Neumann v. John Hancock Mut. Life Ins. Co.

• Decision Date: 30 April 1990
• Docket Number: No. 86 C 5844.,86 C 5844.
• Citation: 736 F. Supp. 182
• Parties: Walter S. NEUMANN and Toba G. Neumann, Plaintiffs, v. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a Massachusetts Insurance Corporation, Alan M. Misale, John W. Jones, Carl J. Santolli, Profesco Corporation, a New York Corporation, Defendants.
• Court: U.S. District Court — Northern District of Illinois

736 F. Supp. 182

Walter S. NEUMANN and Toba G. Neumann, Plaintiffs, v. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a Massachusetts Insurance Corporation, Alan M. Misale, John W. Jones, Carl J. Santolli, Profesco Corporation, a New York Corporation, Defendants.

No. 86 C 5844.

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

April 30, 1990.

Arnold M. Flank, Arnold M. Flank, Ltd., and Martin J. Rubin, Schwartz & Rubin, Chicago, Ill., for plaintiffs.

J. Robert Geiman, Daina B. Van Dervort and William A. Chittenden, III, Peterson, Ross, Schloerb & Seidel, Chicago, Ill., for John Hancock Mut. Life Ins. Co.

Don W. Fowler and Barbara A. McDonald, Lord, Bissell & Brook and David M. Agnew, and Patricia A. Giannis McKay, Chicago, Ill., for Alan Misale, John Jones and Carl Santolli.

Michael G. Boylan, Michael G. Boylan, P.C., Geneva, Ill., for John Jones.

ORDER

NORGLE, District Judge.

Before the Court are the Magistrate's Report and Recommendation that this Court grant Defendants' Motion to Dismiss Count XI of Plaintiffs' Amended Complaint and grant Plaintiffs' Motion to Substitute, as to Counts I-III, V, VI, VII, VIII, and IX. The respective parties have filed timely objections to the Magistrate's Report and Recommendation as to both motions. Since the Magistrate's recommendation concerns claim dispositive motions, this court reviews the Magistrate's Report and Recommendation de novo, pursuant to Fed.R. Civ.P. 72(b) and 28 U.S.C. § 636(b)(1)(C).

Upon conducting a de novo review, the Court, for the reasons set forth below, accepts the Report and Recommendation of the Magistrate and grants both the Defendants' Motion to Dismiss and the Plaintiffs' Motion to Substitute.

MOTION TO DISMISS

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. See Doe v. St. Joseph's Hospital, 788 F.2d 411 (7th Cir.1986). The plaintiff need not set out in detail the facts upon which the 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, 307 (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).

These allegations of the complaint are relevant to the motion to dismiss. During the summer of 1982, Alan Misale, an employee of Hancock and an employee of Hancock general agent John W. Jones, offered the plaintiffs this four-component investment:

1) a $200,000.00 whole life insurance policy (the "New Policy") to be issued by Hancock, having an annual premium of $16,744.38;

2) one or more variable life annuity contracts (the "Annuity") to be issued by Hancock or one of its wholly owned subsidiaries, which required an investment by plaintiffs of approximately $35,500.00;

3) a limited partnership interest in Damson Oil and Gas income fund—1983 (the "O & G Fund") which required an aggregate investment by plaintiffs of $51,000.00; and

4) a loan in the amount of $50,234.25 (the "Premium Loan") from Profesco Corporation ("Profesco"), an amount equal to the premiums required to be paid on the New Policy during the first three years it was to be issued.

Plaintiffs' Complaint at 6-7.

Misale persuaded Walter S. Neumann and Toba G. Neumann to cash in their old life insurance policy in order to make these investments. Misale represented that only an initial investment by plaintiffs was required, since the increase in the cash surrender value of the New Policy, plus the earnings on the Annuity and O & G Fund, would be sufficient to pay all premiums of the New Policy. However, Misale made certain omissions of material facts that caused plaintiffs to purchase the alleged "security," with the knowledge and consent of Hancock, Profesco, and Jones. When the value of the plaintiffs' investments decreased due to market conditions, they brought this suit to recover their losses.

The plaintiffs' complaint initially alleged claims against defendants, John Hancock Mutual Life Insurance, a Massachusetts Insurance Corporation ("Hancock"), Alan M. Misale, John W. Jones, Carl J. Santolli and Profesco Corporation, for violations of federal and state securities laws, RICO, the Illinois Consumer Fraud Act and Deceptive Trade Practices Act, Ill.Rev.Stat. ch. 121½ ¶¶ 261-272 ("Consumer Fraud Act"), common law fraud and negligent misrepresentation. The Neumanns had also sought to maintain an action on the behalf of a class of persons or entities similarly situated. However, on December 2, 1988, this Court struck the Neumanns' class allegations, as well as dismissed Count IV, which alleged a violation of Section 12(2) of the 1933 Securities Act, and Count X, which alleged a violation of RICO. Neumann v. John Hancock Mutual Life Insurance Co., No. 86 C 5844, slip op. at 16 (N.D.Ill. Dec. 2, 1988).

