United States District Court, N.D. Illinois, Western Division
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,
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
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 statutory
language of 15 U.S.C. § 77l, the court presumes Plaintiffs
meant to state a claim under § 77l, and grants Plaintiffs seven
days from the date of this Order to file an amended complaint
properly citing statutory authority.
The parties also run into citation troubles with Plaintiffs'
Second Count, "Violation of the Securities Act of 1934 § 10(b),
15 U.S.C. § 78j(b)." Defendants responded to Count Two with one
objection, stating "Defendants are unsure where to find § 10(b)
under the Securities Exchange Act of 1934." The court itself had
no difficulty locating the proper statute at 15 U.S.C. § 78j(b)
and the proper SEC Rule 10b-5, promulgated under
17 C.F.R. § 240.10b-5. While Plaintiffs omitted a citation to the SEC Rule,
the citation to the proper statute and the plethora of case law
on § 10(b) should have led Defendants directly to the rule.
Indeed, Defendants cite the court to 15 U.S.C. § 78j and
17 C.F.R. § 240.10b-5 on page four of their own Brief in Support of
Defendants' Motion to Dismiss Second Amended Complaint. Because
the court has resolved the preliminary matter of Defendants'
inability to find the applicable laws for Count Two, the court
denies Defendants' Motion to Dismiss the Count on those grounds,
and turns to the more serious issues with Plaintiffs' Second Amended Complaint.
First, Defendants argue that Plaintiffs lack standing to
recover under Plaintiffs' remaining Counts, Three through Seven.
Specifically, Defendants attack Count Three (Violation of the
Racketeer Influenced and Corrupt Organizations Act,
18 U.S.C. §§ 1962, 1964(c)) by quoting this court's statement in response to
Plaintiffs' First Amended Complaint that "shareholders of
corporations do not have standing to recover under RICO statutes
for the corporation's injuries." Plaintiffs respond by arguing
that their claims are not derivative of Sci-Tech's injuries, but
rather that they suffered a loss as individual investors because
they were induced to invest by means of Defendants' false
Whether Plaintiffs' claims are in fact derivative or direct
claims is a crucial issue in this case. Defendants maintain that
Plaintiffs' claims are based entirely on a loss in value of their
investment in Sci-Tech, which would make the Plaintiffs' damages
an indirect result of injury to the corporation, thus barring
their claim under RICO and potentially other Counts. See Gagan
v. American Cablevision, Inc., 77 F.3d 951, 959 (7th Cir. 1996)
("Where the shareholder's injury resulted directly from an injury
to the corporation, but only indirectly from the harm the
wrongdoer wreaked upon the corporation, the RICO claim belongs to
the corporation, and not the shareholder."); Sears v. Likens,
912 F.2d 889, 892 (7th Cir. 1990) ("Shareholders of a corporation
do not have standing as individuals to bring a RICO action for
diminution in the value of their stock caused allegedly by
racketeering activities conducted against the corporation.").
However, Plaintiffs maintain that their loss is not due to the
fact that their investment returns have diminished, but rather
that they were wrongfully induced to invest by Defendants in the
first instance. To the extent the Plaintiffs can demonstrate that they have a
direct action to enforce their rights as individual investors,
rather than asserting losses derivative from alleged injuries to
the corporation, Defendants' objections to standing on this basis
and their subsequent Motion to Dismiss have no merit. Plaintiffs
argue that their Second Amended Complaint does demonstrate a
direct cause of action rather than a derivative complaint because
Defendants persuaded Plaintiffs to invest in a company by
concealing the fact that the company's most valuable assets, the
patents, were not actually held by the company, but instead
belonged to the Defendants. Defendants counter by listing
allegations in Plaintiffs' Complaint that ring of a derivative
action rather than a direct action. For example, they cite
Plaintiffs' Second Amended Complaint, Paragraph 29, which states,
"Vince and Patricia Tylman co-trustees did not assign patents to
Sci-Tech as promised."
