Pike v. Edgar

• Decision Date: 30 September 1992
• Docket Number: Civ. No. 92-56-SD.
• Citation: 801 F. Supp. 907
• Parties: Milo L. PIKE; Henry M. Powers v. Daniel G. EDGAR; Edward A. Hennessey; Wendell W. Jesseman; Albert G. Jones; David P. Goodwin; Raymond E. Closson; Stephen Camann; Theodore Wadleigh.
• Court: U.S. District Court — District of New Hampshire

801 F. Supp. 907

Milo L. PIKE; Henry M. Powers v. Daniel G. EDGAR; Edward A. Hennessey; Wendell W. Jesseman; Albert G. Jones; David P. Goodwin; Raymond E. Closson; Stephen Camann; Theodore Wadleigh.

Civ. No. 92-56-SD.

United States District Court, D. New Hampshire.

September 30, 1992.

Edgar D. McKean III, Gilford, N.H., for plaintiffs.

Irvin D. Gordon, Paul J. Barbadoro, Concord, N.H., Brackett B. Denniston III, Boston, Mass., for defendants.

OPINION

DEVINE, Senior District Judge.

This order addresses the motion to remand the instant action pursuant to 28 U.S.C. § 1447(c) filed by plaintiffs Milo L. Pike and Henry M. Powers. For the reasons that follow, the court grants plaintiffs' motion.

1. Background

Primarily in 1988, plaintiffs acquired approximately 440,000 shares of common stock, at a cost of approximately $8.8 million, in a bank holding company which is currently known as Dartmouth Bancorp, Inc. ("Bancorp").¹ Effective January 1, 1990, the four subsidiary banks held by Bancorp were merged into a single bank known as Dartmouth Bank ("Bank").

On October 10, 1991, the New Hampshire Commissioner of Banks declared Bancorp insolvent, and, pursuant to 12 U.S.C. § 1821(c)(3), appointed the Federal Deposit Insurance Corporation (FDIC) as Bancorp's Receiver/Liquidating Agent. FDIC accepted the appointments. At this juncture, plaintiffs lost their investment in Bancorp.²

On December 23, 1991, plaintiffs commenced the instant action in the Belknap County (New Hampshire) Superior Court against defendants Daniel G. Edgar, et al,³ as officers and/or directors of Bancorp. In the original complaint, plaintiffs made numerous allegations of defendants' negligence,⁴ including allegations that defendants negligently misrepresented the deteriorating financial condition of Bancorp.⁵

On January 23, 1992, defendants removed the instant action to this Court pursuant to 28 U.S.C. §§ 1441(b)⁶ and 1446.⁷ On January 31, 1992, plaintiffs amended the original complaint by eliminating paragraphs 14, 15, and 16, which specifically alleged that defendants violated federal securities laws. Neither the original complaint nor the amended complaint expressly invokes federal law as a basis for a right of action.

Plaintiffs seek the remand of the instant action pursuant to 28 U.S.C. § 1447(c),⁸ on the ground that federal jurisdiction is lacking because the original complaint failed to state a federal cause of action. Defendants contend that removal was proper under 28 U.S.C. § 1441(b) because (1) the original complaint stated federal derivative claims against Bank, and (2) the original complaint stated a federal cause of action under Securities and Exchange Commission (SEC) Rule 10b-5.⁹ 17 C.F.R. § 240.10b-5 (1992).

The parties dispute the legal character of the allegations contained in the original complaint. Defendants contend that the original complaint stated claims for (1) negligent management and (2) violations of Rule 10b-5. Plaintiffs contend that the original complaint stated only a New Hampshire common-law claim for negligence.

The parties also dispute the legal character of the allegations contained in the amended complaint. Defendants contend that the amended complaint states claims for negligent management. Plaintiffs contend that the amended complaint states only a New Hampshire common-law claim for negligence.

2. Discussion

Under 28 U.S.C. § 1441(b), removal of a civil action between nondiverse parties is proper where the plaintiff has brought a claim which "arises under" federal law. 28 U.S.C. § 1441(b). The question whether such a claim has been brought "must ... be determined by reference to the `well-pleaded complaint.'" Merrell Dow Pharmaceuticals, Inc. v. Thompson, 478 U.S. 804, 808, 106 S.Ct. 3229, 3232, 92 L.Ed.2d 650 (1986). Under the well-pleaded complaint rule, "a defendant may not remove a case to federal court unless the plaintiff's complaint establishes that the case `arises under' federal law." Franchise Tax Bd. v. Laborers Vacation Trust, 463 U.S. 1, 10, 103 S.Ct. 2841, 2846, 77 L.Ed.2d 420 (1983) (emphasis in original). This rule also requires that "`a right or immunity created by the Constitution or laws of the United States must be an element, and an essential one, of the plaintiff's cause of action.'" Id. at 10, 11, 103 S.Ct. at 2846, 2847 (quoting Gully v. First Nat'l Bank in Meridian, 299 U.S. 109, 112, 57 S.Ct. 96, 97, 81 L.Ed. 70 (1936)).

a. The putative negligent management claims.

