Independent Order of Foresters v. Donald, Lufkin & Jenrette, Inc.

• Decision Date: 07 October 1998
• Docket Number: D,No. 1721,1721
• Citation: 157 F.3d 933
• Court: U.S. Court of Appeals — Second Circuit
• Parties: THE INDEPENDENT ORDER OF FORESTERS, Plaintiff-Appellant, v. DONALD, LUFKIN & JENRETTE, INC., Donaldson, Lufkin & Jenrette Securities Corporation, and Martha Heintz Walsh, as executor of the last will of Daniel Walsh, Defendants-Appellee. ocket 97-9266.

Page 933

157 F.3d 933

THE INDEPENDENT ORDER OF FORESTERS, Plaintiff-Appellant, v. DONALD, LUFKIN & JENRETTE, INC., Donaldson, Lufkin &

Jenrette Securities Corporation, and Martha Heintz

Walsh, as executor of the last will of

Daniel Walsh, Defendants-Appellee.

No. 1721, Docket 97-9266.

United States Court of Appeals,

Second Circuit.

Argued May 4, 1998.

Decided Oct. 7, 1998.

Edward C. Cerny, III, New York City (Lane & Mittendorf) for Plaintiff-Appellant

Michael R. Lazerwitz, Washington, DC (Cleary, Gottlieb, Steen & Hamilton) for Defendant-Appellee, Donald, Lufkin & Jenrette, Inc. and Defendant-Appellee, Donaldson, Lufkin & Jenrette Securities Corporation.

Anthony Mansfield, and Laura M. Franco, New York City (Seward & Kissell) for Defendant-Appellee, Martha Heintz Walsh.

Before: PARKER, FEINBERG, and PHILLIPS ^*, Circuit Judges.

PHILLIPS, Circuit Judge:

In this diversity action, International Order of Foresters ("IOF") sued Donald, Lufkin & Jenrette, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (collectively "DLJ") on multiple New York common law claims growing out of losses suffered by IOF on securities purchased from DLJ. Two sets of claims were alleged in original and amended complaints. The original pleaded set, invoking a number of legal theories, centered on alleged misrepresentations and warranties made by DLJ in negotiations leading to the purchase of the securities. A later added set, also invoking a number of legal theories, centered on the alleged "commercial bribery" by DLJ of a key IOF investment officer who, as intended, counseled purchase of the misrepresented securities in return for "kickbacks" paid him by DLJ. Following discovery and pre-trial motion proceedings, the district court dismissed all of IOF's claims for failure to state a claim under Fed.R.Civ.P. 12(b)(6) or for summary judgment under Fed.R.Civ.P. 56(c).

On this appeal, IOF challenges the district court's order dismissing its claims as a matter of law, various of the court's discovery rulings, and the court's denial of its pre-trial recusal motion. We affirm the court's discretionary discovery and recusal rulings and its dismissal of all the claims other than that based on allegations that DLJ induced IOF's investment officer to breach his fiduciary duty to IOF. As to that claim, we conclude that there are genuine issues of material fact which precluded its dismissal as a matter of law. Accordingly, we vacate that portion of the judgment and remand that claim for further proceedings.

I. BACKGROUND

A. Facts

IOF is a fraternal benefit society located in Ontario, Canada, that issues life, accident and health policies and annuities for and to its members. The district court found, and neither party disputes on appeal, that at the relevant times, IOF was a large commercial entity with over one million members, offices in Canada, the United States, England and Ireland, that engaged in substantial investment transactions under a professionally- staffed investment department. In 1989, its total investments in bonds, stocks and mortgages were valued at $2.032 billion Canadian and during that year its investment department purchased and sold securities of all types in more than 100 transactions that involved over $1 billion in total value based on net sale and purchase prices.

DLJ is located in New York and engages in the business of buying and selling securities, including the issuance, underwriting and marketing of collateralized mortgage obligation derivative securities ("CMOs").

Over an eleven-month period, from May, 1989 to April, 1990, IOF purchased from DLJ a number of CMOs among which were twelve having a total purchase price of over $120 million, ¹ on which IOF suffered losses of over $14 million upon their later disposition.

From the 1960's until his death in 1990, William E. Boothe was Vice President-Investments and Fixed Income Manager of IOF and in that capacity was responsible, subject to the approval of IOF's Investment Board, for selecting appropriate securities, including CMOs for IOF's investment portfolio.

From 1981 until 1989, Daniel Walsh, while employed by L.F. Rothschild & Co., Inc., advised IOF, through Boothe, on investment matters. Following his move in 1989 to DLJ's employ, Walsh continued to advise IOF through Boothe until the latter's death in 1990.

