In re Enron Corporation Securities, Derivative

• Decision Date: 24 August 2007
• Docket Number: No. MDL-1446.,Civil Action No. H-01-3624.,Civil Action No. G-03-0481.,MDL-1446.
• Citation: 540 F.Supp.2d 759
• Parties: In re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION. Mark Newby, et al., Plaintiffs v. Enron Corporation, et al., Defendants American National Insurance Company, et al., Plaintiffs, v. Royal Bank of Canada, et al., Defendants.
• Court: U.S. District Court — Southern District of Texas

540 F.Supp.2d 759

In re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION.

Mark Newby, et al., Plaintiffs v. Enron Corporation, et al., Defendants American National Insurance Company, et al., Plaintiffs, v. Royal Bank of Canada, et al., Defendants.

No. MDL-1446.

Civil Action No. H-01-3624.

Civil Action No. G-03-0481.

United States District Court, S.D. Texas, Houston Division.

August 24, 2007.

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Andrew J. Mytelka, John S. McEldowney, Steven Carl Windsor, Tara Beth Annweiler, Greer Herz & Adams, Galveston, TX, for Plaintiffs.

Claude L. Stuart, III, Phelps Dunbar LLP, Houston, TX, for Defendants.

OPINION AND ORDER

MELINDA HARMON, District Judge.

Pending before the Court in the above referenced cause are the RBC Defendants' (collectively, "RBC's")¹ motion to dismiss (instrument # 30) Plaintiffs'² Second Amended Complaint³ pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and RBC's motion to strike Plaintiffs' surreply⁴ (# 36).

Plaintiffs allege that RBC conspired with and aided and abetted Enron in defrauding them and other investors by helping to devise and implement complex sham transactions (Alberta, LJM2, Hawaii Trusts, and Cerberus) whose only function was to help Enron hide millions of dollars of debt and overstate its income. Relying on Enron's false financial statements and the information about Enron created by Defendants and disseminated through various media outlets to investors, Plaintiffs purchased and continued to hold through Enron's collapse the following Enron securities: (1) American National Property and Casualty Company, American National Investment Accounts, Inc., SM & R Investments, Inc, and Standard Life and Accident Insurance Company purchased Enron common stock from 1997-2001; (2) Farm Family Casualty Insurance Company and Farm Family Life Insurance purchased Enron Capital, L.L.C. preferred shares in 1993; (3) Farm Family Life Insurance Company purchased an Enron bond in 1992; (4) American National Insurance Company purchased Enron commercial paper and an Enron bond in 2001; and (5) National Western Life Insurance Company purchased Enron bonds in 1992 and 1993. They claim that they suffered substantial losses when Enron collapsed and filed for bankruptcy protection on December 2, 2001.

RBC's motion points out that the four causes of action asserted by Plaintiffs against RBC under Texas law and presents reasons why they should each be dismissed: (1) aiding and abetting fraud by Enron under the Texas Securities Act, Texas Revised Civil Statute Annotated Article 581-33F(2) (West 2002) ("TSA"), because Plaintiffs cannot state a viable claim of primary liability against Enron; (2) common law fraud because Plaintiffs have not alleged an actionable misrepresentation nor material non-disclosure by the RBC Defendants;(3) violation of Section 27.01 of the Texas Business and Commerce Code (West 2002) because Plaintiffs fail to allege that (a) the RBC Defendants had a duty to disclose Enron's alleged misrepresentations, (b) that RBC Defendants directly benefitted from any of Enron's alleged fraudulent misrepresentations, (c) that Plaintiffs actually and justifiably relied on any alleged misrepresentations in purchasing the securities at issue; and (4) civil conspiracy to commit fraud because Plaintiffs fail to adequately plead key elements, specifically a combination or agreement between RBC and Enron and actual and justifiable reliance by Plaintiffs on Enron's alleged misrepresentations in purchasing their Enron securities.

Furthermore, RBC contends that Plaintiffs' "holder" claims, based on the diminution in value of Enron securities they purchased in early 1990's and were induced to hold because of Enron's alleged misrepresentations, should be dismissed. In their response to the motion to dismiss, Plaintiffs state in a footnote that based on the Court's decision in American National Ins. Co. v. J.P. Morgan Chase & Co., G-02-0299, instrument # 66, in which this Court addressed and dismissed the holder claims as a matter of law, Plaintiffs will no longer be urging these claims against the RBC Defendants here. # 32 at 5 n. 1. In addition the Court refers the parties to and incorporates here its earlier opinion and order, # 75 in American National Ins. Co., et al., v. Citigroup, Inc., et al., G-02-723, which further addresses the "holder"-claim issue as a matter of law.

