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Grassi v. Moody's Investor's


March 26, 2010



This case came before the court on July 31, 2009, for hearing of defendants' motions to dismiss plaintiffs' claims pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). Attorneys James J. Coster and David A. McCarthy appeared for defendant Moody's Investors Service, Inc. Attorneys Floyd Abrams, Brian T. Markley, and David Taro Biderman appeared for defendant The McGraw-Hill Companies, Inc., sued as Standard & Poor's. Attorneys Roberta A. Kaplan and Jonathan A. Patchen appeared for defendant Fitch, Inc. Plaintiffs Ronald Grassi and Sally Grassi are proceeding pro se in this action, and each appeared on his or her own behalf. The parties' arguments were heard, and the motions were submitted for decision.

Having considered all written materials filed in connection with defendants' motions, the parties' arguments at the hearing, and the entire file, the undersigned now grants defendants' motions to dismiss but also grants plaintiffs' requests for leave to amend.


Plaintiffs filed a pro se complaint in the Placer County Superior Court on January 26, 2009. The pleading was submitted on a form complaint for personal injury, property damage, or wrongful death. The pleading alleges two state law claims -- (1) negligence and (2) fraud and deceit -- against "Moody's Investor's Services, Standard and Poor's, Fitch" and DOES 1 to 10. (Def'ts' Notice of Removal, Ex. B.)

The three named defendants joined in removing the case to federal court by notice filed February 25, 2010. Defendants assert federal jurisdiction based on complete diversity of citizenship between the parties and an amount in controversy that exceeds $75,000.

After plaintiffs' motion for remand was denied by order filed May 15, 2009, each defendant filed a motion to dismiss. Plaintiffs filed written opposition and appeared at the hearing. The court subsequently granted plaintiffs' request for leave to file supplemental opposition, and the defendants were granted leave to respond. The court denied plaintiffs' request for leave to file still more briefing on the pending motion.


Plaintiffs' negligence claim includes the following statement of the reasons for defendants' liability:

Said defendants negligently over-rated the quality and value of the bonds described below being sold by Lehman Bros. knowing that potential investors and investment advisors would rely on the ratings and would not know said ratings were inaccurate and excessively high. Said conduct by defendants was done for the purpose of both assisting Lehman Bros. in the sale of said bonds, and also allowing said defendant rating companies to retain the rating business of investments being sold by Lehman Bros. by supplying inaccurate and excessively high bond ratings. (Notice of Removal, Ex. B at 4.) Plaintiffs' statement is followed by "official descriptions" of "the subject bonds." The descriptions are abbreviated and cryptic. There is no allegation that plaintiffs purchased these bonds and, but if the bonds were purchased by plaintiffs, there are no details alleged concerning the purchase or purchases.

Plaintiffs' fraud and deceit claim is identical to their negligence claim except that defendants are alleged to have acted "intentionally," rather than "negligently." (Id., Ex. B at 5.)

Plaintiffs claim loss of use of property and "Punitive Damages based upon defendants's [sic] reckless disregard in publishing false and misleading information relating to Lehman Brother's bonds." (Id., Ex. B at 3.) Plaintiffs pray for compensatory and punitive damages. (Id.)


The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test the legal sufficiency of the complaint. N. Star Int'l v. Ariz. Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). "Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). A plaintiff is required to allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Thus, a defendant's Rule 12(b)(6) motion challenges the court's ability to grant any relief on the plaintiff's claims, even if the plaintiff's allegations are true.

In determining whether a complaint states a claim on which relief may be granted, the court generally accepts as true the allegations in the complaint and construes the allegations in the light most favorable to the plaintiff. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Love v. United States, 915 F.2d 1242, 1245 (9th Cir. 1989). In general, pro se complaints are held to less stringent standards than formal pleadings drafted by lawyers. Haines v. Kerner, 404 U.S. 519, 520-21 (1972). However, the court need not assume the truth of legal conclusions cast in the form of factual allegations. W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981). The court is permitted to consider material which is properly submitted as part of the complaint, documents not physically attached to the complaint if their authenticity is not contested and the plaintiff's complaint necessarily relies on them, and matters of public record. See Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001) (on a motion to dismiss, the court may consider matters of public record); MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986) (on a motion to dismiss, the court may take judicial notice of matters of public record outside the pleadings). Of course, a court may take judicial notice of its own files and of documents filed in other courts. Reyn's Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746 n.6 (9th Cir. 2006) (taking judicial notice of documents related to a settlement in another case that bore on whether the plaintiff was still able to assert its claims in the pending case); Burbank-Glendale-Pasadena Airport Auth. v. City of Burbank, 136 F.3d 1360, 1364 (9th Cir. 1998) (taking judicial notice of court filings in a state court case where the same plaintiff asserted similar and related claims); Hott v. City of San Jose, 92 F. Supp. 2d 996, 998 (N.D. Cal. 2000) (taking judicial notice of relevant memoranda and orders filed in state court cases).

