Quail Cruises Ship Management LTD. v. Agencia De Viagens CVC Tur Limitada et al
ORDER denying 202 Motion to Dismiss for Failure to State a Claim. Signed by Judge Paul C. Huck on 1/24/2012. (kfn)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO.: 09-23248-CIV-HUCK/BANDSTRA
QUAIL CRUISES SHIP MANAGEMENT,
AGENCIA DE VIAGENS CVC TUR
LIMITADA, et al.,
ORDER DENYING DEFENDANTS’ MOTION TO DISMISS
This matter is before the Court on the Motion to Dismiss for Failure to State a Claim Upon
Which Relief Can Be Granted (D.E. #202) filed by Agencia de Viagens CVC Tur Limitada (“CVC”),
Valter Patriani, SeaHawk North America, LLC, and Rodolfo Spinelli (collectively “Defendants”).
The Court has considered the Motion to Dismiss, the related briefing, and is otherwise duly advised.
For the reasons discussed below, the Court denies Defendants’ Motion to Dismiss in full.
FACTUAL AND PROCEDURAL BACKGROUND
This is an action by Quail Cruises Ship Management, Ltd., a Bahamian cruise ship operator,
in which Quail alleges that the Defendants fraudulently induced it into purchasing the passenger ship
M/V Pacific through the purchase of stock of Templeton International, Inc., a Bahamian corporation
whose principle asset was the Pacific.1 Quail purchased the stock from Flameck International S.A.,
a Uruguayan corporation. Flameck is not a party to this action because the Share Purchase
Agreement between Quail and Flameck contained an arbitration clause.
In its Amended Complaint (D.E. #90),2 Quail contends that the Defendants conspired to
induce it to purchase the Templeton stock by concealing and fraudulently misrepresenting the
Pacific’s deteriorating and unsafe condition. Specifically, Quail alleges that CVC, a tour operating
company and prior owner of the Pacific, and its president, Valter Patriani, directed SeaHawk, the
The facts relating to the sale of the Templeton stock and the events preceding this suit are
set forth extensively in this Court’s prior orders, and the Court need not recount them here.
This Court dismissed Quail’s initial Complaint with leave to amend on April 14, 2010. See
Order on Mot. to Dismiss (D.E. #87).
company that supervised the vessel’s operations, and SeaHawk’s president, Rodolfo Spinelli, to
defer repairs and conceal the deteriorated condition of the Pacific. Quail also claims that SeaHawk
influenced Lloyd’s Register North America, Inc. (“LRNA”), the classification society responsible
for inspecting the vessel, to provide favorable evaluations so as to conceal the vessel’s true
condition.3 Furthermore, Quail alleges that the Defendants and their representatives made material
misrepresentations regarding the vessel’s condition prior to the sale of the Templeton stock.
The Amended Complaint contains a claim for securities fraud under § 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5,
17 C.F.R. § 240.10b-5; maritime tort claims for fraud in the inducement and recklessness; and
common law claims for civil conspiracy to commit fraud in the inducement, negligence and
negligent misrepresentation, fraud in the inducement, and breach of fiduciary duty. On August 6,
2010, this Court dismissed the Amended Complaint. This Court determined that Quail’s securities
fraud claim was insufficient under the “transactional test” set forth in Morrison v. National Australia
Bank, Ltd., 130 S. Ct. 2869 (2010), because the Amended Complaint did not allege the requisite
domestic transaction. As such, Quail lacked a federal cause of action under 28 U.S.C. § 1331. After
also determining that Quail’s maritime tort claims failed the test for admiralty jurisdiction, this Court
concluded that it lacked subject matter jurisdiction over the litigation and dismissed the case.
The Eleventh Circuit, however, vacated this Court’s order of dismissal. See Quail Cruises
Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 F.3d 1307 (11th Cir. 2011). In
determining that this Court erroneously concluded that it lacked subject matter jurisdiction, the
Eleventh Circuit first recognized, in a footnote, that the “issue of extraterritoriality goes only to the
ability to state a claim, not subject matter jurisdiction.” Id. at 1310 n.3. It then proceeded to address
the issue of whether the purchase or sale of the Templeton stock occurred in the United States. The
Eleventh Circuit found that Quail alleged that the closing of the sale actually occurred in the United
States and that the purchase and sale agreement confirmed that it was not until such closing that title
to the shares was transferred to Quail. It also determined that, by definition, the transfer of title
constituted a sale. Accordingly, the Eleventh Circuit concluded that “we cannot say at this stage in
the proceedings that the alleged transfer of title to the shares in the United States lies beyond
§ 10(b)’s territorial reach.” Id. at 1310–11. The Eleventh Circuit remanded the case to this Court
for further proceedings.
