Opinion
CV-02-215-ST.
June 4, 2002
FINDINGS AND RECOMMENDATION
INTRODUCTION
Plaintiff, TRM Corporation ("TRM"), is a publicly held Oregon company traded on the NASDAQ Stock Exchange and headquartered in Portland, Oregon. Defendants, Frederick O. Paulsell ("Paulsell"), Frederick O. Paulsell III, Michael Paulsell, Leigh Ann Paulsell, and David Paulsell, are major stockholders in TRM, who filed an action against Edward Cohen, Daniel Cohen, ReadyCash Investment Partners, L.P. ("ReadyCash LP"), and ReadyCash GP Corp. ("ReadyCash Corp") (also collectively referred to as the "ReadyCash entities"), Paulsell, et al. v. Cohen, et al., Civil No. 00-1175-ST ("the Paulsell/Cohen litigation"), which was removed from Multnomah County Circuit Court on August 25, 2000. In the Paulsell/Cohen litigation, the Paulsell family alleges that the Cohens breached an agreement ("the Paulsell family stock transaction") to purchase 1 million shares of TRM stock from the Paulsell family for $13 million. At the time that the Paulsell family stock transaction was allegedly entered into, Paulsell was the chairman of both TRM's board of directors and its executive committee.
On February 22, 2002, TRM filed this action, alleging that when entering into or attempting to enter into the Paulsell family stock transaction on behalf of the Paulsell family, Paulsell failed to disclose and instead concealed that transaction from TRM. TRM alleges that in doing so, Paulsell committed fraud, breached his fiduciary duties, and usurped a corporate opportunity. TRM brings claims against Paulsell for fraud, for declaratory relief that it is entitled to control the Paulsell/Cohen litigation and to receive any recovery obtained in that litigation, and for a constructive trust on the proceeds of any recovery in the Paulsell/Cohen litigation.
TRM is an Oregon corporation with its principal place of business in Oregon. Defendants reside in Washington and North Carolina. The amount in controversy exceeds $75,000.00, exclusive of interest and costs. Thus, this court has jurisdiction based upon diversity of citizenship.
Defendants have now filed a Rule 12(b)(6) Motion to Dismiss Plaintiff's Complaint (docket #10) for failure to plead facts to avoid the statute of limitations. Although both parties have presented matters outside the pleadings, this court excludes them and thus need not convert this motion to one for summary judgment pursuant to FRCP 12(b). For the reasons that follow, defendants' motion should be granted without prejudice and with leave for TRM to conduct limited discovery and replead within 60 days.
ANALYSIS
I. Statute of Limitations
The narrow issue revealed in the parties' briefing on this motion is whether TRM failed to commence its claims within the applicable statute of limitations. The parties agree that Oregon law applies and that TRM's fraud claim must be commenced within two years from the discovery of the fraud or deceit. ORS 12.110(1). A two year statute of limitations also applies to TRM's claims for declaratory relief and constructive trust. See Sabre Farms, Inc. v. Jordan, 78 Or. App. 323, 327-28, 717 P.2d 156, 158-59 (1986) (two year statute of limitations on claims for usurpation of corporate opportunity); Brooks v. Dierker, 275 Or. 619, 623, 552 P.2d 533, 535 (1976). ("[W]hen declaratory relief is sought as an alternative to other appropriate and otherwise available relief, the relevant limitations period for the declaratory judgment suit is to be based on that of the underlying grounds for relief.").
The crux of the present motion is when TRM's claims accrued. Because TRM alleges that the misrepresentations underlying all claims in this case took place "prior to June 24, 1998" (Complaint, ¶ 10), any claims commenced after June 24, 2000, would normally be barred by the two year statute of limitations. TRM filed this action on February 22, 2002, nearly two years after the expiration of the statute of limitations, but argues that its claims are nonetheless timely.
TRM asserts that its claims for attempted ursurption of a potential corporate opportunity accrued and could only have been brought when Paulsell either: (a) sold the Paulsell family stock without first seeking approval of TRM's disinterested directors or shareholder after full disclosure; or (2) after Paulsell repudiated his obligation to first present the opportunity to TRM. Paulsell has not yet sold his stock, but TRM asserts that he repudiated his obligations to TRM when filing the Paulsell/Cohen litigation on July 18, 2000, seeking the benefit of the corporate opportunity. TRM filed this action within two years of that repudiation. Similarly, TRM asserts that it first discovered Paulsell's nondisclosure of the Paulsell family stock upon the filing of the Paulsell/Cohen litigation.
