Hershewe v. Givens et al
Filing
156
OPINION AND ORDER DENYING 111 , 112 , 114 , 115 , 116 motions to dismiss, as further set out in order. Signed by Honorable Judge Myron H. Thompson on 9/29/15. (Attachments: # 1 civil appeals checklist)(djy, )
IN THE DISTRICT COURT OF THE UNITED STATES FOR THE
MIDDLE DISTRICT OF ALABAMA, SOUTHERN DIVISION
EDWARD HERSHEWE,
)
)
)
)
)
)
)
)
)
Plaintiff,
v.
KEITH GIVENS, et al.,
Defendants.
CIVIL ACTION NO.
1:14cv655-MHT
(WO)
OPINION AND ORDER
Plaintiff
against
a
Edward
number
of
Hershewe
brings
defendants
this
asserting
action
state-law
claims of fraud, breach of fiduciary duty, piercing the
corporate veil, and corporate dissolution as well as a
federal-law
Influenced
claim
and
of
Corrupt
U.S.C. § 1961 et seq.
a
violation
of
Organizations
the
Act
Racketeer
(RICO),
18
The defendants are Keith Givens
(K. Givens), John Givens (J. Givens), Chase Givens (C.
Givens),
Eagle
Investments,
LLP,
Eagle
Investments
Group, LLP, VLO Management, LLC, and Jacoby & Meyers,
LLC.
The court has federal-question jurisdiction over
the federal claim pursuant to under 28 U.S.C. § 1331
and supplemental jurisdiction over the state-law claims
pursuant to 28 U.S.C. § 1367.
The
case
is
now
before
this
court
on
the
defendants’ motions to dismiss pursuant to Federal Rule
of Civil Procedure 12(b)(6).
The motions to dismiss
will be denied.
I. LEGAL STANDARD
In considering a defendant’s Rule 12(b)(6) motion
to
dismiss,
the
court
accepts
the
plaintiff’s
allegations as true, Hishon v. King & Spalding, 467
U.S. 69, 73 (1984), and construes the complaint in the
plaintiff’s favor, Duke v. Cleland, 5 F.3d 1399, 1402
(11th
Cir.
plaintiff
1993).
will
“The
issue
ultimately
prevail
is
not
but
whether
whether
a
the
claimant is entitled to offer evidence to support the
claims.”
Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).
To survive a motion to dismiss, a complaint need not
2
contain “detailed factual allegations,” Bell Atl. Corp.
v.
Twombly,
550
U.S.
544,
545
(2007),
“only
enough
facts to state a claim to relief that is plausible on
its face.”
Id. at 574.
II. BACKGROUND
This case arises out of a joint venture between
Hershewe,
a
lawyer
lawyer from Alabama.
the
court
accepts
from
Missouri,
and
K.
Givens,
a
As this is a motion to dismiss,
any
plausible
pleading
in
the
complaint as true.
Several years ago, Hershewe and K. Givens began
discussions for the joint venture.
The idea was to
establish a nationwide set of physical and virtual law
offices across the country under the auspices of Jacoby
& Meyers, a law firm where K. Givens worked and had an
ownership interest.
In order to roll out this business
plan,
K.
Hershewe
and
Givens
3
sought
a
company
that
markets pre-made or do-it-yourself legal forms to join
the venture.
Hershewe and K. Givens finalized an agreement for a
joint venture in 2012.
K. Givens, along with his sons
C. Givens and J. Givens, formed VLO Management LLC to
manage the joint venture and agreed to transfer the
intellectual
property,
licenses,
websites,
logos,
copyrights, and brand name from Jacoby & Meyers to VLO.
In exchange, Hershewe agreed to transfer $ 3.5 million
to the company, $ 1.5 million of which would serve as a
capital
contribution.
A
large
part
of
this
$ 3.5
million was to be used as a down payment on USLegal, a
company that could provide the pre-made legal forms
central to the business plan.
As part of the agreement
to form VLO, Hershewe obtained a 46.25% interest in
VLO; Keith Givens, 20%; C. Givens, 15%; J. Givens, 15%;
and two other investors, 1.875% each.
Every member of
VLO except for Hershewe was a lawyer at the same law
firm.
K. Givens and Hershewe were co-managers of VLO,
4
while K. Givens, along with C. Givens, controlled the
bank account.
Soon after the formation, Hershewe transferred the
first $ 1.5 million to VLO.
On the same day, K. Givens
transferred $ 1 million from VLO’s account to Eagle
Investments,1 a company owned by K. Givens, J. Givens,
and C. Givens.
Eagle Investments shortly thereafter
transferred
$
Givens
made
over
930,000
several
other
as
a
loan
questionable
payment.
K.
transactions
from the VLO account in the following months, including
spending nearly $ 40,000 on registration and legal fees
for Jacoby & Meyers and over $ 150,000 in furniture
unrelated to VLO.
VLO’s tax filings were changed to
1. Eagle Investments, LLP ceased to be a company in
2013-2014.
Hershewe alleges that Eagle Investments
Group, LLP, also registered by K. Givens, is its
successor.
The court will refer to them collectively
as Eagle Investments.
5
cover up these transfers (doc. no. 101-10).2
Hershewe
also claims that K. Givens, C. Givens, and J. Givens
spent
any
money
transferred
from
VLO
to
Eagle
Investments and Jacoby & Meyers quickly so that these
companies would be undercapitalized.
In July 2012, Hershewe was scheduled to transfer
the
remaining
$
2
million
of
the
$ 3.5
million
investment to VLO in order to purchase the stake in
USLegal.
