Appendix — Herrmann v. IUE AFL-CIO Pension Fund

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APPENDIX

UNI7ED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

No. 360—August Term, 1993

(Argued September 13, 1993

Decided November 19, 1993)

Docket No. 93-7384

IUE AFL-CIO PENSION FuND; LLoyp J. HAYES; PETER

S. DiCicco; SAL T. INGRASSIA; JOHN S. VOZELLA;

CLARENCE RANALLO; THOMAS F. LYNCH, as Trustees

of the IVE AFL-CIO Pension Fund,

Plaintiffs-A ppellants,

V.

THOMAS HERRMANN; LOCKE MOWERS, INCORPORATED,

Defendants-A ppellees.

Before OAKES, Senior Circuit Judge, MAHONEY,

Circuit Judge, and MISHLER, Senior District Judge.*

Pension Fund appeals an order entered by the District

Court for the District of Connecticut, T.F. Gilroy Daly,

Judge, having adopted Magistrate Judge Arthur H. Lati-

mer’s report and recommendation to dismiss the Pension

Fund’s complaint and denying Pension Fund’s request

for injunctive relief.

*The Honorable Jacob Mishler, Senior District Judge, Eastern

District of New York, sitting by designation.

Oe

2a

Held: There is jurisdiction over the federal claims be-

cause the Appellants have stated a colorable federal

claim; there is personal jurisdiction as to the federal

claims pursuant to the nationwide service of process pro-

vision of the federal statute; there is jurisdiction over the

state law claims pursuant to the doctrines of pendent and

pendent personal jurisdiction because the federal and

state claims derive from a common nucleus of operative

fact; the district court incorrectly dismissed the claims

because the fraud claims alleged in the Complaint are

legally sufficient to survive the specificity requirements of

Rule 9(b) and a Rule 12(b)(6) motion to dismiss; the

district court properly denied injunctive relief.

OAKES, Senior Circuit Judge:

Plaintiff/Appellant, TUE AFL-CIO Pension Fund, a

multiemployer, union pension fund, and its trustees (col-

lectively the “Fund”) appeal an unpublished order of the

United States District Court for the District of Connecti-

cut, T.F. Gilroy Daly, Judge, adopting Magistrate Judge

Arthur H. Latimer’s report and recommendation to dis-

miss the Fund’s second amended complaint (“SAC” or

the “Complaint”) for failure to plead fraud with par-

ticularity, lack of federal jurisdiction, and for failure to

state a claim upon which relief can be granted. Fed. R.

Civ. P. 9(b). 12(b)(1), and (6).’ Given the proce-

dural context of this case, we are required to address

several distinct jurisdictional questions—whether the

Fund timely filed objections to the magistrate judge’s re-

port and recommendation, whether a fine] judgment is

before this court, whether the district court properly dis-

missed the Fund’s federal claims pursuant to Rules 9(b)

1The defendants also have asserted that the court lacked per-

sonal jurisdiction under Fed. R. Civ. P. 12(b) (2). It is unclear

from the magistrate judge’s report and recommendation whether

the complaint was dismissed for lack of personal jurisdiction as

well.

3a

and 12(b), and whether the district court had pendent ”

jurisdiction over the state law claims. We are also asked

to rule on the Fund’s request for injunctive relief pur-

suant to 29 U.S.C. § 1399(c) (1988). We conclude

that timely objections to the magistrate judge’s report and

recommendation were filed, there is a final judgment

before this court, and the district court had jurisdiction

over the federal claims and pendent jurisdiction over the

state law claims. We therefore reverse the district court’s

dismissal of the Complaint, affirm the district court’s de-

nial of the Fund’s request for injunctive relief, and re-

mand for further proceedings.

4

Standard of Review

When an appeal comes before this Court on a motion

to dismiss, we accept as true the factual allegations of

the Complaint. See, e.y., Square D Co. v. Niagara

Frontier Tariff Bureau Inc., 476 U.S. 409, 411 (1986);

2 Supplemental jurisdiction, 28 U.S.C. § 1367(a) (Supp. II 1990),

which codifies the common law doctrine of pendent jurisdiction,

does not apply in this case because Section 1367(a) “shall apply to

civil actions commenced on or after [Dec. 1, 1990].” Pub. L. No.

101-650 § 310(c), 104 Stat. 5114 (1990). Although the Fund filed

the SAC on December 27, 1990, after the effective date of section

1367, the Fund filed the original complaint on February 7, 1990,

prior to the effective date. “An amendment of a pleading relates

back to the date of the original pleading when . . . the claim or

defense asserted in the amended pleading arose out of the conduct,

transaction, or occurrence set forth or attempted to be set forth

in the original pleading.” Fed. R. Civ. P. 15(c) (2). In this case,

thhe SAC is merely an “elaboration of plaintiffs’ pleadings.” See

District Court’s endorsement of the Fund’s Motion to Permit Plain-

tiffs to File and Serve SAC. Therefore, the December 27, 1990

filing date of the SAC relates back to the February 7, 1990 filing

date of the original complaint. Consequently, we rely on the doc-

trine of pendent jurisdiction as articulated in United Mine Workers

of America v. Giggs, 383 U.S. 715, 725-727 (1966), and its progeny.

In any event, an analysis under section 1367(a) would not alter

our analysis.

4a

Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Conley

v. Gibson, 355 U.S. 41, 45-46 (1957); Bankers Trust

Co. v. Rhoades, 859 F.2d 1096, 1098 (2d Cir. 1988),

cert. denied, 490 U.S. 1007 (1989). In considering such

motions, we must read the Complaint liberally, drawing

all inferences in favor of the pleader. See, e.g., Scheuer,

416 U.S. at 236; Conley, 355 U.S. at 45-46; Cosmas v.

Hassett, 886 F.2d 8, 11 (2d Cir. 1989). Moreover,

“[t]he district court should deny the motion [to dismiss]

unless it appears to a certainty that a plaintiff can prove

no set of facts entitling him to relief.” Ryder Energy

Distribution Corp. v. Merrill Lynch Commodities Inc.,

748 F.2d 774, 779 (2d Cir. 1984). This general rule

applies even when fraud is.pleaded. Ross v. Bolton, 904

F.2d 819, 823 (2d Cir. 1990) (“[w]hen a fraud is as-

serted, the general rule is simply applied in light of Rule

9(b)’s particularity requirements.” ).

