Hernandez v. Childers

• Decision Date: 01 May 1990
• Docket Number: No. 89 C 1418.,89 C 1418.
• Citation: 736 F. Supp. 903
• Parties: Keith HERNANDEZ, Plaintiff, v. John H. CHILDERS, Talent Services, Inc., Talent Network, Inc., Defendants.
• Court: U.S. District Court — Northern District of Illinois

736 F. Supp. 903

Keith HERNANDEZ, Plaintiff, v. John H. CHILDERS, Talent Services, Inc., Talent Network, Inc., Defendants.

No. 89 C 1418.

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

May 1, 1990.

COPYRIGHT MATERIAL OMITTED

George W. Gessler, Terence E. Flynn, Gessler, Flynn, Fleischmann, Chicago, Ill., for Keith Hernandez.

Robert K. Blain, Mitchell Bryan, Altheimer & Gray, Chicago, Ill., for John H. Childers.

ORDER

NORGLE, District Judge.

Before the court is defendants' motion to dismiss. For the following reasons, it is granted in part and denied in part.

On a motion to dismiss, the allegations of the complaint as well as the reasonable inferences to be drawn from them are taken as true. Doe v. St. Joseph's Hosp., 788 F.2d 411 (7th Cir.1986). The plaintiff need not set out in detail the facts upon which a claim is based, but must allege sufficient facts to outline the cause of action. Id. The complaint must state either direct or inferential allegations concerning all of the material elements necessary for recovery under the relevant legal theory. Mescall v. Burrus, 603 F.2d 1266 (7th Cir.1979). The court is not required to accept legal conclusions either alleged or inferred from pleaded facts. Carl Sandburg Village Condominium Ass'n No. 1 v. First Condominium Development Co., 758 F.2d 203, 207 (7th Cir.1985). Dismissal under Rule 12(b)(6) is improper unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Papapetropoulous v. Milwaukee Transport Services, Inc., 795 F.2d 591, 594 (7th Cir.1986).

Plaintiff Keith Hernandez is a professional baseball player. Defendant John M. Childers is the President and major owner of co-defendant Talent Services, Inc. ("TSI") and co-defendant Talent Network, Inc. ("TNI"). In 1976, Hernandez retained Childers as his agent. At that time, Hernandez entered into three contracts. Under the Contract Negotiation Agreement, TSI was to handle Hernandez's contract negotiations with professional athletic teams. Under the Merchandising Agreement, TNI was to represent Hernandez in various income producing opportunities including endorsements, licensing, and appearances. Finally, under the Business Management Agreement, TSI was to manage Hernandez financial affairs.

Hernandez's claims arise from his purchase of investment units in a limited partnership known as Sealock (Israel) and Co. ("Sealock"). In late 1979, Childers contacted Hernandez and informed him of an opportunity to invest in Sealock. Childers told Hernandez that funds invested in Sealock would be used for the research and development of meat packing machinery. Childers allegedly promoted the investment as one providing an outstanding opportunity to shelter income from taxes and simultaneously to obtain large profits. In addition, Childers allegedly told Hernandez that he had obtained whatever legal and tax opinions that were necessary to insure that the investment was sound. During 1980, 1981, and 1982, Childers, after receiving authorization from Hernandez, invested a total of $245,000 of Hernandez's money on Sealock.

In 1983, the IRS began an investigation into the entire scheme of Israeli limited partnerships, including Sealock. Hernandez claims he first learned of the IRS challenge to his own Sealock investment in 1986. In September, 1987, the Seventh Circuit held in Levin v. Commissioner, 832 F.2d 403 (7th Cir.1987), that the tax shelter features of Sealock were improper. Consequently, the IRS disallowed the Sealock tax deductions and imposed penalties. As a result, Hernandez claims he lost his entire investment and incurred significant tax liabilities and penalties totalling $830,000, in addition to the loss of $245,000 already invested in Sealock.

Hernandez's complaint centers around a series of alleged misrepresentations and omissions by Childers regarding the Sealock investment. Among the alleged misrepresentations is Childers' statement of the fundamental purpose of Sealock. Hernandez states that although Sealock was promoted as a tax shelter and an income producing investment, it was never meant to be anything but a tax loss. Hernandez also alleges that Childers assured him that the investment had been favorably reviewed by lawyers and accountants when in fact no such evaluation ever took place. In addition, Childers allegedly did not disclose either that he stood to profit if Hernandez invested, that there were the tax risks involved, or that the Sealock promoters had conflicts because of their ownership of the only firms that were to benefit from the venture.

