Krogh et al v. Nielsen et al
MEMORANDUM DECISION granting in part and denying in part 7 Motion to Dismiss for Failure to State a Claim ; granting 16 Motion to Amend/Correct. Signed by Judge Ted Stewart on 12/10/12. (ss)
IN THE UNITED STATES COURT FOR THE DISTRICT OF UTAH
JOHN KROGH, KAREN KROGH, KAYE
DEVENPORT, and MICHAEL
MEMORANDUM DECISION AND
ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANTS’
MOTION TO DISMISS AND
GRANTING PLAINTIFFS’ MOTION
CRAIG NIELSEN, GLEN MINER, GARY
CHLARSON, DAISHIN CO-PACK, LLC,
and JOHN DOES 1 through 10,
Case No. 2:12-CV-795 TS
This matter is before the Court on a Motion to Dismiss filed by Defendants Craig
Nielsen, Glen Miner, and DaiShin Co-Pack, LLC (collectively “Defendants”) and Plaintiffs’
Motion to Amend. For the reasons discussed below, the Court finds that certain of Plaintiffs’
claims require dismissal, but that further amendment is appropriate.
The following facts are taken from Plaintiffs’ Amended Complaint and viewed in the
light most favorable to Plaintiffs, as the non-moving party.
Defendants Nielsen and Miner (the “Individual Defendants”) are partners, managing
members, and members of the Board of Directors for Defendant DaiShin Co-Pack, LLC
(“DaiShin”). Defendant DaiShin was formed to act as a co-pack bottling facility, designed for
hot-fill, canned, and PET operations. In the summer of 2008, Defendants sought capital to invest
in DaiShin. Defendants approached the Devenports and solicited funds. In exchange,
Defendants offered stock in DaiShin and promissory notes. The Devenports agreed to invest in
DaiShin, providing approximately $250,000. The Devenports were given a purported ownership
interest in DaiShin and were also provided signed promissory notes.
In 2009, Defendants solicited funds from the Kroghs. On June 29, 2009, the Kroghs
loaned $250,000 to DaiShin. In consideration for the loan, DaiShin promised to repay the loan
with interest. In addition, Defendants promised to provide the Kroghs with an ownership interest
Plaintiffs allege that, in soliciting the funds from them, Defendants failed to disclose
several material facts. In particular, Plaintiffs allege that Defendants failed to disclose that the
future success of DaiShin was dependent on receiving further funding, that Defendants had a
number of outstanding debts, that Plaintiffs’ investment was to be used to pay off various debts
of Defendants and to diminish their personal guarantees, and so on.
Plaintiffs further allege that Defendants committed a number of acts and omissions to the
detriment of Plaintiffs. Plaintiffs also allege that Defendants used the loan proceeds for their
own personal benefit, rather than for the benefit of the company, and took steps to conceal their
Plaintiffs bring claims under RICO, as well as claims for fraud, breach of fiduciary duty,
breach of contract, and securities fraud.
Plaintiffs originally brought this action in Utah state court. This matter was removed to
this Court on August 14, 2012. On August 19, 2012, Defendants filed their Motion to Dismiss.
Plaintiffs have opposed the Motion to Dismiss and have filed a Motion to Amend, seeking to
amend certain alleged deficiencies in their Amended Complaint.
II. STANDARDS OF REVIEW
MOTION TO AMEND
Where, as in this case, a responsive pleading has been served, Federal Rule of Civil
Procedure 15(a)(2) dictates that “a party may amend its pleading only with the opposing party’s
written consent or the court’s leave.” The Rule specifies that “[t]he court should freely give
leave when justice so requires.”1 “The purpose of the Rule is to provide litigants ‘the maximum
opportunity for each claim to be decided on the merits rather than on procedural niceties.’”2
Fed. R. Civ. P. 15(a)(2).
Minter v. Prime Equip. Co., 451 F.3d 1196, 1204 (10th Cir. 2006) (quoting Hardin v.
Manitowoc-Forsythe Corp., 691 F.2d 449, 456 (10th Cir. 1982)).
