Bastian v. Petren Resources Corp.

• Decision Date: 07 March 1988
• Docket Number: No. 86 C 2006.,86 C 2006.
• Citation: 681 F. Supp. 530
• Parties: R. Richard BASTIAN, III, et al., Plaintiffs, v. PETREN RESOURCES CORPORATION, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

681 F. Supp. 530

R. Richard BASTIAN, III, et al., Plaintiffs, v. PETREN RESOURCES CORPORATION, et al., Defendants.

No. 86 C 2006.

United States District Court, N.D. Illinois, E.D.

March 7, 1988.

Michael H. Moirano, James E. Dahl, Dahl and Moirano, Chicago, Ill., for plaintiffs.

Stephen Novack, Donald A. Tarkington, Mitchell L. Marinello, Novack & Macy, William O'Connor, Zukowski, Rogers, Flood, McArdle and O'Connor, Chicago, Ill., James G. Wiles, Wolf, Block, Schorr and Solis-Cohen, Philadelphia, Pa., for defendants.

MEMORANDUM OPINION

BRIAN BARNETT DUFF, District Judge.

This case arises out of the sales of limited partnership interests in two Illinois oil and gas limited partnerships, Petren 1981A and Petren 1981B. Each plaintiff is a limited partner of one or both of these partnerships. The complaint alleges that defendants—the general partners of the partnerships along with their attorneys — violated federal securities laws as well as state statutes and common law, and engaged in a pattern of racketeering activity, through various material non-disclosures they made prior to the sales of the partnership interests. Defendants have moved to dismiss all seven counts of the complaint on the grounds that plaintiffs have failed to state a claim upon which relief may be granted in any of the counts. This court has jurisdiction pursuant to 28 U.S.C. § 1331. For the reasons set forth below, the motion to dismiss the complaint is granted.

FACTS

The complaint names corporate defendants, Petren Resources Corporation ("PRC") and Faestel Investments ("FI"), as co-general partners in the limited partnerships, individual defendant David J. Faestel ("Faestel"), as the officer, director and sole shareholder of FI and the Chairman of the Board and principal shareholder of PRC, the law firm McDermott, Will and Emery ("MWE"), as legal representative of Faestel and FI, and Brian S. Hucker, as a lawyer with MWE. According to the complaint, at some time in 1981 MWE and Hucker prepared "Offering Memoranda" for the two limited partnerships in order to solicit and sell partnership interests. The Offering Memoranda described the limited partnerships Petren 1981A and 1981B as oil and gas ventures, identified FI and Petren as co-general partners in the partnerships and named MWE as counsel for the partnerships. It also described Faestel, FI and Petren as "being qualified and experienced in oil and gas ventures," and "purported to disclose all material information about the limited partnerships, including information about the two general partners and their principals."

Plaintiffs claim that, after receiving and reading the Offering Memoranda, they each decided to, and did invest in one or both of the limited partnerships. They assert, however, that they would not have invested had the Offering Memoranda not knowingly "failed to disclose the following facts about the qualifications and prior experience of Faestel, FI and Petren:"

(a) That in or about September, 1979, Faestel and FI were sued in federal court in Chicago by investors in a previous oil and gas venture they had promoted and had been charged in that lawsuit with violating federal and state securities laws;

(b) That Faestel and FI had defaulted in the payment of approximately $1,000,000 in loans they had obtained from the Northern Trust Company in connection with prior oil and gas ventures they had promoted; and

(c) That Petren was established by Faestel and FI solely to promote the Petren Oil and Gas Programs and that Petren was, in actuality, nothing more than the alter ego of Faestel and FI.

The complaint further alleges that MWE and Hucker had represented Faestel and FI in the (non-disclosed) securities litigation and loan transactions, that all of the defendants knew about these problems at the time the Offering Memoranda were prepared and distributed, and that plaintiffs did not know of these problems at the time they purchased their partnership interests. Indeed, according to the complaint, plaintiffs only learned of them when, in 1984, plaintiff Ronald Rotunda became concerned about his investment in Petren 1981B and hired an attorney to investigate the limited partnerships.

Plaintiffs claim that, during the investigation Hucker told Rotunda's attorney that Rotunda was the only limited partner questioning the conduct of Faestel or the general partners, but that, in fact, "at the time Rotunda's attorney was conducting the investigation, there were at least two separate federal actions filed against Faestel and the general partners relating to the Petren Oil and Gas Programs." In any case, plaintiffs allege, by the time Rotunda's attorney had completed his investigation, "plaintiffs' investments in the Petren Oil and Gas Programs had become worthless."

