Schuster v. Anderson

Decision Date22 December 2005
Docket NumberNo. C04-4089-MWB.,C04-4089-MWB.
Citation413 F.Supp.2d 983
PartiesOrville SCHUSTER and William Schlichte, Plaintiffs, v. Fay ANDERSON, F.H. Anderson Company, P.C., F.H. Anderson Company, Cal Cleveringa and American State Bank, Defendants.
CourtU.S. District Court — Northern District of Iowa

Edward J. Keane, Gildemeister & Keane, Maurice B. Nieland, Rawlings, Nieland, Probasco, Killinger, Ellwanger, Jacobs, et al., Sioux City, IA, Terrence D. Brown, Hixson & Brown, PC, Clive, IA, Timothy A. Clausen, Klass, Stoik, Mugan, Villone, Phillips, Orzechowski, Clausen, et al, Sioux City, IA, for Plaintiffs.

Edward M. Mansfield, Belin, Lamson, McCormick, Zumbach, Flynn, Des Moines, IA, Lloyd W. Bierma, Oostra Bierma & Schouten, Sioux Center, IA, Cal Cleveringa, John C. Gray, Heidman, Redmond, Fredregill, Patterson, Plaza, Dykstra & Prahl, Sioux City, IA, Robert S. Keith, Stephen G. Olson, II, Engles, Ketcham, Olson & Keith, PC, Omaha, NE, for Defendants.

MEMORANDUM OPINION AND ORDER REGARDING DEFENDANTS' MOTIONS TO DISMISS PLAINTIFFS' THIRD AMENDED AND SUBSTITUTED COMPLAINT

BENNETT, Chief Judge.

TABLE OF CONTENTS
                I. INTRODUCTION AND FACTUAL BACKGROUND ....................................989
                    A. Procedural Background ..............................................989
                    B. Factual Background .................................................993
                       1. RICO allegations ................................................993
                       2. Federal securities allegations ..................................994
                II. LEGAL ANALYSIS ........................................................995
                    A. Rule 12(b)(6) Standards ............................................995
                    B. Civil Rico Claims-Counts XII-XIV ...................................997
                       1. Arguments of the parties ........................................997
                       2. Enterprise ......................................................999
                          a. Generally ....................................................999
                             i. Association-in-fact enterprises ..........................1000
                            ii. Existence separate and distinct from the patter of
                                  racketeering ...........................................1000
                          b. Analysis ....................................................1001
                    C. Federal Securities Allegations (Counts XXI, XXII, and XXVI) .......1006
                
                1. Arguments of the parties .............................................. 1006
                       2. Analysis .............................................................. 1008
                          a. Specification of false statements .................................. 1009
                          b. Scienter ........................................................... 1010
                          c. Loss causation ..................................................... 1013
                    D. Dismissal Of State Law Claims ............................................ 1015
                III. CONCLUSION ................................................................. 1016
                

Following this court's granting, in part, and denying, in part, of the defendants' first onslaught of motions to dismiss and the plaintiffs' subsequent amending of their complaint after the court's prior ruling, the pleadings in this longstanding case have become reminiscent of the legendary phoenix.1 The motions to dismiss currently before the court require the court to determine, inter alia, if the plaintiffs have, on their third attempt, improved their allegations sufficiently to withstand the defendants' motions to dismiss. The plaintiffs' complaint, now in its fourth iteration, asserts a plethora of claims against Fay Anderson, F.H. Anderson Company, P.C., F.H. Anderson Company, Cal Cleveringa and American State Bank (collectively, "the defendants"). The plaintiffs' claims arise out of allegations that defendants Fay Anderson and Cal Cleveringa fraudulently induced both Orville Schuster and William Schlichte (collectively, "the plaintiffs") into investing in a number of unsuccessful investment schemes. The plaintiffs' claims are generally for professional negligence, breach of fiduciary duty, fraudulent misrepresentation, fraudulent nondisclosure, negligent misrepresentation, fraud in the inducement based on fraudulent misrepresentation, fraud in the inducement based on fraudulent nondisclosure, negligent supervision, breach of contract, conversion, state securities law claims, federal securities law claims and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) under 18 U.S.C. §§ 1962(b), (c) & (d). Particularly relevant to the current motion before the court are the plaintiffs' allegations under RICO and their corresponding state and federal securities law claims. Specifically, the court is called upon here to ascertain whether plaintiffs have sufficiently pleaded the element of "enterprise," with respect to their claims under RICO. The defendants contend the plaintiffs are attempting to "fit a square peg into a round hole," and consequently, have not adequately pleaded this element as defined by Eighth Circuit precedent. The defendants argue that because the plaintiffs' third amended and substituted complaint fails to cure the critical flaws identified by the court in the second amended complaint, the plaintiffs should be denied leave to file a fourth amended complaint on the ground that the amendment is futile. The plaintiffs, not surprisingly, contend they have "resurrected" their RICO claims out of the ashes of their second-amended complaint because they have cured the defects identified by this court in its prior ruling.