Il.

Factual Allegations

Taking as true the afctual allegations specified in the

Complaint, the Fund seeks recovery of major Fund debts

and obligations owed to it by co-Defendants/Appellees,

Locke Manuafcturing, Inc. (“Manufacturing”), Thomas

Herrmann, and Locke Mowers, Inc. (“Mowers”). Herr-

mann has been the president and sole shareholder of

Manufacturing since 1986 when he purchased all of its

stock pursuant to a Stock Purchase Agreement dated

October 1, 1986, an agreement “binding upon and inur-

[ing] to the benefit of the parties hereto and their suc-

cessors and assigns.” See SAC, Exhibit. C, Stock Pur-

chase Agreement Among Tippecanoe Management Corp.,

Michael A. Goodman and Thomas A. Herrmann, dated

as .of October 1, 1986, § 10.7. Pursuant to a collective

agreement, Manufacturing was obliged, but failed, to

make contributions to the Fund. At such time, Herrmann

was “fully aware of an unfunded accrued liability with

5a

respect to the IVE AFL-CIO Pension Plan.” Id. at

§ 3.12(g). “The total estimated amount of unfunded

pension liability due to the pension fund at [sic] July 31,

1986 was $476,955.” See SAC, Exhibit B at 7.

On November 10, 1988, Mowers, through its corporate

parent Elswick, PLC, offered to acquire the business and

certain assets of Manufacturing for a stated considera-

tion of $400,000. See SAC, Exhibit D. On April 10,

1989, Mowers, Manufacturing and Herrmann entered

into the acquisition agreement pursuant to which Mowers

purchased Manufacturing’s assets, but did not assume

liability “actual or contingent, whatsoever, including,

without limitation, for any withdrawal liability of Seller

under any multiemployer pension plan.” See SAC, Ex-

hibit E at 5. Moreover, the Fund alleges that the parties

dropped the purchase price to $350,000 and gave Herr-

mann a $50,000 signing bonus instead. It is also alleged

that Herrmann received a one year service arrangement

for $75,000 and over $370,000 payable over three years

for a covenant not to compete. Prior to the asset sale,

Herrmann used a Manufacturing line of credit to pay

himself an extra bonus of more than $250,000. These

transactions allegedly rendered Manufacturing insolvent.

On May 9, 1989, Manufacturing ceased operations

and effectuated a complete withdrawal from the Fund.

On October 27, 1989, the Fund sent a written demand to

Manufacturing for payment of withdrawal liability

amounting to $638,098.

III.

Dismissal of the Complaint

Herrmann and Mowers moved to dismiss the Com-

plaint. Reading the Complaint liberally, the Complaint

states (1) a federal claim as against all defendants under

ERISA’s Multiemployer Pension Plan Amendments Act

(“MPPAA”), 29 U.S.C. §§ 1381, 1383, 1391 (1988),

which imposes “withdrawal liability’ when an “em-

6a

ployer,” in going out of business, effectively “withdraws

from a multiemployer plan” like the Fund, see SAC

claims 1, 4; and (2) a federal claim as against all de-

fendants under 29 U.S.C. §§ 1451(a)(1), 1392(c)

(1988), which imposes liability on any party who has

attempted to “evade or avoid liability” under the MPPAA

and whose acts have “adversely affected” a pension fund,

see SAC, claims 1, 4 and 5. The Complaint also states

(1) a Delaware state law illegal distribution fraud claim

against Herrmann, see SAC, claim 2, (2) a Connecticut

state fraudulent conveyance claim, see SAC, claim 3 and

(3) a Connecticut state law claim for failure to comply

with Article 6 of Connecticut’s U.C.C., Bulk Transfer

Act, Conn. Gen. Stat. § 42a-6-101 et seq., which imposes

liability on debtors who fail to give notice to credtitors

upon a bulk sale of the debtor’s assets and, in some in-

stances, ensures that the money paid to the indebted

seller is applied to pay the seller’s debts, see SAC, claims

6 and 7. These state law claims all derive from the same

circumstances that gave rise to the federal claims. In

support of all their claims, the Fund attached eight ex-

hibits elaborating the factual allegations of the Complaint.

The magistrate judge recommended dismissal of the

Complaint for a variety of reasons. According to the

magistrate judge’s report: (1) neither Mowers nor Herr-

mann can be construed to be an employer under the

MPPAA; (2) fraud allegations were not pleaded with

particularity; (3) the Fund mistakenly invoked the

court’s diversity jurisdiction for a number of the state

law claims;* (4) with the dismissal of the federal law

claims, discretionary pendent jurisdiction should not be

exercised; (5) even if a federal claim is recognized, the

pendent state law claims should be dismissed because

they are disproportionate in number; and (6) the request

for interim quarterly payments of the withdrawal liability

8 All parties now concede that there is no diversity jurisdiction.

7a

is a unique request for which there is no statutory au-

thority.

On appeal, the defendants question the timeliness of

the appeal and this court’s appellate jurisdiction.

IV.

Timeliness of Appeal

Herrmann argues that the Fund’s objection to the mag-

istrate judge’s report and recommendation was not timely

and therefore must not be considered. See Wesolek v.

Canadair Ltd., 838 F.2d 55, 58 (2d Cir. 1988) (citing

McCarthy v. Manson, 714 F.2d 234, 237 & n.2 (2d

Cir. 1983); John B. Hull, Inc. v. Waterbury Petroleum

Prods., Inc., 588 F.2d 24, 29-30 (2d Cir. 1978), cert.

denied, 440 U.S. 960 (1979)).

