Opinion
Civil Action 20-cv-01788-RM-NRN
05-18-2021
FRED SEBASTIAN, and DUKE CAPITAL S.A., Plaintiffs, v. GREENLINK INTERNATIONAL INC., DOUGLAS N. MACDONALD, and JAKE GEORGE, Defendants.
REPORT AND RECOMMENDATION ON DEFENDANTS' MOTION TO DISMISS FOR LACK OF PERSONAL JURISDICTION AND FAILURE TO STATE A CLAIM (Dkt. #41)
N. REID NEUREITER UNITED STATES MAGISTRATE JUDGE
This case is before the Court pursuant to an Order (Dkt. #45) issued by Judge Raymond P. Moore referring Defendants' Motion to Dismiss for Lack of Personal Jurisdiction and Failure to State a Claim. Dkt. #41. The Court has carefully considered the motion, Plaintiffs' response (Dkt. #44), Defendants' reply (Dkt. #48) and on April 29, 2021, the Court heard argument on the subject motion. Dkt. #49. The Court has taken judicial notice of the Court's file, considered the applicable Federal Rules of Civil Procedure and case law, and for the reasons outlined below RECOMMENDS that Defendants' motion be DENIED in part and GRANTED in part. 1
FACTUAL BACKGROUND
Plaintiffs Fred Sebastian and Duke Capital S.A. owned publicly-traded shares of Defendant GreenLink International Inc. (then known as E-Debit Global Corporation), which is a Colorado corporation. During the relevant time-period of June 2018, Defendant Douglas N. MacDonald was President and Chief Executive Officer of Greenlink, and he is currently on the board of directors for GreenLink. Dkt. #28-1 ¶ 2. Defendant Jake George is currently its President and Chief Executive Officer and was on the board of directors in June 2018. Dkt. #41-1 ¶ 2. Plaintiffs allege that Defendants MacDonald and George exercised control over GreenLink at all times relevant to this case.
It is alleged that Sebastian was the holder personally of 14, 111, 729 E-Debit shares, and owned a further 42, 000, 000 E-Debit shares through Duke Capital. See Dkt. #1 at ¶17. Plaintiffs claim that their 56, 111, 729 GreenLink shares were improperly cancelled in June 2018 by Defendants, purportedly because of Sebastian's default on an alleged loan agreement dating from 2012. According to Plaintiffs, the alleged loan agreement was fabricated as part of a scheme on the part of the Defendants to defraud Plaintiffs of their GreenLink shares. In other words, according to the Plaintiffs, the Defendants fabricated a loan agreement with a fraudulent signature, in order to later claim that Plaintiffs defaulted on the loan agreement as an excuse for cancelling Plaintiffs' Greenlink shares. See Dkt. #20 at ¶20 (“In fact, neither Sebastian nor Duke Capital had signed, agreed to or had any knowledge of the Alleged Loan Agreement. Neither Sebastian nor Duke Capital ever signed any document authorizing E-Debit to cancel or otherwise convert Sebastian's Shares.”). 2
Plaintiffs assert five claims against Defendants: (I) conversion; (II) common law fraud; (III) fraud under the Colorado Securities Act, (IV) negligent misrepresentation; and (V) securities fraud under the Securities Exchange Act, 15 U.S.C. § 78j(b).
Defendants move to dismiss MacDonald and George as parties entirely, arguing that this Court lacks personal jurisdiction over them. Defendants also move to dismiss Plaintiffs' four fraud-based claims, Counts II-V, against all Defendants, arguing Plaintiffs failed to state the claims and failed to allege the fraud claims with particularity as required under Fed.R.Civ.P. 12(b)(6) and 9(b)
LEGAL STANDARDS
I. Personal Jurisdiction
“To obtain personal jurisdiction over a nonresident defendant in a diversity action, a plaintiff must show both that jurisdiction is proper under the laws of the forum state and that the exercise of jurisdiction would not offend due process.” Intercon, Inc. v. Bell Atl. Internet Solutions, 205 F.3d 1244, 1247 (10th Cir. 2000) (citation omitted). Because Colorado's long-arm statute permits the exercise of any jurisdiction that is consistent with the United States Constitution, the personal jurisdiction inquiry under Colorado law “collapses into the single due process inquiry.” Id. at 1247 (citation omitted). See also 3 Old Republic Ins. Co. v. Cont'l Motors, Inc., 877 F.3d 895, 903 (10th Cir. 2017).