On April 19, 1989, Walsh set up a DLJ trading account which identified IOF as "Master Client Name" but in which Boothe had the sole beneficial interest (the "IOF-Boothe account"). Through this nominal IOF account, Boothe conducted during 1989 a number of profitable transactions with DLJ that were not reported to or known to IOF. Without any notice to IOF, DLJ closed the account on March 26, 1990, seven days after Boothe's death. IOF did not learn of the account's existence until March 17, 1995.

B. Litigation

On April 14, 1995, IOF sued DLJ, alleging breach of warranty, mutual mistake, breach of fiduciary relationship, negligent misrepresentation, and reckless or fraudulent misrepresentation, all in conjunction with the twelve CMO transactions. In due course, DLJ moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b), and to stay discovery pending disposition of the motion to dismiss. On August 23, 1995, a magistrate judge stayed discovery for three months and later extended the stay another three months. On March 13, 1996, the district court entered an order dismissing on the merits all of IOF's claims, except the claim for breach of warranty, and ordering that discovery close on June 3, 1996. On May 31, 1996, having obtained leave of the court, IOF filed an amended complaint, repleading with some modifications all of the original claims except negligent misrepresentation, adding new claims, and joining the estate of Daniel Walsh as a defendant. Specifically, the amended complaint alleged nine repleaded and new claims: (1) breach of warranty; (2) breach of implied covenant of good faith and fair dealing; (3) money had and received; (4) mutual mistake of fact; (5) unilateral mistake of fact; (6) breach of fiduciary relationship; (7) inducing or participating in a breach of fiduciary duty; (8) breach of duty of loyalty; and (9) reckless and fraudulent misrepresentation. As now pleaded, all of these claims invoked one or the other or both of two conceptually distinct legal/factual theories of liability.

One theory rested on core factual allegations that the CMOs did not perform as promised or as falsely represented by DLJ in the sales brochures and a "Derivative Portfolio" that it used in marketing the CMOs. This was the basis, in whole or part, for the claims of breach of warranty, breach of implied covenant of good faith and fair dealing, money had and received, breach of fiduciary duty, unilateral and mutual mistake of fact, and fraudulent misrepresentation.

The other theory rested on core factual allegations that DLJ, through Walsh, "commercially bribed" Boothe by making "kickback" payments to him through the concealed IOF-Boothe account. This was the basis, in whole or part, for the claims of breach of implied covenant of good faith and fair dealing, money had and received, breach of fiduciary duty, inducing breach of fiduciary duty, and breach of duty of loyalty.

The complaint sought damages on the claims for breach of warranty, breach of implied covenant of good faith, money had and received, inducing breach of fiduciary duty, and fraudulent misrepresentation; it sought rescission on the claims of unilateral and mutual mistake of fact; and it sought an accounting and a constructive trust on the claims for breach of fiduciary relationship and breach of duty of loyalty.

After DLJ indicated that it would move to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) or for summary judgment, IOF unsuccessfully sought to extend the then-expired discovery period. IOF then unsuccessfully moved for recusal of the district judge. In June, 1997, IOF renewed its request to reopen discovery, which the district court denied. On September 5, 1997, the district court dismissed all of IOF's claims on DLJ's Rule 12(b)(6), 56(c) motion. ²

This appeal by IOF followed. Walsh's Executor has adopted DLJ's appellee's brief in defending the appeal.

II.

A. Standards of Review

To the extent the district court's dismissal of claims was under Fed.R.Civ.P. 12(b)(6) we review it de novo, taking all well-pleaded factual allegations as true and drawing all reasonable inferences in IOF's favor. See Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir.1996). To the extent it was by summary judgment, we also review de novo to determine whether there is on the record any genuine issue of material fact and if not, whether DLJ was entitled to judgment as a matter of law. See Catlin v. Sobol, 93 F.3d 1112, 1116 (2d Cir.1996). Because neither party takes issue with the district court's stated assumption that all the materials relevant to its decision were properly before it either as integral to the complaint or as properly presented for summary judgment ruling, we proceed on the same assumption in reviewing the dismissal order. We review the discovery and recusal rulings for abuse of discretion. See Apple v. Jewish Hosp. & Med. Ctr., 829 F.2d 326, 333 (2d Cir.1987) (recusal); Goetz v. Crosson, 41 F.3d 800, 805 (2d Cir.1994) (discovery).

B. Dismissal of IOF's Claims

1. Claims based solely on DJL's negotiation conduct

a. Breach of warranty

This claim was that by statements made in its offering brochures ("Brochures") and a later document styled "Derivative Portfolio" ("Portfolio"), DLJ had expressly warranted to IOF that if purchased in recommended combinations, the twelve CMOs in issue would outperform Treasury notes within a specified range of interest rates. It is undisputed that the CMOs did not perform as allegedly warranted.

The district court dismissed this claim on two legal grounds: (1) that the statements alleged to be warranties were only "puffery and expressions...