Benoay v. Decker

• Decision Date: 30 June 1981
• Docket Number: Civ. A. No. 74-72861.
• Citation: 517 F. Supp. 490
• Parties: LeRoy W. BENOAY, et al., Plaintiffs, v. Donald C. DECKER, et al., Defendants.
• Court: U.S. District Court — Western District of Michigan

517 F. Supp. 490

LeRoy W. BENOAY, et al., Plaintiffs, v. Donald C. DECKER, et al., Defendants.

Civ. A. No. 74-72861.

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

June 30, 1981.

Bolden & Blake, P. C. by Benjamin F. Blake, Patmon, Young & Kirk, P. C. by Frederick A. Patmon, Ulysses W. Boykin, III, Detroit, Mich., for plaintiffs.

Clark, Klein & Beaumont by Laurence M. Scoville, Jr., David H. Paruch, Detroit, Mich., for defendants Coopers & Lybrand, Lybrand, Ross Bros. & Montgomery, Edward Premo and Wilbur Pfromm.

Weisman, Trogan & Young, P. C. by Martin C. Weisman, Troy, Mich., for defendants Bonisteel & Bailey, Bonisteel, Bailey & Sikorski, Joseph Ehlen, Robert Barnes, and Dominic Ferranti.

Honigman, Miller, Schwartz & Cohn by Stephen Wasinger, Detroit, Mich., for defendants Fred Romanoff, Stanford C. Stoddard, George A. Pierson, and Michigan National Bank.

Bodman, Longley & Dahling by George G. Kemsley, Detroit, Mich., for defendants Manufacturers National Bank, Donald E. Black and John A. Mays.

Collins, Einhorn & Farrell, P. C. by Morton H. Collins, Southfield, Mich., for defendants Peter Bentley, and Maguire, Cole, Bentley & Babson.

Dykema, Gossett, Spencer, Goodnow & Trigg by Gregory M. Kopacz, Detroit, Mich., for defendants John K. Cannon, Lloyd A. Semple, Theodore H. Oldham, Alan R. Dominick, and Dykema, Gossett, Spencer, Goodnow & Trigg.

Golden & Lakind by Robert H. Golden, Southfield, Mich., in pro. per. and for defendant POM Financial Corp.

Weisman, Trogan & Young, P. C. by Martin C. Weisman, Troy, Mich., for defendant Roy McCrae.

Kaufman & Friedman by P. David Palmiere, Southfield, Mich., for defendant Donald C. Decker.

Alan R. Miller, P. C. by Alan R. Miller, Birmingham, Mich., for defendants Kenneth E. Tureaud and RSA Corp.

Hill, Lewis, Adams, Goodrich & Tait by Timothy D. Wittlinger, Detroit, Mich., for defendants Richard C. Sanders, Walter L. Maguire, The Maguire Foundation.

OPINION

GILMORE, District Judge.

Several newly-added defendants to this case have brought motions to dismiss pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). The issue is whether plaintiffs have pleaded fraud with sufficient particularity to meet the requirements of FRCP 9(b).

This suit arose out of alleged fraud in the sale and management of oil and gas interests bought by plaintiffs in 1971. The original complaint was filed on November 26, 1974, and the first amended complaint was filed on January 10, 1975, naming 16 defendants and 35 additional "John Doe" defendants.

The 16 named defendants¹ have all filed answers and discovery has been completed. No motions involving these defendants are presently before the Court.

At issue are motions being brought by several of the "Doe" defendants.² On December 15, 1980, Judge Boyle of this Court granted plaintiffs leave to add additional parties. Through their Second Amended Complaint, plaintiffs have added the names of 35 new defendants, substituting their names wherever "Doe" appeared in the First Amended Complaint.

The Second Amended Complaint contains 19 counts. We are concerned here with four counts (I, II, III & XIV), which are the only ones which allege violation of federal law against the "Doe" defendants who are bringing these motions. These are the only counts which provide the basis for federal jurisdiction in this case. These counts allege violations of the 1933 and 1934 Securities Acts — 15 U.S.C. 77l, § 12(1); 15 U.S.C. 77l, § 12(2); 15 U.S.C. 78j, § 10(b), and Securities and Exchange Commission Rule 10b-5, 17 CFR 240.10b-5 (1975). The remaining claims are state claims.

I

FRCP 9(b) states: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Plaintiffs have failed to meet this requirement regarding the "Doe" defendants now before us.

Rule 9(b) clearly applies to claims of securities fraud under the 1933 and 1934 Securities Acts. "Intent to deceive, manipulate, or defraud" is a necessary element in stating a claim under § 10(b) of the Securities Act. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 1381, 47 L.Ed.2d 668 (1975). Without alleging fraud, plaintiffs have no claim under 10(b) of the Securities Act. The Rule 9(b) requirement of particularity also applies to the claims of fraudulent concealment which are present in this case. Rutledge v. Boston Woven Hose & Rubber Co., 576 F.2d 248, 250 (9th Cir. 1978).