Colorado's long-arm statute, Colo. Rev. Stat. Ann. § 13-1-124 (2021), provides:
(1) Engaging in any act enumerated in this section by any person, whether or not a resident of the state of Colorado, either in person or by an agent, submits such person and, if a natural person, such person's personal representative to the jurisdiction of the courts of this state concerning any cause of action arising from:
(a) The transaction of any business within this state;
(b) The commission of a tortious act within this state;
(c) The ownership, use, or possession of any real property situated in this state; . . .
“To exercise jurisdiction in harmony with due process, defendants must have minimum contacts with the forum state, such that having to defend a lawsuit there would not offend traditional notions of fair play and substantial justice.” Shrader v. Biddinger, 633 F.3d 1235, 1239 (10th Cir. 2011) (brackets and internal quotation marks omitted). The minimum contacts may give way to specific or general jurisdiction. See Intercon, 205 F.3d at 1247. General jurisdiction exists when the defendant's contacts with the forum are “‘so continuous and systematic as to render [it] essentially at home in the forum State.'” Fireman's Fund Ins. Co. v. Thyssen Min. Const. of Canada, Ltd., 703 F.3d 488, 493 (10th Cir. 2012) (quoting Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011)).
“Specific jurisdiction is confined to adjudication of issues deriving from, or connected with, the very controversy that establishes jurisdiction.” Goodyear, 131 S.Ct. at 2851. “The inquiry whether a forum State may assert specific jurisdiction over a nonresident defendant focuses on the relationship among the defendant, the forum, and the litigation.” Walden v. Fiore, 571 U.S. 277, 285-4 (2014) (internal quotation marks and citation omitted). The “defendant's suit-related conduct must create a substantial connection with the forum state, ” and “the relationship must arise out of contacts that the defendant himself creates with the forum State. . . with the minimum contacts analysis look[ing] to the defendant's contacts with the forum State itself, not the defendant's contacts with persons who reside there.” Id. at 285.
“Where there has been no evidentiary hearing . . . and the motion to dismiss for lack of jurisdiction is decided on the basis of affidavits and other written material, the 4 plaintiff need only make a prima facie showing that jurisdiction exists.” Rusakiewicz v. Lowe, 556 F.3d 1095, 1100 (10th Cir. 2009). The court must take as true well-pled facts alleged in the complaint. Dudnikov v. Chalk & Vermilion Fine Arts, Inc., 514 F.3d 1063, 1070 (10th Cir. 2008). Any factual disputes in the parties' affidavits must be resolved in the plaintiff's favor. Id.
II. Rule 12(b)(6)
Under Rule 12(b)(6) a court may dismiss a complaint for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). In deciding a motion under Rule 12(b)(6), the court must “accept as true all well-pleaded factual allegations . . . and view these allegations in the light most favorable to the plaintiff.” Casanova v. Ulibarri, 595 F.3d 1120, 1124 (10th Cir. 2010) (quoting Smith v. United States, 561 F.3d 1090, 1098 (10th Cir. 2009)). A plaintiff may not rely on mere labels or conclusions, “and a formulaic recitation of the elements of a cause of action will not do.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Rather, “a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009); see also Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (explaining that plausibility refers “to the scope of the allegations in a complaint, ” and that the allegations must be sufficient to nudge a plaintiff's claim(s) “across the line from conceivable to plausible.”). The court may also consider materials beyond the complaint if the documents are central to the plaintiff's claims, referred to in the complaint, and if the parties do not dispute their authenticity. See Cty. of Santa Fe, N.M. v. Public Serv. Co. of N.M., 311 F.3d 1031, 1035 (10th Cir. 2002). Ultimately, the court must “determine whether the complaint sufficiently alleges facts supporting all the elements necessary to establish an entitlement to relief under 5 the legal theory proposed.” Forest Guardians v. Forsgren, 478 F.3d 1149, 1160 (10th Cir. 2007).
