Eckstein v. Balcor Film Investors

• Decision Date: 22 June 1990
• Docket Number: Civ. A. No. 89-C-1315.
• Citation: 740 F. Supp. 572
• Parties: Robert ECKSTEIN and Sylvia Eckstein, on behalf of themselves and all others similarly situated, Plaintiffs, v. BALCOR FILM INVESTORS, Balcor Entertainment Company, The Balcor Company, The Balcor Securities Company, Jerry M. Reinsdorf, Robert A. Judelson, James E. Finley, Gregory S. Junkin, Barry R. Jackson, Joseph A. Kruszynski, New World Entertainment, Ltd., Lawrence L. Kuppin, Robert Rehme, and Harry E. Sloan, Defendants.
• Court: U.S. District Court — Eastern District of Wisconsin

740 F. Supp. 572

Robert ECKSTEIN and Sylvia Eckstein, on behalf of themselves and all others similarly situated, Plaintiffs, v. BALCOR FILM INVESTORS, Balcor Entertainment Company, The Balcor Company, The Balcor Securities Company, Jerry M. Reinsdorf, Robert A. Judelson, James E. Finley, Gregory S. Junkin, Barry R. Jackson, Joseph A. Kruszynski, New World Entertainment, Ltd., Lawrence L. Kuppin, Robert Rehme, and Harry E. Sloan, Defendants.

Civ. A. No. 89-C-1315.

United States District Court, E.D. Wisconsin.

June 22, 1990.

Michael S. Glassman, Kathleen L. Clemens, Brian Barry, Clemens, Glassman & Clemens, Los Angeles, Cal., Robert S. Schachter, Robin F. Zwerling, Zwerling, Schachter & Zwerling, Jules Brody, Melissa Emert, Stull, Stull & Brody, New York City, for plaintiffs.

Steven L. Bashwiner, Mary Ellen Hennessy, C. Elizabeth McCarty, Katten Muchin & Zavis, Chicago, Ill., Ross Anderson, Frisch Dudek Ltd., Milwaukee, Wis., Dennis M. Perluss, Cassandra S. Franklin, Hufstedler, Miller, Kaus & Beardsley, Los Angeles, Cal., for defendants.

John A. Lawrence, Richman, Lawrence & Mann, Beverly Hills, Cal., Robert J. Walner, Gen. Counsel, The Balcor Co., Skokie, Ill. (pro hac vice), for Kuppin, Sloan & Rehme.

DECISION AND ORDER

REYNOLDS, Senior District Judge.

BACKGROUND

On February 10, 1989, plaintiffs Robert and Sylvia Eckstein ("the Ecksteins") filed a complaint, on behalf of themselves and the class they seek to represent, in the Central District of California. The Ecksteins allege that the defendants (1) violated section 10(b) of the Securities Exchange Act of 1934 ("§ 10(b)") and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission ("Rule 10b-5"), (2) committed the California common-law tort of fraud and deceit, and (3) committed the California common-law tort of negligent misrepresentation (Complaint ¶¶ 63-79).

On February 14, 1989, Judge Ideman, of the Central District of California, dismissed sua sponte without prejudice the pendent state law tort claims. On May 15, 1989, the defendants moved Judge Ideman to dismiss the Ecksteins' federal securities claim pursuant to Fed.R.Civ.P. 12(b)(6) on several grounds. The defendants' primary argument was that the complaint fails to allege reliance, which is an essential element of a Rule 10b-5 claim.

On August 23, 1989, the Judicial Panel on Multidistrict Litigation transferred, pursuant to Title 28 U.S.C. § 1407, the Ecksteins' case (Robert Eckstein, et al. v. Balcor Film Investors, et al.), from the Central District of California to this court for consolidated pretrial proceedings with Ralph Majeski, et al. v. Balcor Film Investors, et al. ("the Majeski action").

On February 13, 1990, this court held a hearing to consider oral argument by the parties on defendants' motion to dismiss. After considering the parties' briefs and oral arguments, this court grants the defendants' motion and the Ecksteins' complaint is dismissed. This decision, however, does not affect the Majeski action, and a separate written decision on defendants' motion to dismiss in the Majeski action (No. 88-C-1079 (E.D.Wis.)) will be issued by this court.

FACTS

In July 1985, the Ecksteins allegedly purchased five limited partnership interests ("Partnership Interests"), at a price of $1,000 for each interest, in Balcor Film Investors ("BFI"), a limited partnership (Complaint ¶¶ 5, 32). The complaint does not indicate from whom these Partnership Interests were purchased. BFI was formed in late 1984 specifically to produce and distribute movies pursuant to an agreement with a motion picture company, New World Entertainment, Ltd. ("New World") (Complaint ¶ 6). The general partner of BFI is Balcor Entertainment Company Ltd. ("BEC"), an Illinois corporation (Complaint ¶ 7). BEC is the wholly-owned subsidiary of the Balcor Company ("Balcor") which in turn is the wholly-owned subsidiary of the American Express Company ("American Express") (Complaint ¶ 8). The Balcor Securities Company ("Balcor Securities") also is a wholly-owned subsidiary of Balcor and was the alleged underwriter of the offering of the Partnership Interests (Complaint ¶ 9). The attached diagram outlines the relationship between the defendants as alleged in the complaint.