However, the Court may refuse to grant leave to amend where it finds evidence of “undue delay,
bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by
amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of
the amendment, [or] futility of amendment.”3
MOTION TO DISMISS
In considering a motion to dismiss for failure to state a claim upon which relief can be
granted under Rule 12(b)(6), all well-pleaded factual allegations, as distinguished from
conclusory allegations, are accepted as true and viewed in the light most favorable to Plaintiffs as
the nonmoving party.4 Plaintiffs must provide “enough facts to state a claim to relief that is
plausible on its face,”5 which requires “more than an unadorned, the-defendant-unlawfully
harmed-me accusation.”6 “A pleading that offers ‘labels and conclusions’ or ‘a formulaic
recitation of the elements of a cause of action will not do.’ Nor does a complaint suffice if it
tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’”7 “The court’s function on
a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial,
Id. (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)).
GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir.
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547 (2007).
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Id. (quoting Twombly, 550 U.S. at 557) (alteration in original).
but to assess whether the plaintiff’s complaint alone is legally sufficient to state a claim for
which relief may be granted.”8 As the Court in Iqbal stated
only a complaint that states a plausible claim for relief survives a motion to
dismiss. Determining whether a complaint states a plausible claim for relief will
. . . be a context-specific task that requires the reviewing court to draw on its
judicial experience and common sense. But where the well-pleaded facts do not
permit the court to infer more than the mere possibility of misconduct, the
complaint has alleged—but it has not show[n]—that the pleader is entitled to
MOTION TO AMEND
Plaintiffs not only oppose Defendants’ Motion to Dismiss, they also seek leave to file a
Second Amended Complaint. The proposed Second Amended Complaint adds two parties, thus
mooting one of the arguments raised by Defendants in their Motion to Dismiss, as will be
discussed below. The proposed Second Amended Complaint also adds additional factual
allegations. However, the proposed Second Amended Complaint does not cure all of the
deficiencies addressed in Defendant’s Motion to Dismiss. Thus, the Court will grant the Motion
to Amend, but will require Plaintiffs to submit an amended complaint that addresses the issues
Miller v. Glanz, 948 F.2d 1562, 1565 (10th Cir. 1991).
Iqbal, 556 U.S. at 679 (alteration in original) (internal quotation marks and citations
MOTION TO DISMISS
Certain of Plaintiffs’ claims involve fraud. Fed. R. Civ. P. 9(b) states that “[i]n alleging
fraud or mistake, a party must state with particularity the circumstances constituting fraud or
mistake.” “Simply stated, a complaint must ‘set forth the time, place and contents of the false
representation, the identity of the party making the false statements and the consequences
thereof.’”10 “Rule 9(b) requires that a plaintiff set forth the who, what, when, where and how of
the alleged fraud.”11
A review of Plaintiffs’ Amended Complaint, as well as the proposed Second Amended
Complaint, reveals that it falls well short of what is required under Rule 9(b). Plaintiffs’
Amended Complaint makes the blanket assertion that “Defendants” made certain fraudulent
representations or took certain actions, but fails to differentiate between the various Defendants
and, thus, fails to set forth the “who.” Nor does the Amended Complaint state when and where
the alleged fraud took place. Because of these deficiencies, dismissal is appropriate. Plaintiffs’
proposed Second Amended Complaint suffers from many of the same flaws. However, the Court
will permit Plaintiffs an opportunity to file a complaint that complies with the requirements of
Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997) (quoting
Lawrence Nat’l Bank v. Edmonds (In re Edmonds), 924 F.2d 176, 180 (10th Cir. 1991)).
United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702,
727 (10th Cir. 2006) (quotation marks and citation omitted).
Defendants also argue that dismissal of the Individual Defendants is appropriate because
Plaintiffs have failed to tie them to any specific fraudulent act. Plaintiffs do not address this
argument in their opposition. The claims against the Individual Defendants fail for substantially
the same reasons set forth above with respect to Plaintiffs’ fraud-based claims, but Plaintiffs will
be afforded an opportunity to amend.
The Utah Revised Uniform Limited Liability Company Act provides:
(1) The debts, obligations, or other liabilities of a limited liability company,
whether arising in contract, tort, or otherwise:
(a) are solely the debts, obligations, or other liabilities of the limited liability
(b) do not become the debts, obligations, or other liabilities of a member or
manager solely by reason of the member acting as a member or manager acting as
(2) The failure of a limited liability company to observe any particular formalities
relating to the exercise of its powers or management of its activities is not a
ground for imposing liability on the members or managers for the debts,
obligations, or other liabilities of the limited liability company.12
Further, under Utah law, “[a]n officer or director of a corporation is not personally liable
for the torts of the corporation or of its other officers and agents merely by virtue of holding
corporate office, but can only incur personal liability by participating in the wrongful activity.”13
Thus, “[w]hen a fraud is alleged, a director or officer of a corporation is individually liable for
Utah Code Ann. § 48-3-304.
