Court Opinion

ID: 8917190
Source: CourtListenerOpinion
Date Created: 2022-11-27 05:34:40.443861+00
Date Added: 2024-06-11T17:09:06.091235
License: Public Domain

MESKILL, Circuit Judge,
dissenting:
I respectfully dissent. The complaint here states at most a state law breach of contract claim. The majority distills a rule 10b-5 cause of action from a complaint and pretrial order devoid of any specific allegations of fraud or deceit. We should not attempt to remedy defects in plaintiffs’ pleadings to convert a commonplace state law claim into a cause of action under the federal securities laws.
Under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j (1976), and rule 10b-5, 17 C.F.R. § 240.10b-5 (1982), plaintiffs must allege that defendants have engaged in “manipulative” or “deceptive” conduct in connection with the sale of any security “which operates or would operate as a fraud or deceit.” Santa Fe Industries v. Green, 430 U.S. 462, 471-74, 97 S.Ct. 1292, 1299-1301, 51 L.Ed.2d 480 (1977); Maldonado v. Flynn, 597 F.2d 789, 793 (2d Cir.1979). This Circuit has articulated stringent pleading standards for rule 10b-5 claims and has required particularized allegations of fraud. See Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 114 (2d Cir.1982) (“conclusory allegations that defendant’s conduct was fraudulent or deceptive are not enough”); Ross v. A.H. Robins Co., 607 F.2d 545, 557-58 (2d Cir.1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980); Segal v. Gordon, 467 F.2d 602, 606-08 (2d Cir.1972); Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 445 (2d Cir.1971).
Here the majority construes the complaint as alleging that defendants violated rule 10b-5 by falsely assuring plaintiffs that they would not attempt to purchase the FDIC-held stock, “thereby lulling plaintiffs into inaction and allowing defendants to buy the stock at a bargain price.”1 The complaint actually alleges only that (1) defendants orally agreed to provide plaintiffs with a veto power over the purchase of the stock, KK 55, 56, J.App. at 14, and (2) plaintiffs relied on this agreement in ceasing their own efforts to acquire the stock, f 58, *67J.App. at 15. No facts are alleged which link defendants’ execution and subsequent breach of this oral agreement with any fraudulent intent to deceive plaintiffs.
Although the boilerplate language in the complaint states that “[e]ach defendant knew or should have known that such representations and actions were misleading and constituted an attempt to deceive and defraud Plaintiffs,” It 104, J.App. at 22 (emphasis added), there is no allegation that defendants falsely promised to perform the oral agreement. Without a specific averment of fraudulent intent, section 10(b) provides no remedy. See Decker v. Massey-Ferguson, Ltd., 681 F.2d at 114; cf. Lewart v. Woodhull Care Center Associates, 549 F.Supp. 879, 883 (S.D.N.Y.1982) (“It is clear, however, that [common law] fraud requires more than a showing of non-performance of the promise; an intent not to perform must be established independent from the showing of failure to perform.”); Cranston Print Works Co. v. Brockmann International A.G., 521 F.Supp. 609, 614 (S.D.N.Y.1981) (“This claim manifestly sounds in contract. Cranston’s attempt to convert this to a tort claim for fraud is based upon the additional naked assertion that BIAG ... never intended to perform as promised .... ”).
Perhaps as damaging as the complaint’s defects is the fact that the pretrial order made no mention of defendants’ fraudulent or false promise. The Federal Rules of Civil Procedure provide that “such [pretrial] order when entered controls the subsequent course of the action.” Fed.R.Civ.P. 16 (emphasis added). It is well-established law that “ ‘[t]he pre-trial order supersedes the pleadings and becomes the governing pattern of the lawsuit.’” Rompe v. Yablon, 277 F.Supp. 662, 663 (S.D.N.Y.1967) (quoting Case v. Abrams, 352 F.2d 193, 195 (10th Cir.1965)); see Napolitano v. Compania Sud Americana De Vapores, 421 F.2d 382, 386 (2d Cir.1970); Laguna v. American Export Isbrandtsen Lines, Inc., 439 F.2d 97, 104 (2d Cir.1971) (Lumbard, J., dissenting). If a claim or issue is omitted from the order, it is waived. See Flannery v. Carroll, 676 F.2d 126, 130 (5th Cir.1982); Price v. Inland Oil Co., 646 F.2d 90, 95 (3d Cir.1981); Union Planters National Bank v. Commercial Credit Business Loans, Inc., 651 F.2d 1174, 1188 (6th Cir.), cert. denied, 454 U.S. 1124, 102 S.Ct. 972, 71 L.Ed.2d 111 (1981). Nowhere in the entire twelve pages of the pretrial order is there any allegation that defendants made the oral agreement with the intention of deceiving, defrauding or manipulating plaintiffs. Consequently, plaintiffs’ omission of this allegation from the pretrial order spells the death knell for their rule 10b-5 cause of action.
