River North Equity LLC v. MPhase Technologies, Inc.
Filing
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MEMORANDUM Opinion and Order; Signed by the Honorable Marvin E. Aspen on 3/1/2017: Status hearing of 3/16/2017 is stricken. Defendant's motion to dismiss 5 is granted. Case dismissed without prejudice. Civil case terminated. Mailed notice(mad, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
RIVER NORTH EQUITY LLC,
Plaintiff,
v.
MPHASE TECHNOLOGIES, INC.,
Defendant.
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Case No. 16 C 10986
Hon. Marvin E. Aspen
MEMORANDUM OPINION AND ORDER
MARVIN E. ASPEN, District Judge:
Presently before us is Defendant mPhase Technologies, Inc.’s motion to dismiss, or in the
alternative, to change venue. (Mot. (Dkt. No. 5).) Defendant removed this action pursuant to
28 U.S.C. §§ 1331, 1332, 1441, and 1446 from the Eighteenth Judicial Circuit, DuPage County,
Illinois on November 30, 2016. Plaintiff has not entered an appearance in this removal action,
nor has it responded to Defendant’s motion. For the reasons that follow, Defendant’s motion to
dismiss is granted and Plaintiff’s complaint is dismissed, without prejudice.
BACKGROUND
Plaintiff River North Equity LLC filed a complaint in DuPage County, Illinois on
July 26, 2016. (Notice of Removal (Dkt. No. 1) ¶ 1.) Plaintiff asserts claims for violations of
Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b–5
promulgated thereunder, 17 C.F.R. § 240.10b-5 (Count I); collection of $400,000 debt allegedly
owed on two delinquent promissory notes (Count II); breach of promissory note
(Counts III and IV); breach of contract (Count V–11); and common law fraud (Count V–2).
(Compl. (Dkt. No. 1–4).)
On or about December 15, 2009, Defendant made two promissory notes (the “Notes”) in
favor of non-party JMJ Financial (“JMJ”) to secure repayment of certain loans made by JMJ to
Defendant. (Compl. ¶ 5.) The first Note was in the principal amount of $1.5 million, as
consideration for a $300,000 loan. (Id.) The second Note was in the principal amount of
$1.2 million, as consideration for a $100,000 loan. (Id. ¶ 6.) Both Notes matured on
December 15, 2012. (Id. ¶¶ 5–6.) Plaintiff alleges that Defendant “concealed material
information concerning its true financial status from JMJ Financial in an effort to induce JMJ to
purchase the First Note.” (Id. ¶ 7.) Defendant was in material default of its obligations, which
Plaintiff alleges was only disclosed in later filings Defendant made with the Securities and
Exchange Commission. (Id.) Plaintiff alleges Defendant sold both Notes to JMJ with the intent
to never repay the obligations. (Id.) Thereafter, on December 22, 2014, JMJ entered into a
Convertible Note Purchase Agreement with Plaintiff pursuant to which Plaintiff agreed to
purchase the Notes. (Id. ¶ 8.) At that time, both Notes were in default for Defendant’s failure to
satisfy the balance at maturity. (Id.) At the time Plaintiff filed its complaint on July 26, 2016, it
alleges Defendant continued to be in material default for “failure to pay sums due and owing
under each Note when they became due.” (Id. ¶ 9.)
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Plaintiff’s complaint contains two counts labeled “Count V.” Consistent with Defendant’s
motion, we will refer to the breach of contract claim as Count V–1 and to the common law fraud
claim as Count V–2.
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Defendant was not served and did not waive service of process in the state court case, and
no proceedings have transpired in the state court case to date. (Notice of Removal ¶¶ 2–3.)
After removing the case, Defendant moved to dismiss Count I and V–2 for failure to state a
claim under Federal Rule of Civil Procedure 12(b)(6). Defendant also moves to dismiss Counts
II through V–2 for lack of personal jurisdiction pursuant to Rule 12(b)(2), because Defendant
does not have the requisite minimum contacts necessary for it to reasonably anticipate being
haled into court in Illinois. In the alternative, Defendant moves for an order transferring this
matter to the District of New Jersey pursuant to 28 U.S.C. § 1404(a). Defendant contends “the
majority (if not all) of the evidence and proofs necessary for the disposition of the case are in
New Jersey,” and “both the private and public interests, the convenience of the parties, and the
interests of justice favor transferring the matter to New Jersey.” (Mot. at 4.)