This Court dismissed LRNA as a defendant on September 21, 2011. See Order of
Dismissal as to Def. Lloyd’s Register North America, Inc. (D.E. #196).
The Defendants now seek to dismiss the Amended Complaint for failure to state a claim.4
In their Motion to Dismiss, the Defendants contend that Quail’s securities fraud claim should be
dismissed because the sale of the Templeton stock does not constitute the sale of a “security” as such
term is defined by the Securities Exchange Act. They also argue that Quail failed to plead fraud with
the level of particularity required by Federal Rule of Civil Procedure 9(b) and under the Private
Securities Litigation Reform Act (“PSLRA”). Furthermore, the Defendants claim that the alleged
misrepresentations do not amount to actionable fraud and that Quail could not have reasonably relied
on such misrepresentations. Finally, they argue that, if this Court does not dismiss the Amended
Complaint in its entirety, it should dismiss Quail’s claims for negligence and maritime recklessness
and exclude those alleged misrepresentations that are non-actionable as a matter of law. Each
argument is addressed in turn below.
Ordinarily, the Federal Rules of Civil Procedure simply require “a short and plain statement
of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). Factual
allegations need only “be enough to raise a right to relief above the speculative level.” Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 555 (2007). Claims of fraud, however, including the securities
fraud claim at issue here, are governed by the heightened pleading standards of Rule 9(b), which
require a complaint to “state with particularity the circumstances constituting fraud.” Mizzaro v.
Home Depot, Inc., 544 F.3d 1230, 1237 (11th Cir. 2008).
Furthermore, the PSLRA requires that a complaint for securities fraud alleging misleading
statements or omissions specify each allegedly misleading statement and the reasons why it is
misleading, and, where an allegation is made on information and belief, the complaint shall “state
with particularity all the facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). The
complaint must also “state with particularity facts giving rise to a strong inference that the defendant
acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2); see also Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 321 (2007) (describing the PSLRA’s heightened pleading
instructions); Mizzaro, 544 F.3d at 1238 (same). The PSLRA raised the standard for pleading
SeaHawk, Spinelli, and CVC asserted the defense of failure to state a claim upon which
relief can be granted in their Answer and Affirmative Defenses to the Amended Complaint
(D.E. #200). Because this Court determined that it was in the interest of justice to hear this defense
at this time, it ordered the Defendants to file an appropriate motion or advise the Court that they
would not continue to assert such defense. See Order (D.E. #201). The Defendants subsequently
filed this Motion to Dismiss.
scienter in that “a plaintiff can no longer plead the requisite scienter element generally, as he
previously could under Rule 9(b).” Mizzaro, 544 F.3d at 1238.
Despite the pleading standards detailed above, a court presented with a Rule 12(b)(6) motion
to dismiss a § 10(b) claim must still, “as with any motion to dismiss for failure to plead a claim on
which relief can be granted, accept all factual allegations in the complaint as true.” Tellabs Inc., 551
U.S. at 322. Furthermore, a court must consider the complaint in its entirety, as well as other sources
ordinarily reviewed on a motion to dismiss. Id.
As a preliminary argument, Quail urges this Court to deny the Defendants’ Motion to
Dismiss because, during the prior appeal in this case, the Eleventh Circuit determined that Quail
adequately stated a claim upon which relief can be granted, and the issues raised in the present
Motion to Dismiss are thus foreclosed by the law-of-the-case doctrine. See Pl.’s Opp’n to Defs.’
Mot. to Dismiss (D.E. #210) at 8. Specifically, Quail contends that because the Eleventh Circuit
noted that the issue of extraterritoriality goes “only to the ability to state a claim, not subject matter
jurisdiction,” and because the appellate court then concluded that Quail’s claim was “within section
10(b)’s ‘territorial reach,’” the Eleventh Circuit decided that Quail adequately stated a claim under
§ 10(b) as well. Id. at 9 (citing Quail Cruises Ship Mgmt. Ltd., 645 F.3d at 1309 n.3, 1310). In
further support of its argument, Quail notes that the Eleventh Circuit declined to address the issue
of admiralty jurisdiction because it found that this Court has supplemental jurisdiction over Quail’s
maritime and common law claims due to the presence of the securities fraud claim. Id.
The Defendants, in response, contend that the Eleventh Circuit did not hold that Quail stated
a claim under the Securities Exchange Act. See Defs.’ Reply in Supp. of Mot. to Dismiss (D.E.
#211) at 2. Rather, the Defendants argue that the only issue decided by the appellate court was
“whether the purchase or sale at issue was adequately alleged to have occurred within the United
States to render the Securities Exchange Act applicable to Plaintiff’s claims.” Id.
