KIRSCHNER v. WACHOVIA CAPITAL MARKETS, LLC et al

Filing 122

ORDER granting in part and denying in part 88 Motion to Dismiss. AND now, this 16th day of September, 2009, upon consideration of the Motion to Dismiss filed by Defendants, Wachovia Capital Markets, LLC d/b/a Wachovia Securities and Wachovia Bank, National Association (Docket No. 88 ), it is ordered that said Motion is granted in part and denied in part. Count Ten (against Wachovia for Breach of Fiduciary Duty) is dismissed, with prejudice. The motion is denied in all other respects. Signed by Judge Donetta W. Ambrose on 09/16/2009. (sps, )

IN THE UNITED STATES DISTRICT COURT F O R THE WESTERN DISTRICT OF PENNSYLVANIA In Re: Le-Nature's Inc. M D L Docket no. 2021 W D P A Docket no. 2:09-mc-00162

M a rc S. Kirschner, solely in his capacity as th e Liquidation Trustee of the Le-Nature's L iq u id a tio n Trust, Plaintiff, vs. W a c h o v ia Capital Markets, LLC, et al., Defendants.

) ) ) ) ) ) ) ) )

C iv il Action No. 08-1518

A M B R O S E , Chief District Judge O P IN IO N AN D O R D E R OF COURT P e n d in g before the court is a Motion to Dismiss filed by Defendants W a c h o v ia Capital M a rk e ts , LLC d/b/a W a c h o v ia Securities and W a c h o v ia Bank, National Association

("W a c h o v ia ") seeking to dismiss all claims asserted against them (Counts One, Two, Five, Six, N in e , Ten, Twelve, Thirteen, Sixteen, Seventeen, Eighteen, Nineteen, Twenty, and TwentyO n e )1 in Plaintiff's Complaint. (Docket No. 88 at 8-cv-1518 and Docket No. 65 at 9-mc-162).2
Count One of the Com p la in t is a claim for violations of the Racketeer Influenced and Corrupt O r g a n iz a tio n s Act ("RICO"), 18 U.S.C. § 1962(c). (Docket No. 1, ¶¶ 190-201). Count Two is a claim for v io la tio n s of RICO, 18 U.S.C. § 1962(d). (Docket No. 1, ¶¶ 202-209). Count Five is a claim for fraud. (Docket No. 1, ¶¶ 233-243). Count Six is a claim for conspiracy to com m it fraud. (Docket No. 1, ¶¶ 2442 5 4 ) . Count Nine is a claim for aiding and abetting fraud. (Docket No. 1, ¶¶ 275-285). Count Ten is a c la im for breach of fiduciary duty. (Docket No. 1, ¶¶ 286-291). Count Twelve is a claim for aiding and a b e ttin g breach of fiduciary duty. (Docket No. 1, ¶¶ 296-307). Count Thirteen is a claim for n e g lig e n c e /n e g lig e n t m is r e p r e s e n ta tio n . (Docket No. 1, ¶¶ 308-313). Count Sixteen is a claim for a v o id a n c e of preferential transfers. (Docket No. 1, ¶¶ 322-328). Count Seventeen is a claim for a v o id a n c e of intentional fraudulent transfers under section 548(a)(1)(a) of the Bankruptcy Code. (Docket N o . 1, ¶¶ 329-332). Count Eighteen is a claim for avoidance of intentional fraudulent transfers under S e c tio n 544 of the Bankruptcy Code. (Docket No. 1, ¶¶ 333-338). Count Nineteen is a claim for 1
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Plaintiff, Marc S. Kirschner ("Kirschner"), in his capacity as Liquidation Trustee of the L e -N a tu re ' s Liquidation Trust, filed a Brief in Opposition thereto (Docket No. 108), to which W a c h o v ia , with leave of court, filed a Reply (Docket No. 112). After careful consideration of the s a m e , W a c h o v ia 's Motion (Docket No. 88) is granted in part and denied in part as more fully set f o rth below. O P IN IO N I. F a c tu a l Background K irs c h n e r is a trustee appointed by the bankruptcy court. The debtor is Le-Nature's Inc. ("L e -N a tu re 's " or "the corporation"). Le-Nature's was a beverage manufacturer, bottler and Gregory Podlucky ("Podlucky") was the chief

d is trib u to r based in Latrobe, Pennsylvania.

e x e c u tiv e officer of Le-Nature's, its majority shareholder, and the chairman of its board. Complaint ¶¶ 1-34. Podlucky's brother, Jonathan Podlucky, served as the chief operating officer of LeN a tu re 's , David Getzik served as the chief financial officer, Robert Lynn was the executive vice p re s id e n t, and Andrew Murin was an advisor to Podlucky. Podlucky's brother, Getzik, Lynn and M u rin all were members of Le-Nature's board of directors and all were nominated to the board b y Podlucky. Complaint ¶¶ 35-37. At times, these individuals are collectively referred to as "the I n s id e r s ." Le-Nature's produced its first beverage product in 1992, and by 2005, claimed to be

a v o id a n c e of constructive fraudulent transfers under Section 548(a)(1)(B) of the Bankruptcy Code. (Docket No. 1, ¶¶ 339-343). Count Twenty is a claim for avoidance of constructive fraudulent transfers u n d e r Section 544 of the Bankruptcy Code. (Docket No. 1, ¶¶ 344-351). Count Twenty-One is a claim for r e c o v e r y of the preferential transfers, the Section 548 intentional fraudulent transfers, the intentional f r a u d u le n t transfers, the Section 548 constructive fraudulent transfers, and the constructive fraudulent tr a n s f e r s . (Docket No. 1, ¶¶ 352-355). 2 The Motion to Dism is s is dual filed at the civil action num b e r (08-cv-1815) and the m is c e lla n e o u s n u m b e r (09-m c - 1 6 2 ) . Docket num b e r s from this point forward will refer solely to the civil action num b e r . 2

producing nearly 60 different products. The growth in the alleged variety of products it sold p u r p o rte d ly spurred growth in its gross sales, net sales and profits. Kirschner, however, has a s s e r te d that between 2002 and 2005, due to a fraudulent scheme advanced by Podlucky along w ith the Insiders, Le-Nature's reported sales were grossly disproportionate to its actual sales. Complaint ¶¶ 42, 44-45. These inflated sales figures enabled Le-Nature's to raise capital with the assistance of th e Defendants, in particular, W a c h o v ia , Krones USA, Krones AG, Volker Kronseder, and Heinz S o m m e r (hereinafter referred to collectively as "Krones"), CIT Group/Equipment Financing, Inc. ( h e r e in a f te r "CIT"), Marshall Financial, Inc., and Marshall Investments Corporation (hereinafter " M a r s h a ll" ) . Together with Podlucky and the Insiders, these parties engaged in a form of a

"P o n z i" scheme ­ constantly raising money and incurring ever-increasing debts to refinance in v e s to rs whole cultivating the image of a legitimate profit-making business. Complaint ¶¶ 1-2. S p e c if ic a lly, Kirschner alleges that Krones inflated prices on equipment for new LeN a tu re 's bottling lines and assisted Podlucky and the Insiders in securing financing based on th e s e inflated prices. Kirschner asserts that CIT and Marshall knew the equipment prices were in f la te d but still arranged for "synthetic lease" equipment lease financing base on those bogus p ric e s , and Krones, CIT, and Marshall reaped significant fees by using these inflated figures w h i l e Podlucky and the Insiders received the excess revenue from the inflated pricing. Complaint ¶¶ 11, 13, 16-18, 134-142. In addition to the actions of Krones, CIT, and Marshall, from April 2003 through D e c e m b e r 2005, W a c h o v ia arranged a series of credit facilities for Le-Nature's. In an effort to s e c u re lenders for each facility, W a c h o v ia assisted Le-Nature's in the preparation and d is trib u tio n of a "Confidential Information Memorandum," but these memoranda materially

