Tigue Investment Co., Ltd. v. Chase Bank of Texas

Full title: TIGUE INVESTMENT CO., LTD., Plaintiff, v. CHASE BANK OF TEXAS, N.A.…

Court: United States District Court, N.D. Texas, Dallas Division

Date published: Nov 15, 2004

Civil Action No. 3:03-CV-2490-N (N.D. Tex. Nov. 15, 2004)

Opinion

Civil Action No. 3:03-CV-2490-N.

November 15, 2004

ORDER

DAVID GODBEY, District Judge

Before the Court is Defendant's Motion to Dismiss Plaintiff's First Amended Complaint, filed July 6, 2004, which seeks dismissal of Plaintiff's fraud claims. Because the Amended Complaint fails to comply with Federal Rule of Civil Procedure 9(b)'s requirement to plead fraud with particularity, the Motion to Dismiss is granted.

I. BACKGROUND

Plaintiff Tigue Investment Co. ("TIC") is a limited partnership whose general partners are Joseph J. Tigue, Jr. and Virginia B. Tigue. In the beginning of 2000, TIC invested $4,000,000 in a discretionary investment account under the management of Chase Bank of Texas, N.A., the predecessor in interest of Defendant JPMorgan Chase Bank ("Chase"). TIC alleges that Chase representatives made verbal commitments to manage the portfolio conservatively, but that Chase in fact made risky investments including the investment of 34% of the funds in technology stocks. In addition, TIC alleges that Chase failed to disclose conflicts of interest between its research, investment banking, and private banking businesses. TIC's portfolio lost about a quarter of its value when the stock market experienced a downturn beginning in mid-2000. Among other claims, TIC now accuses Chase of common law fraud and securities fraud under the laws of Texas.

In an Order dated July 6, 2004, this Court granted a motion to dismiss the fraud claims for failure to comply with Rule (9)(b)'s requirement that the circumstances of fraud be pled with particularity. TIC's original Complaint had alleged that in the months before and after the March 20, 2000 execution of their agreement with Chase, "several representatives" of Chase fraudulently assured them that their investment would be managed conservatively, and fraudulently failed to inform them of Chase's alleged conflicts of interest. Although the Court held the fraud allegations inadequate under Rule 9(b), it granted TIC leave to amend its complaint with the addition of specific information as to the "who, what, when, and where" of the fraud allegations.

II. TIC HAS NOT PLED FRAUD WITH PARTICULARITY

TIC's Amended Complaint now adds the following details: (1) The alleged misrepresentations occurred in multiple meetings at Chase's offices in Arlington and Dallas, Texas; (2) The people making the misrepresentations were Melissa Waite, Randall Rose, Jim Chassen, and Brent Nicholson. TIC continues to maintain that the timeframe for the misrepresentations was from "the early months of 2000," shortly before the parties executed their agreement, until "the first several months after the Investment Management Agency Agreement was signed."

TIC argues that it has adequately pled the "who, what, when and where" of its fraud claims, because the Amended Complaint alleges that over a period of several months in two locations, numerous named individuals made statements that collectively conveyed false propositions to the Tigues. This is not particular enough. Rule 9(b) requires plaintiffs alleging fraud to describe a specific occasion where a particular person misrepresented the truth for purposes of manipulation.¹ "[G]eneral allegations, which lump all defendants together failing to segregate the alleged wrongdoing of one from those of another cannot meet the requirements of Rule 9(b)." Patel v. Holiday Hospitality Franchising, Inc., 172 F. Supp. 2d 821, 824 (N.D. Tex. 2001) (quoting In re Urcarco Sec. Lit., 148 F.R.D. 561, 569 (N.D. Tex. 1993), aff'd sub nom. Melder v. Morris, 27 F.3d 1097 (5th Cir. 1994)). TIC's Amended Complaint not only "lumps together" the individuals accused of making fraudulent statements, it also lumps together several months of time and multiple locations. Nowhere in the Amended Complaint does TIC plead a description of a particular occasion in which a particular person made a fraudulent statement.²

1 See Southland Securities Corporation v. INSpire Insurance Solutions, Inc., 365 F.3d 353, 362 (5th Cir. 2004) ("To satisfy Rule 9(b)'s pleading requirements, the plaintiffs must specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent") (citation omitted); Shushany v. Allwaste, Inc., 992 F.2d 517, 521 (5th Cir. 1993) ("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") (citation omitted).