Quail’s interpretation of the Eleventh Circuit’s holding on appeal is unfounded, and in turn,
its argument that the law-of-the-case doctrine precludes this Court from addressing the issues in the
present Motion to Dismiss is misplaced. The law-of-the-case doctrine provides that “the findings
of fact and conclusions of law by an appellate court are generally binding in all subsequent
proceedings in the same case in the trial court or on a later appeal.” This That and the Other Gift and
Tobacco, Inc. v. Cobb Cnty., Ga., 439 F.3d 1275, 1283 (11th Cir. 2006) (quoting Heathcoat v. Potts,
905 F.2d 367, 370 (11th Cir. 1990)). As such, this doctrine “bars relitigation of issues that were
decided either explicitly or by necessary implication.” Id. The doctrine, however, “does not extend
to every issue that could be ever raised in a given litigation.” Heathcoat, 905 F.2d at 370. Rather,
it is “limited to those issues previously decided.” Id.; see also Luckey v. Miller, 929 F.2d 618, 621
(11th Cir. 1991) (noting that the doctrine “does not bar consideration of matters that could have
been, but were not, resolved in earlier proceedings”); Wallis v. Justice Oaks II, Ltd. (In re Justice
Oaks II, Ltd.), 898 F.2d 1544, 1550 n.3 (11th Cir. 1990) (“[T]he law of the case does not bar
litigation of issues which might have been decided but were not.”) (internal quotation marks
omitted); Wheeler v. City of Pleasant Grove, 746 F.2d 1437, 1440 (11th Cir. 1984) (“[T]he doctrine
encompasses only those issues previously determined.”).
In this case, the issue that the Eleventh Circuit decided was simply whether the Securities
Exchange Act applied to Quail’s claim given Morrison’s recent pronouncement regarding the
territorial scope of § 10(b). See Quail Cruises Ship Mgmt. Ltd., 645 F.3d at 1310 (“[T]he only issue
under Morrison is whether the ‘purchase or sale’ occurred in the United States.”). After analyzing
this issue, the appellate court concluded that “we cannot say at this stage in the proceedings that the
alleged transfer of title to the shares in the United States lies beyond § 10(b)’s territorial reach.” Id.
at 1310–11. There is no indication that the Eleventh Circuit determined, explicitly or by implication,
that Quail sufficiently alleged all of the elements necessary to state a claim under § 10(b). Indeed,
there was no need to decide this, as the sole basis for the dismissal of Quail’s securities fraud claim
below was that Quail did not allege the domestic transaction required by Morrison.5
Transamerica Leasing, Inc. v. Inst. of London Underwriters, 430 F.3d 1326, 1332 (11th Cir. 2005)
(declining to apply the law-of-the-case doctrine where the issue of standing was never before the
appellate court during the prior appeal because the “case law could not be clearer” that this doctrine
“cannot apply when the issue in question was outside the scope of the prior appeal.”). Accordingly,
At most, an argument can be made that, to conclude that the sale of the security at issue
occurred in the United States, as is required under Morrison, the Eleventh Circuit necessarily
determined that the transaction at issue involved a “security,” an issue the Defendants contest in the
instant Motion to Dismiss. Quail, however, does not make this argument here. Furthermore, there
is no indication that the Eleventh Circuit did anything other than assume a security existed—as the
question of whether the transaction involved a security was neither before the Eleventh Circuit on
appeal nor the basis for this Court’s earlier dismissal—and determine where the purchase or sale of
such security occurred.
this Court finds that the law-of-the-case doctrine does not prohibit it from addressing the present
Motion to Dismiss and will proceed to the merits of the Defendants’ arguments.
Pleading Fraud in Connection with a “Security”
To state a claim under § 10(b) and Rule 10b-5, the anti-fraud provisions of the Securities
Exchange Act, a plaintiff must allege 1) a material misrepresentation or omission; 2) scienter; 3) a
connection with the purchase or sale of a security; 4) reliance; 5) economic loss; and 6) a causal
connection between the misrepresentation and the loss. See Scaturro v. Seminole Cas. Ins. Co., 542
F. Supp. 2d 1290, 1296 (S.D. Fla. 2008). In the instant Motion to Dismiss, the Defendants’ first
contention is that Quail cannot allege that the purported misstatements or omissions occurred in
connection with the purchase or sale of a security because the transaction at issue does not qualify
as the purchase or sale of a “security” as that term is defined in the Securities Exchange Act.