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misrepresented (among other things) Le-Nature's sales and profits. These credit facilities were s u p p o s e d to generate funds for the expansion of Le-Nature's production lines. Although LeN a t u r e ' s did expand its production lines by expanding the capacity of its Latrobe, Pennsylvania p la n t in 2003 and by building a new bottling plaint in Phoenix, Arizona in 2005, Kirschner a s s e rts these expansions were unnecessary given the false sales figures. Kirschner further

a v e rs the credit facilities were undertaken to finance and prop up Le-Nature's slumping o p e ra tio n s . Complaint ¶¶ 42-46, 60, 62, 72, 76, 81, 96. In May 2006, Le-Nature's minority preferred shareholders (who were represented by th re e independent directors on the Le-Nature's board), initiated an action in the Delaware C h a n c e ry Court against the corporation, Podlucky, his brother, Murin and Lynn.3 In June 2006, th e Chancery Court entered a preliminary injunction restraining Le-Nature's from taking certain s te p s , such as making capital expenditures in amount in excess of $1,000, without minority s h a re h o ld e r approval. Complaint ¶ 48. In October 2006, Le-Nature's preferred minority shareholders were told that Podlucky h a d converted funds deposited by one of the corporation's equipment lessors, AIG. This

in f o rm a tio n was passed to the shareholders upon AIG's discovery that Krones had transferred n e a rly $20 million of AIG's deposit to Le-Nature's based on a forged AIG letter "authorizing" the tra n s f e r of funds. On October 20, 2006, following the revelation of the forgery, the Delaware C h a n c e ry Court issued a temporary restraining order, and on October 27, 2006, the Court

Kirschner's Com p la in t explains that in addition to the credit facilities, in 2000 and 2002, LeN a tu r e 's issued over 8 m illio n shares of convertible preferred stock. This stock was purchased by three in v e s tm e n t funds ­ the "Pelham Fund" and two separate "Baum Funds." Pelham Fund's nom in e e to LeN a tu r e 's Board of Directors was Venita Fields, and the Baum Funds' nom in e e s were Ruth Huet and Ford B a r th o lo m e w . In 2006, W illia m Thom a s replaced Ford Bartholom e w . These board m e m b e r s allegedly h a d no knowledge of the "form , substance or m a g n itu d e " of the alleged schem e and when they becam e a w a r e of it, they filed for relief in the Chancery Court. Com p la in t ¶¶ 183-185. 4

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approved the preferred minority shareholders' request for the appointment of a custodian for LeN a tu re 's , appointing Kroll Zolfo Cooper ("KZC") as custodian.4 On November 1, 2006, the

m a n a g in g director of KZC filed an affidavit with the Chancery Court detailing financial d is c re p a n c ie s at Le-Nature's. Also on November 1, 2006, several of Le-Nature's creditors

in itia te d involuntary bankruptcy proceedings. Complaint ¶¶ 49-53. Since the initiation of the bankruptcy proceedings, the investigation led by Kirschner has u n c o v e re d two separate accounting systems at Le-Nature's: one system ("Navision") tracked a c tu a l sales, accounts payable, inventory, etc., while the other system ("Real W o rld ") contained p rim a rily fraudulent numbers to which only Podlucky and one Le-Nature's employee (Ms. A n d re yc a k )5 had access. In addition, a secret room was discovered at the Latrobe bottling
I take judicial notice of the Chancery Court's October 27, 2006, order appointing a custodian to take "possession and control of Le-Nature's . . . its business, operations and . . . Assets, and to te m p o r a r ily adm in is te r and m a n a g e the Assets, operate the [Le-Nature's] business . . . " until further order o f the Court, and holding Le-Nature's and its Assets were in custodia legis, m e a n in g they could not be d is tr a in e d , nor otherwise interfered with by a private person. (Docket No. 91-2, ¶¶ 2-3). The Order also states, "... until otherwise ordered by the Court . . . [Podlucky, Podlucky's brother, M u r in , and Lynn] . . . shall cooperate with the Custodian . . . and shall accept the instructions of the C u s to d ia n with respect to [Le-Nature's] and the Assets and shall act with and under the supervision, c o n s e n t and instruction of the Custodian with respect to sam e and, in so doing, are hereby restrained and e n j o in e d from (I) m a k in g , or com m ittin g [Le-Nature's] to m a k e , any expenditure of Com p a n y funds, (ii) a c c e s s in g tam p e r in g with or destroying any [Le-Nature's] property, books or records, (iii) selling, leasing or o th e r w is e disposing of . . . any assets of [Le-Nature's] . . . (iv) m a k in g , or com m ittin g [Le-Nature's] to m a k e , any loans, advances or investm e n ts of any kind or nature, or entering into, or com m ittin g [LeN a tu r e 's ] to enter into, any guarantees, and (v) causing or com m ittin g [Le-Nature's] to incur any debt or o th e r w is e to becom e liable to any party for any reason. [Le-Nature's and Podlucky, Podlucky's brother, M u r in , and Lynn] shall not take any actions . . .without the consent of the Custodian . . .." Id. ¶ 4. Finally, the Order notes, "...until otherwise ordered by the Court . . . [Podlucky, Podlucky's b r o th e r , Murin, and Lynn] are hereby restrained and enjoined from withdrawing or transferring any funds f r o m [Le-Nature's] bank or other financial accounts. . . .The Custodian m a y take such action and incur ... s u c h costs and charges, and m a k e disbursem e n ts as m a y be actually necessary for taking possession a n d control of the Assets, preserving the Assets, operating [Le-Nature's] business in the ordinary course... In the event that the Custodian determ in e s that it is in the best interest of [Le-Nature's] to take any action o th e r than in the ordinary course of business, the Custodian shall m a k e such a recom m e n d a tio n as it d e e m s appropriate to [Le-Nature's] board of directors; . . . if the board of directors does not unanim o u s ly a p p r o v e the recom m e n d a tio n action, [Le-Nature's] m a y apply to the Court on notice to plaintiffs and d e f e n d a n ts for authorization to take such action as it deem s to be necessary or desirable." Id. ¶ 9. 5 Andreycak is Le-Nature's form e r Director of Accounting. In or about April 2008, Andreycak p le a d e d guilty to four felony counts of bank fraud, wire fraud, conspiracy, and falsifying incom e tax returns. Com p la in t ¶ 57. 5
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facility which held safes that contained jewelry purchased by Podlucky.

Podlucky also

p u rc h a s e d over 8,000 Lionel model trains and was building a mansion for his personal re s id e n c e . Kirschner avers that the jewelry, trains and residence all were paid for with monies P o d lu c k y embezzled from Le-Nature's through the "scheme." Complaint ¶ 54. II. L e g a l Analysis A. L e g a l Standard

W a c h o v ia filed its Motion to Dismiss pursuant to Rules 9(b) and 12(b)(6) of the Federal R u le s of Civil Procedure. S u p re m e Court has held: W h ile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need d e ta ile d factual allegations, a plaintiff's obligation to provide the grounds of his e n title m e n t to relief requires more than labels and conclusions, and a formulaic re c ita tio n of the elements of a cause of action will not do. Factual allegations m u s t be enough to raise a right to relief above the speculative level, on the a s s u m p tio n that all the allegations in the complaint are true (even if doubtful in f a c t). B e ll Atlantic Co. v. Twombly, 550 U.S. 544, 555 (2007) (citation and footnote omitted); see also P h illip s v. County of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (a plaintiff's factual allegations m u s t be enough to raise a right to relief above the speculative level). Most recently, in Ashcroft v. Iqbal, ___ U.S.___, 129 S. Ct. 1937 (2009), the Supreme C o u rt held, ". . . a complaint must contain sufficient factual matter, accepted as true, to state a c la im to relief that is plausible on its face. A claim has facial plausibility when the plaintiff pleads f a c tu a l content that allows the court to draw the reasonable inference that the defendant is liable f o r the misconduct alleged." Iqbal, 129 S. Ct. at1949 (citations omitted). In Iqbal, the Court specifically highlighted the two principles which formed the basis of th e Twombly decision: First, for the purposes of a motion to dismiss, courts must accept as true W h e n deciding whether to grant or deny a 12(b)(6) motion the

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all factual allegations set forth in the complaint, but courts are not bound to accept as true any le g a l conclusions couched as factual allegations. Id. at 1949-50; see also Fowler v. UPMC

S h a d ys id e , __ F.3d __, No. 07-4285, 2009 W L 2501662 (3d Cir. Aug. 18, 2009). Second, a c o m p l a i n t will only survive a motion to dismiss if it states a plausible claim for relief, which re q u ire s a court to engage in a context-specific task, drawing on the court's judicial experience a n d common sense. Iqbal, 129 S. Ct. at 1950; Fowler, _ F.3d at _. W h e re well-pleaded facts d o not permit the court to infer more than the mere possibility of misconduct, the complaint has a lle g e d ­ but has not shown ­ the complainant is entitled to relief. Iqbal, 129 S. Ct. at 1950 (c itin g Fed. R. Civ. P. 8(a)(2)). B . RICO and Common Law Claims 1 . Cause of Damages W a c h o v ia 's first argument is that Kirschner's claims fail because W a c h o v ia did not c a u s e Le-Nature's to suffer any legally cognizable damages. (Docket No. 89, at 7-13).

