US Concord, Inc. v. Harris Graphics Corp.

• Decision Date: 05 February 1991
• Docket Number: No. C-89-4003 SAW.,C-89-4003 SAW.
• Court: U.S. District Court — Northern District of California
• Parties: U.S. CONCORD, INC., Plaintiff, v. HARRIS GRAPHICS CORPORATION, Defendant.

757 F. Supp. 1053

U.S. CONCORD, INC., Plaintiff, v. HARRIS GRAPHICS CORPORATION, Defendant.

No. C-89-4003 SAW.

United States District Court, N.D. California.

February 5, 1991.

Cooper, White & Cooper, Jeffrey Wong, Thomas Niu, San Francisco, Cal., Phillips, Lytle, Hitchcock, Blaine & Huber, Buffalo, N.Y., for plaintiff.

George Yuhas, Edward Reines, Orrick, Herrington & Sutcliffe, San Francisco, Cal., for defendant.

MEMORANDUM AND ORDER

WEIGEL, District Judge.

The Second Amended Complaint in this action alleges eleven causes of action against defendant. Defendant's motion to dismiss eight of these claims has been submitted for decision. Because of the complexity of the questions involved, an understanding of the history of this litigation is essential.

BACKGROUND

Alleging myriad theories of liability, plaintiff U.S. Concord, Inc. ("Concord") sues defendant Harris Graphics, Inc. ("Harris") for economic losses sustained from defendant's sale of an allegedly defective printing press. In 1987 Haljak Leasing Co. ("Haljak") purchased a complex printing press from defendant. Haljak then leased the press to S & G Press, Inc.¹ At Harris's request, plaintiff agreed to finance the purchase of the press. S & G ultimately defaulted on the loan.

Plaintiff and defendant entered into two separate agreements to facilitate the financing arrangements. The first agreement ("indemnity agreement") provided that defendant would indemnify plaintiff in the event that the press was not accepted by S & G. The second agreement ("recourse agreement") provided that in the event of a default by S & G, defendant would pay plaintiff 20% of a stipulated loss value as well as interest on the total stipulated loss value. In addition, the recourse agreement set forth the parties' respective obligations with respect to remarketing the press.

This litigation has a protracted and tortured history. In July 1988 S & G filed suit in this Court against Harris and Concord ("S & G action"), alleging that the press was defectively designed and manufactured. S & G later filed for bankruptcy, staying Concord's efforts to collect from S & G on its counterclaim.² Concord filed two separate actions against Harris, one alleging fraud, and the other, breach of the indemnity agreement. Harris, in turn, filed suit in New York, seeking a declaration of the parties' rights and liabilities under the recourse agreement.

In an Order dated October 11, 1990, this Court granted plaintiff leave to file an amended complaint, effectively consolidating the three pending actions between the parties. This amended complaint added claims for violations of the Racketeering Influenced and Corrupt Organizations Act ("RICO") and for implied indemnity. Shortly thereafter, plaintiff amended its complaint once more to add contract and warranty claims.

As noted at the outset, the Second Amended Complaint includes eleven claims for relief. Defendant moves to dismiss the following eight: (1) fraud; (2) negligent misrepresentation; (3) RICO; (4) implied indemnity; (5) breach of express warranty; (6) breach of the implied warranty of merchantability; (7) breach of the implied warranty of fitness; and (8) breach of a third-party beneficiary contract.

SUMMARY OF DECISION

The issues raised by the motion to dismiss call for detailed analysis. However, a brief summary at this point is appropriate.

In its first claim, plaintiff charges defendant with fraud. This claim embraces two distinct theories of liability: (1) affirmative misrepresentations and (2) fraudulent concealment. With the exception of plaintiff's allegation regarding the falsity of defendant's 1985 annual report, the misrepresentation allegations fail to satisfy Federal Rule of Civil Procedure 9(b)'s requirement that fraud be averred with particularity. Plaintiff's third claim for negligent misrepresentation rests on these same defective allegations. Therefore, the Court dismisses plaintiff's fraud and negligent misrepresentation claims, with leave to amend, as to all affirmative misrepresentation allegations save for that regarding the annual report.

Plaintiff's fraudulent concealment claim withstands the motion to dismiss. New York law imposes a duty to disclose material information upon a party who possesses superior knowledge and is aware that another party may be acting on the basis of mistaken information. Here plaintiff charges defendant with concealing numerous consumer complaints regarding the press's performance—information to which Harris had superior access and of which Concord was allegedly unaware.

