Moreno-Gomez et al v. Ponce-Romay et al

Filing 63

MEMORANDUM. Signed by Judge Gregory M. Sleet on 11/21/2016. (mdb)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

ERNESTO MORENO-GOMEZ, a Costa Rican
National, TOTAL-PETS.A., a Costa Rican
sociedad anonima; NEW WORLD RECYCLE,
S.A., a Costa Rican sociedad anonima, TOTAL
PET CORP., a British Virgin Islands Company,

Plaintiffs,
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ROBERTO PONCE-ROMAY, an individual, )
WILLIAM MUECKE, an individual, JOSE
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PABLO CORDERO, an individual, JOACHIM )
ALEXANDER VON DER GOLTZ, an
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Individual, CORE CO. I LIMITED
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PARTNERSHIP, a Delaware Limited
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Partnership, CORECO CENTRAL AMERICA )
FUND I, a Delaware Limited Partnership,
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INVERMASTER, a Costa Rican entity, DOES )
I through X, inclusive, and ROE ENTITITES )
XI through M, inclusive,
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Defendants.
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C.A. No. 16-163-GMS

JURY TRIAL DEMANDED

MEMORANDUM

I.

INTRODUCTION
Plaintiffs Ernesto Moreno-Gomez, Total-Pet S.A. ("Total-Pet"), New World Recycle, S.A.

("New World"), and Total Pet Corp ("TP") initiated this action against Defendants Roberto PonceRomay, William Muecke, Jose Pablo Cordero, Joachim Alexander Von Der Goltz, Core Co. I
Limited Partnership ("Coreco"), Coreco Central America Fund I ("CCAF"), Invermaster, Does I
through X, inclusive, and Roe Entities XI through M, inclusive, on March 16, 2016. (D.I. 1).
Plaintiffs allege a total of eleven claims against Defendants relating to Coreco's and CCAF's

takeover of Total-Pet. Id. Only one of Plaintiffs' claims is a federal claim, brought under§ lO(b)
of the Exchange Act and Rule 1Ob-5 for securities fraud. Id.

Presently before the court is

Invermaster's motion to dismiss for lack of subject matter jurisdiction, personal jurisdiction, and
failure to state a claim. (D.1. 27). The court will grant Invermaster's motion to dismiss for failure
to state a claim. Because dismissal disposes of the case in its entirety, the court declines to address
lnvermaster' s other grounds for dismissal. Plaintiffs are granted leave to amend the Complaint.

II.

BACKGROUND
Total-Pet is a Costa Rican company, and wholly owned subsidiary of TP, that was in the

business of producing plastic bottles for corporations in Costa Rica. (D.I. 1 if 17). It aimed to
create anew recycling division of the company called New World. Id.

if 18. Total-Pet determined

. that it would need about $12,500,000 USD to fund the expansion and enlisted the help of the Costa
Rican Company, Invermaster, to act as its broker and secure the necessary investments for its
expansion plans. Id.

if 20.

Around September 15, 2011, Roberto Ponce-Romay ("Ponce"), representing himself as
president of Invermaster, told Total-Pet that it would need $5,000,000 USD in equity, $3,500,000
USD in a mezzanine loan, and $6,000,000 USD in debt in order to finance the expansion. Id.

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20, 22. Around September 16, 2011, Ponce emailed Moreno, the president of Total-Pet, to tell
him that German bank DEG and other multilateral organizations were interested in investing in
Total-Pet's expansion. Id.

if 24. Allegedly, Ponce then told Moreno that the European banks and

multilateral organizations found the expansion to be too small. Id.

if 26. According to Total-Pet,

Ponce explained that the only way for Total-Pet to receive investment and carry out the expansion
was through an established fund such as Coreco. Id.