A
month
beforehand,
K.
Givens
came
to
Hershewe, warning that USLegal was running out of money
and needed more to support the business.
He asked
Hershewe co-sign a bank loan for $ 1 million so that
VLO could help USLegal with its cash flow; Hershewe
agreed.
However, the $ 1 million was not actually for
2. “Attachments to the complaint are considered
part of the pleadings for all purposes, including a
12(b)(6) motion.”
Reeves v. DSI Sec. Servs., 2008 WL
808612, at *2 n.1 (M.D. Ala. 2008) (Thompson, J.)
(internal
quotation
marks
omitted)
(quoting
Solis-Ramirez v. U.S. Dept. of Justice, 758 F.2d 1426
(11th Cir. 1985)).
6
US Legal’s cash-flow difficulties; rather, K. Givens
needed the money because he had depleted VLO’s bank
account to the point where Hershewe’s earlier transfer
of $ 2 million was not going to be enough to cover the
purchase price for USLegal.
Hershewe now brings this lawsuit alleging, among
other claims, that K. Givens, C. Givens, and J. Givens
defrauded
him
of
his
investment
and
violated
their
fiduciary duty to VLO.
III. DISCUSSION
The defendants move under Rule 12(b)(6) to dismiss
all claims.
The court will address each in turn.
A. Civil RICO
The
court
will
first
analyze
Hershewe’s
only
federal claim: a civil claim under RICO against all
defendants.
should
be
The
defendants
dismissed
because
7
argue
that
Hershewe
this
does
not
claim
have
standing to bring the claim and because he does not
plead the substantive elements.
The court finds that
he meets these requirements.
1.
Standing
“Any person injured in business or property” by
reason of a RICO claim has standing to sue, “except
that no person may rely upon any conduct that would
have been actionable as fraud in the purchase or sale
of securities.”
18 U.S.C. § 1964.
The defendants
argue that Hershewe lacks standing because he relies on
fraud regarding an investment contract that qualifies
as
a
security
exception.3
and
thus
falls
within
the
standing
The questions then are, How do federal
3. In some parts of their motions to dismiss, the
defendants argue that Hershewe’s investment is a
security under the definition provided by 15 U.S.C.
§ 77b, while in other parts they argue it is not a
security.
Compare, e.g., K. Givens Mot. to Dismiss
(doc. no. 114) at 18 (is a security) with id. at 31
(continued...)
8
securities laws define the term ‘security’, and Does
Hershewe’s investment fit within this category?
Section
10b-5
of
the
federal
securities
laws
prohibits the employment of manipulative or deceptive
devices “in connection with the purchase or sale of a
security.”
See 17 C.F.R. § 240.10b-5.
definitions,
the
term
investment
contract.
investment
in
VLO
was
Among its many
“security”
can
U.S.C.
77b.
15
an
§
“investment
include
an
Hershewe’s
contract”
for
purposes of federal securities law only if there was
“(1) an investment of money, (2) a common enterprise,
and (3) the expectation of profits to be derived solely
from the efforts of others.”
Sec. and Exch. Comm’n v.
Unique Fin. Concepts, Inc., 196 F.3d 1195, 1199 (11th
Cir. 1999).
The court will analyze each prong in turn.
n.10 (is not a security). The court assumes these are
arguments in the alternative.
9
Under the first prong of this test, the required
“investment of money refers to an arrangement whereby
an investor commits assets to an enterprise or venture
in such a manner as to subject himself to financial
loss.”
Gilmore v. MONY Life Ins. Co. of Am., 165 F.
Supp. 2d 1276, 1284 (M.D. Ala. 2001) (Thompson, J.).
This
prong
is
easily
met.
The
complaint
describes
Hershewe’s “equity investment” of $ 3.5 million for a
“legal business venture.”
It is clear that Hershewe
committed assets in a way that subjected him to a loss.
The second prong, or ‘common enterprise,’ is also
easily
met.
fortunes
of
A
common
the
enterprise
investor
are
“exists
where
the
interwoven
with
and
dependent on the efforts and success of those seeking
the
investment
Concepts,
Inc.,
or
of
196
third
F.3d
at
parties.”
1199.
Unique
Here,
Fin.
Hershewe
invested his money in VLO, and he would gain or lose
money based on VLO’s performance.
Their efforts were
interwoven and thus formed a common enterprise.
10
The final prong, and the one most at issue in this
case,
requires
that
the
expectation
of
profits
derived solely from the efforts of others.
not interpreted restrictively.”
is
“Solely is
Sec. and Exch. Comm’n
v. Merch. Capital, LLC, 483 F.3d 747, 755 (11th Cir.
2007).
prong]
Instead, “[t]he crucial inquiry [for the third
is
the
amount
of
control
that
retain under their written agreements.”
the
investors
Unique Fin.
Concepts, Inc., 196 F.3d at 1201 (internal quotation
marks omitted).
This amount of control is measured
from the “time the interest is sold, rather than at
some later time after the expectations of control have
developed or evolved.”
Merch. Capital, LLC, 483 F.3d
at 756. Economic reality of the arrangement governs
over form.
Id. at 755.
In the complaint, Hershewe states that he was a
co-manager and part-owner of VLO.
11
Although he does not
provide
role,4
governing
the
documents
terms
that
co-manager
Hershewe’s
ability
regarding
VLO’s
to
make
business.
clearly
and
define
part-owner
significant
Indeed,
his
imply
decisions
the
term
“co-manager” suggests that he is K. Givens’s equal when
making decisions.
