United States District Court, N.D. Illinois, Eastern Division
October 6, 2005.
GLENN MOAK, ROBERT JANSEN, and WILLIAM BERGLUND, Plaintiffs,
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, how"
of the alleged fraud in detail. DiLeo v. Ernst & Young,
901 F.2d 624, 627 (7th Cir. 1990).
The PSLRA requires a complaint to "specify each statement
alleged to have been misleading, the reason or reasons why the
statement is misleading, and, if an allegation regarding the
statement or omission is made on information and belief, the
complaint shall state with particularity all facts on which that
belief is formed." 15 U.S.C. § 78u-4(b)(1) (2005). In addition,
the complaint must "state with particularity facts giving rise to
a strong inference that the defendant acted with the required
state of mind." 15 U.S.C. § 78u-4(b)(2) (2005). If the complaint fails to do either, the court shall dismiss the
complaint. 15 U.S.C. § 78u-4(b)(3)(A) (2005).
A. Count I
In Count I, Plaintiffs allege that Defendants violated Section
10(b) of the Securities Act of 1934 and Rule 10b-5, promulgated
under the Act. Defendants seek to dismiss this Count for failure
to state a claim upon which relief can be granted pursuant to
Rule 12(b)(6) and failure to adhere to Rule 9(b)'s particularity
To state a Rule 10b-5 claim, a plaintiff must prove that the
defendant: (1) made a misstatement or omission, (2) of a material
fact, (3) with scienter, (4) in connection with the purchase or
sale of securities, (5) upon which the plaintiff relied, and (6)
that reliance proximately caused the plaintiff's injury.
Stransky v. Cummins Engine Co., Inc. 51 F.3d 1329, 1331 (7th
To prove the first and second elements of their Rule 10b-5
claim, Plaintiffs allege that Defendants made material, factual
misstatements and omissions related to the true use of revenues
generated by the limited partnership. (Compl. ¶ 8). According to
Plaintiffs, Defendants made false statements and failed to
disclose in the PPM that the project's capital and revenues would
be used to pay "exorbitant fees and salaries [to Roszak] and, on
information and belief, . . . to fund other Roszak construction
projects." (Compl. ¶ 15). Plaintiffs, however, have not pleaded with particularity the
circumstances constituting this fraud, as required by Rule 9(b)
and the PSLRA. Plaintiffs have stated the who and what with
bare detail, but not the when, where or how. Plaintiffs have
not suggested approximately when Defendants diverted funds from
the Chicago Avenue project, what other construction projects
Defendants funded, or how Defendants accomplished this
diversion. In fact, Plaintiffs make their sparsely-stated
allegation "upon information and belief." Yet "allegations made
upon information and belief are insufficient, even if the facts
are inaccessible to the plaintiff, unless the plaintiff states
the grounds for his suspicions." Uni*Quality, Inc. v.
Infotronx, Inc., 974 F.2d 918, 924 (7th Cir. 1992) (emphases
added). Plaintiffs have not stated the grounds for their
suspicion that Defendants engaged in an "intended
misappropriation" of Plaintiffs' investment. (Compl. ¶ 2).
Similarly, Plaintiffs have not suggested the when, where, and
how regarding Roszak's scheme to pay himself exorbitant fees.
Nor have Plaintiffs stated the grounds for their suspicion that
Roszak intended to engage in "undisclosed self-dealing" even
before he approached Plaintiffs to invest in the partnership.
(Compl. ¶ 2). Plaintiffs have merely stated that the general
contractor was originally going to be paid $450,000 in fees and
$560,000 in salaries but was ultimately paid $1,453,419.38 in
fees and $1,628,223.93 in salaries. Moreover, Plaintiff's Exhibit
B shows that nearly all of the projects' estimated costs
increased over 100% by the time Defendants disclosed the actual
costs. This Court, therefore, cannot even infer that Defendants
acted with a fraudulent state of mind in determining its fees and
"By requiring the plaintiff to allege the who, what, where, and
when of the alleged fraud, [Rule 9(b)] requires the plaintiff to
conduct a precomplaint investigation in sufficient depth to assure that the charge of fraud is responsible and supported,
rather than defamatory and extortionate." Ackerman v.
Northwestern Mutual Life Insurance Co., 172 F.3d 467, 469 (7th
Cir. 1999). Plaintiff's broad statements about Defendants'
alleged material misrepresentations and omissions demonstrate the
lack of depth Rule 9(b) and the PSLRA are designed to avoid.
Because the Complaint does not plead with particularity the
first and second elements of a Rule 10b-5 claim, this Court need
not determine whether Plaintiffs sufficiently pleaded the third,
fourth, fifth, and sixth elements of the claim. Plaintiffs have
failed to state with particularity critical facts on which
Plaintiffs' allegations of fraud are formed; accordingly, Count I
must fail. Defendants' motion to dismiss Count I is granted with
leave to file an amended complaint within 21 days.
B. Counts II-IV
Counts II-IV are state law claims. In the absence of a federal
cause of action, this Court will not exercise supplemental
jurisdiction over the state claims. See 28 U.S.C. § 1367(c)(3).
The Court will dismiss Counts II-IV without prejudice at this
time. See United Mine Workers of America v. Gibbs,
383 U.S. 715, 726 (1966); Nemkov v. O'Hare Chicago Corp., 592 F.2d 351,
353 n. 1 (7th Cir. 1979) (holding that the district court
properly dismissed state law claims when the federal securities
claims were dismissed at the outset of the case). IV. CONCLUSION
For the foregoing reasons, 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.
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