Source: https://casetext.com/case/mills-v-polar-molecular-corp
Timestamp: 2019-07-21 02:36:16
Document Index: 123135329

Matched Legal Cases: ['§ 78', '§ 240', '§ 1346', '§ 1961', '§ 78', '§ 12']

Mills v. Polar Molecular Corp, 12 F.3d 1170 | Casetext
12 F.3d 1170 (2d Cir. 1993)
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Millsv.Polar Molecular Corp.
United States Court of Appeals, Second CircuitDec 17, 1993
Dennis W. Grogan, Johnston McShane, P.C., New York City, for defendants-appellees.
Before: CARDAMONE, McLAUGHLIN, and LAY, Circuit Judges.
Plaintiffs William L. Mills, Chester J. Walsh, T.V. Miles and Joseph Mello appeal from a judgment of the United States District Court for the Southern District of New York (Robert W. Sweet, Judge), dismissing their claims of securities fraud, brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78 j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1972), and their claims of mail and wire fraud, brought under 18 U.S.C. § 1346 and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq. Mills separately appeals from a judgment dismissing his claims for breaches of contract and fiduciary duty.
In April 1989, Polar hired Chester Walsh and T.V. Miles to be managers. Both employment contracts provided for $70,000 in salary and 25,000 shares of unregistered Polar stock. Because shares must be registered with the Securities and Exchange Commission ("SEC") before they can be sold on the open market, see Securities Exchange Act of 1934, 15 U.S.C. § 78 l, the contracts stated that Polar would register the shares with the SEC "at the earliest opportunity in the year 1989."
In early 1991, the plaintiffs brought this action in the United States District Court for the Southern District of New York against Polar and the Directors. The complaint (which the plaintiffs amended several times) alleged that Polar and the Directors promised to register the plaintiffs' shares but never did so. The complaint further alleged that the aggregation of broken promises constituted a pattern of mail and wire fraud in violation of RICO. To bolster the fraud claims, and in an attempt to plead predicate acts under RICO, the complaint alleged that Polar and the Directors had breached promises to register shares to several other persons (in addition to the plaintiffs herein) from 1989 to 1990. Notably, the complaint did not allege that any Directors personally made fraudulent statements in these other instances.
Polar was a defendant below; however, it went into bankruptcy after the appeal was filed, and is no longer an appellee.
When we review the grant of a motion to dismiss under Rule 9(b) or Rule 12(b)(6), we accept as true the factual allegations of the complaint, and draw all inferences in favor of the pleader. IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052 (2d Cir. November 19, 1993). Dismissal under either rule is proper where the plaintiff cannot recover on the facts he has alleged. See Ryder Energy Distribution Corp. v. Merrill Lynch Commodities Inc., 748 F.2d 774, 779 (2d Cir. 1984).
I. The Rule 10b-5 Claims
Rule 10b-5 proscribes persons from making untrue or misleading statements of material fact in connection with a securities transaction. Employment contracts promising shares as compensation are generally considered securities transactions within Rule 10b-5. See Dubin v. E.F. Hutton Group Inc., 695 F.Supp. 138, 146-47 (S.D.N.Y. 1988). A person who promises to perform a specific act in the future, while secretly intending not to perform, violates Rule 10b-5, provided that the promise is given as consideration for the transfer of securities. Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986).
A Rule 10b-5 plaintiff must comply with Rule 9(b), which requires that fraud be pled with particularity. Specifically, the complaint must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989).
The fraud allegations of Walsh, Miles and Mello fail because, even though these plaintiffs have served an original and two amended complaints, they still have not linked the alleged fraudulent statements to particular Directors. Rule 9(b) is not satisfied where the complaint vaguely attributes the alleged fraudulent statements to "defendants". Luce, 802 F.2d at 54. See DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1249 (2d Cir. 1987) (allegations of fraud were insufficient where the complaint did not link any of the defendants to the alleged fraudulent statement). Nor did Walsh, Miles and Mello satisfy Rule 9(b) by alleging simply that "Polar" promised to register the shares. The mere fact that the Directors were controlling persons at Polar does not link them to the statements; the plaintiffs also had to allege that the Directors personally knew of, or participated in, the fraud. See IIT v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980); Lanza v. Drexel Co., 479 F.2d 1277, 1289 (2d Cir. 1973).
