Opinion
Case Number 02-10012-BC, CONSOLIDATED CASES, Case Number 02-10234-BC
March 16, 2004
This matter is before the Court on the motion by the plaintiff and counter-defendant John Tramontana to dismiss and to strike portions of a counter-complaint. Third-party defendant Debby Ruyan has filed a motion to dismiss and to strike on the same grounds, and has also alleged that the Court lacks personal jurisdiction over her. The plaintiff originally filed a 191-paragraph, 25-count verified complaint in this Court naming as defendants Cynthia May, Harold Baldauf (who is Cynthia's father), and Jericho II, L.L.C. (Jericho), alleging various acts of fraud and deception in the acquisition and operation of certain domestic and foreign businesses that manufactured and sold generic pharmaceuticals and "nutriceuticals." Three months later the plaintiff filed a 254-paragraph, 22-count amended complaint against defendants May, Baldauf, Jericho II, L.L.C., Graminex, L.L.C., and JTECH Laboratories, Inc. May, Baldauf and Graminex responded with nearly-identical counterclaims against Tramontana and his wife, Debby Ruyan, alleging that it was the counter-defendants who committed fraud and induced them to enter into business relationships to their disadvantage. Shortly thereafter, the counter-plaintiffs filed an amended counterclaim and third-party complaint on leave granted, which together allege one claim of fraudulent inducement (Count I); three claims of breach of fiduciary duty (Counts II, III, XII); two claims of tortious interference (Counts IV and V); breach of a raw materials contract (Count VI); breach of distribution agreement (Count VII); conspiracy (Counts VIII and IX); a request for a declaratory judgment (Count X); breach of contract (Count XI); and contribution (Count XII).
Tramontana and Ruyan answered the counterclaims and filed a motion to dismiss arguing that May, Baldauf, and Graminex have failed to plead their allegations that Tramontana committed a fraud or misrepresentation with particularity as required by Federal Rule of Civil Procedure 9(b). Tramontana also moved to dismiss the claims against him pursuant to Rule 12(b)(6) and, alternatively, moved to strike paragraphs 7 through 10, 25 (last sentence only), 39 and 40 of May and Graminex's counterclaims, as well as paragraphs 6 through 9, 24 (last sentence only), and paragraphs 37 and 38 of Baldauf's counterclaims, all pursuant to Rule 12(f); Tramontana contends these paragraphs contain "scandalous" material. As noted above, Ruyan also contests personal jurisdiction. The motions were referred to United States Magistrate Judge Charles E. Binder pursuant to 28 U.S.C. § 636(b)(1)(B) and E.D. Mich. LR 72.1. The magistrate judge issued his report on July 3, 2003 recommending the denial of Ruyan's motion, and on August 18, 2003 recommending that this Court deny Tramontana's motion. Tramontana and third-party defendant Debby Ruyan filed joint objections to the recommendations.
The Court has conducted a de novo review of the motion papers, the Reports and Recommendations, and the objections thereto, and now concludes that the magistrate judge erred in finding that the requirements of Rule 9(b) are inapplicable to certain counts of the counterclaims; however, the Court believes that the counter-plaintiffs have pleaded the allegations of fraud, where applicable, with sufficient particularity to satisfy Rule 9(b), they have otherwise stated cognizable claims in their other counts, and none of the allegations ought to be stricken pursuant to Rule 12(f). The counter-plaintiffs also have made a sufficient showing to establish personal jurisdiction over Ruyan. The Court, therefore, will adopt in part and reject in part the magistrate judge's reports, adopt his recommendations, and deny the motions to dismiss.
VI.
The facts of the case as reflected by the pleadings are thoroughly set forth in the magistrate judge's Report and Recommendation and need not be repeated here. The parties have not objected to the accuracy of that summary, and the Court adopts it as its own and incorporates that portion of the Report herein.
May and Baldauf allege in their counterclaims that Tramontana purchased a company called AB Cernelle from a Swiss company called Cerbios Pharma S.A. sometime in 1997. They contend that in reliance upon representations made by Tramontana, they caused their corporation, Jericho, to borrow $8.1 million dollars from Citizens Bank, which was then loaned through Jericho in a series of notes to Hemtech S. A., a corporation formed by Tramontana, in order to facilitate the purchase of AB Cernelle. May and Baldauf allege that unbeknownst to them, Tramontana purchased AB Cernelle for less than half of the loan amount and that Tramontana then retained over $3 million for his personal use. May and Baldauf also allege that after Tramontana gained control of AB Cernelle, he established an elaborate invoicing scheme to enable him to extract all the profits from AB Cernelle and avoid the payment of foreign taxes.
May and Baldauf allege that in September 1997, Tramontana convinced them to give Tramontana 25% ownership in Jericho in exchange for his promise to guarantee 50% of the indebtedness of Jericho, but that Tramontana never executed any personal guarantees that would in fact make him liable. They then claim that Tramontana and his wife, Debbie Ruyan, requested that May and Baldauf build a new plant in the United States for the purpose of providing raw pollen to AB Cernelle by representing to May and Baldauf that AB Cernelle had insufficient sources for this pollen and that only the construction of a new facility would meet AB Cernelle's production needs. May and Baldauf allege that Tramontana and Ruyan misrepresented the needs of AB Cernelle and its scientific capabilities, as well as prices that could be obtained for pollen. May and Baldauf allege that they relied upon these misrepresentations and agreed to guarantee a loan to Graminex by Citizens Bank in the amount of $9 million to build this pollen processing plant, but that Tramontana signed only a personal guarantee on this loan and pledged no collateral to secure this loan.