Defendants contend that plaintiffs' original and amended complaints state claims for negligent management of Bank. Defendants' Memorandum In Opposition to Motion to Remand at 6-7. Defendants further contend that any claims for negligent management of Bank "are properly derivative claims" against Bank. Defendants' Memorandum In Opposition Of Their Motion To Remand, supra, at 7. Defendants argue that because Bank has been accepted into receivership by FDIC, these claims are "governed by federal law."¹⁰ Therefore, defendants argue, the instant action was properly removed to federal court. Defendants Memorandum In Opposition Of Motion To Remand, supra, at 5-11.

Assuming arguendo that defendants are correct in assuming (1) that plaintiffs' original and amended complaints state claims for negligent management of Bank; and (2) that these claims are derivative claims against Bank; and (3) that FDIC is the sole owner of any derivative claims against Bank, defendants have done no more than to advance a federal law defense against plaintiffs' putative state-law¹¹ claims for negligent management of Bank. As the United States Supreme Court held in Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 107 S.Ct. 1542, 95 L.Ed.2d 55 (1987),

Federal preemption is ordinarily a federal defense to the plaintiff's suit. As a defense, it does not appear on the face of a well-pleaded complaint, and, therefore, does not authorize removal to federal court.¹²

Id. at 63, 107 S.Ct. at 1546 (citing Gully v. First Nat'l Bank in Meridian, supra, 299 U.S. 109, 57 S.Ct. 96, 81 L.Ed. 70) (whole case). See also Merrell Dow Pharmaceuticals, Inc., supra, 478 U.S. at 808, 106 S.Ct. at 3232 (citing Louisville & Nashville R. Co. v. Mottley, 211 U.S. 149, 29 S.Ct. 42, 53 L.Ed. 126 (1908)) ("A defense that raises a federal question is inadequate to confer federal jurisdiction."). Therefore, defendants' contentions cannot constitute grounds for removal of plaintiffs' action under 28 U.S.C. § 1441(b).

b. The putative Rule 10b-5 claims.

Defendants contend that paragraphs 4-5 and 14-16¹³ of the original complaint stated a federal claim under Rule 10b-5. Plaintiffs contend that paragraphs 14-16, which allege that "defendants violated certain federal securities laws,"¹⁴ were included merely "to establish a rebuttable presumption of negligence." Plaintiffs' Memorandum In Support Of Their Motion To Remand at 2.

A complaint which merely alleges the violation of a federal statute as an element of a state law claim does not state a federal claim unless a private federal cause of action exists for the violation. See Merrell Dow Pharmaceuticals, Inc., supra, 478 U.S. 804, 106 S.Ct. 3229, 92 L.Ed.2d 650. Therefore, plaintiffs' allegations of federal securities law violations cannot invoke federal jurisdiction unless a private federal cause of action exists for the alleged violations.

There is no private federal cause of action for the negligent failure to comply with Section 10(b) and Rule 10b-5. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-214, 96 S.Ct. 1375, 1381-1391, 47 L.Ed.2d 668 (1976). The United States Supreme Court in Ernst held that a Rule 10b-5 action requires an allegation of "scienter", which the Court defined as "a mental state embracing intent to deceive, manipulate or defraud." Id. at 194 n. 12, 96 S.Ct. at 1381 n. 12.¹⁵ The Court expressly declined to address the question whether the term "scienter" includes reckless behavior. Id.

Although nine courts of appeals have, for purposes of a Rule 10b-5 action, defined scienter to include reckless behavior, see e.g. Van Dyke v. Coburn Enterprises, Inc., 873 F.2d 1094, 1100 (8th Cir. 1989) (citing the adoption of a reckless behavior definition by the Second, Third, Fifth, Seventh, Ninth, Eleventh, and D.C. Circuits, and adopting such a definition itself); Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1023 (6th Cir.1979), this Circuit has not decided the question. See e.g. Hoffman v. Estabrook & Co., 587 F.2d 509, 516 (1st Cir.1978). However, consistent with this Circuit's opinion in Hoffman, supra, this court will "assume without deciding that recklessness, as well as fraud, will ground an action under Rule 10b-5." Hoffman, supra, at 516.

In Hoffman, this Circuit applied the following definition of recklessness for purposes of a Rule 10b-5 action: "`acts of commission or omission ... so highly unreasonable and such an extreme departure from the standards of ordinary care as to present a danger of misleading the plaintiff to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.'" Hoffman, supra, at 517 (quoting Sanders v. Nuveen & Co., Inc., 554 F.2d 790, 793 (7th Cir.1977)) (emphasis added).

Under Rule 9(b), Fed.R.Civ.P.,¹⁶ a plaintiff in a Rule 10b-5 action must set forth factual allegations that would support a reasonable inference of reckless behavior. See Romani v. Shearson Lehman Hutton, 929 F.2d 875, 878 (1st Cir.1991). In Romani, this Circuit cited the complaint in Hurley v. FDIC, 719 F.Supp. 27 (D.Mass 1989), as an example of a complaint containing sufficient detail to satisfy Rule 9(b):

The complaint alleged that a bank's financial reports were fraudulent because they did not take into account numerous problem loans. The complaint contained many details about specific delinquent loans, the bank's net worth and its reserves for potential loan losses.

Romani, supra, at 880 (citing Hurley, supra, at 31)....