Gutman v. Howard Sav. Bank

• Decision Date: 27 November 1990
• Docket Number: Civ. A. No. 89-5131 (Formerly Civ. A. No. 90-2397).
• Citation: 748 F. Supp. 254
• Parties: Leo A. GUTMAN and Georgia B. Gutman as Joint Tenants, and Gutman & Gutman, Inc., Plaintiffs, v. HOWARD SAVINGS BANK, Donald F. McCormick, Leo G. Rogers, Andrew V. Aldi and Joseph G. Wojak, Defendants.
• Court: U.S. District Court — District of New Jersey

748 F. Supp. 254

Leo A. GUTMAN and Georgia B. Gutman as Joint Tenants, and Gutman & Gutman, Inc., Plaintiffs, v. HOWARD SAVINGS BANK, Donald F. McCormick, Leo G. Rogers, Andrew V. Aldi and Joseph G. Wojak, Defendants.

Civ. A. No. 89-5131 (Formerly Civ. A. No. 90-2397).

United States District Court, D. New Jersey.

October 11, 1990.

As Amended November 27, 1990.

COPYRIGHT MATERIAL OMITTED

Jared Stamell, Bayonne, N.J. and Joseph J. Tabacco, Jr., Stamell, Tabacco & Schager, New York City, for plaintiffs.

Daniel D. Caldwell, Wolff & Samson, P.A., Roseland, N.J. and Richard H. Klapper, John B. Reid-Dodick, Sullivan & Cromwell, New York City, for defendants.

OPINION

WOLIN, District Judge.

Defendants have moved pursuant to Federal Rule of Civil Procedure 9(b) to dismiss plaintiffs' fraud claim against defendants on the grounds that plaintiffs' averments of fraud are not sufficiently specific. Defendants move in the alternative under Rule 12(e) for a more definite statement of these averments.

Defendants have also moved to dismiss pursuant to Rule 12(b)(6). Defendants argue that plaintiffs' allegations of fraud and negligent misrepresentation fail to state claims upon which relief can be granted because plaintiffs have not alleged that they either bought or sold securities in reliance on defendants' misrepresentations. Defendants urge that plaintiffs' alleged decision to hold securities in reliance on defendants' misrepresentations does not support an actionable claim of fraud or negligent misrepresentation.

For the reasons stated herein, the Court will deny defendants' motions.

I. BACKGROUND

Plaintiffs Leo and Georgia Gutman are residents of New York who began to accumulate substantial holdings in defendant Howard Savings Bank ("Howard") in 1986. Complaint ¶¶ 1, 3. The Gutmans bought Howard stock both for their own account and for the account of plaintiff Gutman & Gutman, Inc., a television and motion picture licensing and distribution business. Id. ¶¶ 4, 11. Gutman & Gutman, Inc. is incorporated and maintains its principal place of business in New York and its shares are owned jointly by the Gutmans. Id. ¶¶ 1, 3, 11. The Gutmans invested in Howard stock because of what they perceived as its safety and its potential for capital appreciation. Complaint ¶ 3. Id. In 1987 the Gutmans sold some of their Howard stock at a profit, but reinvested the proceeds in Howard in 1987 and 1988. Id. ¶ 4. As of April of 1989, plaintiffs held a total of 85,000 shares of Howard common stock. Id. ¶ 6.

Howard is a stock savings bank which is chartered under the laws of New Jersey and has its principal place of business in New Jersey. Id. ¶ 12. Howard has various subsidiaries which engage in various banking and other financial activities. Id. Defendant Donald McCormick, at all times relevant to the Complaint, was chairman of the Board of Directors of Howard and its Chief Executive Officer. Id. ¶ 14. Defendant Leo Rogers, at all times relevant to the Complaint, was a director of Howard and an Executive Vice-President. Id. ¶ 15. Defendant Andrew Aldi was Executive Vice-President of Real Estate during the events alleged in the Complaint. Id. ¶ 16. Finally, defendant Joseph Wojak was Executive Vice-President and Chief Financial Officer during the events alleged in the Complaint. These officers of Howard are sometimes generally referred to herein as "individual defendants."

The Complaint recounts the deterioration of the price of Howard's common stock from $22.75 per share on May 4, 1989, Complaint ¶ 16, to $8.13 per share on December 12, 1990. Id. ¶ 69. The Complaint also tells of misrepresentations made by Howard in quarterly reports and in statements by defendants McCormick and Walter Hislop, Howard's Vice-President for Shareholder Relations. Plaintiffs complain that they were misled, beginning as early as April of 1989, as to Howard's true financial condition. Id. ¶¶ 5-6. "Defendants' scheme and plan to defraud plaintiffs continued until at least December, 1989," when the truth about Howard was revealed and plaintiffs finally sold their stock at great loss. Id. ¶ 7.