May and Baldauf contend that Tramontana's invoicing scheme put in place at AB Cernelle continued after the formation of Graminex and had the effect of draining all of the working capital from that entity. The demand for AB Cernelle's products apparently never approached the levels represented by Tramontana and Ruyan, although Tramontana purportedly intentionally falsified AB Cernell's financial statements to make it appear that this entity was profitable. The financial condition of Graminex allegedly began to deteriorate, and May and Baldauf allege that in 1999 they had personally guaranteed a receivable line of credit from Citizens Bank to Bigmar, the pharmaceutical company originally owned by Tramontana in which May and Baldauf acquired a substantial interest, for approximately $2 million. Meanwhile, Bigmar went into default on its loan by March 2001; Tramontana was unwilling to pay off this credit line either with his own assets or Bigmar's. Instead, May and Baldauf allege that Tramontana "hatched a plan to force Harold Baldauf and Cynthia May to pay off the Bigmar line of credit." Counter Compl. at ¶ 35. May and Baldauf claim that Tramontana and the directors of AB Cernelle and executives of Bigmar decided to "exert financial pressure on AB Cernelle knowing that their actions would place Graminex in dire financial straights, which would in turn place enormous financial pressure" on May and Baldauf, who had invested millions in Graminex. Id. at ¶ 36. May and Baldauf then assert that in early 2001, Tramontana and these other individuals suspended payments to AB Cernelle so that it could not pay Graminex for raw pollen, and that action destroyed Graminex's financial condition. May and Baldauf allege that Tramontana received assistance in this scheme from his wife, Debbie Ruyan, who agreed to keep all of Tramontana's personal assets in her own name and insulate him from the financial consequences of his misdeeds.
May and Baldauf further state in their counterclaims that in May 2001, Citizens Bank called in the Bigmar line of credit. They contend that Tramontana agreed that "he would lift the strangle-hold on AB Cernelle," id. at ¶ 42, if May and Baldauf would take out personal loans from Citizens Bank to purchase additional shares of Bigmar stock so that Bigmar could use the proceeds to pay off the line of credit. However, Citizens Bank refused to allow any further loans under the circumstances. May and Baldauf then allege:
44. Because his blackmail scheme failed when Citizens Bank failed to extend new loans to Harold Baldauf and Cynthia May, Tramontana had no choice but to use Bigmar assets to pay off the Bigmar Line Of Credit. By the time that was ultimately done, however, AB Cernelle was in bankruptcy and Graminex was near bankruptcy.
45. In an attempt to protect Graminex and to extinguish Tramontana's ability to control AB Cernelle, Harold Baldauf and Cynthia May facilitated Graminex's purchase of AB Cernelle from bankruptcy for $1.3 million in August 2001, and caused Graminex to loan additional funds to AB Cernelle to prevent its total collapse.Id. at ¶¶ 44-45.
Based on these allegations, May raises claims of fraudulent inducement (Count I); breach of fiduciary duty owed to both herself and Graminex by Tramontana (Counts II III); tortious interference with business relationships (Count IV); and conspiracy on the part of Tramontana as against both May and Graminex (Count IV V). Count VI is a request for a declaratory judgment.
In addition to these common allegations, Baldauf alleges that Jericho is indebted to him for $6.7 million plus interest based on a promissory note payable on demand. Baldauf further asserts that after his demand for payment, he, May and Tramontana entered into a second amendment to the operating agreement for Jericho. Baldauf alleges that this agreement authorizes Baldauf to transfer to himself shares of common stock of Bigmar that were owned by Jericho in satisfaction of this debt, but using his position as CEO of Bigmar, Tramontana is alleged to have stopped the transfer. Baldauf further alleges that he, May and Tramontana are jointly and severally liable to Citizens Bank under a promissory note. Baldauf asserts that Tramontana has failed to make payments of principal interest or interest on the promissory note and that he and May are entitled to contribution.
On June 6, 2003, the magistrate judge entered an order granting a motion by May, Baldauf and Graminex to amend and combine their counter-complaints. An amended counterclaim and third-party complaint was filed the same day as the order. The amendment adds the following parties and allegations:
AB Cernelle was added as a third-party defendant;
Paragraphs 36 through 39 were amended to indicate that Graminex began supplying raw pollen to AB Cernelle in June 1998, and that Graminex entered into a "Raw Material Contract" and distribution agreement with AB Cernelle in October 1999 in which Graminex agreed to be AB Cernelle's exclusive source for raw materials; Paragraphs 59 through 64 were amended to include reference to Tramontana's agreement to sell AB Cernelle to Graminex in August 2001, and Graminex's subsequent success in making AB Cernelle profitable;
Paragraphs 65 through 71 were amended to include recitation of Tramontana's efforts since May 2002 to seize control of AB Cernelle and harm Graminex by attempting to take its customers and by breaching the raw materials agreement and distribution agreement;
Count II and III were amended to indicate that Tramontana's conduct also constitutes breach of fiduciary duties he owes to May, Baldauf and Graminex;
Count V was added in order to state a claim against AB Cernelle for tortious interference with Graminex's business relationships;
Counts VI and VII were added to assert claims against AB Cernelle for breach of raw materials and distribution agreements.
Tramontana contends that the amended counterclaim does not state cognizable claims and should be dismissed.