2 Nor does TIC describe any context in which Defendant committed fraud by omitting information. In cases of allegedly fraudulent omissions, the "circumstances constituting fraud" for Rule 9(b) purposes include the facts omitted, the place in which the omissions should have appeared, and the way in which the omitted facts made the actual representation misleading. U.S. ex rel. Riley v. St. Luke's Episcopal Hospital, 355 F.3d 370, 381 (5th Cir. 2004) (citing 2 JAMES W. MOORE, ET AL., MOORE'S FEDERAL PRACTICE § 9.03[1][b], at 9-18 through 9-19 (3d ed. 2003) (footnotes omitted)).

The rationale behind Rule 9(b) does not permit TIC to proceed with such a claim. Fraud charges can seriously damage a defendant's reputation, even when the claim is ultimately defeated. See Norman v. Apache Corp., 19 F.3d 1017, 1022 (5th Cir. 1994). This holds for corporations and for their individual employees. In the present case, TIC's general partners fail to identify the approximate dates or specific content of their conversations with the named Chase employees, or to specify which employees spoke at particular meetings. Fraud allegations based on such vague recollections unacceptably increase the chances of falsely impugning the reputations of innocent persons. Indeed, even assuming that some fraud occurred in the present case, allowing the fraud claims to proceed based on TIC's Amended Complaint would risk impugning the reputation of some employees based on statements, omissions, knowledge, or intent of others.³

3 Indeed, TIC's failure to allege knowledge or intent on the part of any single employee may be an independent ground for dismissal. Under ordinary principles of the law of agency, a corporation is deemed to have the requisite scienter for fraud only if the individual corporate officer making the misstatement has the requisite level of scienter. Southland Securities, 365 F.3d at 367 (listing cases and citing RESTATEMENT (SECOND) OF AGENCY § 275, comment b; § 268 comment b); see also Berger v. Beletic, 248 F. Supp. 2d 597, 601 (federal securities fraud plaintiff must plead, inter alia, "the identify of the individual making the false representations and what that person gained from making the representations"). The law of Texas is not alleged to deviate from the general rule, and TIC accuses the named employees only of making misrepresentations, while alleging knowledge and intent only on the part of the legal entity Chase.

III. TIC's CLAIMS OTHER THAN COMMON LAW FRAUD AND SECURITIES FRAUD WITHSTAND THE MOTION

In a footnote to the 9(b) Motion, Chase claims that practically all of TIC's claims, including breach of fiduciary duty and negligent misrepresentation, must be pled with the particularity required by Rule 9(b) for averments of fraud. The Court is unmoved from its earlier conclusion that all claims other than common law fraud and fraud in a stock transaction withstand Chase's 9(b) Motion.

By its clear terms, Rule 9(b) applies only to averments of fraud or mistake, not to averments of negligence, breach of fiduciary duty, or non-fraudulent misstatement. In ordinary circumstances, the particularity requirement does not extend to claims for which fraud is not an element. E.g. Patel v. Holiday Hospitality Franchising, 172 F. Supp. 2d 821, 825 (N.D. Tex. 2001) ("Rule 9(b) does not apply to an action for promissory/equitable estoppel because fraud is not an element of this claim"). Exceptions arise when fraudulent conduct is alleged to underlie a claim for which fraud is a possible — but not a necessary — element. In such cases, particularity is only required to the extent that a plaintiff in fact alleges fraud. Thus, a claim of conspiracy to defraud is subject to Rule 9(b), Castillo v. First City Bancorporation of Texas, 43 F.3d 953, 961 (5th Cir. 1994), but conspiracy in general is not. See Guidry v. U.S. Tobacco Co., 188 F.3d 619, 632 (5th Cir. 1995). Claims of breach of fiduciary duty are subject to Rule 9(b) when the alleged breach consists of fraudulent conduct, Peters v. Metropolitan Life Ins. Co., 164 F. Supp. 2d 830, 836 (S.D. Miss. 2001), but not when it consists of nonfraudulent conduct. In re Electronic Data Systems Corp. ERISA Litigation, 305 F. Supp. 2d 658, 672 (E.D. Tex. 2004). Claims under the Securities Act of 1933 are subject to Rule 9(b) only when "grounded in fraud rather than negligence" Melder v. Morris, 27 F.3d 1097, 1100 n. 6 (5th Cir. 1994).

