The opinion of the court was delivered by: P. MICHAEL MAHONEY, Magistrate Judge
Memorandum Opinion and Order
Plaintiffs filed a seven-count Amended Complaint against
Defendants alleging violations of the Securities Act of 1933, the
Securities Exchange Act of 1934, RICO violations, unjust
enrichment, civil conversion, breach of fiduciary duty and/or
breach of duty to act in good faith, and intentional or negligent
misrepresentation. Defendants have moved to strike and dismiss
Plaintiffs' Second Amended Complaint. For the following reasons,
Defendants' Motion to Strike is denied and Defendants' Motion to
Dismiss is denied in part and granted in part.*fn1 Background
For the limited purposes of this motion, the court accepts as
true the background facts alleged in Plaintiffs' Second Amended
Complaint. By doing so, the court makes no judgment about the
actual truth or accuracy of facts alleged in Plaintiffs'
Complaint. Plaintiffs are a group of investors who purchased
units of interest in Sci-Tech Buildings Systems ("Sci-Tech").
They claim they were induced to purchase their interests because
of fraudulent misrepresentations made by Defendants, Vincent
("Vince") and Patricia ("Patricia") Tylman. Sci-Tech was
apparently created in 1996 by Ken Tylman ("Ken"), Ed Aldis
("Ed"), and Vince. At that time, the company was known as ATT
Building Systems ("ATT"). At some point in 1997 or 1998, the
company changed its name to Sci-Tech.
A business meeting was called to discuss the future structure
and goals of ATT on April 1, 1997. Ed, Ken, and Vince attended
this meeting. The minutes of the meeting appear to show those in
attendance assigning areas of responsibility for tasks to be
completed on behalf of the company. The task of "patent work" was
assigned to Vince, while Ken was to work with an attorney on the
company structure, and Ed was to work on product development.
In 1999, Vince obtained patents ("the patents"), which are the
basis of this lawsuit, and allegedly was to assign the patents to
Sci-Tech. In July of 1999, Vince drafted a document detailing new
lines of expense for Sci-Tech in the form of royalty payments to
be paid from Sci-Tech to himself. These royalty payments to Vince
were allegedly never discussed with Ken or Ed, but were
inadvertently later discovered. Also in 1999, Vince employed a
law firm to file the articles of incorporation necessary to create Sci-Tech Building
In January of 2000, Vince applied for and received a
federally-funded $80,000.00 company loan for Sci-Tech. The
application for this loan stated that Sci-Tech owned the patents.
In March of 2000, Vince led a seminar for potential customers and
investors of Sci-Tech and represented to all attendees that
Sci-Tech owned the patents.*fn2 That same year, Ken and Ed
discovered that Vince was receiving 7% royalty payments from
Sci-Tech for the use of the patents. Ken and Ed confronted Vince
who then suggested that the amount of the royalty payments be
reduced to 3½% but no royalty payments were ever approved.
During the following summer, disputes escalated between Ken,
Vince, and Ed about (1) Vince and Patricia's "covert plan" to
receive royalty payments for Sci-Tech's use of Vince's patents,
then held by Namlyt Trust; (2) Vince's insistence that Ken and Ed
reduce their units of interest in Sci-Tech; and (3) the failure
to resolve issues or make approvals through the use of board
meetings as required in Sci-Tech's operating agreement.
In January of 2001, Vince Tylman allegedly sent additional
fund-raising letters to Plaintiffs, which asserted that Sci-Tech
held the patents. In February of 2001, Sci-Tech was busy
marketing its product to contractors and developers at the World
Concrete Show. By August 2001, problems between the company
founders further multiplied when Vince allegedly hired a new CEO
for Sci-Tech without permission and continued to insist that Ken
and Ed transfer their interest in Sci-Tech to him.
Both Ken and Vince began to seek legal counsel about Sci-Tech
and the problems detailed above in the Fall of 2001. At a September 2001 company
meeting, Ken addressed the possibility that Vince's
representations to investors that Sci-Tech held the patents when
they were actually held by Vince constituted a potential
securities violation. Following this meeting, Vince was removed
as a manager of Sci-Tech and a resolution was passed that
Sci-Tech would assert its right to possess the patents and take
legal action to recover the patents. In response, Vince e-mailed
each Sci-Tech investor informing them that Ronald Guild would
represent him regarding the patent dispute.
In March of 2002, Sci-Tech filed a complaint against Vince and
Patricia, as co-trustees of Namlyt, to take ownership of the
patents. Vince and Patricia, as trustees of Namlyt Trust, entered
into an arbitration agreement settling the parties' dispute, but
Vince and Patricia allegedly defaulted on the agreement.
Plaintiffs, in their current suit as individual investors, now
claim that they have suffered damages in the amount of their
initial investments and to the amount of possible business loss
in excess of $800,000.00 because of the misrepresentation and
fraudulent actions of Vince, Patricia, and Namlyt.
Plaintiffs' First Amended Complaint was dismissed on July 15,
2004, with leave to file a Second Amended Complaint. The court
found that Plaintiffs' First Amended Complaint failed to comply
with the Federal Rules of Civil Procedure 8(a), 8(e), 9(b), and
10(b). The court's Opinion and Order also called into question
the sufficiency of Plaintiffs' cited statutory authority.
Plaintiffs filed a Second Amended Complaint on July 29, 2004. Discussion
Defendants have moved to Strike and Dismiss Plaintiffs' Second
Amended Complaint. First, they argue that the Second Amended
Complaint again violates Federal Rules of Civil Procedure 8, 9,
and 10. Second, they move to Dismiss the Complaint, alleging that
Plaintiffs' statutory authority is either repealed, mis-cited,
and/or unable to be located. Defendants also claim that Plaintiff
lacks standing to bring any action based on any cause of action
Sci-Tech may or may not have against any Defendant because no
injury separate and distinct from the alleged losses suffered by
Sci-Tech have been plead. The court will first address
Defendants' Motion to Dismiss.
The court may dismiss a complaint for failure to state a claim
upon which relief may be granted if it appears the plaintiffs
cannot prove a set of facts entitling them to relief. Hishon v.
King & Spalding, 467 U.S. 69, 73 (1984). In considering such a
motion, the court must view the allegations in the complaint in
the light most favorable to the plaintiffs. Gomez v. Illinois
State Bd. of Educ., 811 F.2d 1030, 1039 (7th Cir. 1987). The
Federal Rules also require that pleadings be construed so as to
do substantial justice. Fed.R. Civ. P. 8(f). Thus, the courts
will not construe pleadings hyper-technically.
Plaintiffs' Count One is labeled as "Violation of the
Securities Act of 1933 § 12, 15 U.S.C. § 77(1)." Defendants' sole
response to Plaintiffs' Count One is that 12 U.S.C. § 77 has been
repealed. Indeed, 12 U.S.C. § 77 has been repealed, but this is
beside the point as Plaintiffs cite 15 U.S.C. § 77.*fn3 There has also been some
confusion in past pleadings because Plaintiffs appear to cite the
Securities Act as 15 U.S.C. § 77(1) instead of the citation the
court presumes Plaintiffs are referring to, 15 U.S.C. § 77l.
This mistake is easily recognizable because 15 U.S.C. § 77(1) is
entitled "Discrimination against Neutral Americans at Time of
War." 15 U.S.C. § 77l, however, is entitled "Civil Liabilities
Arising in Connection with Prospectuses and Communications."
Because Plaintiffs' Count One closely follows the ...