Accordingly, the Court dismisses the holder claims based on Farm Family Casualty Insurance Company and Farm Family Life Insurance's purchases of Enron Capital, L.L.C. preferred shares in 1993; Farm Family Life Insurance Company purchase of an Enron bond in 1992; and National Western Life Insurance Company's purchase of Enron bonds in 1992 and 1993.

RBC points out that Plaintiffs have filed two amended complaints and have had ample opportunity to state a claim and therefore asks the Court to deny them leave to replead. RBC argues that the nature of the deficiencies here is legal and is not subject to cure and thus additional amendment would be futile.

The Court now examines the motion to dismiss the four causes of action.

I. Standards of Review

As stated in 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure Civ.3d § 1204 at 104-05 (West 2004),

The manner and details of pleading in the federal courts are governed by the Federal Rules of Civil Procedure regardless of the source of substantive law to be applied in the particular action.... It no longer can be doubted that the rules regarding the standard of specificity to be applied to federal pleadings, the pleadings allowed in the federal courts, the form of the pleadings, the special requirements for pleading certain matters, the allocation of the burden of pleading among the parties, and the signing of pleadings by an attorney of record or an unrepresented party, all are governed by the federal rules and not by the practice of the courts in the state in which the federal court happens to be sitting.

See also In re Enron Corp. Sec., Derivative & "ERISA" Litig., 388 F.Supp.2d 780, 783-84 (S.D.Tex.2005) (and cases cited therein).

A. Rule 9(b)

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 must be averred generally.

"In every case based upon fraud, Rule 9(b) requires the plaintiff to allege as to each individual defendant the nature of the fraud', some details, a brief sketch of how the fraudulent scheme operated, when and where it occurred, and the participants." Hernandez v. Ciba-Geigy Corp. USA, 200 F.R.D. 285, 291 (S.D.Tex.2001). In a securities fraud suit, the plaintiff must plead with particularity the circumstances constituting the alleged fraud: Rule 9(b) requires the plaintiff to "`specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.'" Southland Securities Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 362 (5th Cir. 2004), quoting Williams v. WMX Technologies, Inc., 112 F.3d 175, 177-78 (5th Cir. 1997), cert. denied, 522 U.S. 966, 118 S.Ct. 412, 139 L.Ed.2d 315 (1997). "`In cases concerning fraudulent misrepresentation and omission of facts, Rule 9(b) typically requires the claimant to plead the type of facts omitted, the place in which the omissions should have appeared, and the way in which the omitted facts made the representations misleading.'" Carroll v. Fort James Corp., 470 F.3d 1171, 1174 (5th Cir.2006), quoting United States ex. rel. Riley v. St. Luke's Hosp., 355 F.3d 370, 381 (5th Cir.2004).

Although Rule 9(b) allows a plain tiff to plead intent to deceive or defraud generally, a mere conclusory statement that the defendant had the required intent is insufficient; the plaintiff must set forth specific facts that raise an inference of fraudulent intent, for example, facts that show the defendant's motive. Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir.1994); Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir.1994). Intent to deceive or defraud usually must be proved by circumstantial evidence, but to establish a material fact, that evidence "`must transcend mere suspicion.'" IKON Office Solutions, Inc. v. Eifert, 125 S.W.3d 113, 124 (Tex.App.-Houston [14th Dist.] 2003, pet. denied). Although a party's intent to defraud is determined at the time the party made the misrepresentation, "it may be inferred from the party's subsequent acts after the representation is made." Id.; see also Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex.1986). The court should not view each piece of circumstantial evidence separately, but should weigh the evidence as a whole. IKON, 125 S.W.3d at 124. "Intent is a fact question uniquely within the realm of the trier of fact because it so depends upon the credibility of the witnesses and the weight to be given to their testimony." Spoljaric v. Percival Tours, Inc., 708 S.W.2d at 434.

"[Wh]en agency is an element of a fraud claim, agency must be pleaded with particularity required under Rule 9(b)." Whitney National Bank v. Medical Plaza Surgical Center, L.L.P., No. H-06-1492, 2007 WL 400094, *3 (S.D.Tex.2007), citing Kolbeck v. LIT America, Inc., 923 F.Supp. 557, 570 (S.D.N.Y.1996), aff'd, 152 F.3d 918, 1998 WL 406036 (2d Cir.1998); American Credit Indemnity Co. v. HCG Financial Servs., Inc., No. 89 C 9583, 1990 WL 77992, *4 (N.D.Ill. June 1, 1990); Chou v. University of Chicago, 254 F.3d 1347, 1362 (Fed.Cir.2001); Abels v. Farmers Commodities Corp., 259 F.3d 910, 916 (8th Cir.2001); and Lachmund v. ADM Investor Servs., Inc., 191 F.3d 777, 783 (7th Cir.1999).⁵

The particularity requirement of Rule 9(b) also governs a conspiracy to commit fraud. Southwest Louisiana...