Brown v. North Cent. F.S., Inc.

• Decision Date: 26 December 1997
• Docket Number: No. C 96-3074-MWB.,No. C 96-3080-MWB.,C 96-3074-MWB.,C 96-3080-MWB.
• Citation: 987 F.Supp. 1150
• Parties: Alan L. BROWN, David Burmester, Don Butson, Steve Hackbarth, Ken Mutschler, Marlyn Tripp, Kurt Wolf, and Maurice Wolf, Plaintiffs/Counterclaim Defendants, v. NORTH CENTRAL F.S., INC., Defendant/Counterclaim Plaintiff. CEBAR FARMS, INC., Barbara Lyon, Jerry Lyon, and James Dean Krabbe, Plaintiffs/Counterclaim Defendants, v. NORTH CENTRAL, F.S., INC., Defendant/Counterclaim, Plaintiff.
• Court: U.S. District Court — Northern District of Iowa

987 F.Supp. 1150

Alan L. BROWN, David Burmester, Don Butson, Steve Hackbarth, Ken Mutschler, Marlyn Tripp, Kurt Wolf, and Maurice Wolf, Plaintiffs/Counterclaim Defendants, v. NORTH CENTRAL F.S., INC., Defendant/Counterclaim Plaintiff.

CEBAR FARMS, INC., Barbara Lyon, Jerry Lyon, and James Dean Krabbe, Plaintiffs/Counterclaim Defendants, v. NORTH CENTRAL, F.S., INC., Defendant/Counterclaim, Plaintiff.

No. C 96-3074-MWB.

No. C 96-3080-MWB.

United States District Court, N.D. Iowa, Central Division.

December 26, 1997.

Glenn Norris of Hawkins & Norris, Des Moines, IA, for Plaintiffs.

Steven H. Hoeft (argued) of McDermott, Will & Emery, Chicago, IL, Edward M. Mansfield (local counsel) of Belin, Harris, Lamson, McCormick, P.C., Des Moines, IA, for Defendant.

MEMORANDUM OPINION AND ORDER REGARDING DEFENDANT'S MOTION TO DISMISS COUNTS II-V OF THE SECOND AMENDED AND SUBSTITUTED COMPLAINT

BENNETT, District Judge.

                TABLE OF CONTENTS
                I. INTRODUCTION ........................................................................... 1152
                     A. The Cases ............................................................ 1152
                     B. The Ruling In Brown II ............................................... 1153
                     C. The Second Amended And Substituted Complaints ........................ 1154
                II. LEGAL ANALYSIS ........................................................... 1155
                     A. Requirements For Pleading Fraud ...................................... 1155
                              1. Pleading falsity and knowledge thereof ...................... 1155
                              2. Broken promises ............................................. 1156
                              3. The Producer's pleading of falsity and knowledge thereof .... 1158
                     B. Dismissal With Prejudice ............................................. 1159
                III. CONCLUSION .............................................................. 1160
                

Have the plaintiffs merely poured the same old wine — or what the defendant might characterize as the same old "whine" — into a new, larger bottle, or is this vintage unquestionably better than the last? The defendant grain elevator contends that, on their third attempt, the plaintiff grain producers have still failed to plead fraud pursuant to the Commodity Exchange Act (CEA), 7 U.S.C. §§ 1-25, and Iowa common law with the "particularity" required by Fed.R.Civ.P. 9(b), because they have failed to correct deficiencies previously found by the court. To paraphrase the elevator's argument, the repleaded fraud claims are just the same "bad wine" the grain producers have already served to the elevator and the court — there is just more of it. The grain producers, however, assert that they have now pleaded fraud in accordance with the applicable rule, this court's prior decisions, and precedent of the Eighth Circuit Court of Appeals. Thus, they might contend, they have served not just more wine, but better. Whether the "wine" is any better or not, there is certainly now a remarkable volume of it, as the repleaded complaints in these two cases run to unprecedented lengths. The court's unenviable task at this "private tasting" is to decide whether the plaintiffs' fraud claims should be "laid down" to mature for trial, or simply disposed of.

I. INTRODUCTION

A. The Cases

These two cases both involve claims concerning so-called "hedge-to-arrive" contracts (HTAs) for the sale and purchase of grain brought by several grain producers (the Producers) against a single grain elevator (the Elevator). Each of the Producers entered into one or more such HTAs with the Elevator during 1994, 1995, or early 1996. As this court observed in its rulings on the Elevator's previous challenges to the adequacy of the Producers' pleading of fraud claims, these two cases have not been formally consolidated in any way. See North Central F.S., Inc. v. Brown, 951 F.Supp. 1383, 1386 (N.D.Iowa 1996) (Brown I); Brown v. North Central F.S., Inc., 173 F.R.D. 658, 661 (N.D.Iowa 1997) (Brown II).¹ Rather, the court and the parties, represented by the same counsel in each case, have recognized the near identity of issues presented. Therefore, for the sake of convenience, the court once again conducted a joint hearing on the motions to dismiss in each case on December 22, 1997,² and now files a single opinion. Also, as in Brown II, the first of these actions, Case No. C96-3074-MWB, filed on August 20, 1996, will be referred to as the Brown Case, while the second, Case No. C96-3080-MWB, filed on September 10, 1996, will be referred to as the CeBar Farms Case.³

