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MOAK v. ROSZAK

October 6, 2005.

GLENN MOAK, ROBERT JANSEN, and WILLIAM BERGLUND, Plaintiffs,
v.
THOMAS ROSZAK and TR CHICAGO AVENUE, Inc., an Illinois Corporation, Defendants.



The opinion of the court was delivered by: DAVID COAR, District Judge

MEMORANDUM OPINION AND ORDER

Before this court is the motion filed by Defendants Thomas Roszak and TR Chicago Avenue, Inc. to dismiss the Complaint filed by Plaintiffs Glenn Moak, Robert Jansen, and William Berglund. For the reasons set forth below, Defendants' motion to dismiss is GRANTED in its entirety with leave to file an amended complaint within 21 days of the date of this order.

I. FACTUAL BACKGROUND

  For the purposes of this motion, the following facts alleged in Plaintiffs' complaint are taken as true. Defendant TR Chicago, Inc. is an Illinois Corporation and the general partner of TR Chicago Avenue Partners, L.P. ("TR Chicago"), a limited partnership established for the purchase and development of real estate located at 1210-28 Chicago Avenue and 1234-1238 Chicago Avenue in Evanston, Illinois. (Compl. ¶¶ 1, 12). Defendant Thomas Roszak ("Roszak") was a special limited partner of TR Chicago. (Compl. ¶ 4). At all relevant times, Roszak was also an officer, director, and sole shareholder of TR Chicago, Inc. In addition, Roszak owned a company, Roszak/ADC, L.L.C., that served as the general contractor for the Chicago Avenue project. The company had direct control over the selection of contractors, the scope of the work, the letting of contracts, and payment to the company. (Compl. ¶ 12).

  Plaintiffs Glenn Moak, Robert Jansen, and William Berglund (collectively, "Plaintiffs") are individuals and residents of the State of Illinois. In 2000, Moak purchased four units in the TR Chicago, investing a total of $100,000 in the partnership. In the same year, Jansen purchased two units in the TR Chicago (a $50,000 investment) and Berglund purchased one unit (a $25,000 investment). Berglund's company also served as the concrete contractor for the Chicago Avenue project. (Compl. ¶¶ 9-11).

  The TR Chicago partnership was formed on February 27, 2000 to acquire and develop the parcels of property identified above. On or about June 6, 2000, TR Chicago published a Confidential Private Placement Memorandum ("PPM") designed to raise capital in the partnership. Pursuant to the PPM, the offering price per unit was $25,000, for a total offering of $2,575,000. (Compl. ¶ 14). The PPM stated that on total revenues of $49,497,029 and project costs of $31,083,471, after repayment of a construction loan and return of the limited partners' investment, the development was projected to realize a profit of $5,038,558. The PPM was careful to disclose that the forecasts were merely projections upon which no assurances could be made. (Compl. ¶ 15). From the time of Plaintiffs' investment, Defendants provided Plaintiffs with optimistic reports of the development's progress and its profitable returns to investors. (Compl. ¶ 3). In 2002, according to the Schedule K-1's Plaintiffs received, the partnership realized a taxable profit per unit of approximately $4,612.75. In 2003, according to the K-1's, the profit grew to $10,273. Although this profit was in paper only since no money had been distributed to the limited partners, Plaintiffs paid taxes on this profit. (Compl. ¶ 16).

  In March 22, 2004, Roszak sent a letter to each partner enclosing that partner's schedule K-1 for 2003. The letter stated that TR Chicago sold a number of units at a profit; it had only ten units left to sell; the project would be finished shortly; and the partners could expect distribution of their capital accounts to begin by the end of 2004. The K-1's accompanying each letter reflected ordinary taxable income to the partners even though the partners had not yet received any distributions. (Compl. ¶ 3).

  Less than six months later, on September 10, 2004, Roszak provided Plaintiffs with an "Investor Update" ("Update"). The Update reported "disappointing results for the Chicago Avenue project with investors likely to receive as a final distribution approximately 42% of their invested capital," and losses despite the fact that actual revenues exceeded projected revenues by 23%. (Compl. Ex. B at 1). The Update also revealed for the first time that the cost of the project was $46.6 million, rather than the $31.6 million originally disclosed. (Compl. ¶ 17). Defendants attributed the substantial cost increases to various factors, including the economic effects of September 11, 2001, unexplained delays, and increases in the price of materials and labor. The list of actual project costs attached to the Update indicated that the general contractor's fee (for an entity controlled by Roszak) increased over 220% (from $450,000 to $1,453,419.38) and its salaries increased 250% (from $560,000 to $1,628,223.93). (Compl. ¶ 18). At the time of the filing of the Complaint, the limited partners had not received even the promised 42% of their invested capital. (Compl. ¶ 3).

  Plaintiffs allege that, in order to solicit their participation in the offering, Defendants supplied the project's budget and represented that Plaintiffs would receive a return of their original investment and a profit. The projections, according to Plaintiffs, were based upon the assumptions that the project revenues would be used to pay the costs associated with the Chicago Avenue project only, and the general contractor's fees and salaries would be commensurate with the projected scope of the work. (Compl. ¶ 19).

  Plaintiffs allege that the representations contained in the PPM were materially false: Much of the cost overruns attributed to the Chicago Avenue project resulted from Defendants funding construction projects unrelated to the limited partnership. In addition, Defendants failed to disclose their intent to unilaterally increase the fees and salaries paid to themselves by as much as 250%. According to Plaintiffs, at the time of their investment, Defendants knew or recklessly disregarded that their projections, purportedly based on "currently available information," had no basis in reality. (Compl. ¶ 20). Defendants knew that (a) the revenues from the project would be used to fund outside projects and (b) the fees to Roszak and Roszak's company would be greatly inflated. (Id.). Finally, Plaintiffs allege that the explanations Defendants provided in the Investor Update for the project's losses were disingenuous and merely intended to further conceal the fraud perpetrated by Defendants upon Plaintiffs. (Compl. ¶ 4).

  Plaintiffs have charged Defendants with violation of Section 10(b) of the Securities Act of 1934 and Rule 10b-5, which was promulgated under the Act (Count I); common law fraud (Count II); violation of Section 12 of the Illinois Securities Law of 1953 (Count III); and breach of fiduciary duty (Count IV).

  II. STANDARD OF REVIEW

  The purpose of a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) is to test the sufficiency of the complaint, not to decide the merits of the case. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990) (citation omitted). On a 12(b)(6) motion, the Court accepts all well-pleaded allegations in the plaintiff's complaint as true, Fed.R.Civ.P. (12)(b)(6), and views the allegations in the light most favorable to the plaintiff. Bontkowski v. First National Bank of Cicero, 998 F.2d 459, 461 (7th Cir. 1993).

  Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA") heighten the pleading requirements for fraud. Rule 9(b) requires a plaintiff to state with particularity any circumstances constituting fraud. Thus, while a plaintiff may plead states of mind generally, he or she must plead the circumstances — the "who, what, when, where, ...


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