Liner v. DiCresce

• Decision Date: 09 September 1994
• Docket Number: No. 1:93CV481.,1:93CV481.
• Court: U.S. District Court — Middle District of North Carolina
• Parties: W. David LINER, et al., Plaintiffs, v. Gary DiCRESCE, et al., Defendants.

905 F. Supp. 280

W. David LINER, et al., Plaintiffs, v. Gary DiCRESCE, et al., Defendants.

No. 1:93CV481.

United States District Court, M.D. North Carolina, Durham Division.

September 9, 1994.

COPYRIGHT MATERIAL OMITTED

Michael W. Patrick of Haywood, Denny & Miller, Durham, NC, for plaintiffs.

William A. Blancato of Bennett & Blancato, Winston-Salem, NC, for defendant DiCresce.

H. Grady Barnhill, Jr., Jimmy H. Barnhill and Pressly McAuly Millen of Womble, Carlyle, Sandridge & Rice, Winston-Salem, NC, for defendant Kilgore.

David McKinley Barnes of Poyner & Spruill, Raleigh, NC, for defendant Wachovia.

Jonathan Drew Sasser and Douglas Ronald Ghidina of Moore & Van Allen, Raleigh, NC, for defendant Mutual Life Insurance of New York.

MEMORANDUM OPINION AND ORDER

HIRAM H. WARD, Senior District Judge.

This matter comes before the Court on defendants' separate Motions to Dismiss, for Protective Orders and a third parties' Motion to Intervene. For the reasons stated herein, the various Motions to Dismiss will be partially granted and partially denied, the Motion to Intervene will be granted and the Motion for a Protective Order will be denied.

I. FACTS

Plaintiffs contend that they each own a business which purchased dairy products from or sold dairy products to the Pine State Creamery Company (hereinafter "Pine State"). Plaintiffs contend that defendant Gary DiCresce (hereinafter "DiCresce"), acting as the agent for defendant Mutual Life Insurance of New York (hereinafter "MONY"), initially contacted Pine State in an attempt to induce Pine State to sell financial security plans to non-employee groups. In 1983, Pine State began selling plaintiffs "Pine State Customers Financial Security Plans" (hereinafter "the Plans"). The Plans offered the participants benefits for death, disability or forced retirement.

Plaintiffs allege that the Plans resembled insurance or annuity products typically offered by insurance companies. The Complaint states that "Pine State promised to pay the participants and their beneficiaries out of the general assets of Pine State." On March 31, 1993, Pine State filed for bankruptcy. Since initiating the bankruptcy proceedings, Pine State has defaulted on its obligations to Plan participants. Plaintiffs allege several claims for relief including; violation of federal and state securities laws, violation of RICO, common-law fraud and misrepresentation.

Plaintiffs contend that DiCresce knowingly and intentionally made false representations to plaintiffs regarding the Plans. Plaintiffs also contend that DiCresce was acting as the agent of MONY and therefore, MONY is liable for DiCresce's actions. Plaintiffs also filed this action against Benjamin W. Kilgore, III, (hereinafter "Kilgore") the former president of Pine State, and Wachovia Bank of North Carolina (hereinafter "Wachovia"), the personal representative of the estate of J.D. Kilgore, the late chairman of the Pine State Creamery Company.

For a variety of reasons, all defendants have moved to dismiss this action. Each defendant's motion will be addressed and discussed individually.

II. DISCUSSION

All defendants have moved to dismiss this action pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. A Rule 12(b)(6) motion should only be granted in very limited circumstances. Rogers v. Jefferson-Pilot Life Ins. Co., 883 F.2d 324, 325 (4th Cir.1989). The Fourth Circuit has stated that "a motion to dismiss for failure to state a claim for relief should not be granted unless it appears to a certainty that the plaintiff would be entitled to no relief under any state of facts which could be proved in support of his claim." Id.

Based on Rogers, the question becomes whether the Complaint, taken in the light most favorable to plaintiffs, states any valid claim for relief. In deciding whether a claim has been stated, Rule 8 of the Federal Rules of Civil Procedure requires only "notice pleading" such that a defendant receives fair notice from the complaint of the claim and the grounds on which the claim rests. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). The Conley court determined that discovery along with other pretrial procedures were more suited to allowing the parties to narrow and define the factual disputes. Id. at 47, 78 S.Ct. at 103.