Plaintiff was served with notice of the removal on December 1, 2016. (Dkt. No. 4.)
Defendant provided notice of the motion to dismiss to Plaintiff on December 8, 2016.
(Dkt. No. 6.) On December 14, 2016, we ordered Plaintiff to respond to the motion by
January 5, 2017, and allowed Defendant to file a reply by January 17, 2017. (Dkt. No. 7.)
On January 17, 2017, with no response having been filed, Defendant filed its reply brief.
(Dkt. No. 8.)
ANALYSIS
Plaintiff’s failure to respond or file anything in this court for nearly three months may be
grounds for dismissal for failure to prosecute under Rule 41(b). Regardless, for the reasons that
follow, Defendant’s motion to dismiss for failure to state a claim is well-supported. Taking
Plaintiff’s allegations as true and construing all facts in its favor, Plaintiff’s Count I and V–2 fail
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to state a claim upon which relief may be granted, and the remainder of Plaintiff’s complaint
must be dismissed for lack of personal jurisdiction. Because we find dismissal of Plaintiff’s
claims is appropriate under Rule 12(b)(2) and Rule 12(b)(6), we decline to address Defendant’s
alternative argument that this matter should be transferred to the District of New Jersey.
I.
MOTION TO DISMISS FRAUD CLAIMS
Defendant first argues Counts I and V–2, which assert fraud claims, do not plead
fraudulent conduct with the requisite specificity under Federal Rule of Civil Procedure 9(b).
In addition, Defendant contends that Count I, which alleges a violation of Section 10(b) of the
Securities Exchange Act, fails for the additional reason that it does not meet the even higher
pleading standards under the Private Securities Litigation Reform Act of 1995 (“PSLRA”),
15 U.S.C. § 78u–4(b).
“The purpose of the motion to dismiss is to test the sufficiency of the complaint, not
decide the merits.” Gibson v. City of Chi., 910 F.2d 1510, 1520 (7th Cir. 1990) (internal
quotation marks omitted) (quoting Triad Assocs., Inc. v. Chi. Hous. Auth., 892 F.2d 583, 586
(7th Cir. 1989)). Dismissal pursuant to Rule 12(b)(6) is proper only if a complaint lacks enough
facts “to state a claim [for] relief that is plausible on its face.” Ashcroft v. Iqbal,
556 U.S. 662, 678, 129 S. Ct. 1937, 1949–50 (2009) (internal quotations omitted) (quoting
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 1974 (2007));
accord. Killingsworth v. HSBC Bank Nev., N.A., 507 F.3d 614, 618–19 (7th Cir. 2007). The
plausibility standard “is not akin to a ‘probability requirement,’ but it asks for more than a sheer
possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678, 129 S. Ct. at 1949
(quoting Twombly, 550 U.S. at 555, 127 S. Ct. at 1964–65). That is, while the plaintiff need not
plead “detailed factual allegations,” the complaint must allege facts sufficient “to raise a right to
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relief above the speculative level.” Twombly, 550 U.S. at 555, 127 S. Ct. at 1964–65. We accept
as true all well-pleaded factual allegations and draw all reasonable inferences in favor of the
plaintiff. White v. Keely, 814 F.3d 883, 887–88 (7th Cir. 2016); Agnew v. Nat’l Collegiate
Athletic Ass’n, 683 F.3d 328, 334 (7th Cir. 2012) (“In reviewing the sufficiency of a complaint,
we must accept all well pled facts as true and draw all permissible inferences in favor of the
plaintiff.”).
A heightened pleading standard applies when a complaint alleges fraud, requiring a party
to “state with particularity the circumstances constituting the fraud or mistake.”