III. Pleading Fraud Claims
Complaints in civil actions generally should contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. (8)(a)(2). But, pursuant to Fed.R.Civ.P. 9(b), a more stringent pleading standard is mandated for fraud and misrepresentation claims. “For any claim alleging fraud, the circumstances constituting fraud or mistake must be stated with particularity.” In re Accelr8 Tech. Corp. Secs. Litig., 147 F.Supp.2d 1049, 1054 (D. Colo. 2001) (citing Fed.R.Civ.P. 9(b)). Thus, with regard to Plaintiffs' claim for fraudulent misrepresentation, Plaintiffs must plead “the who, what, when, where, and how of the alleged fraud” or in other words, “the time, place, and contents of the false representation, the identity of the party making the false statements and the consequences thereof.” United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 726-27 (10th Cir. 2006). See also HealthONE of Denver, Inc. v. UnitedHealth Grp., Inc., 805 F.Supp.2d 1115, 112021 (D. Colo. 2011) (“a plaintiff must meet the heightened pleading requirements pursuant to Rule 9(b) to prove a deceptive or unfair trade practice.”).
With respect to fraud claims made under the Exchange Act, “[a] plaintiff suing under Section 10(b) . . . bears a heavy burden at the pleading stage.” In re Level 3 Commc'ns, Inc. Sec. Litig., 667 F.3d 1331, 1333 (10th Cir. 2012).
To state a securities fraud claim, a plaintiff's complaint must allege that:
(1) the defendant made an untrue or misleading statement of material fact, or failed to state a material fact necessary to make statements not misleading; (2) the statement complained of was made in connection with the purchase or sale of securities; (3) the defendant acted with scienter,6
that is, with intent to defraud or recklessness; (4) the plaintiff relied on the misleading statements; and (5) the plaintiff suffered damages as a result of his reliance.Id. (citing Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1095 (10th Cir. 2003), as amended on denial of reh'g (Aug. 29, 2003)).
Prior to the passage of the Private Securities Litigation Reform Act of 1995 (PSLRA), Fed.R.Civ.P. 9(b) governed the pleading requirements for securities fraud actions. City of Philadelphia v. Fleming Cos., Inc., 264 F.3d 1245, 1258 (10th Cir. 2001). Now, however, under the PSLRA, a heightened pleading standard applies to the first and third elements of securities fraud claims, also referred to as falsity and scienter respectively. Id.
ANALYSIS
I. Personal Jurisdiction
A. Minimum Contacts
Defendant MacDonald lives in Alberta, Canada, while George lives in Tacoma, Washington. Defendants argue that neither has “any connection” to Colorado. They assert that neither of them has purposely directed any activity towards residents of Colorado that resulted in an injury to Plaintiffs, and that no Colorado residents were alleged to have been harmed by the conduct giving rise to this lawsuit. Thus, Defendants argue, there are no minimum contacts between either of them and the state of Colorado that would support the exercise of personal jurisdiction. But Defendants admit that each has contact with Colorado “through service as directors for Defendant GreenLink, which is incorporated in Colorado but located in Washington.” Dkt. #48 at 1.
Plaintiffs counter that MacDonald and George “engaged in tortious conduct while conducting business in Colorado” as officers and directors of GreenLink, and that in 7 2018, GreenLink used an address in Golden, Colorado as its principal place of business, as indicated in its filings with the Securities and Exchange Commission. Dkt. ##44 at 1, 30-2.
Defendants focus much of their argument on the issue of whether their activities were purposefully directed at residents of Colorado, citing OMI Holdings, Inc. v. Royal Ins. Co, 149 F.3d 1086 (10th Cir. 1998). The Court does not agree that the activities of a defendant must be directed at residents of the forum state. See XMission, L.C. v. Fluent LLC, 955 F.3d 833, 840 (10th Cir. 2020) (“Purposeful direction (sometimes referred to as purposeful availment) . . . requires that a defendant have deliberately engaged in significant activities within the forum State or deliberately directed its activities at the forum State, so that it has manifestly availed itself of the privilege of conducting business there.”) (internal quotation marks and citations omitted). In XMission, the Tenth Circuit noted that it “has followed the Supreme Court in requiring a particular focus by the defendant on the forum State to satisfy the purposeful-direction requirement.” 955 F.3d at 843.
