Mills v. Polar Molecular Corp., s. 32

Citation12 F.3d 1170
Decision Date17 December 1993
Docket Number34,D,Nos. 32,s. 32
PartiesFed. Sec. L. Rep. P 98,051, RICO Bus.Disp.Guide 8465 William L. MILLS, Plaintiff-Appellant, v. POLAR MOLECULAR CORPORATION, Otis L. Nelson, Mark L. Nelson, A. Richard Nelson, James E. Larson, Eugene Zwoyer, Kenneth A. Roe and Thomas Ryan, Defendants-Appellees. Chester J. WALSH, Ronald L. Krumm, T.V. Miles and Joseph Mello, Plaintiffs-Appellants, v. POLAR MOLECULAR CORPORATION, Otis L. Nelson, Mark L. Nelson, A. Richard Nelson, James E. Larson and Eugene Zwoyer, Defendants-Appellees. ockets 92-9215, 92-9231.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Richard de Y. Manning, New York City, for plaintiffs-appellants.

Dennis W. Grogan, Johnston & McShane, P.C., New York City, for defendants-appellees.

Before: CARDAMONE, McLAUGHLIN, and LAY, * Circuit Judges.

McLAUGHLIN, Circuit Judge:

Plaintiffs William L. Mills, Chester J. Walsh, T.V. Miles and Joseph Mello appeal from a judgment of the United States District Court for the Southern District of New York (Robert W. Sweet, Judge ), dismissing their claims of securities fraud, brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j (b), and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1972), and their claims of mail and wire fraud, brought under 18 U.S.C. Sec. 1346 and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Sec. 1961, et seq. Mills separately appeals from a judgment dismissing his claims for breaches of contract and fiduciary duty.

We affirm the district court's judgment.

BACKGROUND

Polar Molecular Corporation ("Polar") is a Utah corporation that manufactures and sells petrochemical compounds. The defendants-appellees are Polar officers and directors (the "Directors"). The plaintiffs are former managers and sales representatives of Polar. In 1989 and 1990, Polar entered various contracts with the individual plaintiffs, and the present dispute arises out of Polar's alleged failure to perform obligations under these contracts.

The complaint alleged the following facts:

A. Walsh and Miles

In April 1989, Polar hired Chester Walsh and T.V. Miles to be managers. Both employment contracts provided for $70,000 in salary and 25,000 shares of unregistered Polar stock. Because shares must be registered with the Securities and Exchange Commission ("SEC") before they can be sold on the open market, see Securities Exchange Act of 1934, 15 U.S.C. Sec. 78l, the contracts stated that Polar would register the shares with the SEC "at the earliest opportunity in the year 1989."

Polar gave the 25,000 shares each to Walsh and Miles as promised, but did not register them. In October 1989, Walsh asked Mark Nelson, president of Polar, why the shares had not been registered. Nelson said the shares were "in registration." Between October and January, other Polar personnel also told Walsh and Miles that the shares would be registered. Despite these assurances, Polar never registered any of the shares.

B. Mello

In May 1989, Polar hired Joseph Mello to sell its products on commission. As part of the deal, Polar granted Mello an option to purchase 100,000 shares of Polar's stock at $1.75 per share. Polar never registered any stock to sell Mello, and Mello never exercised his option to purchase.

C. Mills

William Mills was another salesman for Polar. In January 1990, Mills sued Polar for the breach of a sales representative agreement. On March 20, Mills and Nelson discussed settlement over the telephone. Nelson told Mills that Mills would have to accept unregistered stock as payment because Polar was short of cash. Nelson assured Mills that the stock would be registered immediately after it was issued. On March 27, Nelson again told Mills over the phone that Polar would register the shares. A week later, Nelson and Mills met in Michigan. There, they agreed that Polar would execute a new sales representative agreement for Mills. Nelson promised that Polar would perform its part of the new agreement in all respects.

Mills and Polar finally signed a contract settling their dispute on April 13, 1990 (the "Settlement"). Under the Settlement, Mills agreed to dismiss his claims with prejudice in Additionally, as the parties discussed, the Settlement stated that Polar would execute a new sales representative agreement, granting Mills the right to solicit orders for Polar products in South America. The agreement stated that Polar was not obligated to accept any of Mills' orders, but that it would not withhold consent unreasonably.

exchange for 30,000 shares of unregistered Polar stock and an option to purchase an additional 200,000 shares. The Settlement also provided that Polar would register the 30,000 shares in the "then current" registration statement on file with the SEC.

