Preston v. Kruezer

• Decision Date: 01 August 1986
• Docket Number: No. 85 C 20271.,85 C 20271.
• Citation: 641 F. Supp. 1163
• Court: U.S. District Court — Northern District of Illinois
• Parties: Joyce PRESTON, Plaintiff, v. Roger N. KRUEZER and Blunt, Ellis & Loewi, Defendants.

641 F. Supp. 1163

Joyce PRESTON, Plaintiff, v. Roger N. KRUEZER and Blunt, Ellis & Loewi, Defendants.

No. 85 C 20271.

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

August 1, 1986.

Stephen P. Carponelli, Chicago, Ill., for plaintiff.

Thomas P. Ward, Chicago, Ill., Michael K. Havrilesko, Rockford, Ill., for defendants.

ORDER

ROSZKOWSKI, District Judge.

In this securities fraud action, plaintiff Joyce Preston asserts federal statutory claims under Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q (the "1933 Act") (Count I); Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78 (the "1934 Act") and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder (Count II); and, the Racketeer Influenced and Corrupt Organizations Act of 1976 ("RICO"), 18 U.S.C. §§ 1962(a), (c) (Counts III, IV). Plaintiff also asserts a pendent violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill. Rev.Stat. ch. 121½, ¶ 261 et seq. (the "Consumer Fraud Act") (Count V) and claims for breach of fiduciary duty (Count VI), common law fraud (Count VII) and "infliction of emotional distress" (Count VIII).

Defendants Blunt, Ellis & Loewi, Inc. ("Blunt Ellis") and Roger Kruezer filed the instant motion pursuant to Section 3 and 4 of the Federal Arbitration Act, 9 U.S.C. §§ 3, 4 (1970), to compel arbitration of all claims and to stay this action pending arbitration. Defendants also move to dismiss Counts I, V and VIII of plaintiff's complaint.

For the reasons stated herein, defendants' motion to compel arbitration is granted with respect to Counts V, VI, VII, VIII. The arbitration is to be conducted before the American Arbitration Association in Chicago as elected by plaintiff. Arbitration is stayed pending resolution of this action. Defendants' motion to dismiss is granted with respect to Count I. Counts II, III and IV will remain in this court and will proceed without delay.

I. BACKGROUND¹

Plaintiff is a widow with two dependent children. Defendant Kruezer is a stock broker and is the manager of defendant Blunt Ellis' Freeport, Illinois office.

In March of 1980, plaintiff approached Kruezer for investment advice. While she had only modest income from periodic work as a grocery and drug store checker, plaintiff had approximately $22,000 she was interested in investing.² Plaintiff had little education or investment knowledge. Kruezer told plaintiff that he would invest her funds in safe, secure, growth-oriented investments designed to produce capital appreciation. Based on these representations, plaintiff used her money to open an account with Blunt Ellis.

During the time plaintiff's account at Blunt Ellis remained open, Kruezer allegedly made numerous factual misrepresentations. Kruezer also allegedly failed to inform plaintiff of various material facts concerning her account. Specifically, Kruezer failed to explain plaintiff's account statements despite repeated requests. In September of 1982, Kruezer told plaintiff her account had a value of $50,000 when in fact its actual value was substantially lower. In January 1984, Kruezer told plaintiff that the value of her account was $30,000 when in fact it was worth substantially less. On various occasions Kruezer told plaintiff her investments were "doing fine" and that "everything's OK" when in fact she was losing substantial amounts of money. Kruezer failed to inform plaintiff of the high-risk, income oriented nature of her investments. Kruezer allegedly initiated trades and "churned"³ plaintiff's account solely to generate commissions.

Plaintiff closed her Blunt Ellis account in the fall of 1984 and filed this lawsuit in September of 1985.

On September 25, 1985, counsel for Blunt Ellis wrote plaintiff to remind her that she had agreed to submit any account disputes to arbitration. Counsel demanded that plaintiff elect an arbitration forum within five days. Counsel closed by informing plaintiff that should she fail to elect a forum, Blunt Ellis would proceed to arbitration before the New York Stock Exchange, Inc.

Plaintiff's attorneys responded by registered mail on October 1. Their letter informed Blunt Ellis that they intended to proceed with this litigation "unless and until an appropriate order is entered by the court staying proceedings." They informed Blunt Ellis that the arbitration agreement did not cover claims against Kruezer; that the agreement was unenforceable; and that it did not encompass the claims presented by this case. Plaintiff's attorneys closed by stating that if this court were to ultimately determine that arbitration was indeed appropriate, they reserved the right to proceed before the American Arbitration Association in Chicago, Illinois.

The instant motions followed.

II. DISCUSSION

A. DEFENDANTS' MOTION TO DISMISS

Before this court can determine which, if any, counts of plaintiff's complaint should be arbitrated, it is first necessary to determine which counts fail to state a claim for relief. Defendants have challenged the legal sufficiency of Counts I, V and VIII.