Although the nature of the parties' claims has been discussed in each of the prior rulings, for the sake of providing the necessary context to the present ruling, it is worth repeating a brief description of the Producers' claims. In each case, the Producers' Count I is an action for declaratory judgment, seeking a declaration that the HTAs are illegal futures contracts in violation of the CEA; Count II is a claim for fraud in violation of section 4b of the CEA, 7 U.S.C. § 6b, and seeks rescission as the principal remedy; Count III is again a claim of fraud in violation of section 4b of the CEA, 7 U.S.C. § 6b, but this count seeks damages as the principal relief; Count IV is a common-law claim of fraudulent misrepresentation seeking rescission or cancellation of the contracts as relief; Count V is another common-law claim for fraudulent misrepresentation, but this count seeks damages, both actual and punitive, as relief; Count VI asserts negligent misrepresentation against the Elevator, and seeks as relief actual and punitive damages; and Count VII is a cause of action for breach of contract.

The Elevator has moved to dismiss Counts II through V in each of the Producers' second amended and substituted complaints on the ground that each of these counts fails, for the third time, to plead fraud with the particularity required by FED.R.Civ.P. 9(b). Additionally, the Elevator contends that the Producers have failed to allege that the Elevator acted "for or on behalf of" the Producers, as required for a claim pursuant to 4b of the CEA; failed to allege that any action of the Elevator caused them to sustain losses; failed to allege "loss causation"; and failed to allege other requirements of a common-law fraud claim. The Producers have concentrated their response on the adequacy of their pleading of fraud pursuant to Rule 9(b).

B. The Ruling in Brown II

The yardstick against which the second amended and substituted complaints must be judged is, at least in the first instance, this court's ruling in Brown II, because that ruling detailed the failings of the first amended and substituted complaint in each case. In Brown II, the court considered the adequacy of the pleading of fraud as to each alleged misrepresentation in light of five considerations: (1) the pleading of the identity of speaker and recipient; (2) the pleading of time, place, and manner of the alleged fraud; (3) the pleading of the content of the alleged misrepresentation; (4) the pleading of falsity and knowledge thereof; and (5) the fraud pleadings taken as a whole. See Brown II, 173 F.R.D. at 666-72.

In Brown II, the court found that, with specified exceptions, the amended pleadings cured the deficiencies of pleading fraud under Rule 9(b) found in the original complaints with respect to identification of speakers and recipients of alleged misrepresentations. Id. at 667. As to time, place, and manner, the court found that pleading what a plaintiff "understood" is insufficient, because fraud will lie only for what a defendant affirmatively misrepresented or failed to disclose while under a duty to make such a disclosure. Id. at 669. Such pleadings, the court held, are tantamount to "`conclusory allegations that a defendant's conduct was fraudulent and deceptive' which `are not sufficient to satisfy the rule.'" Id. (quoting Commercial Property Inv., Inc. v. Quality Inns Int'l, Inc., 61 F.3d 639, 644 (8th Cir.1995)). Thus, repleaded fraud claims based on "understandings" still failed to meet the particularity requirements of Rule 9(b). Id. The pleading of the content of misrepresentations was also held to be inadequate, to the extent any allegation of fraud was based merely on what a plaintiff "understood." Id.

However, as in Brown I, which dismissed the original complaints, the most critical flaw the court found in Brown II in the first amended and substituted complaints was in the pleading of falsity and knowledge thereof. Upon plaintiffs' second try to plead fraud, the court found that facts upon which inferences of falsity and knowledge of falsity could be based were still not pleaded in the amended complaints. Brown II, 173 F.R.D. at 671. Furthermore, the arguments in the Producers' brief, offered instead of actual pleadings, were not based on facts contemporaneous with the alleged misrepresentations, such that no inference arose as to either falsity or knowledge of falsity at the time the representations were made. Id. Therefore, the first amended complaints still failed to allege with particularity either the falsity of the alleged misrepresentations or the defendants' knowledge or notice of such falsity. Compare Brown II, 173 F.R.D. at 671, with Brown I, 951 F.Supp. at 1408-09 ("Perhaps most fatal to the pleadings here ... is that why the statements were allegedly fraudulent is left entirely to inferences based on suggestions of the content of those statements.... [N]owhere do [the Producers] allege specific facts that make it reasonable to believe that defendants knew that the statements were materially false or misleading.").

Although the court found the repleading of fraud was still inadequate, and the court expressed its reluctance to grant the Producers a further opportunity to amend claims already once dismissed as inadequate and still deficient upon repleading, Brown II, 173 F.R.D. at 671-72, the court did not simply dismiss the fraud claims. See id. at 674-75. Instead,...