Fed. R. Civ. P. 9(b); see also Camasta v. Jos. A. Bank Clothiers, Inc., 761 F.3d 732, 737
(7th Cir. 2014). A complaint setting forth fraud claims “must describe the ‘who, what, when,
where, and how’ of the fraud—‘the first paragraph of any newspaper story.’” United States
ex rel. Presser v. Acacia Mental Health Clinic, LLC, 836 F.3d 770, 776 (7th Cir. 2016)
(quoting United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 853 (7th Cir. 2009));
accord. Camasta, 761 F.3d at 737 (a plaintiff must state “the identity of the person making the
misrepresentation, the time, place and content of the misrepresentation, and the method by which
the misrepresentation was communicated to the plaintiff” (internal quotations omitted)). While a
plaintiff need not provide “precise details” and we do not “take an overly rigid view” of the
allegations, a plaintiff must nevertheless “use some . . . means of injecting precision and some
measure of substantiation into their allegations of fraud.” Presser, 836 F.3d at 776 (alteration in
original) (citation omitted).
In addition to the burden imposed by Rule 9(b), where a Plaintiff alleges securities fraud
under Section 10(b), such claims are subject to the pleading standards set forth in the PSLRA.
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313–14, 127 S. Ct. 2499, 2504
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(2007). To prevail on Count I, Plaintiff must prove: “(1) a material misrepresentation or
omission by the defendant in connection with the purchase or sale of securities; (2) scienter;
(3) reliance; (4) economic loss; and (5) loss causation.” AnchorBank, FSB v. Hofer,
649 F.3d 610, 617 (7th Cir. 2011). Under the PSLRA, where a plaintiff alleges that the
defendant “(A) made an untrue statement of a material fact; or (B) omitted to state a material
fact,” the plaintiff must “specify each statement alleged to have been misleading, the reason or
reasons why the statement is misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint shall state with particularity all facts
on which that belief is formed.” 15 U.S.C. § 78u–4(b)(1). Further, the plaintiff must “state with
particularity facts giving rise to a strong inference that the defendant acted with the requisite
state of mind.” 15 U.S.C. § 78u–4(b)(2). Pursuant to the PSLRA, “the court shall, on the motion
of any defendant, dismiss the complaint if the requirements of paragraphs (1) and
(2) [of § 78u–4(b)] are not met.” 15 U.S.C. § 78u–4(b)(3)(A).
Here, Plaintiff’s Count I and Count V–2 fail to state with particularity the circumstances
constituting fraud under Rule 9(b). Count I additionally falls short of meeting the higher PSLRA
pleading standards. Both claims are based on the same broad, non-specific assertions regarding
omissions and misrepresentations Defendant allegedly made to Plaintiff and to JMJ:
Defendant “concealed material information concerning its true financial status from
JMJ Financial in an effort to induce JMJ to purchase the First Note,” (Compl. ¶ 7);
Defendant concealed from JMJ that it was “in material default” of “a number of its
obligations which it would later disclose in filings made with the S.E.C.,” (id.);
Defendant sold both Notes to JMJ “with the intent to never repay either obligation,”
(id.);
With respect to Plaintiff, Defendant “employed fraudulent misrepresentations,
artifices of fraud, and material omissions as a means to solicit the sale of the Notes
to [Plaintiff],” including (1) “[d]evelop[ing], deriv[ing] and concoct[ing] the sale of
the Notes to [Plaintiff] with knowledge and intent that it would never repay the
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Notes despite assertions as to the same”; and (2) “[w]illfully conceal[ing] and
misrepresent[ing] its financial condition and the fact that it was generally unable to
pay its debts as they came due,” (id. ¶¶ 12, 46);
Defendant knew its statements and representations were “materially false,
misleading, or otherwise failed to contain adverse material information” at the time
they were made in an effort to persuade Plaintiff to transact, (id. ¶¶ 13, 16, 47, 48).