While T.V. Miles does allege that Nelson told him in October 1990 that the shares were "in registration," this statement was made after the contracts were signed, and, obviously, could not have induced Miles to sign the contract. A statement cannot be fraudulent if it did not affect an investment decision of the plaintiff. See Burke v. Jacoby, 981 F.2d 1372, 1378 (2d Cir. 1992) (a 10b-5 plaintiff must demonstrate that he relied on the defendant's false statements when he entered the transaction), cert. denied, ___ U.S. ___, 113 S.Ct. 2338, 124 L.Ed.2d 249 (1993); Weiss v. Wittcoff, 966 F.2d 109, 111 (2d Cir. 1992) (the plaintiff must show that the defendant's misrepresentations caused the plaintiff to invest). See also Schlanger v. Four-Phase Sys. Inc., 555 F.Supp. 535, 538 (S.D.N.Y. 1982) ("Causation is an essential element of all tort cases, and claims under 10b-5 should be no exception."). Because Miles did not allege that Nelson's statement influenced an investment decision, he has not adequately pled fraud.
A Rule 10b-5 plaintiff must "allege material misstatements or omissions indicating an intent to deceive or defraud in connection with the purchase or sale of a security." Luce, 802 F.2d at 55 (citing Ernst Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)). The failure to carry out a promise made in connection with a securities transaction is normally a breach of contract. It does not constitute fraud unless, when the promise was made, the defendant secretly intended not to perform or knew that he could not perform. See id. at 55-56. Accordingly, although Rule 9(b) allows a pleader to aver intent generally, a 10b-5 complaint nevertheless must allege facts that raise a strong inference of fraudulent intent. See Ouaknine v. MacFarlane, 897 F.2d 75, 81 (2d Cir. 1990); Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987), cert. denied, 484 U.S. 1005, 108 S.Ct. 698, 98 L.Ed.2d 650 (1988).
We decline Mills' invitation to infer fraudulent intent from the fact that Polar made a number of contracts to register shares and never performed any of them. A contract may be breached for legitimate business reasons. See generally E. Allan Farnsworth, Contracts § 12.8 at 874-75 (2d ed. 1990). Contractual breach, in and of itself, does not bespeak fraud, and generally does not give rise to tort damages.
To state a mail and wire fraud claim under RICO, a plaintiff must allege that the defendant made two predicate communications, via interstate commerce, that constitute a pattern of racketeering activity. Sedima, S.P.L.R. v. Imrex Co., 473 U.S. 479, 495-96, 105 S.Ct. 3275, 3284-85, 87 L.Ed.2d 346 (1985). Like allegations of securities fraud, allegations of predicate mail and wire fraud acts should state the contents of the communications, who was involved, where and when they took place, and explain why they were fraudulent. See Official Publications, Inc. v. Kable News Co., Inc., 692 F.Supp. 239, 245 (S.D.N.Y. 1988), aff'd in part, rev'd in part on other grounds, 884 F.2d 664 (2d Cir. 1989). Our conclusion that Walsh, Miles, and Mello failed to satisfy Rule 9(b) demands as a corollary that these allegations cannot serve as predicate acts. The plaintiffs' allegations about Polar's broken promises to third parties were equally vague, and cannot serve as predicate acts either.
Having failed to plead any predicate act of mail and wire fraud, the plaintiffs have not stated a RICO action against the Directors. See Moss v. Morgan Stanley, Inc., 719 F.2d 5, 18 n. 14 (2d Cir. 1983), cert. denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984); Sommerville v. Major Exploration, Inc., 576 F.Supp. 902, 913-14 (S.D.N.Y. 1983). Thus, the district court properly dismissed these claims.
Mills does not suggest that Nelson assumed personal liability. However, he argues that Nelson committed a tort by "committing himself . . . to good faith performance" of the contracts and then breaching. Every party to a contract commits himself to good faith performance. That does not transmute breach of contract into a tort.