In such cases as always, Rule 9(b) extends to only "the circumstances constituting fraud." Insufficiently particular allegations of fraud do not taint the remainder of a complaint so as to drag it into Rule 9(b)'s realm:

Where averments of fraud are made in a claim in which fraud is not an element, an inadequate averment of fraud does not mean that no claim has been stated. The proper route is to disregard averments of fraud not meeting Rule 9(b)'s standard and then ask whether a claim has been stated.

Lone Star Ladies Investment Club v. Schlotzsky's, Inc., 238 F.3d 363, 368 (5th Cir. 2001). Sometimes it is appropriate to dismiss a claim under Rule 9(b) even though fraud is not an element of that claim, because the facts underlying the claim are inextricably intertwined with inadequate allegations of fraud. E.g. Patel, 172 F. Supp. 2d at 824-25 (dismissing claim for "fraudulent and negligent" misrepresentation that had been pled as a single cause of action); Melder, 238 F.3d at 1100 n. 6 (dismissing securities claim for which fraud was not an element, in light of "wholesale adoption" of fraud allegations as basis for claim); Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir. 1997) (remanding with instructions to dismiss fraud and negligent misrepresentation claims, where all claims rested upon the same asserted fraud and the parties did not urge separate focus on negligent misrepresentation claim). Nonetheless, where viable, intelligible claims remain in a complaint after all inadequate averments of fraud have been dismissed, those claims are not subject to dismissal. Schlotsky's, 238 F.3d at 368.

Apart from the claims for common law fraud and securities fraud, Chase's 9(b) Motion fails to demonstrate the appropriateness of dismissing TIC's claims for lack of particularity. Chase does not assert that fraud is an element of these other claims, and does not argue that the facts pled by TIC are so entangled with deficient fraud allegations as to be subject to dismissal along with the fraud claims. Instead, Chase provides the Court with a footnote listing cases where, for various reasons or no stated reason, courts considered claims of the same nature as TIC's various claims to be subject to the particularity requirement. By its plain terms, however, Rule 9(b) does not apply categorically to any type of claim other than those for which fraud is an element. Application to other types of claims depends on the role that averments of fraud play in particular cases.

In the present case, it is possible to excise the deficient averments of fraud without rendering TIC's other claims baseless or unintelligible. Apart from Counts 2 (common law fraud), 3 (fraud in a stock transaction), and 8 (exemplary damages based on fraud claims), the Amended Complaint nowhere mentions fraud or fraudulent intent. Indeed, the failure of the Complaint's "factual background" section to set forth the elements of fraud is one reason for dismissing the fraud counts. TIC's response to Chase's earlier motion to dismiss expressly disclaimed any allegation of fraudulent intent in connection with TIC's Article 581-33 claim.⁴ The claim for breach of fiduciary duty appears before the fraud claims and thus does not incorporate any allegations of fraud. The claims for deceptive trade practices and negligent misrepresentation incorporate the allegations in the fraud counts, but remain viable and intelligible when those allegations are disregarded.

4 Both parties acknowledge Herrmann Holdings, Ltd. v. Lucent Technologies, 302 F.3d 552, 564 (5th Cir. 2002), in which the court concluded that " if an article 581-33 claim were to be based on an untrue promise of future performance, fraudulent intent would be required" under Texas law. By disclaiming any assertion of fraudulent intent, TIC has limited its 581-33 claim to an accusation that Chase sold a security by means of a statement that was materially untrue as to facts existing at the time of the misstatement. If the 581-33 claim were based on allegations of fraudulent intent, it would not survive the instant motion.

Accordingly, TIC's causes of action other than common law fraud and fraud in a stock transaction survive this Motion as they survived the earlier Motion.

IV. LEAVE TO AMEND IS DENIED

TIC has asked for leave to again amend its Complaint if it is found deficient. Whether to allow a plaintiff to amend a deficient complaint is a matter in the Court's discretion. Berger v. Beletic, 248 F. Supp. 2d 597, 607 (N.D. Tex 2003) (citation omitted). TIC has already had an opportunity to Amend, but failed to add details required by the uncontradicted authorities cited in Chase's original Rule 9(b) motion. Therefore it is appropriate to deny TIC's request for leave to amend. See Ynclan v. Dep't of the Air Force, 943 F.2d 1388, 1391 (5th Cir. 1991).

Accordingly, the motion to dismiss for failure to plead fraud with particularity is granted. Counts 2 (Common Law Fraud) and 3 (Fraud in a Stock Transaction) of TIC's Amended Complaint are hereby dismissed.