Opinion
Case No. 2:04CV00493.
October 26, 2004
ORDER DISMISSING THE FIRST CLAIM AND GRANTING LEAVE TO AMEND THE SECOND, THIRD, AND FOURTH CLAIMS
Campbell Communications L.L.C., Steven D. Campbell, and Melyn Crapo (collectively the defendants) move to dismiss the first, second, and third claims for relief as against all defendants for failure to state a claim upon which relief may be granted and for failure to plead the claims with the requisite particularity. Additionally, defendants move to dismiss the fourth claim for relief as against Campbell and Crapo for failure to state a claim upon which relief may be granted. This court DISMISSES the first claim and GRANTS leave to amend the Complaint as to the second, third, and fourth claim.
Rule 12(b)(6) of the Federal rules of Civil Procedure provides that a defendant may move to dismiss a cause of action when the plaintiff has failed to plead a claim upon which relief can be granted. When such a motion is made the court should construe the pleadings liberally, accepting all well-pleaded facts as true, and all reasonable inferences must be drawn in favor of the plaintiff. A complaint should not be dismissed unless it is apparent "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Applying this standard the court will give a brief summary of the relevant background and then address each claim in turn.
Area Land Inv. Co., v. Petty, 906 F. Supp. 1470, 1475 (D. Utah 1994).
Id. (quoting Castleglen, Inc., v. Commonwealth Savings Assn., 689 F. Supp. 1069, 1070 (D. Utah 1988).
BACKGROUND
In September 2001, Plaintiff Robert Greene (hereinafter Greene) first communicated his interest in the Campbell Group with Steven D. Campbell (hereinafter Campbell), president of Campbell Communications, L.L.C. (hereinafter Campbell Communications), and Melyn Crapo (hereinafter Crapo). The Campbell Group is a subsidiary of Campbell Communications. Sometime during Spring 2002 Greene began having weekly telephone conferences with either Campbell, Crapo, or both. During one of these conference calls Campbell represented that a large-dollar investor was interested in investing in the Campbell Group. Sometime later, but still during Spring 2002, Greene met with both Campbell and Crapo in Las Vegas. At that meeting Campbell and Crapo proposed an agreement whereby Greene would invest in the Campbell Group for a percent ownership in the Campbell Group. During that meeting Campbell asserted that the funds received from Greene would be used, at least at the outset, only to demonstrate Campbell's financial viability with the intent of having a large-dollar investor invest in the Campbell Group. After this meeting the defendants sent Greene an Equity Purchase Agreement (hereinafter the Agreement), which Greene signed. This Agreement was an express contract with Campbell Communications on behalf of itself, its members, subsidiaries, affiliates, predecessors, and successors. The Agreement provided that Greene would invest $250,000 in the Campbell Group in return for a one percent (1%) ownership interest in the Campbell Group. Greene maintains that to date he has not received any documentation demonstrating his one percent ownership other than the Agreement itself. The agreement also guaranteed a cash flow to Greene in the amount of 5,000 dollars per month. To date Green has received 18 monthly payments of 5,000 dollars each. Greene maintains that two of these payments were late and two payments were never sent. The Agreement also provided that the Campbell Group had, or would acquire, a key-man insurance policy on Campbell and that Greene would be added as a beneficiary under this policy in the amount of 250,000 dollars. To date, Greene has received no policy or proof of a policy showing Greene to be a beneficiary.
FIRST CLAIM: FRAUD IN THE INDUCEMENT
Greene's first Claim for Relief is for fraud in the inducement. In order to establish fraud in the inducement under Utah law the plaintiff must demonstrate each of the following elements: (1) That a representation was made; (2) concerning a presently existing material fact; (3) which was false; (4) which the representor either (a) knew to be false, or (b) made recklessly, knowing that he had insufficient knowledge upon which to base such representations; (5) for the purpose of inducing the other party to act upon it; (6) that the other party, acting reasonably and in ignorance of its falsity; (7) did in fact rely upon it; (8) and was thereby induced to act; (9) to his injury and damage. The Federal Rules of Civil Procedure state that "[i]n all averments of fraud or mistake, the circumstances constituting fraud shall be stated with particularity. Malice, intent, knowledge, and other conditions of mind of a person may be averred generally." This rule has been interpreted to require that "a plaintiff identify the time, place, and content of each allegedly fraudulent representation or omission, to identify the particular defendant responsible for it, and to identify the consequences thereof."
Mikkelson v. Quail Valley Realty, 641 P.2d 124, 126 (Utah 1982).
Karacand v. Edwards, 53 F.Supp.2d 1236, 1241 (D. Utah 1999).
