Opinion ID: 2789954
Heading Depth: 1
Heading Rank: 3

Heading: The Remaining ILSA Claims

Text: In granting developers’ motions to dismiss the ILSA claims in Count I and Count II of the SAC, the district court concluded (i) that Federal Rule of Civil Procedure 9(b) applies to those claims because 15 U.S.C. § 1703(a)(2)(A)-(C) “proscribes fraudulent conduct,” and (ii) that Streambend failed to plead fraud with the particularity that Rule 9(b) requires. Streambend, 2013 WL 3465277, at . On appeal, relying on our decision in In re NationsMart Corp. Securities Litigation, 130 F.3d 309, 314-15 (8th Cir. 1997), cert. denied, 524 U.S. 927 (1998), Streambend argues that Rule 8(a) rather than Rule 9(b) applies to its ILSA pleadings. Alternatively, Streambend argues that its allegations in the SAC satisfied Rule 9(b) and, if not, the district court erred in not permitting further amendments. by the district judge, sua sponte or at the request of a party, under a de novo or any other standard”); Belk v. Purkett, 15 F.3d 803, 815 (8th Cir. 1994) (district court has “substantial control over the ultimate disposition of matters referred to a magistrate”). -6- A. Framing the Rule 9(b) Issues. Rule 9(b) provides: “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” The particularity requirement serves important purposes: First, it deters the use of complaints as a pretext for fishing expeditions of unknown wrongs designed to compel in terrorem settlements. Second, it protects against damage to professional reputations resulting from allegations of moral turpitude. Third, it ensures that a defendant is given sufficient notice of the allegations against him to permit the preparation of an effective defense. Parnes v. Gateway 2000, Inc., 122 F.3d 539, 549 (8th Cir. 1997) (quotation omitted); see Abels v. Farmers Commodities Corp., 259 F.3d 910, 920 (8th Cir. 2001). Claims “grounded in fraud” must meet this heightened pleading requirement. See Roop, 559 F.3d at 822 (False Claims Act); NationsMart, 130 F.3d at 320 (10b-5 action under Securities Exchange Act of 1934). At least some of our sister circuits also apply Rule 9(b) to “associated claims where the core allegations effectively charge fraud.” N. Am. Catholic Educ. Programming Found., Inc. v. Cardinale, 567 F.3d 8, 15 & n.4 (1st Cir. 2009) (negligent misrepresentation and breach of fiduciary duty claims); see Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103 (9th Cir. 2003) (“[I]n cases in which fraud is not an essential element of the claim, Rule 9(b) applies, but only to particular averments of fraud.”). Streambend’s ILSA claims alleged that defendants violated the first three subsections of 15 U.S.C. § 1703(a)(2), which provide: (a) It shall be unlawful for any developer or agent, directly or indirectly, to make use of any means or instruments . . . in interstate commerce, or of the mails . . . -7- (2) with respect to the sale or lease, or offer to sell or lease, any lot not exempt under section 1702(a) of this title -- (A) to employ any device, scheme, or artifice to defraud; (B) to obtain money or property by means of any untrue statement of a material fact, or any omission to state a material fact necessary in order to make the statements made (in light of the circumstances in which they were made and within the context of the overall offer and sale or lease) not misleading, with respect to any information pertinent to the lot or subdivision; (C) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a purchaser . . . . These provisions incorporate, almost verbatim, Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, a rule “prohibiting fraud by any person in connection with the purchase of securities.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 212 n.32 (1976), quoting the SEC press release issued with Rule 10b-5 in 1942. It is not surprising that Congress looked to the federal securities laws when codifying acts and practices that should be prohibited to protect purchasers in interstate land sale transactions. Thus, § 1703(a)(2) has been described as “a general anti-fraud provision.” Rice v. Branigar Org., Inc., 922 F.2d 788, 791 n.4 (11th Cir. 1991); accord United States v. Goldberg, 527 F.2d 165, 167 (2d Cir. 1975) (“general fraud provisions”), cert. denied 425 U.S. 971 (1976). But that generality, while relevant, does not fully answer the Rule 9(b) question presented in this case, an issue that, to our knowledge, has not been addressed in any published circuit court opinion and in very few district court opinions. In addition to Rule 10b-5, the federal securities laws include Sections 11(a) and 12(a)(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k(a), 77l(a)(2), which