Third-party defendant Debby Ruyan contends that she is a resident of Ohio and does not have any connection to Michigan that justifies the exercise of personal jurisdiction over her by this Court. However, Cynthia May has filed an affidavit asserting that Ruyan visited Michigan on two occasions before Graminex was formed. In February 1997, Ruyan and her husband, John Tramontana, met with May at the corporate office of Saginaw Control Engineering to discuss AB Cernelle's business and raw materials needs, discussed the demand for Cernelle's products, and made representations about pricing for the pollen. May further avers that Ruyan came to Michigan in June 1997 to present a business plan and projections for the company that was eventually formed as Graminex. May Aff. at ¶¶ 2-5. Baldauf and May argue that these representations were part of the fraudulent scheme that was perpetrated against them by Tramontana and Ruyan.
II.
Motions to dismiss are governed by Rule 12(b) of the Federal Rules of Civil Procedure and allows for dismissal for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). "The purpose of Rule 12(b)(6) is to allow a defendant to test whether, as a matter of law, the plaintiff is entitled to legal relief even if everything alleged in the complaint is true." Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir. 1993). When deciding a motion under that Rule, "[t]he court must construe the complaint in the light most favorable to the plaintiff, accept all factual allegations as true, and determine whether the plaintiff undoubtedly can prove no set of facts in support of his claims that would entitle him to relief." Cline v. Rogers, 87 F.3d 176, 179(6th Cir. 1996). "A judge may not grant a Rule 12(b)(6) motion based on a disbelief of a complaint's factual allegations." Columbia Natural Res., Inc. v. Tatum, 58 F.3d 1101, 1109 (6th Cir. 1995). "However, while liberal, this standard of review does require more than the bare assertion of legal conclusions." Ibid. "In practice, `a . . . complaint must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory.'" In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993) (emphasis in original) (quoting Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir. 1988)). See also Ana Leon T. v. Federal Reserve Bank, 823 F.2d 928, 930 (6th Cir.) (per curiam) (mere conclusions are not afforded liberal Rule 12(b)(6) review), cert. denied, 484 U.S. 945 (1987). Where the plaintiff offers multiple factual scenarios for a particular claim, only one need be sufficient. Briggs v. Ohio Elections Comm'n, 61 F.3d 487, 494 (6th Cir. 1995).
A.
Tramontana and Ruyan argue that the "fraud-based" claims asserted by May and Baldauf in their counterclaim are not stated with the particularity required by Federal Rule of Civil Procedure 9(b). Under that rule, "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). "The purpose of Rule 9(b) is to provide fair notice to the defendant so as to allow him to prepare an informed pleading responsive to the specific allegations of fraud." Advocacy Org. for Patients Providers v. Auto Club Ins. Ass'n, 176 F.3d 315, 322 (6th Cir. 1999) (citing Michaels Bldg. Co. v. Ameritrust Co., N.A., 848 F.2d 674, 679 (6th Cir. 1988)). To satisfy the requirements of Rule 9(b), a party must "`allege the time, place, and content of the alleged misrepresentation on which he or she relied; the fraudulent scheme; the fraudulent intent of the [the other party]; and the injury resulting from the fraud.'" Coffey v. Foamex L.P., 2 F.3d 157, 161-62 (6th Cir. 1993) (quoting Ballan v. Upjohn Co., 814 F. Supp. 1375, 1385 (W.D. Mich.1992)); see also Vild v. Visconsi, 956 F.2d 560, 567 (6th Cir. 1992). A party's allegations must satisfy Rule 9(b)'s particularity requirement with regard to each element of the claim of fraud and with regard to each defendant against whom fraud is alleged. See Picard Chem. Inc. Profit Sharing Plan v. Perrigo Co., 940 F. Supp. 1101, 1114 (W.D. Mich. 1996).
In their motions to dismiss, Tramontana and Ruyan argue that May's and Baldauf's claims relating to fraud, fraudulent inducement, breach of fiduciary duty, and conspiracy are all predicated upon alleged misrepresentations and therefore are subject to Rule 9(b). In response, May and Baldauf argue that Tramontana's and Ruyan's Rule 9(b) arguments completely disregard the notice pleading requirements of Rule 8(a) and that there is no requirement that they plead fraud with absolute certainty. Pointing to paragraphs 4, 17 through 25, 27, and 50 of May's counterclaims, May and Baldauf argue that they have given Tramontana and Ruyan more than fair notice of what is alleged that they have done and have provided more than enough about "who, what, when and where" to enable Tramontana and Ruyan to prepare appropriate responses.
The magistrate judge suggested that May and Baldauf's allegations of fraudulent inducement, breach of fiduciary duty, and civil conspiracy are not themselves "grounded in fraud," but rather these allegations are grounded upon Tramontana's manipulation of various corporate entities under his control, which occurred subsequent to the alleged fraudulent statements, and which caused May and Baldauf to enter into the various agreements and obligations in the first place. Therefore, the magistrate judge suggested the requirements of Rule 9(b) do not apply to these claims. The magistrate judge also suggested that the defendants' fraud claim and the allegations of fraud contained in the counterclaims meet the requirements of Rule 9(b). Thus, the magistrate judge suggested that Tramontana's and Ruyan's motions on Rule 9(b) grounds should be denied.