Rule 9(b) "is a special pleading requirement and contrary to the general approach of simplified pleading adopted by the federal rules." 5 Wright & Miller, Federal Practice and Procedure: Civil § 1297, 405. In the context of securities litigation it has generally been held that Rule 9(b) serves three purposes: 1) it ensures that allegations are specific enough to inform a defendant of the act of which the plaintiff complains, and to enable him to prepare an effective response and defense; 2) it eliminates those complaints filed as a pretext for the discovery of unknown wrongs — a 9(b) claimant must know what his claim is when he files; and 3) it seeks to protect defendants from unfounded charges of wrongdoing which injure their reputations and goodwill. In re Commonwealth Oil/Tesoro Petroleum Corporation Securities Litigation, 467 F.Supp. 227 (W.D. Texas, 1979) at 250. See also Ross v. A. H. Robins Company, Inc., 607 F.2d 545, 557 (2d Cir. 1979).

With these purposes in mind, it is clear to this Court that plaintiffs have failed to meet the requirements of Rule 9(b). The Second Amended Complaint merely substitutes the actual names of 35 defendants for the "Doe" in the original complaint. The defendants now before the Court comprise a varied group of accounting firms and their employees; law firms and their employees; and bank employees. Yet the complaint makes no attempt to distinguish among them.

This is inadequate; each individual defendant must be appraised separately of the specific acts of which he is accused, especially in a case involving multiple defendants. Brew v. Philips, Apel & Walden, Inc., CCH Fed.Sec.L.Rep. # 97,697 (S.D.N.Y. 1980); Golberg v. Meridor, 81 F.R.D. 105 (S.D.N.Y.1979). "The complaint, therefore, may not rely upon blanket references to acts or omissions by all of the `defendants,' for each defendant named in the complaint is entitled to be apprised of the circumstances surrounding the fraudulent conduct with which he individually stands charged." McFarland v. Memorex Corp., 493 F.Supp. 631, 639 (N.D.Cal.1980), quoting Jacobson v. Peat, Marwick, Mitchell & Co., 445 F.Supp. 518 (S.D.N.Y.1977).

Nor can the Court accept plaintiffs' argument that more "discovery" should be allowed in order to specify their allegations. This case has been in federal court for seven years. Discovery has been completed against the original defendants, and some of this involved discovery against the newly-added defendants now before the Court. If these defendants have committed fraudulent acts or aided and abetted in them, plaintiffs should be able to specify them with some degree of particularity. This has not been done. In none of the documents which the plaintiffs have submitted to this Court have they been able to detail with any particularity the acts of which the newly-added defendants are being accused. The purpose of a fraud complaint is to "seek redress for a wrong, not to find one." Segal v. Gordon, 467 F.2d 602, 606-08 (2d Cir. 1972).

Plaintiff's citation to Denny v. Carey, 72 F.R.D. 574 (E.D.Pa.1976), where plaintiffs survived a 9(b) motion and were given an opportunity through discovery to specify their allegations, is not helpful here. Denny refers to discovery once the plaintiff has satisfied the minimum burden of Rule 9(b). Rule 9(b) provides a threshold plaintiffs must cross before they can rely on future discovery.

Plaintiffs also point to certain general allegations in their complaint. But "mere general allegations that there was fraud, corruption or conspiracy or characterizations of acts or conduct in these terms are not enough, no matter how frequently repeated. Nor do statements of `malice, intent, knowledge, or other conditions of mind' in general terms under the last sentence of Rule 9(b) substitute for particularizations of the circumstances constituting the fraud charged." Chicago Title & Trust Co. v. Fox Theatres, 182 F.Supp. 18, 31 (S.D.N.Y.1960), quoted in McKee v. Federal's Inc., No. 76-70695 (E.D.Mich.1980). In McKee, Judge Thornton of this District held a complaint against the Arthur Young Accounting Firm inadequate under Rule 9(b). The allegations there were far more specific than the allegations in the present complaint.

The allegations in the present complaint against the newly-added defendants never surpass mere general allegations of fraud. When specific acts are alleged in the complaint, the only tie-in to the "Doe" defendants is that they are alleged to be "co-conspirators" in the alleged act. There is never a direct link between a specific act and a "Doe" defendant. This is insufficient to provide the "Doe" defendants with notice under Rule 9(b).

There is also an important policy consideration here. In connection with securities litigation, the Supreme Court has recognized that "the concern expressed for the danger which could result from a widely expanded class of plaintiffs under Rule 10b-5 is founded in something more substantial than the common complaint of many of the defendants who would prefer avoiding lawsuits entirely to either settling them or trying them .... even a complaint which by objective standards may have very little chance of success at trial has a settlement value to the plaintiff out of proportion to its prospect of success at trial so long as he may prevent the suit from being resolved against him by dismissal or summary judgment." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 740, 95 S.Ct. 1917, 1927, 44 L.Ed.2d 539 (1974). Given the length of time that...