impose strict liability -8- on persons who sell securities using a registration statement, prospectus, or “oral communication” that includes an untrue statement of a material fact or omits to state a material fact required to make the statements not misleading, the same language used in § 1703(a)(2)(B) and in Rule 10b-5(b). In NationsMart, plaintiffs asserted securities law claims under Sections 11 and 12(a)(2) and Rule 10b-5. The district court dismissed all claims, in part for failing to comply with Rule 9(b). In reversing dismissal of the Section 11 and Section 12(a)(2) claims, we concluded that Rule 9(b) did not apply because the complaint “expressly disavow[ed] any claim of fraud in connection with” those claims, and because fraud is not an element of those statutory claims. 130 F.3d at 315, 319. But we affirmed dismissal of the Rule10b-5 claims because Hochfelder established that proof of scienter is an element of a Rule 10b-5 claim, 425 U.S. at 193, and therefore “a Rule 10b-5 claim is necessarily grounded in fraud.” 130 F.3d at 320. In more recent decisions, our sister circuits have consistently held that the particularity requirement of Rule 9(b) applies to securities law claims under Rule 10b- 5, where intent to defraud is an element of the claim. Regarding claims under Sections 11 and 12(a)(2), however, most courts have resolved the Rule 9(b) question by close examination of plaintiff’s complaint. The Second Circuit held in Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004), “that the heightened pleading standard of Rule 9(b) applies to Section 11 and Section 12(a)(2) claims insofar as the claims are premised on allegations of fraud.” The Third Circuit fashioned a comparable test in In re Suprema Specialties, Inc. Securities Litigation, 438 F.3d 256, 272-73 (3d Cir. 2006): Section 11 and Section 12(a)(2) “claims do not sound in fraud if ordinary negligence is expressly pled in connection with those claims. In such a case, the fraud allegations [in a separately pleaded Rule 10b-5 claim] cannot be said to ‘contaminate’ the Section 11 and 12(a)(2) claims if the allegations are pled separately.” We need not decide whether the approach in Rombach and Suprema is consistent with our decision in NationsMart, because this is not a case involving -9- securities laws claims in which NationsMart would be controlling. Rather, we conclude that this is a sound approach for applying Rule 9(b) to claims under § 1703(a)(2) of the ILSA, a later statute that borrowed remedial language from the far more complex securities law regime. Thus, to solve the Rule 9(b) riddle, we must look closely at the elements of the claims asserted in Count II and at the allegations in Count I of Streambend’s SAC. B. Count II. In Count II, Streambend alleged that defendants violated 15 U.S.C. § 1703(a)(2)(A) & (C). The allegations tracked those statutory provisions: “Defendants’ devices, schemes or artifices to defraud and/or transactions, practices, or courses of business that operated or would operate as a fraud . . . damag[ed] [Streambend] in an amount exceeding $75,000.” Subsections (A) and (C), like Rule 10b-5(a) and (c), are explicitly grounded in fraud. They prohibit the seller of property from “employ[ing] any device, scheme, or artifice to defraud,” or “engag[ing] in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a purchaser.” Consistent with NationsMart, the district court correctly determined that these claims are “necessarily grounded in fraud,” 130 F.3d at 320, and Rule 9(b) therefore applies. Streambend further argues that Count II satisfied Rule 9(b). In Count II, Streambend broadly alleged various wrongdoings by “Defendants” or “Developers” after Streambend signed the purchase agreements that allegedly established a “scheme or artifice to defraud” and a course of business that operated “as a fraud or deceit” upon unit purchasers -- for example, “Developers’ closing on and conveyance of units to purchasers without providing marketable title to the units,” Developers adding two additional floors to the Development, and “Defendants leading Plaintiffs to believe that their earnest monies were safely maintained in the trust accounts when they were not.” The SAC defined “Developers” as Ivy Minneapolis, Ivy Development, Moody, Goben, Wischermann Holdings, Wischermann Partners, Inc., Laux, Benson, -10- Wischermann, and three John Doe defendants. It defined “Defendants” to include Commonwealth and all “Developers.” A complaint subject to Rule 9(b) “must identify who, what, where, when, and how.” Roop, 559 F.3d at 822 (quotation omitted). It must “specify[] the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result.” Id.; see Mitec