The face of the Complaint does not reveal why TRM delayed filing its claims beyond the two year statute of limitations. To avoid dismissal, TRM must allege facts justifying that delay:
It is a familiar rule of pleading in cases involving delay in the beginning of actions, where it is sought to delay beyond the statutory period by an allegation that the plaintiff did not know or discover the facts upon which he bases his action until a certain date, that such allegation must be fortified by a statement of facts which justifies the claim of ignorance, and this requires a statement of the circumstances under which the discovery was made as well as the reasons for prior ignorance.
Mitchell v. Greenough, 100 F.2d 184, 186 (9th Cir 1938), cert denied, 386 U.S. 659 (1939) (citations omitted); see also, Salem Sand Gravel Co. v. City of Salem, 260 Or. 630, 637, 492 P.2d 271, 275 (1971); Huycke v. Latourette, 215 Or. 173, 177, 332 P.2d 606, 608 (1958); Wood v. Carpenter, 101 U.S. 135, 140 (1879).
However, TRM's responsive brief to the motion indicates that TRM did not know of the alleged fraud until July 18, 2000. In particular, TRM argues that it should not be charged with any knowledge or information the Cohens may have had relating to the Paulsell family stock transaction because the Cohens' interests conflict with those of TRM. TRM seeks leave to replead to resolve that pleading deficiency and requests 60 days to do so in order to first review the extensive discovery which has already occurred in the Paulsell/Cohen litigation.
This court finds that defendants' motion to dismiss should be granted, with leave granted to TRM to replead in 60 days. However, the briefing on the present motion reveals one major area of contention between the parties, namely the extent to which TRM should be charged with the knowledge of the Cohens. Because this issue is central to this case and may be determinative in the future course of this litigation, this court briefly addresses that issue.
II. Imputation of Knowledge
"A potential corporate plaintiff is not a sentient being and, therefore, cannot `know,' be aware of, or discover anything, except through the agency of its officers, directors, and employees. However, a corporation generally is charged with knowledge of facts that its agents learn within the scope of their employment." F.D.I.C. v. Smith, 328 Or. 420, 429, 980 P.2d 141, 146 (1999) (citations omitted).
As discussed at length in this court's opinions in the Paulsell/Cohen litigation, TRM's shareholders approved the TRM/ReadyCash Agreement and elected a new board of directors on June 24, 1998. Shortly thereafter, the new board of directors appointed Edward Cohen as TRM's Chairman of the Board, Paulsell as the Vice Chairman, and Daniel Cohen as head of the executive committee.
See, e.g. Findings and Recommendations dated May 22, 2002 (docket #116), in Civil No. 00-1175-ST.
According to the allegations in the Paulsell/Cohen litigation, the Cohens were parties to, and therefore fully aware of, the Paulsell family stock transaction. Nonetheless, TRM argues that it should not be charged with any knowledge of Edward and Daniel Cohen because their interests conflict with TRM's interests with respect to an additional private purchase of TRM stock. However, knowledge of corporate officers generally is imputed whether the agent's knowledge was acquired before or after affiliating with the corporation and the adverse interest exception applies "only in cases where an agent is stealing from the corporation or otherwise defrauding it." Funk v. Tifft, 515 F.2d 23, 26 n4 (9th Cir 1975), citing RESTATEMENT (SECOND) AGENCY §§ 274, 276, 282 (1958). The Oregon Supreme Court has noted that in order to successfully assert the adverse interest exception, the corporation must show that "the agent's relations to the subject-matter are so adverse as to practically destroy the relationship, as when the agent is acting in his own interest and adversely to that of his principal, or is secretly engaged in attempting to accomplish a fraud which would be defeated by a disclosure to his principal." Saratoga Inv. Co. v. Kern, 76 Or. 243, 254, 148 P.2d 1125, 1128 (1915).
Nothing is alleged in the Complaint or in the Paulsell/Cohen litigation which indicates that the interests of the Cohens are sufficiently adverse to those of TRM to make imputation of knowledge inappropriate. Therefore, TRM also must replead to cure this deficiency.
RECOMMENDATION
For the reasons stated above, defendants' Rule 12(b)(6) Motion to Dismiss Plaintiff's Complaint (docket #10) should be GRANTED without prejudice and with leave granted to plaintiff to conduct discovery on the statute of limitations and imputation of knowledge issues and to file an amended complaint within 60 days from the date of a final order.
SCHEDULING ORDER
Objections to these Amended Findings and Recommendation, if any, are due June 21, 2002. If no objections are filed, then the Amended Findings and Recommendation will be referred to a district court judge and go under advisement on that date.
If objections are filed, the response is due no later than July 11, 2002. When the response is due or filed, whichever date is earlier, the Findings and Recommendation will be referred to a district court judge and go under advisement.