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IN RE SUNRISE SECS. LITIG.

May 22, 1992

IN RE: SUNRISE SECURITIES LITIGATION THIS DOCUMENT RELATES TO: ALL ACTIONS


The opinion of the court was delivered by: O'NEILL

 O'NEILL, J.

 MAY 22, 1992

 I. Background

 Two groups of claims relating to Sunrise Savings and Loan Association of Florida have been consolidated for pretrial proceedings in this multidistrict litigation: claims brought under the Securities Exchange Act of 1934 and under state common law asserted by a class of Sunrise shareholders (the "Securities case") and claims of breaches of fiduciary duties asserted by the Federal Deposit Insurance Corporation as manager of the FSLIC Resolution Fund *fn1" (the "Fiduciary Duty case"). *fn2" Many of the defendants have filed cross-claims against other defendants and counter-claims to the claims asserted by the plaintiffs.

 On May 29, 1990, I entered an Order approving a settlement agreement between defendants Blank, Rome, Comisky & McCauley, Sunrise's law firm, Michael D. Foxman, M. Kalman Gitomer, Kenneth Treadwell and Edward E. Fitzgerald, Jr. and the plaintiffs in the Securities and Fiduciary Duty cases. *fn3" The Order provided for the dismissal with prejudice of all contribution claims against Blank, Rome on the basis that plaintiffs will reduce, by the amount of Blank, Rome's proportional fault, if any, as determined at trial, any judgment that plaintiffs obtain against the non-settling defendants who are found to be joint tortfeasors with Blank, Rome. See In re Sunrise Securities Litigation, MDL No. 655 (E.D.Pa. May 29, 1990).

 Presently before the Court is Blank, Rome's motion to dismiss all the cross-claims asserted by the non-settling defendants against Blank, Rome. *fn4" Extensive briefs were filed and I held an oral argument on the motion on November 4, 1991. The parties submitted additional briefs in March, 1992 on the question of what law is applicable to the FDIC's claims in the Fiduciary Duty case.

 For the reasons that follow, I will grant the motion in part and deny it in part.

 II. Discussion

 A. Standard of Review

 In deciding a motion to dismiss pursuant to Fed. R.Civ.P. Rule 12(b)(6), I accept the well-pleaded factual allegations of the cross-claimants' amended pleadings as true. *fn5" A claim should not be dismissed for failure to state a claim unless it appears beyond a doubt that the non-moving party can prove no set of facts in support of its allegations which would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80 , 78 S. Ct. 99 (1957); Marshall-Silver Construction Co. v. Mendel, 894 F.2d 593, 595 (3d Cir. 1990). In making this determination, the court must construe the pleading in the light most favorable to the non-moving party. Budinsky v. Pennsylvania Dept. of Environmental Resources, 819 F.2d 418, 421 (3d Cir. 1987).

 B. Blank Rome's Motion to Dismiss Cross-Claims

 In the Fiduciary Duty case, defendants Black, Blake & Associates, Devaney, Felps, Gruher, Kenneth Howard, Laddie Howard, Hyman, Ingles, Jacoby, Koushel, Robinson, Shurack, Skubal, Walker, Zambruski and the Outside Directors have cross-claimed for contribution and implied indemnity; Deloitte has cross-claimed alleging fraud, negligent misrepresentation, tortious interference, and for contribution and implied indemnity; and Taber has cross-claimed alleging intentional misrepresentation, negligence (including but not limited to negligent misrepresentation and professional malpractice), breach of contract, violation of Section 10(b) of the 1934 Securities Exchange Act and Rule 10b-5, and for contribution and implied indemnity.

 For the reasons set forth below, I conclude that the contribution claims should be dismissed because they are barred by my Order dated May 29, 1990. I conclude further that the implied indemnity claims in the Securities case should be dismissed because there is no right to implied indemnity under the federal securities laws. I also conclude that the breach of contract claims should be dismissed because Blank, Rome and the non-settling defendants making the claims are not in privity. The negligence claims should be dismissed for similar reasons. The cross-claims asserting securities fraud under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 should be dismissed only to the extent that they are barred by the statute of limitations. All of the other claims have been properly asserted and will not be dismissed.

 1. Pleading Deficiencies

 Blank, Rome argues that the cross-claims alleging fraud should be dismissed because they contain pleading deficiencies -- specifically that fraud is alleged by hypothetical pleading, that the claims were not pleaded with particularity and because the pleadings do not properly state the elements of the fraud claim.

 a. Hypothetical pleading

 Blank, Rome asserts that the cross-claims alleging fraud must be dismissed because they attempt to incorporate the indictment and related bill of particulars in United States v. Jacoby, Crim. No. 87-6034 (S.D.Fla.) by hypothetical pleading, in violation of Fed.R.Civ.P. Rules 10(c) and 8(e)(2).

 Rule 10(c) states:

 Adoption by Reference; Exhibits. Statements in a pleading may be adopted by reference in a different part of the same pleading or in another pleading or in any motion. A copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes.