Specifically, the Defendants argue that Quail failed to allege that what it purchased bears the usual
characteristics of stock and that this alone requires dismissal of the securities fraud claim. See Mot.
to Dismiss at 10. Further, the Defendants contend that the economic realities of the sale of the
Templeton stock demonstrate that the instrument sold does not qualify as a security. Id. at 11.
The law in this area is well settled. In Landreth Timber Co. v. Landreth, 471 U.S. 681
(1985), the Supreme Court explicitly held that “where an instrument bears the label ‘stock’ and
possesses all of the characteristics typically associated with stock, a court will not be required to look
beyond the character of the instrument to the economic substance of the transaction to determine
whether the stock is a ‘security.’” Gould v. Ruefenacht, 471 U.S. 701, 704 (1985) (discussing and
applying the holding in Landreth on the same day Landreth was decided) (internal citation omitted).
This rule recognizes that “stock is, as a practical matter, always an investment if it has the economic
characteristics traditionally associated with stock.” Reves v. Ernst & Young, 494 U.S. 56, 62 (1990).
Accordingly, it is unnecessary to examine the economic realities of the transaction to decide whether
an instrument constitutes a security in such circumstances. See Landreth, 471 U.S. at 693
(“Instruments that bear both the name and all of the usual characteristics of stock seem to us to be
the clearest case for coverage by the plain language meaning of the definition.”).
Here, Quail and Flameck entered into a Share Purchase Agreement whereby Flameck, the
owner of “all of the issued and outstanding shares (the “Shares”) of the share capital of Templeton
International, Inc.,” agreed to sell its shares to Quail. Share Purchase Agreement (D.E. #202-1) at
1. Additionally, and contrary to the Defendants’ contentions, the Amended Complaint states that
this action arises out of the sale of “traditional stock” and that the shares purchased possess the
characteristics commonly associated with stock. Specifically, the Amended Complaint provides that
the Templeton stock “is able to grant its holder voting rights and rights to receive dividends” and “is
capable of appreciating and depreciating in value, and of being pledged or hypothecated, transferred
or sold.” Am. Compl. ¶ 3. These are the very characteristics of stock enunciated by the Supreme
Court in United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975). Quail has therefore
sufficiently alleged that it purchased a “security” under the rule set forth in Landreth. See Scaturro,
542 F. Supp. 2d at 1296 (S.D. Fla. 2008) (“Here, Plaintiff has sufficiently alleged that he purchased
‘stock’ in Seminole within the meaning of the [Securities Exchange Act]. This is because the shares
Plaintiff purchased were called ‘common stock’ in the Agreement, and also because Plaintiff pleads
those shares bear many of the usual characteristics of stock.”).
The Defendants’ reliance on Vujasin v. Chef Vincent, Inc., No. 08-22048, 2008 WL 4792049
(S.D. Fla. Oct. 31, 2008), is misplaced. The Defendants direct the Court to Vujasin as an example
of a post-Landreth decision in which a court examined the economic realities of an instrument
labeled “stock” to determine whether it was in fact a security. In Vujasin, however, the court
explicitly stated that the plaintiffs “have not argued that the stocks in question possess any of the five
characteristics from the Forman test” and that there was “no evidence that the shares were ever used
to pay dividends or create a system of voting rights for the holders.” Id. at *1–2. Accordingly, it was
appropriate for the court in Vujasin to “look beyond the character of the instrument to the economic
substance of the transaction.” Gould, 471 U.S. at 704. Here, unlike in Vujasin, Quail alleges that the
instrument in this case bears both the name and characteristics of stock, and it is thus unnecessary
to conduct any further inquiry.
Pleading Fraud under Rule 9(b) and the PSLRA
The Defendants next argue that Quail’s Amended Complaint should be dismissed because
Quail does not allege fraud with the particularity required by Federal Rule of Civil Procedure 9(b)
or plead scienter with the specificity required under the PSLRA. As discussed below, however,
Quail has satisfied the pleading requirements of both Rule 9(b) and the PSLRA.
Pleading with Particularity under Rule 9(b)
With respect to Rule 9(b), the Defendants do not dispute that the Amended Complaint
adequately sets forth the “who,” “what,” “when,” “where,” and “how” of the fraud. See Defs.’ Reply
in Supp. of Mot. to Dismiss at 5 (noting that the Defendants’ Motion to Dismiss “does not attack the
Amended Complaint (D.E. #90) on those grounds, so those arguments need not be considered here”).
Rather, Defendants’ sole contention is that the Amended Complaint does not comply with Rule
9(b)’s heightened pleading standards because it fails to allege what the Defendants obtained as a
result of the fraud. See Mot. to Dismiss at 11. In response, Quail claims that, although it is not
required under Rule 9(b) to set forth what the Defendants obtained as a consequence of the fraud,
its Amended Complaint does in fact allege how the Defendants benefitted from the fraud in this case.
