Rankow v. First Chicago Corp.

• Decision Date: 05 February 1988
• Docket Number: No. 87 C 4880.,87 C 4880.
• Citation: 678 F. Supp. 202
• Parties: Martin A. RANKOW, et al., Plaintiffs, v. FIRST CHICAGO CORPORATION, Defendant.
• Court: U.S. District Court — Northern District of Illinois

678 F. Supp. 202

Martin A. RANKOW, et al., Plaintiffs, v. FIRST CHICAGO CORPORATION, Defendant.

No. 87 C 4880.

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

February 5, 1988.

Michael J. Daley, Nisen, Elliott & Meier, Chicago, Ill., for plaintiffs.

Peter J. Kilchenmann, Lynn A. Goldstein, Chicago, Ill., for defendant.

ORDER

BUA, District Judge.

This order concerns defendant's motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons stated herein, defendant's motion to dismiss is granted with respect to all counts.

I. FACTS

Beginning in April 1983, plaintiffs participated in a Dividend Reinvestment and Stock Purchase Plan provided by defendant First Chicago Corporation ("First Chicago"). The plan provided an opportunity for investors to reinvest their common stock dividends or to make optional cash payments toward the purchase of newly issued common stock. Participants in the plan received a 5% discount from the prevailing market price of the stock without payment of any brokerage commission or service charge. Immediately after investing in common stock offered through this plan, plaintiffs would then sell short their shares on the open market.

The plan was governed by a prospectus issued by First Chicago. The prospectus provided that shares would be available at 95% of the average high and low sales prices of the stock as reported in the Wall Street Journal "on the first trading day of January, April, July and October of each year (the `Pricing Date') commencing July, 1982."

In December 1984, First Chicago issued a new prospectus that changed the manner in which the price of the stock would be calculated. First, the stock would be priced at 95% of its average high and low sales prices as reported in the Wall Street Journal on the dividend payment date. Secondly, if the stock was not traded on the New York Stock Exchange ("NYSE") on the dividend payment date, then the pricing date to be used would be the last preceding date on which the stock was traded on the NYSE.

On January 1, 1985, First Chicago declared a dividend payment. However, it used January 2, 1985 for the pricing date, rather than the last preceding date the stock was traded on the NYSE. In December 1985, plaintiffs contacted Richard Weincek, the Senior Vice President of First Chicago, to inquire as to the pricing date to be used for the January 1, 1986 purchases. Weincek stated that January 2, 1986 would be used as the pricing date.

Plaintiffs then made an optional cash payment of $11 million. They immediately sold short this stock, assuming that January 2, 1986 was the pricing date that would be used by First Chicago. However, contrary to Weincek's representations, First Chicago followed the procedure set forth in the new prospectus for determining the pricing date, and used December 31, 1985 as the pricing date. Because the price of the stock was greater on December 31, 1985 than on January 2, 1986, plaintiffs had sold short more stock than they had acquired through the plan. As a result, they were forced to make additional purchases on the open market to satisfy their obligations. Plaintiffs now seek to recover the cost of covering their short sales on the open market.

Plaintiffs have alleged that First Chicago's conduct in using December 31, 1985 as the pricing date, rather than January 2, 1986, amounted to a breach of contract and negligent misrepresentation. Plaintiffs have also asserted that First Chicago violated Rule 10b-5 and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), as well as Section 18(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78r(a) (1982).

II. DISCUSSION

A. Count I — Breach of Contract

Plaintiffs argue that Weincek, acting as agent for First Chicago, offered to modify the terms of the plan, and that plaintiffs accepted this offer with their cash payment. First Chicago contends, however, that the prospectus denied Weincek any authority to modify the terms of the plan.

A principal may be bound by the actions of his agent if the agent had actual or apparent authority to bind him. Malcak v. Westchester Park Dist., 754 F.2d 239, 244 (7th Cir.1985). Apparent authority is "such authority as the principal knowingly permits the agent to assume or which he holds his agent out as possessing — it is such authority as a reasonably prudent man, exercising diligence and discretion, in view of the principal's conduct, would naturally suppose the agent to possess." Schoenberger v. Chicago Transit Auth., 84 Ill. App.3d 1132, 1137, 39 Ill.Dec. 941, 946, 405 N.E.2d 1076, 1081 (1980), quoting Wing v. Lederer, 77 Ill.App.2d 413, 417, 222 N.E.2d 535, 538 (1966). Nevertheless, whether the authority is express, implied, or apparent, it must be derived from the words or actions of the principal. Rouse Woodstock, Inc. v. Surety Fed. Savings & Loan Ass'n, 630 F.Supp. 1004, 1010 (N.D.Ill.1986). Furthermore, the party dealing with the agent has the obligation to verify the existence and scope of the agent's authority. Schoenberger, 84 Ill.App.3d at 1138, 39 Ill.Dec. at 946, 405 N.E.2d at 1081. Reliance on indications of authority must be reasonable in light of the circumstances. Rouse, 630 F.Supp. at 1010.