The Court believes that the magistrate judge has not correctly read Rule 9(b). It matters not whether a claim is "grounded in fraud," terminology not found in the Rule. Rather, if an allegation contains "an averment of fraud," whether as part of a fraud claim or an element of a non-fraud claim, the "averment of fraud" must be stated with the requisite particularity. That precept was well stated by the court in Vess v. Ciba-Geigy Corp. USA , 317 F.3d 1097 (9th Cir. 2003):
[A]pplication of Rule 9(b)'s heightened pleading requirements only to "averments" of fraud supporting a claim rather than to the claim as a whole not only comports with the text of the rule; it also comports with the rule's purpose of protecting a defendant from reputational harm. As we stated in In re Stac , "Rule 9(b) serves to . . . protect professionals from the harm that comes from being subject to fraud charges." 89 F.3d at 1405. See also Ross v. Bolton , 904 F.2d 819, 823 (2d Cir. 1990) (Rule 9(b)'s heightened pleading requirement "safeguards defendant's reputation and goodwill from improvident charges of wrongdoing"). Fraud allegations may damage a defendant's reputation regardless of the cause of action in which they appear, and they are therefore properly subject to Rule 9(b) in every case. To require that non-fraud allegations be stated with particularity merely because they appear in a complaint alongside fraud averments, however, serves no similar reputation-preserving function, and would impose a burden on plaintiffs not contemplated by the notice pleading requirements of Rule 8(a).Id. at 1104. Thus, the allegations of fraud that are a part of May's and Baldauf's claims of fraudulent inducement and breach of fiduciary duty must be pleaded with particularity pursuant to Rule 9(b).
In Michigan, "[f]raud in the inducement occurs where a party materially misrepresents future conduct under circumstances in which the assertions may reasonably be expected to be relied upon and are relied upon." Samuel D. Begola Services, Inc. v. Wild Bros., 210 Mich. App. 636, 639, 534 N.W.2d 217, 219 (1995). May and Baldauf allege the following to support their fraudulent inducement claim:
66. Tramontana and Ruyan made material misrepresentations to Harold Baldauf and Cynthia May in connection with the formation of Graminex, which included, but were not limited to, representation about the amount of raw pollen AB Cernelle needed to meet its production needs, the cost per kilogram AB Cernelle was paying the raw pollen it used, and Tramontana's and Ruyan's experience and background in the nutriceuntical and pharmaceutical industries.
67. These representations by Tramontana and Ruyan were false.
68. Tramontana and Ruyan made these representations knowing them to be false or in reckless disregard of their falsity.
69. Tramontana and Ruyan made these false representations with the intent of inducing Harold Baldauf and Cynthia May to build the Graminex plant.
70. Harold Baldauf and Cynthia May suffered harm as a result of the fraud by Tramontana and Ruyan.
Am. Counter-Compl. at ¶¶ 66-70. These allegations sufficiently set forth the time, place, and content of the alleged fraudulent statements on which May and Baldauf relied. Thus, the Court finds that the fraudulent inducement claim is sufficiently plead under Rule 9(b).
May and Baldauf have also brought a claim for breach of fiduciary duty. "A breach of fiduciary duty claim requires that the plaintiff reasonably reposed faith, confidence, and trust in the fiduciary." Rose v. National Auction Group, Inc., 466 Mich. 453, 469, 646 N.W.2d 455, 464 (2002) (quotation omitted) (emphasis in original). "Relief is granted when such position of influence has been acquired and abused, or when confidence has been reposed and betrayed." Vicencio v. Ramirez, 211 Mich. App. 501, 508, 536 NW 2d 280, 286 (1995). In Count II of their amended counter-complaint, May and Baldauf allege the following regarding a breach of a fiduciary duty:
73. Tramontana owed fiduciary duties to Cynthia May and Harold Baldauf, including but not limited to a duty to act in good faith, a duty of honest and fair dealing, and a duty of loyalty.
74. Tramontana breached these duties by knowingly and intentionally seeking to harm Cynthia May and Harold Baldauf through his actions at AB Cernelle and in attempting to force May and Baldauf to convert the Bigmar Line of Credit into equity. Tramontana has further breached these duties by usurping control over AB Cernelle and directing AB Cernelle to steal Graminex's customers and otherwise harm Graminex.
75. As a direct [and] proximate result of Tramontana's actions, Cynthia May and Harold Baldauf have sustained damages, including lost profits.
Am. Counter Compl. at ¶¶ 73-75. May and Baldauf make similar allegations in a claim of breach of fiduciary duty owed to Graminex. See id. at ¶¶ 77-79. The Court finds that these allegations are sufficiently particular to put Tramontana and Ruyan on notice of the allegations against them. The requirements of Rule 9(b) have been satisfied.
May and Baldauf have also brought a civil conspiracy claim against the counterclaim defendants. In Michigan, a civil conspiracy claim is defined as:
a combination of two or more persons, by some concerted action, to accomplish a criminal or unlawful purpose, or to accomplish a lawful purpose by criminal or unlawful means. The agreement, or preconceived plan, to do the unlawful act is the thing which must be proved. Direct proof of agreement is not required, however, nor is it necessary that a formal agreement be proven. It is sufficient if the circumstances, acts and conduct of the parties establish an agreement in fact. Furthermore, conspiracy may be established by circumstantial evidence and may be based on inference.Temborius v. Slatkin , 157 Mich. App. 587, 599-600, 403 N.W.2d 821, 827-28 (1986). Although this claim need not be based on fraud to survive, the particular claim as stated by May and Baldauf contains "averments of fraud" and thus is governed by Rule 9(b). May and Baldauf make the following allegations regarding the civil conspiracy:
102. Tramontana, Rohrer, Kramer, and Ruyan illegally, maliciously, and wrongfully conspired with one another with the intent to and for the illegal purpose of:[]
A. Fraudulently inducing May and Baldauf to invest in Graminex; and
B. Assisting Tramontana in his breaches of fiduciary duty to May and Baldauf.
103. The conspiracy between Tramontana, Ruyan, Rohrer, and Kramer, in combination, resulted in illegal, unlawful, tortious activity as set forth above.