Partners, LLC v. U.S. Bank Nat’l Ass’n, 605 F.3d 617, 622 (8th Cir. 2010). The allegations in Count II do not come close to meeting this standard. The SAC attributed fraudulent representations and conduct to multiple defendants generally, in a group pleading fashion. The district court correctly concluded that such vague allegations do not satisfy Rule 9(b). See Trooien v. Mansour, 608 F.3d 1020, 1030 (8th Cir. 2010); Parnes, 122 F.3d at 550. “Where multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of his alleged participation in the fraud.” DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987). The SAC repeatedly alleged that the Count II defendants took action “directly or indirectly through any series or chain of subsidiaries or other entities,” and then incorporated all those allegations into Count II. Casting such a broad net in pleading a claim “grounded in fraud” does not satisfy Rule 9(b). There also were no allegations of intentional wrongdoing (scienter) by any defendant. C. Count I. In Count I, Streambend alleged that defendants violated § 1703(a)(2)(B), which prohibits a developer or agent from “obtain[ing] money or property by means of any untrue statement of a material fact, or any omission to state a material fact necessary in order to make the statements made . . . not misleading, with respect to any information pertinent to the lot or subdivision.” Unlike § 1703(a)(2)(A) & (C), this provision is not explicitly grounded in fraud. Its language is found in Sections 11(a) and 12(a)(2) of the Securities Act of 1933, as well as in Rule 10b-5(b). Lacking clear guidance in the statute, we conclude that a pleading- -11- specific inquiry, like that fashioned by our sister circuits for determining whether Rule 9(b) applies to claims under Sections 11 and 12(a)(2), is the proper way to determine whether the particularity requirements of Rule 9(b) apply to a § 1703(a)(2)(B) claim. Thus, if the claim is pleaded separately from any (a)(2)(A) or (C) fraud claims, as here, and if there are no specific averments of fraud, only allegations of innocent or negligent misrepresentations and omissions, then the sufficiency of this claim is governed by the notice pleading standards of Rule 8(a). Applying this standard, we conclude that Rule 8 governs the § 1703(a)(2)(B) allegations in Count I. Though Count I did not “expressly disavow[] any claim of fraud,” unlike the complaint in NationsMart, 130 F.3d at 315, Count I was pleaded separately, focused on different conduct and representations, and contained no fraud averments, such as wrongful intent. Also indicative of an intent to plead nonfraudulent misrepresentation is the fact that Streambend withdrew a state law fraud claim in the initial complaint from its FAC and SAC. Thus, the allegations in Count I did not implicate an important purpose of Rule 9(b), to ensure that defendants may promptly respond to specific allegations of immoral conduct. However, this conclusion does not end our inquiry, as we “may affirm the district court’s decision on any ground supported by the record.” Wald v. Sw. Bell Corp. Customcare Med. Plan, 83 F.3d 1002, 1005 (8th Cir. 1996). To satisfy Rule 8(a)’s pleading requirements, “a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quotation omitted). A complaint does not suffice if it “tenders naked assertions devoid of further factual enhancement.” Id. (quotations omitted). When the particularity requirement of Rule 9(b) does not apply to a misrepresentation or omission claim such as Count I, the Rule 8(a)(2) standard -- “a short and plain statement of the claim showing that the pleader is entitled to relief” -- requires some attempt to show, “What is the representation? . . . Why is each representation false? Where was each representation made? Who made each -12- representation? When was each representation made?” In re Buffets, Inc. Sec. Litig., 906 F. Supp. 1293, 1298 (D. Minn. 1995). The allegations in Count I fail to state a plausible claim under § 1703(a)(2)(B). First, regarding the allegations of untrue statements and omissions made prior to Streambend signing the purchase agreements, most involved contractual promises of future performance contained in the purchase agreements, Disclosure Statement, Declaration, “model representations and blue print schematics” -- for example, “Developers would timely complete,” “Developers would deliver the Units,” “Developers would timely disclose insulation values.” In avoiding averments of fraud, Streambend failed to allege that the Developers never intended to fulfill their contractual promises to perform future undertakings. Absent an allegation defendants made promises they did not intend to keep, these