Opinion
Civil Action No. 03-CV-2290.
September 28, 2004
MEMORANDUM ORDER
Presently before the Court is Defendants' Ronald D. Butler, Esquire and Ronald D. Butler, P.C., d/b/a The Butler Law Firm, Motion for Summary Judgment (Doc. No. 35), and Plaintiffs Paul A. Geary, Jr., Sean M. Geary, GWR Medical, Inc., and GWR Medical, LLP's, response thereto. For the following reasons, Defendants' Motion will be granted.
Although Ronald D. Butler and Ronald D. Butler, P.C., are named as individual Defendants, we will refer to them collectively as "Butler."
The Complaint also names Thomas E. Rueger as a Defendant. However, on March 19, 2004, pursuant to a settlement agreement entered into by Plaintiffs and Rueger, we issued an Order dismissing Counts I, II, III, IV, V, VI, and IX of the Complaint as they relate to Rueger, and Count VIII as it relates to all Defendants. We also dismissed Rueger's Counterclaim. (Doc. No. 49.)
I. FACTS
The following is a recitation of the facts in a light most favorable to the Plaintiffs, the non-moving party. In the mid-1990s, Plaintiffs Paul Geary and his son, Sean Geary, became suppliers of medical devices for disposable Topical Hyperbaric Oxygen Therapy ("THBO"), and subsequently sold distribution rights for the THBO products. (P. Geary Aff. ¶¶ 1-5, Pls.' App. Supp. Partial Summ. J. [hereinafter Pls.' App.] at 74-75.) Paul Geary invited Defendant Rueger, whom he had met through a business organization, to become an investor in the operation. At that time, Paul Geary provided Rueger with a copy of an operating agreement for an entity named AmeriMed LLP. According to Plaintiffs, Rueger sought the legal advice of Defendants Ronald D. Butler, P.C. ("Butler Firm") and Ronald D. Butler, Esquire ("Butler"), and sent Butler a copy of the AmeriMed LLP operating agreement for his review. Rueger had previously retained Butler's services for business matters, and Butler served as the executor of Rueger's estate. (Rueger Dep. at 10.)
This was not Paul Geary's first business venture. He is a sophisticated businessman who has been involved in the creation of at least ten companies. (P. Geary Dep. at 39.)
The AmeriMed agreement provided for two levels of ownership, divided into Class A and Class B partners. (AmeriMed LLP Partnership Agreement, Pls.' App. 223.) According to the agreement, "[c]ontrol of the Partnership and all of its affairs shall be in the Class B Partners." (Id. at 230.) Class B partners included Paul Geary, Sean Geary, Joseph Westwood, and Ralph ColDepietro. (Id. At. 246.) Class A partners would play a limited role, primarily as investors. However, Class A partners were also empowered to "vote on and veto any decision" of the Class B partners related to:
(1) confession of a judgment;
(2) providing a guarantee, mortgage indemnity bond, surety bond;
(3) creating personal liability for any partner other than what the partner may have agreed;
(4) obligating the partnership in excess of two-thousand dollars ($2,000) in terms of expense or performance obligation; and
(5) paying any performance bonus in excess of two hundred thousand dollars ($200,000) per year per individual.
(Pls.' App. 229, 231, 253, 256.) Rueger was the sole Class A partner. (Pls.' App. 246.)
When Paul Geary learned that a company with the same name already existed, he changed AmeriMed's name to GWR Medical, LLP ("GWR LLP"). (P. Geary Dep. at 25.) Plaintiffs claim that for all other purposes, GWR LLP's operating agreement was identical to that of AmeriMed. (Pls.' App at 16.) GWR LLP's partnership agreement was drafted by the law firm of Kassab, Archbold, and Cherry, which is not affiliated with Butler. (P. Geary Dep. at 99.)
Plaintiffs and Rueger retained Butler to transfer GWR LP to a corporation. According to Butler, he used the same form by-laws for the Corporation that he had used for other companies that he had incorporated for the same parties in the past. ((Rule 56(A) Mem. of Law on Behalf of Mot. for Summ. J. by Butler Defs.[hereinafter Defs.' Mot. for Summ. J.] at 3.)