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26, 27. Coreco, a Delaware limited

partnership, would receive funds from European banks and multilateral organizations and then use
those funds to make loans to Total-Pet for the expansion. Id.
Around December 30, 2011, Coreco and CCAF executed an initial bridge loan agreement
to provide Total-Pet with a loan of $1,500,000 USD, which would later be converted to equity. Id.

if 33. Around October 9, 2012, Coreco and CCAF entered into a loan agreement with TP, TotalPet, and New World. Id.

if 38. The agreement stated that Coreco was to loan $770,935 USD to

TP--evidenced by a convertible promissory note ("Note 1")-and CCAF was to loan TP
$4,380,315 USD-also evidenced by a promissory note ("Note 2"). New World also received an
$8,500,000 USD loan from Banco Nacional de Costa Rica. Id.
Ponce notified Total-Pet that they still required $1,500,000 USD to fund the expansion. Id.

ii 46.

Around May 14, 2013, Coreco entered into another convertible promissory note with Total-

Pet for $225,000 USD ("Note 3"). Id.

if 47. CCAF also entered into another promissory note with

Total-Pet for $1,275,000 USD ("Note 4"). Id. Both notes granted Coreco the option to acquire
majority ownership in TP, Total-Pet, and New World. Id. The funding was still insufficient to
cover certain additional expenses. Id. Muecke, a representative of Coreco, notified Total-Pet that
shareholders ofTP would need to use their shares as collateral for the additional funding necessary
for Total-Pet's expansion. Id.

if 50. According to Total-Pet, Coreco and CCAF claimed that TP,

Total-Pet, and New World breached the terms of the original agreement by being underfunded.

Id. if 54. Allegedly, as a result of Total-Pet's, TP's, and New World's default, Coreco and CCAF
foreclosed on the TP shares pledged as collateral, thereby taking over ownership and control of
TP. Id.

if 55.

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Ill.

STANDARD OF REVIEW

A defendant may move to dismiss a complaint if the plaintiff fails "to state a claim upon
which relief can be granted." Fed. R. Civ. P. 12(b)(6). While the complaint need not include
"detailed factual allegations," it must at least contain "sufficient factual matter ... to 'state a claim
for relief that is plausible on its face."' Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007)). To be facially plausible a claim must be

supported by "well-pleaded facts that permit the court to infer more than a mere possibility of
misconduct." Id. at 679. In evaluating a motion under Rule 12(b)(6), the court accepts all factual
allegations in the complaint as true, so long as they are not simply "legal conclusions[s] couched
as factual allegations[s]." Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555). Thus, "[a]
motion to dismiss pursuant to Rule 12(b)(6) may. be granted only if, accepting all well pleaded
allegations in the complaint as true, and viewing them in the light most favorable to plaintiff,
plaintiff is not entitled to relief." In re Burlington, 114 F.3d at 1420.
IV.

DISCUSSION

A. Federal Securities Claim under the Securities Exchange Act of 1934
Section 1O(b) of the Exchange Act states:
It shall be unlawful for any person, directly or indirectly, by the use of any means
or instrumentality of interstate commerce or of the mails, or of any facility of any
national securities exchange--(b) To use or employ, in connection with the purchase
or sale of any security registered on a national securities exchange or any security
not so registered, or any securities-based swap agreement any manipulative or
deceptive device or contrivance in contravention of such rules and regulations as
the Commission may prescribe as necessary or appropriate in the public interest or
for the protection of investors.

15 U.S.C. § 78j(b) (2012). Rule lOb-5, promulgated under§ lO(b), provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means
or instrumentality of interstate commerce, or of the mails or of any facility of any
national securities exchange,

