Leemon v. Burns

175 F.Supp.2d 551

Ira LEEMON, Plaintiff, v. Gerry BURNS a/k/a John Henry, Steven Nocito, Franco Nocito, James Young, CCF Capital Group, Inc., Pines International Resort, Inc., and Whalen E. McMullen, Defendants.

No. 99 CIV 9432 (AJP).

United States District Court, S.D. New York.

May 2, 2001.

Michael R. Koblenz, Mound, Cotton & Wollan, New York City, for plaintiff.

Ross M. Abelow, Abelow & Cassandro, LLP, New York City, for defendants.

OPINION AND ORDER

PECK, United States Magistrate Judge.

Plaintiff Ira Leemon has sued defendants CCF Capital Group, Inc., Steven Nocito, Franco Nocito, Gerry Burns a/k/a John Henry, Pines International Resorts, Inc., and Waylon McMullen (collectively "defendants"), claiming violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and breach of contract. Defendants moved to dismiss the complaint, inter alia, pursuant to Fed. R.Civ.P. 9(b) and 12(b)(6) and the Private Securities Litigation Reform Act for failure to plead fraud with particularity and failure to state a claim upon which relief can be granted. The parties have consented to disposition of this action by a Magistrate Judge pursuant to 28 U.S.C. § 636(c). For the reasons set forth below, the complaint is dismissed with leave to replead.

FACTS

The Complaint

According to the complaint:

In November 1998, defendants, individually and in their capacities as officers and directors of Pines and CCF, induced Leemon to invest in AMDL, Inc. (Dkt. No. 1: Compl. ¶¶ 20-23.)¹ Defendants represented to Leemon that if Leemon invested $150,000 in AMDL, defendants would supply an additional $150,000 to AMDL and together they would obtain management control of AMDL. (Compl.¶ 23.) Defendants also promised Leemon that he would receive a promissory note for $150,000, as well as AMDL stock and AMDL stock incentives, and receive "appointment to a position of authority of AMDL" and "operational control of AMDL through written agreements of defendants who held the majority of the stock of AMDL." (Compl. ¶ 24.) Leemon gave defendants a check for $150,000 and received a promissory note from Pines. (Compl. ¶ 25 & Ex. A: Promissory Note.) In February 1999, at an AMDL Board of Directors meeting, Leemon's check was delivered to AMDL, but defendants never paid their additional $150,000. (Compl. ¶ 26.) Leemon was elected to AMDL's Board of Directors, but he was never placed in a leadership position because defendants never delivered their $150,000. (Compl. ¶¶ 26-27.) Leemon conclusorily alleges that "Defendants never intended to carry out the proposed plan and engaged in the activities described herein solely for the purpose of inducing plaintiff's investment of $150,000 for their own gain." (Compl.¶ 28.)

Attached to the complaint as Exhibit A is a promissory note (the "Note") dated February 10, 1999 in the principal amount of $150,000, identifying Pines as the maker and Leemon as the payee. (Compl. Ex. A: Promissory Note.) The Note is signed by defendant Waylon McMullen as President of Pines. (Id.) Under the heading "terms of payment," the Note provides that "[a]ll principal shall be due and payable in 365 days. Therefore $150,000.00 shall be due and payable on February 8, 2000." (Id.) Under the heading "conversion rights," the Note provides that "Maker hereby grants to Payee the right to convert all or part of the Unpaid Principal herein into common stock of AMDL, Inc. NASDAQ symbol AMDL, a publicly traded company. The conversion right will be for 1,000,000 shares of stock for the total Principal." (Id.)

Defendants' Motion to Dismiss

Defendants moved to dismiss the complaint on the grounds, inter alia, that: (1) the complaint fails to state a claim under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 because the Note is not a security, and (2) the complaint fails to allege fraud with the specificity required by Rule 9(b) and the Private Securities Litigation Reform Act. (See Dkt. Nos. 3, 11-13, 18-19.)

The parties have consented to decision of this action by a Magistrate Judge pursuant to 28 U.S.C. § 636(c). (See Dkt. Nos. 25-30.)

ANALYSIS

I. THE APPLICABLE LAW

A. The Standard Governing a Motion to Dismiss Pursuant to Fed. R.Civ.P. 12(b)(6)

A district court should deny a motion to dismiss "`unless it appears to a certainty that a plaintiff can prove no set of facts entitling him to relief.'" IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052 (2d Cir.1993) (quoting Ryder Energy Distrib. Corp. v. Merrill Lynch Commodities Inc., 748 F.2d 774, 779 (2d Cir.1984)), cert. denied, 513 U.S. 822, 115 S.Ct. 86, 130 L.Ed.2d 38 (1994); accord, e.g., Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir.1998); LaSalle Nat'l Bank v. Duff & Phelps Credit Rating Co., 951 F.Supp. 1071, 1080-81 (S.D.N.Y.1996) (Knapp, D.J. & Peck, M.J.); In re Towers Fin. Corp. Noteholders Litig., 93 Civ. 0180, 1995 WL 571888 at * 11 (S.D.N.Y. Sept.20, 1995) (Peck, M.J.), report & rec. adopted, 936 F.Supp. 126 (S.D.N.Y.1996) (Knapp, D.J.). A court must accept as true the facts alleged in the complaint and draw all reasonable inferences in favor of the nonmoving party — here, plaintiff Leemon. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989).² This general rule also applies to fraud claims. Grandon v. Merrill Lynch & Co., 147 F.3d at 188; IUE AFL-CIO Pension Fund, 9 F.3d at 1052; Ross v. Bolton, 904 F.2d 819, 823 (2d Cir.1990) ("When fraud is asserted, the general rule is simply applied in light of Rule 9(b)'s particularity requirements.").³

