Vt Investors v. R & D FUNDING CORP.
| Citation | 733 F. Supp. 823 |
| Decision Date | 27 February 1990 |
| Docket Number | Civ. A. No. 89-490. |
| Court | U.S. District Court — District of New Jersey |
| Parties | VT INVESTORS, et al., Plaintiffs, v. R & D FUNDING CORP., et al., Defendants. |
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Michael A. Saffer, Klein, Chapman, Greenberg, Henkoff & Siegel, Clifton, N.J., for plaintiffs.
Thomas Kavaler, Cahill, Gordon & Reindez, New York City, for defendants.
This purported securities fraud action requires the Court to retraverse familiar terrain. Before the Court is defendants' motion to dismiss plaintiffs' amended complaint pursuant to Rules 12(b)(1), 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. The Court is intimately familiar with this litigation having heard a similar motion by the defendants on July 12, 1989 requesting dismissal of plaintiffs' original complaint. At that time, rather than dismiss plaintiffs' complaint for its total insufficiency, the Court allowed the plaintiffs 30 days to amend the deficiencies in conformance with the "road map" provided in the defendants' memorandum of law.
A thorough review of plaintiffs' amended complaint reveals that the amendments fail to remedy the original deficiencies. Therefore the plaintiffs' federal claims will be dismissed for failure to state a claim upon which relief can be granted. The Court will dismiss plaintiffs' state law claims for lack of jurisdiction.
Plaintiffs are a New Jersey general partnership known as VT Investors ("VTI") and several individual investors of VisionTech, Inc. ("VisionTech"), a publicly traded corporation engaged in the business of manufacturing and distributing specialty and commodity contact lenses. The investors claim that they purchased VisionTech securities between 1986 and 1988 and have sustained severe losses from their investment. On February 3, 1989 plaintiffs filed a complaint for violation of the federal securities and racketeering laws, violation of the New Jersey "blue sky" laws, breach of contract, breach of fiduciary duty and common law fraud. Named as defendants are various officers and directors of VisionTech, specifically John Keenan, David Gamsey, Patrick Burns and Louis Gerken; R & D Funding Corp. ("R & D"), a corporate investor alleged to have been VisionTech's majority shareholder; Prudential-Bache Securities, Inc. ("Pru-Bache"), a corporate affiliate of R & D; and the accounting firm of Arthur Andersen & Co. ("Arthur Andersen"). The thrust of the complaint is that the various defendants fraudulently induced plaintiffs to purchase or retain certain securities by making affirmative material misrepresentations and omissions of fact.
In lieu of answer, on April 17, 1989 defendants filed a motion to dismiss the complaint pursuant to Fed.R.Civ.P. 12. The Court heard the motion on July 12, 1989, acknowledged the legal insufficiency of plaintiffs' complaint, and provided plaintiffs with 30 days to amend the complaint to allege legally sufficient and cognizable claims. Plaintiffs were admonished that should their amendments fail to correct the deficiencies in the complaint, a future motion to dismiss would, if granted, result in a dismissal with prejudice. Tr. 5-8 to 5-11.
Prior to the July 12, 1989 hearing, the Court thoroughly reviewed the plaintiffs' original complaint and found that, among other deficiencies, the complaint alleged inapplicable sections of the securities laws, misperceived many of the security laws and failed to properly allege the jurisdiction of the Court. At the hearing, the Court stated that as a whole, the complaint failed to "pass muster." Tr. 3-23 to 3-24. Expressing agreement with the Court's assessment of the complaint, plaintiffs' attorney stated that "he understood the deficiencies set forth in the complaint." Tr. at 4-23 to 4-24.
After that hearing all defendants, except Arthur Andersen filed a motion to sanction the plaintiffs under Fed.R.Civ.P. 11. Arthur Andersen joined the sanction motion by letter.1
On September 18, 1989 the Court awarded defendants a total sanction of Ten Thousand Dollars ($10,000.00). By written opinion, the Court stated that sanctions were warranted because "the extensive and serious deficiencies in plaintiffs' complaint rise to the level of wasting the defendants' and the Court's resources." Slip Op. at 5.
The Court now faces another motion to dismiss for lack of subject matter jurisdiction and for failure to state a claim. Once again the Court must use valuable resources to instruct plaintiffs' counsel on certain basic requirements of pleading and fundamental concepts of fraud under the federal securities laws. This time, however, the Court will not allow plaintiffs to amend their complaint. Plaintiffs' amendments fail to cure the deficiencies of the original complaint. Therefore, in accordance with the Court's previous directives in this matter, plaintiffs' federal claims will be dismissed with prejudice.