Specifically, W a c h o v ia asserts that the Complaint attempts to assert two types of damage: (1) "a rtif ic ia l prolongation of [the] failed and insolvent enterprise . . . by being kept afloat with s p u rio u s debt," and (2) losses from the theft and active malfeasance of the Insiders. Id. at 8. W a c h o v i a argues that the first allegation is an attempt to assert a "deepening insolvency" theory o f recovery that must fail under precedent set by the Court of Appeals for the Third Circuit in In re CitX Corp., 448 F.3d 672 (3d Cir. 2006). W a c h o v ia contends that the second allegation

s ta te s a claim for damages against the Insiders but not against W a c h o v ia . Id. I address each o f these arguments in turn. a . "Deepening Insolvency" In Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340 (3d

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Cir. 2001), a matter arising out of the bankruptcy of two lease financing corporations that a lle g e d ly were operated as a "Ponzi scheme," the Court of Appeals for the Third Circuit d e s c rib e d "deepening insolvency" as a type of "injury to the Debtors' corporate property from t h e fraudulent expansion of corporate debt and prolongation of corporate life." Id. at 347. In L a f f e rty, the court of appeals predicted that "where `deepening insolvency' causes damage to c o rp o ra te property," the Pennsylvania Supreme Court "would provide a remedy by recognizing" a deepening insolvency cause of action. Id. at 351. In CitX, decided five years after Lafferty, th e court of appeals clarified that, although Lafferty recognized deepening insolvency as a valid c a u s e of action in Pennsylvania, the court "never held that it was a valid theory of damages for a n independent cause of action." CitX, 448 F.3d at 677; see also id. ("Those statements in L a f f e rty were in the context of a deepening-insolvency cause of action. They should not be in te rp re te d to create a novel theory of damages for an independent cause of action like m a lp r a c tic e ." ) . The CitX court further held that although Lafferty approved deepening

in s o lv e n c y as a tort for fraudulent conduct, allegations of negligence cannot support a d e e p e n in g insolvency claim. CitX, 448 F.3d at 680-81. A lth o u g h the CitX court held that deepening insolvency is not an independent form of d a m a g e s , it made clear that W h e re an independent cause of action gives a firm a remedy for the increase in its liabilities, the decrease in fair asset value, or its lost profits, then the firm may re c o v e r, without reference to the incidental impact upon the solvency calculation. Id . at 678 (quoting Sabin W ille t t , The Shallows of Deepening Insolvency, 60 Bus. Law. 549, 575 (2 0 0 5 )). In other words, traditional damages stemming from a given cause of action "do not b e c o m e invalid merely because they have the effect of increasing a corporation's insolvency." Thabault v. Chait, 541 F.3d 512, 523 (3d Cir. 2008); see also Official Comm. of Unsecured

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Creditors of Allegheny Health, Educ. & Research Found. v. Pricewaterhouse Coopers, LLP, No. 2 :0 0 c v 6 8 4 , 2007 W L 141059, at *7 (W .D . Pa. Jan. 17, 2007) ("AHERF"). Here, W a c h o v ia seeks dismissal of Kirschner's common law and RICO claims against it b e c a u s e , according to W a c h o v ia , the damages Kirschner seeks to recover are similar to a d e e p e n in g insolvency measure of damages and, thus, are precluded by CitX. (Docket No. 89, a t 8-9). I disagree. As an initial matter, as Kirschner makes clear in his opposition brief, the C o m p l a i n t does not assert an independent "deepening insolvency" claim. (Docket No. 108, at 8 -9 ). Indeed, the term "deepening insolvency" does not appear anywhere in the Complaint. Id. Moreover, Kirschner states in his opposition that he is not seeking deepening insolvency d a m a g e s for any of his common law or RICO claims. Id. As Kirschner points out and as set f o rth above, neither Pennsylvania law nor CitX precludes otherwise available recovery simply b e c a u s e a complaint makes reference to "an injury to the Debtor's corporate property from the f ra u d u le n t expansion of corporate debt and prolongation of its corporate life." Id. at 9 (quoting T h a b a u lt, 541 F.3d at 520). To the contrary, as previously explained, if available under

a p p lic a b le law, damages for an increase in a corporation's liabilities, decrease in fair asset v a lu e , or lost profits, remain available regardless of the impact on the solvency calculation. I agree with Kirschner that, although the Complaint refers to the "artificial prolongation of [th e ] failed and insolvent enterprise," it also alleges that W a c h o v ia 's purported wrongful conduct c a u s e d an increase in Le-Nature's liabilities. W a c h o v ia does not argue that such damages are u n a v a ila b le under Kirschner's common law or RICO claims. Moreover, as CitX and Thabault m a k e clear, such damages do not become unavailable simply because the alleged increase in lia b ilitie s also may have deepened Le-Nature's insolvency. Accordingly, W a c h o v ia 's motion to d is m is s Kirschner's common law and RICO claims on deepening insolvency grounds is denied.

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See, e.g., AHERF, 2007 W L 141059, at *7 (denying motion for summary judgment where c o m p la in t alleged "independent causes of action in the form of professional negligence, breach o f contract, and aiding and abetting breach of fiduciary duty, which, if viable, give AHERF a `re m e d y for the increase in its liabilities, the decrease in fair market value, or its lost profits'"). b . Proximate Cause ­ Insiders' Malfeasance W a c h o v ia argues that to the extent Kirschner properly alleges claims for malfeasance a g a in s t Podlucky and the Insiders, he does not allege that W a c h o v ia caused that malfeasance o r otherwise caused any damage to Le-Nature's resulting therefrom. (Docket No. 89, at 10-11). W a c h o v ia contends that it was merely a lender, and the Complaint does not contain any a lle g a tio n s that W a c h o v ia extended any loans to enable the fraud at Le-Nature's. Id. In