 Rule 8(e)(2) states:

 A party may set forth two or more statements of a claim or defense alternately or hypothetically, either in one count or defense or in separate counts or defenses.

 Rule 8(e)(2) may be relied upon by any party. 5 Wright & Miller § 1282, at 529. Claims asserted hypothetically need not be consistent with the defenses and denials raised in a party's answer. Id. For example, Wright and Miller cite a conspiracy action in which defendants denied that a conspiracy existed and then hypothetically asserted in a counterclaim that if in fact a conspiracy did exist plaintiffs had participated in it and had injured defendants. Id., citing Charles Rubenstein, Inc. v. Columbia Pictures, Corp., 14 F.R.D. 401 (D.C.Minn. 1953).

 Blank, Rome concedes that hypothetical pleading is permitted, Supplemental Memorandum of Blank, Rome Comisky & McCauley in Support of its Motion to Dismiss All Cross-Claims, at 36, but contends that hypothetical pleading should not be used to allege fraud, at least where there has been adequate opportunity to determine the facts, because fraud may not be alleged merely on information and belief. In addition, Blank, Rome argues that hypothetical pleading is not permitted unless the pleader "honestly is in doubt about the factual background or legal theories supporting his claim." Id. at 37, citing 5 Wright & Miller at § 1282. It thus asks that those portions of the cross claims that attempt to incorporate the indictment and bill of particulars by hypothetical pleading be stricken. Blank, Rome Supplemental Memorandum, at 38. *fn6"

 Additionally, while Blank, Rome contends that fraud may not be alleged merely on information and belief, the allegations of the cross-claimants are not information and belief allegations; they are if-then, or hypothetical, pleadings. The claims are detailed and are structured as they are merely to reflect the Directors' decision not to admit facts they cannot admit and which might lead to liability they do not believe they have.

 b. Particularity

 Blank, Rome argues further that the fraud claims should be dismissed because they were not pleaded with adequate facts to support certain conclusions or because they were not pleaded with particularity in violation of Fed.R.Civ.P. Rule 9(b). *fn7"

 Rule 9(b) requires a claimant to plead (1) a specific false representation of material fact; (2) knowledge by the person who made it of its falsity; (3) ignorance of its falsity by the person to whom it was made; (4) the intention that it should be acted upon; and (5) that the claimant acted upon it to his damage. Shapiro v. UJB Financial Corp., 964 F.2d 272, (3d Cir. May 20, 1992). The Court of Appeals for the Third Circuit has held that "Rule 9(b) requires plaintiffs to plead with particularity the 'circumstances' of the alleged fraud in order to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior." Seville Industry Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir. 1984).

 Despite these requirements, courts should "respect the 'general simplicity and flexibility' of the Federal Rules of Civil Procedure." Shapiro, No. 91-5153, slip op. at 29, quoting Christidis v. First Pennsylvania Mortgage Trust, 717 F.2d 96, 99 (3d Cir. 1983). Thus, the standard of pleading under Rule 9(b) is a generous one. Odesser v. Continental Bank, 676 F.Supp. 1305, 1314 (E.D.Pa. 1987).

 Focusing exclusively on the particularity requirement is "too narrow an approach and fails to take account of the general simplicity and flexibility contemplated by the rules." Craftmatic Secur. Litigation v. Kraftsow, 890 F.2d 628, 645 (3d Cir. 1989). Instead, under Seville the fraud allegations must withstand a case-specific evaluation, made with a view to the policies to be served by Rule 9(b). Odesser, 676 F.Supp. at 1314. In addition, "when the transactions are numerous and take place over an extended period of time, less specificity is required . . . The rule should not be applied with such draconian strictness as to undermine the liberal spirit of the Federal Rules of Civil Procedure." In Re Catanella and E.F. Hutton and Co., Secur. Litigation, 583 F.Supp. 1388, 1398 (E.D.Pa. 1984).

 In this case the Outside Directors have alleged fraud with the particularity required by Rule 9(b). Construing Rule 9(b) liberally and considering that the alleged transactions are numerous and took place over an extended period of time, I conclude that the allegations have put Blank, Rome on notice of the misconduct it is said to have committed. In addition to the pleadings, the Directors have provided a summary of the allegations. See Certain Non-Settling Defendants' Response, Appendix 2.

 Similarly, Deloitte's allegations of fraud satisfy Rule 9(b). Deloitte's cross-claim alleges specific misrepresentations based upon, among other things, the allegations mentioned in the amended complaint, the bill of particulars and the indictment. *fn8" These allegations put Blank, Rome on notice of the misconduct it is said to have committed.

 c. Elements of fraud

 Rule 9(b) also requires the pleadings to contain identification of the elements of the fraud claim. Craftmatic, 890 F.2d at 645.