Even if K. Givens later excluded him
from all business decisions, the focus of this test is
the
relationship
at
the
formation
rather than how it evolved.
of
the
business
Id. at 756.
Because
Hershewe was originally a co-manager and had control
over
his
investment,
the
investment
was
not
an
investment contract and therefore not a security.
As
such, he has standing to bring a civil RICO claim.5
4. The Second Amended Complaint states that it
provides the by-laws in Exhibit 8. However, Exhibit 8
(doc. no. 101-17) appears to be a lease agreement and
not the by-laws.
5. Hershewe initially alleged a 10b-5 claim in the
alternative to the civil RICO claim.
However, he
admitted in open court that he did not state a claim
(continued...)
12
2.
Substantive Elements
The defendants next argue that Hershewe does not
meet the substantive requirements for pleading a civil
RICO claim under 18 U.S.C. § 1962(c).
To establish a
RICO claim, a plaintiff must plead “(1) conduct (2) of
an enterprise (3) through a pattern (4) of racketeering
activity.”
Williams v. Mohawk Indus., Inc., 465 F.3d
1277, 1282 (11th Cir. 2006).
As a “breed of fraud
claims,” civil RICO allegations “must be pled with an
increased
level
of
specificity.”
Ambrosia
Coal
&
Const. Co. v. Pages Morales, 482 F.3d 1309, 1316 (11th
Cir. 2007).
must
As with other fraud claims, the plaintiff
identify
the
“(1)
the
precise
statements,
documents, or misrepresentations made; (2) the time,
place, and person responsible for the statement; (3)
for relief on this issue, and the
dismissed the claim (doc. no. 144).
13
court
has
since
the content and manner in which these statements misled
the Plaintiffs; and (4) what the defendants gained by
the alleged fraud.”
605
F.3d
1283,
Am. Dental Ass'n v. Cigna Corp.,
1291
(11th
Cir.
2010).
The
particularity requirement serves to “alert[] defendants
to the precise misconduct with which they are charged
and protect[] defendants against spurious charges of
immoral and fraudulent behavior.”
Brooks v. Blue Cross
and Blue Shield of Fla., Inc., 116 F.3d 1364, 1370-71
(11th Cir. 1997) (internal quotation marks omitted).
The court first examines whether Hershewe pleads
conduct of an enterprise.
An enterprise “includes any
individual, partnership, corporation, association, or
other
legal
entity,
and
any
union
or
group
of
individuals associated in fact although not a legal
entity.”
18 U.S.C. § 1961.
It “is proved by evidence
of an ongoing organization, formal or informal and by
evidence
unit.”
that
the
various
associates
Williams, 465 F.3d at 1284.
14
function
as
a
“[T]he complaint
should
inform
each
defendant
of
the
alleged participation in the fraud.”
nature
of
his
Ambrosia Coal,
482 F.3d at 1317 (internal quotation marks omitted).
Hershewe
claims
that
the
“Givens
defendants”--K.
Givens, C. Givens, and J. Givens--formed an enterprise
to artificially and illegally depreciate the value of
VLO corporate assets and defraud him of his interest in
VLO.
Hershewe in essence alleges two steps to show
enterprise.
First,
he
pleads
that
K.
Givens
fraudulently induced Hershewe to invest $ 3.5 million
in
VLO
by
promising
to
contribute
Jacoby
&
Meyers
assets, furthered his fraud by inducing Hershewe to
guarantee another $ 1 million loan, and continues to
defraud Hershewe of his interest by filing false tax
returns regarding Hershewe’s contribution.
This set of
claims puts K. Givens on notice of Hereshewe’s simple
charge: K. Givens, through VLO and Jacoby & Meyers, is
stealing Hershewe’s contribution to VLO for his own
benefit.
15
Second, Hershewe argues that K. Givens served as
the agent of C. Givens and J. Givens and that his acts
are attributable to them.
A party can allege actual or
apparent authority as a basis for holding a principal
liable for the actions of an agent.
Agency § 15.
principal
behalf--can
3 Am. Jur. 2d
An actual agency relationship--where the
intended
for
either
be
the
agent
express
to
act
through
a
on
his
formal
contractual agreement or implied based on the facts and
circumstances of a particular case.
Fisher v. Comer
Plantation, Inc., 772 So. 2d 455, 465 (Ala. 2000).
On
the other hand, to allege liability based on apparent
authority, a party need not prove that the principal
intended the agent act on his behalf but rather that
the principal “by his acts or conduct has clothed the
agent with the appearance of authority.”
Johnson v.
Shenandoah Life Ins. Co., 281 So. 2d 636, 640 (Ala.
1973).
“The question of agency is one for the trier of
fact; and the existence and scope of a principal-agent
16
relationship
is
normally
a
determined by the jury.”
question
of
fact
to
be
Calvert v. Cas. Reciprocal
Exch. Ins. Co., 523 So. 2d 361, 362 (Ala. 1988).
The
court
finds
that
Hershewe
has
alleged
adequately that K. Givens was an actual agent of C.
Givens and J. Givens.
While Hershewe did not plead
that there was a formal contract between K. Givens and
his
sons,
indicate
the
an
facts
implied
and
circumstances
agency
pled
relationship.
could
Both
C.