This Court finds that MacDonald and George purposely availed themselves of the privilege of conducting business in Colorado. See Pittsburgh Terminal Corp. v. Mid Allegheny Corp., 831 F.2d 522, 527 (4th Cir. 1987) (personal jurisdiction over nonresident corporate directors existed where the directors participated in a decision, which, even if accomplished by telephone or mail, could have been given effect only in the state of incorporation). Each was a director or officer of a Colorado entity with its principal address in Colorado at the time they voted to cancel Plaintiffs' shares in GreenLink. 8
Defendants assert that Plaintiffs seek to exercise jurisdiction over them based solely on the fact that they are officers and directors of a Colorado entity, which, Defendants argue, is not permitted. The Court does not find that personal jurisdiction over MacDonald and George exists merely by virtue of the fact that GreenLink is a Colorado entity, but on the facts as alleged that MacDonald and George each took action giving rise to Plaintiffs' claims. See Rusakiewicz, 556 F.3d 095. In Rusakiewicz, the Tenth Circuit held that the district court had personal jurisdiction over the defendants in their individual capacities because the defendants, directors of a corporate entity, engaged in “personal acts as individuals” when they supported and voted to fund a prior lawsuit in the forum state. The Tenth Circuit found that these acts were sufficient contacts in the forum, and that this was not a situation where the plaintiffs predicated jurisdiction over the defendants “on jurisdiction over the corporation itself.” Id. at 110203 (ellipsis omitted). Plaintiffs' claimed injury resulted from the vote by MacDonald and George when they were directors of GreenLink, which at the time, was a Colorado corporation with a Colorado address as its principal place of business. Thus, the Court 9 finds that plaintiff has established the minimum contacts necessary to exercise jurisdiction over MacDonald and George.
Defendants also argue that while Delaware state law expressly provides for personal jurisdiction over all non-resident directors, Colorado does not. See 10 Del. Code § 3114. However, as Plaintiffs point out, it is well-established that Colorado's long arm statute allows for personal jurisdiction that extends as far as what is constitutionally permissible. The Court is not aware of any law holding Delaware's statute unconstitutional. It would follow then, that if Delaware's statute is constitutional, it would be permissible to exercise personal jurisdiction over all non-resident directors in Colorado. A counter-argument might be that Delaware's statute is only constitutional because of the advance notice it gives to directors that they may be haled into court in Delaware, while Colorado gives no such advance notice. Nevertheless, I conclude that directors of a Colorado corporation, when they take an action, including voting on a corporate resolution, that has direct impact on the Colorado corporation, can be sued in Colorado without violating the Constitution's due process limitations.
B. Fairness Factors
When a plaintiff satisfies its minimum contacts burden, the burden shifts to the defendant to demonstrate that exercising personal jurisdiction would nonetheless “offend traditional notions of fair play and substantial justice.” Newsome v. Gallacher, 722 F.3d 1257, 1271 (10th Cir. 2013) (quoting Dudnikov, 514 F.3d at 1080). “Such cases are rare.” Rusakiewicz, 556 F.3d at 1102. Defendants must “present a compelling case that the presence of some other considerations would render jurisdiction unreasonable.” Dudnikov, 514 F.3d at 1080. This usually involves five considerations:
(1) the burden on the defendant, (2) the forum state's interest in resolving the dispute, (3) the plaintiff's interest in receiving convenient and effective relief, (4) the interstate judicial system's interest in obtaining the most efficient resolution of controversies, and (5) the shared interest of the several states in furthering fundamental substantive social policies.OMI, 149 F.3d at 1095.
The OMI case arose out of an underlying patent lawsuit in Kansas; when one of the litigants sought coverage for the claims made in the Kansas lawsuit, the Canadian insurance company denied coverage. The claims against the Canadian insurance company, made by an Iowa subsidiary of a Canadian parent company, were governed by Canadian law. In Newsome v. Gallacher, the Tenth Circuit described its decision in the OMI case, in which it reversed the trial court's finding that there was personal jurisdiction over a Canadian insurance company, by noting that “everything about the lawsuit looked Canadian, and so we held that ‘fair play and substantial justice' could not accommodate the suit in Kansas.” 722 F.3d at 1271. 10
Here, MacDonald and George were officers and directors of a Colorado corporation, with a Colorado address as its principal place of business at the time of the actions giving rise to Plaintiffs' claims. The Court finds their relationship with GreenLink puts them on notice that they may be haled into court in Colorado for actions taken in their roles as offices and directors of GreenLink. Accordingly, the Court finds that the exercise of personal jurisdiction for the claims made by Plaintiffs here does not offend traditional notions of fair play and substantial justice. Having found that the exercise of personal jurisdiction over MacDonald and George is appropriate here, the Court turns to Defendants' argument that Plaintiffs' fail to adequately state four of their claims.
