Walters v. Generation Financial Mortgage LLC et al
Filing
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ORDER denying 57 Motion to Dismiss. Signed by Judge Warren W. Eginton on 4/5/12. (Ladd-Smith, I.)
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
J. TODD WALTERS,
Plaintiff,
v.
GENERATION FINANCIAL MORTGAGE,
LLC, and AMSTON MORTGAGE CO.,
INC.,
Defendants.
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3:10 cv 647 WWE
MEMORANDUM OF DECISION ON DEFENDANTS’ MOTION TO DISMISS
In this action, plaintiff J. Todd Walters asserts claims of breach of contract, breach of the
covenant of good faith and fair dealing, fraud, violation of Connecticut General Statutes § 3151q, wrongful discharge in violation of public policy, violation of the Connecticut Unfair Trade
Practices Act (“CUTPA”), and breach of fiduciary duty against Generation Financial Mortgage
LLC (“Generation”) and Amston Mortgage Company Inc. (“Amston”).
Defendants have moved to dismiss count four, fraud, for failure to plead the claim with
the required particularity. For the following reasons, defendants’ motion to dismiss will be
denied.
BACKGROUND
For purposes of ruling on a motion to dismiss, the Court accepts all allegations of the
complaint as true and draws all inferences in favor of plaintiff.
Plaintiff was the sole owner of Amston, a regional reverse mortgage company. In 2007,
plaintiff entered into an agreement to sell Amston to Generation, a competitor. As part of the
consideration for the sale, defendants entered into an employment agreement in which they
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agreed to employ plaintiff as Executive of the Amston division for a five-year term. Defendants
also agreed to grant plaintiff a 3.5% interest in defendants.
Plaintiff alleges that defendants never intended to fulfill their contractual commitments
and that defendants made the promises to induce plaintiff to sell his company, thereby
eliminating a competitor. In addition, plaintiff accuses defendants of falsely representing that
they were on the market, and that plaintiff would earn substantial amounts from his interest once
defendants were sold.
Defendants argue that plaintiff was not promised “unconditional” employment.
However, both plaintiff and defendants agree that plaintiff’s employment was governed by the
five-year employment contract. The contract provided that plaintiff’s employment could only be
terminated “for cause” or upon plaintiff’s death or incapacity.
Defendants assert that plaintiff was terminated for cause pursuant to section 4(g)(i)(4) of
the employment agreement. 4(g)(i)(4) provides:
“Cause” shall include any of the following grounds for the Company’s
termination of the Executive’s employment: . . . (4) The Executive
continually fails to substantially perform his reasonably assigned material
duties to the Company . . . as reasonably determined by the President of [ ]
Generation, which failure (A) has continued for a period of at least ten
(10) days after written notice of demand for substantial performance has
been delivered to the Executive specifying the manner in which the
Executive has failed to substantially perform, and/or (B) the Executive
unreasonably allows the situation to recur following the giving of such
notice;
On November 6, 2009, defendants attempted to terminate plaintiff’s employment without
giving a reason. Instead of following the procedure laid out in the agreement, defendants
informed plaintiff of his poor performance two weeks after they informed him of his termination.
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No notice specifying the manner in which plaintiff failed to “substantially perform his reasonably
assigned material duties” was ever given. Rather, defendants sent plaintiff a letter stating that his
employment was being terminated “for cause” due to drop in revenue generated by the Amston
division.
Following the termination, defendants claimed the right to redeem plaintiff’s membership
units. Defendants tendered payment of $350 for plaintiff’s 3.5% interest - an interest defendants
represented as potentially worth between $3,500,000 and $11,000,000 during sales negotiations
three years earlier.
Plaintiff alleges that the decrease in the Amston division’s revenue resulted from
defendants’ actions and was used as pretext to fire him. Furthermore, plaintiff claims that
defendants lied about the value of plaintiff’s 3.5% interest.
DISCUSSION
The function of a motion to dismiss is "merely to assess the legal feasibility of the
complaint, not to assay the weight of the evidence which might be offered in support thereof."
Ryder Energy Distribution v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir.
1984). When deciding a motion to dismiss, the Court must accept all well-pleaded allegations as
true and draw all reasonable inferences in favor of the pleader. Hishon v. King, 467 U.S. 69, 73
(1984). The complaint must contain the grounds upon which the claim rests through factual
allegations sufficient “to raise a right to relief above the speculative level.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 556 (2007). A plaintiff is obliged to amplify a claim with some factual
allegations in those contexts where such amplification is needed to render the claim plausible.
Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009).
