Mercer v. Jaffe, Snider, Raitt and Heuer, PC

• Decision Date: 03 May 1989
• Docket Number: G88-582 CA1.,No. G88-380 CA1,G88-380 CA1
• Citation: 713 F. Supp. 1019
• Parties: Harold MERCER, et al., Plaintiffs, v. JAFFE, SNIDER, RAITT AND HEUER, P.C., et al., Defendants. Mohamed ABDORABEHE, et al., Plaintiffs, v. JAFFE, SNIDER, RAITT AND HEUER, P.C., et al., Defendants.
• Court: U.S. District Court — Western District of Michigan

713 F. Supp. 1019

Harold MERCER, et al., Plaintiffs, v. JAFFE, SNIDER, RAITT AND HEUER, P.C., et al., Defendants.

Mohamed ABDORABEHE, et al., Plaintiffs, v. JAFFE, SNIDER, RAITT AND HEUER, P.C., et al., Defendants.

Nos. G88-380 CA1, G88-582 CA1.

United States District Court, W.D. Michigan, S.D.

May 3, 1989.

COPYRIGHT MATERIAL OMITTED

Tolley, Fisher & Verwys, P.C. by Thomas F. Koernke, Todd R. Dickinson and James B. Doezema, Grand Rapids, Mich., for plaintiffs.

Morton H. Collins, Collins Einhorn & Farrell, Southfield, Mich., for Jaffe, Snider, Raitt and Heuer, P.C., Peter Sugar and David Warner.

Frank J. Kelley, Atty. Gen. by Ronald W. Emery, Asst. Atty. Gen., Tort Defense Div., Lansing, Mich., for Frederick Hoffecker.

Frank J. Kelley, Atty. Gen. by John D. Walter, Asst. Atty. Gen., Executive Div., Lansing, Mich., for James Karpen.

OPINION

HILLMAN, Chief Judge.

These actions are brought by approximately five hundred investors who lost money in the so-called Diamond Mortgage Corporation/A.J. Obie and Associates securities fraud. Plaintiffs sue two distinct sets of defendants. At all times relevant to these suits, defendants Peter Sugar and David Warner were attorneys at a Detroit law firm, defendant Jaffe, Snider, Raitt & Heuer, P.C. (the Jaffe defendants). Defendants James Karpen and Frederick Hoffecker (the state defendants) were respectively the Director of Enforcement of the Michigan Corporations and Securities Bureau, and the Assistant Attorney General in charge of the Michigan Attorney General's Consumer Protection Division.

The parties agree that these actions are identical in all respects, except they involve different plaintiffs. The court will therefore treat the actions as one for purposes of this opinion. The court's use of the term "complaints" refers to the first amended complaint filed in case number G88-380 CA1, and the amended complaint filed in case number G88-582 CA1.

The matter is before the court on motions to dismiss brought under Fed.R.Civ.P. 12(b)(6) by both the Jaffe defendants and the state defendants. The parties have ably briefed the legal issues, and the court has carefully considered all the arguments and authorities relied upon in the various briefs. In addition to consideration of the motions, the court will also address several matters made material by the status conference held in these cases on March 17, 1989.

I. Statement of Facts

The complaints in these cases contain ten counts. Each count, based upon the general allegations of the complaint and more specific allegations pertinent to that count, attempts to set forth a cause of action under the federal securities statutes, Michigan statutes, or Michigan common law. The court will briefly summarize the complaints' main allegations.

Diamond Mortgage Corporation (Diamond) began doing business as a mortgage broker in 1973. In 1980, Diamond's owners formed Commerce Mortgage Investments, Ltd. (CMI), a real estate investment trust. Around the same time, Diamond's owners gained control of A.J. Obie and Associates (Obie), a securities broker. Obie sold securities for and on behalf of Diamond and CMI.

As early as 1979, public complaints about the Diamond entities' business practices brought those practices under state governmental scrutiny. In October of 1980 the Michigan Corporations and Securities Bureau (MCSB) began administrative proceedings against Obie based on alleged violations of Michigan securities law. In November 1981 the MCSB charged Diamond with similar violations.

As a result of these charges and proceedings, Diamond and the MCSB entered into a November 30, 1981 consent order in which Diamond undertook to correct previous irregularities and bring its operations into compliance with state law. Sugar and Warner represented the Diamond entities' interests at the negotiation of the consent order. A Jaffe, Snider representative approved the order's final form and content.

Despite Diamond's promises, the Diamond entities did not comply with the consent order, and continued to violate state and federal law requirements. For example, the entities ignored regulatory formalities imposed by the consent order and the law, such as the submission of accurate financial documents and sales reports to appropriate state officials.

