).
I. Only James Duggan and J. Duggan 1500 LLC Have Standing to Sue Centerpoint
To meet Article Ill's standing requirements, Plaintiff's must allege that they sustained a "personal injury" that is in-fact "fairly traceable to the defendant's allegedly unlawful conduct [ Page 5]
and likely to be redressed by the requested relief." Johnson v. Allsteel, Inc., 259 F.3d 885, 887 (7th Cir. 2001) (internal quotation and citation omitted). While Plaintiff's generally allege remediable injury to their business and property, Plaintiff's have attached an exhibit to their Complaint that identifies the individual investors for each of the properties in this case. According to the exhibit, which the Court considers a part of the pleadings, see Wright v. Associated Ins. Cos. Inc., 29 F.3d 1244, 1248 (7th Cir. 1994), only James Duggan and J. Duggan 1500 LLC hold a property interest in the Honeywell Building. Consequently, only James Duggan and J. Duggan 1500 LLC have standing to sue Centerpoint. Accordingly, the Court grants Defendants' motion to dismiss Counts IV-VI with respect to Plaintiff's Lois Duggan, J. Duggan Parkside LLC, James G. Duggan Trust, and Lois S. Duggan Trust.
II. Plaintiff's*fn6 Have Pleaded Counts IV and VI with Particularity
In Count IV, Plaintiff's assert that Defendants violated the ICFA. In Count VI, Plaintiff's allege that Defendants engaged in common law fraud. Although these causes of action have distinct elements,*fn7 Defendants do not contest whether Plaintiff's adequately have pled those elements. Instead, Defendants maintain that Plaintiff's have not alleged the facts surrounding the fraud with sufficient particularity to satisfy the mandates of Rule 9(b). Because Plaintiff's allege the same facts for both of these counts, the Court's analysis on particularity is the same for Counts IV and VI.
Plaintiffs' allegations satisfy Rule 9(b)'s requirements for three reasons. First, Plaintiff's have sufficiently pled Centerpoint's role in the alleged deceptive act and fraudulent scheme. Plaintiff's claim that Centerpoint sold the Honeywell Building at an inflated price in September [ Page 6]
2000 in order to induce investment, which Defendants began seeking even before the real estate transaction. On June 9, 2000, Centerpoint leased part of the building from the purchasers, who misrepresented the terms of Centerpoint's lease to Plaintiff's and other investors. Significantly, Defendants showed Plaintiff's and other investors an offering memorandum and a rent roll that exaggerated the amount of space and time frame of Centerpoint's lease. Centerpoint also assisted Defendants in defrauding Plaintiff's by listing Invenys as a ten-year tenant in the rent roll, when, in fact, Centerpoint itself was leasing this space for just a three-year period. At closing, Defendants failed to provide Plaintiff's and the other investors with an accurate rent roll. These allegations are sufficient to detail the circumstances constituting the fraud.
Second, the Court must evaluate Rule 9(b)'s particularity requirement in light of its purposes of: (1) protecting defendants' reputations from harm, (2) "Minimizing `strike suits' and `fishing expeditions,'" and (3) providing defendants with adequate notice. See Vicom, 20 F.3d at 777 (citations omitted); Cumis Ins. Soc'y, Inc., 983 F. Supp. at 792-93 (citations omitted). Plaintiffs' Complaint, which alleges over one hundred factual allegations and contains various detailed exhibits, indicates that Plaintiff's conducted a sufficient preliminary investigation. This level of detail evidences that the Complaint is neither a strike suit nor a fishing expedition. Additionally, the allegations provide Centerpoint with adequate notice. Therefore, Rule 9(b) has served its protective functions.
Finally, while Plaintiff's "lump together" multiple Defendants throughout their Complaint, which is typically insufficient to satisfy Rule 9(b) particularity, see Vicom, Inc., 20 F.3d at 778 (citing Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990)), Plaintiff's also allege substantial overlapping ownership among the entities. Indeed, Plaintiff's allege, in many instances, that there is "no corporate separateness among these entities" and that the entities are the alter egos of one another. (R. 1-1, Compl. ¶ 20, 29, 33, 37.) It is clear that Plaintiff's have provided Centerpoint with sufficient information to answer the allegations. See Banowitz v. State Exchange Bank, 600 F. Supp. 1466, 1469 (N.D. Ill. 1985). Accordingly, the Court denies Centerpoint's motion to dismiss Counts IV and VI with respect to the remaining Plaintiff's, James Duggan and J. Duggan 1500 LLC. [ Page 7]
III. Count V Withstands Dismissal
In Illinois, a cause of action for civil conspiracy requires an underlying claim. See Sober v. Glaxo Wellcome PLC, 246 F.3d 934, 943 (7th Cir. 2001). Centerpoint bases its entire argument that Count V should be dismissed on its mistaken belief that Plaintiff's did not adequately allege underlying claims in Counts IV and VI. Centerpoint has not raised an independent ground for dismissing Count V. Accordingly, the Court denies Centerpoints' motion to dismiss Count V with respect to James Duggan and J. Duggan 1500 LLC.
James Duggan and J. Duggan 1500 LLC are the only Plaintiff's with standing to sue Centerpoint. Accordingly, the Court grants Defendant's motion to dismiss Counts IV-VI with respect to the following Plaintiff's: Lois Duggan, J. Duggan Parkside LLC, James G. Duggan Trust, and Lois S. Duggan Trust. The remaining Plaintiff's, James Duggan and J. Duggan 1500 LLC, have pleaded Counts IV and VI of their Complaint with particularity. Accordingly, the Court denies Centerpoint's motion to dismiss Counts IV and VI as to those Plaintiff's. In addition, the Court also denies Centerpoint's motion to dismiss Count V because James Duggan and J. Duggan 1500 LLC have sufficiently pleaded an underlying claim for civil conspiracy.