Plaintiff has painted the alleged misrepresentations and fraudulent omissions in broad strokes
and recited in conclusory fashion the elements of a fraud claim. For example, Plaintiff does not
state what “material information” concerning its financial status was concealed from JMJ, or
why such concealment was false or misleading. Plaintiff fails to indicate what “statements” or
“fraudulent misrepresentations” were made, what was said, how they were communicated, or
when they took place. Plaintiff alleges no connection between itself and Defendant. Further,
despite alleging Defendant “was in material default of a number of its obligations,” Plaintiff does
not specify what obligations it refers to or why “later disclos[ure]” to the SEC constitutes fraud
or concealment.
Nor has Plaintiff plausibly alleged reliance, a necessary element of both its common law
and securities law fraud claims. AnchorBank, 649 F.3d at 617; Doe v. Dilling,
228 Ill. 2d 324, 342–43, 888 N.E.2d 24, 35–36 (Ill. 2008). Plaintiff asserts that it relied on
Defendant’s “fraudulent misrepresentations, artifices of fraud, and material omissions” to JMJ,
but as Defendant points out, the assignment entered into between Plaintiff and JMJ plainly
contradicts these allegations. (Mot. at 8.) The assignment agreement states:
[Plaintiff] is aware that the Notes are non-performing and in default. [Plaintiff] is
aware that [Defendant is a] troubled, under-capitalized, development stage
compan[y] with little or no revenue and ongoing losses that are likely to continue.
[Plaintiff] is aware that this is a risky investment and that [Plaintiff] may lose part
or all of its investment.
(Compl., Ex. C at PageID #: 35.) The assignment agreement further states that “due to adverse
market conditions, a large number of the convertible notes have become non-performing, and . . .
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[JMJ] does not have the capacity to manage distressed investments or to pursue collection efforts
against non-performing assets.” (Id.) Contrary to Plaintiff’s allegations, at the time it purchased
the Notes, it acknowledged that it was aware that the Notes were in default, it knew Defendant
was a “troubled, under-capitalized, development stage compan[y] with little or no revenue and
ongoing losses that are likely to continue,” and that it was making “a risky investment.” (Id.) In
light of this language in the assignment agreement, we fail to see how Plaintiff can prove its
allegations that Defendant “concealed material information concerning its true financial status
from JMJ Financial” or Plaintiff; what “fraudulent misrepresentations, artifices of fraud, and
material omissions” Defendant used; or how Defendant concealed its “financial condition and
the fact that it was generally unable to pay its debts as they came due.” (Compl. ¶¶ 7, 12, 46.)
Furthermore, Count I fails to “state with particularity the facts—known to the speaker at
the time—that render the statement false or misleading” as required under the PSLRA.
Constr. Workers Pension Fund-Lake Cnty. and Vicinity v. Navistar Int’l Corp.,
114 F. Supp. 3d 633, 651 (N.D. Ill. 2015). “When alleging that Defendants omitted something,
plaintiffs must point to a specific statement that is made misleading by [an] omission, and offer
specific, contradictory information known to [Defendants] sufficient to establish that
[Defendants] made any misleading statements.” Id. (internal quotations omitted)). For the
above-stated reasons, Plaintiff’s complaint lacks the necessary details regarding the alleged
misrepresentations or omissions.
In addition to Plaintiff’s failure to allege specific facts or information showing why the
statements made or omitted were false or misleading, Count I must be dismissed because
Plaintiff has insufficiently pled scienter as required by the PSLRA. To establish scienter requires
showing “a mental state embracing intent to deceive, manipulate, or defraud.” Tellabs,
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551 U.S. at 319, 127 S. Ct. at 2507 (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193,
96 S. Ct. 1375, 1381 (1976)). “Conclusory allegations that defendants acted with knowledge that
the representations were false and misleading do not satisfy the PSLRA’s pleading
requirements.” Premier Capital Mgmt., L.L.C. v. Cohen, No. 02 C 5368, 2003 WL 21960357,
at *5 (N.D. Ill. Aug. 15, 2003). “To find scienter, the inference must be more than merely
‘reasonable or permissible,’ it must be ‘cogent and at least as compelling as any opposing
inference one could draw from the facts alleged.’” Greer v. Advanced Equities, Inc.,
683 F. Supp. 2d 761, 773 (N.D. Ill. 2010) (quoting Tellabs, 551 U.S. at 324, 127 S. Ct. at 2510).
Here, Plaintiff has not alleged any non-conclusory facts giving rise to a strong inference that
Defendant made any statement or omission knowingly with intent to deceive, manipulate, or
defraud.
