Opinion
Civil Action No. 3:03-CV-1355-B.
November 22, 2004
MEMORANDUM ORDER
Before the Court is the Motion of Defendant Extreme Networks, Inc. ("Extreme") to dismiss Plaintiff Edward M. Milkie's ("Milkie") Complaint for Failure to State a Claim under Rule 12(b)(6) and for failure to plead fraud with particularity pursuant to Rule 9(b), filed May 19, 2004. Also before the Court is the Motion of Plaintiff Milkie, in the Alternative, for Leave to Amend his Complaint and for Discovery, filed June 29, 2004. For the reasons explained below, the Court GRANTS Extreme's motion to dismiss and DENIES Milkie's motion for leave to amend and for discovery.
I. PROCEDURAL HISTORY
This is a Texas state law fraud and negligent misrepresentation case arising out of the sale of securities. Milkie originally sued Extreme in the 191st Judicial District Court of Dallas County, Texas. Extreme removed to the Northern District on June 18, 2003 on the basis of diversity jurisdiction. The case was originally assigned to Honorable Judge Jorge Solis. While in Judge Solis's Court, Extreme moved to dismiss Milkie's Original Complaint under Federal Rules of Civil Procedure 12 (b) (6) and 9 (b) ("First Motion"). Judge Solis granted Extreme's Motion and also granted Milkie's motion for leave to amend his complaint in a Memorandum Opinion and Order ("Order"), dated March 30, 2004. Subsequently, on April 18, 2004, Milkie filed a First Amended Complaint, amending his allegations as well as adding a claim for constructive fraud. On May 19, 2004, Extreme filed another motion to dismiss, on the same grounds. That motion is presently before the Court.
II. FACTUAL BACKGROUND
For purposes of consistency, the Court incorporates the background section, below, as originally set out in Judge Solis's Order of March 30, 2004:
This action arises out of conversations among [Milkie] and Extreme's Director of Investor Relations, John Carvell, between September 18, 2002 and September 27, 2002. (Compl. at ¶ III.) [Milkie] is a stockholder of Extreme and also represents clients who hold stock in Extreme. Id. According to the Complaint, on September 17, 2002, [Milkie] attempted to contact Extreme in order to seek information regarding a pending lawsuit involving Extreme. Id. Because of the perceived downward pressure on Extreme's stock price, [Milkie] was interested in knowing when the trial was set to begin on the pending suit. (Resp. at 3.) On September 18, 2002, Carvell contacted [Milkie], but would not comment on the pending lawsuit. (Compl. at ¶ III.) Carvell did state, however, that Extreme's upcoming 10-K filing would contain information regarding the pending lawsuit. Id. According to [Milkie], Carvell explained that Extreme's depressed stock price was due to "perceived competition from new products introduced by Cisco Systems." Id. Concluding the conversation, Carvell allegedly stated that "no material adverse news" was coming from Extreme. Id. On September 18, 2002, the price of Extreme stock was $7.41 per share. Id.
According to the Complaint, over the course of the following week, [Milkie]'s assistant, Jeremy Graham, repeatedly spoke with Carvell to determine if anything had changed since the previous conversation between [Milkie] and Carvell on September 18, 2002. Id. at ¶ IV. Carvell allegedly re-stated that "there was no adverse news coming from Extreme, and, in short, there was nothing to explain the on-going drop in the stock price." Id. As a result of these communications, [Milkie] decided not to sell his stock in Extreme. Id.
On September 30, 2002, Extreme announced that it would miss earnings projections. Id. at ¶ V. Following the announcement, [Milkie] sold his Extreme stock for $3.45 per share. Id. Thereafter [Milkie] commenced this action for common law fraud and negligent misrepresentation regarding Carvell's representations to [Milkie] and Graham between September 18, 2002 and September 27, 2002. [Milkie] contends that Carvell's statements were made in an "effort to prop-up its stock price by disseminating incorrect information to unsuspecting investors." (Resp. at 13.).