Butler asserts that when Plaintiffs "retained Butler to incorporate the business, Thomas Collins, C.P.A., the Partnership's accountant, gave Butler written instructions in response to a request made by Paul Geary as to the number of shares that each partner would hold in the new corporation," and that Butler acted in accordance with this information. (Exs. 5 6 to Mot. for Summ. J. by Butler Defs.) Butler further contends that the shareholder agreement, articles of incorporation, and by-laws were drafted according to Collins's instructions. (Id.) Butler also claims that Collins informed him that the ownership interest in the corporation would result in fifty percent ownership for the Geary family and fifty percent ownership for the Rueger family. (Id.) Butler emphasizes that this fifty-fifty apportionment replicated the apportionment in GWR LP. (Id.) It is also clear, however, that Butler understood that the GWR LP stock was divided into two classes with separate voting rights. This distinction was not replicated in the formation of GWR Inc., and gives rise to the core of the dispute in this lawsuit.
Collins's letter to Butler is discussed in greater details in Section III.A.
A letter dated November 20, 2001, sent by Butler to Paul Geary stated the following:
Dear Paul:
You have informed me that GWR Medical, Inc. will be activated as of January 1, 2002. You also indicated that the corporation will be electing Subchapter S status. According to my records, the following individuals are partners in GWR Medical, LLP in the indicated percentages:
Thomas E. Rueger 48.5% (35% Class A and 13.5% Class B) Paul A. Geary, Jr. 24.5% Class B Sean M. Geary 23.5% Class B Thomas E. Rueger, Jr. 2.5% Class B Ralph ColDepietro 1% Class B
Are all of the above to be shareholders of GWR Medical, Inc? If so, will they own stock in the percentages listed above? Will all of the individuals listed above be members of the Board of Directors of GWR Medical, Inc?
You had previously indicated that the officers of GWR Medical, Inc. might be the following:
Thomas E. Rueger CEO and Chairman Paul A. Geary, Jr. COO and President Sean M. Geary Secretary/Treasurer
Is Thomas E. Rueger, Jr. also to be an officer of the corporation?. . . .
Please provide this information at your earliest convenience.
Very truly yours,
Ronald D. Butler
RDB/clf cc: Thomas E. Rueger
(Letter from Butler to Paul Geary of 11/20/01 at 1-2, attached as Ex. 6 to Defs.' Mot. for Summ. J.)
Rueger initially invested $300,000 in GWR Medical, LP in 1996. (Rueger Dep. at 12.) Within two years, Rueger invested an additional $100,000, which was originally classified as a loan and then transferred to ownership. (Id.) In 2000, Westwood sold his Class B interest to Plaintiffs and Rueger. (P. Geary Dep. at 37.) Plaintiffs emphasize that while Rueger had fifty percent of the equity ownership, Paul Geary, Sean Geary, and Ralph ColDepietro, (P. Geary's brother-in-law), controlled seventy-seven percent of the Class B membership, thereby effectively controlling the company's managerial decisions. (Id. at 158-60.)
ColDepietro has not joined Plaintiffs in bringing this lawsuit.
In April or May of 2000, Plaintiffs agreed to convert GWR Medical from an LP to a corporation for tax and liability purposes. (Pls.' App at 16.) According to Plaintiffs, Paul Geary instructed Butler "to create the Company with the same rights as in GWR LP." (Id.) Plaintiffs allege that on May 3, 2000, Butler filed GWR Inc.'s Articles of Incorporation without first asking the Gearys or Rueger to review the information. (Id. at 7.) Unlike the operating agreement for GWR LP, the Articles of Incorporation for GWR, Inc. "provide for only one class of stock in the Company, representing one hundred thousand shares of stock, with no differentiation among the shares." (Id.) Plaintiffs further allege that despite having filed these documents in May 2000, Butler did not send the Articles of Incorporation to the Gearys or Rueger until February 2003, when Paul Geary requested a copy. (Id.. at 7.) It was not until that time that the Gearys learned that GWR Inc. was not organized with two classes of stock. (Id.)
After filing its Articles of Incorporation, GWR Inc. went on inactive status. (Pls.' App at 285.) In the fall of 2001, the Gearys and Rueger agreed to transfer the operations of GWR LP to the corporation on January 1, 2002, and Paul Geary directed Butler to begin preparing the documents for the conversion. (Id. at 8.) Plaintiffs claim that during that time, Paul Geary specifically told Butler that "the new documents were to reflect what was in the LP documents, both with respect to ownership and voting rights." (P. Geary Dep. at 55.) In February 2002, Butler formalized GWR Inc.'s by-laws and relevant corporate documents. (Exs. 24, 25 to Defs. Mot. For Summ. J.) Plaintiffs claim that Butler "adopted these documents by signing an `incorporator's consent,' although [Butler's] powers as an incorporator had ceased months earlier." (Pls.' Opp'n to Butler Defs.' Mot. for Summ. J. at 9. (citing Pls. App. at 318-23.)) Plaintiffs also emphasize that Butler signed those documents "in February or March of 2002, but backdated the documents January 1, 2002." (Id. (citing Pls.' App. at 318-23).)