Givens and J. Givens accepted their shares in VLO after
K. Givens negotiated the contract with Hershewe, and
both
had
Neither
partial
raised
ownership
any
issue
of
Eagle
when
$ 1
Investments.
million
was
transferred from VLO to Eagle Investments, when over
$ 930,000 of that $ 1 million was used to pay off a
loan, or when additional funds from VLO were spent for
Eagle
Investments
or
their
personal
businesses.
Moreover, C. Givens had his name the Eagle Investments
bank
account
into
which
VLO
17
transferred
the
money.
With this pleading, Hershewe alerted C. Givens and J.
Givens that their principal-agent relationship with K.
Givens, and his actions taken on their behalf, is the
basis of the fraud claim.
Brooks, 116 F.3d at 1370-71
(internal quotation marks omitted).
While the court
makes no determination on the truth of this pleading,
it is sufficient to survive a 12(b)(6) motion.
The defendants next challenge whether there was a
pattern of racketeering activity.
In particular, they
argue that Hershewe failed to plead two predicate acts
to constitute a pattern and that the alleged activity
is not continuous. For the purposes of RICO, a “pattern
of racketeering activity” first requires at least two
predicate
acts.
Mohawk,
465
F.3d
at
1283.
Here,
Hershewe alleges several acts of mail fraud and/or wire
fraud.6
He
pleads
that
K.
Givens’s
promise
to
6. Both mail fraud and wire fraud “require that a
person (1) intentionally participates in a scheme or
(continued...)
18
contribute Jacoby & Meyers’s intellectual property led
him to make the initial agreement to invest in VLO; K.
Givens’s
assurances
that
the
original
$ 1.5
million
would be a capital contribution that he would get back
induced
him
Givens’s
to
make
false
the
initial
representation
wire
that
transfer;
USLegal
K.
needed
additional cash led him to co-guarantee the $ 1 million
loan
later
to
purchase
promise
to
stock
in
spend
the
USLegal;
$ 2
and
million
K.
Givens’s
transfer
on
USLegal--rather than for his personal benefit--led him
to
transfer
alleges
continues
that
to
this
final
VLO’s
related
to
filing
depreciate
Hershewe is a member.
the
amount.
the
of
value
Moreover,
false
of
tax
VLO,
Hershewe
returns
of
which
These predicate acts are all
underlying
purpose
of
defrauding
artifice to defraud another of money or property, and
(2) uses or causes the use of the mails or wires for
the purpose of executing a scheme or artifice.” United
States v. Ward, 486 F.3d 1212, 1221-22 (11th Cir.
2007).
19
Hershewe and draining VLO assets.
They therefore meet
the pleading requirement of two predicate acts towards
a common purpose.
In
addition
to
pleading
two
predicate
acts,
Hershewe must also allege that the acts “amount to or
pose a threat of continued criminal activity.”
Jackson
v. BellSouth Telecomm., 372 F.3d 1250, 1264 (11th Cir.
2004) (emphasis in original).
A plaintiff can meet
this requirement in one of two ways.
First, he can
allege that the pattern of conduct is “closed,” meaning
that there was a past period of repeated conduct.
Id.
at 1265 (quoting H.J. Inc. v. Nw. Bell Tel. Co., 492
U.S. 229, 241-42 (1989)).
Alternatively, he can allege
that the pattern of conduct is “open,” meaning that
there is a specific threat of ongoing conduct in the
future or that “the predicate acts or offenses are part
of an ongoing entity’s regular way of doing business.”
Id.
(quoting
H.J.
Inc.,
492
U.S.
at
242).
The
underlying concept is that a pattern must continue over
20
a substantial period of time--usually more than a year;
two discrete acts within a short period of time are
insufficient.
A plaintiff can allege this period of
time occurred in the past, in a ‘closed’ pattern, or
will occur in the future, in an ‘open’ pattern.
Hershewe
racketeering
pleads
an
activity
continue indefinitely.
open
is
pattern--i.e.,
ongoing
and
that
threatens
the
to
In particular, he notes that
the defendants continue to falsify tax returns in order
to cover up the dissipation of assets.
Additionally,
K. Givens, C. Givens, and J. Givens continue to have
exclusive
control
over
financial
decisions
at
VLO,
which makes possible their continuing fraud of using
Hershewe’s investment in VLO for their own benefit.
In
other words, VLO’s regular way of doing business now
entails those in control dissipating VLO’s assets for
their own benefit.
Such an allegation of a continuing
scheme meets the continuity requirement.
21
As Hershewe meets both the standing and substantive
requirements for a RICO claim, the court denies the
12(b)(6) motions on this claim.
B. Fraud
Hershewe next alleges that K. Givens, C. Givens, J.
Givens,
and
investment
Eagle
in
Investments
VLO,
and
each
defrauded
defendant
dismiss for failure to state a claim.
him
his
moves
now
of
to
The court denies
the motions to dismiss this claim.
Under Alabama common law, fraud can be based on the
misrepresentation
or
failure
to
disclose
a
present
material fact or on a fraudulent promise to act or not
to act in the future. See Penmont, LLC v. Blue Ridge
Piedmont, LLC, 607 F. Supp. 2d 1266 (M.D. Ala. 2009)
(Thompson,
fraud).
Givens,
J.)
(describing
the
different
types
of
Here, Hershewe contends that K. Givens, C.
and
J.
Givens
promised
to
spend
his
$
3.5
million investment for VLO’s operation and growth, but
22
instead used it for their own benefit.
In other words,
he alleges promissory fraud, claiming that they falsely
promised to use the investment towards VLO’s business.
