Bank of Vermont v. Lyndonville Sav. Bank & Trust Co.

• Decision Date: 29 November 1995
• Docket Number: Civ. No. 1:94-CV-228.
• Citation: 906 F. Supp. 221
• Parties: BANK OF VERMONT v. LYNDONVILLE SAVINGS BANK & TRUST COMPANY, Roger Lussier, George Hopkins, John Campbell, Arthur Elliott, Pearl Baird and Doug Nelson.
• Court: U.S. District Court — District of Vermont

906 F. Supp. 221

BANK OF VERMONT v. LYNDONVILLE SAVINGS BANK & TRUST COMPANY, Roger Lussier, George Hopkins, John Campbell, Arthur Elliott, Pearl Baird and Doug Nelson.

Civ. No. 1:94-CV-228.

United States District Court, D. Vermont.

November 29, 1995.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Deborah Anne Weiss, Burlington, VT, for plaintiff.

John C. Gravel, Burlington, VT, for Lyndonville Savings Bank.

Robert R. Bent, St. Johnsbury, VT, for George B. Hopkins and Pearl G. Baird.

Brian J. Grearson, Berlin, VT, for John Campbell.

Richard I. Rubin, Barre, VT, for Arthur B. Elliott.

Oreste V. Valsangiacomo, Jr., Barre, VT, for Douglas Nelson.

RULING ON DEFENDANTS' MOTIONS TO DISMISS PLAINTIFF'S AMENDED COMPLAINT AND PLAINTIFF'S MOTION TO DISMISS COUNTERCLAIM AND SCANDALOUS MATTER AND FOR LEAVE TO AMEND ITS COMPLAINT

(Papers 33, 36, 37, 39, 54, 55, 56, 58)

MURTHA, Chief Judge.

Plaintiff Bank of Vermont (hereinafter "BOV") filed this complaint on August 1, 1994. See Amended Complaint (paper 9). In Count I of the complaint, BOV alleges defendants fraudulently concealed facts regarding an ongoing check-kiting scheme. Id. ¶¶ 19-25. In Count II of the complaint, plaintiff alleges defendants made false representations concerning the nature of a particular bank account at BOV and certain checks deposited in that account. Id. ¶¶ 26-32. In Count III, plaintiff alleges defendants wrongfully converted funds belonging to BOV. Id. ¶¶ 33-37. In Count IV, BOV alleges violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-68. Id. at ¶¶ 38-43.

Plaintiff seeks recovery of damages caused by defendants' conduct totalling $2,948,255.52. See Amended Complaint ¶¶ 24, 31, 36. Plaintiff is also seeking recovery of attorney's and accountant fees and discovery expenses, see Amended Complaint ¶¶ 23, 30, 35, as well as treble and punitive pursuant to RICO. See Amended Complaint at 10.

Defendants Lyndonville Savings Bank, Roger Lussier, John Campbell, and Arthur Elliot have moved to dismiss the complaint for failure to properly plead fraud according to Fed.R.Civ.P. 9(b). Defendants George Hopkins and Pearl Baird joined Lyndonville Savings Bank in its motion. See Notice of Joinder in Motion (paper 58). Plaintiff has moved to dismiss a counterclaim filed by Roger Lussier and to strike scandalous matter. See Motion to Dismiss Counterclaim and Strike Scandalous Matter (paper 37). The counterclaim charges BOV, BOV's attorneys, and Carl Kelton with racketeering and fraud. See Defendant's Answer Presenting Defenses and Counterclaim (paper 26) at 4.

Defendants' motions to dismiss plaintiff's complaint pursuant to Fed.R.Civ.P. 9(b) are GRANTED. Plaintiff's motions for leave to amend are GRANTED. Plaintiff's motion to dismiss Lussier's counterclaim and motion to strike scandalous matter is GRANTED in part and DENIED in part.

I. BACKGROUND

Solely for the purpose of deciding the instant motions, the Court finds the following facts: Defendant Lyndonville Savings Bank and Trust Company is a banking institution organized and with its principle place of business in Vermont. Defendant Roger Lussier was President and Chairman of the Board of Directors of Lyndonville Savings. Defendants George Hopkins, John Campbell, Arthur Elliott, Pearl Baird, and Doug Nelson were members of the Board of Directors of Lyndonville Savings. Plaintiff BOV is a banking institution organized and with its principle place of business in Vermont.

According to plaintiff's amended complaint, Carl E. Kelton held a checking account at Lyndonville Savings Bank in the name of Charlie Kelton's Chevrolet Oldsmobile, Inc. Kelton used this account to operate a criminal check-kiting scheme between Lyndonville and other banks in the area. The scheme involved drawing checks against insufficient, uncollected, or non-existent funds to create false or fraudulent account balances. See Amended Complaint ¶¶ 5, 6.

During the operation of the alleged scheme, Mr. Kelton opened a checking account at Bank of Vermont in the name of Charlie Kelton's Chrysler Plymouth Dodge of Brattleboro, Inc. BOV alleges Kelton claimed the purpose of the account was business, when, in fact, it was to kite checks. See Amended Complaint ¶ 10.