Plaintiffs allege that these corporate documents required that "all decisions of the president and officers of the Company be subject to reversal and veto by the Board of Directors, which would be a 50/50 split on the Board between the Gearys and Defendant Rueger." (Pls.' Opp'n to Butler Defs.' Mot. for Summ. J. at 9 (citing Pls. App. at 341.)) These requirements were unlike the agreement in GWR LP, which, as discussed above, restricted the rights of the Class B members in only five specific areas. (Id.) According to Plaintiffs, they were unaware of these changes because Butler did not mail Plaintiffs a copy of the by-laws or the incorporators consent. Plaintiffs admit that on February 18, 2002, Butler mailed some, but not all, of the corporate documents to Paul Geary for his signature. (Pls.'s App. at 362.) At that time, Paul Geary, Sean Geary, Rueger, and Thomas Rueger, Jr. signed one document entitled "Unanimous Consent in Lieu of First Meeting of Board of Directors" and a second document entitled "Shareholders' Agreement." (Pls.' App. at 318-20, 322-23.) As discussed in greater detail below, both documents specify the number of shares that each member controls, and neither establishes two voting classes.
In January 2003, problems arose between Rueger and the Gearys. Plaintiffs claim that Rueger objected to a series of decisions that the Gearys made, including the Gearys' decision to give themselves an increase in pay. (Pls.' App. at 98, 125, 131.) Plaintiffs point out that their raises were still within the Hay Group formulas. Plaintiffs also emphasize that in 2002, Rueger received over $240,000 in compensation, and Rueger's son received a thirty percent salary increase. During the dispute concerning the Gearys' authority to approve their own pay raise, Rueger told Paul Geary that he had better check their business agreements. According to Plaintiffs, this comment prompted Paul Geary to immediately request the corporate documents, at which point he learned for the first time that the corporate documents for GWR Inc. did not duplicate the corporate structure in place under GWR LP. (Pls.' App. at 24, 32, 160.) Plaintiffs claim that "within days, Plaintiff Paul Geary provided Rueger with a proposed corporate resolution to address these concerns, and also provide for the Hay Group to act as an independent arbiter of any salary disputes." (Id. at 11.) Plaintiffs allege that Rueger stated that he was not interested in changing the corporate structure. (Pls.' App. at 368.)
The parties had previously agreed to have their compensation determined by the Hay Group, an independent firm. (P. Geary Dep. at 116.)
II. LEGAL STANDARD
Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c)). In considering a motion for summary judgment, "a court does not resolve factual disputes or make credibility determinations, and must view facts and inferences in the light most favorable to the party opposing the motion." Siegel Transfer, Inc. v. Carrier Express, Inc., 54 F.3d 1125, 1127 (3d Cir. 1995). The moving party bears the burden of proving that no genuine issue of material fact is in dispute. Adickes v. S.H. Kress Co., 398 U.S. 144, 157 (1970). Once the moving party has carried its initial burden, to prevent summary judgment the non-moving party "may not rest upon the mere allegations or denials of his pleading, but his response . . . must set forth specific facts showing that there is a genuine issue for trial." FED. R. CIV. P. 56(e).
III. DISCUSSION
A. Violation of Section 10(b) of the Securities Exchange Act and Rule 10(b)-5
Plaintiffs allege that Butler violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (collectively "Section 10(b)"). Section 10(b) makes it "unlawful for any person, directly or indirectly . . . to use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe. . . ." 15 U.S.C. § 78j(b)(2000). Rule 10b-5 makes it
unlawful for any person, directly or indirectly . . . (a) to employ any device, scheme or artifice to defraud; (b) to make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading or; (c) to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5 (2004).