To
make
out
a
claim
for
promissory
fraud,
a
plaintiff must allege “(1) a false representation, (2)
of material existing fact, (3) reasonably relied upon
by
the
plaintiff,
proximate
(4)
consequence
of
who
suffered
damage
misrepresentation.”
as
Id.
a
at
1273 (quoting S.B. v. St. James Sch., 959 So. 2d 72,
101 (Ala. 2006)).
The plaintiff must also show that at
the time of the misrepresentation the defendant “had
the intention not to perform the act as promised” and
had the “intent to deceive.”
Id. (quoting St. James,
959 So. 2d at 101). The intent to deceive “can be
established
relates
to
through
events
circumstantial
that
occurred
misrepresentations were made.”
2d 334, 343 (Ala. 2002).
a
plaintiff
can
evidence
after
the
that
alleged
Byrd v. Lamar, 846 So.
As discussed above, although
allege
23
intent
generally,
the
circumstances
constituting
particularity.
must
be
pled
with
Fed. R. Civ. P. 9(b).
1.
Hershewe
fraud
claims
K. Givens
that,
during
negotiations,
K.
Givens represented both that he would use Hershewe’s
$ 3.5 million investment to advance VLO’s business and
that he would transfer Jacoby & Meyers’s intellectual
property to VLO.
either promise.
However, K. Givens did not fulfill
He used the $ 3.5 million for his own
businesses, including transferring $ 1 million of the
initial
investment
into
Eagle
Investments,
and
he
failed to transfer any intellectual property to VLO.
As evidence that K. Givens intended to deceive at the
moment of the promise, Hershewe notes that Jacoby &
Meyers never transferred any intellectual property and
that
K.
Givens
transferred
Hershewe’s
initial
$
1
million to his personal account the same day Hershewe
wired the money to VLO.
24
These detailed allegations put K. Givens on notice
of the alleged fraud.
His
failure
assets
to
transfer
to
VLO
to
Brooks, 116 F.3d at 1370-71.
transfer
and
his
the
own
any
intellectual
timing
account
of
the
provide
$
property
1
million
circumstantial
evidence of K. Givens’s intent to deceive when VLO was
formed.
these
Lamar, 846 So.2d at 343.
pleadings
state
a
The court finds that
claim
for
fraud
with
particularity and thus denies the motion to dismiss on
this claim.
2.
Although
the
C. Givens and J. Givens
complaint
details
a
Givens’s actions that constitute fraud,
number
of
K.
it does not
have the same level of detail for C. Givens or J.
Givens.
Indeed, the complaint never describes their
individual actions separate from K. Givens.
It only
provides any specificity on three occasions: stating
that C. Givens’s name was on the Eagle Investments’
25
bank
account
along
with
K.
Givens;
describing
C.
Givens’s joint control of VLO’s bank account with K.
Givens;
and
mentioning
that
K.
Givens
delegated
management of VLO to C. Givens and J. Givens.
None of
these statements allege a specific action by C. Givens
or J. Givens that they took alone.
These statements do
not qualify as pleading with particularity as to C.
Givens
or
J.
Givens.
See
Morrow
v.
Green
Tree
Servicing, LLC, 360 F. Supp. 2d 1246, 1250 (M.D. Ala.
2005) (Thompson, J.).
Alternatively,
Hershewe
makes
the
claim
that
K.
Givens at all times acted as the actual or apparent
agent for C. Givens and J. Givens.
As discussed above,
this agency claim meets the pleading requirements.
3.
Hershewe
last
Eagle Investments
alleges
that
Eagle
Investments
is
liable for fraud because K. Givens acted as its agent.
According to the complaint, K. Givens was part-owner
26
and manager of Eagle Investments and transferred funds
out
of
VLO’s
account
Investments.
K.
into
Givens’s
one
owned
position
by
Eagle
within
Eagle
Investments gave him express power as an actual agent
to act on its behalf.
Moreover, Eagle Investments’s
failure to protest the additional money flowing into
its bank account suggests that K. Givens had the power
to manage its finances and act on its behalf.
Based on
K. Givens’s formal position as well as the facts and
circumstances of how he managed Eagle Investments, the
court
finds
that
Hershewe
pleads
an
actual
agency
relationship between K. Givens and Eagle Investments
and
therefore
denies
the
motion
to
dismiss
on
this
claim.
C.
Hershewe
Breach of Fiduciary Duty
next
brings
direct
and
derivative
breach-of-fiduciary-duty claims against K. Givens, C.
27
Givens, and J. Givens.7
Each moves to dismiss.
The
court denies the motions.
1. Direct Claim
In order to have standing for a direct claim of
breach
of
fiduciary
duty,
plaintiffs
“suffered a harm unique to them.”
Inc.
v.
Adams,
However,
“[i]f
76
the
So.
3d
wrong
228,
must
have
Altrust Fin. Servs.,
245
directly
(Ala.
2011).
damages
the
corporation and its assets from waste, conversion and
intentional
mismanagement,
corporation’s.”
the
claim
is
the
Mobile Attic, Inc. v. Cash, 2012 WL
7. It is unclear whether the plaintiffs actually
plead this claim against J. Givens.
The heading of
Count II does not include J. Givens, but the paragraphs
under it and the request for relief do apply to him.
To avoid “elevat[ing] form over substance,” the court
considers the claim against J. Givens.
See Valentine
v. Legendary Marine FWB, Inc., 2010 WL 1687738, at *2
(N.D. Fla. 2010) (Rodgers, J.).
The court therefore
denies J. Givens’s motion to strike paragraphs 121 and
122 (doc. no. 115) in relation to J. Givens.
