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D & G ENTERPRISES v. CONTINENTAL ILL. NAT. BANK

April 13, 1983

D & G ENTERPRISES, ET AL., PLAINTIFFS,
v.
CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, DEFENDANT.



The opinion of the court was delivered by:  Aspen, District Judge:[fn*] [fn*] Pursuant to Rule 9 of the Rules of Procedure of the Judicial Panel on Multidistrict Litigation, 89 F.R.D. 273, 278-79 (1981), on January 19, 1983, a conditional transfer order was issued by the Judicial Panel on Multidistrict Litigation, transferring this action to the Western District of Oklahoma, pursuant to 28 U.S.C. § 1407. The purpose of the transfer was to coordinate or consolidate this action with 50 civil actions that had been transferred there on December 23, 1982, since this action involved questions of fact common to the actions previously transferred to Oklahoma. In January, 1983, the Judicial Panel on Multidistrict Litigation granted Continental Bank's request for a stay of the January 19, 1983, conditional transfer order pending this Court's ruling on Continental's motion to dismiss. Once an order of transfer is entered, the jurisdiction of the transferor court ceases, 78 F.R.D. at 576, citing In re Plumbing Fixture Cases,  
MEMORANDUM OPINION AND ORDER

Plaintiffs, multiple investors*fn1 in eight entities identified as the Longhorn Partnerships,*fn2 brought this action against Continental Illinois National Bank & Trust Company of Chicago ("Continental") alleging securities fraud under Section 12(2) of the Securities Act, 15 U.S.C. § 771(2); Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b) and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5; the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(b); and pendent state law claims under 15 Okla.Stat. §§ 101 and 408(b); 76 Okla.Stat. §§ 2 et seq.; and common law.*fn3

Facts

Plaintiffs allege that they each invested in the Longhorn partnerships, corporations "engaged in oil and gas exploration and production." According to plaintiffs, from 1978 continuing until the present, Continental with the Longhorn Partnerships*fn4 and the Penn Square entities*fn5 conspired to defraud plaintiffs in conjunction with the sale of the Longhorn partnership interests. Plaintiffs further allege that Continental, the Longhorn Partnerships and Penn Square caused investors to finance a portion of the Longhorn partnerships by furnishing letters of credit in favor of Penn Square and "by making false and misleading statements of material facts which were reasonably relied upon by plaintiffs" in making the investment. Plaintiffs' complaint alleges that Continental, Longhorn and Penn Square issued "false and misleading reports" concerning the success of the partnership, that Continental and other banks fraudulently obtained loans to generate banking business for Penn Square, and that Continental and certain other banks made loans to the Longhorn and Penn Square entities without conducting the usual credit investigations. Additionally, the complaint describes various unlawful activities attributed to Longhorn and Penn Square, which do not include defendant Continental.

Continental, in its motion to dismiss the complaint, alleges various pleading deficiencies in the complaint which we will consider in turn. When confronted by a motion to dismiss, courts must view the allegations contained in the complaint in the light most favorable to the plaintiff. Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). Therefore, unless a plaintiff cannot prove any set of facts in support of his claim that would entitle him or her to relief, the complaint should not be dismissed under Fed.R.Civ.P. Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Conley, 355 U.S. at 45-46, 78 S.Ct. at 101-102.

Count I

Continental argues that the allegations of fraud in Count I of plaintiffs' complaint, which is based upon § 12(2) of the Securities Act, 15 U.S.C. § 771(2), fail to satisfy the particularity requirement of Fed.R.Civ.P. 9(b). Rule 9(b) provides that:

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

The demand for greater specificity in pleadings codified in Rule 9(b) serves a number of purposes. Complaints alleging fraud should seek redress for a wrong rather than attempting to discover unknown wrongs. Gross v. Diversified Mortgage Investors, 431 F. Supp. 1080, 1087 (S.D.N.Y. 1977), aff'd, 636 F.2d 1201 (2d Cir. 1980), citing Segal v. Gordon, 467 F.2d 602, 608 (2d Cir. 1974). Moreover, defendants must be protected from the harm that results from charges of serious wrongdoing, Todd v. Oppenheimer & Co., Inc., 78 F.R.D. 415, 419 (S.D.N Y 1978), citing Segan v. Dreyfus Corp., 513 F.2d 695, 696 (2d Cir. 1975), as well as the harm that comes to their reputations when they are charged with the commission of acts involving moral turpitude. Gross v. Diversified Mortgage Investors, 431 F. Supp. at 1087. Finally, allegations of fraud must be concrete and particularized enough to give notice to the defendants of the conduct complained of, to enable the defendants to prepare a defense, Id.

Nevertheless, Rule 9(b) must be read in harmony with Fed.R.Civ.P. 8. Tomera v. Galt, 511 F.2d 504, 508 (7th Cir. 1975). Rule 8 requires a "short and plain statement of the claim showing that the pleader is entitled to relief." Therefore, a complaint which alleges securities fraud must state with particularity specific fraudulent acts comprising fraud. Rule 9(b), however, does not require plaintiff to plead detailed evidentiary matters.

In describing the circumstances constituting fraud, the plaintiff must describe the "time, place and particular contents of the false representations, as well as the identity of the party making the misrepresentation, and what was obtained or given up thereby." Bennett v. Berg, 685 F.2d 1053, 1062 (8th Cir. 1982). Mere conclusory language which asserts fraud, without a description of fraudulent conduct, does not satisfy Rule 9(b). Lincoln Nat. Bank v. Lampe, 414 F. Supp. 1270, 1279 (N.D.Ill. 1976).

Where there are allegations of a fraudulent scheme with multiple defendants, the complaint must "inform each defendant of the specific fraudulent acts" which constitute the basis of the action against the particular defendant, Lincoln, 414 F. Supp. at 1278. In discussing a particular insufficiency of the complaint under Rule 9(b), that court noted that a particular defendant could not ascertain from the complaint which representation it was charged with having made, by whom and to whom the statements were given, the place and circumstances of the conversation, or, with a sole exception, the date of the utterance. As further evidence of the insufficiency of that complaint under Rule 9(b), the court stated that "all the representatives are lumped together, seemingly in an effort to imply that each defendant is responsible for statements made by the others." Lincoln, 414 F. Supp. at 1278. See also Adair v. Hunt International Resources Corp., 526 F. Supp. 736 (N.D.Ill. 1981).

Where the allegations in the complaint are based "on information and belief," the general rule is that such allegations do not satisfy the particularity requirements of Fed.Rule 9(b). Segal v. Gordon, 467 F.2d at 608. Therefore, allegations of matters particularly within the knowledge of an adverse party must "be accompanied by a statement of facts upon which the belief is founded." 2A Moore's Federal Practice ¶ 9.03 (3d ed. 1982). In Duane v. Altenburg, 297 F.2d 515 (7th Cir. 1962), a shareholder derivative suit, the court noted that

  while pleading on "information and belief" is
  permissible as to matters peculiarly within the
  adverse party's knowledge, it has also been held
  that allegations of fraud . . . when made on
  "information and belief" must be accompanied by a
  statement of facts ...

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