W a c h o v ia 's view, without such allegations, Kirschner's claims must fail for lack of damages c a u s a tio n . Kirschner responds by stating that he has pled that W a c h o v ia 's conduct constituted a substantial factor in bringing about Le-Nature's harm, and, thus, it proximately caused LeN a tu re 's injury. As noted by the Court of Appeals for the Third Circuit in the multidistrict litigation matter, In re Orthopedic Bone Screw Products Liability Litigation, 193 F.3d 781 (3d Cir. 1999), "[w ]h e t h e r plaintiffs have adequately alleged causation depends greatly on the particulars of the s ta te law governing each claim." Id. at 794. Accordingly, I must apply Pennsylvania law to the i n s ta n t matter. In Lux v. Gerald E. Ort Trucking, Inc., 887 A.2d 1281 (Pa. Super. Ct. 2005), the P e n n s ylv a n ia Superior Court held: "Proximate causation is defined as a wrongful act which was a substantial factor i n bringing about the plaintiff's harm." Dudley v. USX Corp., 414 Pa. Super. 160, 6 0 6 A.2d 916, 923 (1992) (citations omitted). Proximate cause does not exist w h e re the causal chain of events resulting in plaintiff's injury is so remote as to a p p e a r highly extraordinary that the conduct could have brought about the harm. Id ., 606 A.2d at 923.
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887 A.2d at 1286-87. Kirschner acknowledges that a bank cannot be liable in tort simply for making a loan that it knew, or should have known, the debtor could not repay. (Docket No. 108, at 10-11). He a rg u e s , however, that the Complaint alleges that W a c h o v ia did much more than make loans. Among other things, the Complaint avers that W a c h o v ia raised the monies squandered or lo o te d from Le-Nature's through a series of lending transactions based upon financial s ta te m e n ts that W a c h o v ia knew or knowingly ignored were materially false; and that W a c h o v ia c o n c e a le d the true financial condition of Le-Nature's from the Company's innocent decision m a k e rs . See, e.g., Complaint ¶¶ 2, 44-48, 68, 71-73, 88, 100-118, 131, 134-142, 144-182. Based on the facts as pled by Kirschner, W a c h o v ia engaged with Podlucky and the Insiders in a s c h e m e to conceal the true nature of Le-Nature's finances from the Company's independent d e c is io n makers, resulting in Le-Nature's alleged injuries. Kirschner has adequately pled facts th a t illustrate W a c h o v ia 's alleged wrongful acts, W a c h o v i a ' s knowledge that its acts would f u rth e r a fraud, and that W a c h o v ia enabled the fraud. Accordingly, I find W a c h o v ia 's actions a n d inactions (as pled) to be a substantial factor contributing to Le-Nature's alleged injuries. For th e s e reasons, I decline to dismiss the common law claims against W a c h o v ia for failure to a d e q u a te ly plead proximate cause. c. Causation ­ RICO Claims W a c h o v ia also seeks dismissal of Kirschner's RICO claims against it for failure to plead d a m a g e s causation. (Docket No. 89, at 11-14). W a c h o v ia argues that RICO requires a plaintiff to plead and prove a "direct causal connection" between the RICO violation and the injury to its b u s in e s s or property. Id. at 11 (citing Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461

(2 0 0 6 )). W a c h o v ia contends that, although courts have used the term "proximate causation" to
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describe this requirement, the causal link nevertheless must be much more direct than what w o u ld suffice to satisfy a common-law proximate cause requirement. Id. at 11-12. Kirschner d is a g re e s and argues that the Complaint clearly alleges damages sufficient to support its RICO c la im s . (Docket No. 108, at 12-13). F o r the same reasons set forth in the immediately preceding subsections, I find that K irs c h n e r has pled damages causation sufficient to support its RICO claims against W a c h o v ia . The Supreme Court in Anza stated that "[w]hen a court evaluates a RICO claim for proximate c a u s a tio n , the central question it must ask is whether the alleged violation led directly to the p l a i n tif f 's injuries." 547 U.S. at 461. Here, contrary to W a c h o v ia 's assertions, the Complaint d e s c rib e s Le-Nature's as one of the direct victims of the fraudulent scheme. Complaint ¶ 195 ("[T ]h e . . . predicate acts were performed . . . for the purpose of executing the Fraudulent S c h e m e and with the intent to defraud Le-Nature's. . . ."). S im ila r to the common law counts, the Complaint further alleges with respect to the R IC O claims that: Le-Nature's was injured because its operations were needlessly prolonged and it w a s caused to incur enormous debts that it did not have the ability to repay, t h e re b y greatly dissipating its assets, and thereby greatly increasing its liabilities. Had the independent decision makers of Le-Nature's known its true financial c o n d itio n , they would have blocked Podlucky's expansion efforts, moved to stop th e needless financings in 2003 through 2006 that were promoted by W a c h o v ia a n d sought to liquidate a failed enterprise long before October 2006. Id . ¶ 199; see also id. ¶ 208. Courts have held, and I agree, that "[i]t is reasonably foreseeable

th a t misrepresenting a company's financial condition, and thus hiding from its innocent m a n a g e rs that the company is being driven into the ground, will cause the company harm." In re Parmalat Sec. Litig., 501 F. Supp. 2d 560, 580 (S.D.N.Y. 2007), aff'd sub. nom Pappas v. B a n k of Am. Corp., 309 F. App'x 536 (2d Cir. 2009); see also In re Allou Distributs., Inc., 395

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B.R. 246, 266 (Bankr. E.D.N.Y. 2008) ("[A]llegations that a corporation's assets were dissipated, d iv e rte d , or depleted, without a corresponding benefit, are sufficient to allege damages."). For th is reason as well, I find that Kirschner has adequately pled RICO damages causation against W a c h o v ia in this case. 2. Fraud

W a c h o v ia 's second argument challenges the sufficiency of W a c h o v ia 's pleadings with re s p e c t to the requirements of Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) re q u ire s particularity when pleading fraud. See Marangos v. Swett, Civ. No. 8-4146, 2009 W L 1 8 0 3 2 6 4 , at * 3 (3d Cir. June 25, 2009). Specifically, Rule 9(b) provides that: [i]n all averments of fraud or mistake, the circumstances constituting fraud or m is ta k e shall be pleaded with particularity. Malice, intent, knowledge, and other c o n d itio n of mind of a person may be averred generally. Fed. R. Civ. P. 9(b). "The purpose of Rule 9(b) is to provide notice of the `precise misconduct' w ith which defendants are charged" in order to allow them the opportunity to respond to the c o m p la in t "and to prevent false or unsubstantiated charges." Rolo v. City Investing Co. L iq u id a tin g Trust, 155 F.3d 644, 658 (3d Cir. 1998) (citing Seville Indus. Mach. v. Southmost M a c h ., 742 F.2d 786, 791 (3d Cir. 1984)). T h u s , to satisfy Rule 9(b), Kirschner must "plead with particularity the `circumstances' of th e alleged fraud." Rolo, 155 F.3d at 658. Kirschner need not "plead the `date, place or time' of th e fraud, so long as [he] use[s] an `alternative means of injecting precision and some measure o f substantiation into [his] allegations of fraud." Id. (quoting Seville, 742 F.2d at 791). Further, I a m cognizant that, where a party alleges a complex corporate fraud, much of the factual i n f o r m a tio n necessary to describe the details of the fraud may be "peculiarly within the d e f e n d a n t's knowledge and control." See Kaiser Found. Health Plan, Inc. v. Medquist, Inc., Civ.

13

No. 8-4376, 2009 W L 961426, at * 6 (D.N.J. Apr. 8, 2009) (citing In re Craftmatic Sec. Litig., 890 F .2 d 628, 645 (3d Cir. 1989) and Shapiro v. UJB Fin. Corp., 964 F.2d 272, 284 (3d Cir. 1992)). H e re , W a c h o v ia argues that the Complaint fails to state a common law fraud claim a g a in s t it because Kirschner does not allege fraudulent misrepresentation or justifiable reliance. (Docket No. 89, at 14-15). W ith respect to the first part of this argument ­ failure to allege a f ra u d u le n t misrepresentation ­ W a c h o v ia alleges that it was Le-Nature's that defrauded W a c h o v ia , not vice-versa, and that any allegation that W a c h o v ia defrauded third parties (such a s lenders or noteholders that extended credit to Le-Nature's) is irrelevant because Kirschner c a n only bring claims that belong to Le-Nature's. Id. at 14. W a c h o v i a further contends that, to th e extent the Complaint makes minimal reference to misrepresentations and reliance, such re f e r e n c e s do not satisfy the heightened pleading requirements of Federal Rule of Civil P ro c e d u re 9(b). Id. Kirschner responds that the Complaint identifies numerous

m is re p re s e n ta tio n s on which Le-Nature's relied as well as concealment of numerous material f a c ts . (Docket No. 108, at 13-16). The elements of fraud in Pennsylvania are: (1) a material misrepresentation of fact, (2) w h ic h is false, and (3) made with knowledge of its falsity, (4) which is intended to induce the re c e iv e r to act, and (5) upon which a party justifiably relies. Michael v. Shiley, Inc., 46 F.3d 1 3 1 6 , 1333 (3d Cir. 1995) (citing Mellon Bank Corp. v. First Union Real Estate, 951 F.2d 1399, 1 4 0 9 (3d Cir. 1991)). It is further well-established in Pennsylvania that f ra u d consists of anything calculated to deceive, whether by single act or c o m b in a tio n , or by suppression of truth, or suggestion of what is false, whether it b e by direct falsehood or innuendo, by speech or silence, word of mouth, or look o r gesture. W e have held that "fraud is composed of a misrepresentation f ra u d u le n tly uttered with the intent to induce the action undertaken in reliance u p o n it, to the damage of its victim." The concealment of a material fact can a m o u n t to a culpable misrepresentation no less than does an intentional false s t a t e m e n t.
14

