Federal Sav. and Loan Ins. Corp. v. Musacchio

• Decision Date: 17 June 1988
• Docket Number: C-87-2604 RFP.,No. C-86-6641 RFP,C-86-6641 RFP
• Citation: 695 F. Supp. 1053
• Court: U.S. District Court — Northern District of California
• Parties: FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Conservator for Columbus Savings & Loan Association, Plaintiff, v. Ted A. MUSACCHIO, et al., Defendants. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Conservator for Columbus Savings & Loan Association, Plaintiff, v. Theodore A. MUSACCHIO, a/k/a Ted A. Musacchio, Defendant.

695 F. Supp. 1053

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Conservator for Columbus Savings & Loan Association, Plaintiff, v. Ted A. MUSACCHIO, et al., Defendants.

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Conservator for Columbus Savings & Loan Association, Plaintiff, v. Theodore A. MUSACCHIO, a/k/a Ted A. Musacchio, Defendant.

Nos. C-86-6641 RFP, C-87-2604 RFP.

United States District Court, N.D. California.

June 17, 1988.

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Stephen E. Taylor, David F. Gross, Mark C. Dosker, Graham & James, San Francisco, Cal., for plaintiff FSLIC.

William E. Bennett, San Jose, Cal., C. Judith Johnson, Burlingame, Cal., for defendants Trade Wind Traders, Inc. and Patricia Henry.

Lee Ann Huntington, Morgenstein & Jubelirer, Michael I. Spiegel, Spiegel, Cutler, Liao & Kagay, San Francisco, Cal., for defendant Ted A. Musacchio.

Philip E. Bass, Titchell, Maltzman, Mark, Bass, Ohler & Mishel, San Francisco, Cal., for defendant Herbert Worden.

Jeremiah F. Hallisey, Hallisey & Johnson, San Francisco, Cal., for defendant Robert W. Kenney.

John A. Koeppel, Lisa Lorea, Ropers, Majeski, Kohn, Wagner & Kane, Barry D. Hovis, Adams, Sadler & Hovis, San Francisco, Cal., for defendants Joseph Garbarino, et al.

John Enscoe, Red C. Radosevich, Landels, Ripley & Diamond, San Francisco, Cal., for defendant Frederick A. Fuchs.

Neil Bloomfield, Law Offices of Neil Bloomfield, Fairfax, Cal., for defendant Charlotte Noda.

Eric J. Noda, Novato, Cal., in pro. per.

AMENDED MEMORANDUM AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS OR FOR MORE DEFINITE STATEMENT

PECKHAM, Chief Judge.

INTRODUCTION

Defendant Theodore A. Musacchio moves to dismiss the plaintiff's complaint for failure to state a claim upon which relief can be granted. The defendant argues that the plaintiff Federal Savings and Loan Insurance Corporation ("FSLIC") has failed to plead essential elements of fraud, that the plaintiff has not pleaded its allegations of fraud with sufficient particularity, that the statute of limitations bars the plaintiff's claims based on negligence, and that the alleged breach by the defendant of the Federal Home Loan Bank Board ("FHLBB") supervisory agreement of June 12, 1984 does not create a private right of action for the FSLIC as conservator of Columbus Savings and Loan Association ("Columbus"). For the reasons that follow, this motion is granted in part and denied in part.

BACKGROUND

Defendant Theodore A. Musacchio is a founder and principal shareholder of Columbus. Until the Columbus Board of Directors ("Board") terminated his employment in late 1985, the defendant served as Columbus' president. These actions seek to hold the defendant personally liable for a variety of alleged acts of fraud, negligent misrepresentation, breach of fiduciary duty and negligence.

The complaints detail the activities of the defendant and others in connection with Columbus. These allegations are described in greater detail in the course of the discussion of the motion to dismiss. Briefly, in its original complaint the plaintiff accuses the defendant of fraud, negligent misrepresentation, gross negligence and breach of fiduciary duty, and states that he guided Columbus "from a traditional homeowner-oriented savings and loan association in 1982 to a prolific real estate venturer and commercial lender in 1984-1985, to a deteriorated and insolvent wreck in late 1985 and early 1986." Plaintiff's Memorandum in Opposition to Defendant's Motion to Dismiss at 5.

Following an investigation of Columbus' affairs, the Federal Home Loan Bank Board ("FHLBB") entered into a supervisory agreement with Columbus dated June 12, 1984. Pursuant to that agreement, the Federal Savings and Loan Insurance Corporation ("FSLIC") intervened in the day-to-day management of Columbus with the authority to regulate how Columbus conducted its business. On April 14, 1986, the FHLBB declared Columbus insolvent and appointed the FSLIC conservator.