Defendants move to dismiss Count XI which alleges a violation of the Consumer Fraud Act. The Neumanns allege that the defendants' business activities constitute the conduct of a trade or commerce, in the state of Illinois as that term is defined in the Consumer Fraud Act. Count XI ¶ 36. They further allege that the "security" describe above constitutes "merchandise" as defined by the Consumer Fraud Act. They also allege that the sales of, and offers to sell, the security described above occurred within the three-year statute of limitations that governs the Consumer Fraud Act. The Neumanns seek their actual damages incurred as a result of their purchase of the security, together with interest, attorney's fees and costs.

The defendants contend that a plaintiff seeking relief under the Consumer Fraud Act must plead and prove that a violation of the Consumer Fraud Act caused a public injury—something plaintiffs have not and cannot do. The defendants argue that, at most, the acts of the defendants resulted in a purely private injury to the plaintiffs individually and did not affect the consuming public generally.

The Magistrate rejected the defendants' contention that a cause of action under the Consumer Fraud Act requires an allegation of public injury. However, the Magistrate concluded that the Consumer Fraud Act is not intended to extend to every transaction between contracting parties, or to be completely open-ended. Thus even though courts have not required an allegation of "public injury," application of the Consumer Fraud Act is restricted to conduct that "affects consumers generally." See Magistrate's Report and Recommendation at 4.

Although the Illinois Supreme Court has not directly addressed this question, the general trend of authority in both the Illinois Appellate Courts and in the Northern District of Illinois is in accord with this interpretation. See, e.g., Bonfield v. AAMCO Transmissions, Inc., 708 F.Supp. 867 (N.D.Ill.1989); Maduff v. Life Insurance Company of Virginia, 657 F.Supp. 437 (N.D.Ill.1987); Blake v. State Farm Mutual Automobile Insurance Company, 168 Ill.App.3d 918, 119 Ill.Dec. 617, 523 N.E.2d 85 (1st Dist.1988); Beaton and Associates v. Joslyn Manufacturing & Supply Company, 159 Ill.App.3d 834, 111 Ill.Dec. 649, 512 N.E.2d 1286 (1st Dist.1987) (the Consumer Fraud Act is not intended to provide a redundant remedy to redress a private wrong). Century Universal Enterprises, Inc. v. Triana Development Corporation, 158 Ill.App.3d 182, 110 Ill.Dec. 229, 510 N.E.2d 1260 (2d Dist.1987); Exchange National Bank v. Farm Bureau Life Insurance Co. of Michigan, 108 Ill.App.3d 212, 63 Ill.Dec. 884, 438 N.E.2d 1247 (3d Dist. 1982) (one does not need to allege a public injury to recover under the Consumer Fraud Act).

In Blake, the plaintiff attacked the entire notification procedure used by the defendant to inform new policyholders that underinsured motorist insurance coverage was available. 168 Ill.App.3d at 924, 119 Ill.Dec. at 621, 523 N.E.2d at 89. The Blake court stated that the intent of the Consumer Fraud Act was not to extend to wrongs committed in the context of private transactions, but rather addressed wrongs committed in the course of business or trade. Id. The court reasoned that there might have been a sufficient showing of a course of business or trade to state a claim under the Consumer Fraud Act if the case were sustainable as a class action. Id. However, since the trial court had properly dismissed the class action allegations, the court dismissed the plaintiff's allegation of a violation of the Consumer Fraud Act. Id.; see also Newman-Green, Inc. v. Alfonzo-Larrain, 590 F.Supp. 1083, 1086 (N.D.Ill.1984).

Here, as in Blake, there might have been a sufficient showing of course of business or trade to state a claim under the Consumer Fraud Act if the case were sustainable as a class action. However, just as in Blake, once the class action allegations were dismissed, any basis for such a showing is eliminated.

Furthermore, in line with the general trend of authority which holds that the Consumer Fraud Act does not address private wrongs, the one-to-one transaction between the plaintiffs and defendants does not result in a public injury. The transaction that took place between the parties in this case relates to a specific investment made by the plaintiffs based on the alleged misrepresentations and omissions made in individualized consultations. The Consumer Fraud Act does not address, nor was it intended to extend to, such private transactions. Obviously, if one has a public injury, it affects...