104. As a direct and proximate result of the conspiracy and wrongful conduct of Tramontana and Ruyan, together with Rohrer and Kramer, May and Baldauf suffered substantial economic injury, harm to their business reputation, loss of esteem and standing in the community, and loss of business opportunities.
105. As members of the conspiracy described above, Tramontana and Ruyan are liable to May and Baldauf for all of their injuries or damages caused by the conspiracy.
According to the counterclaim, Phillipe Rohrer was the director of Cernelle SA and AB Cernelle and was also the CFO of Bigmar, and Bernard Kramer was a director of AB Cernelle and Bigmar. See Counter Compl. at ¶¶ 36.
Am. Counter Compl. at ¶¶ 102-105. May and Baldauf make similar allegations of conspiracy by Tramontana and others against Graminex. See id. at ¶¶ 106-110. The averments of fraud in this count of the counterclaim refer to the specific allegations already set forth in Count I alleging fraudulent inducement. Consequently, they are pleaded with sufficient particularity to satisfy Rule 9(b).
May and Baldauf also make several "straight" fraud allegations in their amended counterclaim. These allegations are contained in the following paragraphs:
17. Sometime prior to September 17, 1997, Tramontana approached Harold Baldauf and Cynthia May about becoming a member of Jericho.
. . .
21. After convincing Harold Baldauf and Cynthia May to form Jericho to facilitate Tramontana's purchase of AB Cernelle, Tramontana and his wife, Debby Ruyan ("Ruyan") presented Harold Baldauf and Cynthia May with a request to build a new plant in the United States for the purpose of supplying raw pollen to AB Cernelle.
22. Tramontana and Ruyan represented to Harold Baldauf and Cynthia May that AB Cernelle had insufficient sources to provide it with the raw pollen it needed to produce its products, and represented further that the demand for AB Cernelle's product was such that only the construction of a new facility to produce this raw pollen could meet AB Cernelle's production needs.
23. Tramontana and Ruyan represented to Harold Baldauf and Cynthia May that AB Cernelle had secured a lucrative contract with Richardson Labs to produce a derivative of Cernitin, a product manufactured by AB Cernelle, that would require a huge new pollen producing plant to supply AB Cernelle with raw pollen.
24. Tramontana and Ruyan further represented to Harold Baldauf and Cynthia May that AB Cernelle would pay $50 per kilogram for new raw pollen.
25. In making their pitch to Harold Baldauf and Cynthia May, Tramontana and Ruyan both claimed to be pharmaceutical chemists who were extremely knowledgeable of the nutriceutical and pharmaceutical industries. In reality, Tramontana was an economist by education and a salesman by training. For her part, Ruyan's primary pharmaceutical experience consisted of working in the office staff of Adria Labs, a pharmaceutical company.
26. Tramontana provided Harold Baldauf, Cynthia May, and Citizens Bank with a proposed business plan for a new entity to be formed, Graminex L.L.C. ("Graminex"), whose purpose would be to produce pollen to supply exclusively to AB Cernelle. In this business plan, which was drafted by Tramontana, Tramontana reiterated the incredible demand for AB Cernelle's products around the world and included therein projections for the amount of raw pollen AB Cernelle would need in the future.
27. Tramontana and Ruyan knew that the pollen projections in the business plan were unrealistic and unachievable, and that the price quoted, $50 per kilogram, was grossly inflated in that the actual price paid for such pollen was approximately $7 per kilogram.
Am. Counter Compl. at ¶¶ 17, 21-27.
The Court agrees with the magistrate judge that these allegations meet May and Baldauf's obligation under Rule 9(b) Given the backdrop admonition of simplicity in pleading, see Rule 8, the purpose undergirding the particularity requirement of Rule 9(b) is to provide Tramontana and Ruyan with fair notice of the substance of May and Baldauf's claims in order that he may prepare a responsive pleading. See Michaels Bldg. Co. , 848 F.2d at 679. May and Baldauf's claims are sufficiently detailed to satisfy the notice requirement. The fraud counts specify the parties and the participants to the alleged fraud, the representations made, and the nature in which the statements are alleged to be misleading or false. Although not exquisitely detailed, the time, place and content of the representations, the fraudulent scheme, the fraudulent intent of the defendants, reliance on the fraud, and the injury resulting from the fraud essentially are set forth.
B.
Tramontana and Ruyan also object to the magistrate judge's conclusion that the amended counterclaims stated cognizable claims based on tortious interference with a contract. The gravamen of the claim is that Tramontana, while acting as an officer or director of AB Cernelle, took actions that caused Cernelle to breach its agreements with Graminex. Tramontana argues, however, that an officer or director of a corporation cannot be held to have interfered with contractual relationships between his corporation and another party because the director or officer is, at that point, acting on behalf of the corporation and corporations can only act through their offices and directors. This tort, he insists, can only occur when an unaffiliated third party interferes with a contract between two others.