Id. (quoting Moser v. DeSetta, 589 A.2d 679, 682 (Pa. 1991) (other citations omitted)); see also B o rtz v. Noon, 729 A.2d 555, 560 (Pa. 1999) (discussing elements of intentional

m is re p re s e n ta tio n and intentional non-disclosure). After careful review of the Complaint, I find that W a c h o v ia 's criticisms of Kirschner's f ra u d claim are without merit. First, I disagree that the Complaint is devoid of allegations of m is re p re s e n ta tio n or reliance. Second, I find that the allegations of misrepresentation and

re lia n c e satisfy the pleading requirements of Rule 9(b) and state a plausible claim for fraud a g a in s t W a c h o v ia . In addition to numerous allegations that W a c h o v ia made material misrepresentations r e g a rd in g the operations and financial performance of LeNature's in various W a c h o v i a m e m o ra n d a , reports, and bulletins directed to lenders, the Complaint sets forth detailed a lle g a tio n s that W a c h o v ia deliberately concealed material facts from Le-Nature's innocent d e c i s i o n makers. See, e.g., Complaint ¶¶ 65-67, 73-74, 83, 87-88, 91-94, 101-103, 114-117, 1 6 1 -1 8 5 , 234-240. For example, the Complaint alleges: L e -N a tu re 's ' failure to make timely interest payments continued throughout 2006. In fact, upon information and belief, on August 29, 2006 - two days before the S e p te m b e r 2006 Facility closed - Le-Nature's was still behind on its interest p a ym e n ts . W a c h o v ia never disclosed this disturbing information to Le-Nature's' in d e p e n d e n t decision makers or its other creditors. Id . ¶ 114 (emphasis added). It also avers, inter alia, that W a c h o v ia hired someone to audit Le-

N a tu re 's ­ for the first time since . . . 2003 . . . . PriceW a te rh o u s e C o o p e rs . . . [i]n its final report . . . noted significant accounting discrepancies, including erroneous accounting of capital leases a s operating leases and overstatement of EBITDA. Nonetheless W a c h o v ia kept the PW C

c o n c lu s io n s to itself and pushed ahead with yet another $285 million in financing for Le-Nature's Id . 125-126; see also id. ¶ 128. The Complaint further specifically alleges:

15

Podlucky, the Insiders, and W a c h o v ia made the material misrepresentations and o m itte d to disclose the material facts [t]herein alleged with the intention of in d u c in g Le-Nature's to agree to Podlucky and the Insiders' expansion efforts a n d the several financings W a c h o v ia arranged in the years 2003 to 2006, and L e -N a tu re 's , through its independent decision makers, did reasonably and ju s tifia b ly rely on those misrepresentations and omissions in agreeing to those fin a n c in g s and allowing the prolongation of the Le-Nature's enterprise. Id . ¶ 241 (emphasis added). As evidenced by the sampling of allegations set forth above, W a c h o v ia 's contention that th e fraud claim is deficient because it does not allege any misrepresentations by W a c h o v ia or a n y justifiable reliance by Le-Nature's must fail. The Complaint has more than sufficient detail c o n c e rn in g material misrepresentations (or omissions) and justifiable reliance to pass muster u n d e r 9(b). W a c h o v ia 's argument that any allegations that W a c h o v ia defrauded third parties such as le n d e rs or noteholders are irrelevant because Kirschner can only bring claims that belong to LeN a t u r e ' s does not change this conclusion. As set forth above, Kirschner's fraud claim is not that W a c h o v ia defrauded third parties, but that Le-Nature's relied to its detriment on W a c h o v ia 's m is re p re s e n ta tio n s , including misrepresentations initially made to lenders and other investors. Complaint ¶¶ 240-241. Courts applying Pennsylvania law have recognized that liability for

f ra u d u le n t misrepresentation extends beyond those to whom the declarant directs his fraudulent m is re p re s e n ta tio n to those whom the declarant has special reason to anticipate will be induced to act. Michael, 46 F.3d at 1334-35 (quoting W o o d w a r d v. Dietrich, 548 A.2d 301, 313, 315 (Pa. S u p e r. Ct. 1988)). Le-Nature's plausibly falls into this latter category at least based on the

a lle g a tio n s of the Complaint. See, e.g., Complaint ¶ 241. Moreover, as set forth above, the C o m p la in t specifically alleges that W a c h o v ia intentionally concealed material facts from LeN a tu re 's independent decision makers. Although, for the reasons set forth elsewhere in this

16

Opinion, I find that W a c h o v ia did not have a fiduciary duty to Le-Nature's, Pennsylvania courts h a v e recognized that there is a duty to disclose in a number of other situations, including when d i s c l o s u r e is necessary to prevent an ambiguous statement from being misleading, and where a n undisclosed fact is basic to a transaction. Here, the Complaint alleges, inter alia, that

"W a c h o v ia aggressively promoted the various financings made possible by the Fraudulent S c h e m e , derived great benefit from those financings, had significant access to evidence re g a rd in g the Fraudulent Scheme, and knew that the independent decisions [sic] makers of LeN a tu re 's did not know of that Scheme." Complaint ¶ 237. The Complaint further alleges that W a c h o v ia 's conduct resulted in "Le-Nature's agreeing to what became hundreds of millions of d o lla rs of additional debt that needlessly prolonged the life of the failed Le-Nature's enterprise a n d greatly diminished its assets." Id. ¶ 240. Thus, W a c h o v ia 's concealment of material facts f ro m Le-Nature's is relevant at this stage as well. I also find nondispositive W a c h o v ia 's argument that the fraud claim against W a c h o v ia is "illo g ic a l" because, as evidenced by Andreycak's guilty plea, it was Le-Nature's that defrauded W a c h o v ia , and not vice-versa. (Docket No. 89, at 14). According to the Complaint, Andreycak w a s acting in conjunction with Podlucky and the Insiders, and the Complaint cites her guilty plea a s evidence of Podlucky and the Insiders' role in the alleged Fraudulent Scheme. Complaint ¶ 57. Thus, the guilty plea is not conclusive proof at this stage that Le-Nature's defrauded

W a c h o v ia . In addition, the Complaint alleges throughout that, to the extent Podlucky and the In s id e rs provided W a c h o v ia with false information, W a c h o v ia knew or deliberately ignored the m is in f o rm a tio n , and nevertheless continued its participation in the Fraudulent Scheme and a s s is te d Podlucky and the Insiders in hiding the truth. See, e.g., id. ¶¶ 77, 80, 86, 89-90, 93-96, 9 9 -1 1 8 , 122, 126. In short, the ultimate impact of Andreycak's guilty plea entails factual issues

17

best left for analysis after discovery. Accordingly, dismissal based on the guilty plea is improper a t the 12(b)(6) stage under Iqbal. 3. Aiding and Abetting Fraud and Breach of Fiduciary Duty

W a c h o v ia 's third argument is that Kirschner's claims for aiding and abetting fraud and b re a c h of fiduciary duty are fatally flawed. (Docket No. 89, at 15-16). Specifically, W a c h o v ia a r g u e s that claims for aiding and abetting both fraud and breach of fiduciary duty are not c o g n iz a b le under Pennsylvania law. Pertinent here, the Pennsylvania Supreme Court has not e x p r e s s ly adopted the Restatement (Second) Torts § 876(b), on which Kirschner relies for his a id in g and abetting claims. See, e.g., Clayton v. McCullough, 670 A.2d 710, 713 (Pa. Super. C t. 1996). That Section reads, in its entirety, as follows: § 876 Persons Acting in Concert F o r harm resulting to a third person from the tortious conduct of another, one is s u b je c t to liability if he (a ) d o e s a tortious act in concert with the other or pursuant to a common d e s ig n with him, or k n o w s that the other's conduct constitutes a breach of duty and gives s u b s ta n ti a l assistance or encouragement to the other so to conduct h im s e lf , or g iv e s substantial assistance to the other in accomplishing a tortious result a n d his own conduct, separately considered, constitutes a breach of duty to the third person.