See Pl.’s Opp’n to Defs.’ Mot. to Dismiss at 14–15.
As written, Rule 9(b) does not expressly require a plaintiff to allege what was obtained as a
result of the fraud. Rule 9(b) simply provides that, for allegations of fraud, “a party must state with
particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b). In the Eleventh Circuit,
however, alleging the benefit obtained by a defendant has become part of the accepted test for
determining whether a plaintiff has sufficiently alleged fraud under Rule 9(b)’s heightened standards.
See Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194, 1202 (11th Cir. 2001) (“Rule 9(b) is satisfied if
the complaint sets forth ‘(1) precisely what statements were made in what documents or oral
representations or what omissions were made, and (2) the time and place of each such statement and
the person responsible for making (or, in the case of omissions, not making) same, and (3) the
content of such statements and the manner in which they misled the plaintiff, and (4) what the
defendants obtains as a consequence of the fraud.’” (quoting Brooks v. Blue Cross and Blue Shield
of Fla., Inc., 116 F.3d 1364, 1371 (11th Cir. 1997))). Furthermore, while case law provides that
“alternative means are also available to satisfy the rule,” Brooks, 116 F.3d at 1371, courts in this
circuit have dismissed fraud claims where a plaintiff fails provide what the defendant obtained from
an alleged fraud. See In re Eagle Bldg. Techs., Inc., Sec. Litig., 319 F. Supp. 2d 1318, 1332 (S.D.
Fla. 2004) (“Because Plaintiffs’ Complaint fails to state what [a defendant] obtained as a
consequence of the fraud, it must be dismissed under Rule 9(b).”).
In the present case, Quail has sufficiently alleged what the Defendants obtained as a result
of the fraud. While the Amended Complaint may not provide any individual allegation that, by
itself, satisfactorily describes what the Defendants gained from misleading Quail, the allegations of
the Amended Complaint, taken collectively, set forth what the Defendants obtained from their
fraudulent conduct. See Prager v. FMS Bonds, Inc., No. 09-80775, 2010 WL 2950065, at *5 (S.D.
Fla. July 26, 2010) (noting that, while the only express reference to what the defendants gained
lacked the necessary specificity when viewed in isolation, “what was ‘obtained as a consequence of
the fraud’ may be reasonably inferred from the specific circumstances alleged in the complaint”).
In the Amended Complaint, Quail alleges that CVC was the Pacific’s beneficial and de facto
owner. Am. Compl. ¶¶ 2, 96. Upon information and belief, CVC also controlled Flameck
International S.A., the company that sold the Templeton shares to Quail. Am. Compl. ¶ 65. The
Amended Complaint additionally provides that CVC and Patriani, along with SeaHawk and Spinelli,
sought to conceal material damage to the Pacific and exert influence over LRNA “as part of [a]
scheme to inflate the value of the Vessel in advance of the sale of Templeton stock.” Am. Compl.
¶¶ 56, 108(c). The Templeton stock ultimately sold for approximately $14,892,000 in June 2008.
Am. Compl. ¶ 66. Furthermore, the Amended Complaint alleges that CVC was a beneficiary from
the sale of the Templeton stock. Am. Compl. ¶ 7. Such allegations, taken together, indicate that the
benefit CVC and its president, Patriani, obtained as a result of the fraud was the ultimate sale of the
Templeton shares, and the Pacific, to Quail at an artificially inflated price. See Pl.’s Opp’n to Defs.’
Mot. to Dismiss at 15 (“CVC, under Patriani’s direction, obtained the sale of the Templeton shares
that CVC held through Flameck International S.A., a company controlled by CVC.”).
With respect to SeaHawk and its president, Spinelli, the Amended Complaint provides that
both SeaHawk and Spinelli acted as agents of CVC and Patriani. Am. Compl. ¶¶ 15, 16. And, as
stated above, Quail alleges that SeaHawk and Spinelli acted with CVC and Patriani to inflate the
value of the Pacific prior to the sale of the stock to Quail. Am. Compl. ¶¶ 56, 108(c). Then, during
“intense negotiations” with Quail regarding the purchase of the Templeton stock, Patriani asked
Quail to “maintain SeaHawk as the Vessel’s technical manager after the sale on the assurance that
SeaHawk’s technical history with the Vessel was essential for maintaining the Vessel in good
working order and condition and represented that this would facilitate CVC’s ability to charter the
Vessel back from Quail.” Am. Compl. ¶ 108(i). After the closing, SeaHawk remained responsible
for the operations of the Pacific in hopes of procuring a formal management agreement from Quail.