A party may request a judge to reconsider a magistrate

judge’s report and recommendation within ten days of

being served with a copy of the order. 28 U.S.C. § 636

(b)(1) (1988). A failure to file timely objections to a

magistrate judge’s report and recommendation may be

fatal. See Thomas v. Arn, 474 U.S. 140, 155 (1985)

(court of appeals may deny review to a petitioner who

“was notified in unambiguous terms of the consequences

of a failure to file, and deliberately failed to file never-

theless”); Roldan v. Racette, 984 F.2d 85, 89 (2d Cir.

1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir.)

(holding that petitioner’s failure to file timely objections

to magistrate judge’s report and recommendation barred

further judicial review and no circumstances warranted

excusing the default in the interests of justice), cert. de-

nied, US. , 113 S. Ct. 825 (1992); Small v.

Sec’y of Health & Human Serv., 892 F.2d 15, 16 (2d

Cir. 1989) (per curiam) (confirming previously stated

rule that “failure to object timely to a magistrate’s re-

port operates as a waiver of any further judicial review

of the magistrate’s decision,” although holding that this

8a

rule does not apply to pro se parties unless the “magis-

trate’s report explicitly states that failure to object to the

report within ten (10) days will preclude appellate re-

view and specifically cites 28 U.S.C. § 636(b)(1) and

[Fed. R. Civ. P.] 72, 6(a) and 6(e)”).

Applying the normal rules guiding the timeliness of

appeals, the Fund had 10 days to file and serve objec-

tions after the magistrate judge’s order was entered (De-

cember 10, 1992). Day 1 was the day after entry or

December 11. Because the time period involved is less

than 11 days, intermediate Saturdays, Sundays and legal

holidays do not count. Fed. R. Civ. P. 6(a). Finally,

Fed. R. Civ. P. 6(e) provides for an additional three

days where service is by mail, as is the case here. See,

e.g., Nalty v. Nalty Tree Farm, 654 F. Supp. 1315, 1317-

18 (S.D. Ala. 1987) (applying above analysis).

A simple glance at a December 1992 calendar con-

firms that the Fund had until December 30, 1992 to file

objections. The Fund filed objections on December 28.

Thus, the Fund made timely objections to the magistrate

judge’s report and recommendation.

V.

Appellate Jurisdiction

Herrmann argues that this court lacks appellate juris-

diction because the Fund filed a notice of appeal before

a final decision of the district court had been rendered.

28 U.S.C. § 1291 (1988). However “a premature no-

tice of appeal from a nonfinal order may ripen into a

valid notice of appeal if a final judgment has been en-

tered by the time the appeal is heard and the appellee

suffers no prejudice.” Welch v. Cadre Capital, 923 F.2d

989, 992 & n.1 (2d Cir) (citations omitted) (noting

Yaretsky v. Blum, 592 F.2d 65, 66 (2d Cir. 1979)

(“the better rule is that in the absence of prejudice to

the appellee, the court should treat a premature appeal

9a

as from a final judgment so as to avoid denial of justice,

expense, and inconvenience.”) ), vacated on _ other

grounds and remanded sub nom. Northwest Sav. Bank

v. Welch, 111 S. Ct. 2882, vacated, 946 F.2d 185 (2d

Cir. 1991).*

On March 30, 1993, the district court entered an order

affirming, approving, and adopting the magistrate judge’s

report and recommendation of December 7, 1992. On

April 8, 1993, the Fund appealed to the Second Circuit.

On June 2, 1993, the Fund voluntarily dismissed its

cause of action against Manufacturing without prejudice

pursuant to Fed. R. Civ. P. 41(a)(1)(i). The Fund

did not renew its appeal to the Second Circuit after this

time.

Under the circumstances surrounding this appeal, the

Fund has filed a premature notice of appeal from a non-

final order which has now ripened into a valid notice of

appeal. Therefore, the notice of appeal, as well as appel-

late jurisdiction, is valid.”

4This Court in Welch noted that although “the holding in

Yaretsky has been superseded by Fed. R. App. Proc. 4(a) (4) as

the Supreme Court subsequently noted” [citing Griggs], “the

philosophy of Yaretsky, tolerating a premature notice of appeal,

remains valid so long as the notice is not nullified under Fed. R.

App. P. 4(a) (4).” Welch, 923 F.2d at 992 n.1.

5 Herrmann argues that the Fund’s premature notice of appeal

renders it without effect. See Griggs v. Provident Consumer Dis-

count Co., 459 U.S. 59, 61 (1982) (per curiam) (holding that a

notice of appeal filed before the disposition of a Rule 59 motion

to alter or amend a judgment shall not have effect). Griggs does

not apply to this case, however, because Griggs involves an inter-

pretation of Fed. R. App. P. 4(a)(4) pursuant to which “[a]

notice of appeal filed before the disposition of [a Rule 59 motion]

shall have no effect.” This rule is an exception to the more general

rule that “a notice of appeal filed after the announcement of a

decision or order but before the entry of the judgment or order

shall be treated as filed after such entry and on the day thereof.”

Fed. R. App. 4(a) (2). Rule 4(a) (2) is inapplicable as well because

there is not, in this case, a notice of appeal that followed an an-

10a

VI.

Federal Jurisdiction Under Rule 12(b)

Having determined that we have appellate jurisdiction

to review the Fund’s appeal, we must determine (1)

whether the district court had subject matter jurisdiction

over the federal claims, Fed. R. Civ. P. 12(b)(1); (2)

whether the district court had personal jurisdiction over

the defendants, Fed. R. Civ. P. 12(b)(2); and (3)

whether the liberally construed allegations made in the

Complaint set forth a federal claim upon which relief

can be granted, Fed. R. Civ. P. 12(b) (6).