When a plaintiff alleges fraud, "the circumstances constituting fraud . . . shall be stated with particularity." Fed. R. Civ. P. 9(b). "Rule 9(b) serves not only to give notice to defendants of the specific fraudulent conduct against which they must defend, but also 'to deter the filing of complaints as a pretext for the discovery of unknown wrongs, to protect [defendants] from the harm that comes from being subject to fraud charges, and to prohibit plaintiffs from unilaterally imposing upon the court, the parties and society enormous social and economic costs absent some factual basis.'" Bly-Magee v. California, 236 F.3d 1014, 1018 (9th Cir. 2001) (quoting In re Stac Elec. Sec. Litig., 89 F.3d 1399, 1405 (9th Cir. 1996)).

Thus, pursuant to Rule 9(b), a plaintiff must, at a minimum, plead evidentiary facts such as time, place, persons, statements and explanations of why allegedly misleading statements are misleading. In re GlenFed, Inc. Sec. Litig., 42 F. 3d 1541, 1547 n.7 (9th Cir. 1994). In addition, a plaintiff proceeding on a state fraud claim in federal court must allege facts demonstrating the existence of the elements of such a claim. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105-06 (9th Cir. 2003) (quoting Moore v. Brewster, 96 F.3d 1240, 1245 (9th Cir. 1996)) ("Under California law, the 'indispensable elements of a fraud claim include a false representation, knowledge of its falsity, intent to defraud, justifiable reliance, and damages.'"); Fecht v. Price Co., 70 F.3d 1078, 1082 (9th Cir. 1995).


I. The Parties' Arguments

The defendants are credit rating companies, and all three seek dismissal of plaintiffs' claims with prejudice. Although defendants' arguments vary to some degree, all defendants move to dismiss plaintiff's claims pursuant to Rule 12(b)(6) on the ground that plaintiffs' pleading fails to state any claim on which relief can be granted. Defendant Moody's Investors Service, Inc. (Moody's) also seeks dismissal of plaintiffs' fraud claim pursuant to Rule 9(b) for failure to plead circumstances of fraud with sufficient particularity.

Defendants treat plaintiffs' negligence claim as a claim of negligent misrepresentation because, as defendant The McGraw-Hill Companies, Inc. (McGraw-Hill) explains, defendants' alleged misconduct lay in the dissemination of their ratings to potential investors and investment advisors. (Def. McGraw-Hill's Mot. to Dismiss, Mem. of P. & A. at 2 n.2. In this regard, defendant McGraw-Hill cites to California court decisions finding that the plaintiffs' negligence claims in those cases were more precisely considered claims of negligent misrepresentation. (Id.)

Defendants argue that plaintiffs' claim of negligent misrepresentation fails because, as a matter of law, defendants owed no duty of care to plaintiffs. Defendants point out that plaintiffs have not alleged any relationship or contact of any kind with any of the defendants, let alone the kind of relationship required to establish a duty of care. Defendants cite both to New York law holding that a provider of information cannot be held liable for negligent misrepresentation absent pleading and proof of a special relationship approximating privity, and also California law holding that a negligent misrepresentation claim requires pleading and proof that the plaintiff is a member of a "limited group" of intended beneficiaries of the representation. Defendants view plaintiffs as belonging to the unlimited audience of readers and viewers of their ratings. Such a view appears to be consistent with plaintiffs' complaint, in which plaintiffs allege that defendants negligently over-rated the quality and value of Lehman Brothers' bonds "knowing that potential investors and investment advisors would rely on the ratings."

Defendants contend that plaintiffs' claim of negligent misrepresentation also fails because plaintiffs did not plead with particularity (1) a material misrepresentation, (2) actual and reasonable reliance, and (3) causation, which are the essential elements of a claim of negligent misrepresentation. Defendants argue that plaintiffs cannot amend their complaint to cure this pleading defect because plaintiffs cannot establish the element of reasonable reliance due to the explicit cautionary disclaimers that accompany the defendants' ratings, including their ratings of Lehman Brothers and its bonds.

