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WANETICK v. MEL'S OF MODESTO

December 15, 1992

LAWRENCE WANETICK, Plaintiff,
v.
MEL'S OF MODESTO, INC., a California Corporation, DAVID MELVIN WEISS, MICHAEL WEISS, LAWRENCE M. SPERGEL, M.D., ALLAN BEAR, GREGORY DOLINAJEC, SALLY WEISS, RAFAEL INVESTMENT TRUST, MONTGOMERY TRANSFER, JEFFREY M. WEISS, MARK S. WEISSMAN, WEISS & WEISSMAN, INC., a California corporation; FRED WATSON, MOREY DUNGOTT; MICHAEL GIANELLI; ANDREW H. WILSON, Defendants.



The opinion of the court was delivered by: STANLEY A. WEIGEL

 Summary of Decision

 Plaintiff has sued Defendants for securities fraud in conjunction with his investment in Original Mel's Inc., a restaurant franchisor, and Mel's of Modesto, a partnership which franchises an Original Mel's restaurant in Modesto, California. Defendants Gregory Dolinajec, Jeffrey Weiss, Mark Weissman, and Weiss & Weissman, Inc. move to dismiss the complaint for failure to state fraud with particularity, lack of Plaintiff standing, and failure to state a claim upon which relief can be granted. Defendants Andrew Wilson and Michael Gianelli move to dismiss claims alleged against them for failure to state a claim upon which relief can be granted and lack of standing. Plaintiff moves for leave to file a Third Amended Complaint.

 The court dismisses without prejudice Counts I, II, III, IV, V, VI, VII, VIII and XII of Plaintiff's Second Amended Complaint. It further dismisses with prejudice Counts IX, X, XI and XIII. Plaintiff's motion for leave to amend is granted.

 I. Background

 Plaintiff is a doctor who invested in Original Mel's Inc., a restaurant franchisor, and Mel's of Modesto, a partnership which franchises an Original Mel's restaurant in Modesto, California. Sometime before October 1, 1990, Plaintiff met Defendant Mel Weiss. Weiss made oral representations to Plaintiff about the profitability of Original Mel's, Inc., and induced Plaintiff to invest. Plaintiff purchased a 20% interest in Mel's of Modesto partnership for $ 120,000.00 and purchased stock in Original Mel's, Inc. for $ 265,000.00. On May 10, 1991, eight days after Plaintiff made his last investment in Original Mel's, Inc., Original Mel's, Inc. instituted Chapter 11 bankruptcy proceedings in San Francisco, California.

 Plaintiff filed a complaint which divides allegations into Group I and Group II Defendants. Plaintiff alleges that Group I Defendants individually and as a group, misrepresented the financial stability and profitability of Original Mel's, Inc. and Mel's of Modesto, failed to disclose certain material facts to Plaintiff, and failed to file federal or state registration statements for the offerings of the limited partnership interest in Mel's of Modesto and the common stock of Original Mel's, Inc. Plaintiff further states that members of the lawfirm of Weiss & Weissman, fraudulently induced him to sign a limited partnership agreement which limited Plaintiff's rights.

 Based on these allegations Plaintiff brings thirteen causes of action against the Group I Defendants. Count I alleges failure to register securities in violation of § 12(1) of the Securities Act of 1933. Count II alleges omission of material facts in violation of § 10(b) and rule 10(b)-5 of the Securities Exchange Act of 1934. Count III alleges violation of §§ 1961(a) and (d) and §§ 1962 (c) and (d) of the Racketeer Influenced and Corrupt Organizations Act (RICO). Count IV alleges failure to qualify securities in violation of Cal. Corp. Code § 25110 et seq. Count V alleges dissemination of communications containing false statements and omissions in violation of Cal. Corp. Code § 25401. Count VI alleges insider trading in violation of Cal. Corp. Code Section § 25402. Count VII alleges conspiracy to defraud. Count VIII alleges negligent misrepresentation. Counts IX and X allege intentional and negligent infliction of emotional distress, respectively. Count XI alleges conversion and requests imposition of constructive trust. Count XII alleges common-law fraud. Count XIII alleges professional negligence.

 Plaintiff alleges that Group II Defendants improperly accepted payments for services rendered to Mel Weiss and to Original Mel's, Inc. drawn on funds belonging to the Mel's of Modesto partnership. Group II Defendants Wilson and Gianelli are charged in Counts IX, X and XI with intentional infliction of emotional distress, negligent infliction of emotional distress and conversion.

 Group I Defendants Gregory Dolinajec, Jeffrey Weiss, Mark S. Weissman, and Weiss & Weissman move to dismiss Plaintiff's complaint on several grounds. They allege that Counts I, II, III, IV, V, VI, VII, VIII and XII fail to comply with the particularity requirements of Fed. R. Civ. P. 9(b). They further move to dismiss Counts I, IV, V and VI with prejudice, alleging that Defendants are not proper parties for suit under the relevant statutory provisions. They move to dismiss Counts III, VII, IX, X and XIII with prejudice for failure to state a claim upon which relief can be granted. They further move to dismiss Count XI on the grounds that Plaintiff lacks standing to sue.

 Group II Defendants, Andrew Wilson and Michael Gianelli, also move to dismiss Count XI, alleging that Plaintiff lacks standing to sue. They further move to dismiss Counts IX and X for failure to state a claim on which relief can be granted.

 Plaintiff moves for leave to file a Third Amended Complaint.

 II. Discussion

 A. Dismissal Under Rule 9(b)

 To survive a motion to dismiss, a complaint alleging fraud must satisfy the particularity requirement of Fed. R. Civ. P. 9(b). Allegations of fraud must be pled with specificity to "give defendants notice of the particular conduct alleged to constitute the fraud charge . . .," Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985), and to "prohibit a plaintiff from unilaterally imposing upon ...


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