A. Subject Matter Jurisdiction

“In determining whether the federal courts have sub-

ject matter jurisdiction over a cause of action, a district

court must look to the way the complaint is drawn to see

if it claims a right to recover under the laws of the United

States.” Goldman v. Gallant Sec., Inc., 878 F.2d 71, 73

(2d. Cir. 1989) (per curiam) (citing Bell v. Hood, 327

U.S. 678, 681 (1946)). “Dismissal for lack of juris-

diction is not appropriate merely because the legal theory

alleged is probably false, but only because the right

claimed is ‘so insubstantial, implausible, foreclosed by

prior decisions of this Court, or otherwise completely

devoid of merit as not to involve a federal controversy.’ ”

Growth Horizons, Inc. v. Delaware County, Pa., 983

F.2d 1277, 1280 (3d Cir. 1993) (quoting Oneida Indian

Nation v. County of Oneida, 414 U.S. 661, 666 (1974) )

(internal quotations and other citations omitted); cf.

Van Gemert v. Boeing Co., 520 F.2d 1373, 1380 (2d

Cir.) (violation of stock exchange rule gave rise to color-

able claim under securities laws so as to sustain federal

jurisdiction), cert. denied, 423 U.S. 947 (1975).

nounced decision that it subsequently entered. Instead, we have a

notice of appeal that followed entry of the judgment dismissing

the Complaint (but not as to all parties).

lla

The question thus posed is whether the federal

MPPAA claim was so insubstantial, implausible, or other-

wise completely devoid of merit as not to involve a fed-

eral controversy. This is a high burden for the defendants

to meet. Under such an analysis, a colorable federal

claim has been stated in this case. 29 U.S.C. § 1451

(a)(1) (1988) provides (emphasis added):

A plan fiduciary, employer, plan participant, or

beneficiary, who is adversely affected by the act or

omission of any party under this subtitle with re-

spect to a multiemployer plan, or an employee or-

ganization which represents such a plan participant

or beneficiary for purposes of collective bargaining,

may bring an action for appropriate legal or equit-

able relief, or both.

Thus, the federal courts have subject matter jurisdiction

over “any party under this subtitle” if that party’s act

Or omission adversely affects, among others, any plan

participant.

In this case, the Fund, a plan participant, has been

adversely affected by the acts of Manufacturing, Mowers

and Herrmann. By their actions, as alleged in the

liberally-construed Fifth claim of the Complaint (which

incorporates by reference the facts alleged in the previous

paragraphs), Manufacturing, Mowers and Herrmann par-

ticipated in a scheme, the principal purpose of which was

to evade or avoid withdrawal liabiilty by depriving Manu-

facturing of funds sufficient to meet its pension liability.

See SAC, claims 1, 2, 5 and attached exhibits. Section

1392(c) of Title 29 (1988), entitled, “Transactions to

evade or avoid liability,” provides (emphasis added):

If a prinicpal purpose of any transaction is to evade

or avoid liability under this part, this part shall be

applied (and liability shall be determined and col-

lected) without regard to such transaction.

Reading sections 1451(a)(1) and 1392(c) together,

if a pension fund (such as the Fund in this case) is ad-

12a

versely affected by the acts of any party who has at-

tempted to “evade or avoid liability” under the MPPAA

(such as Manufacturing Mowers or Herrmann), then the

MPPAA shall be applied “without regard to such trans-

action.” To calculate and collect liability, “without re-

gard to such transaction,” any assets that were trans-

ferred in order to “evade or avoid liability,” as well as

the parties to whom they were improperly transferred,

must be within the reach of the statute. Further, to ap-

ply the MPPAA “without regard to such transaction,”

the transferor entity must be deemed to be in possession

of improperly transferred assets. Those assets must there-

fore be recoverable from the parties to whom they have

been illegitimately transferred. Those parties thus become

“part[ies] under this subtitle’ within the meaning of

§ 1451(a)(1). Cf. Stotter Div. of Graduate Plastics Co.

Inc. v. District 65, United Auto Workers, AFL-CIO, 991

F.2d 997, 1002-03 (2d Cir. 1993) (upholding an arbi-

trator’s finding that an asset purchaser may be liable for

non-ERISA fund contributions as a “successor” even

though a corporation that merely purchases another cor-

poration’s assets for cash does not normally assume the

seller corporation’s liabilities).

B. Personal Jurisdiction

Having stated a colorable claim against defendants

under the MPPAA, the district court has personal juris-

diction over the defendants insofar as the MPPAA in-

cludes a provision for nationwide service of process. See

29 U.S.C. § 1451(d) (1988). Moreover, under the doc-

trine of pendent personal jurisdiction, where a federal

statute authorizes nationwide service of process, and the

federal and state claims “derive from a common nucleus

of operative fact”, see United Mine Workers v. Gibbs,

383 U.S. 715, 725 (1966), the district court may assert

personal jurisdiction over the parties to the related state

law claims even if personal jurisdiction is not otherwise

available. See, e.g., Hargrave v. Oki Nursery, Inc., 646

13a

F.2d 716, 719 (2d Cir. 1980) (“by giving jurisdiction

over an ‘action’ to enforce a federal right Congress

granted the district courts power also to consider state

law claims provided they had a nucleus of pertinent facts

in common with a substantial federal claim”); Interna-

tional Controls Corp. v. Vesco, 593 F.2d 166, 175 (2d

Cir.) (authorizing pendent personal jurisdiction over re-

lated state law claims where federal statute invoked is

Section 27 of the Securities and Exchange Act of 1934)

(citing Leasco Data Processing Equip. Corp. v. Maxwell,

468 F.2d 1326 (2d Cir. 1972)), cert. denied, 442 US.

941 (1979): Oetiker v. Jurid Werke, G.m.b.H., 556

F.2d 1, 4-5 (D.C. Cir. 1977) (authorizing pendent per-

sonal jurisdiction over related state law claims under

federal patent statute); Robinson v. Penn Central Co.,

484 F.2d 553, 555-56 (3d Cir. 1973) (Securities and

Exchange Act); Travis v. Anthes Imperial Ltd., 473

F.2d 515, 528 (8th Cir. 1973) (same); Schwartz v.