Plaintiffs filed the instant lawsuit in March, 1986, alleging private rights of action under the following criminal statutes: Count I — § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) ("§ 10(b)") and Securities and Exchange Commission Rule 10b-5 ("Rule 10b-5"), 17 C.F.R. § 240.10-5; Count II — § 17(a) of the Securities and Exchange Act of 1933, 15 U.S.C. § 77q(a) ("§ 17a") (Count II); Count III — the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO"); and, Count IV — the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.Stat. ch. 121½, § 261 et seq. Plaintiffs also alleged the following Illinois common law claims: Count V — breach of fiduciary duty; Count VI — fraud; and Count VII — against MWE and Huckster only, negligence.

In two sets of well-written and well-reasoned briefs,¹ defendants asserted a number of grounds for dismissing each of the five counts in the complaint. Plaintiffs, in equally articulate papers, countered each of the substantive arguments in turn. In addition, in the period after the motions became fully briefed, both sides promptly informed the court of new decisions which could bear on the resolution of the issues joined in the briefs. This court commends the attorneys involved in this case for their skillful advocacy of their clients' causes.

DISCUSSION

Count I

In Count I, plaintiffs seek to recover the losses on their investments in the limited partnerships on the grounds that defendants failed to disclose the earlier loan problems and securities litigation. To recover under a § 10(b) or Rule 10b-5 private cause of action, plaintiffs must first prove that defendants violated the statute or the rule. To do so, plaintiffs must establish the following:

(1) that defendants intentionally or recklessly;

(2) misrepresented or omitted to disclose

(3) material facts;

(4) in connection with the purchase or sale of a security.²

Beck v. Canton, 621 F.Supp. 1547, 1553 (D.C.Ill.1985). See also Harris v. Union Electric Co., 787 F.2d 355, 362 (8th Cir.), cert. denied, ___ U.S. ___, 107 S.Ct. 94, 93 L.Ed.2d 45 (1986); Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d 1042, 1046 (11th Cir.1987).

Showing a § 10(b) or Rule 10b-5 violation is not, however, enough. To recover, plaintiffs must also prove that they justifiably relied on defendants' misrepresentations or omissions in making their investments and that the misrepresentations or omissions "caused" the losses. Harris Trust and Savings Bank v. Ellis, 810 F.2d 700, 706 (7th Cir.1987). See also Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522 (7th Cir.1985).

Defendants do not contest, for the purposes of the motion to dismiss, that plaintiffs have properly pled the elements of a § 10(b) or Rule 10b-5 violation. Nor do they challenge plaintiffs' contention that, because the claims here are predicated on material omissions, "reliance and `causation in fact' are presumed." Beck v. Cantor, 621 F.Supp. at 1556. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972); Kademian v. Ladish, Co., 792 F.2d 614, 627 (7th Cir.1986) (in § 10(b) cases, "causation in fact and reliance are closely related"); Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1049 (7th Cir.) ("With materiality established, reliance in an omissions case is presumed."), cert. denied, 434 U.S. 875, 98 S.Ct. 225, 54 L.Ed.2d 155.

Nevertheless, defendants do insist that Count I must be dismissed because plaintiffs have failed to allege a second element necesary to establish legal causation in a § 10(b) case — that defendants' material omissions were causally linked to the loss in value of plaintiffs' investments. Stated differently, defendants claim that Count I fails to state a claim upon which relief may be granted because, although plaintiffs have sufficiently pled "transaction causation" — that the nondisclosures "caused" plaintiffs to invest in Petren A and Petren B — they have not pled "loss causation" — that the nondisclosed information "caused" the subsequent decline in the value of the partnership interests.

The majority of courts to consider the issue have stated that "loss causation" is an essential element in a private action under § 10(b) or Rule 10b-5:

The causation requirement is satisfied in a Rule 10b-5 case only if the misrepresentation touches upon the reasons for the investment's decline in value. If the investment decision is induced by misstatements or omissions that are material and that were relied on by the claimant, but are not the proximate reason for his pecuniary loss, recovery under the Rule is not permitted.

Huddleston v. Herman & MacClean, 640 F.2d 534, 549 (5th Cir.1981), aff'd in part and rev'd in part on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983); Currie v. Cayman Resources Corp., 835 F.2d 780 (11th Cir.1988); Platsis v. E.F. Hutton & Co., 642 F.Supp. 1277, 1299-1300 (W.D.Mich.1986), aff'd, 829 F.2d 13 (6th Cir.1987). See also Messer v. E.F. Hutton & Co., 833 F.2d 909, 924 (11th Cir.1987) (Clark, J., concurring); Zoelsch v. Arthur Andersen & Co., 824 F.2d 27, 35 n. 5 (...