The majority’s remedy for this void is to suggest that on remand plaintiffs amend the pretrial order. Under Rule 16 a pretrial order may be amended “to prevent manifest injustice.” See Laguna v. American Export Isbrandtsen Lines, Inc., 439 F.2d at 101. Yet, the facts of this case do not justify such a cavalier dismissal of the restraint embodied in Rule 16. Plaintiffs have had approximately six years between the commencement of their suit in September 1976 and the filing of the pretrial order in April 1981 to engage in discovery and refine their understanding of the facts. After all this time they still fail to allege the crucial fact that when defendants entered into the 1976 oral agreement, they had no intention of honoring it. Rather than attributing this omission to mere oversight, I think it is more likely that after years of searching for the missing link, plaintiffs have simply failed to find evidence to support their claim of fraud.
Regardless of one’s views concerning the relative flexibility of Rule 16, I do not believe that it is our role to fill the interstices in plaintiffs’ pleadings or argument.
Ours is an adversary system of justice .... In our system lawyers worry about the whereabouts of witnesses. The court does not. Lawyers worry about proof. The court does not .... Lawyers get the case ready for trial. The court does not.
*68McCargo v. Hedrick, 545 F.2d 393, 401 (4th Cir.1976) (emphasis added). Although Rule 16’s “manifest injustice” language provides an exception to the otherwise binding nature of pretrial orders, it was never intended as a justification for courts to modify pretrial orders based on legal theories never presented by the parties.2 At-will modification of pretrial orders is judicial activism run rampant.
Furthermore, the colloquy between our panel and plaintiffs’ counsel at oral argument emphasized both plaintiffs’ failure to state a rule 10b-5 cause of action and the majority’s efforts to craft a legal theory which would remedy that failure. In framing the issue on appeal, plaintiffs queried “whether ... the acts of the defendants in refusing to remove a restrictive legend on shares owned by the plaintiff, 150,000 shares of Emons Industries, constituted a fraud in connection with the purchase [of that stock] by Emons Industries .... ” Plaintiffs’ remarks completely ignored the alleged false promise as a basis for the rule 10b-5 claim. Even after incessant questioning by a member of the panel, plaintiffs refused to state affirmatively that the fraud underlying their rule 10b-5 claim stemmed from defendants’ promising to cooperate in the purchase of stock without ever intending to live up to that agreement.
Although the Federal Rules of Civil Procedure generally embody a liberal policy of notice pleading, the drafters expressly required more specificity in pleading claims of fraud. See Fed.R.Civ.P. 9(b). In the common law fraud context, a number of courts have expressly rejected plaintiffs’ efforts to convert breach of contract actions into tort claims of fraud. See Lewart v. Woodhull Care Center Associates, 549 F.Supp. at 883; Cranston Print Works Co. v. Brockmann International A.G., 521 F.Supp. at 614 (“Several courts have rejected such efforts to convert a contract action into a tort claim of fraud based upon just such an allegation that a contracting party never intended to fulfill his promise.”).
Such stringent pleading requirements are even more compelling with respect to rule 10b-5 claims. If amorphous allegations sufficed to state a cause of action for securities fraud, the floodgates would open to scores of state law claimants who seek access to federal court. The Supreme Court recently admonished the federal courts that “[a]bsent a clear indication of congressional intent, we are reluctant to federalize the substantial portion of the law of corporations that deals with transactions in securities.” Santa Fe Industries v. Green, 430 U.S. at 479, 97 S.Ct. at 1304; see Decker v. Massey-Ferguson, Ltd., 534 F.Supp. 873, 879 & n. 9 (S.D.N.Y.1981), modified, 681 F.2d 111, 120-21 (2d Cir.1982); Golar v. Daniels & Bell, Inc., 533 F.Supp. 1021, 1027 (S.D.N. Y.1982). The majority’s decision transmogrifies a commonplace state law breach of contract claim into a federal securities law violation and in so doing pays only lip-service to the Supreme Court’s concerns in Santa Fe Industries v. Green, 430 U.S. at 479, 97 S.Ct. at 1304. I would affirm the district court’s dismissal of the complaint for failure to state a cause of action under section 10(b) and rule 10b-5.

. Plaintiffs also alleged that defendants’ wrongful refusal to remove the restrictive legend from the stock provided the element of “deceit” needed to state a 10b-5 claim. The majority persuasively rejected this claim.

. The parties have represented to the court that the New York Statute of Frauds, N.Y.Est. Powers & Trusts Law § 13-2.1 (McKinney 1967), will bar plaintiffs’ breach of contract action in state court. However, the existence of a valid defense to a state court cause of action does not satisfy the “manifest injustice” exception to Rule 16. That there may be a valid defense to a state court'cause of action does not justify opening the doors of the federal courthouse to the litigation of state law claims.