ANALYSIS

I. CONTROLLING LAW

The first question this court must address is which federal circuit's law should control for the purpose of deciding dispositive motions. The Ecksteins' claim, and the defendants do not dispute, that Ninth Circuit decisions should control because the United States Supreme Court has held that the law of the transferor court governs. Van Dusen v. Barrack, 376 U.S. 612, 84 S.Ct. 805, 11 L.Ed.2d 945 (1964). Van Dusen, however, concerned a question of which state law governs in a federal diversity action and is not directly applicable to the transfer of a federal question case for purposes of pretrial discovery. See In re Korean Air Lines Disaster, 829 F.2d 1171 (D.C.Cir.1987), cert. granted, 485 U.S. 986, 108 S.Ct. 1288, 99 L.Ed.2d 499 (1988), aff'd on other grounds, Chan v. Korean Airlines, Ltd., 490 U.S. 122, 109 S.Ct. 1676, 104 L.Ed.2d 113 (1989).

Although the complaint, at least in theory¹, ultimately will be transferred back to the Ninth Circuit for trial, there is no compelling reason why Ninth Circuit decisions should take precedence over those in the Seventh Circuit. If a party were to appeal a pretrial decision by this court, then the appeal would be made to the Seventh Circuit Court of Appeals, not the Ninth Circuit. The Seventh Circuit has recognized this rule of law and stated:

Although the multidistrict statute does not say which court of appeals has jurisdiction over appeals from orders by the district court to which a case is transferred, most cases hold that it is the court of appeals covering the transferee court rather than the one covering the transferor court.

FMC Corp. v. Glouster Engineering Co., 830 F.2d 770, 771 (7th Cir.1987), cert. dismissed, 486 U.S. 1063, 108 S.Ct. 2838, 100 L.Ed.2d 937 (1988). The Seventh Circuit is the proper court for an appeal because the Ninth Circuit has no jurisdiction over the case until this court retransfers, if appropriate, the case there. Manual for Complex Litigation, Second, § 31.121; See also FMC Corp., 830 F.2d at 771-72 (1987); Allegheny Airlines, Inc. v. LeMay, 448 F.2d 1341, 1344 (7th Cir.1971) (per curiam), cert. denied, 404 U.S. 1001, 92 S.Ct. 565, 30 L.Ed.2d 553 (1974); In re Corrugated Container Antitrust Litigation, 662 F.2d 875, 880 (D.C.Cir.1981); Preston Corp. v. Raese, 335 F.2d 827, 828 (4th Cir.1964); Astarte Shipping Co. v. Allied Steel & Export Service, 767 F.2d 86 (5th Cir.1985) (per curiam); In re Plumbing Fixture Cases, 298 F.Supp. 484 (J.P.M.D.L.1968).

In addition, the District of Columbia Circuit Court has considered the question of which circuit's federal common law should govern in a case transferred for consolidated pretrial proceedings and has held:

The federal courts spread across the country owe respect to each other's efforts and should strive to avoid conflicts, but each has an obligation to engage independently in reasoned analysis. Binding precedent for all is set only by the Supreme Court, and for the district courts within a circuit, only by the court of appeals for that circuit.

Korean Air Lines, 829 F.2d at 1176. The D.C. Circuit Court then went on to state that:

We deal here not with an "all-purpose" transfer under 28 U.S.C. § 1404(a), but with a transfer under 28 U.S.C. § 1407 "for coordinated or consolidated pretrial proceedings." We have held, in accord with the district court, that the law of a transferor forum on a federal question ... merits close consideration, but does not have stare decisis effect in a transferee forum situated in another circuit.

Id. The D.C. Circuit's reasoning in Korean Air Lines is persuasive, and therefore this court follows its holding. Accordingly, although close consideration will be given to the law of the Ninth Circuit, only the holdings of the Supreme Court and Seventh Circuit will be binding on this court.

II. STANDARD OF REVIEW FOR FED. R.CIV.P. 12(b)(6) MOTION

The United States Supreme Court has repeatedly held that a federal district court should only grant a motion to dismiss on the pleading if "the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1973) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957)) (footnote omitted). In addition, the Supreme Court has stated that:

The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleadings that a recovery is very remote and unlikely but that is not the test. Moreover, it is well established that, in passing on a motion to dismiss, whether on the ground of lack of jurisdiction over the subject matter of for failure to state a cause of action, the allegations of the complaint should be construed favorably to the pleader.

Scheuer, 416 U.S. at 236, 94 S.Ct. at 1686. The plaintiff, however, is required to allege each of the essential elements of a claim in the complaint, and if any element is missing, then the complaint must be dismissed.

III. ALLEGATION OF RELIANCE

The United States Supreme Court has held that there is an implied private right of action for a violation of § 10(b) and Rule 10b-5. Basic Inc. v. Levinson, 485 U.S. 224, 230-31, 108 S.Ct. 978, 982-83, 99 L.Ed.2d 194 (1987), citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196, 96 S.Ct. 1375, 1382, 47 L.Ed.2d 668 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 95 S.Ct. 1917, 1922, 44 L.Ed.2d 539 (1975); See also Bastian v. Petren Resources Corp., 892 F.2d 680, 683 (7th Cir.1990), cert. denied, ___ U.S. ___, 110 S.Ct. 2590, 110 L.Ed.2d 270. The elements of a ...