Am. Compl. ¶ 68. Taken collectively, these allegations demonstrate that, in addition to assisting in
the sale of the Pacific at an artificially inflated price by their principal, CVC, “through their active
participation in the alleged fraud, SeaHawk, under Spinelli’s control, continued to receive
management fees from CVC.” Pl.’s Opp’n to Defs.’ Mot. to Dismiss at 15; see also Am. Compl.
¶ 118 (“The relationship between the Defendants was financial, creating incentive for SeaHawk to
continue to receive management fees . . . after the closing on the sale of Templeton’s stock if the
actual condition of the Vessel remained concealed such that CVC could sell the Vessel to Quail for
substantial profit . . . .”).
Because the Amended Complaint adequately sets forth what the Defendants obtained as a
result of the fraud and because the Defendants do not dispute that Quail has otherwise alleged the
“who,” “what,” “when,” “where,” and “how,” of the fraud, Quail has satisfied the heightened
pleading requirements of Rule 9(b). See CC-Aventura, Inc. v. Weitz Co., No. 06-21598, 2009 WL
2030378, at *4 (S.D. Fla. July 9, 2009) (holding that an allegation that CC-Aventura “engaged in a
plan of misrepresentations to avoid paying the all-risk insurance policy’s $250,000 deductible,”
along with other allegations detailing the statements and omissions made, the time, place, and person
responsible for such statements, and the manner in which such statements were misleading satisfied
Pleading Scienter under the PSLRA
For Quail’s securities fraud claim to survive the Motion to Dismiss, however, Quail must also
satisfy the pleading standards set forth in the PSLRA. In their Motion to Dismiss, the Defendants
contend that Quail fails to meet these standards. As noted above, the PSLRA raised the standards
for pleading scienter, the “mental state embracing intent to deceive, manipulate, or defraud.”
Tellabs, Inc., 551 U.S. 308 at 319 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12
(1976)). “The PSLRA provides that plaintiffs must ‘state with particularity facts giving rise to a
strong inference that the defendant acted with the required state of mind’ in alleging a section 10(b)
claim.” Scaturro, 542 F. Supp. 2d at 1301 (citing 15 U.S.C. § 78u-4(b)(2)). Thus, to sufficiently
allege scienter under the PSLRA, Quail must state with particularity facts giving rise to a strong
inference that the Defendants acted either with an intent to deceive, manipulate, or defraud or with
severe recklessness. See Mzizaro, 544 F.3d at 1238 (“Although the PSLRA substantially raised the
pleading standard for scienter, it did not change any substantive intent requirements. In this Circuit
it is by now well-established that § 10(b) and Rule 10b-5 require a showing of either an intent to
deceive, manipulate, or defraud, or severe recklessness.”) (internal citation and quotation marks
omitted); Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1283 (11th Cir. 1999) (“[A] complaint
alleging with particularity that a defendant acted with a severely reckless state of mind still suffices
to state a claim for civil liability under § 10(b) and Rule 10b-5.”).
In Tellabs, Inc. v. Makor Issues & Rights, Ltd., the Supreme Court established the framework
for determining whether a securities fraud complaint sufficiently alleges scienter under the PSLRA.
First, when “faced with a 12(b)(6) motion to dismiss a § 10(b) action, courts must, as with any
motion to dismiss for failure to plead a claim upon which relief can be granted, accept all factual
allegations in the complaint as true.” Tellabs, Inc., 551 U.S. at 322. Second, “courts must consider
the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule
12(b)(6) motions to dismiss.” Id. The Supreme Court noted that the proper inquiry is “whether all
of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any
individual allegation, scrutinized in isolation, meets that standard. Id. at 323. Third, “in determining
whether the pleaded facts give rise to a ‘strong’ inference of scienter, the court must take into
account plausible opposing inferences.” The Supreme Court concluded that a complaint will survive
“only if a reasonable person would deem the inference of scienter cogent and at least as compelling
as any opposing inference one could draw from the facts alleged.” Id. at 324.
Although the Defendants argue that Quail fails to adequately plead scienter under the
PSLRA, they seem to concede that the test set forth in Tellabs has been satisfied. In their Motion
to Dismiss, the Defendants contend that Quail does not allege a motive for the purported fraud and
that CVC’s commitment to take the Vessel back on charter during the Brazilian cruising season is
inconsistent with evidence that the Defendants were aware of the Pacific’s deficient condition.
