Gutfreund v. Christoph, 86 C 6821.

• Decision Date: 06 July 1987
• Docket Number: No. 86 C 6821.,86 C 6821.
• Citation: 658 F. Supp. 1378
• Parties: Kurt GUTFREUND, et al., Plaintiffs, v. Robert W. CHRISTOPH, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

658 F. Supp. 1378

Kurt GUTFREUND, et al., Plaintiffs, v. Robert W. CHRISTOPH, et al., Defendants.

No. 86 C 6821.

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

April 20, 1987.

Supplemental Memorandum Order July 6, 1987.

COPYRIGHT MATERIAL OMITTED

Herbert Beigel, Paul R. Shuldiner, Dean Armstrong of Beigel & Lichtenstein, Chicago, Ill., for plaintiffs.

Clifford Yuknis, Joel Sprayregen, David W. Gleicher, Chicago, Ill., for Christoph.

Michael Bruton, Pretzel & Stouffer, Chtd., Chicago, Ill., for Ostrow.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Kurt Gutfreund¹ and 16 other investors initially filed a nine-count Amended Complaint (the "Complaint") against Robert W. Christoph ("Christoph"), Gordon D. Boydston ("Boydston"), Ostrow Reisin Berk & Abrams, Ltd. ("Ostrow") (an accounting firm) and Michigan limited partnership Fox Briar Farm, alleging:

1. federal statutory violations involving:

(a) Securities Exchange Act of 1934 ("1934 Act") § 10(b), 15 U.S.C. § 78j(b) ("Section 10(b)") and related SEC Rule 10b-5;

(b) Securities Act of 1933 ("1933 Act") §§ 12(2) and 17(a), 15 U.S.C. §§ 77l(2) and 77q(a) ("Section 12(2)" and "Section 17(a)"); and

(c) the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962(a), (c) and (d) ("Sections 1962(a), (c) and (d)"); and

2. state statutory and common law violations involving:

(a) fraud;

(b) breach of fiduciary duties; and

(c) the Illinois Securities Law, Ill. Rev.Stat. ch. 121½, ¶ 137.13 ("Section 137.13").

Now Christoph moves for dismissal of four of the claims asserted against him, and Ostrow for dismissal of all seven claims asserted against it, under Fed.R.Civ.P. ("Rule") 12(b)(6). For the reasons stated in this memorandum opinion and order, each motion is granted in part and denied in part.

Facts²

Between April and August 1983 (Ex. A) plaintiffs executed subscription agreements (the "Agreements") in which they agreed to invest as limited partners in Fox Briar Farm Limited Partnership ("Fox Briar"). As the transaction was structured, Fox Briar was to acquire for $1.45 million a Michigan dairy farm (the "farm") owned by Christoph (¶¶ 12, 15). Part of the purchase price ($175,000) was to be paid in cash as a down payment and the balance ($1.275 million) was to be paid to Christoph in deferred payments. Part of the deferred payment ($950,000) was secured by the farm's real estate and personal property (¶ 15).³

It was contemplated that the farm would generate enough cash flow to service Fox Briar's debt obligations and generate a profit for Fox Briar and its limited partners (¶ 15). However, each limited partner was required to execute an "Assumption Agreement" under which, in case of any default under the contract for purchase of the farm, he or she would be liable for his or her share of the balance due on the farm (¶ 15).

To carry out the alleged scheme to defraud plaintiffs, Christoph enlisted Boydston to be one of the Fox Briar general partners (¶ 13). Christoph and Boydston then retained Ostrow to prepare certain financial projections designed to persuade plaintiffs of Fox Briar's economic viability (¶ 14). Those projections were placed in a Private Placement Memorandum (the "Memorandum") prepared, issued and distributed by defendants (¶ 5).

Plaintiffs charge fraudulent representations infected the Memorandum. To avoid any potential mischaracterization, the Complaint will be quoted verbatim:

17. In order to induce plaintiffs to invest in Fox Briar Farm, defendants Christoph and Boydston in the Memorandum and otherwise, falsely represented, among other things, that:

(a) the size of the herd would increase, thereby providing increased production of milk; and

(b) the projected revenues reflect increases in prices and production of milk.

18. These representations were materially false and misleading in that:

(a) the physical plant of the farm could not accommodate the projected increase in the herd; and

(b) the projections were based upon false assumptions, such as increasing milk prices and increases in the size and quality of the herd.