Defendant Moody's argues that plaintiffs' fraud claim fails as a matter of law because plaintiffs have failed to allege with the required particularity not only (1) a material misrepresentation, (2) actual and reasonable reliance, and (3) causation, but also (4) scienter, which is an element of a fraud claim.

Finally, defendants argue that both of plaintiffs' claims fail as a matter of law because credit rating opinions published by rating agencies have been consistently held to be protected under the First Amendment in two ways. Defendants assert first that, as expressions of protected opinion rather than fact, credit ratings cannot be proven false and are not actionable as false "statements." Defendants assert second that, as protected speech on matters of public concern, credit ratings cannot give rise to liability absent pleading and proof of "actual malice."

In opposition to defendants' motions, plaintiffs argue that their complaint was properly drafted under California law on state-approved forms. However, plaintiffs request leave to amend if more detailed pleadings are required. Plaintiffs claim that they can and will re-plead their claims for relief more specifically.

Plaintiffs' insistence that they can and will re-plead more specifically is cast into doubt, however, by plaintiffs assertion that they cannot plead their claims with specificity until discovery has been completed. Plaintiffs indicate that if they are required to file an amended pleading alleging actual facts, they will need to (1) take the depositions of the defendants' CEO's and the analysts who reviewed the information available on the bonds purchased by plaintiffs, (2) propound interrogatories, and (3) request production of extensive records. Toward that end, plaintiffs request an order permitting them to conduct at least limited discovery.

Returning to their argument that their complaint is sufficient under California law, plaintiffs argue that they should not be required to change their claims or how their claims are pled just because this court has determined that their state claims will be heard in federal court. Plaintiffs contend that their common law negligence and fraud claims have not been preempted by federal law and that they have pled sufficient facts to apprise defendants of the specific negligence and fraud at issue, when it occurred, and what the result was.

On the subject of defendants' duty of care, plaintiffs contend that California law should be applied, and once again they argue that they can and will amend their complaint to allege the relationship required under California law in order to establish defendants' duty to plaintiffs. Plaintiffs contend that the investing public is a "limited group," thereby establishing the required privity, and that plaintiffs are third party beneficiaries or intended beneficiaries or at least foreseeable recipients of the companies' ratings. Plaintiffs reiterate that if required to replead their state court causes of action to conform to federal rules, they can and will comply.

Plaintiffs conclude by disputing defendants' arguments regarding First Amendment protection for credit rating companies. Plaintiffs do not view defendants' ratings as protected opinions but as provably false statements. Plaintiffs also assert that they can amend their complaint to allege malice or reckless disregard to meet the standard described by defendants.*fn1

In their replies, defendants note that plaintiffs repeatedly claim that they can plead facts but do not identify any of those facts, thus failing to show that they can state any cognizable claim under New York or California law. Defendant Moody's asserts that plaintiffs have in fact admitted they had no relationship with Moody's other than being members of the entire "investing public." Defendant Moody's cites federal court decisions dismissing negligent misrepresentation claims brought by members of the "general investing public." (Def't Moody's Reply filed July 16, 2009, at 4 n.3.) Defendant McGraw-Hill also cites cases rejecting the argument that the limited group requirement actually encompasses all members of the investing public. (Def't McGraw-Hill's Reply filed July 16, 2009, at 4-5.) All defendants argue that plaintiffs have failed to rebut any of defendants' arguments in support of dismissal, that the court should deny plaintiffs' unsupported requests for leave to amend and to conduct discovery, and that defendants' motions to dismiss should be granted with prejudice.

II. Discussion

Once a case has been removed from state court, it is subject to the Federal Rules of Civil Procedure, and those rules govern procedure after removal. Fed. R. Civ. P. 81(c)(1) ("These rules apply to a civil action after it is removed from a state court."). The United States Supreme Court has determined that the "expansive language" of Rule 81(c) "contains no express exceptions and indicates a clear intent to have the Rules . . . apply to all district court civil proceedings." Willy v. Coastal Corp., 503 U.S. 131, 134-35 (1992).