Defs.’ Mot. to Dismiss at 12–13. They then conclude that, “[b]ased on the foregoing, the inference
that [the Defendants] represented the condition of the Vessel as they thought it to be, supported by
the very class certifications Plaintiff complains of, is at least as strong as the inference that they
intentionally deceived Plaintiff.” Id. at 13.6
This, however, is all that is required to satisfy Tellabs. As noted above, to determine whether
a complaint adequately alleges scienter, this Court must ask: “When the allegations are accepted as
true and taken collectively, would a reasonable person deem the inference of scienter at least as
strong as any opposing inference?” Tellabs, Inc., 551 U.S. at 326. In other words, if the strength
of the inference of scienter is equal to or greater than the strength of any opposing inference, the
complaint survives. Thus, by stating that the inference that the Defendants represented the condition
of the Pacific as they thought it to be “is at least as likely as” the inference that they acted with an
intent to defraud Quail—or in other words, by stating that the strength of an opposing inference is
at least equal to the strength of an inference of scienter—the Defendants essentially acknowledge
that Quail alleges scienter with the requisite particularity.
In their Reply, the Defendants similarly state that “the inference that [the Defendants]
represented the condition of the Vessel as they thought it to be is at least as likely as the inference
that they acted with an intent to defraud Plaintiff.” Defs.’ Reply in Supp. of Mot. to Dismiss at 8.
In any event, irrespective of the Defendants’ acknowledgment, the Court finds that the
Amended Complaint sufficiently sets forth facts giving rise to a strong inference of scienter. The
allegations regarding the Defendants’ statements about the condition of the vessel and subsequent
discovery of the use of painted cement to hide its true condition are a prime example of facts that,
taken together, give rise to the inference of scienter required by Tellabs. The Amended Complaint
provides that, in early 2008, Patriani and other CVC representatives told Quail that CVC spent
“significant sums of money in correcting all deficiencies and making improvements to the Vessel”
and that “the Vessel had been completely restored.” See Am. Compl. ¶¶ 54, 55, 58, 108.
Specifically, they informed Quail that CVC spent “over $15,000,000 correcting all deficiencies.”
Am. Compl. ¶¶ 60, 108(i). Additionally, in April and May of 2008, Spinelli represented that
“SeaHawk had supervised all the costly repairs undertaken by CVC to address all the class
concerns.” Am. Compl. ¶¶ 59, 108(h). In May and June of 2008, Spinelli informed Quail that the
Pacific would be “delivered free of any deficiencies that could affect her operation as a fully
functional cruise ship.” Am. Compl. ¶¶ 62, 108(k). He again assured Quail that the twenty-two
outstanding Conditions of Class “had been corrected under his supervision and the resulting
Conditions of Class deleted by LRNA as a result thereof.” Am. Compl. ¶¶ 62, 108(k).
Quail contends, however, that in actuality CVC directed SeaHawk “to defer repairs, conceal
damage by widespread use of painted cement to cover up corrosion, wastage and structural damage,
and otherwise mask the true deteriorated, wasted and damaged condition of the Vessel.” Am.
Compl. ¶ 27. Quail further alleges that, throughout negotiations, Spinelli “withheld information
about the extensive use of painted cement to hide the widespread corrosion and wastage.” Am.
Compl. ¶¶ 57, 108(f). The Amended Complaint then provides that post-sale surveys conducted by
Lloyd Register surveyors different from those previously designated by LRNA in coordination with
SeaHawk, the first of which occurred only two months after the sale, began to reveal the Pacific’s
true condition. Am. Compl. ¶ 70. Such surveys revealed significant corrosion, thinning, and
wastage throughout the vessel and that much of this damage had been hidden by layers of cement
paint. See Am. Compl. ¶¶ 74, 89, 94. Finally, Quail contends that “[t]he widespread use of cement
to conceal wastage and corrosion is not an accepted practice” and that it was “impossible for widespread stop-gap cement usage to be used on the Vessel without the express knowledge of its ship
management company, SeaHawk, with approval from the de facto owner CVC.” Am. Compl. ¶¶
95, 96. Such facts, taken collectively, give rise to an inference of fraudulent intent, or at a minimum,
severe recklessness, that is cogent and certainly at least as compelling as the inference that the
Defendants represented the condition of the Pacific as they truly thought it to be. Quail, therefore,
has satisfied the heightened standards for pleading scienter as set forth by the PSLRA.7
Forward-Looking Statements, Materiality, and Reasonable Reliance
In the final section of their Motion to Dismiss, the Defendants urge this Court to dismiss
Quail’s securities fraud claim because certain alleged misrepresentations are non-actionable forwardlooking statements, because the remaining misrepresentations are non-actionable puffery, and
because the “as is where is” language and the integration clause in the Share Purchase Agreement
render Quail’s reliance on any misrepresentations unreasonable. See Defs.’ Mot. to Dismiss at 13.
