Magic Circle Corp. d/b/a Dixie Chopper, Arthur Evans, Wesley Evans, Jeffrey Haltom v. Simon Wilson, Gary Morgan, and Crowe Horwath LLP (mem. dec.) ( 2015 )

MEMORANDUM DECISION
Pursuant to Ind. Appellate Rule 65(D),
this Memorandum Decision shall not be Dec 30 2015, 9:26 am
regarded as precedent or cited before any
court except for the purpose of establishing
the defense of res judicata, collateral
estoppel, or the law of the case.
ATTORNEY FOR APPELLANTS ATTORNEYS FOR APPELLEE
R. William Jonas, Jr. SIMON WILSON
Hammerschmidt, Amaral & Jonas Andrew W. Hull
South Bend, Indiana Jason L. Fulk
Hoover Hull Turner LLP
Indianapolis, Indiana
ATTORNEYS FOR APPELLEE
GARY MORGAN
Brian S. Jones
Joel T. Nagle
Bose McKinney & Evans LLP
Indianapolis, Indiana
ATTORNEYS FOR APPELLEE
CROWE HORWATH LLP
Eric A. Riegner
Maggie L. Smith
Frost Brown Todd LLC
Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015 Page 1 of 12
Magic Circle Corp. d/b/a Dixie December 30, 2015
Chopper, Arthur Evans, Wesley Court of Appeals Case No.
Evans, Jeffrey Haltom, 71A03-1507-PL-790
Appellants-Plaintiffs, Appeal from the St. Joseph Circuit
Court
v. The Honorable Michael G.
Gotsch, Judge
Simon Wilson, Gary Morgan, Trial Court Cause No.
and Crowe Horwath LLP, 71C01-1404-PL-93
Appellees-Defendants
Baker, Judge.
[1] Appellants Magic Circle Corporation (Magic Circle), Arthur Evans, Wesley
Evans, and Jeffrey Haltom appeal the judgment of the trial court dismissing
their complaint for fraud against Simon Wilson and Gary Morgan. Finding
that the trial court did not err in concluding that the complaint failed to allege
fraud with the particularity required by Indiana Trial Rule 9(B), we affirm.
Facts
[2] For more than thirty years, Magic Circle designed and manufactured
lawnmowers under the name Dixie Chopper. In late 2008 and early 2009,
Magic Circle hired Simon Wilson and Gary Morgan to help steer the company
through difficult economic times. Magic Circle alleges that, during their time
with the company, Wilson and Morgan knowingly misrepresented the
company’s financial position. It was not until 2013 that members of the
company’s board realized that the company had incurred massive losses
Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015 Page 2 of 12
throughout this period. Morgan had left the company in 2011 and the board
accepted Wilson’s resignation in 2013.
[3] On December 15, 2014, after having been given an opportunity to amend its
first complaint,1 Magic Circle filed its second amended complaint against
Wilson and Morgan alleging fraud and breach of fiduciary duty. Three
shareholders, Arthur Evans, Wesley Evans, and Jeffrey Haltom, also joined as
plaintiffs, alleging that they had been personally injured when they were
induced to buy more of the company’s stock as a result of Wilson’s and
Morgan’s misrepresentations. The complaint requested that the trial court
award Magic Circle attorney fees as well as treble damages.2
[4] On February 17, 2015, Wilson filed a motion to dismiss Magic Circle’s
complaint, alleging that the complaint failed to plead fraud with the
particularity required by Indiana Trial Rule 9(B) and that the plaintiffs had
therefore failed to state a claim under Indiana Trial Rule 12(B)(6). On May 15,
2015, after hearing argument on the issue, the trial court granted the motion,
and dismissed Magic Circle’s claims against Wilson and Morgan with
prejudice. The trial court reasoned that the allegations were too general to meet
Rule 9(B)’s particularity requirement. As to the individual plaintiffs’ claims of
personal damage, the trial court reasoned that these claims could not be brought
1
Appellants have not included the original complaint in the record.
2
Magic Circle also alleged malpractice against Crowe Horwath, the company’s former accounting firm.
These claims do not concern us here as the trial court has yet to rule on them.
Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015 Page 3 of 12
directly, but instead must be brought as derivative claims under Indiana Trial
Rule 23.1, with which the plaintiffs had failed to comply. All plaintiffs now
appeal.
Discussion and Decision
I. Direct v. Derivative Claims
[5] The complaint at issue in this case makes several claims that can be divided into
two categories. First, there are claims brought by Magic Circle against Wilson
and Morgan for alleged harm done to the corporation. Second, there is a claim
brought directly by the above-mentioned individual plaintiffs for personal
damages resulting from the same fraud. The trial court dismissed these latter
claims, determining that they could not be brought directly, and we briefly
comment on why the trial court was correct.
[6] The trial court determined that the individual plaintiffs, being Magic Circle
shareholders, had suffered no injury distinct from the alleged injury to Magic
Circle and, therefore, could not sue directly. This Court has recognized that
“shareholders of a corporation may not bring actions in their own name to
redress an injury to the corporation.” PricewaterhouseCoopers, LLP v. Massey, 860
N.E.2d 1252, 1257 (Ind. Ct. App. 2007).
[7] The plaintiffs attempt to distinguish their injuries by pointing out that they
“executed promissory notes to acquire funds to purchase more shares of Magic
Circle.” Reply Br. p. 17. They argue that, because they are personally liable on
these notes, they have been personally injured and should be allowed to seek
Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015 Page 4 of 12
recovery directly. Id. However, this Court has heard this argument before and
held that
The plaintiffs can show no such injury because they cannot claim
any cognizable injury aside from the diminution in share value. .
. . Their only injury is to repay the funds that they themselves
borrowed to purchase stock. This injury makes them no different
than any other shareholder.
PricewaterhouseCoopers, 860 N.E.2d at 1262. In so holding, we agreed with the
reasoning of the Seventh Circuit that
“To hold otherwise would lead to an absurd result. Under the
plaintiffs’ theory, any shareholder who funded a stock purchase
through any form of loan—whether a margin loan, an advance
on a home equity line or even a loan from relatives—could claim
a separate and distinct injury because they were now ‘personally
liable’ on a loan instrument.”
Id. (quoting Massey v. Merrill Lynch & Co., Inc., 464 F.3d 642, 649 (7th Cir.
2006)). Here, as the diminution in the share value of Magic Circle’s stock is the
sole reason for plaintiffs’ injury, their direct claims must likewise fail. 3 With
this issue out of the way, we now turn to the central question presented in this
case: whether the complaint alleged fraud with sufficient particularity.
3
Magic Circle attempts to argue that we should apply the exception outlined in Barth v. Barth, where our
Supreme Court held that “‘[i]n the case of a closely held corporation, the court in its discretion may treat an
action raising derivative claims as a direct action’” under certain circumstances. 659 N.E.2d 559, 562 (Ind.
1995) (quoting A.L.I., Principles of Corporate Governance § 7.01(d)). However, Magic Circle fails to argue that
it is, in fact, a closely held corporation and has failed to give us any information, such as the number of
shareholders it has, from which we could make this determination. This argument therefore fails.
Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015 Page 5 of 12
II. Pleading Fraud
[8] A person commits fraud when he has, (1) with knowledge or reckless ignorance
of falsity, (2) made a material misrepresentation of past or existing facts, (3)
which caused the complainant to rely on the misrepresentation to the
complainant’s detriment. Ohio Farmers Ins. Co. v. Ind. Drywall & Acoustics, Inc.,
970 N.E.2d 674, 684 (Ind. Ct. App. 2012). While our rules of trial procedure
generally require only notice pleading, Indiana Trial Rule 9(B) provides an
exception for complaints alleging fraud. Dutton v. Int’l Harvester Co., 504 N.E.2d
313, 318 (Ind. Ct. App. 1987). The rule, which is nearly identical to Federal
Rule of Civil Procedure 9(B), requires that:
In all averments of fraud or mistake, the circumstances
constituting the fraud or mistake shall be specifically averred.
Malice, intent, knowledge, and other conditions of the mind may
be averred generally.
T.R. 9(B); McKinney v. State, 693 N.E.2d 65, 71 (Ind. 1998).