To establish a prima facie case of securities fraud under Section 10(b) and Rule 10(b)-5, a plaintiff must establish that the defendant: (1) made a misrepresentation or omission of a material fact; (2) with scienter; (3) in connection with the purchase or sale of a security; (4) upon which the plaintiff reasonably relied; and (5) that the plaintiff's reliance was the proximate cause of his or her injury. Semerenko v. Cendant Corp., 223 F.3d 165, 174 (3d Cir. 2000). Butler argues that Plaintiffs' claim must fail because Plaintiffs cannot establish these elements. We agree. While Plaintiff asserts that Butler made a misrepresentation or omission of material fact when he created GWR Inc., Plaintiffs have provided no evidence to support the notion that Butler's misrepresentation or omission was the result of anything other than simple negligence. After examining the evidence before us, we are compelled to conclude that Plaintiffs have failed to establish the elements of a 10(b) violation.
As a preliminary matter, we note that in Santa Fe Industries, Inc. v. Green, the Supreme Court explicitly rejected the idea that "any plaintiff who suffers an injury as a result of deceptive practices touching its sale (or purchase) of securities" has a cause of action under Section 10(b) 430 U.S. 462, 476 (1977). The Court in Santa Fe explained that a "claim of fraud and fiduciary breach states a cause of action under any part of Rule 10b-5 only if the conduct alleged can be fairly viewed as `manipulative or deceptive' within the meaning of the statute." Id. at 473-74 (emphasis added); see also Sec. Exch. Comm'n v. Nat'l Sec., Inc., 393 U.S. 453, 466 (1969) ("Section 10(b) and Rule 10b-5 together constitute one of the several broad anti-fraud provisions contained in the securities laws. . . . Consequently, we must ask whether respondents' alleged conduct is the type of fraudulent behavior which was meant to be forbidden by the statute and the rule." (emphasis added)).
We recognize that in 10(b) cases, Plaintiffs need only prove their case by a fair preponderance of the evidence. Herman MacLean v. Huddleston, 459 U.S. 375, 389 (1983). However, in this case, Plaintiffs cannot demonstrate by a preponderance of the evidence that Butler acted with the requisite scienter. In 1976, the Supreme Court in Ernst Ernst v. Hochfelder, 425 U.S. 185, 194 (1976), concluded that scienter — i.e. the intent to deceive, manipulate and defraud — is a necessary element in a private cause of action for damages for violation of Section 10(b) and Rule 10b-5. To satisfy the scienter requirement, a plaintiff must either: (1) present "facts establishing a motive and an opportunity to commit fraud;" or (2) establish "facts that constitute circumstantial evidence of either reckless or conscious behavior." In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999). Negligence alone does not support recovery under Section 10(b). Ernst Ernst, 425 U.S. at 205-6. In Hochfelder, the Supreme Court, resolving a dispute among the circuits, concluded that an accounting firm could not be held liable under Section 10(b) for conduct which the plaintiff alleged to be "inexcusable negligence." 425 U.S. at 190, n. 5.
In the instant case, Plaintiffs have failed to establish Defendants' motive to commit fraud. While Plaintiffs spend considerable time addressing Rueger's motivation in this alleged fraudulent scheme — greater control of the business — Butler's motivation is far from clear. Plaintiffs would like this Court to assume that Butler's motivation to commit fraud was the desire to assist his client because of their strong attorney-client relationship. Such an assumption is not supported by the evidence presented, however. Plaintiffs state that they were not aware that Rueger had a personal relationship with Butler. However, Plaintiffs admit that they were aware of Rueger's business relationship with Butler at the time they made the decision to retain Butler. In the Complaint, Plaintiffs allege: "Defendant Rueger has enjoyed a longstanding professional attorney-client and personal relationship with Defendant Butler." (Compl. ¶ 22 (emphasis added).) Butler and Rueger both deny the existence of a personal relationship, and Plaintiffs fail to cite to anything in the record that would support such a conclusion. Moreover, at his deposition, Paul Geary made the following statement in this regard:
A: No, I never knew the relationship that the Ruegers had with him other than a business that the Ruegers had with Attorney Butler, such as, you know, their trust agreements and that whole personal area, I was never aware of that.
Q: When you say "personal," you mean personal legal work, correct?
A: Personal legal work.
Q: But you understand that the entire relationship between the Butlers and the Ruegers was always on a professional level; correct?
A: I understand it was on a business level.
(P. Geary Dep. at 98.)
In addition, Plaintiffs have failed to present evidence that Butler received any financial benefit from this alleged fraudulent scheme. Apparently, in forming this corporation, Butler was simply following the usual course of business by using the same by-laws that he had used repeatedly in creating companies for the parties. Although as the attorney incorporating the business Butler may have had an opportunity to commit fraud, Plaintiff has failed to demonstrate Butler's motive for doing so.