(b )

(c )

R e s ta te m e n t (Second) Torts § 876(b). W h e n state law issues arise that remain unaddressed by the highest court in the state, a f e d e ra l court must predict how that court would rule. Berrier v. Simplicity Mfg., 563 F.3d 38, 454 6 (3d Cir. 2009). In so doing, I may consider "relevant state precedents, analogous decisions,

18

considered dicta, scholarly works, and any other reliable data tending convincingly to show how th e highest court in the state would decide the issue at hand." McKenna v. Ortho Pharm. Corp., 6 2 2 F.2d 657, 663 (3d Cir. 1980). In making that prediction, "a federal court can . . . give due re g a rd , but not conclusive effect, to the decisional law of lower state courts." Nationwide Mut. I n s . Co. v. Buffetta, 230 F.3d 634, 637 (3d Cir. 2000) (citation omitted). Moreover, I am not to d is re g a rd the opinions of intermediate appellate courts, unless persuasive data convinces me th a t the Pennsylvania Supreme Court would decide to the contrary. Id. O n this issue, I reach the same conclusion as that in Gilliland v. Hergert, No. 2 :0 5 -c v -0 1 0 5 9 , 2007 U.S. Dist. LEXIS 84508 (W .D . Pa. Nov. 15, 2007), and Chicago Title Ins. C o . v. Lexington & Concord Search & Abstract, LLC, 513 F. Supp. 2d 304, 317 (E.D. Pa. 2007), b o th of which predicted that the Supreme Court of Pennsylvania would recognize Section 8 7 6 (b ).6 I am persuaded by the thorough analyses set forth in those cases. I note, too, that W a c h o v ia has not pointed to ­ nor have I found -- language in any Pennsylvania state court o p in io n that criticizes or otherwise undermines the principles underlying or stated in Section 8 7 6 (b ). In other words, there is no persuasive data to convince me to decide contrary to the

P e n n s ylv a n ia caselaw on which the courts in both Gilliland and Lexington & Concord relied. N e x t, W a c h o v ia argues that, even if the Pennsylvania Supreme Court would recognize a id in g and abetting claims, Kirschner has not sufficiently pleaded a claim for aiding and abetting b re a c h of fiduciary duty.
6

(Docket No. 89, at 16-18).7

In particular, W a c h o v ia contends that

Both parties rely, inversely, on Skipworth v. Lead Indus. Association, in which the Pennsylvania S u p r e m e Court adopted the principle that a "concert of action" claim under 876(a) cannot lie if plaintiff c a n n o t identify the wrongdoer or the person who acted in concert therewith. 690 A.2d 169, 174-175 (Pa. 1 9 9 7 ) . Although Defendant urges that Skipworth be lim ite d to 876(a), Pennsylvania courts subsequently c o n s id e r in g that decision have not taken that approach. 7 W a c h o v ia does not advance this argum e n t with respect to Kirschner's aiding and abetting fraud c la im . W a c h o v ia 's only argum e n t for dism is s a l of the aiding and abetting fraud claim (Count Nine) is that P e n n s ylv a n ia does not recognize such a cause of action. As set forth above, Kirschner's argum e n t in that r e g a r d is unpersuasive. 19

Kirschner has failed to plead "knowledge" and "substantial assistance," as required by Section 8 7 6 (b ). Id. In this case, the Complaint seeks redress for an "elaborate fraudulent scheme."

The scheme, as defined in the Complaint, involved "constantly raising new money and incurring e v e r-in c re a s in g debts to refinance investors, thereby cultivating an illusion that a legitimate p ro f it-m a k in g business existed...." (Docket No. 1, ¶ 2). To prove the tort of aiding and abetting, a plaintiff must show that the defendant knowingly and substantially assisted "the principal v io la tio n ," and that the defendant "must be generally aware of his role as part of an overall i l l e g a l or tortious activity at the time that he provides the assistance." Hurley v. Atlantic City P o lic e Dep't, 174 F.3d 95, 127 (3d Cir. 1999). After a review of the Complaint, I find that Kirschner has sufficiently pled his aiding and a b e ttin g breach of fiduciary duty cause of action against W a c h o v ia . See Complaint ¶¶ 59-130, 1 6 1 -1 8 2 , 296-307. Under the applicable pleading standard, the Complaint asserts sufficient

f a c ts with respect to W a c h o v ia 's knowledge of and participation in the scheme on which K irs c h n e r bases his suit such that I find his claims for aiding and abetting fraud have facial p la u s ib ility. See id.; Iqbal, 129 S. Ct. at 1949. Therefore, W a c h o v ia 's motion to dismiss

K irs c h n e r's claim for aiding and abetting breach of fiduciary duty is denied. 4. Breach of Fiduciary Duty W a c h o v ia 's fourth argument is that Kirschner has failed to allege sufficient facts to a s s e rt a breach of fiduciary duty claim against it. (Docket No. 89, pp. 19-21). Fiduciary or

c o n fid e n tia l relationships arise when one party places confidence in another with resulting s u p e rio rity and influence on the other. Yohe v. Yohe, 353 A.2d 417 (Pa. 1976). u n d e r Pennsylvania law, a lender does not owe a fiduciary duty to a borrower. Ordinarily, Bucci v.

20

W a c h o v ia Bank, N.A., 591 F. Supp. 2d 773, 783-84 (E.D. Pa. 2008); W a ye v. Commonwealth B a n k , 846 F. Supp. 321, 326 (M.D. Pa. 1994); Temp-W a y Corp. v. Continental Bank, 139 B.R. 2 9 9 , 318 (E.D. Pa.) (citing Grace v. Moll, 132 A. 171, 171-72 (1926)), aff'd, 981 F.2d 1248 (3d C ir . 1992); Fed. Land Bank of Baltimore v. Fetner,, 410 A.2d 344, 348 (Pa. Super. Ct. 1979); B u c z e k v. First Nat'l Bank, 531 A.2d 1122, 1124 (Pa. Super. Ct. 1987). Although a lender does not ordinarily owe a fiduciary duty to a borrower, a f id u c ia ry relationship may arise if the lender gains substantial control over the b o rro w e r's business affairs. Control over the borrower is demonstrated when th e re is evidence that the lender was involved in the actual day-to-day m a n a g e m e n t and operations of the borrower or that the lender had the ability to c o m p e l the borrower to engage in unusual transactions. The mere monitoring of th e borrower's operations and the proffering of management advice by lenders, w ith o u t more, does not constitute control. Moreover, action taken by the creditor to minimize risk does not constitute total and absolute control. T e m p -W a y Corp., 139 B.R. at 318 (internal citations omitted). K irs c h n e r responds that he has alleged an "intimate and special relationship with LeN a tu re 's " giving rise to a breach of a fiduciary duty. (Docket No. 108, p. 29). He argues that "th e Complaint sets forth in detail how W a c h o v ia Bank and W a c h o v ia Securities acted as LeN a tu re 's `financial advisor, investment bank, merger and acquisition consultant, underwriter, le n d e r, securities broker, book runner and de facto partner in a multi-year effort to feed the re le n tle s s fraudulent growth of what actually was a failed beverage enterprise.'" (Docket No. 1 0 8 , at 30). Under the law set forth above, this "partnership" is simply not enough to set forth a c a u s e of action for a breach of fiduciary duty. After a review of the Complaint, I find that the Complaint fails to allege sufficient facts to a s s e rt a cause of action for breach of fiduciary duty on the part of W a c h o v ia . The Complaint f a ils to assert that W a c h o v ia exerted substantial control over the business operations of LeN a tu re 's sufficient to establish that a fiduciary duty was owed to Le-Nature's. Further, the