Defendants claim that plaintiff Greene's complaint is not sufficiently particular under Rule 9(b) as interpreted. In determining whether a complaint is sufficiently particular, the court will consider whether there was enough detail to "give adequate notice to an adverse party and enable him to prepare a responsive pleading." The Complaint, however, is not required to plead detailed evidentiary matter. With the foregoing in mind the court will now address each of the rule 9(b) requirements. A. Content of the Representation
Dahl v. Gardner, 583 F. Supp. 1262, 1267 (D. Utah 1984) (citation omitted).
Seattle-First National Bank v. Carlstedt, 800 F.2d 1008, 1011 (10th Cir. 1986).
Rule 9(b) requires the plaintiff to identify the content of each allegedly fraudulent representation. In his First Claim for Relief, Greene relies on two representations, (1) that a large-dollar investor was interested in investing 50 million dollars into the Campbell Group, and (2) that Greene's investment would be used to demonstrate the financial viability of the Campbell Group to this large-dollar investor. Although, the complaint does not give specific quotes, it does describe the contents of the representations with sufficient particularity to allow defendants to prepare an adequate response. There is no ambiguity about what plaintiff alleges to be misrepresentations. Consequently, defendants are on notice that they need to defend the existence of a large-dollar investor that was interested in the Campbell Group at the time Greene was discussing a possible investment in the Campbell Group, and that Greene's money was used to demonstrate the financial viability of the Campbell Group to this investor.
B. Time and Place where Representation was Made
Defendants claim that the complaint is not sufficiently particular as to the time when, or place where the misleading representations were made. Greene states that during a weekly phone conference he was told that there was a large-dollar investor interested in the Campbell Group. Yet, in other parts of the Complaint, Greene seems to indicate that this representation was made on multiple occasions, not just once. The fact that there is ambiguity about the number of times this representation was made makes it difficult for the defendants to make an adequate response. Even if we assume that the representation was confined to the one conversation, plaintiff fails to identify in which phone conference the representation was made. The Defendants are only told that it was in one of the weekly conference calls that could have taken place any time between March and June of 2002.
The second representation complained of under the first Claim for Relief was made sometime in the spring at a meeting wherein Greene, Campbell, and Crapo were present. Again the only reference to time is that the meeting occurred in the spring of 2002. However, the complaint does state that this meeting took place in Las Vegas, and that it was the only Las Vegas meeting between the three individuals. Therefore the defendants have notice of the time when the statement was made so as to prepare an adequate response. Additionally, since there was only one meeting in Las Vegas the representation regarding the intended use of Greene's investment is also sufficiently particular as to location. If there was only one Las Vegas meeting and the defendants attended it, it is reasonable to infer that they know when and where the meeting was and can therefore prepare an adequate response accordingly.
The particular location of the parties during the phone conference is not given in the Complaint. However, the fact that the representation was made over the phone is enough of a location to allow an adequate response if the plaintiff had also provide the particular phone conference in which the complained of representation occurred. Plaintiff could also be more particular considering the line used to make the call. Was this a home line, a business line, or a cell phone? Such information would be of use to the defendants in identifying when and where the representations were made and thus ensure themselves the opportunity to make an adequate response. For these reasons the court concludes that the complaint is deficient as to particular time and place. C. Who Made the Representation
Defendants claim that Greene failed to identify which particular defendant made the representations. Yet paragraph 13 of the complaint states that Campbell represented that there was a large-dollar investor during a weekly conference call; paragraph 17 of the complaint also states that Campbell was the person who represented the intended use for Greene's money in the Las Vegas Meeting. Since Campbell, as President of Campbell Communications, is an officer of the corporation, it is reasonable to infer that he was also speaking for Campbell Communications when he made these statements. Greene does fail to identify whether Crapo ever made these representations. While Greene states that Crapo was sometimes involved in the weekly phone conversations he does not state that she ever represented that there was a large-dollar investor. Indeed, as the court already noted, Greene's complaint fails to make clear whether the representation regarding the interested large-dollar investor was made outside of the one phone conference with Campbell.
Additionally, Greene states that Crapo was at the Las Vegas meeting but does not specifically attribute any representation to Crapo. In his memorandum in opposition to the motion to dismiss, Greene asserts that Crapo's silence was a non-verbal affirmation of Campbell's representation. Whether this is true is not for the court to decide since that argument is not placed within the complaint itself. In fact there is no statement in the Complaint that particularly states that Crapo made either of the representations. For these reasons the complaint is not particular as to the preson who made the statements. D. Consequences
Since neither the defendant or the plaintiff have addressed the particularity of the consequences the court accordingly will not address that issue.