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Fraud
Defendants have moved to dismiss count four, fraud, for failure to plead the claim with
the required particularity. The elements of a fraud case in Connecticut are: “(1) a false
representation was made as a state of fact; (2) the statement was untrue and known to be so by its
maker; (3) the statement was made with the intent of inducing reliance thereon; and (4) the other
party relied on the statement to his detriment.” Axelrod v. Flannery, 476 F. Supp. 2d 188, 19394 (D. Conn. 2007).
A “complaint alleging fraud must contain a greater level of factual specificity than that
required under the requirements of Rule 8(a)(2) and Twombly.” Allstate Ins. Co. v. Advanced
Health Professionals, P.C., 256 F.R.D. 49, 51 (D. Conn. 2008). The facts pleaded by a plaintiff
must give rise to a strong inference of fraudulent intent. Shields v. Citytrust Bancorp, Inc., 25
F.3d 1124, 1128 (2d Cir. 1994). “In addition, the complaint should explain how the
misrepresentations were fraudulent and plead those events which give rise to a strong inference
that the defendant had an intent to defraud, knowledge of the falsity, or a reckless disregard for
the truth.” Infra-Metals, Co. v. Topper & Griggs Group, Inc., F. Supp. 2d, 2005 WL 3211385 *4
(D.Conn. 2005) (internal quotation omitted). “The requisite ‘strong inference’ of fraud may be
established either (a) by alleging facts to show that defendants had both motive and opportunity
to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of
conscious misbehavior or recklessness.” Shields, 25 F.3d at 1128.
Plaintiff alleges that defendants’ motive for committing fraud was economic. By
eliminating or absorbing the competition at less than the agreed upon price, defendants would
gain market advantage at a discount. The opportunity to commit fraud existed when plaintiff was
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willing to sell his company in exchange for illusory promises of continued employment and a
3.5% ownership interest.
Plaintiff has cited multiple pre-sale meetings with executives at Generation where he was
led to believe that his 3.5% interest would realize him $3,500,000 to $11,000,000 if Generation
was acquired by another company. While defendants’ representation that they were on the
market was not a promise of eventual sale, the value of plaintiff’s compensation was certainly
important to his decision to sell his company. Likewise, although an LLC member’s projected
realization at sale is not the same as the value of the member’s interest upon expulsion,
elimination of plaintiff’s interest through payment of one ten-thousandth of the purported floor
value constitutes strong circumstantial evidence of conscious misbehavior. Defendants have
offered no explanation for the extreme disparity in valuation of membership units.
Defendants’ failure to abide by the procedural requirements of the employment contract is
also circumstantial evidence of conscious misbehavior. The decreased revenue explanation for
plaintiff’s termination was only offered after plaintiff protested that defendants were attempting
to terminate him without sufficient cause. Furthermore, plaintiff claims that shortly after
Generation’s purchase of plaintiff’s reverse mortgage business, defendants commenced a
systematic campaign to impair plaintiff’s ability to enhance the Company’s business through
Amston, as contemplated by the parties in their agreement. Such conduct included: (1)
materially reducing its retail marketing and advertising budget from the levels expended by
Amston prior to its purchase by Generation; (2) eliminating its retail business’ website and
instead steering potential retail customers to Generation’s centralized national call center; and (3)
failing to become licensed to do business in New York, thereby entirely eliminating a substantial
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portion of Amston’s retail business’ product line, greatly reducing Amston’s ability to compete in
the retail mortgage lending industry. Despite plaintiff’s requests that the foregoing conduct be
abated, defendants continued to dismantle Amston’s business through closure of eight of its
branch offices and elimination of key employees. Plaintiff alleges that defendants engaged in
these activities with the purpose of terminating plaintiff’s employment, thereby avoiding paying
him under the employment agreement and providing an excuse to call plaintiff’s ownership
interest for an inadequate price. In other words, the 36% decrease in Amston’s average monthly
loan volume was not the result of plaintiff’s failure to “substantially perform his reasonably
assigned material duties.”
Defendants made representations that plaintiff’s employment would only be terminated
for cause and that plaintiff’s ownership interest could be worth $3,500,000 to $11,000,000.
Defendants’ statements to plaintiff about his employment contract and the value of his ownership
interest in the company were made with the intent of inducing reliance thereon - so plaintiff
would sell Amston to defendant Generation. Plaintiff relied on these statements. Drawing all
inferences in favor of plaintiff, defendants’ failure to comply with the employment agreement
and $350 payment for plaintiff’s ownership interest make feasible plaintiff’s claim that
defendants’ false statements were known to be untrue by defendants. Therefore, defendants’
motion to dismiss will be denied.
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CONCLUSION
For the above stated reasons, defendants’ motion to dismiss is DENIED.
Dated this 5th day of April, 2012 at Bridgeport, Connecticut.
_______________/s/________________________
WARREN W. EGINTON
SENIOR UNITED STATES DISTRICT JUDGE
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