Court Opinion

ID: 3166340
Source: CourtListenerOpinion
Date Created: 2015-12-30 16:03:24.890168+00
Date Added: 2024-06-11T12:17:05.012222
License: Public Domain

MEMORANDUM DECISION
Pursuant to Ind. Appellate Rule 65(D),
this Memorandum Decision shall not be                              Dec 30 2015, 9:26 am
regarded as precedent or cited before any
court except for the purpose of establishing
the defense of res judicata, collateral
estoppel, or the law of the case.

ATTORNEY FOR APPELLANTS                                  ATTORNEYS FOR APPELLEE
R. William Jonas, Jr.                                    SIMON WILSON
Hammerschmidt, Amaral & Jonas                            Andrew W. Hull
South Bend, Indiana                                      Jason L. Fulk
                                                         Hoover Hull Turner LLP
                                                         Indianapolis, Indiana
                                                         ATTORNEYS FOR APPELLEE
                                                         GARY MORGAN
                                                         Brian S. Jones
                                                         Joel T. Nagle
                                                         Bose McKinney & Evans LLP
                                                         Indianapolis, Indiana
                                                         ATTORNEYS FOR APPELLEE
                                                         CROWE HORWATH LLP
                                                         Eric A. Riegner
                                                         Maggie L. Smith
                                                         Frost Brown Todd LLC
                                                         Indianapolis, Indiana

                                          IN THE
    COURT OF APPEALS OF INDIANA

Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015   Page 1 of 12
      Magic Circle Corp. d/b/a Dixie                           December 30, 2015
      Chopper, Arthur Evans, Wesley                            Court of Appeals Case No.
      Evans, Jeffrey Haltom,                                   71A03-1507-PL-790
      Appellants-Plaintiffs,                                   Appeal from the St. Joseph Circuit
                                                               Court
              v.                                               The Honorable Michael G.
                                                               Gotsch, Judge
      Simon Wilson, Gary Morgan,                               Trial Court Cause No.
      and Crowe Horwath LLP,                                   71C01-1404-PL-93
      Appellees-Defendants

      Baker, Judge.

[1]   Appellants Magic Circle Corporation (Magic Circle), Arthur Evans, Wesley

      Evans, and Jeffrey Haltom appeal the judgment of the trial court dismissing

      their complaint for fraud against Simon Wilson and Gary Morgan. Finding

      that the trial court did not err in concluding that the complaint failed to allege

      fraud with the particularity required by Indiana Trial Rule 9(B), we affirm.

                                                    Facts
[2]   For more than thirty years, Magic Circle designed and manufactured

      lawnmowers under the name Dixie Chopper. In late 2008 and early 2009,

      Magic Circle hired Simon Wilson and Gary Morgan to help steer the company

      through difficult economic times. Magic Circle alleges that, during their time

      with the company, Wilson and Morgan knowingly misrepresented the

      company’s financial position. It was not until 2013 that members of the

      company’s board realized that the company had incurred massive losses

      Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015   Page 2 of 12
      throughout this period. Morgan had left the company in 2011 and the board

      accepted Wilson’s resignation in 2013.

[3]   On December 15, 2014, after having been given an opportunity to amend its

      first complaint,1 Magic Circle filed its second amended complaint against

      Wilson and Morgan alleging fraud and breach of fiduciary duty. Three

      shareholders, Arthur Evans, Wesley Evans, and Jeffrey Haltom, also joined as

      plaintiffs, alleging that they had been personally injured when they were

      induced to buy more of the company’s stock as a result of Wilson’s and

      Morgan’s misrepresentations. The complaint requested that the trial court

      award Magic Circle attorney fees as well as treble damages.2

[4]   On February 17, 2015, Wilson filed a motion to dismiss Magic Circle’s

      complaint, alleging that the complaint failed to plead fraud with the

      particularity required by Indiana Trial Rule 9(B) and that the plaintiffs had

      therefore failed to state a claim under Indiana Trial Rule 12(B)(6). On May 15,

      2015, after hearing argument on the issue, the trial court granted the motion,

      and dismissed Magic Circle’s claims against Wilson and Morgan with

      prejudice. The trial court reasoned that the allegations were too general to meet

      Rule 9(B)’s particularity requirement. As to the individual plaintiffs’ claims of

      personal damage, the trial court reasoned that these claims could not be brought

      1
          Appellants have not included the original complaint in the record.
      2
       Magic Circle also alleged malpractice against Crowe Horwath, the company’s former accounting firm.
      These claims do not concern us here as the trial court has yet to rule on them.

      Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015     Page 3 of 12
      directly, but instead must be brought as derivative claims under Indiana Trial

      Rule 23.1, with which the plaintiffs had failed to comply. All plaintiffs now

      appeal.

                                   Discussion and Decision
                              I. Direct v. Derivative Claims
[5]   The complaint at issue in this case makes several claims that can be divided into

      two categories. First, there are claims brought by Magic Circle against Wilson

      and Morgan for alleged harm done to the corporation. Second, there is a claim

      brought directly by the above-mentioned individual plaintiffs for personal

      damages resulting from the same fraud. The trial court dismissed these latter

      claims, determining that they could not be brought directly, and we briefly

      comment on why the trial court was correct.

[6]   The trial court determined that the individual plaintiffs, being Magic Circle

      shareholders, had suffered no injury distinct from the alleged injury to Magic

      Circle and, therefore, could not sue directly. This Court has recognized that

      “shareholders of a corporation may not bring actions in their own name to

      redress an injury to the corporation.” PricewaterhouseCoopers, LLP v. Massey, 860

      N.E.2d 1252, 1257 (Ind. Ct. App. 2007).

[7]   The plaintiffs attempt to distinguish their injuries by pointing out that they

      “executed promissory notes to acquire funds to purchase more shares of Magic

      Circle.” Reply Br. p. 17. They argue that, because they are personally liable on

      these notes, they have been personally injured and should be allowed to seek
      Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015   Page 4 of 12
recovery directly. Id. However, this Court has heard this argument before and

held that

         The plaintiffs can show no such injury because they cannot claim
         any cognizable injury aside from the diminution in share value. .
         . . Their only injury is to repay the funds that they themselves
         borrowed to purchase stock. This injury makes them no different
         than any other shareholder.

PricewaterhouseCoopers, 860 N.E.2d at 1262. In so holding, we agreed with the

reasoning of the Seventh Circuit that

         “To hold otherwise would lead to an absurd result. Under the
         plaintiffs’ theory, any shareholder who funded a stock purchase
         through any form of loan—whether a margin loan, an advance
         on a home equity line or even a loan from relatives—could claim
         a separate and distinct injury because they were now ‘personally
         liable’ on a loan instrument.”

Id. (quoting Massey v. Merrill Lynch & Co., Inc., 464 F.3d 642, 649 (7th Cir.

2006)). Here, as the diminution in the share value of Magic Circle’s stock is the

sole reason for plaintiffs’ injury, their direct claims must likewise fail. 3 With

this issue out of the way, we now turn to the central question presented in this

case: whether the complaint alleged fraud with sufficient particularity.

3
  Magic Circle attempts to argue that we should apply the exception outlined in Barth v. Barth, where our
Supreme Court held that “‘[i]n the case of a closely held corporation, the court in its discretion may treat an
action raising derivative claims as a direct action’” under certain circumstances. 659 N.E.2d 559, 562 (Ind.
1995) (quoting A.L.I., Principles of Corporate Governance § 7.01(d)). However, Magic Circle fails to argue that
it is, in fact, a closely held corporation and has failed to give us any information, such as the number of
shareholders it has, from which we could make this determination. This argument therefore fails.

Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015             Page 5 of 12
                                        II. Pleading Fraud
[8]   A person commits fraud when he has, (1) with knowledge or reckless ignorance

      of falsity, (2) made a material misrepresentation of past or existing facts, (3)

      which caused the complainant to rely on the misrepresentation to the

      complainant’s detriment. Ohio Farmers Ins. Co. v. Ind. Drywall & Acoustics, Inc.,

      970 N.E.2d 674, 684 (Ind. Ct. App. 2012). While our rules of trial procedure

      generally require only notice pleading, Indiana Trial Rule 9(B) provides an

      exception for complaints alleging fraud. Dutton v. Int’l Harvester Co., 504 N.E.2d

      313, 318 (Ind. Ct. App. 1987). The rule, which is nearly identical to Federal

      Rule of Civil Procedure 9(B), requires that:

              In all averments of fraud or mistake, the circumstances
              constituting the fraud or mistake shall be specifically averred.
              Malice, intent, knowledge, and other conditions of the mind may
              be averred generally.

      T.R. 9(B); McKinney v. State, 693 N.E.2d 65, 71 (Ind. 1998).