(Order at 1-3). Judge Solis's Order dismissed Milkie's common law fraud claim and negligent misrepresentation claim. Milkie has repled those claims, and has also added a claim for constructive fraud. Extreme has moved to dismiss Milkie's claims in their entirety.
II. ANALYSIS
A. Standard for Dismissal Under Rule 12(b)(6).
Motions to dismiss under Rule 12(b)(6) are disfavored and rarely granted. Kaiser Aluminum Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir. 1982). The Court liberally construes the complaint in the plaintiff's favor, and all pleaded facts are taken as true. Campbell v. Wells Fargo Bank, N.A., 781 F.2d 440, 442 (5th Cir. 1986). Unless it appears beyond doubt that the plaintiff cannot prove any set of facts entitling it to relief, the complaint should not be dismissed. Conley v. Gibson, 355 U.S. 42, 45 (1957).
B. Heightened Pleading Requirements of Rule 9(b).
Rule 9(b) elevates the federal rules' liberal pleading standards to require plaintiffs to plead the circumstances of constituting claims for fraud claims with particularity. The Fifth Circuit requires plaintiffs alleging fraud to specifically allege the "time, place, and contents of the false representations, as well as the identity of the person making the representation and what the person obtained thereby." Tuchman v. DSC Comm. Corp., 14 F.3d 1061, 1068 (5th Cir. 1994) (citations omitted); Williams v. WMX Tech., Inc., 112 F.3d 175, 177 (5th Cir. 1994), cert. denied, 522 U.S. 966 (1997). Motions to dismiss under Rule 9(b) receive the same treatment as motions for dismissal pursuant to Rule 12(b)(6). See Shushany v. Allwaste, Inc., 992 F.3d 517, 520 (5th Cir. 1993) ("A dismissal for failure to state fraud with particularity as required by Rule 9(b) is a dismissal on the pleadings for failure to state a claim."). C. Milkie's Common Law Fraud Claim.
In Judge Solis's original order of dismissal, the Court held that while Milkie properly set forth the requisite "who, what, when and where" in his Original Complaint, he failed to plead fraudulent intent with specificity because his "circumstantial allegations [were] not strong enough to allege facts sufficient to demonstrate Carvell's fraudulent intent, i.e., that Carvell knew that the statements were false when they were made and not after the fact." (Order at 8-9). Specifically, Judge Solis held that the following two circumstantial allegations were insufficient to demonstrate fraudulent intent: (1) the "timing" of the alleged statements and the subsequent press release to show that Carvell knew the statements were false, and (2) the contention that Carvell had "special knowledge" of Extreme's financial position because of his position as Director of Investor Relations. ( Id. at 8).
In Milkie's First Amended Complaint, he adds various insignificant details related to the same two circumstantial allegations Judge Solis found insufficient to support allegations of fraudulent intent (First Am. Compl. at 9-11), but there are no new factual allegations which might be construed to support a finding of intent. Milkie's First Amended Complaint sets out a more detailed analysis of the inferences that he asserts may (or in some cases must) be drawn from the same essential set of allegations. Because of this, the Court finds that Milkie has failed to plead fraudulent intent with specificity, and that his First Amended Complaint, like his Original Complaint, is not sufficient under Rule 9(b). The Court therefore GRANTS Extreme's motion to dismiss Milkie's common law fraud claim and DENIES Milkie's motion for leave to amend, as any amendment would be futile. See, e.g., U.S. ex rel. Williard v. Humana Health Plan of Tex., Inc., 336 F.3d 375, 387 (5th Cir. (Tex.) 2003). (finding that giving the plaintiff an opportunity to amend would be futile where there was no indication in his briefs that he would be able to allege the necessary "who, what, when, where and how' of the alleged fraud."). D. Milkie's Negligent Misrepresentation Claim.