We also conclude that Plaintiffs have failed to establish "facts that constitute circumstantial evidence of either reckless or conscious behavior." In re Advanta Corp. Sec. Litig., 180 F.3d at 534. As mentioned above, the scienter test requires either "reckless or conscious behavior." Id. The Third Circuit defines Section 10(b) recklessness as "closer to intentional conduct than indifference." Healey v. Catalyst Recovery of Pa., 616 F.2d 641, 649 (3d Cir. 1980). In McLean v. Alexander, 599 F.2d 1190, 1197 (3d Cir. 1979), the Third Circuit pointed out that the Supreme Court in Hochfelder, while closing the door on negligence actions, "included in a footnote a statement which is rapidly becoming as famous as the main text, `(that the) term "scienter" refers to a mental state embracing intent to deceive, manipulate or defraud." The Third Circuit added that if plaintiffs cannot prove intent, "the scienter element in a § 10(b) case require(s) "a misrepresentation so recklessly made that the culpability attaching to such reckless conduct closely approaches that which attaches to conscious deception.'" 599 F.2d at 1197 (quoting L.O.C. Indus. Inc. v. United States, 423 F. Supp. 274, 296 (E.D. Pa. 1976)). The court continued by "precisely defining the legal standard for recklessness," adopting the Seventh Circuit's minimum threshold for liability under Section 10(b) as follows:
(Reckless) conduct may be defined as . . . highly unreasonable (conduct), involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.Id. (quoting Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033 (7th Cir. 1977). See also In re Ikon Office Solutions, Inc., 277 F.3d 658, 667 (3d Cir. 2002) (holding that scienter requires, "at a minimum, highly unreasonable (conduct), involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, . . . which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.")
Plaintiffs have not presented sufficient evidence to establish that Butler's actions satisfy this prong of the scienter test. While Defendants may have acted negligently, Plaintiffs present no facts to demonstrate the deceptive intent or reckless behavior required by the scienter element as defined by the Third Circuit. Defendant Butler followed Plaintiff's accountant's instructions in incorporating GWR LP, relying on previously used forms in performing the task. While he may not have paid close enough attention to Plaintiff's instructions, Butler's actions certainly do not rise to the level of "a misrepresentation so recklessly made that the culpability attaching to such reckless conduct closely approaches that which attaches to conscious deception.'"Sunstrand, 599 F.2d at 1197 (quoting L.O.C. Indus., Inc., 423 F. Supp. at 296).
It is clear that at some point, Butler was aware of the fact that GWR Inc. was to be structured so as to divide the stock between Class A and Class B partners. See Letter from Butler to P. Geary of 11/20/01 (explaining the percentage of each type of stock for each partner). However, it is also clear that Butler followed the direction of Collins, Plaintiffs' accountant, who, subsequent to Paul Geary's instruction, told Butler to divide the stock as follows:
P. Geary President and Chief Executive Officer 25% ownership S. Geary Vice-President and Secretary 24% ownership ColDepietro No Title 1% ownership Rueger Chairman and Treasurer 47.5% ownership Thomas Rueger, Jr. Assistant Secretary 2.5% ownership (Defendant Rueger's son)(Letter from Collins to Butler of 8/02, attached as Ex. 5 to Butler Defs.' Mot. for Summ. J.) Following an accountant's instructions does not indicate "conscious deception."
Plaintiffs do not suggest that Butler was the first to think of changing GWR LP to a corporation or that Butler conspired with Rueger to convince Plaintiffs that changing to a corporate forum was appropriate. Rather, Plaintiffs admit that they had plans to transfer from a partnership to a corporation even before speaking with Butler. The record reflects that Plaintiffs first decided to make the change, and then, at Rueger's suggestion, retained Butler to complete the work.
Q. Let me put it this way, when you first went to [Butler] with respect to GWR, had you already decided that you wanted to incorporate?
A. Yes.
Q. And who had you conferred with that led to the decision to incorporate?
A. My partners, Sean and Tom.
(P. Geary Dep. at 264.) The evidence demonstrating that Butler had nothing to do with the decision to incorporate but was only called in by Plaintiffs to do the legal work further weakens the conspiracy or fraudulent scheme theory that is the basis for Plaintiffs' Section 10(b) claims.
