Ossman v. Diana Corp.

• Decision Date: 29 June 1993
• Docket Number: Civ. No. 4-92-976.
• Citation: 825 F. Supp. 870
• Parties: Carl and Dorothy OSSMAN; Wilmer and Florence Tiede; and Rosemary and Ray Ward; individually and on behalf of all others similarly situated, Plaintiffs, v. DIANA CORPORATION; Donald E. Runge; Richard Y. Fisher; and Farm House Foods Corporations, Defendants.
• Court: U.S. District Court — District of Minnesota

825 F. Supp. 870

Carl and Dorothy OSSMAN; Wilmer and Florence Tiede; and Rosemary and Ray Ward; individually and on behalf of all others similarly situated, Plaintiffs, v. DIANA CORPORATION; Donald E. Runge; Richard Y. Fisher; and Farm House Foods Corporations, Defendants.

Civ. No. 4-92-976.

United States District Court, D. Minnesota, Fourth Division.

June 29, 1993.

Russell J. Jensen, and Russell J. Jensen, P.A., St. Paul, MN, Dylan J. McFarland, and Fred Burstein & Associates, Minneapolis, MN, David B. Zlotnick, Susan Schneider Thomas, and Zlotnick & Thomas, Bala Cynwyd, PA, and Donald B. Lewis, Philadelphia, PA, for plaintiffs.

Joe A. Walters, James A. Rubenstein, and O'Connor & Hannan, Minneapolis, MN, Natalie I. Koether, Robert J. Schechter, Cary Brian Samowitz, and Keck Mahin Cate & Koether, New York City, and Arthur R. Miller, Langdell West, Cambridge, MA, for defendants.

Patrick J. McLaughlin, and Dorsey & Whitney, Minneapolis, MN, for intervening plaintiff First Trust Nat. Ass'n David L. Mitchell, Robert T. Kugler, and Robins, Kaplan, Miller & Ciresi, Minneapolis, MN, for intervening plaintiff Norwest Bank Minnesota, National Ass'n.

Karen M. O'Brien, Washington, DC, for North American Securities Admin'rs Ass'n, Inc.

DOTY, District Judge.

This matter is before the court on the plaintiffs' motion for partial summary judgment, on the defendants' motion to dismiss, on intervenor Norwest Bank Minnesota, National Association's ("Norwest Bank") motion for summary judgment and on the North American Securities Administrators Association, Inc.'s ("NASAA") motion for leave of the court to file an amicus curiae brief. Based on a review of the file, record and proceedings herein, the court:

1. Grants the plaintiffs' motion for summary judgment on Count IV of their complaint;

2. Grants intervening plaintiff Norwest Bank's motion for summary judgment;

3. Grants NASAA's motion for leave to file a brief amicus curiae; and

4. Denies the defendants' motion to dismiss.

BACKGROUND

In 1966, defendants Donald Runge¹ ("Runge") and Richard Fisher² ("Fisher") founded Farm House Foods Corporation ("Farm House").³ Between 1977 and 1980, Farm House acquired a majority of the shares and control of Diana Corporation ("Diana").⁴ By January 1985, Farm House owned approximately sixty-percent of Diana and Diana owned approximately twenty-two percent of Farm House.⁵

In January 1988, Diana issued approximately 351,000 of its shares to defendants Fisher and Runge, diluting Farm House's interest in Diana by four percent. At about the same time, Diana's board of directors approved a tender offer ("exchange offer") for the stock of Farm House. Diana offered to exchange its stock for all outstanding Farm House shares of stock that it did not already own. As a result of the exchange offer, which took effect on April 11, 1988, Diana owned 93% of Farm House's stock and Farm House only owned 37% of Diana.⁶ Shortly thereafter, Farm House sold Diana its entire holding of Diana stock for an $18,549,000 promissory note bearing interest at twelve and one-half percent per annum. Diana subsequently paid off that note.

On October 10, 1988, Farm House purchased various insurance policies from The Home Indemnity Company ("Home Indemnity"). On June 8, 1990, Home Indemnity commenced an action against Diana and Farm House in the United States District Court for the Eastern District of Wisconsin ("Wisconsin court") to recover unpaid premiums. Farm House admitted that it owed certain premiums. Diana, however, denied owing any premiums.