E. Scienter
Defendants also argue that plaintiffs do not address the scienter element with sufficient particularity. In support of this defendants rely on language from the Karacand case that "in the securities fraud context, a plaintiff, must also allege facts showing that an alleged misstatement is false. . . . In other words, the plaintiff must set forth an explanation as why the statement or omission complained of was false or misleading." However, the first Claim for Relief is for fraud in the inducement and is not brought under the Federal Securities Exchange Act, as was the claim in Karacand. Rule 9(b) allows the plaintiff to plead scienter generally rather than with particularity therefore the complaint is sufficient.
Karacnad v. Edwards, 53 F. Supp. 2d 1236, 1242 (D.Utah 1999).
F. MATERIALITY
Defendants contend that even if the complaint is sufficiently particular under rule 9(b) the claim should still be dismissed under the principle that a prediction of future conduct is in the nature of opinion and therefore is not actionable as fraud. Although defendants do not explicitly state it, their argument is directed at the material fact element of fraud in the inducement. "A statement or omission is only material if a reasonable investor would consider it important in deciding whether to [make the investment]." The test for materiality requires the court to determine whether information contained in the statement or omission would be considered important by a reasonable investor; if so the court must then determine if the information is still important in light of other information available to the investor.
In support of this theory defendants cite Nielson v. Leamington Mines Exploration Corp., 48 P.2d 439, 442 (Utah 1935).
Karacnad, 53 F. Supp. at 1242.
Id.
Additionally there are some statements that are by there very nature considered unimportant. These statements are often categorized as mere puffing and are typically forward-looking statements, or generalized optimistic statements that are incapable of being objectively verified. In this claim, the information relied on by Greene in deciding to invest was a representation by Campbell that there was a large dollar investor interested in investing 50 million in the Campbell Group, yet there was no representation that the investor would invest the 50 million into the Campbell Group. A reasonable investor would not consider a representation of mere interest as important because even if the investor exists the fact that he is merely interested does not mean that he will actually invest. At best all plaintiff can contend is that Campbell made a prediction regarding the likelihood of additional investors. As already stated, forward-looking statements are not considered important and therefore the representation regarding the interested investor is not material.
Id.
Greene also states that Campbell represented that Greene's money was needed to demonstrate financial viability to the interested investor. The information contained in this representation is likewise unimportant. Greene does not claim that anyone represented to him that the investor would invest if Campbell could demonstrate its financial viability, therefore there is still a good chance that the interested investor would decide to not invest even if financial viability was proven.
As stated above, a Motion to Dismiss will be granted only when it appears "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Since the large-dollar representation is an immaterial fact, it is beyond doubt that the plaintiff can provide no facts that would satisfy the materiality element of fraud in the inducement. Consequently, the plaintiff has failed to state a claim upon which relief can be granted. It is important to note that the defect is in the nature of the representation and not in the pleadings, therefore, the plaintiff cannot cure the defect by amending the complaint. For the forgoing reasons the first claim for relief is dismissed with prejudice.
Area Land Inv. Co., 906 F.Supp. at 1475.
SECOND CLAIM: VIOLATION OF THE FEDERAL SECURITIES EXCHANGE ACT
The second claim of relief is a claim for violation of section 10(b) of the Federal Securities Exchange Act. In order to obtain redress under a 10(b) claim "a plaintiff must allege: (1) a misleading statement or omission of a material fact; (2) made in connection with the purchase or sale of securities; (3) with scienter; (4) reliance; and (5) damages." The pleadings must also conform to the rule 9(b) requirements. Additionally, in 1995 Congress passed the Private Securities Litigation Reform Act of 1995 (hereinafter PSLRA). As interpreted, the PSLRA requires that a plaintiff plead scienter with particularity as opposed to generally, as permitted under Fed.R.Civ.P. 9(b). Under the PSLRA the plaintiff must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind and must do so with respect to each act or omission alleged to be a violation of the securities fraud. Furthermore, for allegations made on information or belief, the complaint shall state with particularity all facts on which that belief is formed."
Id.
Karacand, 53 F. Supp. at 1242.
In addition to the representations complained of in the first Claim for Relief, Plaintiff adds two more representations that he claims are fraudulent. First plaintiff claims that he was promised a 1% ownership interest in the Campbell Group, and second, plaintiff avers that he was promised to be named as a beneficiary in the amount of $250,000 under a key-man insurance policy that Campbell Group had, or would acquire, on Campbell.