Eaton, 264 F.2d 195, 197-98 (2d Cir. 1959) (Invest-

ment Company Act of 1940); Mills, Pendent Jurisdiction

and Extraterritorial Service Under the Federal Securities

Laws, 70 Colum. L. Rev. 423 (1970); 2 Moore’s Fed-

eral Practice, 4 4.42[1], at 4-524, n.47 (1978); 4A C.

Wright & A. Miller, Federal Practice and Procedure,

§ 1125, at 326 (1987 & Supp. 1993). We need not reach

the question whether personal jurisdiction as to the state

law claims was otherwise available because the district

court had personal jurisdiction over the defendants under

the MPPAA and the state law claims derive from a com-

mon nucleus of operative facts with the federal claims.

Accordingly there is jurisdiction over both the federal

and state claims as stated in the Complaint.

C. Legal Sufficiency of the Claims

In part VI.A of this opinion, we decided that, for

purposes of Rule 12(b)(1), the Fund has asserted a

colorable federal claim. However, we have not yet de-

cided whether any of the federal claims asserted sets forth

Tn

l4a

a federal claim upon which relief can be granted. Fed.

R. Civ. P. 12(b)(6). Our inquiry would be over if none

of the claims alleged in the Complaint were fraud claims

because each claim is legally sufficient to state a claim

upon which relief can be granted pursuant to the liberal

standard set forth under Fed. R. Civ. P. 8(a) (“short

and plain statement of the claim showing that the pleader

is entitled to relief’). See Ross v. Bolton, 904 F.2d 819,

823 (2d Cir. 1990). However, Rule 9(b) requires that

the pleader of a fraud claim “state[ ]” “the circum-

stances constituting fraud . . . with particularity.” Fed.

R. Civ. P. 9(b). This Court has construed Rule 9(b)

to require a complaint alleging fraud to “allege the time,

place, speaker and sometimes even the content of the

alleged misrepresentation.” Ouaknine v. MacFarlane, 897

F.2d 75, 79 (2d Cir. 1990) (citations omitted).

“Malice, intent, knowledge, and other condition of mind

of a person may be averred generally.” Fed. R. Civ. P.

9(b). Thus, “scienter need not be alleged with great

specificity.” Ouaknine, 897 F.2d at 79-80 (citing Beck

v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50

(2d Cir. 1987), cert. denied, 484 U.S. 1005 (1988);

Connecticut Natl Bank v. Fluor Corp., 808 F.2d 957,

962 (2d Cir. 1987); Goldman v. Belden, 754 F.2d 1059,

1071-72 (2d Cir. 1985)). In fact, conclusory allegations

of scienter are sufficient “if supported by facts giving rise

to a ‘strong inference’ of fraudulent intent.” Ouaknine,

897 F.2d at 80; Beck, 820 F.2d at 50; Connecticut Nat'l

Bank, 808 F.2d at 962.

The specificity required by Rule 9(b) is distinct from

Rule 8(a)’s liberal “plain statement” rule. This distinc-

tion serves several purposes: (1) “to afford defendant

fair notice of the plaintiff's claim and the factual ground

upon which it is based,” Ross v. Bolton, 904 F.2d 819,

823 (2d Cir. 1990) (citations omitted); see also O’Brien

v. National Prop. Analysts Partners, 936 F.2d 674, 676

(2d Cir. 1991); (2) “[to] safeguard[ ] defendant’s rep-

utation and goodwill from improvident charges of wrong-

15a

doing,” Ross v. Bolton, 904 F.2d at 823 (citations

omitted); see also O’Brien, 936 F.2d at 676; and (3)

“to inhibit the institution of strike suits.” Ross v. Bolton,

904 F.2d at 823 (citations omitted). Nevertheless, Rule

9(b) “must be read together with rule 8(a).” Oucknine,

897 F.2d at 79 (citations omitted); 5 C. Wright & A.

Miller, Federal Practice and Procedure § 1298, at 617

(1969 & Supp. 1989).

Moreover, “[d]espite the generally rigid requirement

that fraud be pleaded with particularity, allegations may

be based on information and belief when facts are pecu-

liarly within the opposing party’s knowledge.” Wexner

y. First Manhattan Co., 902 F.2d 169, 172 (2d Cir.

1990) (citations omitted).

The magistrate judge incorrectly dismissed the Com-

plaint under the Rule 9(b) standard of specificity. Ap-

plying the general rule this Court invokes when an appeal

comes before us on a motion to dismiss, accepting as true

the factual allegations in the liberally construed Com-

plaint, and drawing all inferences in favor of the pleader,

see Ross v. Bolton, 904 F.2d at 823, we hold that the

fraud claims alleged in the Complaint are legally suffi-

cient to survive the specificity requirements of Rule 9(b)

and a Rule 12(b)(6) motion to dismiss. Everything

necessary to ascertain a federal claim under the MPPAA

is in the Complaint and its attached exhibits.

To support its claim that Manufacturing, Mowers and

Herrmann structured the asset sale to “evade and avoid”

withdrawal liability under the MPPAA, the Fund attaches

the documents that structured the asset sale. For ex-

ample, the Fund, in alleging that Herrmann knew about

the withdrawal liabliity, quotes from the Stock Purchase

Agreement and includes as exhibits both the Stock Pur-

chase Agreement and associated financial statements.

The Fund then alleges how Herrmann and Mowers con-

spired to avoid withdrawal liability by quoting from

specific passages in the Asset Sale Agreement whereby

ee

—

l6a

Mowers could purchase the entire company except for

certain liabilities including the withdrawal liability.

Moreover, the Fund alleges intent and supports it with

quoted passages from signed contracts attached as ex-

hibits. These allegations raise the strong inference that

this transaction was not the typical asset sale but one

structured to circumvent the mandates of a federal statute

and to defraud a pension fund.