II. Fraud Claims
Defendants argue that all of Plaintiffs' fraud based claims (Count II for common law fraud, Count III for fraud under the Colorado Securities Act, Count IV for negligent misrepresentation, and Count V for fraud under the Exchange Act), fail because Plaintiffs did not “identify a misrepresentation upon which Plaintiffs relied to their detriment.” Dkt. #41 p. 12. Defendants argue that Plaintiffs allege that the Defendants falsely represented that there was a loan agreement that Plaintiffs failed to pay, and which entitled GreenLink to cancel Plaintiffs' shares in the event of nonpayment. Defendants point out that (assuming the allegations in the Complaint are true) Plaintiffs cannot assert that they were unaware that the loan agreement did not exist, and as such, cannot have relied on the existence of the alleged fraudulent loan agreement to their detriment. The Court agrees. As outlined below, each of Plaintiffs' four fraud-based claims requires either that the plaintiff did not know that the representation was untrue or that plaintiff reasonably relied on the misrepresentation. 11
Under Colorado law, a claim for fraudulent misrepresentation has five elements: (1) the defendant made a false representation of a material fact, (2) the one making the representation knew it was false, (3) the person to whom the representation was made was ignorant of the falsity, (4) the representation was made with the intention that it be acted upon, and (5) the reliance resulted in damage to the plaintiff. Bristol Bay Prods., LLC v. Lampack, 312 P.3d 1155, 1160 (Colo. 2013). To demonstrate the fifth (reliance) element of a fraudulent misrepresentation claim, the plaintiff must establish “its three discrete sub-parts, [namely] requiring the plaintiff to prove separately actual reliance, the reasonableness of that reliance, and that the plaintiff's reliance caused its damages.” Id.
Similarly, justifiable reliance is an element of a negligent misrepresentation claim in Colorado. Allen v. Steele, 252 P.3d 476, 482 (Colo. 2011) (A plaintiff must allege the following to sufficiently allege a negligent misrepresentation claim: (1) one in the course of his or her business, profession or employment; (2) makes a misrepresentation of a material fact, without reasonable care; (3) for the guidance of others in their business transactions; (4) with knowledge that his or her representations will be relied upon by the injured party; and (5) the injured party justifiably relied on the misrepresentation to his or her detriment).
The Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10(b) require reliance. Amgen Inc. v. Conn. Retirement Plans & Trust Funds, 568 U.S. 455, 461 (2013) (“Reliance . . . is an essential element of the § 10(b) private cause of action because proof of reliance ensures that there is a proper connection between a defendant's misrepresentation and a plaintiff's injury.” (internal quotation marks 12 omitted)). Colorado's analog to the Exchange Act, Colorado Securities Act, Colo. Rev. Stat. § 11-51-101, does not explicitly require reliance. It does however, require that “the plaintiff did not know of the untruth or of the omission.” Fed. Deposit Ins. Corp. v. RBS Acceptance Inc., No. 14-CV-00418-PAB-NRN, 2020 WL 491202, at *4 (D. Colo. Jan. 30, 2020).
Because the Plaintiffs would know whether they entered into a loan agreement, the Court agrees with Defendants that Plaintiffs do not plausibly allege that they were somehow unaware that the alleged misrepresentation by Defendants, that the loan agreement provided a basis to lawfully cancel Plaintiffs' shares, was untrue.
CONCLUSION
Based on the foregoing, the Court RECOMMENDS that Defendants Motion to Dismiss for Lack of Personal Jurisdiction and Failure to State a Claim, Dkt. #41, be DENIED with respect to the issue of personal jurisdiction. and GRANTED with respect to Plaintiffs' fraud-based claims. The Court recommends that Count II (Common Law Fraud), Count III (Fraud under the Colorado Securities Act), Count IV (Negligent Misrepresentation), and Count V (Violation of §10(b) of the Exchange Act and Rule 10b-5) be dismissed for failure to state a claim.
NOTICE: Pursuant to 28 U.S.C. § 636(b)(1)(c) and Fed.R.Civ.P. 72(b)(2), the parties have fourteen (14) days after service of this recommendation to serve and file specific written objections to the above recommendation with the District Judge assigned to the case. A party may respond to another party's objections within fourteen (14) days after being served with a copy. The District Judge need not consider frivolous, conclusive, or general objections. A party's failure to file 13 and serve such written, specific objections waives de novo review of the recommendation by the District Judge, Thomas v. Arn, 474 U.S. 140, 148-53 (1985), and also waives appellate review of both factual and legal questions. Makin v. Colorado Dep't of Corrections, 183 F.3d 1205, 1210 (10th Cir. 1999); Talley v. Hesse, 91 F.3d 1411, 1412-13 (10th Cir. 1996). 14