While the court has already addressed the representations carried over from the first Claim for Relief, it will now briefly address these two representations under the PSLRA. Plaintiff states that to date he has no knowledge that any large dollar investor had invested in the Campbell Group and had no knowledge of any documentation showing that a large dollar investor was at any time interested in the Campbell Group. In his memorandum opposing the Motion to Dismiss, plaintiff states that on several occasions he tried to obtain this information from the defendants, and they have repeatedly refused to provide any information concerning this investor. Similarly, Plaintiff states that when he asked Campbell where his money was he was told it was none of his business. Greene bases his belief of fraud on these facts.
At first glance, the Complaint appears to satisfy the PSLRA requirements since it provides the facts on which Greene reached his conclusion. However, the PSLRA requires particular facts giving rise to a strong inference that the defendant acted with the required state of mind. The fact that Greene has not seen any documentation does not mean that defendants acted with the intent to defraud the plaintiff. It is quite possible that no documents were prepared that demonstrated the interest of the potential investor. Simply stating that Greene has no knowledge of such documents is insufficient to create a strong inference that the defendants had the state of mind required for fraud.
Additionally, Greene's statement that defendants refused to give him any information regarding the investor lacks the requisite particularity to create a strong inference of the required mental state since Greene does not state why defendants refused to give the requested information. Greene has not shown that the defendants acted inappropriately in refusing to supply him with the requested information. Additionally, it is important to note that one of the elements of a rule 10-b claim is that the statement or omission concerns a material fact. As discussed under the first claim, a representation that there is another interested investor is not a material fact and therefore, at least regarding this representation, even if the PSLRA requirements were satisfied the claim would still fail because it does not state a claim upon which relief can be granted. For these reasons the pleading of the large-dollar investor representation does not meet the PSLRA requirements.
The second representation that Greene relies on was a promise that he would receive a 1% interest in the Campbell Group. The only place that Greene specifies that this representation was made was in the purchase agreement itself. Greene's belief that this promise was fraudulently made is based on the fact that he has received any documentation, other than the agreement, demonstrating that he does have a 1% ownership interest in the Campbell Group.
In order for a failure to perform a promise to constitute a cause of action in fraud, "there must be some intention on the part of the promisor, at the time of making the promise not to perform it." Greene introduces no facts that support the contention that defendants did not intend to give Greene the 1% ownership interest at the time they made the promise.
Nielson, 48 P.2d at 443.
The same is true for Greene's statement that he was promised that he would be made a beneficiary under the key-man insurance policy. As with the 1% ownership interest representation, the insurance policy representation was made exclusively in the agreement. There is no statement in the complaint that either of the representations were made in another place or at another time. Greene again relies on the fact that he has received no documentation that he is a beneficiary under the policy as the basis for his belief that the promise was fraudulently made. However, this is not enough to produce a strong inference of as to the requisite state of mind, since Greene has shown no fact that give rise to an inference that defendants, at the time of making these promise did not intend to fulfill them. For these reasons the second claim for relief fails to pleading scienter with the particularity required by the PSLRA. Therefore dismissal of the second claim is appropriate.
THE THIRD CLAIM: VIOLATION OF THE UTAH UNIFORM SECURITIES ACT
The third Claim for Relief is identical to the second Claim for Relief except that it is plead under the Utah Uniform Securities Act. Since the plaintiff did not reference which part of the Act he was bringing his claim under the court must make an assumption. It seems that the relevant part of the Act provides that it is unlawful for a person, in connection with a securities transaction, directly or indirectly, to "make an untrue statement of a material fact or to omit to state a material fact necessary in order to make the made, in the light of the circumstances under which they are made not misleading." Since the claim is made under a state law, the PSLRA does not apply. Therefore the Third Claim for Relief is only subject to the requirements of Fed.R.Civ.P. 9(b). We therefore analyze the representations made in both claims under the Rule 9(b) standard.First defendants represented to plaintiff that there was a large-dollar invester interested in purchasing a 49% interest in the Campbell Group for 50 million dollars. As discussed under the first Claim for Relief this representation is not pleaded with sufficient particularity as to when and who made the representations. However, the defendant cites two more representations that the court has not yet addressed under rule 9(b). It does so now.
A. The Content of the Representation
The two additional representations complained of are, (1) that defendants represented that in return for his $250,000 Greene would receive a 1% ownership interest in Campbell communications, and (2) that Greene would be added as a beneficiary, in the amount of $250,000 dollars, under a key-man insurance policy held on Campbell. Again both representations are sufficient to allow defendants to prepare an adequate response. Although not specific quotes, the representations are not ambiguous, in that they explain the full content of what is alleged to be the misrepresentation, namely that Greene would receive a 1% ownership interest in the Campbell Group and be named a beneficiary under the key-man insurance policy. Thus the representations are adequate to allow defendants to prepare an adequate response regarding the alleged misrepresentations.