28
2120794, at *2 (M.D. Ala. 2012) (Thompson, J.) (quoting
id. at 241).
self-dealing
For example, claims of mismanagement and
are
“quintessential
derivative
injury,
merely incidental to status as a stockholder.”
Mobile
Attic, 2012 WL 2120794, at *2 (internal quotation marks
omitted).
Investors
direct
can
allege
claim--where
the
a
unique
nature
of
harm--and
thus
the
was
harm
a
an
inducement to provide funding to enter a joint venture
or guarantee a loan.
218,
222
purchased
limited
(Ala.
an
In DGB, LLC v. Hinds, 55 So. 3d
2010),
interest
liability
the
in
a
plaintiffs
originally
real-estate-development
company.
After
this
initial
investment, at the request of the managers of the LLC,
the
plaintiffs
agreed
to
fund
an
additional
$ 2.5
million investment and to guarantee an additional $ 7.5
million loan in order to purchase a specific piece of
property that the LLC told them was worth $ 10 million.
Id.
at
222-23.
Unbeknownst
29
to
the
plaintiffs,
the
property had been purchased days earlier for half that
price
by
a
company
partially
defendants who owned the LLC.
owned
Id.
by
the
same
The court held that
the plaintiffs had standing to sue on direct claims
because
“the
concealed
defendants
information
made
directly
representations
from
[the
to
and
plaintiffs]
regarding the circumstances” of the joint venture.
Id.
at 229; see also ECR Properties, LLC v. Camden Cnty.
Dev., LLC, 998 F. Supp. 2d 1295, 1310-11 (M.D. Ala.
2014) (Fuller, J.) (finding standing for direct claim
where plaintiffs were induced by a false representation
to make a capital contribution to a joint venture).
The
defendants
make
three
arguments
against
Hershewe’s claim of direct breach of fiduciary duty:
Hershewe lacks standing to bring the claim, he fails to
allege a fiduciary duty, and that, even if there was a
fiduciary duty, there was no breach of it.
rejects all three arguments.
30
The court
The first issue is whether Hershewe has standing to
bring this direct claim.
Hinds,
Hershewe
was
Similar to the plaintiffs in
induced
to
provide
a
capital
contribution and later to guarantee personally a loan
based on a false premise: that the investment would be
used for the benefit of VLO.
The alleged wrong for
this claim was based on the inducement to invest money
and not on K. Givens’s misappropriation of VLO funds.8
Because K. Givens “made representations directly to and
concealed
information
directly
from”
Hershewe
when
inducing him to invest, Hershewe has standing to bring
a direct claim for breach of fiduciary duty.
Hinds, 55
So. 3d 218 at 229.
8. Indeed, this holding on standing for a direct
claim is limited to the inducement alone.
To the
extent Hershewe alleges direct, versus derivative,
injury to VLO from K. Givens’s self-dealing use of VLO
funds, which affects all members of the LLC, the claim
is rejected. See Mobile Attic, 2012 WL 2120794, at *2.
31
The defendants next contend that Hershewe fails to
allege the existence of a fiduciary duty between the
parties.
Breach of fiduciary duty sounds in tort law.
Hensley v. Poole, 910 So.2d 96, 106 (Ala. 2005).
As
such, Hershewe has to plead duty, causation, breach,
and damages.
Under Alabama law, members of an LLC owe
each other a duty of loyalty and a duty of care.
Ala.
Code
§
10A-5-3.03.
These
duties
1975
include
accounting for property, profit, or benefits derived
from
the
self-dealing
business
and
as
well
grossly
intentional misconduct.
Id.
as
refraining
negligent,
reckless,
from
or
Each member must also act
in a manner consistent “with the obligation of good
faith and fair dealing.”
Id.
The complaint sufficiently pleads that K. Givens
had a fiduciary duty to Hershewe, that he violated that
duty, and that the breach caused Hershewe damages.
The
complaint makes clear that they were both members of
the LLC and accordingly owed each other a duty of care,
32
duty of loyalty, and duty to act in good faith.
See
id.; Compl. ¶ 107. Givens first induced Hershewe to
invest $ 1.5 million in VLO and then used it for his
personal
benefit;
and
K.
Givens
misrepresented
the
reason for the $ 1 million loan in order to induce
Hershewe into guaranteeing it.
This self-dealing on
both issues violates the duty of loyalty as well as the
duty to deal in good faith.
In sum, Hershewe has standing and properly pled a
direct claim for breach of fiduciary duty against K.
Givens.
Based on the agency theory discussed above, he
also pled a claim against C. Givens and J. Givens.
court
therefore
denies
the
motions
to
dismiss
The
this
claim.
2. Derivative Claim
To plead a derivative claim, a plaintiff must meet
both
the
derivate
procedural
claim
and
requirements
the
substantive
33
for
pleading
requirements
a
for
breach of fiduciary duty.
The court will first turn to
whether Hershewe met the procedures outlined in the
federal rules and then move to the substantive claim
against each defendant.
i.
The
pleads
first
a
derivative
Procedural Requirements
question
derivative
claim
is
whether
claim.
under
federal
In
Hershewe
order
to
procedural
properly
make
a
rules,
a
plaintiff must allege that the shareholder was a member
of the corporation at the time of the transaction and
that the action is not a collusive attempt to confer
jurisdiction.
Fed. R. Civ. Proc. 23.1.
He must also
plead with particularity any demand he made to those in
charge to change their actions or the reasons for not
making such an effort, i.e., why such an effort would
have been futile.