The law on this point in Michigan is well summarized by the court in Reed v. Michigan Metro Girl Scout Council , 201 Mich. App. 10, 13, 506 N.W.2d 231, 233 (1993): "It is now settled law that corporate agents are not liable for tortious interference with the corporation's contracts unless they acted solely for their own benefit with no benefit to the corporation." May and Baldauf contend that Tramontana pursued his course of conduct for his own benefit, and therefore his agent status is no bar to the claim. The Court agrees that the amended counterclaim adequately sets forth that theory. May, Baldauf, and Graminex have alleged that Tramontana and his cohorts, Ruyan, Kramer, and Rohrer, manipulated various companies in order to personally benefit. The Court will adopt the magistrate judge's recommendation that this count should not be dismissed.
C.
Tramontana and Ruyan also contended in their motions that the counts in the amended counterclaims based on contribution were fatally defective. In the report and recommendation, the magistrate judge set forth the elements one must prove to establish a claim for contribution and suggested that May and Baldauf have stated a claim for contribution based on the allegations in their amended counterclaims. Neither Tramontana nor Ruyan stated any specific objections to the magistrate judge's recommendation that his motion to dismiss May and Baldauf's contribution claim be denied.
The magistrate judge also recommended denial of Tramontana's and Ruyan's motions to dismiss the portion of the counterclaims alleging breach of fiduciary duty, observing that the counter-plaintiffs stated those claims "without ambiguity." Tramontana and Ruyan likewise did not lodge any objections to this portion of the recommendation.
The plaintiff's failure to file objections to the Report and Recommendation waives any further right to appeal. Smith v. Detroit Federation of Teachers Local 231, 829 F.2d 1370, 1373 (6th Cir. 1987). Similarly, the failure to object to the magistrate judge's report obviates the need for the Court to independently review the motion. Thomas v. Arn, 474 U.S. 140, 149(1985). However, the Court agrees with the findings and conclusions of the magistrate judge and will deny the motions to dismiss the contribution and breach of fiduciary duty counts.
D.
Next, Tramontana and Ruyan argue in their motions to dismiss that a certain Commercial Guaranty, together with the Raw Materials Contract, which is said to contain an integration clause and binds Graminex to buy all of its raw materials from AB Cernelle, bar any fraud based claims. Tramontana and Ruyan premise their arguments on the economic loss doctrine, which "is a judicially created doctrine that bars all tort remedies where the suit is between an aggrieved buyer and a nonperform[ing] seller . . . and the only losses alleged are economic." Sullivan Indus., Inc. v. Double Seal Glass Co., Inc. , 192 Mich. App. 333, 339, 480 N.W.2d 623, 627 (1991). The magistrate judge found that May and Baldauf predicated their claims upon fraudulent misrepresentations antecedent to either the Raw Materials Contract or the Commercial Guaranty, and therefore the counter-plaintiffs may press their tort claim based on pre-contractual conduct.
Tramontana and Ruyan object to these conclusions claiming that the magistrate judge failed to recognize that May and Baldauf's tort claims are interwoven with the Raw Materials Contract and the contention that AB Cernelle breached that agreement. In their fraudulent inducement claim, May and Baldauf assert that Tramontana and Ruyan in some manner misstated the amount of bee pollen AB Cernelle would purchase from Graminex and the price it would pay for these products, but the Raw Materials Contract specifically identifies the volume of raw materials to be purchased and the price at which it would be purchased. Tramontana and Ruyan insist that Michigan law prohibits May and Baldauf from basing a fraudulent inducement claim upon purported representations inconsistent with the express terms of the contract. Further, to the extent that May and Baldauf allege that Tramontana manipulated AB Cernelle's corporate machinery in order to cause it to breach the terms of the Raw Materials Contract, their breach of fiduciary duty and fraudulent inducement claims are also inextricably interwoven with this contract because they are based upon the breach of that contract and seek the very damages May and Baldauf would otherwise recover if they could demonstrate that AB Cernelle breached the Raw Materials Contract, according to Tramontana and Ruyan.
Michigan courts have drawn a distinction in the application of the economic loss doctrine between fraud claims alleged to have induced a party to enter a contract — wherein the remedy sought presumably is the restoration of the innocent party to his former position — and those alleged to have occurred during the execution of the contract — where the wronged party seeks the benefit of his bargain "With respect to the latter kind of fraud, the misrepresentations relate to the breaching party's performance of the contract and do not give rise to an independent cause of action in tort." Huron Tool and Engineering Co. v. Precision Consulting Services, Inc. , 209 Mich. App. 365, 372, 532 N.W.2d 541, 544-45 (1995). However, fraud in the inducement claims are not similarly barred.
[W]e decline to adopt defendants' position that the economic loss doctrine precludes any fraud claim. Fraud in the inducement presents a special situation where parties to a contract appear to negotiate freely — which normally would constitute grounds for invoking the economic loss doctrine — but where in fact the ability of one party to negotiate fair terms and make an informed decision is undermined by the other party's fraudulent behavior. In contrast, where the only misrepresentation by the dishonest party concerns the quality or character of the goods sold, the other party is still free to negotiate warranty and other terms to account for possible defects in the goods.Id. at 372-73, 532 N.W.2d at 545 (emphasis in original).
There is no question that May and Baldauf have sued for breach of the Raw Materials Contract. See Am. Counter Compl. at ¶¶ 94-96. However, they also are contending that they were duped into entering into the agreement to begin with by Tramontana's and Ruyan's fraudulent conduct. The fraud claim is not "inextricably intertwined" with the breach of contract claim and can stand on its own. In the counterclaim, the plaintiffs seek to vindicate an interest in pursuing the fraud claim that is distinct from enforcing the benefit of the contractual bargain. The fraud claim, therefore, is not barred by the economic loss doctrine.