21

Complaint fails to establish that W a c h o v ia exerted an overmastering influence and domination o v e r Le-Nature's. Consequently, W a c h o v ia 's motion to dismiss the tenth cause of action

a g a in s t W a c h o v ia for Breach of Fiduciary Duty is granted. H a v in g argued that Le-Nature's and W a c h o v ia were de facto partners (Docket No. 108, a t 30), I cannot envision a way to amend the Complaint to sufficiently allege a cause of action f o r breach of fiduciary duty against W a c h o v ia and, therefore, believe any attempt to do so would b e futile. As a result, leave to amend the Complaint to reassert a claim for breach of fiduciary d u ty against W a c h o v ia is denied. 5 . Negligence/Negligent Misrepresentation W a c h o v ia 's fifth argument is based on the thirteenth cause of action for

n e g lig e n c e /n e g lig e n t misrepresentation. (Docket No. 89, at 21-23). To begin with, W a c h o v ia a rg u e s that the negligent/negligent misrepresentation claim must fail because the Complaint f a ils to allege facts demonstrating a duty owed by W a c h o v ia to Le-Nature's. Id. In response, K irs c h n e r first argues that the duty exists because W a c h o v ia owed Le-Nature's a fiduciary duty. As set forth above, under the facts pled in the Complaint, W a c h o v ia does not owe Le-Nature's a f id u c ia ry duty. Kirschner also argues, however, that W a c h o v ia had a duty to disclose under R e s ta te m e n t (Second) Torts § 552. (Docket No. 108, at 30-31). A cause of action for negligent m is re p re s e n ta tio n under Pennsylvania law is provided by Section 552 of the Second R e s ta te m e n t of Torts, which provides, in pertinent part, as follows: O n e who, in the course of his business, profession or employment, or in any o th e r transaction in which he has a pecuniary interest, supplies false information f o r the guidance of others in their business transactions, is subject to liability for p e c u n ia ry loss caused to them by their justifiable reliance upon the information, if h e fails to exercise reasonable care or competence in obtaining or c o m m u n ic a tin g the information.
22

Restatement (Second) Torts § 552(1) (1977); see also Bilt-Rite Contractors, Inc. v. The A rc h ite c tu ra l Studio, 866 A.2d 270, 287-88 (Pa. 2005). "Liability extends only to injuries

s u f f e re d by those who justifiably rely on information and whose reliance the defendant could h a v e reasonably foreseen." Sonecha v. New England Life Ins. Co., 124 F. App'x 143, 146 (3d

C ir. 2005) (citing Bilt-Rite Contractors, 866 A.2d at 286-87 and Mill-Mar, Inc. v. Statham, 420 A .2 d 548, 552 (Pa. Super. Ct. 1980)). W a c h o v ia does not respond to this argument in its reply b rie f . See Docket No. 110. After a review of the Complaint, I find that the Complaint asserts sufficient facts to show a duty on the part of W a c h o v ia . For example, the Complaint alleges: 114. L e - N a tu re 's ' failure to make timely interest payments continued th ro u g h o u t 2006. In fact, upon information and belief, on August 2 9 , 2006 - two days before the September 2006 Facility closed L e -N a tu re 's was still behind on its interest payments. W a c h o v ia n e v e r disclosed this disturbing information to Le-Nature's' in d e p e n d e n t decision makers or its other creditors. O n November 1, 2006, Le-Nature's was forced into bankruptcy a n d taken over by KZC, and the Fraudulent Scheme was over. H o w e v e r, that Scheme - perpetrated by Podlucky and the Insiders w ith the substantial assistance of W a c h o v ia , among others d ra g g e d out the life of Le-Nature's for over four years and wasted h u n d re d s of millions of dollars on avoidable transactions in the p ro c e s s . The independent decision makers of Le-Nature's, had t h e y known the truth about Le-Nature's and it unsustainable o p e ra tio n s , could have blocked Podlucky's expansion efforts, m o v e d to stop the unnecessary financing promoted by W a c h o v ia , a n d closed Le-Nature's' operations down years earlier.

130.

(D o c k e t No. 1, ¶¶ 114, 130). Therefore, W a c h o v ia 's Motion to Dismiss Count Thirteen on the b a s is of failure to allege a duty is denied. N e x t, W a c h o v ia argues that Kirschner's negligence/negligent misrepresentation claim

23

fails based on the "gist of the action" doctrine.8 (Docket No. 89, at 22). "The gist of the action d o c trin e bars a plaintiff from bringing a tort claim for damages that merely replicates a claim for b r e a c h of an underlying contract." Bealer v. Mut. Fire, Marine & Inland Ins. Co., 242 F. App'x 8 0 2 , 804 (3d Cir. 2007) (citing W e rw in s k i v. Ford Motor Co., 286 F.3d 661, 680 n.8 (3d Cir. 2 0 0 2 )); Grimm v. Discover Fin. Servs., No. 08-cv-747, 2008 W L 4821695, *11 (W .D . Pa. Nov. 4, 2 0 0 8 ). To begin with, I note that Kirschner is not pursuing a claim against W a c h o v ia for breach o f contract. See Complaint, Docket No. 1. Thus, there is no concern of duplication of claims or d u p lic a tiv e recovery in this case. Furthermore, the allegations in the Complaint do not See id. "The

d e m o n s tra te that the contracts and tort claims are "inextricably intertwined."

d i f f e r e n c e between tort and contract actions is noted by the fact that tort actions arise where a p a rty breaches a duty imposed as a matter of social policy; whereas contract actions arise w h e re a party breaches a duty imposed by mutual consensus between the parties." W eber

D is p la y & Packaging v. Providence W a s h in g to n Ins. Co., No. 02-7792, 2003 W L 329141, at *3 (E .D . Pa. Feb. 10, 2003) (citing Phico Ins. Co. v. Presbyterian Med. Servs. Corp., 663 A.2d 753 (1 9 9 5 )). Kirschner's claim for negligence/negligent misrepresentation sounds primarily in tort, ra th e r than contract law. Therefore, the "gist of the action" doctrine does not bar Kirschner's c la im for negligence/negligent misrepresentation. Consequently, W a c h o v ia 's Motion to Dismiss C o u n t Thirteen on the basis of the "gist of the action" doctrine is denied. N e x t, W a c h o v ia argues that Kirschner's negligence/negligent misrepresentation claim is b a rre d by the economic loss doctrine. (Docket No. 89, at 23). Under Pennsylvania law, the
Although the "gist of the action" doctrine has not been expressly adopted by the Pennsylvania S u p r e m e Court, the Pennsylvania Superior Court and the United States Court of Appeals for the Third C ir c u it, as well as m a n y United States District Courts, including this Court, have predicted the P e n n s ylv a n ia Suprem e Court will adopt the doctrine. See Grim m , 2008 W L 4821695, at *11 (string citing c a s e s predicting adoption of "gist of the action" doctrine). 24
8

economic loss doctrine states that "no cause of action exists for negligence that results solely in e c o n o m ic damages unaccompanied by physical injury or property damage." Grimm, 2008 W L 4 8 2 1 6 9 5 , at *12 (quoting Adams v. Copper Beach Townhome Cmtys., L.P., 816 A.2d 301, 305 (P a . Super. Ct. 2003)). W a c h o v ia fails to acknowledge, however, that one notable exception to th e economic loss doctrine applies to cases involving claims of negligent misrepresentation, as is the case here. See Bilt-Rite Constr., Inc., 866 A.2d at 288 (holding that the economic loss d o c trin e does not apply to claims of negligent misrepresentation sounding under Section 552 of th e Restatement (Second) Torts). W a c h o v ia does not argue that the exception does not apply. As a result, at this stage of the case, Kirschner's claim for negligence/negligent Consequently,

m is re p re s e n ta tio n claim is not barred by the "economic loss doctrine."