Id.; 1975 Ala. Code § 10A-5-4.04.
34
As neither party disputes whether Hershewe was a member
of VLO and no evidence suggests collusion,9 the court
turns
to
whether
he
pleads
demand
or
futility
with
particularity.
When
analyzing
a
demand
or
futility
federal courts look to state substantive law.
argument,
Playford
v. Lowder, 635 F. Supp. 2d 1303, 1307 (M.D. Ala. 2009)
(Thompson, J.) (quoting
Kamen v. Kemper Fin. Serv.,
Inc, 500 U.S. 90, 95-6, 101-103 (1991)).
undisputed that Hershewe
Here, it is
did not make a pre-lawsuit
demand, so the question is whether he can demonstrate
futility.
Although courts have not elaborated on the
futility requirement for
limited-liability companies,
they have evaluated a similar law for corporations.
To
9. Even though Hershewe does not allege collusion,
“[f]ailure to plead lack of collusion is not fatal to a
derivative action where the facts alleged in the
complaint do not establish the existence of collusion.”
Plunkett v. Poyner, 2009 WL 5176542, at *5 (S.D. Fla.
2009) (Cohn, J.). K. Givens has not argued collusion,
and the facts do not suggest it.
35
demonstrate futility under Alabama corporations law, a
plaintiff
must
show
“such
a
degree
of
antagonism
between the directors and the corporate interest that
the directors would be incapable of performing their
duty.”
Davis v. Dorsey, 495 F. Supp. 2d 1162, 1174
(M.D. Ala. 2007) (Thompson, J.) (quoting Elgin v. Alfa
Corp., 598 So. 2d 807, 815 (Ala. 1992)). A court can
consider
whether
a
majority
of
the
directors
are
accused of breaches of fiduciary duty by the plaintiff,
and
the
futility
requirement
is
generally
“deemed
satisfied if the directors or a majority thereof are
shown to have been under the control of the alleged
wrongdoers.”
Id.
(internal
citations
and
quotation
marks omitted).
The
same
concepts
limited-liability
company
can
be
in
this
applied
to
the
case.
Hershewe
alleges that he did not hold a majority interest in VLO
and that he would not have been able to convince other
members to take action, as they were all part of the
36
same
law
firm.
Moreover,
three
defendants
in
this
case--K. Givens, C. Givens, and J. Givens--own 50% of
VLO,
rendering
any
attempt
to
secure
a
majority
VLO’s members to bring this lawsuit futile.
therefore
finds
that
Hershewe
met
the
of
The court
procedural
requirements for a derivative claim and turns to the
substantive merits.
ii. Substantive Requirements
The
defendants
allege
that
Hershewe
does
not
plausibly claim the underlying elements for breach of
fiduciary duty for a derivative claim.
As stated above, Hershewe must allege a harm on
behalf of VLO in order to state a derivative claim.
According to the complaint, K. Givens used his position
as co-manager of VLO to funnel money into his personal
enterprises, including a $ 1 million transfer and over
$ 100,000 worth of purchases for another business he
owned.
In
addition,
K.
Givens
37
and
C.
Givens
had
control of the Eagle Investments bank account to which
the money was transferred and from which they spent
money for their personal benefit.
company
for
personal
self-dealing.
gain
Taking money from a
is
the
epitome
of
As such, Hershewe plausibly alleges a
derivative claim for breach of the fiduciary duty of
loyalty against K. Givens as well as his sons on the
agency theory.
Because
Hershewe
meets
the
substantive
and
procedural requirements for pleading a derivative claim
for
breach
of
fiduciary
duty,
the
court
denies
the
motions to dismiss on this issue.
D. Piercing the Corporate Veil
Hershewe next claims that the court should pierce
the veil corporate veil of VLO, Eagle Investments, and
Jacoby & Meyers because K. Givens, C. Givens, and J.
Givens
used
these
personal liability.
companies
as
alter
egos
to
avoid
Each defendant moves to dismiss.
38
Under Alabama law, a plaintiff can move to pierce
the
corporate
veil
of
an
directly” on the members.
LLC
and
“impose
liability
Filo America, Inc. v. Olhoos
Trading Co., LLC, 321 F. Supp. 2d 1266, 1268 (M.D. Ala.
2004)
(Thompson,
J.)
(quoting
Culp
v.
Econ.
Mobile
Homes, Inc., 895 So. 2d 857, 859 (Ala. 2004)) (internal
quotation marks omitted).
corporate
veil
is
to
The purpose of piercing the
“furnish[]
a
means
for
a
complainant to reach ... [an] individual upon a cause
of
action
that
otherwise
would
have
existed
only
against the ... corporation.” Gilbert v. James Russell
Motors,
2001)
Inc.,
812
(internal
differently,
if
So.2d
1269,
quotation
a
1273
marks
plaintiff
(Ala.
Civ.
App.
omitted).
sues
a
Put
defendant
corporation and the corporation lacks assets, piercing
the
corporate
collect
any
corporation]
veil
provides
...
award
from
another
39
a
“means
against
source,
by
[the
which
to
defendant
namely
[the
corporation’s]
shareholders.”
Stephens
v.
Fines
Recycling, Inc., 84 So. 3d 867, 877 (Ala. 2011).
The defendants argue that piercing the corporate
veil is inapplicable in this case because every claim
asserted against Eagle Investments and Jacoby & Meyers
can be, and has been, asserted against K. Givens, C.