In its second cause of action, plaintiff avers that defendant violated RICO, 18 U.S.C. §§ 1962(a), (b) & (d), by committing several predicate acts of mail and wire fraud. Plaintiff has no standing to allege a RICO violation under Section 1962(a) because it has failed to allege injury from defendant's use or investment of racketeering proceeds. Similarly, plaintiff lacks standing to allege a RICO violation under Section 1962(b) because it has failed to allege injury from defendant's acquisition or maintenance of an interest in a RICO enterprise. The Court dismisses these claims with leave to amend. Nor may plaintiff allege a RICO conspiracy under Section 1962(d). Plaintiff claims that Harris conspired with its employees and representatives to violate RICO. A corporation cannot conspire with its own employees and officers. This claim is dismissed with prejudice.

In its fourth claim, plaintiff seeks implied indemnity from Harris for any liability it incurs in the S & G action. This claim is precluded because a party may seek indemnity only when it is innocent of wrongdoing. S & G alleged intentional fraud and conspiracy to defraud against Concord. If S & G prevails against Concord, then Concord necessarily will be guilty of intentional wrongdoing. The Court dismisses this claim with prejudice.

In counts seven, eight, and nine, plaintiff alleges breach of express and implied warranties against Harris. Dismissal is not warranted on these claims. New York's privity requirement is satisfied because the relationship between Harris and Concord is the "functional equivalent" of privity.

Finally, in its tenth claim, plaintiff sues for breach of a third-party beneficiary contract between Harris and S & G. It may maintain this cause of action because the complaint alleges that Harris and S & G entered into the sales contract for the benefit of Concord.

DISCUSSION

I. Fraud (Count One)

Plaintiff's fraud claim embraces two distinct theories of liability: (1) defendant's affirmative misrepresentations to plaintiff and S & G, and (2) defendant's fraudulent concealment of adverse information regarding the quality of the printing press. Defendant attacks the sufficiency of both theories.

A. Affirmative Misrepresentations

Concord alleges that Harris made several oral representations to Concord that the printing press was the "workhorse of the industry" and known for its speed and quality. Complaint, para. 8. In addition, plaintiff alleges that Harris represented to S & G that all units of the press were new (Complaint, para. 16) and that the press would be capable of producing quality product at a speed of 60,000 impressions per hour ("iph"). Complaint, para. 22. In fact, according to plaintiff, the printing press was incapable of producing high quality product at the warranted speed; two units of the press were not new; and the press was the subject of numerous consumer complaints.

Defendant persuasively argues that Concord's oral misrepresentation allegations fail to satisfy the particularity requirements of Federal Rule of Civil Procedure 9(b).³ To meet the rule's requirements, plaintiff must allege the time, place, and contents of the alleged fraud. Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir.1985). Plaintiff has not satisfied this burden. Although plaintiff specifies the contents of the purported misrepresentations, it fails to allege their time and place. Allegations such as "during the course of discussions in 1986 and 1987," "in or about May through December 1987," and "May 1987 and thereafter" (Complaint, paras. 8, 16) do not make the grade. The timing of these statements is particularly important because Concord must establish that it relied upon the misrepresentations in signing the security agreement with S & G and the recourse and indemnity agreements with Harris.⁴

At the hearing on January 10, 1991, plaintiff's counsel directed the Court's attention to its decision in David K. Lindemuth Co. v. Shannon Financial Corp., 637 F.Supp. 991 (N.D.Cal.1986), which held that an allegation setting forth specific misrepresentations within an identified document satisfied Rule 9(b). See id. at 994. Relying on Lindemuth, plaintiff points to four specific documents containing alleged misrepresentations regarding the press's speed and newness. Plaintiff argues that reference to these four documents supplies the specificity required by Rule 9(b). These four documents are (1) Harris's 1985 annual report; (2) a letter dated September 17, 1987 from Harris to Concord; (3) the recourse agreement; and (4) the indemnity agreement. The Court finds that only the annual report supports plaintiff's position.

The complaint alleges that Harris gave Concord a copy of its 1985 annual report, which represented that the press was capable of producing saleable products at a speed of 60,000 iph. Complaint, para. 9. Concord further alleges that Harris knew or should have known that the press was incapable of performing at that speed. This allegation satisfies Rule 9(b).

Harris's September 17, 1987 letter to Concord, which again represented a printing speed of 60,000 iph (Complaint, para. 10), is insufficient to support plaintiff's fraud claim. All the relevant agreements were signed two months earlier, in July 1987. Although the allegation is specific, Concord's contention that the false statement induced it to provide financing is...