B. The Time and Place Where The Representations were Made
The representations were made within the agreement itself, which was sent to Greene through the mail. Greene received this agreement on or about June 13, 2002, therefore the Complaint is particular as to the time when the representations were made. Additionally, since the representations were contained within the agreement sent to Greene's address the Complaint is also sufficient as to place, namely the actual document.
C. Who Made the Representations
Since both representations occur within the agreement with Campbell Communications, and since Campbell Communications signed the document it is clear that at least Campbell Communications made the representations to Greene. However, the Complaint does not particularly state if Campbell or Crapo also made the same representation to Greene. Therefore the complaint is sufficiently particular as to who made the representation with respect to Campbell Communications, but not as to Campbell or Crapo. For this reason dismissal as to Campbell and Crapo is appropriate. D. Consequences
Again neither side discussed the particularity of the consequences, therefore the court will not address that issue either.
E. Scienter
Finally regarding scienter it is important to note that within the securities context, rule 9(b) has been interpreted as requiring a plaintiff to set forth what is false or misleading about a statement and why it is false. In other words, the plaintiff must set forth an explanation as to why the [representation] complained of was false or misleading.
In this case Greene alleges that he never received documentation of his 1% ownership interest or of his position as a beneficiary under the key-man insurance policy. Consequently he believes that the promises made to him regarding the 1% ownership and the beneficiary status were false. Since Greene is not required to plead any facts regarding the requisite state of mind but merely to set forth the facts upon which he bases his belief that the representations are false, the complaint is sufficiently particular as to the scienter requirement of rule 9(b).
FOURTH CLAIM: BREACH OF CONTRACT
Defendants move to dismiss the fourth claim as against defendants Campbell and Crapo for breach of contract because neither Campbell, nor Crapo were parties to the contract. As the Complaint states the contract was an express agreement between Campbell Communications and Greene. As plaintiff acknowledges in his memorandum in opposition to the motion to dismiss Greene there is no claim against Campbell and Crapo unless the corporate veil can be breached. Yet Greene contends Campbell and Crapo were ignoring the corporate veil and used the corporate entity as a guise for their own benefit. The very nature of the corporate entity is to limit the liability of the stockholders to the amount that they voluntarily put at risk by investing in the corporation, thus courts "will only reluctantly and cautiously pierce the corporate veil."
Salt Lake City Corp., v. James Constructors, Inc., 761 P.2d 42, 46 (Utah App. 1988).
In order to justify piercing the corporate veil Utah law requires two elements: "(1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist . . . and (2) the observance of the corporate form would sanction a fraud, promote injustice, or an inequitable result would follow." However, plaintiff's Complaint is devoid of any reference to piercing the corporate veil. Nor does he provide any facts that would support his claim to pierce the corporate veil. For example, while noting that Campbell is the President of Campbell Communications, he makes no mention of what relationship Crapo has to Campbell Communications. If Crapo is merely an employee then there is no veil to pierce and no way to hold Crapo personally liable. For this reason, dismissal of the breach of contract claim against Campbell and Crapo is appropriate.
Id. at 46-47.
U.S., v. A and C Investments, Inc., 513 F. Supp. 589, 591 (N.D. Ill. 1981) (dismissing complaint against individuals which was devoid of reference to any claim for piercing the veil).
LEAVE TO AMEND SHOULD BE GRANTED TO PREVENT INJUSTICE
In his memorandum opposing the Motion to Dismiss, plaintiff requests that the court grant him leave to amend his Complaint if it should find the Complaint deficient in any way. Fed.R.Civ.P. 15(a) provide that courts may grant a party leave to amend the party's pleading. As a matter of policy "the court should grant leave to amend freely if it appears at all possible that the plainitff can correct the defect." Additionally, "[i]n the absence of an apparent reason to refuse leave to amend — such as undue delay, bad faith or dilatory motive, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party, futility of an amendment, etc. — the leave sought should, as the rules require, be freely given." In this case there is no suggestion that by granting leave to amend there will be undue delay, or cause undue prejudice to the defendants.
Triplet v. Leflore Co., 712 F.2d 444, 446 (10th Cir. 1983).
Id. (citations omitted).
Nor is there any suggestion that Greene's request is made in bad faith. Greene maintains that he can correct whatever defects occur within the pleadings, as this is the first time that Greene has requested to amend the court takes him at his word and hereby grants leave to amend his pleadings in order to correct any deficiencies noted in his complaint.
For the foregoing the First Claim is DISMISSED with prejudice, and Plaintiff is GRANTED leave to amend the Complaint as to the other claims.