Opinion
Civil Action No. 99-2332, Section "N"
June 23, 2000
ORDER AND REASONS
Before the Court is Defendant Dr. Christopher E. Kalmus' Motion to Dismiss Plaintiffs' Supplemental and Amending Complaint for Damages Pursuant to Fed.R.Civ.P. 12(b)(6) and Alternative Motion for More Definitive Statement Pursuant to Fed.R.Civ.P. 12(e) Based on Plaintiffs' Failure to Plead Fraud with Particularity. For the following reasons, the Court concludes that Defendant's Motion to Dismiss is GRANTED in part and DENIED in part.
A. BACKGROUND
Plaintiffs Dhanpot Mohnot, Surendra Purohit and Sunil Purohit ("Plaintiffs") filed this action against Defendants Rajeev Bhansali ("Bhansal") and Dr. Christopher E. Kalmus ("Kalmus"), alleging fraud, breach of fiduciary duty, and Racketeer Influenced and Corrupt Organizations ("RICO") violations.
In January 1994, Defendants Bhansali and Kalmus met with Plaintiffs in New Orleans, Louisiana to discuss a potential business venture involving the manufacture of printed circuit boards in India. Plaintiffs claim they initially invested $5,000 as subscribers to this project. On March 7, 1994, Defendants Kalmus and Bhansali formed International Circuits, Limited, ("ICL"), an Illinois corporation, to carry out the printed circuit board project. ICL, in turn, invested in International Technologies (India), Limited ("ITIL"). ITIL, which is under the control of Defendants Kalmus and Bhansali, was to purchase land in India and build a plant to manufacture the printed circuit boards. From the original solicitation in 1994 to the present, the Plaintiffs allege that they have each invested $150,000 in ICL. To date, no plant has been built, and no printed circuit boards have been manufactured.
Plaintiffs allege that Kalmus made misrepresentations in soliciting their investment and in reporting the status of the project, and that Kalmus misappropriated ICL funds. Kalmus moves to dismiss all these claims.
B. STANDARD OF REVIEW
In a motion to dismiss for failure to state a claim upon which relief may be granted, the Court must accept all well-pleaded facts as true and view the facts in the light most favorable to the plaintiffs. See Campbell v. City of San Antonio, 43 F.3d 973, 975 (5th Cir. 1995). Dismissal is warranted if "it appears certain that the plaintiff[s] cannot prove any set of facts in support of [their] claim that would entitle [them] to relief." Piotrowski v. City of Houston, 51 F.3d 512, 514 (5th Cir. 1995) (quoting Leffall v. Dallas Indep. Sch. Dist., 28 F.3d 521, 524 (5th Cir. 1994)),
C. LAW AND ANALYSIS
Defendant Kalmus now moves to dismiss the Plaintiffs' claims for breach of fiduciary duty, fraud, and RICO violations pursuant to Federal Rule of Civil Procedure 12(b)(6). Kalmus argues that Plaintiffs have failed to state a cause of action for the alleged breach of fiduciary duty due to their failure to allege a fiduciary relationship. Kalmus argues that defendants have failed to plead their fraud claims with particularity as required by Federal Rule of Civil Procedure 9(b). Finally, Kalmus argues that Plaintiffs have failed to state a claim for RICO violations due to their failure to properly allege the predicate acts.
1. Breach of Fiduciary Duty
Plaintiffs allege that Kalmus breached his fiduciary duty to them by mismanaging the assets of ICL and ITIL, by engaging in self-dealing, and by failing to monitor the expenses incurred by Bhansali. Second Suppl. Am. Compl. ¶ XXXVII. Kalmus claims that Plaintiffs (a) lack standing to bring this claim and (b) failed to allege a fiduciary relationship.
Plaintiffs' claim for breach of fiduciary duty through corporate waste and mismanagement is a derivative action. See Kramer v. Western Pacific Indus., Inc., 546 A.2d 348, 353 (Del. 1988) (holding mismanagement of corporate funds and corporate waste gives rise only to derivative cause of action). Derivative actions are brought by shareholders on behalf of the corporation. Plaintiffs question their status as shareholders of ICL because they did not receive stock certificates in return for their investment in ICL. Mem. Opp. at 3. However, under Illinois law possession of a stock certificate is not a prerequisite to ownership of an interest in a corporation. See Connelly v. Dooley's Estate, 422 N.E.2d 143, 147 (Ill.App.Ct. 1981).
To bring a derivative claim, Plaintiffs must make a demand on the board of directors unless demand is excused under state law. See Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 97 (1991). ICL is an Illinios corporation, and Illinois law excuses demand when "the directors or officers sought to be sued are in control of the corporation." Conway v. Conners, 427 N.E.2d 1015, 1019 (Ill.App.Ct. 1981). At a minimum, Plaintiffs must allege facts in their complaint explaining the lack of demand. See 7c CHARLES ALAN WRIGHT, ARTHUR R. MILLER MARY KAY KANE, FEDERAL PRACTICE AND PROCEDURE: CIVIL 2D § 1831 (2d ed. 1986). Taken as true, the Plaintiffs' allegations that Kalmus and Bhansali were officers and directors of ICL and that they "retained complete control" over the corporation, Suppl. Am. Compl. ¶ V, are sufficient to excuse demand.