[9] Like its federal counterpart, Rule 9(B) serves the objectives of deterring
groundless suits or “fishing expeditions,” protecting the reputations of
defendants, and providing defendants with sufficient information to enable
them to prepare a defense. McKinney, 693 N.E.2d at 72; Vicom, Inc. v. Harbridge
Merchant Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994). In light of these
objectives, we have held that this rule requires plaintiffs to state the time, the
place, the substance of the false representations, the facts misrepresented, and to
identify what was procured by fraud. Ohio Farmers, 970 N.E.2d at 683; see also
Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015 Page 6 of 12
DiLeo v. Ernst & Young, 901 N.E.2d 624, 627 (7th Cir. 1990) (observing that the
rule requires plaintiffs to state “the who, what, when, where, and how: the first
paragraph of any newspaper story”).
[10] Here, Magic Circle attempts to comply with Rule 9(B) by designating ten
paragraphs in the middle of its complaint that purport to “detail the time, place,
and specific content of false statements of fact by Morgan and Wilson that are
formally recorded and documented in the Company’s corporate records.”
Appellant’s App. p. 18. However, close inspection of these paragraphs shows
that they fail, both individually and collectively, to state a claim of fraud with
the specificity necessary to effectuate Rule 9(B)’s purpose.
[11] We take the first of these paragraphs as an example. It reads:
As recorded in the minutes for the Annual Shareholders meeting
held March 11, 2009, at the offices of Magic Circle in
Coatesville, Indiana . . . :
Mr. Wilson indicated the company began the year in
a serious cash shortfall and the requirement for a
turn-around plan. A plan was created and is kept on
file at the company’s headquarters. The company
struggled throughout 2009 but the actions enacted in
the year left the company solvent and in good
position for the future.
These statements were materially false and misleading. The
actions of he and Morgan had not left the company “solvent and
in a good position.” In fact, Morgan and Wilson were materially
misstating the company’s financial results to the shareholders, all
of which Crowe [Magic Circle’s accountant] failed to detect by
Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015 Page 7 of 12
failing to conduct GAAS audits. The minutes document[] [that]
Morgan and Wilson provided the shareholder[s] written reports
about the company’s financial position and business operations.
Those report[s] were materially inaccurate, mischaracterized
Morgan and Wilson’s actions, and provided a materially
inaccurate picture of the company[’s] overall position and its
prospects. Each of the individual Plaintiffs attended the meeting,
among others.
Id. at 18-19.
[12] We first note our bewilderment at Magic Circle’s decision to quote directly
from the minutes of the meeting, which by their very nature present a terse
summary of events rather than a particularized account. As a result of this, the
paragraph fails to provide us enough information to get a true picture of events.
First, we cannot gather who made the statements at issue. While the first
sentence of the minutes attributes a statement to Wilson, it is not clear whether
the sentences that follow refer to his statements. Furthermore, although the
minutes only refer to Wilson, the paragraph goes on to conclude that Wilson
and Morgan “were materially misstating the company’s financial results to the
shareholders.” Id. In short, we do not know who said what and, even were we
to assume that both men spoke in unison, we would not know what was said.
[13] The paragraph also alleges that Morgan and Wilson gave shareholders
“materially inaccurate” reports that “mischaracterized” their actions. Id. at 19.
It does not, however, specify what was inaccurate, how the inaccuracy was
material, what actions Wilson and Morgan had taken, or how they had
mischaracterized these actions. Rule 9(B) requires that these questions be
Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015 Page 8 of 12
answered with some specificity, and conclusory declarations, such as “[the
reports] provided a materially inaccurate picture of the company[’s] overall
position and its prospects,” come no closer to meeting this requirement. Id.
The contention that “[Wilson] and Morgan’s actions had not left the company
‘solvent and in a good position’” is similarly vague. Id. at 18 (emphasis added).
Was the company not solvent? Was it not in a good position? Or was is not
both of these things at once? Does Magic Circle mean to say that the company
was unable to pay its debts, or does it mean only to say that Wilson and
Morgan had done nothing to help the cause? Magic Circle may view such
questions as nitpicking, but we honestly do not know the answers.