Sixth Circuit precedent interpreting Michigan law is consistent with these observations. In Detroit Edison Co. v. NABCO, Inc. , 35 F.3d 236 (6th Cir. 1994), the court observed that the purpose of "[t]ort law" is to ""protect[s] society's interest in freedom from harm."" Id. at 239 (quoting Neibarger v. Universal Cooperatives, Inc. , 439 Mich. 512, 520, 486 N.W.2d 612, 615 (1992)). Contract law, however, is based on mutual promises that serve mutual self-interest where "parties of equivalent bargaining power negotiate the terms of the transaction and each is then entitled to the benefit of the bargain." Detroit Edison , 35 F.3d at 239.
The distinction between tort and contract becomes problematic when, as in the present case, a commercial buyer seeks to recover in tort for damages caused by a defective product which was purchased in a commercial setting. In pursuing such recovery, the buyer asks for more than the benefit of the bargain; the buyer wants to be put back where he was before the product failed. In this situation, the economic loss doctrine defines the boundary between what a buyer in a commercial setting can and cannot seek to recover in tort.Ibid. The Michigan Supreme Court shaped that State's iteration of the doctrine in Neibarger when it decided in the context of a commercial transaction that recovery for damages caused by a defective product is limited by the remedies prescribed by the Uniform Commercial Code, that is, "the benefit of the bargain (the difference between the value of the goods as delivered and the value the goods would have had they complied with the warrant[ies]) as well as incidental and consequential damages in a proper case." Neibarger , 439 Mich. at 519-20, 486 N.W.2d at 615. The dispute in that case centered around defective milking machines that were sold to dairy farmers. The machines caused lower productivity but also introduced infections resulting in the illness and death of some of the herd. The state court expanded the economic loss doctrine to include not only damage to the product itself, but also other property and consequential loss that might have been contemplated by the parties at the time they entered into the contract. Id. at 531, 486 N.W.2d at 620. The court's rationale, however, was that the allocation of this risk of loss could have been negotiated and made part of one side's or the other's bargain. It is apparent that fraud during negotiations distorts the negotiating process and skews the relative positions of the parties beyond that contemplated by the law of contracts. The essence of the counterclaim plaintiffs' fraud allegations is that Tramontana's and Ruyan's wrongful (tortious) conduct interfered with the conventional market forces in a manner that is beyond the power of the law of contracts to protect. The Court agrees that the economic loss doctrine, as interpreted by the Michigan courts, does not limit the claims here.
E.
Finally, Tramontana and Ruyan argue in their motions to dismiss that the Court should strike paragraphs 7 through 10, 25 (last sentence only), 39 and 40 of May's and Graminex's counterclaims, as well as paragraphs 6 through 9, 24 (last sentence only), 37 and 38 of Baldauf's counterclaims pursuant to Rule 12(f). The magistrate judge suggests that because striking portions of a pleading is a "drastic remedy" and should be used sparingly, striking the requested portions of the pleadings of the defendants should not now be exercised. The magistrate judge observed that "[i]n light of the numerous complex and interlaced corporate relationships alleged to exist between the parties . . . it is premature at this preliminary stage to conclude that either the corporate financial structure of the Cernelle entities or the methods chosen by Tramontana to structure his personal assets have no bearing on the subject matter of the litigation." RR at 41 (internal quotation omitted).Tramontana and Ruyan did not file an objection to this portion of the recommendation but urge the Court to address the incorrect allegations contained in the counterclaims. A motion to strike portions of pleadings may be granted when the allegations "have no bearing on the subject matter of the litigation," or "where the requested relief is unavailable." Wrench LLC v. Taco. Bell Corp., 36 F. Supp.2d 787, 789 (W.D. Mich. 1998). However, motions to strike are indeed disfavored, see Resolution Trust Corp. v. Vanderweele, 833 F. Supp. 1383, 1387 (N.D. Ind.1993), perhaps because they generally are brought at an early stage in the litigation when the materiality of the contested allegations may not be apparent. The Court agrees that it is indeed premature to tamper with the parties' pleadings, precisely for the reasons articulated by the magistrate judge: the misconduct alleged is dependent on proof of intricate intercorporate relationships and manipulations that may raise an inference of actionable impropriety. The Court, therefore, will adopt the magistrate judge's recommendation and deny Tramontana's and Ruyan's motions to strike.
III.
Third-party defendant Debby Ruyan has objected to the magistrate judge's recommendation that her motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(2) (lack of personal jurisdiction) be denied. In a motion to dismiss under Rule 12(b)(2), the non-moving party has the burden of establishing personal jurisdiction over the moving party. Neogen Corp. v. Neo Gen Screening, Inc., 282 F.3d 883, 887 (6th Cir. 2002). If there is no evidentiary hearing on the issue of personal jurisdiction, the non-moving party ""need only make a prima facie showing of [personal] jurisdiction."" Id. (quoting CompuServe, Inc., v. Patterson, 89 F.3d 1257, 1262 (6th Cir. 1996)). A prima facie showing is made if the moving party has "minimum contacts" with the forum state to support jurisdiction. Ibid. The Court shall "construe the facts in the light most favorable to the nonmoving party in reviewing a dismissal [motion] pursuant to Rule 12(b)(2)." Ibid. "A federal court's exercise of personal jurisdiction in a diversity of citizenship case must be both (1) authorized by the law of the state in which it sits, and (2) in accordance with the Due Process Clause of the Fourteenth Amendment." Id. at 888.
