SALIT v. CENTERBANK

Civ. No. N90-018(EBB)

767 F. Supp. 429 (1990) | Cited 0 times | D. Connecticut | October 9, 1990

RULING ON MOTION TO DISMISS

The defendants have filed a motion to dismiss the complaintfor failure to state a claim upon which relief can be grantedand for failure to state fraud with particularity, pursuant toFederal Rules of Civil Procedure 12(b)(6) and 9(b). For thereasons that follow, defendant's motion to dismiss is granted.

FACTS

The plaintiff, Peter Salit, brings this action as a classaction on behalf of himself and all other purchasers ofCenterbank common stock from July 25, 1989, to January 9, 1990.The defendant Centerbank is a Connecticut corporation whosestock is listed on the National Association of SecuritiesDealers Automated Quotations System ("NASDAQ") national system.The defendant John Burke was Chairman, President, and ChiefExecutive Officer of Centerbank during most of the ClassPeriod, although his resignation was announced on December 11,1989.

During the Class Period, plaintiff purchased 1,000 shares ofcommon stock. The plaintiff seeks certification of the class ofpersons who purchased Centerbank common stock from July 25,1989, to January 9, 1990. Plaintiff alleges that 14 millionshares of Centerbank common stock were traded during the ClassPeriod. Complaint ¶ 9(a).

During the Class Period, defendant Centerbank issued severalpublic statements concerning the strength of Centerbank as afinancial institution. Defendants asserted their commitment tothe dividend policy, and maintained that their reserve positionwas adequate to meet the requirements of their loan portfolio.Complaint ¶ 14. On November 29, 1989, defendants "announcedthrough the PR Newswire" that the board of directors hadreaffirmed its intention to hold the dividend. On December 11,1989, defendant Burke resigned. And on "January 10, 1990,defendants disclosed that the Company would add about $40million to loan loss reserves in its fourth quarter and that itwould not pay its first-quarter dividend of $0.20." Complaint¶ 17.

The plaintiff alleges that the public information and reportsissued during the Class Period "contained materially false andmisleading information because they overstated the Company'sprofitability and expected profitability during that period."Complaint ¶ 18. Specifically, the plaintiff accusesdefendants of "failing to make adequate provision foranticipated losses or giving adequate warning that the takingof such enormous loan loss reserves would be necessary," offailing to have a "reasonable basis for the repeated statementsthat the company would be able to maintain its $0.20 quarterlydividend", and of failing to"disclose either that they had caused the Company to engage inloans involving a high degree of risk and/or which had becomehighly risky as a result of events subsequent to the making ofthe loans, or, until December 12, 1989, that defendant Burkehad been pursuing a business strategy with which the Company'sboard was in fundamental disagreement." Complaint ¶ 18.

DISCUSSION

A motion to dismiss for failure to state a claim should notbe granted "unless it appears beyond doubt that the plaintiffcan prove no set of facts in support of his claim which wouldentitle him to relief." Conley v. Gibson, 355 U.S. 41,45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). In deciding amotion to dismiss, the court must presume all factualallegations of the complaint to be true and must draw anyreasonable inferences in favor of the non-moving party. 2AMoore's Federal Practice ¶ 12.07[2.-5] at 12-63(2d ed. 1987). "The issue is not whether a plaintiff willultimately prevail but whether the claimant is entitled tooffer evidence to support the claims." Scheuer v.Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d90 (1974). Dismissal for failure to state a claim is generallynot favored by the courts. See 2A Moore's FederalPractice, supra.

Plaintiff's sole substantiation for his accusations is thetiming of defendants' announcements. The plaintiffapparently maintains that the defendants must have beenreleasing misleading information as to their ability to paydividends and meet loan losses, because the disclosure inJanuary, 1990, of the refusal to pay dividends and the additionof about $40 million to loan loss reserves followed too closelythe positive announcements in the last quarter of 1989. Thedefendants characterize the complaint as a charge "thatCenterbank should have predicted in its press releases that itwould not be able to maintain its historically high earningsand dividend payment record." Defendants' Memorandum of Law inSupport of their Motion for Stay of Proceedings and Extensionof Time, p. 1.

Plaintiff's allegations are essentially twofold: (1) that thedefendant affirmatively stated that it could meet loan lossesand dividend payments, and (2) that the misrepresentationsincluded fraudulent projections with no basis in fact.

As the plaintiff correctly summarizes, "[t]he Second Circuitheld in Goldman that allegations of `positivepredictions' coupled with allegations that the defendants had`knowledge of the undisclosed negative factors' states a claimunder Section 10(b) and Rule 10b-5" of the Securities ExchangeAct of 1934, 15 U.S.C. § 78j(b). Plaintiff's Memorandum inOpposition, p. 9; Goldman v. Belden, 754 F.2d 1059 (2dCir. 1985). However, the plaintiff gives no particulars as tothe respect in which he contends the statements are fraudulentand presents no basis for his belief that the defendants wereengaging in fraud. Paragraph eighteen of the complaint, whichattempts to characterize the misrepresentations, does notprovide a basis for (1) the allegation that the defendants"overstated" the Company's profitability, (2) the allegationthat there was no reasonable basis for the announcement thatthe Company would be able to maintain its $0.20 quarterlydividend, (3) the allegation that the Company was aware orshould have been aware of the high degree of risk of theirloans, or (4) the allegation that Mr. Burke "had beenpursuing a business strategy with which the Company's board wasin fundamental disagreement" (emphasis added).

Because the complaint fails to allege fraud with therequisite particularity, defendants' motion to dismiss isgranted. The plaintiff is given leave to amend his complaintwithin thirty days of the filing of this ruling.