The plaintiff filed its complaint on November 28, 1986 (the "FSLIC Complaint"). The defendant then filed a petition under Chapter 11 of the Bankruptcy Code. The plaintiff filed a second complaint in bankruptcy court (the "Bankruptcy Complaint") to determine the dischargeability of the defendant's debts pursuant to the claims against him in the original complaint. Ultimately, the bankruptcy action was consolidated with the original action in this court.

Based upon the same allegations of fact as the FSLIC complaint, the bankruptcy action states claims for nondischargeability against the defendant for debts incurred through false representation, fraud and defalcation while acting in a fiduciary capacity, and willful and malicious injury. Except where otherwise noted, the defendant moves to dismiss both complaints on the same grounds.

DISCUSSION

In considering the defendant's motion to dismiss, the court must presume that the plaintiff's allegations are true, granting the motion only if it appears "beyond doubt" that the plaintiff can prove no set of facts entitling it to relief. Simon Oil Co. Ltd. v. Norman, 789 F.2d 780, 781 (9th Cir.1986) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957)); see also Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir.1987).

1. Defendant's motion to dismiss for plaintiff's failure to plead its allegations with sufficient particularity.

In its FSLIC Complaint, the plaintiff partly relies on a common law fraud claim against the defendant. Under Federal Rule of Civil Procedure 9(b), fraud claims are subject to a higher pleading standard than are most other claims. See McFarland v. Memorex Corp., 493 F.Supp. 631, 638 (N.D.Cal.1980), reconsideration granted on other grounds, 581 F.Supp. 878 (N.D.Cal.1984). Rule 9(b) provides:

In all averments of fraud ..., the circumstances constituting fraud shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

Rule 9(b) is intended to ensure that the defendant in a fraud claim will have adequate notice of the nature of the charges against him, permitting him a meaningful opportunity to respond. Wool, supra, 818 F.2d at 1439; Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir.1985). "It also prevents the filing of a complaint as a pretext for the discovery of unknown wrongs," and prevents the harm to one's reputation that accompanies even unjustified charges of fraud. Id. Accordingly, the plaintiff must identify "circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations." Walling v. Beverly Enterprises, 476 F.2d 393, 397 (9th Cir.1973). Although mere conclusory allegations of fraud are insufficient, statements of the "time, place and nature of the alleged fraudulent activities" do suffice. Walling, supra, 476 F.2d at 397; see also Semegen, supra, 780 F.2d at 731 (dismissing fraud claim for want of particularity). Rule 9(b) does not require that the plaintiff plead matters best left to discovery or trial. Walling, supra, 476 F.2d at 397-98.

Here, the plaintiff has joined its claims of fraud and negligent misrepresentation with claims of fiduciary breach. "Generally, Rule 9(b) does not extend to allegations of breach of duty. However, when the conduct underlying the breach of fiduciary duty is also alleged to constitute fraud, the requirement does apply." Roskos v. Shearson/American Express, Inc., 589 F.Supp. 627 (E.D.Wisc.1984). Thus, the court distinguishes between fiduciary breach claims based upon the duty of loyalty, and those based upon a breach of the duty of care, applying the requirements of Rule 9(b) only to the former.

Applying these principles to the instant case, the plaintiff bears the burden of pleading what fraudulent statements were made, the nature of their fraudulence, and the time and place of their utterance. The defendant argues that the FSLIC Complaint does not disclose who discovered his alleged misconduct, who conducted the investigation revealing the alleged abuses, and how the plaintiff learned the facts underlying its claims, and urges the court to conclude that the plaintiff has not met its pleading burden.

The court disagrees, however. In virtually every instance in which fraud is alleged, the plaintiffs have set forth the time, place and manner of the allegedly fraudulent acts. How the plaintiffs obtained these facts is certainly relevant, but it is essentially an evidentiary matter best left to discovery. For example, the plaintiff alleges that the defendant committed fraud and negligent misrepresentation in connection with the Serramonte Highlands real estate venture. Specifically, the plaintiff claims that the defendant failed to disclose to the Board at its April 26, 1983 meeting any negative conclusions or recommendations with respect to the project, even though a disinterested senior Columbus officer had analyzed the proposal at the defendant's request and urged that it be rejected as too risky. Such allegations provide the defendant with ample notice as to the time, place and manner of the alleged fraudulent act ?€” the failure to disclose the negative recommendation. In sum, the plaintiff has provided sufficient detail to rebut the defendant's charges that the plaintiff's fraud claims amount to a mere fishing expedition.

The defendant also attacks the fact that much of the plaintiff's FSLIC Complaint is founded on "information and belief." Indeed, "allegations of fraud based on information and belief usually do not satisfy the degree of particularity required under Rule 9(b)." Wool, supra, 818 F.2d at 1439 (quoting Zatkin v. Primuth, 551 F.Supp. 39, 42 (S.D.Cal.1982)). The plaintiff may evade this requirement by showing that the evidence at issue is exclusively within the defendant's control, as is often the case in instances of alleged corporate wrongdoing (see Zatkin, s...