Additionally, a Rule 12(b)(6) motion challenges only the face of the pleading. Thus, in deciding a 12(b)(6) motion, "the Court must limit its analysis to the four corners of the complaint." Vassilatos v. Ceram Tech Int'l Ltd., 92 Civ. 4574, 1993 WL 177780 at *5 (S.D.N.Y. May 19, 1993) (citing Kopec v. Coughlin, 922 F.2d 152, 154-55 (2d Cir.1991)).⁴

The Court, however, may consider documents attached to the complaint as an exhibit or incorporated in the complaint by reference. E.g., Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir.2000) ("For purposes of a motion to dismiss, we have deemed a complaint to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference ...."); Paulemon v. Tobin, 30 F.3d 307, 308-09 (2d Cir.1994); Brass v. American Film Tech., Inc., 987 F.2d 142, 150 (2d Cir.1993); LaSalle Nat'l Bank v. Duff & Phelps, 951 F.Supp. at 1081. Here, Leemon has attached a promissory note to his complaint. (See Compl. Ex. A: Promissory Note.) Accordingly, the Court will consider that document on this motion.

B. Pleading Requirements for Fraud Under Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act

In considering the sufficiency of Leemon's § 10(b) and SEC Rule 10b-5 claims, the Court must determine the adequacy of the complaint's allegations pursuant to Rule 9(b) of the Federal Rules of Civil Procedure. E.g., Ganino v. Citizens Utils. Co., 228 F.3d 154, 168 (2d Cir.2000) ("It is well-settled in this Circuit that a complaint alleging securities fraud must satisfy the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure."); Anatian v. Coutts Bank (Switzerland) Ltd., 193 F.3d 85, 88 (2d Cir.1999) ("when a plaintiff alleges securities fraud, we must ... consider the complaint in light of Fed. R.Civ.P. 9(b)") cert. denied, 528 U.S. 1188, 120 S.Ct. 1241, 146 L.Ed.2d 100 (2000); Shields v. Citytrust Bancorp, 25 F.3d 1124, 1127 (2d Cir.1994); LaSalle Nat'l Bank v. Duff & Phelps Credit Rating Co., 951 F.Supp. 1071, 1081 (S.D.N.Y.1996) (Knapp, D.J. & Peck, M.J.); In re Towers Fin. Corp. Noteholders Litig., 93 Civ. 0180, 1995 WL 571888 at * 12 (S.D.N.Y. Sept.20, 1995) (Peck, M.J.), report & rec. adopted, 936 F.Supp. 126 (S.D.N.Y.1996) (Knapp, D.J.). Fed.R.Civ.P. 9(b) sets forth special pleading requirements for fraud claims:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

Although Rule 9(b) must be read together with Rule 8(a), which requires only a "short and plain statement of the claim," Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir.1990), the fraud allegations in the complaint must be specific enough to allow the defendant "a reasonable opportunity to answer the complaint," Ross v. A.H. Robins Co., 607 F.2d 545, 557 (2d Cir.1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980).⁵ Furthermore, the complaint must give the defendant "adequate information" to allow the defendant "to frame a response." Ross v. A.H. Robins Co., 607 F.2d at 557-58; Ryan v. Hunton & Williams, No. 99-CV-5938, 2000 WL 1375265 at *6 (E.D.N.Y. Sept.20, 2000) ("Allegations of fraud ... must be specific enough to provide a defendant with `a reasonable opportunity to answer the complaint and adequate information to frame a response.'").

Because Leemon's complaint asserts a claim for securities fraud, Rule 9(b)'s requirements are supplemented by the parallel requirements of the Private Securities Litigation Reform Act ("PSLRA"). See, e.g., Novak v. Kasaks, 216 F.3d 300, 306-07 (2d Cir.), cert. denied, 531 U.S. 1012, 121 S.Ct. 567, 148 L.Ed.2d 486 (2000); In re Revlon, Inc. Secs. Litig., 99 Civ. 10192, 2001 WL 293820 at *6 (Mar. 27, 2001) ("A complaint alleging a violation of section 10(b) must satisfy the particularity requirement of Rule 9(b) as well as the pleading requirements of the PSLRA.") (citation omitted); Rich v. Maidstone Fin., Inc., 98 Civ. 2569, 2001 WL 286757 at *4-7 (S.D.N.Y. Mar.23, 2001); Vogel v. Sands Bros. & Co., 126 F.Supp.2d 730, 737 (S.D.N.Y.2001). The PSLRA provides:

(b) Requirements for securities fraud actions

(1) Misleading statements and omissions

In any private action arising under this chapter in which the plaintiff alleges that the defendant —

(A) made an untrue statement of a material...