Plaintiff alleges defendants assisted Kelton in the execution of the check-kite. According to plaintiff, defendants "knowingly concealed and disguised the existence of the check-kiting scheme, failed to report it to bank regulators, and intentionally allowed the amount of money in the kite to increase." Amended Complaint ¶ 7. Plaintiff alleges defendants arranged for Lyndonville Savings to charge Kelton interest for the use of Lyndonville funds to cover overdrafts created by the kite. According to plaintiff, in July 1988, defendants arranged for the kite to end, causing BOV approximately $3 million in overdraft losses. See Amended Complaint ¶ 12.

II. DISCUSSION

When reviewing a complaint for failure to plead fraud with particularity, plaintiff's allegations must be taken as true. See, e.g., Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir.1986). "The court must read the complaint generously and draw all inferences in favor of the pleader." E.g. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir.1989).

Fed.R.Civ.P. 9(b) states: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The Second Circuit has adopted a strictly enforced pleading requirement under Rule 9(b). See Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990); Arthur F. Mathews, Andrew B. Weissman, John H. Sturc, Civil RICO Litigation § 9.02 (2d ed. 1992). The purpose of the pleading requirement is to give notice to defendants, to eliminate complaints filed only for discovery purposes, and to protect defendants' reputations from frivolous lawsuits. See, e.g., Cosmas v. Hassett, 886 F.2d at 11.

An allegation of fraud must specify the time, place, speaker and content of the misrepresentation. See Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir.1990); Cosmas v. Hassett, 886 F.2d at 11; Luce v. Edelstein, 802 F.2d at 54. Any claim of fraud based on information and belief must include a statement of facts on which the belief is founded. See Wexner v. First Manhattan Co., 902 F.2d at 172; DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1248 (2d Cir.1987); Luce v. Edelstein, 802 F.2d at 54 n. 1.

Generally, however, dates, times and places need not be pleaded with absolute precision, as long as enough information is disclosed to put the defendants on notice as to the circumstances of the charged misrepresentations. Harris v. Wells, 757 F.Supp. 171, 174 (D.Conn.1991); see Jubran v. Musikahn Corp., 673 F.Supp. 108, 112 (E.D.N.Y. 1987). "Plaintiff need not plead his evidence, so long as he gives defendants notice of what they are charged with." Ballan v. Wilfred American Educational Corp., 720 F.Supp. 241, 252 (E.D.N.Y.1989) (citing Goldman v. Belden, 754 F.2d 1059, 1070 (2d Cir.1985)). Also, while the circumstances of fraud must be pled specifically, scienter may be averred generally when the complaint sets forth facts that give rise to a strong inference of fraudulent intent. See Wexner v. First Manhattan Co., 902 F.2d at 172; Ouaknine v. MacFarlane, 897 F.2d at 80; Cosmas v. Hassett, 886 F.2d at 12-13.

Plaintiffs must connect the allegations of fraud to each individual defendant. See, e.g., Luce v. Edelstein, 802 F.2d at 54. "General allegations that defendants `conspired' in the scheme do not sufficiently attribute responsibility for fraud to each individual defendant." Center Cadillac v. Bank Leumi Trust Co. of New York, 808 F.Supp. at 230 (citing Morin v. Trupin, 711 F.Supp. 97, 111 (S.D.N.Y.1989)).

When suing corporate directors for fraud, "no specific connection between fraudulent representations or omissions need be pleaded as to defendants who are insiders or affiliates personally participating in the statements at issue." Karasyk v. Marc Commodities Corp., 770 F.Supp. 824, 829 (S.D.N.Y. 1991) (citing DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d at 1247; Luce v. Edelstein, 802 F.2d at 55). However, "with respect to corporate outsiders, i.e. individuals serving on corporate boards of directors who have never held management positions with the company and who do not own significant amounts of corporate stock, the standard of specificity required to plead fraud under Rule 9(b) is higher." Prostic v. Xerox Corp., 1991 WL 208441 *6 (D.Conn. 1991) (citing Greenfield v. Professional Care, Inc., 677 F.Supp. 110, 114-15 (E.D.N.Y. 1987)).

Because plaintiff alleges Roger Lussier was President and Chairman of the Board of Lyndonville Savings Bank, he may be considered an inside director. As a result, plaintiff's complaint need not plead a specific connection between Mr. Lussier and the particular allegations set forth in the complaint. BOV, however, states John Campbell, Arthur Elliot, George Hopkins, and Pearl Baird were "directors and employees" of Lyndonville Savings. See Amended Complaint ¶ 4. BOV gives no indication whether these defendants held additional management positions or owned large shares of corporate stock. This Court will treat Campbell, Elliot, Hopkins, and Baird as outside directors. As a result, BOV's complaint must connect the allegations of fraud to these particular defendants.

A. Count I: Fraudulent Concealment

The elements of fraudulent concealment in Vermont are "concealment of facts by one with knowledge, or the means of knowledge, and a duty to disclose, coupled with an intention to mislead or defraud." Silva v. Stevens, 156 Vt. 94, 103, 589 A.2d 852 (1991). "`Actual fraud' is a deceitful misrepresentation or concealment with evil intent, while `constructive fraud' is wrongdoing without bad faith." Sugarline Assoc. v. Alpen Assoc., 155 Vt. 437, 444, 586 A.2d 1115 (1990) (quoting Proctor Trust Co. v. Upper Valley Press, Inc., 137...