While it is true that Plaintiffs have allowed portions of a
derivative action to seep into their Second Amended Complaint, as
in Paragraph 29, this court finds that this is not necessarily
fatal to Plaintiffs' Complaint because Defendants'
characterization of Plaintiffs' loss as a mere alleged failure of
Vince to transfer patents to Sci-Tech is inaccurate. It appears
to this court that Plaintiffs have also alleged direct and
distinct injuries to themselves as investors. Specifically, they
allege they were fraudulently deprived of full information
regarding the nature of their investments by Defendants, and that
they were ergo fraudulently induced into giving their money to
Defendants. These are allegations distinct from any cause of
action that Sci-Tech may have. Thus, a motion to dismiss on the
grounds that Plaintiffs lack standing to sue based on the
derivative nature of their claims fails. Defendants' Motion to
Dismiss Count Three is denied. Because Defendants make the same
narrow argument in regards to the remaining Counts, Four through Seven, the Motion to Dismiss these Counts for lack of
standing is denied as well.
Finally, Defendants make one last effort to Dismiss Plaintiffs'
entire Complaint by arguing that Plaintiffs failed to allege any
proximate cause between any damages suffered by investors and any
act or omission of any Defendant. To the contrary, Plaintiffs do
allege that Defendants' omission about the true ownership of the
patents caused them to be fraudulently separated from their
money. It is enough to allege the wrong done and leave the
particulars to the later steps of litigation. See Brownlee v.
Connie, 957 F.2d 353, 354 (7th Cir. 1992) (so-called
"conclusory" statement of claim may be sufficient if complaint
outlines the law claimed to be violated and connects defendants
with alleged violation). Therefore, Defendants' Motion to Dismiss
on the grounds of proximate cause is denied.
B. Motion to Strike
Defendants argue that Plaintiffs' Complaint fails to comply
with the pleading requirements of the Federal Rules of Civil
Procedure. This court agreed with Defendants in their previous
Motion to Dismiss Plaintiffs' First Amended Complaint.
Specifically, this court found that (1) Plaintiffs' conspiracy
count failed to allege any wrongdoing as to one or all the
Defendants, (2) Plaintiffs failed to plead with particularity
under Rule 9(b) their Securities Fraud Allegations, (3)
Plaintiffs failed to provide proper statutory authority, and
finally, (4) the court warned Plaintiffs that derivative injuries
were not enough to entitle them to standing in RICO claims.
Each of the court's concerns have been addressed in Plaintiffs'
Second Amended Complaint. First, Plaintiffs dropped their
conspiracy count. Second, Plaintiffs added a section to their
Securities Fraud Counts in which each Plaintiff specifically
alleged the fraudulent misrepresentations/omissions made to them by Defendants. Third,
the court took it upon itself infra to address the parties'
citation problems, and thus, after the Plaintiffs amend their
complaint, proper statutory authority will no longer be an issue.
Finally, Plaintiffs' Second Amended Complaint established to the
court's satisfaction that Plaintiff alleged direct injuries in
their complaint, not merely derivative claims.
While the court agrees with Defendant that Plaintiffs'
Complaint contains more allegations than necessary, the court
does not find that this results in an incomprehensible
presentation of Plaintiffs' claim. Thus, the court does not find
the surplus allegations fatal to Plaintiffs' Complaint. See
Davis v. Ruby Foods, Inc., 269 F.3d 818, 819-21 (7th Cir. 2001)
(district court abused its discretion in dismissing complaint
that was sufficient to put defendant on notice merely because
complaint also contained superfluous matter); Bennett v.
Schmidt, 153 F.3d 516, 517-518 (7th Cir. 1998) (although
complaint was longer than model complaints, complaint was
intelligible and gave notice of claim for relief). Plaintiffs'
wisdom in pleading beyond the detail required by notice pleading
is debatable, but this could just as well work to Defendants'
Plaintiffs have cured the deficiencies in their First Amended
Complaint. Additionally, Plaintiffs outlined violations of the
statutes on which they rely and connected their complaints to the
Defendants. Thus, Defendants' Motion to Strike Plaintiffs' Second
Amended Complaint for violations of the pleading requirements of
the Federal Rules of Civil Procedure is denied.
C. Plaintiffs Lanning and Magdiarz
As to Defendants' prayer that Plaintiffs Lanning and Magdiarz
be dismissed with prejudice from the suit for failure to be named
in Plaintiffs' Second Amended Complaint, the court states that all parties not named in Plaintiffs' Amended
Complaint are not parties to the stated action. See
Fed.R.Civ. P. 21.
For the foregoing reasons, Defendants' Motion to Strike is
denied and Defendants' Motion to Dismiss is denied in part and
granted in part. Plaintiffs are given seven days to file an
amended complaint containing correct citations, while Defendants
are directed to answer Plaintiffs' Complaint within twenty-one