Pursuant to the Settlement, Polar delivered to Mills 30,000 unregistered shares on May 1, 1990. Afterward, Nelson told Mills on several occasions that registration was imminent. At the end of August 1990, however, Polar filed a new registration statement that did not list Mills' shares. The statement, however, did register shares belonging to Nelson and other managers at Polar.

Also in August, Mills procured a large order of Polar products from a Paraguayan buyer. Although Polar initially indicated its approval to both Mills and the Paraguayan buyer, it ultimately rejected the order on the advice of counsel.

D. The Proceedings Below

In early 1991, the plaintiffs brought this action in the United States District Court for the Southern District of New York against Polar and the Directors. 1 The complaint (which the plaintiffs amended several times) alleged that Polar and the Directors promised to register the plaintiffs' shares but never did so. The complaint further alleged that the aggregation of broken promises constituted a pattern of mail and wire fraud in violation of RICO. To bolster the fraud claims, and in an attempt to plead predicate acts under RICO, the complaint alleged that Polar and the Directors had breached promises to register shares to several other persons (in addition to the plaintiffs herein) from 1989 to 1990. Notably, the complaint did not allege that any Directors personally made fraudulent statements in these other instances.

Mills added an allegation that the Directors breached their fiduciary duty by not accepting the Paraguayan order. Mills also alleged claims for breach of contract, arising out of Polar's failure to perform both the sales representative agreement and the Settlement.

Polar and the Directors moved to dismiss the fraud claims for failure to satisfy the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure, and all the other claims for failure to state a claim under Rule 12(b)(6).

The district court granted the motion and dismissed the entire complaint. It found that the plaintiffs had failed to plead fraud with particularity under Rule 9(b), and that they had not adequately alleged facts to raise a strong inference of scienter, or, fraudulent intent. The court dismissed the RICO claims under Rule 12(b)(6) for failure to allege predicate acts. It dismissed Mills' fiduciary breach claim because he failed to make a demand on the Directors before filing suit. Finally, the court dismissed Mills' contract claims, saying that, for reasons never fully articulated, they should be adjudicated in a Michigan state court.

The plaintiffs now appeal.

DISCUSSION

When we review the grant of a motion to dismiss under Rule 9(b) or Rule 12(b)(6), we accept as true the factual allegations of the complaint, and draw all inferences in favor of the pleader. IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052 (2d Cir. November 19, 1993). Dismissal under either rule is proper where the plaintiff cannot recover on the facts he has alleged. See Ryder Energy Distribution Corp. v. Merrill Lynch Commodities Inc., 748 F.2d 774, 779 (2d Cir.1984).

I. The Rule 10b-5 Claims

The district court dismissed the Rule 10b-5 securities fraud claims on the grounds that the plaintiffs: (1) had not pled fraud with particularity under Rule 9(b), and (2) had not alleged facts that gave rise to a strong inference of fraudulent intent.

Rule 10b-5 proscribes persons from making untrue or misleading statements of material fact in connection with a securities transaction. Employment contracts promising shares as compensation are generally considered securities transactions within Rule 10b-5. See Dubin v. E.F. Hutton Group Inc., 695 F.Supp. 138, 146-47 (S.D.N.Y.1988). A person who promises to perform a specific act in the future, while secretly intending not to perform, violates Rule 10b-5, provided that the promise is given as consideration for the transfer of securities. Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir.1986).

A Rule 10b-5 plaintiff must comply with Rule 9(b), which requires that fraud be pled with particularity. Specifically, the complaint must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir.1989).

A. Walsh, Miles and Mello

The fraud allegations of Walsh, Miles and Mello fail because, even though these plaintiffs have served an original and two amended complaints, they still have not linked the alleged fraudulent statements to particular Directors. Rule 9(b) is not satisfied where the complaint vaguely attributes the alleged fraudulent statements to "defendants". Luce, 802 F.2d at 54. See DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1249 (2d Cir.1987) (allegations of fraud were insufficient where the complaint did not link any of the defendants to the alleged fraudulent statement). Nor did Walsh, Miles and Mello satisfy Rule 9(b) by alleging simply that "Polar" promised to register the shares. The mere fact that...

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