Opinion
Civil Action NO. 00-1674, Section "N"
November 9, 2000
ORDER AND REASONS
Before the Court are defendants Ruth U. Fertel, Inc.'s, Philip S. Brooks', William L. Hyde, Jr.'s, and James E. Ryder, Jr.'s Motion to Dismiss Counts I, III, IV, and V and defendant Ruth U. Fertel's Motion to Dismiss Pursuant to Rule 12(b)(6), or Alternatively, Motion for More Definitive Statement Pursuant to Rule 12(e). For the following reasons, defendants' motions are GRANTED IN PART and DENIED IN PART.
Since defendant Ruth U. Fertel ("Fertel") has adopted the positions of her co-defendants and added a few arguments of her own, the Court will rule on both motions with a single order and reasons.
BACKGROUND
Plaintiff Ralph J. Giardina ("Giardina") was employed by defendant Ruth U. Fertel, Inc. ("RUFI") for fourteen years; he rose to the level of president in 1992, served on the board of directors from its inception until August of 1995, and served as a consultant for a period of ten months during 1994 and 1995. In February, 1994, the RUFI board of directors issued ten shares of stock to Giardina. Giardina sold eight shares back to RUFI in August, 1995. In February of 1998, Giardina sold his remaining shares, which had become 10,000 shares through a series of stock splits, back to RUFI for $14.00 per share.
Giardina claims the defendants deceived him, breached their fiduciary duty, and violated federal securities laws by telling him that $14.00 per share was the full, undiscounted value of his stock when they knew that the $14.00 share price was a minority valuation. Giardina alleges that, despite his repeated inquiries about a possible IPO or merger, the defendants concealed that (1) they had been in negotiations with a Texas entity known as the "Copp Group" concerning its possible acquisition of RUFI and (2) Starwood Capital Group ("Starwood") of Greenwich, Connecticut had offered to buy 70% of RUFI's stock and had valued the company at $110 million. Giardina further alleges that the defendants breached their employment contact with him and failed to issue the appropriate stock options.
The "Copp Group" and the Starwood overtures were ultimately turned down, but RUFI was eventually sold to Madison Dearborn Partners, LLC for a price of $31.17 per share.
The defendants now move to dismiss Giardina's claims for breach of fiduciary duty, fraud, and breach of contact.
LAW AND ANALYSIS
In a motion to dismiss for failure to state a claim upon which relief may be granted, the Court must accept all well-pleaded facts as true and view the facts in the light most favorable to the plaintiffs. See Campbell v. City of San Antonio, 43 F.3d 973, 975 (5th Cir. 1995). Dismissal is warranted if "it appears certain that the plaintiff[s] cannot prove any set of facts in support of [their] claim that would entitle [them] to relief." Piotowski v. City of Houston, 51 F.3d 512, 514 (5th Cir. 1995) (quoting Leffall v. Dallas Indep. Sch. Dist., 28 F.3d 521, 524 (5th Cir. 1994)).
A. BREACH OF FIDUCIARY DUTY CLAIMS
In Count V of his complaint, Giardina alleges that the defendants, as officers and directors of RUFI, breached fiduciary duties they owed him as a shareholder. The breaches allegedly occurred in two contexts. The first context, which the defendants have not challenged, is the defendants' alleged failure to disclose material facts regarding Giardina's stock when he sold it in February, 1998.
The defendants challenge the second context, which concerns alleged corporate waste and mismanagement. The defendants argue that such a claim may only be brought as a shareholder derivative suit. Giardina admits that the defendants are correct and asks the Court for leave to amend his complaint to assert a derivative action. "Unless there is a substantial reason to deny leave to amend, the discretion of the district court is not broad enough to permit denial." Farias v. Bexar County Bd. of Trustees for Mental Health Retardation Serv.'s, 925 F.2d 866, 874 (5th Cir. 1991). Accordingly, defendants motion to dismiss Giardina's claims for breach of fiduciary duties in the management and operation of RUFI is GRANTED, but Giardina is granted leave to amend his complaint within 30 days from the date of this order.
Although Giardina may amend his complaint, the Court reserves ruling at this time on whether he has standing to bring a derivative lawsuit.
B. FRAUD CLAIMS
Defendants contend that Counts I, III and IV of Giardina's complaint are deficient because (1) Giardina's allegations of fraud do not meet the minimum pleading requirements of either Fed.R.Civ.P. 9(b) of Louisiana law, (2) Giardina fails to plead the scienter, and (3) the information the defendants allegedly withheld is not material.1. State and Federal Pleading Requirements
Giardina alleges that the defendants committed fraud by failing to reveal information about his stock. Federal Rule of Civil Procedure 9(b) provides that "[i]n all averments of fraud and mistake, the circumstances constituting fraud or mistake shall be stated with particularity." FED. R. CIV. P. 9(B). Giardina alleges fraud by silence, which "is, by its very nature, difficult to plead with particularity." Chrysler Credit Corp. v. Whitney Nat'l Bank, 824 F. Supp. 587, 598 (E.D.La. 1993) (quoting Daher v. G.D. Searle Co., 695 F. Supp. 436, 440 (D.Minn. 1988)).