Kalmus also moves the Court to dismiss this claim because the Plaintiffs have failed to allege facts establishing a fiduciary relationship between Kalmus and the Plaintiffs. Mem. Supp. at 10. However, the Plaintiffs allege that Kalmus is president of ICL. Second Suppl. Am. Compl. ¶ XXXVII. Officers and directors of a corporation owe fiduciary duties to the corporation and its shareholders. See Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985). Accordingly, the Court holds that Kalmus' Motion to Dismiss Plaintiffs' claim for breach of fiduciary duty is DENIED.
2. Fraud
Secondly, Kalmus contends that the Plaintiffs have failed to plead fraud with particularity as required by Federal Rule of Civil Procedure 9(b). Rule 9(b) requires allegations of the particulars of "time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby."Tel-Phonic Services, Inc. v. TBS Intern, Inc., 975 F.2d 1134, 1138 (5th Cir. 1992), quoting 5 CHARLES ALAN WRIGHT ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE: CIVIL 2D § 1297 (2d ed. 1990). At a minimum, a plaintiff pleading fraud must set forth the "who, what, when and where." Williams v. WMX Tech.'s. Inc., 112 F.3d 175, 178 (5th Cir. 1997). Plaintiffs have failed to do this in their Complaint, Supplemental and Amending Complaint, and Second Supplemental and Amending Complaint.
Plaintiffs allege that through a series of at least seventeen meetings in Louisiana, Illinois, and India over the course of four years, Kalmus and Bhansali continuously misrepresented the status of the project and the propriety of their expenses. However, Plaintiffs offer only vague, general statements as to the content of these meetings. Many of Plaintiffs' allegations are redundant, and Plaintiffs do not differentiate among the series of meetings listed in their complaint. Finally, Plaintiffs often identify only the month and year of the alleged misrepresentations. Since the Plaintiffs fail to specify the time, place, or contents of the statements and the identity of the speaker, their fraud claims are dismissed for failure to comply with Rule 9(b).
Accordingly, Kalmus' Motion to Dismiss Plaintiffs' fraud claims is GRANTED. The dismissal is without prejudice and with leave to amend to assert each allegation of fraud in a separate count, stating with particularity the time, place, and contents of each alleged misrepresentation, as well as the identity of the person making the misrepresentation and what he obtained thereby.
3. RICO Claims
Finally, the Plaintiffs have filed a RICO claim pursuant to 18 U.S.C. § 1961, et seq., against Kalmus. "in order to state a claim under 18 U.S.C. § 1962, a plaintiff must allege: 1) the conduct; 2) of an enterprise, 3) through a pattern; 4) of racketeering activity."Elliott v. Foufas, 867 F.2d 877, 880 (5th Cir. 1989).
Kalmus' alleged racketeering activity is the use of the mail and wires to "convince the plaintiffs to continue with the project, invest more money into the project, and to discontinue this litigation." Second Suppl. Am. Compl. ¶ XXXI. Since the predicate acts alleged by the plaintiffs are mail fraud and wire fraud, the plaintiffs must comply with Rule 9(b) in pleading these allegations with particularity. See Brown v. Coleman Investments. Inc., 993 F. Supp. 439, 447 (M.D.La. 1998) (dismissing plaintiffs' RICO claims for failure to state with specificity the actions which furthered the alleged fraud).
In light of the above principles and the Court's discussion of fraud, supra, the Court finds that the Plaintiffs have failed to meet the particularity requirement of Rule 9(b). As to the allegedly fraudulent mailings, the Plaintiffs list a series of dates on which reports were made and their general subject matter, but they fail to specify the author or the content of the reports. Second Suppl. Am. Compl. ¶ XXX. As to the alleged wire fraud, Plaintiffs offer no specific circumstances. Id. at XXXI.
Since these allegations fail to meet the minimum standards of Rule 9(b), Kalmus' Motion to Dismiss Plaintiffs' RICO claims is GRANTED. The dismissal is without prejudice and with leave to amend to assert each predicate act in a separate count, stating with particularity the time, place, and contents of each alleged act of wire fraud and mail fraud, as well as the identity of the person making the misrepresentation and what he obtained thereby.
D. CONCLUSION
IT IS ORDERED that:
(1) Defendant's 12(b)(6) Motion to Dismiss Plaintiffs' breach of fiduciary duty claims is DENIED.
(2) Defendant's 12(b)(6) Motion to Dismiss Plaintiffs' fraud claims is GRANTED.
(3) Defendant's 12(6)(6) Motion to Dismiss Plaintiffs' RICO claims is GRANTED.