Extreme next moves to dismiss Milkie's negligent misrepresentation claim, contending that the facts as plead by Milkie do not sufficiently allege that the information given him by Carvell was false when the statements were made. Because Milkie's negligent misrepresentations rely on the same misrepresentations as the fraud claims, and because Milkie makes no effort to distinguish his negligent misrepresentation claims from his fraud claims, the Court does not distinguish between them here. See Williams, 112 F.3d at 177 (citing Shushany, 992 F.2d at 520 n. 5). In Judge Solis's Order of March 30th, the Court "conclude[d] that [Milkie] failed to plead his claim of negligent misrepresentation with particularity, pursuant to Rule 9(b)," because Milkie failed to set forth specific facts demonstrating the falsity of the statement when made, and rather made only conclusory allegations. ( Id. at 11). The Court noted that "[t]he fact that Carvell's alleged statements turned out to be false a week and a half later does not necessarily mean that they were false when made." ( Id.).
In his First Amended Complaint, Milkie reiterates his conclusory allegation that "[d]efendant falsely represented to Plaintiff that there was `no adverse news coming' about Extreme." (First. Am. Compl. ¶ 23). The Amended Complaint, however, like the Original, fails to provide any factual support for his conclusion that the statements made by Extreme were false when made. The Court therefore GRANTS Extreme's motion to dismiss Milkie's negligent misrepresentation claim for the same reason provided in Judge Solis's Order, and DENIES Milkie's motion to amend, as any further amendment would be futile. U.S. ex rel. Williard, 336 F.3d at 387.
E. Milkie's Claim for Constructive Fraud.
Milkie also includes a new claim, for constructive fraud, in his First Amended Complaint. Extreme moves to dismiss Milkie's constructive fraud claim on the basis that Mr. Carvell, who made the alleged statements at issue, bore no fiduciary relationship to Milkie and had no other legal duty to Milkie. (Second Motion at 7; see also generally Reply). Under Texas law, constructive fraud is defined as the breach of a legal or equitable duty that the law declares fraudulent because it violates a fiduciary relationship. See Welder v. Green, 985 S.W.2d 170, 175 (Tex.App.-Corpus Christi 1998, pet. denied). While Milkie has responded that a fiduciary relationship is not an element of a constructive fraud claim, (Response at 10-11), this contention is without merit. Texas courts have routinely recognized that breach of a fiduciary or other legal duty is an element of any claim for constructive fraud, and Milkie has not demonstrated that any such duty existed under the facts as alleged. See, e.g., Welder, 985 S.W.2d at 175; Hubbard v. Shankle, 138 S.W.3d 474, 483 (Tex.App.-Fort Worth 2004, pet. denied) (holding that romantic relationship did not establish the fiduciary relationship necessary for a constructive fraud claim). Furthermore, Milkie has failed to allege any facts sufficient to demonstrate that Mr. Carvell, an employee of Extreme possessed the "whole truth" that Milkie alleges he intentionally hid. (Resp. at 11). Accordingly, the Court GRANTS Extreme's motion to dismiss Milkie's constructive fraud claim and DENIES Milkie's motion for leave to amend, as any further amendment would be futile. U.S. ex rel. Williard, 336 F.3d at 387.
F. Milkie's Request for Discovery is Denied.
In addition to his alternative request for leave to amend, Milkie requests leave to conduct discovery so that he may "add such additional facts as may be necessary." (Resp. at 22). Milkie does not cite any cases to support his request, nor does he demonstrate in any way how the requested discovery would be anything other than a "fishing expedition." Krim v. Banc Texas Group, Inc., 989 F.2d 1435, 1443 (5th Cir. 1993) (holding that plaintiff who did not "state how further discovery would have aided his cause of action . . . failed to demonstrate that further discovery would be anything other than a `fishing expedition.'"). The Court therefore DENIES Milkie's request for discovery.
III. CONCLUSION
For the reasons set forth in this order, it is ORDERED that Extreme's motion to dismiss is GRANTED in its entirety. Milkie has previously been given an opportunity to amend his Complaint, and, even in the light of the specific directives given him in Judge Solis's March 30, 2004 Order, he has failed to allege facts sufficient to state a valid claim. The Court finds that any further amendment would be futile, and therefore dismisses Milkie's claims with prejudice and DENIES Milkie's motion for leave to amend and for discovery.
SO ORDERED.