[9]   Like its federal counterpart, Rule 9(B) serves the objectives of deterring

      groundless suits or “fishing expeditions,” protecting the reputations of

      defendants, and providing defendants with sufficient information to enable

      them to prepare a defense. McKinney, 693 N.E.2d at 72; Vicom, Inc. v. Harbridge

      Merchant Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994). In light of these

      objectives, we have held that this rule requires plaintiffs to state the time, the

      place, the substance of the false representations, the facts misrepresented, and to

      identify what was procured by fraud. Ohio Farmers, 970 N.E.2d at 683; see also

      Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015   Page 6 of 12
       DiLeo v. Ernst & Young, 901 N.E.2d 624, 627 (7th Cir. 1990) (observing that the

       rule requires plaintiffs to state “the who, what, when, where, and how: the first

       paragraph of any newspaper story”).

[10]   Here, Magic Circle attempts to comply with Rule 9(B) by designating ten

       paragraphs in the middle of its complaint that purport to “detail the time, place,

       and specific content of false statements of fact by Morgan and Wilson that are

       formally recorded and documented in the Company’s corporate records.”

       Appellant’s App. p. 18. However, close inspection of these paragraphs shows

       that they fail, both individually and collectively, to state a claim of fraud with

       the specificity necessary to effectuate Rule 9(B)’s purpose.

[11]   We take the first of these paragraphs as an example. It reads:

               As recorded in the minutes for the Annual Shareholders meeting
               held March 11, 2009, at the offices of Magic Circle in
               Coatesville, Indiana . . . :

                       Mr. Wilson indicated the company began the year in
                       a serious cash shortfall and the requirement for a
                       turn-around plan. A plan was created and is kept on
                       file at the company’s headquarters. The company
                       struggled throughout 2009 but the actions enacted in
                       the year left the company solvent and in good
                       position for the future.

               These statements were materially false and misleading. The
               actions of he and Morgan had not left the company “solvent and
               in a good position.” In fact, Morgan and Wilson were materially
               misstating the company’s financial results to the shareholders, all
               of which Crowe [Magic Circle’s accountant] failed to detect by
       Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015   Page 7 of 12
               failing to conduct GAAS audits. The minutes document[] [that]
               Morgan and Wilson provided the shareholder[s] written reports
               about the company’s financial position and business operations.
               Those report[s] were materially inaccurate, mischaracterized
               Morgan and Wilson’s actions, and provided a materially
               inaccurate picture of the company[’s] overall position and its
               prospects. Each of the individual Plaintiffs attended the meeting,
               among others.

       Id. at 18-19.

[12]   We first note our bewilderment at Magic Circle’s decision to quote directly

       from the minutes of the meeting, which by their very nature present a terse

       summary of events rather than a particularized account. As a result of this, the

       paragraph fails to provide us enough information to get a true picture of events.

       First, we cannot gather who made the statements at issue. While the first

       sentence of the minutes attributes a statement to Wilson, it is not clear whether

       the sentences that follow refer to his statements. Furthermore, although the

       minutes only refer to Wilson, the paragraph goes on to conclude that Wilson

       and Morgan “were materially misstating the company’s financial results to the

       shareholders.” Id. In short, we do not know who said what and, even were we

       to assume that both men spoke in unison, we would not know what was said.

[13]   The paragraph also alleges that Morgan and Wilson gave shareholders

       “materially inaccurate” reports that “mischaracterized” their actions. Id. at 19.

       It does not, however, specify what was inaccurate, how the inaccuracy was

       material, what actions Wilson and Morgan had taken, or how they had

       mischaracterized these actions. Rule 9(B) requires that these questions be

       Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015   Page 8 of 12
       answered with some specificity, and conclusory declarations, such as “[the

       reports] provided a materially inaccurate picture of the company[’s] overall

       position and its prospects,” come no closer to meeting this requirement. Id.

       The contention that “[Wilson] and Morgan’s actions had not left the company

       ‘solvent and in a good position’” is similarly vague. Id. at 18 (emphasis added).

       Was the company not solvent? Was it not in a good position? Or was is not

       both of these things at once? Does Magic Circle mean to say that the company

       was unable to pay its debts, or does it mean only to say that Wilson and

       Morgan had done nothing to help the cause? Magic Circle may view such

       questions as nitpicking, but we honestly do not know the answers.

