Opinion
Case No. A4-03-83
March 4, 2004
ORDER GRANTING IN PART AND DENYING IN PART THE DEFENDANTS' MOTION TO DISMISS
Summary:
The plaintiffs initiated an action alleging that their participation in loan participation agreements executed by the parties was induced through knowing and deliberate misrepresentations, both oral and written, by the defendants. They sought to recover under the theories of negligent misrepresentation, fraudulent inducement, and fraudulent conveyance. The defendants filed a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b)(6). The Court granted the motion in part and dismissed the plaintiffs' claims for negligent misrepresentation and fraudulent induce without prejudice on the grounds that the plaintiffs had failed to plead these claims with the requisite particularity.
Before the Court is the Defendants' Motion to Dismiss pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. For the reasons set forth below, the Defendants' motion is granted in part and denied in part.
I. FACTUAL BACKGROUND
This action arises from loan participation agreements entered into by the Defendants and the Plaintiffs. Miller Schroeder Investments Corporation ("Miller Schroeder") made over $28,000,000 in loans to the President R.C.-St. Regis Management Company (President R.C."), a developer and manager of a gambling casino owned by the St. Regis Mohawk Tribe of Hogansonburg, New York. The St. Regis Mohawk Tribe is a federally recognized tribe. The casino was located on the Tribe's reservation lands in upstate New York. On March 1, 1999, Miller Schroeder entered into loan participation agreements with the Plaintiffs, Security First Bank of North Dakota, United Community Bank of North Dakota, First National Bank Trust Company of Williston ("Banks"), resulting in a $2,000,000 investment in the loans to President R.C. The loans to President R.C. went into default almost immediately.
The Plaintiffs have alleged that Marshall Miller Schroeder, Inc. is now operating the company formerly known as Miller Schroeder Investments Corporation. Miller Schroeder Investments Corporation is the entity which initially made the loans as issue in this case. The Plaintiffs have only named what they allege to be the successor company as a defendant.
The Banks filed this action on July 9, 2003, alleging that their participation in the loan was induced through knowing and deliberate misrepresentations, both oral and written, by the Defendants, Steven W. Erickson, Michael J. Frank and by Miller Schroeder. Specifically, the Banks set forth five claims: (1) fraud in the inducement against Steven W. Erickson, (2) negligent misrepresentation against Steven W. Erickson, (3) fraud in the inducement against Michael J. Frank, (4) negligent misrepresentation against Michael J. Frank, and (5) fraudulent conveyance as to the acquisition by Marshall Miller Schroeder, Inc., of Miller Schroeder.` On October 16, 2003, the Defendants filed a Motion to Dismiss asserting that under Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure the complaint must be dismissed because the Banks have failed to allege facts sufficient to meet their burden of establishing as least one element of each of their claims.
II. LEGAL ANALYSIS
In reviewing a Rule 12(b)(6) motion to dismiss for failure to state a claim, the Court must accept all of the factual allegations set out in the complaint as true and construe the complaint in a light most favorable to the plaintiff. Fabisch v. University of Minnesota, 301 F.3d 797, 802 (8th Cir. 2002). Dismissal for failure to state a claim will only be granted if it appears beyond doubt that the plaintiff could prove no set of facts in support of its claim which would entitle it to relief. Judgment on the pleadings is appropriate where no material issue of fact remains to be resolved and the movant is entitled to judgment as a matter of law. Id.
In addition, a complaint alleging fraud must be pled with particularity pursuant to Rule 9(b) of the Federal Rules of Civil Procedure. "This particularity requirement demands a higher degree of notice than that required for other claims. The claim must identify who, what, where, when, and how." United States ex rel. Costner v. United States, 317 F.3d 883, 888 (8th Cir. 2003). A plaintiff must plead such matters as the time, place and contents of the allegedly false representations, as well as the identity of the person making the representations and what was obtained or given up. Schaller Telephone Company v. Golden Sky Systems, Inc., 298 F.3d 736, 746 (8th Cir. 2002). "Conclusory allegations that a defendant's conduct was fraudulent and deceptive are not sufficient to satisfy the rule." Id. A. NEGLIGENT MISREPRESENTATION FRAUDULENT INDUCEMENT CLAIMS
The Banks' complaint purports to set forth essentially four fraud claims — two against Steven W. Erickson and two against Michael J. Frank. As to Erickson, the complaint states:
47.Mr. Erickson rendered representation to Banks made by him, by those employees supervised by him, and/or by Miller Schroeder of which Mr. Erickson knowingly acquiesced, that, among other things, the NIGC would approve the Amendment and the Pledge Agreement (collectively "Mr. Erickson's Representations").
As best, the complaint alleges that Mr. Erickson represented to the Banks that the National Indian Gaming Commission would approve the Amendment and Pledge Agreement. The complaint does not allege when, where, or how these representations were made.
As to Frank, the complaint is somewhat more detailed.