Moreover, the Fund was wholly dependent on the de-

fendants’ representations to make out its case of fraud.

As the Fund was not privy ito the negotiation of the asset

sale, a more particularized account of the fraud claims

could only be established through discovery.

A thorough reading of the Complaint puts the defend-

ant on fair notice both as to the claims and the factual

ground upon which the claims are based. Given the stand-

ard of review, drawing all inferences in favor of the Fund,

we cannot state that it appears to a certainty that the

Fund can prove no set of facts entitling it to relief.

To summarize, the Fund has stated a colorable federal

claim upon which relief can be granted because (1) the

Fund has alleged that Mowers, Manufacturing, and Herr-

mann structured the asset sale so as to avoid withdrawal

liability under the MPPAA and (2) taking the Fund’s

allegations in the Complaint as true, there is a federal

basis upon which the court may grant relief to the Fund.

Having so alleged this harm and having stated such claims,

the district court has federal question jurisdiction over

such claims upon which relief can be granted and per-

sonal jurisdiction over the parties for purposes of the

federal and the state claims. Fed. R. Civ. P. 9(b),

12(b)(1), (2) and (6). In concluding that there is a

viable federal claim, we need not reach the question

whether Mowers or Herrmann are “employers” within the

meaning of section 1381.

Vil.

Federal Jurisdiction of State Law Claims

Several of the claims are based on state law. Once a

federal court has federal jurisdiction, it can normally exer-

cise pendent jurisdiction over the state law claims. See,

e.g., United Mine Workers v. Gibbs, 383 U.S. 715, 725

(1966) (federal court has pendent jurisdiction over state

law claims so long as the relationship between the federal

and state claims “permits the conclusion that the entire

action before the court comprises but one constitutional

‘case.’”). See also Rosado v. Wyman, 397 U.S. 397, 404

(1970); see also Cushing v. Moore, 970 F.2d 1103, 1106

(2d Cir. 1992) (using the same analysis but for supple-

mentary jurisdiction under 28 U.S.C. § 1367 (Supp.

1990)). Furthermore, this Circuit has held that once a

claim is sufficient for federal jurisdictional purposes, the

state law claims also may be considered. See, e.g., Flick-

inger v. Harold C. Brown & Co., Inc., 947 F.2d 595, 598

(2d Cir. 1991).

The Supreme Court continually has stated that a federal

court lacks jurisdiction to resolve pendent state claims

only when the federal question is “ ‘so insubstantial, im-

plausible, foreclosed by prior decisions of this Court or

otherwise completely devoid of merit as not to involve a

federal controversy within the jurisdiction of the District

Court, whatever may be the ultimate resolution of the

federal issues on the merits.” Hagans v. Lavine, 415

U.S. 528. 548 (1974) (quoting Oneida Indian Nation

v. County of Oneida, 414 USS. 661. 666-67 (1974)).

However, the judicial power of pendent jurisdiction “need

not be exercised in every case in which it is to be found

to exist. . .. pendent jurisdiction is a doctrine of discre-

tion, not of plaintiff's right. Its justifiaction lies in con-

siderations of judicial economy, convenience and fairness

to litigants.” United Mine Workers v. Gibbs, 383 US. at

126: see also Castellano v. Board of Trustees of Police

18a

Officers’ Variable Supplements Fund, 937 F.2d 752, 758

(2d Cir. 1991), cert. denied, 112 S. Ct. 378 (1991).

In this case, the federal and state law claims derive

from a common nucleus of opeartive fact. See Gibbs, 383

U.S. at 725. All the claims derive from the transaction

between Manufacturing, Mowers, and Herrmann (the

asset sale purchase), events leading up to this tarnsaction,

and events following this transaction. In each instance,

these events allegedly tell the story of how the defendants

conspired to defraud the pension fund cither under the

MPPAA or under state law. Therefore, in the interest of

justice and judicial economy, the district court should

have exercised pendent jurisdiction over the state law

claims.

Vill.

Injunctive Relief

The Fund asks us to reconsider its motion to compel

quarterly withdrawal liability payments pursuant to 29

U.S.C. §1399(c) (emphasis added) which expressly

states that “an employer shall pay the amount determined

under Section 1391 of this title . . . .” However, before

a court may compel an employer to make interim pay-

ments under Section 1399(c), the plaintiff must comply

with the statutory notice and demand requirements under

Section 1399(b)(1)(A). This gives the employer an

opportunity to object to the calculation of interim pay-

ments and to furnish additional relevant information. 29

U.S.C. § 1399(b)(2)(A) (1988).

The Fund complied with the statutory notice and de-

mand requirements only with respect to Manufacturing

and not with respect to Mowers and Herrmann. See SAC,

q 17 and Exhibit A. Thus, neither Mowers nor Herrmann

was provided with the opportunity to contest the calcula-

tion of the withdrawal liability or to have the dispute

arbitrated.

Porarceme yh)

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19a

More importantly, by the plain language of the statute,

only employers are liable for interim payments. However,

it has yet to be determined that the defendants were

“employers” within the meaning of the MPPAA. This is

not a dispute in which an employer admits its obligation

to pay withdrawal liability but contests the pension fund’s

calculations. Rather, the defendants contest the underly-

ing basis for the Fund’s attempt to collect withdrawal lia-

bility. Under the circumstances, we believe it would be

unfair to burden the defendants with an order compelling

payment where defendants were not given the opportunity

to object to the calculations and especially where the

defendants may not be liable at all.

IX.

Conclusion

For the foregoing reasons, we affirm the denial of the

Fund’s motion to compel defendants to make interim pay-

ments pursuant to 29 U.S.C. § 1399(c), but otherwise

reverse the judgment and remand to the district court for

further proceedings in accordance with this opinion.

