In the above discussion of the Fourth Cause of Action, the court found that National Union owed no fiduciary duty at the time of the sale of the securities. Plaintiffs have alleged, however, that National Union failed to disclose material information concerning a waiver in the Financial Guarantee Bond by which plaintiffs waived defenses to payments on the investor promissory notes and execution of the Financial Guarantee Bond. These allegations concern actions taken after the sale of the securities and therefore require further discussion.
Plaintiffs' argument that a fiduciary relationship exists is twofold. First, plaintiffs argue that whenever trust and confidence are reposed by one person in the integrity and fidelity of another and the person in whom such confidence is reposed obtains control over the affairs of the first person, a fiduciary relationship is created. See Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 67 Cal. App. 3d 19, 136 Cal. Rptr. 378 (1977). Second, plaintiffs argue that their relationship with National Union is essentially that of insured and an insurer, which in certain circumstances may be characterized as a fiduciary relationship. See Egan v. Mutual of Omaha Insurance Company, 24 Cal. 3d 809, 820, 157 Cal. Rptr. 482, 598 P.2d 452 (1979), cert. denied, 445 U.S. 912, 100 S. Ct. 1271, 63 L. Ed. 2d 597 (1980).
The first argument fails as plaintiffs have not alleged the type of facts necessary to create a fiduciary relationship. Plaintiffs do not allege face-to-face contact creating special trust and confidence, nor do they allege facts showing National Union having control over their affairs.
On the second argument, this court is not persuaded that the analogy of an insured and an insurer properly applies here. A surety's obligations "are generally limited to those it undertakes in the bond." In re Rexplore, Inc. Securities Litigation, 685 F. Supp. 1132, 1149 (N.D. Cal. 1988). The court finds, therefore, that plaintiffs have failed to sufficiently plead fiduciary duty against National Union and, therefore, this claim should be dismissed.
Finally, plaintiffs allege a breach of the covenant of good faith and fair dealing. Under California law, every contract has an implied covenant of good faith and fair dealing. Egan, 24 Cal.3d at 818. "The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the benefits of the agreement. [Citations omitted]. The precise nature and extent of the duty imposed by such an implied promise will depend on the contractual purpose." Id.
Because the nature and extent of the duty imposed under the contract between plaintiffs and National Union is an issue of fact, a motion for summary judgment would more properly raise the question of what the duty was and whether National Union breached that duty. Finally, the court notes that when it decided to exercise its pendent jurisdiction over the state claims against National Union, there were both federal and state substantive claims existing in this action against National Union.
As discussed above, all of the federal claims are being dismissed and the only remaining state claim is the claim for breach of the covenant of good faith and fair dealing. This remaining state claim does not share enough factual similarity with the other remaining claims in this action to justify the exercise of this court's pendent jurisdiction. As the United States Supreme Court has stated, "pendent jurisdiction is a doctrine of discretion, not of plaintiff's right." United Mine Workers of America v. Gibbs, 383 U.S. 715, 726, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966).
Accordingly, the claim for breach of fiduciary duty in the Thirteenth Cause of Action should be dismissed with prejudice, while the claim for breach of covenant of good faith and fair dealing should be dismissed without prejudice.
K. RICO; the Nineteenth Cause of Action
Plaintiffs have alleged violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968, against defendants Sybedon, Glickman, Lewis and Davis.
The RICO allegations against Sybedon are based upon 18 U.S.C. § 1962(a) which provides in relevant part:
(a) It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity. . . to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.
Sybedon moves to dismiss on the grounds that plaintiffs failed to show that defendants derived income from alleged racketeering activity, and failed to show that plaintiffs were damaged by the use or investment of such income.
In order to plead a cause of action under section 1962(a), plaintiffs must show both that defendants have received income or proceeds from the racketeering activity and that plaintiffs have been injured by the use or investment of that income or proceeds. See In re Rexplore, Inc. Securities Litigation, 685 F. Supp. 1132, 1141 (N.D. Cal. 1988).
The only statement pleaded in the Second Amended Complaint which alleges that Sybedon received income from the pattern of racketeering activity is a general statement that simply alleges that Sybedon "directly or indirectly derived income from the pattern of racketeering activity." (Complaint para. 349). This allegation is simply a recitation of the general requirements for pleading a § 1962(a) action. There are no specific allegations in the Second Amended Complaint as to the type of income received by Sybedon or the manner in which Sybedon received such income.
Plaintiffs' pleadings in the Second Amended Complaint allege simply that they have been injured by the underlying predicate acts of the fraudulent scheme. This is insufficient to show that Sybedon received income or proceeds from the racketeering activity and that plaintiffs have been injured by the use or investment of that income or proceeds.
2. Glickman, Lewis and Davis
The RICO allegations against Glickman, Lewis and Davis are based on 18 U.S.C. § 1962(c), which provides:
(c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct, or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.