19. The Memorandum was false and misleading in that it failed to disclose, among other things, the following material facts:

(a) The herd was not high of quality sic;

(b) The historical trend of milk prices in Michigan for equivalent farms for the period 1981 to the sale of the limited Partnership units reflected a decline rather than the purported trend of rising prices as described in the Memorandum on the basis of nationwide averages through 1980;

(c) A certain number of the cattle were leased, thereby imposing an additional financial burden on the farm and the Partnership;

(d) The projected growth in the size of the herd was not possible due to financial constraints and the lack of the necessary physical facilities;

(e) Jerry L. Himebaugh, the co-general partner, and manager of the farm did not agree with the projected revenues and considered them to be inflated; and

(f) Certain equipment was subject to security interests and liens, and also was pledged as security for the purchase of the farm.

* * * * * *

21. Defendant Ostrow knowingly aided and abetted the fraudulent scheme set forth above by consciously engaging in conduct for the purpose of facilitating the fraud. Said conduct included but was not limited to the following:

Knowingly or recklessly, providing projections which contained insupportable assumptions, omitted to disclose the true facts of the relevant historical milk prices, the operating history of the farm, and the matters set forth in paragraph 19 above.

22. Defendant Ostrow was aware of the misrepresentations and omissions by the other defendants set forth above in that at a minimum it knew the contents of the Memorandum and the lack of reasonable possibility of economic gain. These projections were of critical importance to Christoph and Boydston's efforts to sell the limited Partnership units.

* * * * * *

26. Defendant Ostrow misrepresented the true facts regarding its Financial Projections. This was done on two occasions, March 7, 1983, when the original Financial Projections were issued, and on March 27, 1984, when Financial Projections for the Expansion of Present Limited Partnership Interests ("Expansion") were issued. In Note 1 of the Expansion Financial Projections, reference was made to the original Financial Projections as providing a complete discussion of the assumptions made and possible consequences. Upon information and belief, all of the existing Fox Briar investors also received a copy of the Expansion private placement memorandum.

This reference constituted a republication of Ostrows' original erroneous findings and further misled the investors both in relation to the Expansion and the original Fox Briar farm investment. This republication lulled the plaintiffs into a false sense of security regarding the viability of their investments.

Defendants allegedly concealed their unlawful conduct from plaintiffs by subsequently promoting the acquisition by Fox Briar of another farm and by not providing plaintiffs with adequate documentation regarding their investments (¶ 24). Thus plaintiffs allege:

25. Prior to 1986, and shortly before the filing of this complaint, plaintiffs were unaware of any of the true facts as described above, and could not have reasonably discovered such facts until a default occurred in the contract of purchase in or about March, 1986, when investor contributions were used by Boydston to maintain the solvency of the farm rather than make the required payments to Christoph. Prior to this time and due to the fraudulent concealment of defendants, plaintiffs were unaware of the true facts pertaining to the economics of the farm. Plaintiffs therefore could not have discovered the untrue statements and omissions by the exercise of reasonable diligence until 1986. Any efforts by plaintiffs to discover the fraud at an earlier time would have proven and did prove unsuccessful due to the acts of fraudulent concealment described above and defendants' refusal to make information available to plaintiffs.⁴

In an attempt to intimidate the limited partners, Christoph has allegedly "consistently threatened legal action" that would have the effect of jeopardizing any remaining value of plaintiffs' investments (id.).⁵ Christoph has also refused or failed to provide accurate information to the limited partners (id.). Three plaintiffs (Gutfreund, Bandiera and Johnson) filed this action September 11, 1986. On November 11, 1986 an Amended Complaint was filed adding the remaining 13 plaintiffs.

Federal Securities Claims

1. Section 10(b) and Rule 10b-5:

Plaintiffs' Count 1 ¶ 16 alleges:

Defendants, and each of them, separately and in concert, directly and indirectly, conspired to, aided and abetted each other, and did through the use of the mails and other means and instrumentalities of interstate commerce, in connection with the purchase of securities, knowingly, willfully and recklessly violate Section 10(b) and Rule 10b-5.

Only Ostrow moves to dismiss those claims against it on two grounds:

1. They are barred by the statute of limitations.

2. Plaintiffs' Complaint fails to identify with sufficient particularity what theories of recovery are alleged against each defendant.

Ostrow also moves to dismiss Count 1 to the extent it alleges Ostrow:

1. failed to disclose material facts— because Ostrow had no duty to disclose to plaintiffs;

2. aided and abetted a Section 10(b) violation or conspired to violate that section —because secondary liability should no longer be recognized under Section 10(b);

3. conspired to violate Section 10(b)— because the Complaint does not allege (a) an agreement existed and (b) Ostrow committed acts in furtherance of that agreement.

This opinion treats with each of those arguments in turn.

(a) Statute of Limitations

There is neither a general federal statute of limitations nor a time limitation specified in the federal...