Accordingly, after considering Defendant’s motion and independently reviewing the
allegations in the complaint, we agree Plaintiff has failed to state a plausible fraud claim, and
Counts I and V–2 must be dismissed, without prejudice. As the dismissal is without prejudice at
this point, we decline Defendant’s request that we make findings regarding compliance with the
PSLRA pursuant to 15 U.S.C. § 78u–4(c)(1).
II.
MOTION TO DISMISS FOR LACK OF PERSONAL JURISDICTION
Defendant additionally argues Count V–2, along with Counts II through V–1, must be
dismissed for lack of personal jurisdiction. (Mot. at 9.) Specifically, Defendant argues it has
insufficient contacts with Illinois such that we may not exercise specific jurisdiction over it. (Id.)
Plaintiff alleges we have specific personal jurisdiction over Defendant pursuant to Illinois’ long
arm statute, 735 ILCS 5/2–209, “as the facts and circumstances which form the basis of the
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causes of action alleged herein arise from a contract substantially related to the State of Illinois
and a breach of fiduciary duty within the State of Illinois.” (Compl. ¶ 3.)
Plaintiff bears the burden of establishing that personal jurisdiction exists.
N. Grain Mktg., LLC v. Greving, 743 F.3d 487, 491 (7th Cir. 2014); Purdue Research
Found. v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003). In determining whether
personal jurisdiction exists, we accept all well-pleaded allegations in the complaint as true.
Felland v. Clifton, 682 F.3d 665, 672 (7th Cir. 2012). “[O]nce the defendant has submitted
affidavits or other evidence in opposition to the exercise of jurisdiction, the plaintiff must go
beyond the pleadings and submit affirmative evidence supporting the exercise of jurisdiction.”
Purdue Research Found., 338 F.3d at 783. We resolve factual disputes in the plaintiff’s favor,
but unrefuted assertions by the defendant will be accepted as true. GCIU-Emp’r Ret. Fund v.
Goldfarb Corp., 565 F.3d 1018, 1020 n.1 (7th Cir. 2009).
A federal court has personal jurisdiction over a plaintiff’s state law claims if an Illinois
court would have jurisdiction. Purdue Research, 338 F.3d at 779; Fed. R. Civ. P. 4(k)(1)(A)
(in order to establish personal jurisdiction, the defendant must be “subject to the jurisdiction of a
court of general jurisdiction in the state where the district court is located”). The Illinois
long-arm statute governs the exercise of personal jurisdiction by an Illinois court over a
nonresident. Russell v. SNFA, 2013 IL 113909, ¶ 29, 987 N.E.2d 778, 784 (Ill. 2013). “A state’s
exercise of personal jurisdiction is also subject to the demands of the Fourteenth Amendment’s
due process clause. Because Illinois permits personal jurisdiction if it would be authorized by
either the Illinois Constitution or the United States Constitution, the state statutory and federal
constitutional requirements merge.” uBID, Inc. v. GoDaddy Grp., Inc., 623 F.3d 421, 425
(7th Cir. 2010); accord. N. Grain Mktg., 743 F.3d at 492 (“Thus, the statutory question merges
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with the constitutional one—if Illinois constitutionally may exercise personal jurisdiction over a
defendant, its long-arm statute will enable it to do so.”). “A forum state’s courts may not
exercise personal jurisdiction over a nonconsenting, out-of-state defendant unless the defendant
has ‘certain minimum contacts with it such that the maintenance of the suit does not offend
traditional notions of fair play and substantial justice.’” N. Grain Mktg., 743 F.3d at 492
(quoting Int’l Shoe Co. v. State of Wash., Office of Unemployment Comp. & Placement,
326 U.S. 310, 316, 66 S. Ct. 154, 158 (1945)).
Defendant must have purposely established minimum contacts with the forum state “such
that he should reasonably anticipate being haled into court there.” Burger King Corp. v.