A. MONY's Motion to Dismiss

1. Plans as Securities

MONY initially argues that Pine State's Plans are not securities and therefore, plaintiffs' claims for violation of federal and state securities laws should be dismissed. MONY correctly notes that in order to be a "security", the Plans must fall within one of the statutory definitions.¹ MONY proceeds from this point to argue that the only category into which the Plans could fit is that of "investment contracts." MONY then spends great time and effort in arguing that the Plans are not investment contracts. MONY concludes by arguing that since the Plans are not investment contracts, they are not securities and the federal Securities law should not apply.

This is a well reasoned and convincing argument and may prove pivotal at the summary judgment stage. However, we are currently only deciding whether plaintiffs have stated a valid cause of action. It would be premature and inequitable to allow MONY to argue substantive reasons to dismiss this action before plaintiffs have been allowed to pursue discovery. MONY would be arguing from a position of knowledge while plaintiffs would be forced to counter from a position of ignorance.

At this stage, plaintiffs are only required to state a claim upon which relief could be granted. Plaintiffs have alleged that the Plans are securities and are covered by the federal Securities laws. This allegation is sufficient to withstand a Rule 12(b)(6) Motion to Dismiss. Accordingly, MONY's Motion to Dismiss because the Plans are not securities is denied. As noted earlier, plaintiffs' bare allegation may not be sufficient to withstand the inevitable summary judgment motion. However, by the time a Motion for Summary Judgment is made, plaintiffs will have had the opportunity to participate in discovery and will be better prepared to counter MONY's argument.

2. McCarran-Ferguson Act

MONY's next argument is that the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, bars all federal causes of action in this case. The McCarran-Ferguson Act states that "no Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance." 15 U.S.C. § 1012(b).

The gist of MONY's argument is that all federal causes of action relating to the violation of North Carolina insurance laws are barred if North Carolina has enacted a statute which regulates the business of insurance. MONY concludes that North Carolina has enacted laws regulating the business of insurance and accordingly, all federal causes of action plead by plaintiffs are barred.

The plain meaning of the McCarran-Ferguson Act is clear; the Federal Government may not enact legislation that will "invalidate, impair or supersede" any state law regulating the business of insurance. What is not clear is whether the Federal Government may enact legislation which coincides with a State law but does not "invalidate, impair or supersede" the State law.

A brief look at the history of the McCarran-Ferguson Act may be helpful. Prior to 1945, the Supreme Court held that the business of insurance is interstate commerce and that the Sherman Act had not intended to exempt the insurance industry. United States v. South-Eastern Underwriters Asso., 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944). Soon after this decision, the McCarran-Ferguson Act was passed. In a decision subsequent to the enactment of the McCarran-Ferguson Act, the Supreme court stated that the "primary concern of Congress in the wake of the South-Eastern Underwriters Assoc. decision was in enacting legislation that would ensure that the States would continue to have the ability to tax and regulate the business of insurance." Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 217, 99 S.Ct. 1067, 1076, 59 L.Ed.2d 261 (1979).

The Supreme Court has held that insurance regulation has traditionally been under State control. SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65, 79 S.Ct. 618, 3 L.Ed.2d 640 (1959). The McCarran-Ferguson was enacted to protect a state's power to regulate the business of insurance.

MONY has not stated any way in which the Securities Act would invalidate, impair or supersede any law of the State of North Carolina. Likewise, allowing plaintiffs to proceed with their federal claims will in no way affect North Carolina's ability to tax and regulate the business of insurance. As a consequence, application of the Securities Act to the insurance industry is not prohibited by the McCarran-Ferguson Act. Accordingly, MONY's Motion to Dismiss based on the McCarran-Ferguson Act will be denied.

3. Securities Act's Statute of Limitations.

MONY contends that § 77m of Securities Act contains a statute of limitations and compliance with this period must be affirmatively pleaded. In Caviness v. DeRand Resources Corp. 983 F.2d 1295 1302 (4th Cir.1993), the Fourth Circuit stated that "because the very statute that gives a plaintiff his cause of action conditions its enforcement on commencement of the action within specified time periods, the plaintiff bears the burden of establishing that his action meets the statutory requirements." Caviness at 1302. The Caviness court went on to hold that a plaintiff must "plead and prove facts that show his action was filed within the time periods specified by the statute." Id.

Normally a statute of limitations defense is an affirmative defense and a plaintiff bears no responsibility for pleading compliance with the limitations period. However in the Fourth Circuit, Caviness has created an exception for a complaint alleging violation of the Securities...