Armed Forces Ins. Exch. v. Harrison, 70 P.3d 35, 41 (Utah 2003) (quotation marks and
fraudulent acts or false representations of his own or in which he participates, even though this
action in such respect may be in furtherance of the corporate business.”14
Finally, a corporate officers is not personally liable under contract unless “he executed the
contract in a manner clearly indicating that the liability was his alone.”15
As discussed above, Plaintiffs’ Amended Complaint generally attributes the acts or
omissions complained of to “Defendants.” The Amended Complaint does not differentiate
between DaiShin and the Individual Defendants, nor does it distinguish among the Individual
Defendants. Without more specific allegations, the Amended Complaint fails to state a claim
against the Individual Defendants. However, as with the fraud-based claims, Plaintiffs will be
permitted to amend their complaint to provide the additional allegations required to withstand
Defendants next argue that Martin Evans is an indispensable party and that the case
should be dismissed based on Plaintiff’s failure to join him.
Plaintiffs’ proposed Second Amended Complaint adds Mr. Evans as a Defendant.
Because the Court will permit amendment and no argument has been made against the inclusion
of Mr. Evans, this argument is moot.
Id. (quotation marks and citation omitted).
Daines v. Vincent, 190 P.3d 1269, 1280 (Utah 2008) (quotation marks and citation
Claims Against Glen Miner
Defendants’ final argument is that the claims against Glen Miner must be dismissed
because any claims against him were discharged in a recent Chapter 7 bankruptcy. Plaintiffs
oppose, arguing that Defendant Miner failed to include Plaintiffs as creditors in his bankruptcy
Under 11 U.S.C. § 523(a)(3), an individual debtor does not receive a discharge from
debts that were neither listed nor scheduled in time to permit a timely request for a determination
of dischargeability, unless the creditor had “notice or actual knowledge” of the case. It is
undisputed that Plaintiffs were not identified as potential creditors in Defendant Miner’s
bankruptcy proceeding. Thus, the issue becomes whether Plaintiffs were provided sufficient
The type of notice required depends on whether the creditor is “known” or “unknown.”
A “known” creditor is one whose identity is either known or “reasonably ascertainable by the
debtor.”16 An “unknown” creditor is one whose “interests are either conjectural or future or,
although they could be discovered upon investigation, do not in due course of business come to
the knowledge [of the debtor].”17 When a creditor is “unknown,” notice by publication may
Tulsa Prof’l Collection Serv., Inc. v. Pope, 485 U.S. 478, 490 (1988).
Mullane v. Cent. Hanover Bank & Trust, Co., 339 U.S. 306, 317 (1950).
satisfy the requirements of due process.18 However, when a creditor is “known,” notice by
publication is not sufficient and actual notice is required.19
Defendant Miner makes the conclusory statement that Plaintiffs were unknown creditors.
However, this determination cannot be made based solely on the Amended Complaint.
Therefore, it is not appropriate for the Court to make this determination on a motion to dismiss
under Rule 12(b)(6). Defendant further states that, since Plaintiffs were unknown creditors, they
were given sufficient notice through the routine publication of the bankruptcy court’s orders,
presumably on the bankruptcy court’s website. Defendant cites no authority to support such a
proposition. Therefore, the Court will reject this argument.
Even if Plaintiffs were unknown creditors and were given appropriate notice, Plaintiffs
claims may not be barred, at least not all of them. Though not addressed by the parties, 11
U.S.C. § 523(a)(2)(A) does not discharge debts “for money, property, services, or an extension,
renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false
representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s
financial condition.” It is possible that at least some of Plaintiffs’ claims, were they properly
plead, would fall within this exception to discharge. For the foregoing reasons, dismissal of
Plaintiffs’ claims against Defendant Miner is not appropriate at this time.
Id. at 317-18.
City of New York v. New York, New Haven & Hartford R.R. Co., 344 U.S. 293, 296
It is therefore
ORDERED that Defendants’ Motion to Dismiss (Docket No. 7) is GRANTED IN PART
AND DENIED IN PART. Dismissal is done without prejudice to Plaintiff filing a properly
amended complaint. It is further
ORDERED that Plaintiffs’ Motion to Amend (Docket No. 16) is GRANTED. Plaintiff
must file an amended complaint with thirty (30) days of this Order.
DATED December 10, 2012.
BY THE COURT:
United States District Judge