1. Section 17(a) of the 1933 Act (Count I)

There is a split in the circuits as to whether an implied private right of action should be recognized under Section 17(a) of the 1933 Act. See Mosher v. Kane, 784 F.2d 1385, 1390-91 n. 9 (9th Cir.1986). The Supreme Court has recognized this split, Eichler v. Berner, 472 U.S. 299, 105 S.Ct. 2622, 2625 n. 9, 86 L.Ed.2d 215 (1985), but has on four occasions declined to decide the issue. See Eichler, Id.; Herman & MacLean v. Huddleston, 459 U.S. 375, 378 n. 2, 103 S.Ct. 683, 685 n. 2, 74 L.Ed.2d 548 (1983); International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 557 n. 9, 99 S.Ct. 790, 795 n. 9, 58 L.Ed.2d 808 (1979); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 733 n. 6, 95 S.Ct. 1917, 1924 n. 6, 44 L.Ed.2d 539 (1975). While the Seventh Circuit has previously held that there is such an action, Daniel v. International Brotherhood of Teamsters, 561 F.2d 1223, 1244-46 (7th Cir.1977) rev'd on other grounds, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979), the Supreme Court's subsequent reversal of that case, "coupled with its express refusal to decide the § 17(a) issue ... removed the authority of the discussion in Daniel." Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522, 530-31 (7th Cir.1985). Since Daniel, the Seventh Circuit has on three occasions specifically declined to decide the existance of a private Section 17(a) cause of action. See Ray v. Karris, 780 F.2d 636, 641 n. 3 (7th Cir.1985); Angelos, supra; Peoria Union Stock Yards, Inc. v. Penn Mutual Life Insurance, 698 F.2d 320, 323 (7th Cir.1983).

When implying a statutory private cause of action, the central inquiry is whether Congress intended to create such an action. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982); Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). Most courts that have found a private right of action under Section 17(a) have done so without conducting an indepth analysis of the legislative intent. For example, in Daniel, the Seventh Circuit found a private Section 17(a) right of action merely "because there was `little practical point in denying the existence of an action under § 17 once it is established that an aggrieved buyer has a private action under § 10(b) of the 1934 Act.'" 561 F.2d at 1245 n. 45 (quoting Globus v. Law Research Service, Inc., 418 F.2d 1276, 1283-84 (2nd Cir.1969), cert. denied, 397 U.S. 913, 90 S.Ct. 913, 25 L.Ed.2d 93 (1970)).⁴ This same over-simplified approach to the problem was used again more recently in Angelos. 762 F.2d at 530 ("there is no reason to think that a § 17(a) action would have different elements than a Rule 10b-5 action...."). See also Stephenson v. Calpine Conifers II, Ltd., 652 F.2d 808, 815 (9th Cir.1981) (found an implied private right of action under Section 17(a) "in light of the minimal differences between § 17(a) ... and § 10(b)....").

Despite the facial similarity between Section 17(a)⁵ and Rule 10b-5⁶ the two have not been interpreted identically. Allegations of the defendant's scienter are an essential element of a plaintiff's Rule 10b-5 cause of action. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201-06, 96 S.Ct. 1375, 1384-87, 47 L.Ed.2d 668 (1976). Section 17(a) on the other hand "requires scienter under § 17(a)(1), but not under § 17(a)(2) or § 17(a)(3)." Aaron v. Securities Exchange Commission, 446 U.S. 680, 697, 100 S.Ct. 1945, 1956, 64 L.Ed.2d 611 (1980).

A pre-Aaron panel of the Seventh Circuit had determined that Section 17(a) required proof of scienter when accompanying a viable Rule 10b-5 claim. Sanders v. John Nuveen & Co., Inc., 554 F.2d 790, 795 (7th Cir.1977). Aaron casts considerable doubt on the continued validity of this portion of Sanders. While Aaron dealt only with an SEC enforcement action under Section 17(a), "it is doubtful that a different interpretation would be given if an implied private cause of action is found to exist." Landry v. All American Assurance Co., 688 F.2d 381, 387 (5th Cir.1982).

Given this assumption, § 17(a) suddenly becomes an attractive, viable alternative to actions previously brought under Rule 10b-5, at least as to those based on negligence.

Id.

Since the Seventh Circuit has yet to resolve the Section 17(a) issue this court is free to follow the well-reasoned decision in Landry. No purpose is served by reciting the lengthy analysis set forth in Landry. It is sufficient to note that after conducting a detailed review of the four elements set forth in Cort v. Ash for implying a cause of action, the Fifth Circuit concluded that no private right of action exists under Section 17(a). Landry, 688 F.2d at 387-90. The Landry court found support for its holding from "such noted authorities on securities law as Professors Loss and Ruder." Beck v. Cantor, Fitzgerald & Company, Inc., 621 F.Supp. 1547, 1560 (N.D.Il...