20a

[Filed Dec. 7, 1992]

UNITED STATES DISTRICT COURT

DISTRICT OF CONNECTICUT

Civil No. B-90-57 (TFGD)

IUE AFL-CIO PENSION FUND, et al.,

Plaintiffs

VS.

LOCKE MANUFACTURING, INC.. ef al.,

Defendants

RULING ON PENDING MOTIONS

Plaintiffs are a union pension fund and its trustees, es-

sentially seeking recovery of major fund debts and obliga-

tions owed by defendant Locke Manufacturing, Inc.

(“Locke”) incident to Locke’s going out of business. Co-

defendant Thomas Herrmann was Locke’s president and

sole shareholder; another co-defendant, Locke Mowers

Inc. (“Mowers”), is a new corporation which acquired

Locke’s assets by contract negotiated ameng Locke,

Herrmann, and Mowers’ predecessor, Elswick, PLC.

Plaintiffs’ second amended complaint aileges in part that

the sale of Locke’s assets was structured so as to exclude

assumption of responsibility for its debts. The final as-

signed asset price was $350,000.00, with Herrmann also

to receive a signing bonus of $50,000.09, a one year serv-

ice arrangement for $75,000.00, and over $370,000.00

additionally payable over three years for a covenant not

to compete; prior to the asset sale, Herrmann also used

a bank line of credit to Locke to pay himself an extra

bonus of more than $250,000.00. Locke was allegedly

rendered insolvent, and plaintiffs question the good faith

and adequacy of consideration involved in the transac-

tions.

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2ia

Or renewed motions by Herrmann and Mowers to dis-

miss this twice-amended complaint, it should be noted

both that compalints are generally read liberally when

challenged on their face, see Scheuer v. Rhodes, 216 US.

232. 236 (1974), and that claimed fraud’s circumstances

must be alleged with “particularity”, Rule 9(b), Fed. R.

Civ. P. In this case, plaintiffs have attempted to state a

primary federal claim as against all defendants under

ERISA, cf. 29 U.S.C. § 1001, et seq.—and more specifi-

cally, under the Multiemployer Pension Plan Amendments

Act (MPPAA or the Act), 29 U.S.C. § 1381, et seq.,

which imposes “withdrawal liability” when an “employer”

like Locke in going out of business effectively “withdraws

from a multiemployer plan” like the plaintiffs’ fund, 29

U.S.C. § 1381(a). The essential question presented is

whether Mowers or Herrmann can also be treated as an

“employer” liable to the fund under the Act.

The MPPAA itself does not set forth an express defini-

tion of “employer”. One cannot simply and automatically

borrow definitions from other provisions of ERISA; our

court of appeals has concluded that the definition of “em-

ployer” for the special purpose of MPPAA withdrawal

liability is to be developed by the courts. See Korea Ship-

ping Corp. v. New York Shipping Ass'n, 880 F.2d 1531,

1536 (2 Cir. 1989). In the face of an argued more re-

strictive “common law or dictionary meaning”, the Second

Circuit has at least endorsed a district court’s urged mean-

ing of “a person who is obligated to contribute to a plan

either as a direct employer or in the interest of an em-

ployer of the plan’s participants”, id. at 1537. Another

circuit has suggested that the principle common to Korea

Shipping and most other authorities imposing withdrawal

liability in uncertain “employer” cases is that all defend-

ants held liable for MPPAA purposes had been “con-

tractually bound” in some fashion to make pension con-

tributions. Seaway Port Authority of Duluth v. Duluth-

Superior ILA Marine Ass'n, 920 F.2d 503, 509 (8 Cir.

1990). If that is so, it would truly be an invented exten-

-_—— eee ne meen LLL LLL LLL LLL

22a

sion of the statute’s reach to include a new and distinct

corporate entity like the asset purchaser Mowers in this

case, and plaintiffs are better left to other and clearer

existing remedies for fraud and the like if any are war-

ranted.

As far as Herrmann is concerned, the sound and ordi-

nary rule consensus would seem that controlling officers

and shareholders will not be held liable for MPPAA pur-

poses as an “employer” along with their corporation. See,

e.g., DeBreceni v. Graf Bros. Leasing Inc., 828 F.2d 877,

879-881 (1 Cir. 1987), cert. denied, 484 U.S. 1064

(1988); Canario v. Lidelco, Inc., 782 F. Supp. 749, 756-

760 (E.D.N.Y. 1992); cf. also JUVE AFL-CIO Pension

Fund v. Locke Machine Co., 726 F. Supp. 561, 565-570

(D.N.J. 1989). And while Herrmann presumably had

operational control, there is no sufficient indication of an

utter disregard of corporate formalities which would tradi-

tionally allow piercing of the corporate veil, cf. Canario,

supra at 759. On the other hand, plaintiffs do in con-

clusionary terms claim fraud, and the Second Circuit has

affirmed trial imposition of personal liability upon a con-

trolling officer and shareholder who had been criminally

convicted of fraud in the analogous circumstance of evad-

ing benefit fund contribution obligations, cf. 29 U.S.C.

§ 1145. See Leddy v. Standard Drywall, Inc., 875 F.2d

383, 387-388 (2 Cir. 1989). Yet that was perhaps the

special case, since the fraud was patent and had been

judicially established of record. In this present instance

of conclusory allegations, more pleaded substance and

particularity fairly may and should be demanded, cf. Rule

9(b), supra, before considering a novel extension of

MPPAA “employer” liability, cf. Smith v. Ambrogio, 456

F. Supp. 1130, 1136-1137 (D. Conn. 1978).

Plaintiffs do also allege a number of distinct purported

state law claims, mistakenly invoking this court’s diversity

jurisdiction. There is no such independent jurisdictional

basis for those supposed claims, because it is evident that

complete diversity is lacking, in that when suit was

23a

brought one plaintiff trustee was a Connecticut citizen and

defendant Locke’s last principal place of business, cf. 28

U.S.C. § 1332(c), was also in Connecticut, see, e.g., Wm.