At the heart of their complaint, plaintiffs allege that the Diamond entities offered or sold securities by means of circulars, advertisements, and other promotional literature which stated that Diamond or CMI securities were fully backed by mortgages, when they were not, or failed to state that mortgages backing some securities were invalid or had been assigned to more than one investor. As a consequence of these fraudulent representations, and in reliance upon the fact or belief that the Diamond entities had been permitted to operate by state officials after investigation and imposition of appropriate restrictions and supervision, numerous investors, including plaintiffs in these cases, were induced to purchase Diamond or CMI securities that are now worthless.

After November 30, 1981, it is alleged Sugar and Warner "took an active role" in furthering the Diamond entities' activities. They had "a general awareness, or were reckless in not knowing," that their contributions furthered the Diamond entities' fraud. Plaintiffs further contend that Sugar and Warner falsely assured state officials that the Diamond entities were in substantial compliance with the consent order. In addition, Sugar and Warner also convinced state officials that any deviation from the consent order by the Diamond entities, such as the failure to submit financial statements to the state, was either immaterial or not harmful to the investing public.

Sugar and Warner additionally represented to state officials that they had diligently examined the Diamond entities, and were satisfied that the entities' practices were truthful and in accordance with applicable law. They in fact "knew or were reckless in not knowing" that they had not performed with due diligence, and that the Diamond entities' activities were illegal.

Finally, it is claimed Sugar and Warner assisted in preparing the Diamond entities' security offering circulars, and took an active role in approving advertising and promotional literature used by the Diamond entities in offering or selling securities. Sugar and Warner "knew or recklessly failed to know" that the securities promotions were false. At no time did either Sugar or Warner disclose his knowledge of the Diamond/Obie fraud to state regulatory officials or the investing public.

Plaintiffs claim that since at least 1980, Karpen and Hoffecker "knew or should have known" of the Diamond entities' violations of the law and the consent order. Karpen allegedly "failed to discover, or discovered and ignored," those violations. After 1981, Hoffecker or his subordinates received investor complaints including information that Diamond entities were selling notes allegedly secured, but in fact not secured, by valid mortgages. Despite Hoffecker's knowledge of the Diamond fraud, plaintiffs assert, he failed to take proper action on those complaints. Had Karpen and Hoffecker demanded compliance with the law and the consent order, plaintiffs believe the Diamond entities would have been shut down by the state.

II. Motions to Dismiss

A. Standard of Review.

The Sixth Circuit recently summarized the standard this court must use in reviewing defendants' Rule 12(b)(6) motions:

A Rule 12(b)(6) motion tests whether a cognizable claim has been pleaded in the complaint. Rule 8(a) sets forth the basic federal pleading requirement that a pleading "shall contain ... a short and plain statement of the claim showing that the pleader is entitled to relief." The familiar standard for reviewing dismissals under Rule 12(b)(6) is that "the factual allegations in the complaint must be regarded as true. The claim should not be dismissed unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Windsor v. The Tennessean, 719 F.2d 155, 158 (6th Cir.1983) (citing Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 86 S.Ct. 347, 15 L.Ed.2d 247 (1965), and Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)), cert. denied, 469 U.S. 826, 105 S.Ct. 105, 83 L.Ed.2d 50 (1984).

Although this standard for Rule 12(b)(6) dismissals is quite liberal, more than bare assertions of legal conclusions is ordinarily required to satisfy federal notice pleading requirements. 5 C. Wright & A. Miller, Federal Practice & Procedure § 1357 at 596 (1969). "In practice, `a ... complaint must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory.'" Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir. 1984) (quoting In re Plywood Antitrust Litigation, 655 F.2d 627, 641 (5th Cir. 1981), cert. dismissed, 462 U.S. 1125, 103 S.Ct. 3100, 77 L.Ed.2d 1358 (1983), cert. denied, 470 U.S. 1054, 105 S.Ct. 1758, 84 L.Ed.2d 821 (1985); see also Sutliff, Inc. v. Donovan Cos., 727 F.2d 648, 654 (7th Cir.1984); 5 C. Wright & A. Miller, Federal Practice & Procedure § 1216 at 121-23 (1969). As the First Circuit stated,

we are not holding the pleader to an impossibly high standard; we recognize the policies behind rule 8 and the concept of notice pleading. A plaintiff will not be thrown out of court for failing to plead facts in support of every arcane element of his claim. But when a complaint omits facts that, if they existed, would clearly dominate the case, it seems fair to assume that those facts do not exist.

O'Brien v. DiGrazia, 544 F.2d 543, 546 n. 3 (1st Cir.1976) cert. denied, 431 U.S. 914, 97 S.Ct. 2173, 53 L.Ed.2d 223 (1977).

Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436-37 (6th Cir.1988).

B. Jaffe Defendants.

The Jaffe defendants point...