In their motions to dismiss, the defendants further take issue with the plaintiffs' newly-asserted securities fraud claims and aver these claims should be dismissed because the plaintiffs' third amended complaint fails to exhibit the degree of particularity required by the Private Securities Litigation Reform Act ("PSLRA"). Accordingly, the defendants argue that because all of the plaintiffs' federal law claims require dismissal, the remaining state law claims asserted by the plaintiffs in their third amended complaint should be dismissed from federal court. Contrarily, the plaintiffs assert they have pleaded their securities law fraud claims with sufficient particularity in order to survive the defendants' motions to dismiss. However, in the event the court dismisses the plaintiffs' federal law claims, the plaintiffs argue this court should retain jurisdiction of their asserted state law claims. Thus, this court is called upon to determine whether the plaintiffs' third amended complaint sufficiently breathes new life into their federal law claims.

I. INTRODUCTION AND FACTUAL BACKGROUND

The procedural and factual background for this lawsuit is discussed extensively in this court's prior ruling. See Schuster v. Anderson, 378 F.Supp.2d 1070, 1075-81 (N.D.Iowa 2005). The court will therefore present here only procedural matters arising since the court dismissed the second amended complaint and the new factual allegations of the proffered third amended and substituted complaint.

A. Procedural Background

[1] By order dated July 12, 2005, this court granted in part and denied in part the defendants' motions to dismiss the plaintiffs' second amended complaint.2 See id. at 1123. Specifically, with respect to the RICO claims,3 the court held that the plaintiffs' complaint sufficiently complied with the particularity required by Rule 9(b) and that the plaintiffs could assert RICO claims against American State Bank as a "person" under a respondeat superior theory of liability. Id. at 1083-1105. Thus, the court denied the defendants' motions to dismiss the plaintiffs' RICO claims on these grounds. Id. at 1094. However, the court granted the defendants' motions to dismiss the plaintiffs' RICO claims because the plaintiffs failed to state a claim for which relief could be granted under Rule 12(b)(6) of the Federal Rules of Civil Procedure by inadequately pleading the "enterprise" requirement. Id. at 1098. The basis for the court's dismissal was that the plaintiffs failed to adequately plead a RICO enterprise consisting of an "association-in-fact." Id. Although the plaintiffs met their burden with respect to two of the three requirements—common purpose and continuity—the plaintiffs failed to adequately plead the third element—that the association-in-fact had an ascertainable structure distinct from the alleged pattern of racketeering.4 Id. The plaintiffs were allowed to file a third amended and substituted complaint remedying this deficiency and any additional infirmities perceived in their complaint not addressed by the court in its order. Id. at 1105, 1123-24. The plaintiffs were further permitted to assert additional federal and state law claims and amend existing claims in their third amended and substituted complaint. Id. at 1124.

On August 31, 2005, plaintiffs Orville Schuster ("Schuster") and William Schlichte ("Schlichte") filed their Third Amended and Substituted Complaint against defendants American State Bank ("ASB"), Cal Cleveringa ("Cleveringa"), Fay Anderson ("Anderson"), F.H. Anderson Company, P.C. and F.H. Anderson Company. (Doc. No. 77). Whereas the second amended complaint was 55 pages and 206 paragraphs long and alleged 20 causes of action against the defendants, the third amended complaint is 68 pages and 255 paragraphs long and asserts 27 various causes of action against the defendants. The plaintiffs' third amended complaint realleges all the counts iterated in the plaintiffs' second amended and substituted complaint, with the exception of the two counts that were dismissed by the court in its previous order. Although these eighteen causes of action are identical with respect to the types of claims, the counts have been renumbered and are as follows:

I. Schuster's professional negligence claim against defendants Anderson, F.H. Anderson...

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