Plaintiffs have brought claims of common law fraud and negligent misrepresentation against defendants. Their case shares certain facts with a class action before this Court, In re Howard Savings Bank Securities Litigation. Although plaintiffs' case has been consolidated with the class action, plaintiffs are not class members because they did not purchase any shares of Howard stocks during the period at issue in the class action.

II. DISCUSSION

A. The Particularity of Plaintiffs' Averments of Fraud

Defendants argue that plaintiffs have failed to plead fraud, and specifically the element of reliance,¹ with sufficient particularity. Defendants' Memorandum in Support of their Motion to Dismiss ("Defendants' Opening Memorandum") at 21-26. Federal Rule of Civil Procedure 9(b) provides: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." The purpose of Rule 9(b) is to place defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior. Seville Industrial Machinery Corp. v. Southmost Co., 742 F.2d 786, 791 (3d Cir.1984). Allegations of date, place or time fulfill these functions, but are not required so long as plaintiffs "inject some precision and some measure of substantiation into their allegations of fraud." Id. at 786.

Rule 9(b) requires the identification of the elements of a fraud claim. In re Craftmatic Securities Litigation, 890 F.2d 628, 645 (3d Cir.1989) (citing Christidis v. First Pennsylvania Mortgage Trust, 717 F.2d 96, 99 (3d Cir.1983)). A common law fraud claim in New York or New Jersey² consists of the following elements: (1) a knowing misrepresentation by defendant as to a material fact; (2) defendant's intention to induce plaintiff to rely on that misrepresentation; (3) reliance by plaintiff on the misrepresentation; and (4) resulting damage to plaintiff. Channel Master Corp. v. Aluminum Ltd. Sales, 4 N.Y.2d 403, 151 N.E.2d 833, 836, 176 N.Y.S.2d 259, 262 (1958); Jewish Center v. Whale, 86 N.J. 619, 624, 432 A.2d 521 (1981). Rule 9(b) also requires that the detrimental reliance element of a fraud claim be pleaded with particularity. Learning Works, Inc. v. The Learning Annex, Inc., 830 F.2d 541, 546 (4th Cir.1987) (failure to allege sufficiently the reasonableness of reliance). To survive a 9(b) motion, plaintiff must show that he or she acted upon the fraud or misrepresentation complained of. Caballero v. Celeste, 1989 WL 200986, at 3 (D.N.J. May 31, 1989).

Plaintiffs make the following allegation of reliance:

Had the Gutman's sic not been deceived by the defendants beginning in late April 1989 but instead told the truth about Howard, they would not have relied to their detriment on such false and misleading statements and would have been able to sell their shares of Howard common stock at prices substantially above those prevailing in December, 1989 and would have done so and avoided substantially all of the actual losses plaintiffs suffered.

Complaint ¶ 9. Defendants argue that plaintiffs have failed to state with particularity the facts that would have induced them to sell during this period. Defendants' Opening Memorandum at 22.³

Defendants break down what they consider the problematic course of plaintiffs' reliance into two periods: April and May of 1989, and the summer of 1989. On April 24, 1989, Leo Gutman was invited to an analyst's meeting which was chaired by defendant McCormick. Defendant Wojak and Walter Hislop, Howard's Vice President for Shareholder Relations, also participated in the meeting. Complaint ¶¶ 31-32. At that meeting, these Howard officers stated that Howard earnings were expected to be $.59 per share. McCormick gave Mr. Gutman

a handout outlining Howard's performance. The defendants represented that loan loss reserves were adequate and that they did not anticipate increasing the reserve for loan losses above current level in the foreseeable future. With respect to certain of its then non-performing loans defendants represented that "government guarantees" covered a substantial portion of the potential losses. Defendants also predicted that Howard would earn $2.80 to $3.00 per share for 1989. In short, the entire tenor of management's presentation was very positive.

Id. ¶ 32. At about the same time, Howard issued a press release announcing earnings of $.59 per share; a second quarter dividend of $.15 per share; and a 32.8% increase in net interest income from the same period in 1988. Id. ¶ 34.

On or about May 12, 1989, Howard filed its quarterly Form F-4 report with the FDIC for the first quarter of 1989. Complaint ¶ 36. This report stated that the amount of Howard's loan reserves during the first quarter was three million dollars. Id. ¶ 36. The F-4 report also reported that the amount of nonperforming loans was $157.8 million. Id. ¶ 37.

Plaintiffs state that they relied on defendants' representations on April 24 concerning $8.5 million in earnings and three million dollars in additional loan reserves. Id. ¶ 38. According to plaintiffs, however, defendants knowingly and recklessly under-reserved by tens of millions of dollars in order to create the impression of increasing profits. Id. "In fact, as of April 24, 1989, the date of Howard's announcement of its First Quarter 1989 results, the Bank had no basis to report any profits." Id.

Thus, plaintiffs have alleged that defendants' misrepresentations concerning the amount of loan reserves and the profitability of Howard caused them to hold on to stock they otherwise would have sold. See Complaint ¶ 9, quoted supra. The misrepresentations complained of began as early as April 24, and continued through...