Givens, and J. Givens.
In other words, they argue that
this case is not the normal context for piercing the
corporate veil where an individual is attempting to
avoid liability through a sham corporation.
The
court
rejects
the
defendants’
prejudge the outcome of this case.
invitation
to
For example, the
defendants could argue, and a jury could find, that K.
Givens, C. Givens, and J. Givens are protected from
individual liability for Eagle Investments and Jacoby &
Meyers’s actions because of the corporate structure.
In that case, Hershewe’s claim that these companies are
undercapitalized
defendants
would
and
meet
alter
the
40
egos
of
purpose
the
of
individual
piercing
the
corporate veil because piercing the veil might be the
only
alternative
Recycling,
84
means
So.
3d
to
at
collect
877.
an
The
award.
court
Fines
therefore
denies the motion to dismiss this claim.
E. Corporate Dissolution
Hershewe next brings a corporate-dissolution count
against VLO and its subsidiaries.
VLO contends that
this count should be dismissed because the court lacks
subject-matter jurisdiction and because Hershewe failed
to state a claim for which relief can be granted.10
Alabama law provides for judicial dissolution of a
limited-liability company:
10. VLO listed general affirmative defenses at the
end of its answer, including these two objections.
Although not clear, the court assumes the affirmative
defenses
apply
to
each
claim
against
VLO.
Additionally, several other defendants allege the same
defenses to corporate dissolution; however, they cannot
assert these defenses on VLO’s behalf.
41
“On application by or for a member, the circuit
court for the county in which the certificate
of formation is filed may decree dissolution of
a limited liability company whenever it is not
reasonably practicable to carry on the business
in conformity with the governing documents.”
Ala. Code 1975 § 10A-5-7.02.
The
court
subject-matter
argues
that
must
first
examine
jurisdiction
there
is
no
over
whether
this
claim.
subject-matter
it
has
VLO
jurisdiction
because the statute only allows the Alabama circuit
court, and not a federal court, to dissolve a company.
In essence, they argue that the state legislature, by
limiting jurisdiction to only circuit courts, barred
federal-court review.
jurisdiction
to
Federal courts, however, have
hear
state-law
claims
under
supplemental or diversity-of-citizenship jurisdiction,
and corporate law is not one of the limited spheres
where federal courts cannot exercise this jurisdiction,
such as the granting of divorce or a decree of alimony.
Cf. Ankenbrandt v. Richards, 504 U.S. 689, 704 (1992)
42
(upholding
domestic-relations
federal-court
jurisdiction,
exception
but
narrowing
to
it
to
encompass only issuance of divorce, alimony, or a child
custody decree).
Indeed, a state legislature cannot
avoid federal-court jurisdiction simply by enacting a
statute
that
requires
the
case
be
brought
in
state
court.
Cf. Jolly v. Pittore, 1993 WL 277284, at *2
(S.D.N.Y. 1993) (Martin, J.) (exercising jurisdiction
for
corporate
specified
that
dissolution
the
Court
issue
is
where
of
Delaware
Chancery
statute
could
decree
dissolution).
The
next
whether
Hershewe
plausibly
alleges why it is not reasonably practicable to carry
on
VLO’s
documents.
business
in
Although
accordance
Alabama
with
law
the
does
governing
not
define
‘reasonably practicable,’ and Alabama courts have not
ruled on the issue, other state courts have addressed
it.
For
example,
Delaware
courts,
interpreting
an
almost identical statute, have labeled dissolution as
43
an “extreme remedy” and identified only two situations
where it is not reasonably practicable to operate the
business: “(i) where there is deadlock that prevents a
corporation from operating and (ii) where the defined
purpose of the entity is fulfilled or impossible to
carry out.”
Wiggs v. Summit Midstream Partners, LLC,
2013 WL 1286180, at *12 (Del. Ch. 2013); see also In re
Arrow Inv. Advisors, LLC, 2009 WL 1101682, at *4 (Del.
Ch.
2009).
Other
state
courts
have
stressed
that
deadlock or breaches of fiduciary duty alone cannot be
grounds for dissolution but must instead be tied to the
inability of the business to conform with the governing
documents.
590,
596
In re 1545 Ocean Ave., LLC, 893 N.Y.S.2d
(N.Y.
App.
2010)
(interpreting
almost
identical statute to the one at issue here)
The court agrees with the interpretation of the
Delaware and New York courts.
Under the plain language
of
member
the
Alabama
managerial
statute,
deadlock
or
a
a
fundamental
44
must
plead
change
in
how
the
company, the market, or the legal landscape makes it
impossible to achieve the business’s purpose.
Hershewe
describes
a
meets
company
this
pleading
where
one
standard.
member
is
He
suing
his
co-manager and two other members for embezzling money
from the company for their own purposes and failing to
carry
Unlike
out
the
a
case
core
purpose
where
one
of
the
joint
executive
at
venture.
a
large
corporation is embezzling, the alleged fraud and breach
of fiduciary duty here implicates four out of the six
members of the LLC, a large portion of the capital
being
used
for
the
business,
property central to the business.
and
the
intellectual
The court finds that
it not reasonably practicable to carry on the business
given this deadlock.
It therefore denies the motion to
dismiss on this claim.
***
45
Accordingly,
it
is
ORDERED
that
the
motions
to
dismiss (doc. nos. 111, 112, 114, 115, 116) are denied.
DONE, this the 29th day of September, 2015.
/s/ Myron H. Thompson___
UNITED STATES DISTRICT JUDGE
46
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