Opinion ID: 854141
Heading Depth: 2
Heading Rank: 5

Heading: Pleading with Particularity

Text: It remains to be decided whether the trial court correctly granted the State's motion for summary judgment. We do not reach this question, however, because we hold that the trial court erred in denying McKinney's motion to dismiss or to make more specific. On appeal, the Court of Appeals held that the State's use of the words false, misleading, and deceptive combined with the allegation of an unfulfilled promise was sufficient to state a claim and affirmed the trial court on this point. We disagree and hold that for actions under the Act that are grounded in fraud, the specificity requirement of Rule 9(B) must be met. We also hold that the elements of an action for civil penalties under the Act are such that it is grounded in fraud and therefore is subject to Rule 9(B). As explained in Part II, to the extent the State seeks civil penalties under § 4(c) or § 8, a knowing violation or an incurable deceptive act must be shown. These claims sufficiently sound in fraud to trigger Rule 9(B) if based on a discrepancy between what was told to the consumer and the underlying facts. However, Rule 9(B) does not apply to claims based on allegations that the supplier should reasonably know of the misrepresentations. Nor does it apply to injunctive relief the attorney general may obtain under § 4(c) except to the extent it relates to real estate transactions. Indiana Trial Rule 9(B) is identical to Federal Rule 9(b). It provides: In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be specifically averred. Malice, intent, knowledge, and other conditions of mind may be averred generally. In moving to dismiss under Rule 12(B)(6) and Rule 9(B), McKinney argued that the State did not aver facts showing the time, place, and content of the asserted misrepresentationsi.e., the circumstances constituting fraud, Dutton v. International Harvester Co., 504 N.E.2d 313, 318 (Ind.Ct. App.1987)or allege that any of the misrepresentations were false at the time they were made. Instead, McKinney claimed, the State simply recited statutory language without the support of operative facts. The State responded that Rule 9(B) does not apply to deceptive acts under the Act. Rather, the State contended, Rule 9(B) applies to common law or actionable fraud but not to a statutory action where statutory remedies are sought. [11] Further, the State continued, actionable fraud requires five elementsrepresentation, falsity, scienter, reliance, and injurywhereas deceptive acts under the Act meet a lower threshold. Application of Rule 9(B) to actions under the Act is a question of first impression. There are, however, useful analogs. For example, § 11 of the Securities Act of 1933 generally provides that any person acquiring a security issued under a registration statement that contained an untrue statement of a material fact can bring an action on the basis of the misrepresentation. 15 U.S.C. § 77k(a) (1994). Similarly, § 12(a)(2) of the 1933 Act generally provides that persons who offer or sell a security by means of a prospectus which includes an untrue statement of material fact are liable to the purchaser. 15 U.S.C. § 77 l (a)(2) (1997). Scienter is not an element under either provision. Claims under sections 11 and 12, like actions under the Act, are based on misrepresentations of material fact and do not require proof of intentional deception on the part of the seller or offeror. Despite the absence of scienter as an element in these 1933 Act claims, however, Rule 9(b) of the Federal Rules of Civil Procedure has been held to apply, at least when the claim sounds in fraud or is grounded in fraud. In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1404-05 (9th Cir.1996); Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1222-23 (1st Cir.1996); Melder v. Morris, 27 F.3d 1097, 1100 n. 6 (5th Cir.1994) (When 1933 Securities Act claims are grounded in fraud rather than negligence as they clearly are here, Rule 9(b) applies.); accord Shapiro v. UJB Fin. Corp., 964 F.2d 272, 288 (3d Cir.1992); Goldsmith v. Technology Solutions Co., 1994 WL 323317, at  (N.D.Ill. June 27, 1994) (if the nub of the allegations sound in fraud, then Rule 9(b) applies); Todd v. Oppenheimer & Co., 78 F.R.D. 415, 419 n. 4 (S.D.N.Y.1978) (in action under § 12, Rule 9(b) applies when complaint sounds essentially in fraud); but see In re NationsMart Corp. Sec. Litig., 130 F.3d 309, 315 (8th Cir.1997) (holding that Rule 9(b) does not apply to claims under § 11 because proof of fraud or mistake is not a prerequisite to establishing liability). The reasoning behind most of these decisions is that although fraud is not an