Rudzewicz, 471 U.S. 462, 474, 105 S. Ct. 2174, 2183 (1985). To support the exercise of specific
personal jurisdiction “the defendant’s suit-related conduct must create a substantial connection
with the forum State.” Walden v. Fiore, ––– U.S. –––, 134 S. Ct. 1115, 1121 (2014);
see also Tamburo v. Dworkin, 601 F.3d 693, 702 (7th Cir. 2010) (explaining the defendant’s
contacts with the forum state must “directly relate to the challenged conduct or transaction” and
we must evaluate specific personal jurisdiction “by reference to the particular conduct underlying
the claims made in the lawsuit”); ABN AMRO, Inc. v. Capital Int’l Ltd., 595 F. Supp. 2d 805, 820
(N.D. Ill. 2008) (“The defendant, rather than the plaintiff or a third party, must create the
contacts.”). “Specific personal jurisdiction is appropriate where (1) the defendant has
purposefully directed his activities at the forum state or purposefully availed himself of the
privilege of conducting business in that state, and (2) the alleged injury arises out of the
defendant’s forum-related activities.” Tamburo, 601 F.3d at 702 (citing Burger King Corp.,
471 U.S. at 472, 105 S. Ct. at 2182).
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In support of its motion to dismiss Counts II through V–2, Defendant submitted the
affidavit of Martin S. Smiley, Executive Vice President, Chief Financial Officer, and General
Counsel for Defendant. (Smiley Aff. (Dkt. No. 5–1) ¶ 1.) Smiley attests Defendant is a New
Jersey corporation with principal places of business in New Jersey and Connecticut. (Id. ¶ 2.)
Defendant “does not, and has not, conducted business within Illinois, and neither Defendant nor
any of its agents were involved in the sale of the promissory notes from JMJ to Plaintiff.
(Id. ¶¶ 3–4.) All of Plaintiff’s common law claims in Counts II through VI relate to Defendant’s
alleged nonpayment of debts in connection with the promissory notes. However, while Plaintiff
is an Illinois company, prior to receiving notice of this litigation, “neither Defendant nor any of
its agents had any involvement, communication, or interaction with any agent of Plaintiff,” and
Defendant “has not tendered any payments to Plaintiff” in connection with the Notes, or
otherwise. (Id. ¶¶ 5–6.) Rather, Defendant argues it was not a party to the transaction between
Plaintiff and JMJ, and it has not transacted with Plaintiff “or any citizen or resident of Illinois” in
connection with the Notes. (Mot. at 11.) Nor do the Notes themselves “contemplate any action
related to Illinois.” (Id.)
Plaintiff’s conclusory allegation that the “facts and circumstances which form the basis of
the causes of action alleged [in the complaint] arise from a contract substantially related to the
State of Illinois and a breach of fiduciary duty within the State of Illinois” is refuted by
Defendant’s affidavit, which presents uncontested evidence to the contrary. Plaintiff’s complaint
contains no other allegations establishing Defendant had any contacts with Illinois whatsoever.
Accordingly, based on Defendant’s affidavit challenging personal jurisdiction and its unrefuted
assertions, there is insufficient evidence supporting the exercise of personal jurisdiction, and
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Counts II through V–2 must be dismissed, without prejudice. Purdue Research Found.,
338 F.3d at 782–83; GCIU-Emp’r Ret. Fund, 565 F.3d at 1020 n.1.
CONCLUSION
For the foregoing reasons, Plaintiff’s complaint is dismissed in its entirety, without
prejudice. To the extent Plaintiff can amend the complaint consistent with this Order, it may do
so on or before March 24, 2017 or the dismissal will be with prejudice. It is so ordered.
___________________________________
Honorable Marvin E. Aspen
United States District Judge
Dated: March 1, 2017
Chicago, Illinois
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