 Blank, Rome asserts that the claims of the Outside Directors fail to satisfy this aspect of Rule 9(b) because the claims fail to identify the alleged misrepresentations, fail to allege adequate facts to support the scienter, or intent, requirement, and fail to demonstrate that the Directors justifiably relied on the alleged misrepresentations.

 i. Misrepresentations

 Rule 9(b) requires a party to plead a false statement or omission of material fact. However, Rule 9(b) "does not require nor make legitimate the pleading of detailed evidentiary matter." Denny v. Carey, 72 F.R.D. 574, 578 (E.D.Pa. 1976). A complaint is not deficient for failing to state every detail that might be a proper subject for interrogatories. In re Catanella & E.F. Hutton, 583 F.Supp. at 1398.

 Blank, Rome contends that the Outside Directors' attempts to provide details of the fraudulent conduct alleged are inadequate. Memorandum in Support of Motion to Dismiss Cross-Claims Against Blank, Rome, Comisky & McCauley, at 23. I conclude, however, that the Directors have met the requirements of Rule 9(b) in terms of pleading the element of misrepresentation.

 ii. Scienter

 To succeed on a claim of fraud, a party must prove "that the defendant acted with scienter, i.e., with intent to deceive, manipulate, or defraud." Herman & MacLean v. Huddleston, 459 U.S. 375, 382, 74 L. Ed. 2d 548 , 103 S. Ct. 683 (1983); In re Phillips Petroleum Secur. Litigation, 881 F.2d 1236, 1244 (3d Cir. 1989). To state a claim under Rule 9(b), "malice, intent, knowledge and other condition of mind of a person may be averred generally." There is no problem of insufficient particularity under Rule 9(b) since it expressly authorizes "knowledge" to be averred generally. Denny, 72 F.R.D. at 580.

 Thus, despite Blank, Rome's contentions that Rule 9(b) requires dismissal of a claim where parties with extensive knowledge of the facts fail to plead even one example of relevant knowledge on the part of the opposing party, the allegations of scienter in this case, which allege that Blank, Rome misled the Outside Directors "intentionally, with reckless disregard for the truth or falsity," are sufficient to satisfy Rule 9(b).

 2. Contribution

 Blank, Rome asserts that the claims against it seeking contribution have been barred by my Order dated May 29, 1990 in which I approved the settlement between Blank, Rome and the plaintiffs in both cases. The Outside Directors have conceded this point. Deloitte's claims also will be dismissed. *fn9"

 a. Fiduciary Duty Case

 i. Choice of law

 As a threshold matter, I must decide what law to apply in determining whether the non-settling defendants have stated a claim against Blank, Rome for implied indemnity in the Fiduciary Duty case. In order to make such a determination, it is helpful to decide what law is applicable to the FDIC's claims in that case.

 Courts in several jurisdictions have held that suits brought by the FDIC in its corporate capacity arise under the laws of the United States; thus these courts have applied federal law to such claims. See FDIC v. Blue Rock Shopping Center, 766 F.2d 744, 747 (3d Cir. 1985), citing D'Oench, Duhme & Co., Inc. v. FDIC, 315 U.S. 447, 455-56, 62 S. Ct. 676, 678, 86 L. Ed. 956 (1942); Gaff v. FDIC, 919 F.2d 384, 388 (6th Cir. 1990); Trigo v. FDIC, 847 F.2d 1499, 1502 (11th Cir. 1988); FDIC v. Ashley, 749 F.Supp. 1065, 1067 (D.Kan. 1990). While federal law supplies the rule of decision in these circumstances, I must decide whether to turn to federal common law or state law in order to give content to the federal rule. United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S. Ct. 1448, 59 L. Ed. 2d 711 (1979); Blue Rock, 766 F.2d at 747.

 In Kimbell Foods, the Supreme Court held that "controversies directly affecting the operations of federal programs, although governed by federal law, do not inevitably require resort to uniform federal rules." Kimbell Foods, 440 U.S. at 728. The Court stated that "when there is little need for a nationally uniform body of law, state law may be incorporated as the federal rule of decision." Id. See also In re Sunrise, 916 F.2d at 879-882.

 The Court identified three factors for courts to consider in determining whether to fashion a nationwide federal rule or to adopt state law: (1) whether there is a substantial need for a nationally uniform federal rule; (2) whether application of state law would frustrate specific objectives of the federal program; and (3) whether application of a federal rule would disrupt commercial relationships predicated on state law. Kimbell Foods, 440 U.S. at 728-729. Applying these factors, I conclude that federal common law should control the FDIC's claims in the Fiduciary Duty case. *fn10"

 The first Kimbell Foods factor is whether there is a substantial need for a national uniform rule. It is well settled that there is a strong federal interest in uniform regulation of federal savings and loan associations. See FSLIC v. Kidwell, 716 F.Supp. 1315, 1317 (N.D.Cal. 1989), vacated without opinion, in part, 937 F.2d 612, 1991 U.S.App. LEXIS 14853 (9th Cir. July 5, 1991) (vacating lower court opinion as to sanctions award only). Although Sunrise was not a federally chartered association, there is a federal interest in uniform regulation of state-chartered associations where, like Sunrise, they are federally insured and therefore subject to ...


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