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(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the 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.lOb-5.
A plaintiff must allege the following elements to state a claim for a violation of
Rule 1Ob-5: "(1) a material misrepresentation or omission by the defendant; (2) scienter;
(3) a connection between the misrepresentation or omission and the purchase or sale of a
security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6)
loss causation." Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157
(2008). When a case concerns foreign companies, foreign securities or transactions outside
of the United States, however, there is an added level of complexity to the Rule 1Ob-5
pleading requirements. See Absolute Activist Value Master Fun Ltd. v. Ficeto, 677 F.3d
60, 68 (2d Cir. 2012) (holding that the complaint must sufficiently allege domestic
purchases to state a claim under§ lO(b)).
The Supreme Court has held that § 1O(b) and Rule 1Ob-5 have no extraterritorial
application, applying only to "transactions in securities listed on domestic exchanges[] and
domestic transactions in other securities." Morrison v. National Australia Bank Ltd., 561
U.S. 247, 267 (2010); see U.S. v. Georgio, 777 F.3d 125, 134 (3d. Cir. 2015) ("[i]ndeed,
Section lO(b) has no extraterritorial reach."). "With regard to securities not registered on
domestic exchanges, the exclusive focus [is] on domestic purchases and sales .... "
Morrison, 561 U.S. at 268. To determine whether a purchase or sale is domestic, courts
have looked to the location where the parties incurred irrevocable liability-where the

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parties became bound to effectuate the purchase or sale. Absolute Activist, 677 F.3d at 68.
The Third Circuit is in agreement with the Second Circuit that "territoriality under

Morrison turns on 'where, physically, the purchaser or seller committed him or herself to
pay for or deliver a security." Georgiou, 777 F.3d at 136 (quoting US. v. Vilar, 729 F.3d
62, 77 n.11 (2d. Cir. 2013)).
To adequately allege a domestic securities transaction in securities not listed on a
domestic exchange, the plaintiff must alleged facts leading to a plausible inference "that
irrevocable liability was incmTed or title was transfe1Ted within the United States." Id.
Facts proving irrevocable liability within the United States include the "formation of
contracts, the placement of purchase orders, the passing of title, or the exchange of money."

Absolute Activist, 677 F.3d. at 69.
Plaintiffs did not allege any facts supporting the notion that the securities at
issue were listed on an American stock exchange, and, in fact, concede that point in their
brief. (D.I. 43 at 6). Additionally, Plaintiffs did not allege that contracts were formed,
purchase orders were placed, title was passed or money was exchanged within the United
States in connection with TP, Total-Pet or New World securities.
In the Complaint, there is no mention of where Total-Pet, TP or New World entered

into transactions with Defendants. Under the eighth cause of action, the federal securities
fraud claim, the Complaint states that "[b ]y soliciting TP to transfer its shares as collateral
in. Note 1, Note 2, Note 3, and Note 4, PONCE, MUECKE, GOLTZ, CORDERO,
CORECO, CCAF, and INVERMASTER were offered securities by TP." (D.I. 1 if 10).
The Complaint also alleges that Ponce, Muecke, Cordero, Goltz, Coreco, CCAF, and
Invermaster violated § 78j and § 73-201 of the Delaware Security Act, in addition to

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violating Rule IOb-5 of the Securities Exchange Act of 1934. Id

ii 112. None of the above

factual averments demonstrate that Total-Pet, TP, New World or Invermaster incurred
irrevocable liability within the United States.
The only time there is even a reference to the United States in connection with this
action occurs within the section of the Complaint where jurisdictional allegations are laid
out. The Complaint states that Coreco and CCAF are limited partnerships doing business
in Delaware, and that Muecke and Goltz are individuals doing business in the United
States. Id ,-i,-i 7, 8. The Complaint also states that "[t]he contractual instruments that are
the subjects of this action are governed by the laws of the state of Delaware." Id

ii 14.

