Sussex Financial Enterprises, Inc. v. Bayerische Hypo-Und Vereinsbank AG et al

Filing 47

ORDER by Judge Samuel Conti granting 38 Motion to Amend/Correct ; Sussex Financial Enterprises, Inc. is required to E-FILE the amended document (sclc2, COURT STAFF) (Filed on 7/1/2009)

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For the Northern District of California

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

SUSSEX FINANCIAL ENTERPRISES, INC., Plaintiff, vs. BAYERISCHE HYPO-UND VEREINSBANK AG, a/k/a HYPOVEREINSBANK; HVB RISK MANAGEMENT PRODUCTS, INC.; HVB U.S. FINANCE, INC., f/k/a HVB STRUCTURED FINANCE, INC.; and DOES 1-100, inclusive, Defendants. I. INTRODUCTION

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Case No. 08-4791 SC ORDER GRANTING PLAINTIFF'S MOTION FOR LEAVE TO AMEND COMPLAINT

This matter comes before the Court on the Motion for Leave to Amend Complaint ("Motion") filed by Plaintiff Sussex Financial Enterprises, Inc. ("Plaintiff" or "Sussex"). Docket No. 38.

Plaintiff attached to the Motion a copy of the proposed First Amended Complaint ("Proposed FAC"). Id. Ex. A. Defendants

Bayerische Hypo-Und Vereinsbank AG, HVB Risk Management Products, Inc. and HVB U.S. Finance, Inc. (collectively, "Defendants" or "HVB") filed an Opposition and Plaintiff submitted a Reply. Docket Nos. 44, 46. GRANTED. /// /// For the reasons stated herein, the Motion is

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II.

BACKGROUND According to the Complaint, this action concerns a finance

program known as Custom Adjustable Rate Debt transactions, or "CARDS." Docket No. 1 ("Compl.") ¶ 6. Under the program,

Defendants loaned money to limited liability companies, and clients of Sussex subsequently became jointly and severally liable on the loans in return for receiving fifteen percent of the loan. Id. Sussex received investment banking fees from the CARDS

transactions, and Sussex paid Defendants loan origination fees.1 Id. Participation in the transactions was supposed to result in Id. ¶ 9. In order for the clients

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tax benefits for the clients.

to receive those tax benefits, the loans were supposed to be set up and funded in separate accounts in the year in which the loans were made, and all parties to the loans had to have the intent of renewing the loans for thirty (30) years. Id. ¶¶ 11, 15.

According to Sussex, Defendants failed to set up the loans in separate accounts in the year in which they were made, and falsely represented that they had done so. Id. ¶¶ 16-17. Sussex learned

of these false representations when Defendants entered into a Plea Bargain/Deferred Prosecution Agreement with the U.S. Department of Justice. Id. ¶ 17. Defendants did not renew some of the loans Id. ¶ 18. Sussex alleges that when

after the first reset period.

Defendants entered into the loans, Defendants did not have the intent to renew the loans. Id. ¶ 18.

In the Complaint, Sussex asserts two causes of action: (1) Sussex Financial Enterprises, Inc., was formerly known as Chenery Associates, Inc. Compl. ¶ 3. 2
1

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fraud for failing to properly fund the loans; and (2) fraud for failing to have the intent to renew the loans. Id. ¶¶ 26-35.

Sussex seeks leave to add a third cause of action under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961, et seq. Mot. at 3.

III. LEGAL STANDARD With leave of the court, a party may amend its pleadings, and "[t]he court should freely give leave when justice so requires." Fed. R. Civ. P. 15(a)(2). "extreme liberality." This policy should be applied with

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Eminence Capital, LLC v. Aspeon, Inc., 316 However, district courts may

F.3d 1048, 1051 (9th Cir. 2003).

deny amendments that would cause undue prejudice to the defendant, that are sought in bad faith, that are futile, or that would cause undue delay. 1999). Bowles v. Reade, 198 F.3d 752, 757-58 (9th Cir.

Ordinarily, courts will defer consideration of challenges

to the merits of a proposed amended pleading until after leave to amend is granted and the amended pleading is filed. Netbula, LLC

v. Distinct Corp., 212 F.R.D. 534, 539 (N.D. Cal. 2003)

IV.

DISCUSSION Sussex seeks leave to file the Proposed FAC adding a RICO

cause of action.

The Complaint in this case was filed on October See Compl.;

17, 2008, and Defendants answered on January 5, 2009. Docket No. 10 ("Answer").

The discovery cut-off date is December See

31, 2009, and the case is set for trial on August 2, 2010. Docket No. 17.

Therefore, granting leave to amend will not cause 3

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undue delay or prejudice Defendants, and there is nothing to suggest bad faith. Defendants contend the proposed amendments would be futile because (1) adding a RICO cause of action is barred by section 107 of the Private Securities Litigation Reform Act ("PSLRA"), Pub. L. No. 104-67, 109 Stat. 737, 758 (1995), which amended the RICO statute to eliminate securities fraud as a predicate act upon which to base a RICO claim; and (2) the Proposed FAC fails to plead the RICO cause of action with the requisite particularity. Opp'n at 2. As amended by the PSLRA, the RICO statute provides that "no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of [the RICO statute]." 18 U.S.C. § 1964(c). The Ninth

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Circuit has dismissed RICO claims in tax shelter cases that are based upon acts that are actionable as securities fraud. v. KPMG LLP, 476 F.3d 756, 761 (9th Cir. 2007). Swartz

Here, both the See

Complaint and the Proposed FAC focus on the CARDS program. Compl. ¶¶ 6-25; Proposed FAC ¶¶ 6-25.

It is not clear to the

Court that the CARDS program involved the purchase or sale of securities. At this particular stage of the proceedings, the

Court is not persuaded that the proposed amendment is futile due to the PSLRA. Defendants contend the Proposed FAC fails to plead the RICO cause of action with the requisite particularity. Opp'n at 5.

The particularity requirement must be followed in RICO actions alleging the predicate act of mail fraud. 4 Lancaster Cmty. Hosp.

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v. Antelope Valley Hosp. Dist., 940 F.2d 397, 405 (9th Cir. 1991). A plaintiff satisfies the particularity requirement if it identifies "the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations." Semegen v. Weidner, 780 F.2d 727, 735 (9th Cir. 1985)(citations omitted). Here, the Court finds that HVB can prepare an adequate

response to the RICO cause of action based on the allegations in the Proposed FAC relating to HVB's allegedly fraudulent involvement in the CARDS program. See Proposed FAC ¶¶ 6-25. At

this particular stage of the proceedings, the Court is not persuaded that the proposed amendment is futile due to a failure to plead the RICO cause of action with the requisite particularity.

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V.

CONCLUSION For the reasons stated above, the Court GRANTS Plaintiff's

Motion for Leave to Amend Complaint.

The Proposed FAC must be

filed within thirty (30) days of this Order.

IT IS SO ORDERED.

Dated: July 1, 2009 UNITED STATES DISTRICT JUDGE

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