Because it does not involve an affirmative misrepresentation, it often does not occur at a specific place or precise time, or involve specific persons. Nonetheless, a plaintiff alleging fraud by silence should be able to allege the following with reasonable particularity: (1) the information that was withheld, (2) the general time period during which the fraudulent conduct occurred, (3) the relationship giving rise to the duty to speak, and (4) what the person or entity engaged in the fraudulent conduct gained by withholding the information.Id. (internal footnote omitted).
The Court finds that Giardina's complaint meets these requirements. First, Giardina particularly alleged the information that was withheld — the "Copp Group" and Starwood overtures. Second, Giardina identified the general time period during which the fraudulent conduct occurred late 1997 to early 1998. Third, Giardina identified the relationship giving rise to the duty to speak — the individual defendants were officers and directors of RUFI, and he was a shareholder. Finally, what the defendants allegedly gained by withholding the information can reasonably be inferred from the complaint — the sale of Giardina' s stock back to RUFI increased the value of the company and the defendants' interests in it. Accordingly, the defendants' motion to dismiss the fraud counts for failing to meet the pleading requirements of Rule 9(b) is DENIED. In addition, because the Court finds Giardina's complaint to be sufficiently particular, defendant Fertel's motion for more definite statement of the fraud claims is DENIED.
The defendants also challenge Giardina's state law fraud and negligent misrepresentation claims. Under Louisiana law, to adequately plead a claim for negligent misrepresentation, a plaintiff must allege that a defendant had a duty to supply correct information, that the defendant breached that duty, and that the breach caused damages to the plaintiff. See Nat'l Council on Comp. Ins. v. Ouixx Temp. Serv.'s. Inc., 665 So.2d 120, 122 (La.App. 4th Cir. 11/16/95). To adequately plead a claim for fraud, a plaintiff must allege that the defendant made a material misrepresentation or omission in order to deceive another, to obtain an unjust advantage, or to cause loss to another. See Edmonson Bros. P'ship v. Montex Drilling Co., 731 So.2d 1049, 1061 (La.App. 3rd Cir. 5/5/99). The Court finds that Giardina has met these pleading requirements. He has alleged that the defendants withheld material information about his stock in a breach of their fiduciary duty, and that he suffered monetary loss as a result. Accordingly, defendants' motion to dismiss Giardina's state law fraud claims is DENIED.
2. Scienter
The defendants also argue that Giardina failed to plead the scienter element of his claim under Rule 10b-5 of the Securities Exchange Act.
In order to adequately plead scienter, a plaintiff must set forth specific facts to support an inference of fraud. Alleged facts are sufficient to support such an inference if they either (1) show a defendant's motive to commit securities fraud, or (2) identify circumstances that indicate conscious behavior on the part of the defendant.Lovelace v. Software Spectrum. Inc., 78 F.3d 1015, 1018 (5th Cir. 1996) (citing Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir. 1994)).
The Court finds the facts alleged by Giardina indicate conscious behavior by the defendants. Giardina alleges that he repeatedly asked the defendants about the possibilities of an IPO or a merger. He further alleges that, despite his inquiries, the defendants repeatedly withheld information about (1) on-going negotiations with the "Copp Group" concerning its possible acquisition of RUFI, (2) Starwood's offer to purchase 70% of the company, and (3) Starwood's valuation of RUFI at approximately $110 million. In light of these allegations, defendants' motion to dismiss the fraud counts for failure to adequately plead scienter is DENIED.
3. Materiality
To articulate a claim under Rule 10b-5 of the Securities Exchange Act, a plaintiff must allege (1) a misstatement or omission (2) of a material fact (3) made with scienter (4) on which the plaintiff relied (5) that proximately caused the plaintiff's injury. See Lovelace, 78 F.3d at 1018 (citation omitted). Defendant Fertel claims that Giardina's Rule 10b-5 claim is deficient because the Starwood and "Copp Group" overtures were not material. See Basic. Inc. v. Levinson, 485 U.S. 224, 238 (1988) (holding the duty of an officer or director in purchasing stock is only to disclose to the seller information material to the transaction). Information is material if it would be viewed by a reasonable investor as significantly altering the total mix of information available concerning the value of a company's stock. See SEC v. Fox, 855 F.2d 247, 252 (5th Cir. 1988). Giardina alleges the defendants withheld information about (1) the Starwood overture, (2) the "Copp Group" negotiations and (3) the $110 million Starwood valuation. The Court finds that reasonable investors would view that information as material to their decision to sell their stock. Accordingly, defendant Fertel's motion to dismiss based on the immateriality of the information withheld is DENIED.
C. BREACH OF EMPLOYMENT CONTRACT
Finally, defendants Brooks, Hyde and Ryder move to dismiss Count III's breach of employment contact allegation to the extent that it asserts a claim against non-company defendants. Giardina admits that his employment contact was with RUFI, and any cause of action arising from the contract must be against RUFI alone. Accordingly, defendants' motion to dismiss the breach of contact claim against non-company defendants is GRANTED. However, Giardina's claim for breach of employment contact against RUFI shall remain.
CONCLUSION
IT IS ORDERED that:
(1) Defendants' Motion to Dismiss Giardina's breach of fiduciary duty claim for corporate waste and mismanagement is GRANTED. However, plaintiff is granted leave to amend his complaint within 30 days from the date of this order.
(2) Defendants' Motion to Dismiss Giardina's fraud claims is DENIED. In addition, defendant Fertel's Motion for More Definite Statement is DENIED.
(3) The non-company defendants' Motion to Dismiss Giardina's breach of employment contact claim is GRANTED.