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SCOGNAMILLO v. CREDIT SUISSE FIRST BOSTON LLC

August 25, 2005.

FRANK SCOGNAMILLO, et al., Plaintiffs,
v.
CREDIT SUISSE FIRST BOSTON LLC, et al., Defendants.



The opinion of the court was delivered by: THELTON HENDERSON, Senior District Judge

ORDER GRANTING MOTIONS TO DISMISS BY DEFENDANTS SHELL, LONGINOTTI, AND QUATTRONE
This matter came before the Court on Monday, July 11, 2005, on motions to dismiss filed by Defendants West Shell III, John F. Longinotti, and Frank Quattrone. The parties submitted supplemental briefs on the impact of the United States Supreme Court's decision in Dura Pharmaceuticals, Inc. v. Broudo, 125 S. Ct. 1627 (2005), on August 5, 2005. After carefully reviewing all of the parties' papers and considering the parties' oral arguments, relevant case law, and Plaintiffs' factual allegations, the Court now GRANTS all three motions for the reasons discussed below.

BACKGROUND

  The parties are familiar with the factual background of this case, and the Court has already summarized Plaintiffs' allegations in a prior order. Thus, the Court need not re-summarize the allegations here.

  By agreement of the parties and order of this Court, Plaintiffs filed a second amended complaint on January 13, 2004.*fn1 It was not until the second amended complaint that Defendant Quattrone was added to the case. Again by agreement of the parties and order of this Court, Plaintiffs filed a third amended complaint ("TAC") on May 3, 2004.

  On September 27, 2004, Defendants Credit Suisse First Boston ("CSFB"), George Boutros, and Storm Duncan (collectively referred to as the "CSFB Defendants") filed motions to dismiss and strike portions of the third amended complaint. On February 1, 2005, the Court granted in part and denied in part the CSFB Defendants' motion to strike. The Court granted the motion regarding allegations that reference unadjudicated government investigations, regulatory actions, and other litigation, and it also granted the motion to strike allegations regarding Defendant Quattrone's compensation at CSFB, the termination of his employment at CSFB, and his indictment and trial on charges of obstruction of justice. The Court denied the motion to strike on all other issues.

  On March 21, 2005, the Court granted in part and denied in part the CSFB Defendants' motion to dismiss. The Court dismissed without prejudice Plaintiffs' fraud-based claims that rely on allegations that Defendants Boutros and Duncan "encouraged many of the practices described in this Complaint" and "in some instances, personally engaged in the practices described in this Complaint" for failure to plead fraud with particularity. In addition, the Court dismissed with prejudice Plaintiffs' fraud-based claims based on alleged misstatements regarding the business prospects and future value of Netcentives as non-actionable statements of opinion, and it also dismissed with prejudice Plaintiffs' claim for violation of California Corporations Code sections 25401 and 25501 for lack of privity. The Court denied the CSFB Defendants' motion in all other respects, concluding that the allegations viewed in a light most favorable to Plaintiffs were sufficient to withstand scrutiny at this early stage of the proceedings.

  Defendants Shell, Longinotti, and Quattrone have now filed separate motions to dismiss the claims asserted against them in the third amended complaint. This order addresses the issues raised in all three motions. LEGAL STANDARD

  Dismissal is appropriate under Federal Rule of Civil Procedure 12(b)(6) when a plaintiff's allegations fail "to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). A court should not grant dismissal "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Moreover, dismissal should be with leave to amend unless it is clear that amendment could not possibly cure the complaint's deficiencies. Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1296 (9th Cir. 1998).

  In deciding whether a case should be dismissed, a court may generally only consider the complaint and any attached exhibits that have been incorporated therein. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). However, the court may consider a document external to the complaint if the complaint "necessarily relies" on the document and no party contests the document's authenticity. Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir. 1998). The court may also consider facts for which judicial notice is appropriate. Barron v. Reich, 13 F.3d 1370, 1377 (9th Cir. 1994). Thus, while the court must generally accept as true the factual allegations of the complaint and construe those allegations in the light most favorable to the plaintiff, the court need not "accept as true allegations that contradict matters properly subject to judicial notice or by exhibit." Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001), amended by 275 F.3d 1187 (9th Cir. 2001). "Nor is the court required to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." Id.