W a c h o v ia 's Motion to Dismiss Count Thirteen on the basis of the economic loss doctrine is d e n ie d . F in a lly, W a c h o v ia argues that Kirschner's negligence/negligent misrepresentation claim f a ils for lack of any allegations that W a c h o v ia made any representations to Le-Nature's. (Docket No. 89, at 23). After a review of the Complaint, I disagree. See Complaint ¶¶ 114, 130 (s e t forth at length above). Thus, W a c h o v ia 's Motion to Dismiss Count Thirteen on the basis of th e lack of representations is denied. F o r all of these reasons, W a c h o v ia 's Motion to Dismiss Count Thirteen of the Complaint is d e n ie d . 6 . Conspiracy to Commit Fraud W a c h o v ia 's sixth argument is that Count Six of the Complaint does not properly allege a c o m m o n law civil conspiracy claim against it. (Docket No. 89, at 22- 24). The Court of Appeals f o r the Third Circuit described the necessary elements of a civil conspiracy in General

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Refractories Co. v. Fireman's Fund Ins. Co.: In Pennsylvania, "to state a cause of action for civil conspiracy, the following e le m e n ts are required: (1) a combination of two or more persons acting with a c o m m o n purpose to do an unlawful act or to do a lawful act by unlawful means or f o r an unlawful purpose; (2) an overt act done in pursuance of the common p u rp o s e ; and (3) actual legal damage." Strickland v. Univ. of Scranton, 700 A.2d 9 7 9 , 987-988 (1997) (citation and internal quotations marks omitted) (cited in A lle g h e n y General Hosp. v. Philip Morris, Inc., 228 F.3d 429, 446 (3d Cir.2000)). 337 F.3d 297, 313 (3d Cir. 2003); accord Adams v. Teamsters Local 115, 214 F. App'x 167, 1 7 2 (3d Cir. 2007) ("A civil conspiracy is a combination of two or more persons acting in concert to commit an unlawful act, or to commit a lawful act by unlawful means, the principal element of w h ic h is an agreement between the parties to inflict a wrong against or injury upon another, and a n overt act that results in damage." (internal citations omitted)). W a c h o v ia argues that within this definition of a civil conspiracy, a tacit agreement b e t w e e n W a c h o v ia and at least one other party must exist, and claims Kirschner failed to p ro v id e factual details concerning the date, time, and place of any meetings, conferences or te le p h o n e calls necessary to illustrate such an agreement. (Docket No. 89, at 23). W a c h o v ia a ls o suggests Kirschner's allegations fail to show how W a c h o v ia intended to harm Le-Nature's. Id. at 23-24. Because of these shortcomings, W a c h o v ia moves for a dismissal of the civil

c o n s p ira c y claim. Although I agree with W a c h o v ia that the first element of a civil conspiracy claim e s s e n tia lly requires an agreement between W a c h o v ia and at least one other party, I disagree th a t Kirschner failed to plead requisite facts supporting the existence of an agreement and that th e complaint fails to show how Le-Nature's was injured. Under the Iqbal and Fowler standard, if Kirschner's complaint contains sufficient factual matter, accepted as true, to state a claim for re lie f that is plausible on its face ­ meaning if Kirschner has pled facts enabling this court to

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draw the reasonable inference that W a c h o v ia acted in concert with other defendants to do an u n la w f u l act, the principal element of which is an agreement between W a c h o v ia and the other p a rtie s to inflict an injury upon another, and an overt act that results in damage ­ the motion to d is m is s must be denied. Turning to the complaint, Kirschner asserts: · "W a c h o v ia was a key participant in the Fraudulent Scheme, constantly assisting LeN a tu re 's in raising capital, paying down capital, then raising more capital . . . ." C o m p la in t ¶ 59. In or about 2003, Le-Nature's commenced what would become a multi-year relationship w ith W a c h o v ia . . . During the course of this relationship, W a c h o v ia obtained significant a c c e s s to, and knowledge of, [Le-Nature's] operations and financial condition and ­ as a re s u lt ­ was fully aware of numerous red flags demonstrating that Le-Nature's o p e ra t i o n s and finances were not as reported. . . .W a c h o v ia went so far as to actually a s s is t Podlucky and the Insiders in constructing excuses for how Le-Nature's reported f in a n c ia l data was somehow consistent with contrary real world observations. Id. ¶¶ 6061. . . . W a c h o v ia hired someone to audit Le-Nature's ­ for the first time since . . . 2003 . . . . P ric e W a te rh o u s e C o o p e rs . . . [i]n its final report . . . noted significant accounting d is c re p a n c ie s , including erroneous accounting of capital leases as operating leases and o v e rs ta te m e n t of EBITDA. Nonetheless W a c h o v ia kept the PW C conclusions to itself a n d pushed ahead with yet another $285 million in financing for Le-Nature's. Id. ¶¶ 125126. S u b s e q u e n t to the Chancery Court's entering the temporary restraining order, on O c to b e r 22, 2006, Jay Braden of W a c h o v ia securities received an email from Podlucky re q u e s tin g his help to convince Le-Nature's Board that another facility ($340 million) c o u ld be done. "Braden appeared at the Board meeting advocated $340 million in new f in a n c in g even though clear evidence of the Fraudulent Scheme was now before the D e la w a re Chancery Court and in the public domain." Id. ¶ 128. ". . . W a c h o v ia , among others dragged out the life of Le-Nature's for over four years and w a s te d hundreds of millions of dollars on avoidable transactions in the process. . . . The in d e p e n d e n t decision-makers of Le-Nature's, had they known the truth about LeN a tu re 's and its unsustainable operations, could have . . . moved to stop the u n n e c e s s a ry financings promoted by W a c h o v ia , and closed Le-Nature's operations d o w n years earlier." Id. ¶ 130. T h e s e facts render it plausible that W a c h o v ia , Podlucky and the Insiders agreed to make

· ·

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·

· ·

·

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false representations with respect to Le-Nature's operations and overall financial condition for th e purpose of closing numerous credit facilities which provided W a c h o v ia with fees and LeN a t u r e ' s with additional debt. W a c h o v ia 's decision to go forward with each credit facility and ig n o re "red flags" concerning Le-Nature's true financial health constitute overt acts. As noted, L e -N a tu re 's was forced into bankruptcy and as the Lafferty Court noted: Even when a corporation is insolvent, its corporate property may have value. The f ra u d u le n t and concealed incurrence of debt can damage that value in several w a ys . For example, to the extent that bankruptcy is not already a certainty, the in c u rre n c e of debt can force an insolvent corporation into bankruptcy, thus in f lic tin g legal and administrative costs. . . . [B]ankruptcy also creates o p e ra tio n a l limitations which hurt a corporation's ability to run its business in a p ro f ita b le manner.

267 F.3d at 349-50. Accordingly, I find it plausible that W a c h o v ia 's alleged intentional disregard f o r the true financial condition of LeNature's and its alleged conscious efforts to withhold this in f o rm a tio n from the independent shareholders and facility investors illustrates its intent to injure L e - N a tu r e 's . For all of these reasons, W a c h o v ia 's motion to dismiss the conspiracy to commit fraud c la im is denied. 7 . RICO Claims W a c h o v ia 's seventh argument is that Kirschner's RICO claims set forth against it in Counts O n e and Two of the Complaint are deficient and must be dismissed. (Docket No. 89, at 24-28). I will address each count in turn. a. RICO ­ Section 1962(c)

RICO Section 1962(c) provides: It shall be unlawful for any person employed by or associated with any enterprise e n g a g e d in, or the activities of which affect, interstate or foreign commerce, to c o n d u c t or participate, directly or indirectly, in the conduct of such enterprise's
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affairs through a pattern of racketeering activity or collection of unlawful debt. 18 U.S.C. § 1962(c). In order to state a RICO claim under Section 1962(c), a plaintiff must a lle g e : (1) the existence of an enterprise, (2) that the person was employed by or associated w ith the enterprise, (3) that the defendant participated, directly or indirectly, in the conduct or a f f a irs of the enterprise, and (4) that the defendant participated through a pattern of ra c k e te e rin g activity. Hartford Fire Ins. Co. v. Lewis, Civ. A. No. 08-1198, 2009 W L 174105, at

* 3 (E.D. Pa. Jan. 21, 2009) (quoting United States v. Urban, 404 F.3d 754, 769 (3d Cir. 2005)). F o r purposes of this Motion, W a c h o v i a focuses solely on the third element, i.e., whether W a c h o v i a participated, directly or indirectly, in the conduct of the enterprise's affairs. S p e c i f i c a l l y, W a c h o v ia contends that the Complaint does not aver that W a c h o v ia "directed or c o n tro lle d " the RICO enterprise as required to satisfy that element of Section 1962(c). (Docket N o . 89, at 24-27). W a c h o v ia states that although the Complaint contains numerous details

a b o u t the financial services that W a c h o v ia provided to Le-Nature's, providing such services is in s u f f ic ie n t to show that W a c h o v ia directed the affairs of the Podlucky Enterprise in any way that w o u ld afford a