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ATT SYSTEMS CO. v. TYLMAN

October 13, 2004.

ATT SYSTEMS CO., BERNARD SUPPELAND; CORNELLIER FIREWORKS CO., LTD.; ERIC NIEHAUS, FRANK CHELI; NITA CHELI; HAL E. ADAMS; HARRY THEODORE; KMC ASSET MANAGEMENT CO.; R. ELLEN ENGSTROM; SIDLA COMPANY; STAHELIN PARTNERS DUPAGE CORP. CENTER; STEVE MILLER and WENDY MILLER; TECHTONICS INTERNATIONAL; THOMAS SIMMONS; WESLEY HAYNES; and KENTON TYLMAN, Plaintiffs,
v.
VINCENT R. TYLMAN, PATRICIA B., TYLMAN, and THE NAMLYT TRUST, Defendants.



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 Systems, LLC.

  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.

  A. 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 ...


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