  DISCUSSION

  I. Breach of Fiduciary Duty

  The Court summarized the law governing claims for breach of fiduciary duty in its order on the CSFB Defendants' motion to dismiss:
"The mere fact that in the course of their business relationships the parties reposed trust and confidence in each other does not impose any corresponding fiduciary duty in the absence of an act creating or establishing a fiduciary relationship known to law." City Solutions, Inc. v. Clear Channel Communications, Inc., 201 F. Supp. 2d 1048, 1050 (N.D. Cal. 2002) (citing Worldvision Enterprises, Inc. v. Am. Broad. Cos., 142 Cal. App. 3d 589, 595 (1983)). To become a fiduciary, a person "must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law." Comm. on Children's Television, Inc. v. Gen. Foods Corp., 35 Cal. 3d 197, 221 (1983). That is, a fiduciary "assumes duties beyond those of mere fairness and honesty in marketing its product — he must undertake to act on behalf of the beneficiary, giving priority to the best interest of the beneficiary." Id. at 222. A fiduciary relationship generally does not arise in a buyer-seller relationship, "even though sellers routinely make representations concerning their product, often on the basis of a claimed expert knowledge about its utility and value." Id. However, "[d]oubtless in an exceptional case a court might be able to find that a close and trusting relationship between buyer and seller, in which the buyer relied on the seller and the seller recognized that reliance, justified imposing fiduciary duties." Id. at 222 n. 22.
Mar. 21, 2005 Order Granting in Part & Denying in Part the CSFB Defs.' Mot. to Dismiss at 3-4 [hereinafter "CSFB Mot. to Dismiss Order"].
  In ruling on the CSFB Defendants' motion to dismiss, the Court found that the allegations in the TAC demonstrate that Plaintiffs negotiated aggressively during the merger, thus suggesting that the negotiations were arms-length. Furthermore, the Court found that the merger agreement itself expressly states that the parties agreed that they were represented by counsel during the negotiation, preparation, and execution of the agreement. The Court noted that the fiduciary duty claims therefore appeared to be unfounded, and that Plaintiffs did not identify a single case where a financial advisor in an arms-length negotiation was found to owe fiduciary duties to the opposing party. Nonetheless, the Court concluded that Plaintiffs' allegations were sufficient to withstand a motion to dismiss:
Plaintiffs specifically allege that Defendant Duncan, on behalf of all Defendants, told Plaintiffs that they "need not retain their own financial adviser or separate investment banker because CSFB was the `underwriter and `market maker' for Netcentives shares, and that CSFB owed duties to the marketplace, including duties to Plaintiffs, to disclose all material information." TAC ¶ 89. Plaintiffs further allege that "Duncan insisted that all CSFB personnel were `straight shooters.' These representations, along with the business advice provided by Duncan and Boutros to Plaintiffs during the Merger, induced Plaintiffs to impose trust and confidence in CSFB and each Individual Defendant and to consider the Merger a joint venture in which they did not need separate advisers." Id. Thus, Defendants allegedly went beyond saying they had confidential or superior information about Netcentives. When viewed in a light most favorable to Plaintiffs, the allegations suggest that Defendants induced Plaintiffs' trust and convinced Plaintiffs that Defendants would be acting in Plaintiffs' best interest. This is sufficient to state claims for breach of fiduciary duty, and the Court therefore DENIES Defendants' motion as to these claims.
Id. at 4-5.

  A. Shell and Longinotti

  Plaintiffs heavily rely on paragraph 89 of the TAC to support their breach of fiduciary claims against Shell and Longinotti, but that paragraph only alleges that Duncan made statements "on behalf of all Defendants." At oral argument, the Court asked Plaintiffs what statements or actions by Shell or Longinotti — as opposed to statements or actions by Boutros, Duncan, or CSFB — allegedly gave rise to a fiduciary relationship. The Court further asked Plaintiffs if they had any authority for their proposition that Shell and Longinotti became Plaintiffs' fiduciaries because Duncan allegedly spoke on their behalf. These questions were included in a list of questions distributed to all counsel prior to argument, yet Plaintiffs' counsel failed to respond. The Court considers this failure to respond to be a concession that Plaintiffs can allege no statements or actions by Shell or Longinotti, as opposed to statements or actions allegedly made on their behalf, that may give rise to a fiduciary duty. By failing to respond to the Court's questioning, Plaintiffs also conceded that they have no authority for the proposition that Shell and Longinotti may have entered into a fiduciary relationship with Plaintiffs based on statements allegedly made on their behalf by a third party.

  Plaintiffs do attribute several statements to Shell or Longinotti in the TAC, but these are insufficient to give rise to a fiduciary duty. For example, Plaintiffs allege that Shell and Longinotti, like Boutros and Duncan, represented that they had superior inside information that Plaintiffs should rely upon, and that Shell and Longinotti encouraged Plaintiffs to be team players. As the case law cited above demonstrates, this is not enough to establish a fiduciary relationship; instead, it is mere puffery that would likely be present in any sales relationship. It is highly unlikely that the CEO and CFO of a company on the other side of a merger deal would seek to act in the target company's best interests, and Plaintiffs have failed to point to any specific allegations of statements or actions by Shell or Longinotti that indicate that this case is so exceptional that the fiduciary duty claims should be allowed to proceed. Accordingly, with good cause appearing, the Court GRANTS the motion to dismiss the breach of fiduciary duty claims against Shell and Longinotti with prejudice. Plaintiffs have already had two opportunities to amend the complaint, and their failure to respond to the Court's questioning on what already appears to be a tenuous claim convinces the Court that further leave to amend would be futile.

  B. Quattrone

  Quattrone presents an even more tenuous case than Shell and Longinotti. Plaintiffs nowhere allege any direct interactions between themselves and Quattrone, and they admitted at oral argument that Quattrone had no involvement in the merger that forms the basis for this lawsuit. Instead, Plaintiffs assert that Quattrone assumed a fiduciary relationship with Plaintiffs because, as the director of the group at CSFB that handled the Netcentives IPO, he knew that the Netcentives prospectus contained fraudulent misrepresentations and that Plaintiffs were "invited to rely upon CSFB and the Prospectus." Opp'n at 30. Even if that were true, however, it is not enough to show that Quattrone knowingly undertook to act on behalf and for the benefit of Plaintiffs, which is what is required to state a claim for breach of fiduciary duty. The Court therefore GRANTS Quattrone's motion to dismiss the breach of fiduciary duty claims against him. Dismissal of these claims is with prejudice because, even if given leave to amend, Plaintiffs could not allege that Quattrone somehow assumed fiduciary duties to individuals he never had any interactions with on a merger with which he was not involved.

  II. Aiding and Abetting Breach of Fiduciary Duty

  To be liable for aiding and abetting breach of a fiduciary duty, a defendant must have knowledge of the breach and must have substantially assisted or encouraged the breach. Ortho-Med, Inc. v. Micro-Aire Surgical Instruments, Inc., No. CV 93-7621 JGD, 1995 WL 293180, at *12 (C.D. Cal. Apr. 10, 1995). Plaintiffs do not dispute ...


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