25. . . . Mr. Frank advised the banks: "The borrower is confident that the NIGC will approve the cap increase, however, the borrower would like to keep the casino on schedule for its grand opening on April 10, 1999. Therefore, in light of the time frame required by NIGC to complete the review, the borrower has requested that Miller Schroeder close and fund the loans without NIGC approval of the cap increase as the casino is near completion. As the loans are first being repaid from the revenues as described above, Miller Schroeder is recommending the participants close and fund as scheduled."
29. Mr. Frank made verbal representations to the principals of the Banks that (1) this was a credit that was backed by the full faith and credit of a very "wealthy" Tribe; (2) this credit was one of the very finest loans Miller Schroeder had ever had the opportunity to present; (3) the credit was so good, that the Banks would have to act immediately as there would certainly be a waiting list.
Complaint (Docket No. 1). As to Frank, the complaint clearly alleges that he made verbal representations as set forth in paragraphs 25 and 29, but it fails to allege when and where these representations were made.
The Banks' complaint does not specify when and where the alleged representations were made, and as to Erickson, the complaint does not specify how he made the alleged representations. The Court finds the Banks have failed to set forth their fraud claims with sufficient particularity and dismisses Claims One through Four without prejudice. Given the Court's findings as outlined above, it is unnecessary to consider the remaining assertions of the Defendants as to the negligent misrepresentation and fraudulent inducement claims. B. FRAUDULENT CONVEYANCE CLAIM
With respect to such claims, the Court notes that under North Dakota law it does not appear that the plaintiffs need to show the existence of a duty separate from the existence of a contractual relationship to satisfy the elements of a negligent misrepresentation claim. See Bougois v. Montana-Dakota Utilities, Co., 466 N.W.2d 813, 817 (N.D. 1991). In addition, the Court notes that under North Dakota law it does not appear that the waivers set forth in the participation agreements would be controlling as to whether the plaintiffs could prove justifiable reliance. See Krank v. A.O. Smith Harvestore Products, Inc., 456 N.W.2d 125, 130 (N.D. 1990) (holding that "when a party to a contract seeks to rescind the contract because of fraud, provisions in the contract waiving warranties or disclaiming or limiting liability are not controlling").
Both parties appear to agree that the fraudulent conveyance claim is governed by the Minnesota Fraudulent Transfer Act because the sale of assets took place in Minnesota and was almost entirely between Minnesota companies with headquarters in Minnesota. Minnesota case law provides that "where one company sells or otherwise transfers all its assets to another company, the purchasing company is not liable for the debts and liabilities of the transferor." J.F. Anderson Lumber Co. v. Myers, 206 N.W.2d 365, 368 (Minn. 1973). Minnesota recognizes five exceptions to this general rule: (1) where the purchaser expressly or impliedly agrees to assume such debts, (2) where the transaction amounts to a consolidation or merger of the corporation, (3) where the purchasing corporation is merely a continuation of the selling corporation, (4) where the transaction is entered into fraudulently in order to escape liability for such debts, and (5) where there is the absence of adequate consideration for the sale or transfer. Id. at 368-69.
In the complaint, the Banks allege that "Marshall Miller Schroeder, Inc., is now operating substantially the same business that was formerly operated by Defendant Miller Schroeder Investments Corporation." Complaint, 73 (Docket No. 1). The Banks also allege that:
At the time of the advances and transfers from Miller Schroeder Investments Corporation that Miller Schroeder Investments Corporation was insolvent, or as a result of the conveyances and transfers became insolvent, that the above described transfers were made without a fair consideration; therefore said transfers and conveyances are fraudulent as to the Banks without regard to Defendant Miller Schroeder Investment Corporation's actual intent.
Complaint, 76 (Docket No. 1). The complaint specifies the dates on which the alleged transfers were made.
In response, the Defendants assert that the companies do not have the same shareholders, that the officers and employees are not identical, and that Marshall Miller Schroeder did not purchase all of the assets and liabilities of Miller Schroeder. Determinations as to the truth of the allegations in the complaint are not appropriate at this stage of the litigation, and in fact, this Court has a duty to accept the pleading as true when deciding a Rule 12(b)(6) motion. Fabisch v. University of Minnesota, 301 F.3d 797, 802 (8th Cir. 2002). The essence of the Court's review is whether the plaintiffs have sufficiently pled a claim for fraudulent conveyance, not whether the plaintiffs will succeed on such a claim. The Court finds that the plaintiffs have sufficiently pled a claim for fraudulent conveyance. The complaint also satisfies the particularity requirement of Rule 9(b) as to the fraudulent conveyance claim in that it sets forth the who, what, when, where, and how the alleged fraudulent conveyance was made.
III. CONCLUSION
The Court GRANTS IN PART AND DENIES IN PART the Defendants' Motion to Dismiss (Docket No. 4). The Court DISMISSES WITHOUT PREJUDICE the claims for negligent misrepresentation and fraudulent inducement against Steven W. Erickson and Michael J. Frank. The fraudulent conveyance claim against Marshall Miller Schroeder, Inc., may proceed.