Passalacqua Builders, Inc. v. Resnick Developers South,

Inc., 933 F.2d 131, 141 (2 Cir. 1991). Suit was com-

menced prior to the December 1, 1990 effective date of

the federal “supplemental jurisdiction” statute, 28 U.S.C.

§ 1367, so any discretionary exercise of pendent jurisdic-

tion would be governed by previously governing caselaw

principles, as in United Mine Workers of America v.

Gibbs, 383 U.S. 715, 725-727 (1966). With dismissal of

the purported federal claims, the state claims should

plainly be dismissed, see id. at 726. In this case, more-

over, the pendent state claims should be dismissed even

if a federal claim is recognized, because the state claims

are disproportionate in number, and present distinct, con-

troverted issues and potential for confusion. See id. at

726-727. If such claims are deemed necessary by plain-

tiffs, any interest in judicial economy can be better served

by state court suit, where both any state law claim and

any valid MPPAA withdrawal liability claim can be as-

serted together as of right. Cf. 29 U.S.C. § 1451(c).

Plaintiffs have additionally moved for court-ordered in-

terim quarterly payments by defendants Herrmann and

Mowers as to claimed withdrawal liability, cf. 29 U.S.C.

§ 1399(c). See, e.g., DeBreceni v. Merchants Terminal

Corp., 889 F.2d 1 (1 Cir. 1989). This is a novel request

indeed, for there is no authority indicating the MPPAA

statute contemplated such ar automatic payment duty

when one’s very identity as a responsible employer is in

question. And if the application is a more general equi-

table relief request, rather than an argued claim of statu-

tory right to interim payments, the request must be denied

in any event because there is no showing as required that

plaintiffs cannot be adequately compensated ultimately by

money damages if they secure a favorable judgment. See,

e.g., Jackson Dairy, Inc. v. H.P. Hood & Sons, 596 F.2d

70, 72 (2 Cir. 1979).

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24a

Subject to review, cf. 28 U.S.C. § 636(b), defendants’

pending motions to dismiss should be granted, and plain-

tiffs’ motion to compel prejudgment payments denied, on

the grounds and for the reasons stated above.

Dated at New Haven, Connecticut, this 7th day of

December, 1992.

s/ Arthur H. Latimer

ARTHUR H. LATIMER

United States Magistrate Judge

25a

|

UNITED STATES DISTRICT COURT

DISTRICT OF CONNECTICUT

Civil No. B-90-57 (TFGD)

IUE AFL-CIO PENSION FUND, et al.,

Vv.

LOCKE MANUFACTURING, INC., ef al..

JUDGMENT

This cause came on for consideration defendants’ mo-

tions to dismiss and plaintiffs’ motion to compel before

the Honorable Arthur H. Latimer, United States District

Magistrate Judge, and

The Court having considered the pending motions and

all the papers submitted in connection therewith filed its

Ruling on Pending Motions, granting the motions to dis-

miss and denying the plaintiffs’ motion to compel prejudg-

ment payments for the reason stated in its ruling, and

the Honorable T. F. Gilroy Daly, United States District

Judge having Approved, Affirmed and Adopted Magistrate

Judge Latimer’s recommended ruling,

It is therefore ORDERED and ADJUDGED that judg-

ment be and hereby is entered in favor of the defendants,

in accordance with the Court’s order.

Dated at Bridgeport, Connecticut this 30th day of

March, 1993.

KEVIN F. ROWE

Clerk

By /s/ Carol E. Cannady

Caro E. CANNADY

Deputy in Charge

ee mi

26a

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

At a stated term of the United States Court of Appeals

for the Second Circuit, held at the United States Court-

house in the City of New York, on the 23rd day of March

one thousand nine hundred and ninety-four.

Docket Number: 93-7384

IUE AFL-CIO PENsION FUND; LLoyp J. HAYES; PETER

S. Dicicco; SAL T. INGRASSIA; JOHN S. VOZELLA;

CLARENCE RANALLO; THOMAS F. LYNCH, as Trustees

of the TUE AFL-CIO PENSION FUND,

Plaintiffs-appellants,

-V.-

THOMAS HERRMANN; LOCKE MOwERS, INCORPORATED,

Defendants-A ppellees.

A petition for rehearing containing a suggestion that

the action be reheard in banc having been filed herein by

defendant-appellee Thomas Herrmann,

Upon consideration by the panel that decided the ap-

peal, it is

Ordered that said petition for rehearing is DENIED.

It is further noted that the suggestion for rehearing in

banc has been transmitted to the judges of the court in

regular active service and to any other judge that heard

27a

the appeal and that no such judge has requested that a

vote be taken thereon.

FoR THE COURT

GeorGE LANGE III

Clerk

By: /s/ Carolyn Clark Campbell

CAROLYN CLARK CAMPBELL

Chief Deputy Clerk

28a

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

At a stated Term of the United States Court of Appeals

for the Second Circuit, held at the United States Court-

house in the City of New York, on the 19th day of No-

vember, one thousand nine hundred ninety-three.

Present: Hon. JAMES L. O/XEs,

Senior Circuit Judge,

Hon. J. DANIEL MAHONEY,

Circuit Judge,

Hon. JACOB MISHLER,

District Judge.*

Docket No. 93-7384

IUE AFL-CIO PENSION FuND; LLoyp J. HAYES; PETER

S. Dicicco; SAL T. INGRASSIA; JOHN S. VOZELLA;

CLARENCE RANALLO; THOMAS F. LYNCH, as Trustees

of the [UE AFL-CIO PENSION FUND,

Plaintiffs-A ppellants,

-V.-

THOMAS HERRMANN: LOCKE MOwERsS, INCORPORATED.

Defendants-A ppellees.

Appeal from the United States District Court for the

District of Connecticut.

This cause came on to be heard on the transcript of

record from the United States District Court for the Dis-

trict of Connecticut and was argued by counsel.

ISSUED AS MANDATE. 3-30-94

ES

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OMS