[14]   The complaint’s next paragraph displays similar shortcomings. Magic Circle

       alleges:

               As recorded in the minutes for the Annual Shareholders meeting
               for fiscal year 2009, held November 11, 2010, at the offices of
               Magic Circle in Coatesville, Indiana, Wilson:

                       [C]ompleted a review of the 2009 financial
                       performance of the company. Mr. Wilson discussed
                       in detail the issue[s] the company faced in early 2009
                       and the resulting actions that were required to be
                       taken. He discussed the action plan developed in
                       concert with the Keystone consulting group that was
                       adopted by the board in early April 2009. The plan
                       was required to be presented to PNC bank due to
                       financial defaults experienced at the end of quarter
                       two. PNC accepted the plan and the loan was
                       modified in early June (copy of the plan and First
                       Amendment Agreement attached). Mr. Wilson

       Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015   Page 9 of 12
                       reviewed the 1st half of 2010 performance as these
                       were available on the meeting date. There were
                       several questions from Mr. Stan Morton in regards to
                       measure of margins that were answered by Mr.
                       Wilson and Mr. Morgan.

               Each of these statements was materially false. The financial
               performances Wilson stated for 2009 was materially inflated.
               The actions he claimed had been taken were not in fact taken, the
               performance for the first half of 2010 provided was materially
               inflated, and the information Wilson provided PNC was
               materially inaccurate, as the “plan” he provided was never
               intended to be achieve[d] except through materially inflating the
               company’s actual financial results. Morgan attended the meeting
               and, as noted, specifically answered questions that confirmed Mr.
               Wilson’s false statements. Attending this meeting were each of
               the individual Plaintiffs in this lawsuit, among others.

       Id. at 19.

[15]   The minutes cited here do a slightly more thorough job of indicating who was

       speaking at this meeting, but we still have no true sense of what was actually

       going on. We are simply assured that everything Wilson said was false, again

       without being told what he said. We are also asked to imagine a plan that

       Wilson presented to a bank and assume, once again, that its contents were

       materially inaccurate. There is no mention of the substance of any of the

       alleged misrepresentations other than the perfunctory assertion that they

       generally dealt with finance. Then, in perhaps the complaint’s most dubious

       moment, we are given the following word puzzle: “Morgan . . . specifically

       answered questions that confirmed Mr. Wilson’s false statements.” Id. We will

       Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015   Page 10 of 12
       leave it to the interested reader to determine how many possible meanings can

       be derived from this phrase.

[16]   The complaint continues on in a similar fashion, perhaps in the hope that it will

       eventually land on something specific enough to satisfy Rule 9(B). However,

       even if the complaint had managed to include a paragraph which offered a

       sufficiently detailed description of events, it would not be enough at this point.

       It is clear from the complaint that Magic Circle believes all of the alleged

       misrepresentations it purports to detail are important and that the fraud came

       about through Magic Circle’s reliance on the whole of these representations. Id.

       at 30. Thus, even had the complaint clearly alleged one instance of Wilson or

       Morgan knowingly misrepresenting information, it would still fail to plead

       fraud, as Magic Circle does not claim to have detrimentally relied on any one

       instance alone.

[17]   The complaint also contains a claim by Magic Circle that Wilson and Morgan

       breached their fiduciary duty. The trial court dismissed this claim for vagueness

       as well because, although it is styled differently, it relies on the alleged fraud

       and therefore sounds in fraud. This decision was correct. Rule 9(B) has been

       held to apply to claims “grounded in fraud,” and such is the case here, as Magic

       Circle’s breach of fiduciary duty claim is based on the same allegations of

       fraudulent conduct against Wilson and Morgan as its fraud claim. McKinney,

       693 N.E.2d at 72.

       Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015   Page 11 of 12
[18]   We find that the appellants’ complaint is insufficiently specific when judged in

       light of the purposes Rule 9(B) is intended to serve. While the appellants ask

       for another opportunity to plead this matter, they do not argue that more time

       will allow them to discover any relevant information that was not already in

       their possession at the time of this complaint’s filing. About eighteen months

       passed between the filing of the original complaint and the dismissal of the

       second amended complaint, during which the appellants were given more than

       one opportunity to plead this matter with sufficient specificity. As one of the

       purposes behind Rule 9(B) is to put an end to meritless litigation brought in the

       hope of a settlement, we see no reason to drag this out further, and we believe

       that the trial court was correct to dismiss this case with prejudice.

[19]   The judgment of the trial court is affirmed.

       Bradford, J., and Pyle, J., concur.

       Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015   Page 12 of 12