In Malcak, supra, the Seventh Circuit examined the extent of an agent's authority to modify a contract that expressly limited his authority to act on behalf of the principal. The plaintiff in that case sued four individual commissioners of a municipal corporation for unlawful termination. 754 F.2d at 240. In addition to the alleged constitutional violations, the plaintiff claimed that the commissioners' verbal assurances regarding his performance created a contract for continued employment as long as he performed satisfactorily. Id. at 244. However, according to the corporation's operating policy manual: "An individual Board member has no legal or moral right to speak for the Park/Recreation Board unless specifically authorized to do so by action of the Board." Id. at 245. The court held that this statement in the manual denied individual commissioners any authority to make representations on behalf of the Board regarding a contract for continued employment. Thus, reliance by the plaintiff on the representations made by the individual commissioners would not support a contract under principles of agency or estoppel. Id.

Similarly, in the instant case, the prospectus denied any individual the right to speak on behalf of First Chicago in contradiction of the information contained in the prospectus. The prospectus stated: "No person is authorized by First Chicago Corporation to give any information or to make any representations, other than those contained in this prospectus, in connection with the offer contained in this prospectus." This statement provided adequate notice of Weincek's lack of authority, regardless of whether plaintiffs ever read the prospectus. Knowledge of material contained in a prospectus is imputed to investors, even if they have not read such a document. Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1518 (10th Cir.1983). When a party is put on notice that the agent lacks authority to bind the principal, "belief that the agent has apparent authority to bind the principal is unreasonable; the principal will not be bound under principles of agency or estoppel." Malcak, 754 F.2d at 245.

Because First Chicago never authorized anyone to modify the terms of the prospectus, Weincek lacked authority to change the pricing date. Furthermore, plaintiffs knew or should have known that no one was authorized to make representations that contradicted the prospectus. Thus, any reliance by plaintiffs on Weincek's representations about the pricing date was unreasonable. Such reliance will not support a finding of a contract under the principles of agency. Because Weincek had no authority to modify the contract, and because the prospectus alerted plaintiffs to Weincek's lack of authority, plaintiffs have failed to state a claim for breach of contract. Therefore, Count I is dismissed.

B. Count II — Negligent Misrepresentation

Plaintiffs also contend that Weincek's representation as to the pricing date is actionable under the theory of negligent misrepresentation. Although the Illinois Supreme Court has held that purely economic losses cannot be recovered under tort claims, "economic loss is recoverable ... where one who is in the business of supplying information for the guidance of others in their business transactions makes negligent representations." Black, Jackson and Simmons Ins. Brokerage, Inc. v. IBM Corp., 109 Ill.App.3d 132, 134, 64 Ill. Dec. 730, 731-32, 440 N.E.2d 282, 283-84 (1982), quoting Moorman Mfg. Co. v. National Tank Co., 91 Ill.2d 69, 88-89, 61 Ill.Dec. 746, 755, 435 N.E.2d 443, 452 (1982). Thus, under Illinois law, the tort of negligent misrepresentation is very narrowly defined. In order for a plaintiff to state a claim for negligent misrepresentation, "the defendant must be in the business of supplying information." Black, Jackson and Simmons, 109 Ill.App.3d at 135-36, 64 Ill.Dec. at 732, 440 N.E.2d at 284.

In the case at bar, plaintiffs cannot sue for negligent misrepresentation because the defendant, a bank, does not engage in the business of supplying information. This issue was resolved in National Union Fire Ins. Co. of Pittsburgh v. Continental Ill. Corp., 654 F.Supp. 316 (N.D.Ill.1987). In that case, several insurance companies filed a counterclaim against a bank holding company and its officials claiming that they were entitled to indemnification because of the bank's alleged negligent misrepresentations. Id. at 317. The court held that "there is no way in which Continental (or its officials charged with the alleged misrepresentation) can conceivably be characterized as `in the business of supplying information for the guidance of others in their business transactions.'" Id. at 318 (emphasis in original)....