Rule 81(c) establishes the general rule that, "[a]fter removal, repleading is unnecessary unless the court orders it." Fed. R. Civ. P. 81(c)(2). However, federal pleading rules apply regardless of whether the substantive law at issue is state or federal. Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009).*fn2 A pleading removed from state court is therefore subject to dismissal pursuant to Rule 8(a)(2) of the Federal Rules of Civil Procedure if the pleading does not contain a short and plain statement of the claim showing that the pleader is entitled to relief.

When fraud is alleged in a pleading removed from state court, the pleading is subject to dismissal pursuant to Rule 9(b), which requires that "a party must state with particularity the circumstances constituting fraud." Kearns, 567 F.3d at 1124. The circumstances constituting the alleged fraud must be specific enough to give each defendant notice of its particular misconduct so that the defendant can defend against the charge. Id. (citing Bly-Magee, 236 F.3d at 1019). Where fraud is not an essential element of all claims alleged in a pleading, only the claims that allege fraud are subject to the heightened pleading standard of Rule 9(b). Kearns, 567 F.3d at 1124. To satisfy that standard, a plaintiff alleging fraud must set forth more than the neutral facts necessary to identify the transaction at issue. Id. (citing In re GlenFed, Inc., 42 F.3d at 1548).

In the present case, the court finds plaintiffs' pleading deficient under both Rules 8 and 9. The fact that the form complaint was adequate for purposes of proceedings in state court is irrelevant. For federal court proceedings, plaintiffs' complaint, while undeniably short, is not a plain statement of claims showing that plaintiffs are entitled to relief on their claims of negligent misrepresentation and fraud. The allegations of the pleading are not specific enough to give each defendant notice of its particular misconduct, it does not allege facts that establish each element of the two claims, and it falls far short of stating a plausible, cognizable claim against any defendant.

While the undersigned finds it unlikely that plaintiffs can file an amended complaint that will meet federal pleading standards and state a cognizable claim, it is not possible to conclude that they cannot do so. Accordingly, defendants' motion to dismiss will be granted, but dismissal of the complaint originally filed in state court by plaintiffs will be without prejudice to the filing of an amended complaint. See Smith v. Local Union No. 110, Int'l Brotherhood of Elec. Workers, F. Supp. 3d , , Civil No. 09-2528 (DWF/SRN), 2010 WL 173797, at *9 (D. Minn. Jan. 13, 2010) (finding no basis to dismiss the state court pleading with prejudice and therefore dismissing the complaint with leave to file an amended complaint that conforms to the applicable federal rules); Rockwood Retaining Walls, Inc. v. Patterson, Thuente, Skaar & Christensen, P.A., Civil No. 09-2493 (DWF/FLN), 2009 WL 5185770, at *6 (D. Minn. Dec. 22, 2009) (dismissing the complaint without prejudice upon finding that "the threadbare, conclusory allegations" in the pleading removed from state court failed to meet the federal pleading standard as defined by the United States Supreme Court in recent cases).

Plaintiffs are cautioned that the amended complaint must comply with the requirements of Rules 8 and 9 to allege facts that establish all elements of the claims alleged and must provide the specificity required for the fraud claim under Rule 9.

In this regard, plaintiffs are advised that Rule 9(b) serves three purposes. First, a plaintiff's compliance with the rule provides defendants with adequate notice to allow them to defend the charge and deters plaintiffs from filing complaints "as a pretext for the discovery of unknown wrongs"; second, a plaintiff's compliance with the rule protects those whose reputation would be harmed as a result of being subject to fraud charges; third, compliance with the rule prohibits plaintiffs from "unilaterally imposing upon the court, the parties and society enormous social and economic costs absent some factual basis. Kearns, 567 F.3d at 1125. Plaintiffs' request for leave to conduct discovery is denied because permitting discovery before the plaintiffs have filed an adequate pleading that states claims upon which relief may be granted would violate all three of these purposes of Rule 9(b).


Accordingly, IT IS HEREBY ORDERED that:

1. Defendants' motions to dismiss filed June 15, 2009 (Doc. Nos. 44, 47, and 52) are granted;

2. Plaintiffs' July 2, 2009 request for limited discovery (Doc. No. 55) is denied; and

3. Plaintiffs are granted thirty days to file an amended complaint that complies with this order, the Local Rules of Practice, and the Federal Rules of Civil Procedure; plaintiffs' amended complaint must bear the case number assigned to this case, must be titled "Amended Complaint," and must comply with the requirements of the Federal Rules of Civil Procedure, the Local Rules of Practice, and this order.

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