SO ORDERED.

RULING ON MOTION TO DISMISS

The defendants have filed a motion to dismiss the complaintfor failure to state a claim upon which relief can be grantedand for failure to state fraud with particularity, pursuant toFederal Rules of Civil Procedure 12(b)(6) and 9(b). For thereasons that follow, defendant's motion to dismiss is granted.

FACTS

The plaintiff, Peter Salit, brings this action as a classaction on behalf of himself and all other purchasers ofCenterbank common stock from July 25, 1989, to January 9, 1990.The defendant Centerbank is a Connecticut corporation whosestock is listed on the National Association of SecuritiesDealers Automated Quotations System ("NASDAQ") national system.The defendant John Burke was Chairman, President, and ChiefExecutive Officer of Centerbank during most of the ClassPeriod, although his resignation was announced on December 11,1989.

During the Class Period, plaintiff purchased 1,000 shares ofcommon stock. The plaintiff seeks certification of the class ofpersons who purchased Centerbank common stock from July 25,1989, to January 9, 1990. Plaintiff alleges that 14 millionshares of Centerbank common stock were traded during the ClassPeriod. Complaint ¶ 9(a).

During the Class Period, defendant Centerbank issued severalpublic statements concerning the strength of Centerbank as afinancial institution. Defendants asserted their commitment tothe dividend policy, and maintained that their reserve positionwas adequate to meet the requirements of their loan portfolio.Complaint ¶ 14. On November 29, 1989, defendants "announcedthrough the PR Newswire" that the board of directors hadreaffirmed its intention to hold the dividend. On December 11,1989, defendant Burke resigned. And on "January 10, 1990,defendants disclosed that the Company would add about $40million to loan loss reserves in its fourth quarter and that itwould not pay its first-quarter dividend of $0.20." Complaint¶ 17.

The plaintiff alleges that the public information and reportsissued during the Class Period "contained materially false andmisleading information because they overstated the Company'sprofitability and expected profitability during that period."Complaint ¶ 18. Specifically, the plaintiff accusesdefendants of "failing to make adequate provision foranticipated losses or giving adequate warning that the takingof such enormous loan loss reserves would be necessary," offailing to have a "reasonable basis for the repeated statementsthat the company would be able to maintain its $0.20 quarterlydividend", and of failing to"disclose either that they had caused the Company to engage inloans involving a high degree of risk and/or which had becomehighly risky as a result of events subsequent to the making ofthe loans, or, until December 12, 1989, that defendant Burkehad been pursuing a business strategy with which the Company'sboard was in fundamental disagreement." Complaint ¶ 18.

DISCUSSION

A motion to dismiss for failure to state a claim should notbe granted "unless it appears beyond doubt that the plaintiffcan prove no set of facts in support of his claim which wouldentitle him to relief." Conley v. Gibson, 355 U.S. 41,45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). In deciding amotion to dismiss, the court must presume all factualallegations of the complaint to be true and must draw anyreasonable inferences in favor of the non-moving party. 2AMoore's Federal Practice ¶ 12.07[2.-5] at 12-63(2d ed. 1987). "The issue is not whether a plaintiff willultimately prevail but whether the claimant is entitled tooffer evidence to support the claims." Scheuer v.Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d90 (1974). Dismissal for failure to state a claim is generallynot favored by the courts. See 2A Moore's FederalPractice, supra.

Plaintiff's sole substantiation for his accusations is thetiming of defendants' announcements. The plaintiffapparently maintains that the defendants must have beenreleasing misleading information as to their ability to paydividends and meet loan losses, because the disclosure inJanuary, 1990, of the refusal to pay dividends and the additionof about $40 million to loan loss reserves followed too closelythe positive announcements in the last quarter of 1989. Thedefendants characterize the complaint as a charge "thatCenterbank should have predicted in its press releases that itwould not be able to maintain its historically high earningsand dividend payment record." Defendants' Memorandum of Law inSupport of their Motion for Stay of Proceedings and Extensionof Time, p. 1.

Plaintiff's allegations are essentially twofold: (1) that thedefendant affirmatively stated that it could meet loan lossesand dividend payments, and (2) that the misrepresentationsincluded fraudulent projections with no basis in fact.

As the plaintiff correctly summarizes, "[t]he Second Circuitheld in Goldman that allegations of `positivepredictions' coupled with allegations that the defendants had`knowledge of the undisclosed negative factors' states a claimunder Section 10(b) and Rule 10b-5" of the Securities ExchangeAct of 1934, 15 U.S.C. § 78j(b). Plaintiff's Memorandum inOpposition, p. 9; Goldman v. Belden, 754 F.2d 1059 (2dCir. 1985). However, the plaintiff gives no particulars as tothe respect in which he contends the statements are fraudulentand presents no basis for his belief that the defendants wereengaging in fraud. Paragraph eighteen of the complaint, whichattempts to characterize the misrepresentations, does notprovide a basis for (1) the allegation that the defendants"overstated" the Company's profitability, (2) the allegationthat there was no reasonable basis for the announcement thatthe Company would be able to maintain its $0.20 quarterlydividend, (3) the allegation that the Company was aware orshould have been aware of the high degree of risk of theirloans, or (4) the allegation that Mr. Burke "had beenpursuing a business strategy with which the Company's board wasin fundamental disagreement" (emphasis added).

Because the complaint fails to allege fraud with therequisite particularity, defendants' motion to dismiss isgranted. The plaintiff is given leave to amend his complaintwithin thirty days of the filing of this ruling.

SO ORDERED.

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