On February 21, 1989, Hernandez filed a seven count complaint consisting of federal securities law and various state law claims. Count I is a common law breach of fiduciary duty claim; Count II is a common law fraud claim; Count III is a claim for violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934; Count IV is a claim for violation of Section 12(2) of the Securities Act of 1933; Count V is a claim for violation of section 17(a) of the Securities Act of 1933; Count VI is a common law negligence claim; Count VII is a common law breach of contract claim. These will be addressed seriatim.

Section 10(b) and Rule 10b-5 claims

Defendants move to dismiss Hernandez's Section 10(b) and Rule 10b-5 claims in Count III as barred by the applicable statute of limitations. As no federal limitations provision governs claims brought under Section 10(b) or Rule 10b-5, federal courts look to the most analogous limitations period controlling in the state in which the action is brought. See Teamsters Local 282 Pension Trust Fund v. Angelos, 815 F.2d 452, 456 (7th Cir.1987). The Seventh Circuit has held that the most analogous statute of limitations in Illinois is the three year period prescribed by the Illinois Securities Act, Ill.Rev.Stat. ch. 121½, ¶ 137.13(D). See Suslick v. Rothschild Securities Corp., 741 F.2d 1000, 1004 (7th Cir.1984).

Under Section 137.13(D) of the Illinois Securities Act, the three year statute of limitations period begins to run "from the date of sale." Ill.Rev.Stat. ch. 121½, ¶ 137.13(D). The parties in this case disagree as to when Hernandez "purchased" the securities in question and, therefore, when the limitations period began to run. Defendants argue that in Section 10(b) and Rule 10b-5 actions the purchase of a security pursuant to a written agreement occurs on the date when the agreement becomes binding on the purchaser, rather than any future date or dates when the agreement unconditionally requires payment of the purchase price. Therefore, defendants assert, the Sealock securities were purchased when Hernandez signed the Subscription Agreement to Sealock and his Letter of Understanding to DMC, Ltd. which provided research and development services regarding Sealock. Under the terms of the Subscription Agreement, Hernandez was to make an initial payment and then to pay the balance of the purchase price at future dates which were to be determined. (Subscription Agreement ¶ 1-2, 4). Both of these documents were dated September 15, 1980. Consequently, defendant argues, the limitations period began to run on that date.

Hernandez acknowledges that Childers sent him the Sealock Investment documents in November or December of 1979. Although Hernandez states that he promptly returned these documents to Childers, he does not indicate when he signed them. Rather, Hernandez instead emphasizes that after his initial investment in Sealock he was required to provide additional capital contributions in 1994. Hernandez, relying upon Goodman v. Epstein, 582 F.2d 388, 414 (7th Cir.1978), contends that calls for additional capital contributions entail new investment decisions, thus precluding the contract execution date or initial investment from being the "purchase" date from whence the statute of limitations would run.

Hernandez's reliance on Goodman is misplaced. Although the Goodman Court held that additional capital contributions constituted separate investment decisions and, therefore, separate purchases of securities, Goodman is easily distinguishable. In Goodman, the plaintiffs were limited partners in a real estate development limited partnership. Under the terms of the partnership agreement, the plaintiffs were required to provide additional contributions of capital upon call for such contributions by the general partners. 582 F.2d at 412. The plaintiffs contended that those subsequent capital contributions constituted additional purchases of securities within the meaning of Section 10(b) and Rule 10b-5, even though they were obligated to make those contributions under the terms of the partnership agreement. The Seventh Circuit held that the additional contributions did constitute separate purchases of securities because the plaintiffs faced a separate investment decision each time a call was made. This was because under Illinois law, they had a right to relieve themselves of their obligations to provide additional capital if the facts showed that the partnership was unprofitable. Ill.Rev.Stat. ch. 106½, ¶ 32(1)(e)); 582 F.2d at 413.¹

Unlike the plaintiffs in Goodman, Hernandez is obligated to provide additional capital and has no legal right to relieve himself of this obligation. Paragraph 41 of the complaint states that "an additional payment is due in January, 1994 and the plaintiff is obligated to make that payment." Accordingly, the plaintiff's obligation with respect to the purchase of the securities has not yet been completed. Therefore, Hernandez is not making a separate investment decision. Rather, he is fulfilling his contractual obligation. In Goodman, the Seventh Circuit was careful to distinguish a situation, such as this, where the purchaser would have "no legal alternative to performing the contract ...." 582 F.2d at 412. Because Hernandez has no legal alternative to providing an additional contribution in...