As a threshold matter the Court must address plaintiffs' allegations of subject matter jurisdiction. A basic requirement of pleading is that the jurisdiction of a federal court must appear on the face of the complaint. Schultz v. Cally, 528 F.2d 470, 474 (3d Cir.1975).
Plaintiffs allege in their complaint that jurisdiction is founded upon: (a) the existence of federal questions construing various sections of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Rules issued thereunder; (b) diversity of citizenship pursuant to 28 U.S.C. § 1332; and (c) the pendent jurisdiction of the federal courts. Complt., ¶ 1.
Diversity jurisdiction under 28 U.S.C. § 1332 is available only if the citizenship of all plaintiffs is diverse from that of all defendants. Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L.Ed. 435 (1806). Hence, "allegations of the citizenship of all parties to the lawsuit must appear in the complaint." Lentino v. Fringe Employee Plans, Inc., 611 F.2d 474, 478 (3d Cir.1979) (emphasis added).
A corporation is a citizen of the state in which it is incorporated and where it has its principal place of business. 28 U.S.C. § 1332(c) (1982). The amended complaint is defective for failing to allege the states of incorporation of the corporate defendants. Complt., ¶¶ 10, 15. Randazzo v. Eagle-Picher Indus. Inc., 117 F.R.D. 557, 558 (E.D.Pa.1987).
Plaintiffs' original complaint did not properly allege specific federal statutes for a jurisdictional basis and failed to allege the citizenship of all the parties for the purpose of establishing diversity jurisdiction. Slip Op. at 5. When plaintiffs attempted to remedy the deficiencies of the original complaint by providing supplemental information to the Court in their papers, the Court informed counsel, "it's not sufficient for you to say in a brief and supply information that should have been in the complaint...." Tr. 3-24 to 4-1.
Once again plaintiffs' counsel attempt to remedy jurisdictional deficiencies of the complaint by providing additional information in their papers. Pltf.Mem., 1-2. At this juncture there is little reason for the Court to be receptive to such maneuvers. Moreover, because the Court specifically instructed counsel on this very point, the Court is not persuaded by counsel's equity argument. Tr. 8-18 to 8-24. Counsel received instruction on the jurisdictional deficiencies of the original complaint. To require diversity to be properly alleged is not a hypertechnicality and failure to remedy an insufficiency of such a fundamental nature must result in dismissal as to all counts predicated upon diversity jurisdiction.
Although defendants argue that plaintiffs have not properly invoked federal question jurisdiction because "not one of the plaintiffs' purported federal claims (Counts V through XI) is legally sufficient," (Def.Mem., 3), legal insufficiency is not the standard applicable to a motion to dismiss for lack of subject matter jurisdiction. The Supreme Court has declared that such a dismissal is justified "only if that claim were so attenuated and unsubstantial as to be absolutely devoid of merit or frivolous." Baker v. Carr, 369 U.S. 186, 199, 82 S.Ct. 691, 700, 7 L.Ed.2d 663 (1962) (citations omitted). Applying that standard, the Court finds that plaintiffs' claims are not so absolutely devoid of merit or frivolous to warrant dismissal for lack of subject matter jurisdiction.
Defendants have also requested that plaintiffs' complaint be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6). Legal insufficiency is the standard for dismissal under Rule 12(b)(6). "If as a matter of law it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations, a claim must be dismissed, without regard to whether it is based on an outlandish legal theory or on a close but ultimately unavailing one." Neitzke v. Williams, ___ U.S. ___, ___, 109 S.Ct. 1827, 1832, 104 L.Ed.2d 338 (1989). Thus failure to state a proper cause of action calls for a judgment on the merits, not for dismissal for want of jurisdiction. Baker, 369 U.S. at 200, 82 S.Ct. at 700.
Accordingly, the Court will next determine the legal sufficiency of each count of the Amended Complaint that alleges a violation of federal law.
In Count Five plaintiff VTI alleges a violation of Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 ("Rule 10b-5")3 and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j ("§ 10(b)")4 in connection with "VTI's purchase of the New Warrants during February 3, 1988...." Complt., ¶¶ 71, 76.5 Plaintiff contends that each defendant made fraudulent statements, with knowledge of falsity or with reckless disregard for their truth, concerning the value of VisionTech's stock and that plaintiffs relied to their detriment...
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