allegations sound in breach of contract, not tortious misrepresentation. See Sindecuse v. Katsaros, 541 F.3d 801, 803-04 (8th Cir. 2008) (interpreting Missouri law); Restatement (Second) of Contracts § 159 cmt. c. Second, Streambend alleged that the Declaration provided identical and thus false legal descriptions for the Ivy Residence and the related Ivy Hotel, but it failed to allege that this was an untrue and material statement of fact. Third, Streambend alleged that “Developers failed to disclose that two additional floors would be added . . .” but failed to allege when the floors were added and how this was a material nondisclosure “with respect to the sale,” as § 1703(a)(2) requires. Fourth, Streambend signed the purchase agreements on October 23, 2004. Many Count I allegations concern events occurring long after that date, in particular, the removal of Streambend’s earnest moneys from the trust escrow accounts, the adding of additional floors during construction, the failure to timely complete construction of the purchased units and to timely deliver the units to Streambend after completion, the failure to pay for labor and materials furnished in construction, and -13- the failure to deliver a warranty deed. These later events obviously did not affect Streambend’s decision to enter into the purchase agreements. Conceivably, depending on the way Streambend agreed to pay for the units, these events might have included untrue statements or omissions by which defendants obtained money “with respect to the sales.” But Count I with its vague and conclusory allegations did not plausibly state such a claim. For these reasons, we affirm the dismissal of Count I of the SAC because it failed to state a plausible claim upon which § 1703(a)(2)(B) relief can be granted. D. Streambend’s Further Amendments. Streambend contends the district court erred by not granting leave to file the Third and Fourth Amended Complaints. “A district court may appropriately deny leave to amend where there are compelling reasons such as undue delay, bad faith, or dilatory motive, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the non-moving party, or futility of the amendment.” Moses.com Sec., Inc. v. Comprehensive Software Sys., Inc., 406 F.3d 1052, 1065 (8th Cir. 2005) (quotations omitted). In granting Streambend leave to file the SAC, Judge Boylan explicitly warned that repeated amendments were a wasteful, dilatory tactic and that the Streambend plaintiffs “have now had more than adequate opportunity to amend their pleadings.” A few months later, in defiance of that warning, Streambend moved for leave to file a Third Amended Complaint while the motions to dismiss the SAC were pending. In January 2014, Judge Boylan denied the motion (which by then included a Fourth Amended Complaint) as moot but also noted that Streambend had “failed to cure deficiencies by amendments previously allowed,” and that the motion “appears to have been brought in bad faith and with dilatory motive . . . to avoid dismissal after defendants’ motions to dismiss were fully briefed, heard, and taken under advisement by the District Court.” The district court did not abuse its discretion when it affirmed -14- Judge Boylan’s decision not to permit Streambend more opportunities to file a complaint capable of surviving a motion to dismiss. E. The Proposed Wischermann Claims. Streambend argues the district court also erred in affirming Judge Boylan’s October 2012 Order denying Streambend leave to add Wischermann Partners, Inc. and Paul Wischermann as defendants to the ILSA claims in Count I and Count II of the SAC. The proposed SAC alleged that Wischermann Partners, Inc. and Paul Wischermann were liable because of their ownership interests in Wischermann Holdings. Judge Boylan concluded this amendment was futile because, “Plaintiffs have not adequately pleaded any theory under which Wischermann Partners, Inc. or Paul Wischermann could be liable merely by their association with Wischermann Holdings LLC.” We review de novo the denial of leave to amend based on futility. United States ex rel. Gaudineer & Comito, L.L.P. v. Iowa, 269 F.3d 932, 936 (8th Cir. 2001), cert. denied, 536 U.S. 925 (2002). Here, the district court subsequently dismissed the ILSA claims against Wischermann Holdings, a ruling we have now affirmed. These subsequent rulings confirm that the district court did not err in affirming Judge Boylan’s denial of leave to amend. The claims against the proposed new defendants were properly dismissed as to all defendants. Thus, as in Wald, 83 F.3d at 1005, “the court correctly determined that [Streambend] did not state a cause of action” against the proposed additional defendants.