[14] The complaint’s next paragraph displays similar shortcomings. Magic Circle
alleges:
As recorded in the minutes for the Annual Shareholders meeting
for fiscal year 2009, held November 11, 2010, at the offices of
Magic Circle in Coatesville, Indiana, Wilson:
[C]ompleted a review of the 2009 financial
performance of the company. Mr. Wilson discussed
in detail the issue[s] the company faced in early 2009
and the resulting actions that were required to be
taken. He discussed the action plan developed in
concert with the Keystone consulting group that was
adopted by the board in early April 2009. The plan
was required to be presented to PNC bank due to
financial defaults experienced at the end of quarter
two. PNC accepted the plan and the loan was
modified in early June (copy of the plan and First
Amendment Agreement attached). Mr. Wilson
Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015 Page 9 of 12
reviewed the 1st half of 2010 performance as these
were available on the meeting date. There were
several questions from Mr. Stan Morton in regards to
measure of margins that were answered by Mr.
Wilson and Mr. Morgan.
Each of these statements was materially false. The financial
performances Wilson stated for 2009 was materially inflated.
The actions he claimed had been taken were not in fact taken, the
performance for the first half of 2010 provided was materially
inflated, and the information Wilson provided PNC was
materially inaccurate, as the “plan” he provided was never
intended to be achieve[d] except through materially inflating the
company’s actual financial results. Morgan attended the meeting
and, as noted, specifically answered questions that confirmed Mr.
Wilson’s false statements. Attending this meeting were each of
the individual Plaintiffs in this lawsuit, among others.
Id. at 19.
[15] The minutes cited here do a slightly more thorough job of indicating who was
speaking at this meeting, but we still have no true sense of what was actually
going on. We are simply assured that everything Wilson said was false, again
without being told what he said. We are also asked to imagine a plan that
Wilson presented to a bank and assume, once again, that its contents were
materially inaccurate. There is no mention of the substance of any of the
alleged misrepresentations other than the perfunctory assertion that they
generally dealt with finance. Then, in perhaps the complaint’s most dubious
moment, we are given the following word puzzle: “Morgan . . . specifically
answered questions that confirmed Mr. Wilson’s false statements.” Id. We will
Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015 Page 10 of 12
leave it to the interested reader to determine how many possible meanings can
be derived from this phrase.
[16] The complaint continues on in a similar fashion, perhaps in the hope that it will
eventually land on something specific enough to satisfy Rule 9(B). However,
even if the complaint had managed to include a paragraph which offered a
sufficiently detailed description of events, it would not be enough at this point.
It is clear from the complaint that Magic Circle believes all of the alleged
misrepresentations it purports to detail are important and that the fraud came
about through Magic Circle’s reliance on the whole of these representations. Id.
at 30. Thus, even had the complaint clearly alleged one instance of Wilson or
Morgan knowingly misrepresenting information, it would still fail to plead
fraud, as Magic Circle does not claim to have detrimentally relied on any one
instance alone.
[17] The complaint also contains a claim by Magic Circle that Wilson and Morgan
breached their fiduciary duty. The trial court dismissed this claim for vagueness
as well because, although it is styled differently, it relies on the alleged fraud
and therefore sounds in fraud. This decision was correct. Rule 9(B) has been
held to apply to claims “grounded in fraud,” and such is the case here, as Magic
Circle’s breach of fiduciary duty claim is based on the same allegations of
fraudulent conduct against Wilson and Morgan as its fraud claim. McKinney,
693 N.E.2d at 72.
Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015 Page 11 of 12
[18] We find that the appellants’ complaint is insufficiently specific when judged in
light of the purposes Rule 9(B) is intended to serve. While the appellants ask
for another opportunity to plead this matter, they do not argue that more time
will allow them to discover any relevant information that was not already in
their possession at the time of this complaint’s filing. About eighteen months
passed between the filing of the original complaint and the dismissal of the
second amended complaint, during which the appellants were given more than
one opportunity to plead this matter with sufficient specificity. As one of the
purposes behind Rule 9(B) is to put an end to meritless litigation brought in the
hope of a settlement, we see no reason to drag this out further, and we believe
that the trial court was correct to dismiss this case with prejudice.
[19] The judgment of the trial court is affirmed.
Bradford, J., and Pyle, J., concur.
Court of Appeals of Indiana | Memorandum Decision 71A03-1507-PL-790 | December 30, 2015 Page 12 of 12