Plaintiffs allege no facts in the general allegations section of the Complaint linking the
transactions that occurred between Plaintiffs and Defendants to the United States. The
limited facts that connect this action to the United States are insufficient to satisfy the
Plaintiffs' burden of alleging domestic securities fraud. See Absolute Activist, 677 F.3d
at70 (explaining that a complaint alleging that defendant was a resident or corporation of
California "does not lead to the plausible inference that the Funds became irrevocably
bound to purchase U.S. Penny Stocks in the United States"); see also Arco Capital Corp.

v. Deutsche Bank AG, 949 F. Supp. 2d 532, 541 (S.D.N.Y. 2013) (asserting that the law
that governed the relevant contracts was irrelevant to the determination of whether the
purchase or sale of the securities at issue occurred within the United States). Thus,
Plaintiffs fail to allege facts leading to a plausible inference that a domestic transaction
occurred. Consequently, the court must dismiss their federal securities fraud claim under
§IO(b) and Rule IOb-5.

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B. Supplemental Jurisdiction Doctrine
The court must decide whether to exercise supplemental jurisdiction over the
remaining state-law claims now that the sole claim grounded in federal law has been
dismissed before trial. The court has jurisdiction over Plaintiffs' state-law claims under 28
U.S.C. § 1367(a) because the state-law claims are so related to the federal-law claims "that
they form part of the same case or controversy under Article III of the United States
Constitution." 28 U.S.C. § 1367(a) (2012). Normally, "the balance of factors to be
considered under the pendent jurisdiction doctrine-judicial economy, convenience,
fairness, and comity-will point toward declining to exercise jurisdiction" when all
federal-law claims are dismissed and only state-law claims remain. Carnegie-Mellon Univ.
v. Cohill, 484 U.S. 343, 350 n.7 (1988).
This case remains in the early stages of litigation. A Joint Status Report was filed
on August 10, 2016, explaining that, due to the pending motions to dismiss, discovery has
not begun. (D.I. 39 at 5). The court does not find that it would be unfair or inconvenient
for Plaintiffs to bring their remaining claims in state court. Judicial economy also favors
Plaintiffs bringing their remaining claims in state court. This case has not advanced far
enough in this court for there to be a concern that the state court would be duplicating our
work. See Carnegie-Mellon, 484 U.S. at 351 (explaining that when the single federal-law
claim was eliminated early on in the litigation, the District Court had a strong reason to
decline to exercise jurisdiction over the state-law claims). Additionally, comity concerns
and the state's interest in enforcing its own law persuade the court that Plaintiffs' remaining
state law claims should be dismissed without prejudice, so that they may be brought in state
court. See Hagans v. Lavine, 415 U.S. 528, 548 (1974) (highlighting the preference for

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state courts to handle state law claims because they have more familiarity with the
controlling principles).

V.

CONCLUSION
For the foregoing reasons the court will grant Invermaster's motion to dismiss. 1 (D.I. 26).

Plaintiffs are granted leave to amend their Complaint if they wish to attempt to plead facts that the
purchase or sale of the securities at issue took place within the United States.

Dated: November

±L 2016

1

The court grants Invermaster's motion to dismiss because Plaintiffs failed to state a claim upon which relief could
be granted by failing to allege facts demonstrating the existence of a domestic securities transaction. Because the
same federal securities claim under § 1O(b) and Rule lOb-5 is asse1ied against all Defendants, the claim is dismissed
as to all Defendants. D.I. 1 iii! 106-13. As a matter of procedure, the court can only formally grant Invermaster's
Motion to Dismiss because it was brought under Federal Rule of Civil Procedure 12(b )(6). See Absolute Activist,
677 F.3d at 67 (stating that, though the district court erroneously dismissed the complaint for lack of subject matter
jurisdiction, a footnote indicated the case could have also been dismissed under 12(b)(6), making remand
unnecessary). All other Defendants moved to dismiss this case under 12(b)(1) for lack of subject matter jurisdiction.
(D.1. 23, 32). Dismissing this case under 12(b)(I) would constitute legal error because Morrison is clear in its
assertion that§ 1O(b )'s application to certain conduct is a merits question. See Morrison, 561 U.S. at 254 ("(b Jut to
ask what conduct § I O(b) reaches is to ask what conduct § lO(b) prohibits, which is a merits question.").

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