The magistrate judge placed heavy reliance on this Court's gloss on the law of personal jurisdiction under Michigan's long-arm statute as set forth in Bagsby v. Gehres , 195 F. Supp.2d 957 (E.D. Mich. 2002). He concluded that the counterclaim plaintiffs had made a sufficient showing in the pleadings as supplemented by May's affidavit to establish limited personal jurisdiction over Ruyan. See Mich. Comp. Laws § 600.705. Ruyan argues that there is no evidence to support the magistrate judge's conclusion that Ruyan conducted any personal business in the state of Michigan, so the predicates of the Michigan long-arm statute have not been met. Ruyan says that she did not conduct negotiations which resulted in the purchase or sale of goods in an attempt to make a profit for herself. All that May has alleged is that Ruyan made certain misrepresentations, but she has failed to allege any connection between these purported misrepresentations and Ruyan's alleged tangential contacts with Michigan, thus also failing to state a claim against her. Ruyan also argues that the magistrate judge erroneously considered that it was reasonable to hale her into a court in the state of Michigan.
However, as the magistrate judge correctly stated, May, Baldauf, and Graminex need only make a prima facie showing of jurisdiction, and the Court is not to consider "facts proffered by [Ruyan] that conflict with those offered by [May, Baldauf, and Graminex]." Neogen, 282 F.3d at 887. Under that standard, the magistrate judge correctly found that May, Baldauf, and Graminex have submitted at least prima facie evidence supporting the requisites for limited personal jurisdiction in this Court over Ruyan. Under Michigan law, Ruyan's business dealings in Michigan need not be extensive or prolonged, since Mich. Comp. Laws § 600.705 allows "any business" dealings within the state to suffice. In Oberlies v. Searchmont Resort, Inc. , 246 Mich. App. 424, 430, 633 N.W.2d 408, 413 (2001), the Michigan Court of Appeals stated that the Michigan Legislature's "use of the word `any' to define the amount of business that must be transacted establishes that even the slightest transaction is sufficient to bring [an individual] within Michigan's long-arm jurisdiction." In her affidavit, Cynthia May states that Ruyan discussed AB Cernelle's need for pollen and that AB Cernelle would pay $50 per kilogram for the pollen. See Cynthia May Aff. at ¶¶ 3-4. May also states that on another visit to Michigan she presented May with a "business plan" for a company that eventually became Graminex. See id. at ¶ 5. Because Ruyan discussed prices for buying pollen with May and presented May with a business plan for a company Ruyan was hoping May would create, Ruyan has conducted a sufficient business transaction that brings her within the personal jurisdiction of Michigan courts.
The Court also agrees with the magistrate judge that assertion of personal jurisdiction over Ruyan by this Court would not offend the Due Process Clause. The Court determines compliance with the Due Process Clause under the following test:
First, the defendant must purposefully avail himself of the privilege of acting in the forum state or causing a consequence in the forum state. Second, the cause of action must arise from the defendant's activities there. Finally, the acts of the defendant or consequences caused by the defendant must have a substantial enough connection with the forum state to make the exercise of jurisdiction over the defendant reasonable.Neogen, 282 F.3d at 890(quoting Southern Mach. Co. v. Mohasco. Indus., Inc., 401 F.2d 374, 381 (6th Cir. 1968)). As mentioned, Ruyan availed herself of the privilege of conducting business in Michigan by coming to Michigan to discuss pollen purchases and starting a new business with May. Moreover, May's cause of action against Ruyan arose from Ruyan's activities here because, as alleged by the counterclaim plaintiffs, but for the meetings between Ruyan and May, Graminex might never have been created and at least one of the claims — that AB Cernelle, Tramontana, and Ruyan, fraudulently induced Graminex to supply it with pollen — might not have been filed. The first two points lend support to the third factor supporting the conclusion that Michigan's exercise of jurisdiction over Ruyan is reasonable. Finally, although Ruyan lives in Ohio, it appears that Michigan's interests in resolving the conflict are equally strong. For these reasons, the Court finds that it has personal jurisdiction over Ruyan.
IV.
The Court concludes that the magistrate judge's suggestion that the requirements of Federal Rule of Civil Procedure 9(b) do not apply to certain allegations in the amended counterclaims is not correct. The Court finds nonetheless that the counter-plaintiffs have pleaded the allegations of fraud, where applicable, with sufficient particularity to satisfy Rule 9(b). In addition, the counter-plaintiffs have stated cognizable claims in each of the counts of the amended counterclaims. The Court also holds that none of the allegations should be stricken pursuant to Rule 12(f) at the present time. Finally, the counterclaim plaintiffs have made a showing sufficient to establish personal jurisdiction over Debby Ruyan.Accordingly, it is ORDERED that the magistrate judge's reports are adopted in part and rejected in part.
It is further ORDERED that the magistrate judge's recommendations are ADOPTED.
It is further ORDERED the motion to dismiss and to strike by plaintiff and counter-defendant John Tramontana [dkt # 40] is DENIED.
It is further ORDERED the motion to dismiss and to strike [dkt # 46] and the renewed motion to dismiss [dkt # 114] by third-party defendant Debby Ruyan are DENIED.
It is further ORDERED that counsel for the parties appear for a status conference on Tuesday, April 6, 2004 at 3:30 p.m. to address the need to amend the Case Management and Scheduling Order.