United States District Court, N.D. Illinois, Eastern Division
CHAO XIA " RENEE" ZHANG, KIRKPATRICK and M& E INT'L, INC., Plaintiffs,
LAYER SAVER LLC, an Illinois limited, liability company, CHARLES G. KIOLBASA, JR., STEVE PIERSON and SELDEN FOX, LTD., Defendants
For M& E International Inc., Chao Xia Renee Zhang-Kirkpatrick, Plaintiffs: Howard A. Davis, Law Offices of Howard A. Davis, Chicago, IL.
For Layer Saver LLC, an Illinois limited liability company, Charles G. Kiolbasa, Jr., Defendants: Robert C. Keck, Jr., Keck & Associates, P.C., Chicago, IL.
For Steve Pierson, Sleden Fox, LTD, Defendants: Thomas F. Falkenberg, LEAD ATTORNEY, Kirstin Beth Ives, Williams Montgomery & John, Ltd., Chicago, IL.
Susan E. Cox, United States Magistrate Judge.
Defendants Steve Pierson and Selden Fox, Ltd. have filed a motion for summary judgment on plaintiff's claims for securities fraud, Count IV, and common law fraud, Count V. We grant defendants' motion with respect to Count IV for securities fraud [dkt. 37]. We also grant the parties an opportunity to file simultaneous briefs explaining the basis for the exercise of federal jurisdiction over the remaining claims in this case, and to generally address the subject of continued federal jurisdiction. The parties' briefs on the question of jurisdiction are due on or before April 10, 2015. Should the parties confer and determine that they agree to supplemental jurisdiction by this Court, the parties may instead submit a joint letter to the Court indicating their agreed position. The remainder of defendants' motion for summary judgment is denied without prejudice, with leave to reinstate should the jurisdictional question be resolved in favor of this Court retaining supplemental jurisdiction.
This lawsuit arises from plaintiff, Renee Zhang-Kirkpatrick's, $150,000 investment in defendant Layer Saver LLC. When plaintiff did not get paid back, she filed suit against Layer Saver LLC, Charles Kiolbasa, Jr., Steve Pierson, and Selden Fox, Ltd., alleging six counts of securities fraud, common law fraud, breach of contract, and requesting injunctive relief. Both parties have filed motions for summary judgment. Here, we will address defendants' motion for summary judgment on the claims for securities fraud - Count IV - and common law fraud - Count V - against both Selden Fox and Pierson.
As further outlined below, we find the Promissory Note documenting the parties' agreement does not fall within the definition of a " security" under the Securities and Exchange Act of 1934. Plaintiff's claim under Count IV for securities fraud, therefore, cannot stand. This presents an issue of supplemental jurisdiction over plaintiff's remaining state law claims that we believe deserves mention by the parties. We, therefore, request additional briefing on the issue of pendent jurisdiction of plaintiff's remaining claims before moving to defendants' motion as to Count V.
For purposes of this motion, we consider the facts in the light most favorable to plaintiff, as the non-moving party. Plaintiff has owned and operated two businesses, a Chinese restaurant in Wheaton, Illinois, which is now closed, and her current scrap metal brokerage business. Her friend of many years, defendant Pierson, is a Certified Public Accountant and a Shareholder of the defendant accounting firm Seldon Fox. Plaintiff met him nearly 16 years ago at a networking event and since that time she has sought him out for professional advice and assistance on several occasions, including potential investment opportunities.
In 2011, Layer Saver engaged Selden Fox to perform certain accounting services. That is when Pierson first got to know Kiolbasa, Layer Saver's manager. Layer Saver started in 2006 and manufactures, markets, and sells shipping frames used in transport and storage. It is a Limited Liability Corporation with three other members (in addition to Kiolbasa), Kiolbasa's wife's entity, SH Partners, Todd Jensen, and a " B member" named Mike Gilroy. Mr. Jensen and Kiolbasa's wife's company both have ownership interest in Layer Saver, each with 47 and half percent, and Mr. Gilroy owns a 5 percent interest. Over the years Mr. Jensen has invested approximately 1.4 million into the company and SH Partners nearly 638,000 dollars. Though the company has operated in the negative, it has received loans from Mr. Jensen to continue to finance the business (as he was considered the " funding source" ).
In September 2011 Mr. Jensen had lost significant money in another investment and was unable to contribute funds to Layer Saver. At this time, Kiolbasa indicated to Pierson that there may be some tax ramifications relating Mr. Jensen, and he mentioned the company's funding problems to Pierson.  Pierson then told Kiolbasa about plaintiff, and that she had a " connection to the steel industry," and may be able to help. Pierson later told plaintiff about Layer Saver as a potential investment opportunity, and mentioned that Layer Saver was a new client who was starting a business and perhaps she should look into it. He also noted that Kiolbasa had been a " long time client with the firm in the past." 
Plaintiff was interested, and first met with Pierson about Layer Saver in December 2011. At this meeting Pierson showed her a spreadsheet detailing Layer Saver's potential future sales with two large companies, Heinz and Tropicana, told her the loan amount would be $150,000 with an interest rate of 15% per year, and indicated that it was a great investment opportunity. The next meeting took place at the offices of Selden Fox with plaintiff, Pierson and Kiolbasa, as well as John Stuckey, Pierson's partner at Selden Fox. According to plaintiff, the same spreadsheet was again shown to her and both Pierson and his partner told her that because of these purchase contracts Layer Saver had with Heinz and Tropicana, the company would be able to repay her loan amount. At the time, plaintiff did not know who had prepared the spreadsheet or that it was merely sales projections for Layer Saver.
Throughout this time Pierson expressed his enthusiasm about Layer Saver and its product. After approximately four meetings, plaintiff ultimately decided to loan the $150,000 to Layer Saver, but requested some protection built into the note. Either Pierson or Kiolbasa presented plaintiff with the idea of securing the note with Kiolbasa's intellectual property, to which plaintiff agreed. On January 3, 2012, Layer Saver, through Kiolbasa, executed the Promissory Note with a maturity date of July 15, 2012, and the note was secured with Kiolbasa's intellectual property. Layer Saver paid plaintiff the ...