On April 15, 1991, Home Indemnity moved for summary judgment on the issue of Diana's liability for the premiums. Home Indemnity argued that Diana is liable for the premiums because (1) it is an insured under the insurance policies; (2) a de facto merger between Diana and Farm House occurred; or (3) Diana is a mere continuation of Farm House. The court granted Home Indemnity's motion, finding that Diana is an insured under the insurance policy and that the transactions between Diana and Farm House constitute a de facto merger of the two corporations. Home Indem. Co. v. Farm House Foods Corp., 770 F.Supp. 1339, 1346 (E.D.Wis.1991).⁷ Home Indemnity and Diana subsequently agreed to settle the action on the condition that the Wisconsin court vacate Home Indemnity I. The Wisconsin court denied the request, finding that its "decision may have potential value to numerous third parties not involved in this action, including other possible creditors who might be interested in the relationship between Farm House and Diana, and other judges who might find the decision instructive." Home Indem. Co. v. Farm House Foods Corp., 770 F.Supp. 1348, 1350 (E.D.Wis.1991) (citation omitted).⁸ Nevertheless, Diana chose to settle the action.

The plaintiffs in the action at bar,⁹ investors who hold various securities issued by Farm House, commenced this action on February 15, 1991, alleging that they are the victims of defendants Diana, Farm House, Runge and Fisher's (together "the defendants") fraudulent conduct. The plaintiffs contend that the defendants fraudulently stripped Farm House of its assets, rendering it insolvent and leaving them with worthless investments. The plaintiffs thus assert the following claims:¹⁰

1. The defendants' fraudulent acts constitute a violation of Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), ("Count I");

2. The defendants' fraudulent acts constitute a violation of Sections 14(e) and 20 of the Securities Exchange Act, 15 U.S.C. §§ 78n(e) and 78t, ("Count II");

3. Defendants Diana, Fisher and Runge's fraudulent acts constitute a violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq., ("Count III");

4. Defendants Diana and Farm House are liable to the plaintiffs pursuant to doctrine embodied in the common law of contract and promissory estoppel ("Count IV");

5. Defendants Diana, Fisher and Runge are liable to the plaintiffs pursuant to the doctrine embodied in the common law of tortious interference with contract ("Count V"); and

6. The defendants' fraudulent acts constitute a violation of the Uniform Fraudulent Transfer Act ("Count VI").

The plaintiffs now move for summary judgment on Count IV of their amended complaint. The plaintiffs, arguing that the Wisconsin court has already decided the factual and legal issues underlying Count IV, contend that they are entitled to summary judgment on that count based on the doctrine of collateral estoppel. Intervening plaintiffs First Trust National Association¹¹ ("First Trust") and Norwest Bank Minnesota, National Association¹² ("Norwest") contend that the application of collateral estoppel is appropriate in this case. NASAA also contends that application of the doctrine of collateral estoppel is appropriate and warrants an order granting summary judgment on Count IV.¹³

The defendants contend that collateral estoppel is not applicable in this case because the Wisconsin court's order is an interlocutory order and, moreover, is based on an erroneous application of law. The defendants thus contend that the court should deny the plaintiffs' motion for summary judgment on Count IV. In addition, the defendants move to dismiss the plaintiffs' action pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted. The defendants also contend that certain of the plaintiffs' claims are subject to dismissal under Rules 9(b) and 8(a) of the Federal Rules of Civil Procedure. The plaintiffs, arguing that they present claims that are legally viable, contend that no dismissal is warranted.¹⁴ The court will consider the parties' motions in turn.

DISCUSSION

I. The Plaintiffs' Motion for Summary Judgment on Count IV

Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." This standard mirrors the standard for a directed verdict under Federal Rule of Civil Procedure 50(a), which is that the trial judge must direct a verdict if, under the governing law, there can be but one reasonable conclusion as to the verdict. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). Stated in the negative, summary judgment will not lie if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Id. at 248, 106 S.Ct. at 2510. In order for the moving party to prevail, it must demonstrate to the court that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986); Fed.R.Civ.P. 56(c). A fact is material only when its resolution affects the outcome of the case. Anderson, 477 U.S. at 248, 106 S.Ct. at 2510. On a motion for summary judgment, all evidence and inferences are to be viewed in a light most favorable to the nonmoving party. Id. at 250, 106 S.Ct. at 2511. The nonmoving party, however, may not rest upon mere denials or allegations in the pleadings, but must set forth specific facts sufficient to raise a genuine issue for trial. Celotex, 477 U.S. at 324, 106 S.Ct. at 2553. Moreover, if a plaintiff cannot support each essential element of its claim, summary judgment must be granted because a complete failure of proof regarding an essential element necessarily renders all other facts immaterial. Id. at 322-23, 106 S.Ct. at 2552. With this standard at hand, the court will consider the plaintiffs' motion for summary judgment on Count IV.

The issue before the court is whether the Wisconsin court's ruling that the transactions between...