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Zang v. Alliance Financial Services of Illinois

September 27, 2010


The opinion of the court was delivered by: Michael T. Mason, United States Magistrate Judge


Before the Court is defendants' motion to dismiss plaintiff's Second Amended Complaint [67] and memorandum of law in support [68]. Plaintiff has filed a response [71], and defendants have filed a reply [73]. For the reasons stated below, defendants' motion to dismiss the Second Amended Complaint is granted in part and denied in part.

I. Background

In his Second Amended Complaint [63], plaintiff John Zang ("plaintiff" or "Zang") sets forth the following allegations relevant to the pending motion: plaintiff is a resident of Lexington, Michigan, and at "all relevant times, Zang was engaged in the process of identifying and acquiring a business to purchase in the Midwest." (S. Am. Compl. ¶ 1.) Defendant Alliance Financial Services of Illinois, Ltd. ("Alliance") is an Illinois corporation with its principal place of business in Chicago. (Id. ¶ 2.) Defendant Burton Stern*fn1 ("Stern") was a resident of Chicago, Illinois, and was the president of Alliance during the relevant time periods. (Id. ¶ 3.) Defendants were "in the business of providing consulting and accounting services" to assist individuals in locating and financing businesses for purchase. (Id. ¶ 2.)

On or about June 19, 2007, Zang contacted Alliance in response to an advertisement Alliance placed on a website that "promised companies 'for acquisition with NO principal payments' and that 'Alliance will provide Buyer with Investment Bankers.'" (S. Am. Compl. ¶ 6.) Later that month, Zang traveled to Alliance's Chicago office and met with Stern. (Id. ¶ 7.) At that meeting, Stern represented that Alliance "would use its best efforts to locate a company for Zang to purchase" and "would arrange the financing for the purchase through a scheme which made use of viatical settlements as investment securities." (Id.) A copy of the diagram Stern gave Zang at this meeting to explain the financing Alliance would obtain for Zang is attached to the Second Amended Complaint at Exhibit 2.

Stern's proposal involved purchasing the right to receive life insurance policy proceeds at death from the original insurance policy holders. (Id. ¶ 8.) These purchased life insurance policies are termed viatical settlements. Id. The proposal also involved purchasing surety bonds for these policies to ensure maturity within seven years. Next, Alliance would offer the package of policies and sureties as collateral for a bank loan, "the proceeds of which allegedly would be used to purchase the business Zang wished to acquire." (Id.) Stern also stated that once Zang purchased a company through Alliance, Zang would pay Alliance a fee of 3% of the closing price of the business, but that such a fee would be due only if Zang closed on a business purchase. (Id. ¶ 9.) Stern requested a $5,000 "refundable" retainer, which Zang paid. (Id. ¶¶ 9, 10.)

Despite Stern's representations that Alliance would locate potential companies for Zang to purchase, Alliance sent Zang only a few outdated listings for companies found through publicly available internet searches. (S. Am. Compl. ¶ 11.) Just one of those companies met the cash flow criteria Stern informed Zang a potential acquisition should meet. (Id.) Furthermore, this company was located in Southern Texas. (Id.) Zang had previously informed Stern that he wanted to purchase a company in the Midwest and Stern agreed to locate a Midwest company for acquisition. (Id.)

Zang himself located two companies and instructed Alliance to pursue purchases of each. (S. Am. Compl. ¶ 12.) At Stern's insistence, on or about August 16, 2007, Zang gave him checks for $14,500.00, and $18,000.00, supposedly as down payments for the purchases of these companies and to fund Alliance's efforts to secure financing for the deals. (Id. ¶¶ 13-16.) Ultimately, neither deal was consummated, and Stern refused to refund any portion of the amounts, totaling $37,500.00, that Zang had paid. (Id. ¶¶ 18-20.)

On June 11, 2008, Zang filed his initial complaint against Alliance and Stern [1]. In that complaint, Zang alleged eight counts, all but two of which were based on Illinois state common and statutory law (Counts II-V, VII-VIII). As for the two counts asserted under federal law, in Count I, plaintiff asserted defendants violated Section 10(b) of the Securities Exchange Act because their "material misstatements and deceptive acts were made in connection with the purchase or sale of a security, specifically, life insurance sureties." (Compl. ¶ 25.) In Count VI, plaintiff asserted defendants violated the Lanham Act by making "false" and "misleading" "representations of fact in commercial advertising about [Alliance's] products and services." (Id. ¶¶ 49, 48.)

Zang asserted that this Court had federal question jurisdiction under 28 U.S.C. § 1331 over Counts I and VI and supplemental jurisdiction over the Illinois state law claims under 28 U.S.C. § 1367. (Compl. ¶ 4.) Defendants filed a motion to dismiss the initial complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). [25]. On May 7, 2009, this Court entered a Memorandum Opinion and Order granting in part and denying in part defendants' motion to dismiss. [46]. In that ruling, this Court dismissed Count VI, which purported to state a claim under the Lanham Act, with prejudice, and gave plaintiff leave to file an amended Count I under the Securities Exchange Act. [Id.].

On June 8, 2009, plaintiff filed his First Amended Complaint. [51]. In response, defendants filed a Motion to Dismiss the First Amended Complaint. [53]. On July 16, 2009, plaintiff filed a motion for leave to file a Second Amended Complaint. [59]. Defendants did not object to this motion and this Court granted plaintiff's motion to file a Second Amended Complaint. [62]. On July 24, 2009, plaintiff filed the operative complaint, his Second Amended Complaint.

In the Second Amended Complaint, plaintiff asserts eight counts. In Count I, Zang alleges defendants violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), as well as SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. (S. Am. Compl. ¶¶ 22-29.) Zang also asserts seven claims based on Illinois state common and statutory law (Counts II-VIII). (S. Am. Compl. ¶¶ 30-62.)

Zang asserts that this Court has federal question jurisdiction, under 28 U.S.C. § 1331, over Count I. (S. Am. Compl. ¶ 4.) Zang also asserts complete diversity jurisdiction exists under 28 U.S.C. § 1332 because the parties reside in different states and the amount in controversy exceeds $75,001.

Defendants move to dismiss Count I pursuant to Federal Rule of Civil Procedure 12(b)(6) on the ground that plaintiff has failed to meet the pleading requirements of Federal Rule of Civil Procedure 9(b) ("Rule 9(b)") and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. ยง 78u-4 ("PSLRA"). Defendants also ...

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