Morever, it does not appear that Paul Geary himself is fully convinced that Butler acted with the required fraudulent intent. At his deposition, Geary testified: "I didn't change — I didn't ask — I didn't ask Butler to change what I originally asked him to do. Either [Butler] did it mistakenly or he's lying or Mr. Rueger knew about it." (P. Geary Dep. at 96 (emphasis added).) In addition, in a letter from Paul Geary to Rueger, dated March 26, 2003, P. Geary stated: "We are disappointed in your attempt to make Attorney Butler's clear mistake into a 50/50 voting benefit for you." (Pls.' App. at 375 (emphasis added).) Paul Geary's own words demonstrate his recognition that Butler's actions were simply negligent, and do not rise to the level of Section 10(b) intent.
Finally, Paul Geary and Sean Geary signed the Unanimous Consent in Lieu of First Meeting of Board of Directors, which provides:
RESOLVED, That full paid and non-assembled shares of the corporation be issued as follows:
Paul. A. Geary, Jr. 250 shares Sean M. Geary 240 shares Ralph ColDepietro 10 shares Thomas E. Rueger and Jeanne M. Rueger, TEN ENT 475 shares Thomas E. Rueger, Jr. 25 shares
(Pls.' App. at 318-20.) The Gearys also signed the Shareholders' Agreement, which states: "WHEREAS, the shareholders are the sole shareholders of this corporation, each owning shares in the numbers listed below," and then provides that identical shareholder information as stated above. (Pls. App. at 322-23.) Neither document mentions two classes of stock. Paul Geary does not denying reviewing and signing these documents. However, he claims that he did not understand what the documents stated.
I reviewed them but, you know, in the course of my business history, I reviewed thousands and thousands of documents and signed thousands of documents. There are things in these documents that I have no idea what they mean. . . . So there are certain parts of this document that — you know, that I'm not trained to understand. I'm not a lawyer, that's why I have lawyers, and I trust the lawyers to prepare the documents properly for my signature.
(P. Geary at 79-80.) Paul Geary is a sophisticated businessman. It is difficult to accept the proposition that he did not understand the significance of the documents he signed. In any event, it makes little sense that an attorney intending to defraud his clients would ask his clients to sign documents that fully disclose the intended fraud.
After a thorough examination of the record, we are persuaded that Plaintiffs have not met their burden of demonstrating that Butler acted with deceit or manipulative intent. While Butler may have acted negligently in not seeking clarification from Plaintiff's accountant concerning the division between Class A and Class B stock when incorporating GWR Medical, such negligence does not constitute federal securities fraud and is more properly a matter for state court. Plaintiffs have failed to establish the scienter required for a claim under Section 10(b), and therefore we will grant Defendants' Motion for Summary Judgment as to Count I of the Complaint.
B. Claims Under Pennsylvania Law
In addition to the federal claims in Count I, Plaintiffs allege eight counts under Pennsylvania law, including violation of the Pennsylvania Securities Act, fraudulent misrepresentation and non-disclosure, negligent misrepresentation, rescission, breach of fiduciary duties, and negligence. We have granted summary judgment as to the only federal claim (Count I) and we decline to exercise supplemental jurisdiction pursuant to 28 U.S.C. § 1367(c)(3). Accordingly, we will dismiss Counts II, III, IV, V, VII, IX, X, and XI without prejudice.
Plaintiffs originally brought ten state law claims, but following a settlement with Rueger, Plaintiffs subsequently dismissed two of the claims.
IV. CONCLUSION
For the foregoing reasons, we will grant Defendant's Motion for Summary Judgment as it relates to Count I, and will dismiss Counts II, III, IV, V, VII, IX, X, and IX without prejudice.
ORDER
AND NOW, this 28th day of September, 2004, upon consideration of the Motion for Summary Judgment by Defendants Ronald D. Butler, Esquire and Ronald D. Butler, P.C., d/b/a The Butler Law Firm, (Doc. No. 35), and all documents in support thereof and opposition thereto, it is hereby ORDERED as follows:
1. Summary Judgement is GRANTED in favor of Defendants Ronald D. Butler, Esquire and Ronald D. Butler P.C., d/b/a The Butler Law Firm and against Plaintiffs on Count I of Plaintiffs' Complaint.
2. Counts II, III, IV, V, VII, IX, X, and XI of Plaintiffs' Complaint are
DISMISSED without prejudice, pursuant to 28 U.S.C. Section 1367(c)(3).
IT IS SO ORDERED.