element of the action, the action is nonetheless based on fraud. For example, a complaint under the 1933 Act need not prove fraud to prevail, but the allegations in the complaint often accuse the defendant of knowingly, wilfully, or intentionally misrepresenting information. This type of action is grounded in fraud and Rule 9(b) applies for the same reason it applies in typical averments of fraud. [12] Federal Rule 9(b), like its Indiana counterpart, serves the objectives of deterring groundless suits and providing defendants with sufficient information in the complaint to enable them to prepare a defense. See generally 5 CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 1296 (2d ed. 1990). Accordingly, in securities fraud cases, the plaintiff must plead the circumstances of fraud, what is false or misleading about a statement, and that the statement was false or misleading at the time it was made. In re Stac, 89 F.3d at 1404. But where the claim is based on negligence or innocent misrepresentations of fact, Rule 9(b) does not apply. Id. at 1405 n. 3; Shaw, 82 F.3d at 1222-23 (complaint which asserted that defendants possessed information they did not disclose did not aver fraud and Rule 9(b) did not apply); Shapiro, 964 F.2d at 288 (court does not decide whether Rule 9(b) applies to negligence violations). Cf. Sears v. Likens, 912 F.2d 889, 892-93 (7th Cir.1990) (holding that Rule 9(b) applies to § 12(2) without distinguishing between negligent or fraudulent based claims). The State did not meet the requirements of Rule 9(B) in its complaint in this case. The complaint alleged that McKinney made representations described in the complaint and alleged in conclusory terms that they were false and misleading and constitute deceptive acts and incurable deceptive acts. By alleging the acts to be incurable, the State alleged intent and asserted a basis for civil penalties. Accordingly, Rule 9(B) applied. Perhaps the State could have alleged as a separate claim a right to injunctive relief based on a lesser mental state, but it did not do so. Rather, the complaint did not distinguish between the allegations of deceptive acts and incurable deceptive acts. As a result, the entire complaint must be judged by Rule 9(B) standards. Cf. In re Stac, 89 F.3d at 1405 n. 2 (complaint alleging §§ 11, 12, and 10(b) violations of the 1933 and 1934 Acts specifically disclaimed fraud with respect to § 11, but Rule 9(b) applied to all claims because the gravamen of the complaint was plainly fraud and no effort was made to show any other basis). Under the standards of Rule 9(B), at least major portions of the complaint are deficient. Affidavits attached to and incorporated in the complaint supply some of the required information, but not all. Treating the complaint and affidavits as one document, they do not state with specificity what the representations were, who made them, [13] or when or where they were made. Most importantly, in most cases they do not plead what the statements were that were false, and in what respect they were false. In many instances they amount to an assertion that McKinney made promisessometimes in the form of warranties and guarantees and then failed to perform. [14] Although these allegations may support a breach of contract claim, without more flesh these bare bones do not state claims under the Act. A broken promise is not ipso facto a false representation. Cf. Anderson v. Indianapolis Ind. Aamco Dealers Adver. Pool, 678 N.E.2d 832, 837 (Ind.Ct.App.1997) (actual fraud may not be based on representations of future conduct, on broken promises, or on representations of existing intent that are not executed), trans. denied. A promise can be made without knowledge or reason to believe that it will be broken, but a statement that is false for purposes of the Act must be false when made. The State's complaint also contains some allegations that suggest misrepresentations of then currently existing state of affairs, but these are quite general. [15] Even unfulfilled promises can also support allegations of misrepresentation or misdescription of the product if the facts at the time support the conclusion that fulfillment of the promise was problematic. Cf. R.R.S. II Enterprises, Inc. v. Regency Assocs., 646 N.E.2d 56, 59 (Ind.Ct.App.1995) (representation that shopping mall would have double lane traffic access was misrepresentation of existing fact, where it was known at time that double lane was impossible and a construction plan for single lane had been approved). These allegations may very well be expandable to assert claims under the statute, but are not pleaded with sufficient particularity to be evaluated, and do not pass Trial Rule 9(B) muster.