Even if this Court were to assume that the paragraphs identified by the Defendants as forwardlooking statements do in fact constitute forward-looking statements,8 and that some of the alleged
misrepresentations amount to no more than mere puffery, the Amended Complaint sets forth enough
As a last attempt to demonstrate that Quail did not plead fraud with specificity, the
Defendants contend that Quail failed to plead that several of the representations set forth in the
Amended Complaint were actually false. This argument merits little discussion. While Quail refers
to what the Defendants “represented,” as opposed to what they “misrepresented,” in certain
paragraphs, the Defendants ignore the fact that the allegedly insufficient paragraphs fall under the
portion of the Amended Complaint entitled “Defendants’ Material Misrepresentations and Omissions
Prior to the Stock Acquisition.” See Am. Compl. at 18–23. Furthermore, these same paragraphs are
restated in full in Count I of the Amended Complaint, which, prior to listing the Defendants’
statements, provides that the Defendants “made the following material misrepresentations or
omissions” to induce Quail to acquire the stock and, in turn, the Pacific. See Am. Compl. ¶ 108.
It is unlikely, however, that the statements challenged as forward looking actually qualify
for protection under the PSLRA’s safe harbor provision. The PSLRA “shields defendants from
liability for forward-looking statements, regardless of defendant’s state of mind, if the statements
are either (1) ‘identified as . . . forward-looking statement[s], and . . . accompanied by meaningful
cautionary statements identifying important factors that could cause actual results to differ materially
from those in the forward-looking statement[s],’ or (2) ‘immaterial.’” Theoharous v. Fong, 256 F.3d
1219, 1225 n.6 (11th Cir. 2001) (citing 15 U.S.C. § 78u-5(c)(1)(A)(i) & (ii)). This provision is the
counterpart to the judicially created “bespeaks caution” doctrine. See In re Scientific-Atlanta, Inc.
Sec. Litig., 239 F. Supp. 2d 1351, 1361 (N.D. Ga. 2002). Even assuming that paragraphs 8, 9, 18,
21, and 25 of Amended Complaint are forward-looking statements, they are not accompanied by the
kind of “meaningful cautionary statements” the PSLRA requires. The Defendants point to the “as
is where is” language of the Share Purchase Agreement as appropriate cautionary language. See
Defs.’ Mot. to Dismiss at 14. Cautionary statements, however “must be ‘detailed and informative’
and must warn the reader ‘what kind of misfortunes could befall the company and what the effect
could be.’” Waterford Twp. Gen. Employees Ret. Sys. v. BankUnited Fin. Corp., No. 08-CIV-22572,
2010 WL 1332574, at *11 (S.D. Fla. 2010) (citing Harris v. Ivax Corp., 182 F.3d 799, 807 (11th Cir.
1999)). The “as is where is” language of the Share Purchase Agreement simply does not constitute
a sufficient cautionary statement.
material factual allegations, such as those discussed in detail in Part III.C., supra, for Quail’s
securities fraud claim to survive the instant Motion to Dismiss. Accordingly, the Court need only
address the Defendants’ contentions regarding reasonable reliance.
The Defendants argue that Quail should be precluded from relying on any of the alleged
misrepresentations based on the language of the Share Purchase Agreement. The Share Purchase
Agreement provides that “the Seller makes no warranties or representations as to the condition of
the Vessel” and that the Pacific was being transferred on an “as is where is” basis. Share Purchase
Agreement ¶ 3(e). Additionally, the Share Purchase Agreement provides that “the Seller makes no
representation or warranty, express or implied, in respect of the Shares or the Company or any of its
assets, liabilities or operations, and any such other representations or warranties are hereby expressly
disclaimed.” Id. at ¶ 3(f). Furthermore, the Share Purchase Agreement provides that “[t]his
Agreement . . . constitutes the entire agreement between the parties pertaining to the subject matter
hereof and supersedes all prior agreements, understanding, negotiations and discussions, whether
oral or written, of the parties.” Id. ¶ 7. Accordingly, the Defendants argue that Quail should be
precluded from relying on the Defendants’ misrepresentations as a matter of law.
While courts, in some instances, have held that the inclusion of a “no other representations”
or integration clause bars a claim as a matter of law, the circumstances of this case caution against
a determination, at this stage of the litigation, that the language of the Share Purchase Agreement
precludes Quail from relying on the Defendants’ statements. First, it is important to note that the
Share Purchase Agreement is an agreement between Quail, the “Buyer,” and Flameck International
S.A., the “Seller.” Although CVC alleges the existence of some relationship between CVC and
Flameck, CVC itself is not a named party to the contract. And, as a general rule, a non-party to a
contract may not invoke that contract for his benefit. See Galstaldi v. Sunvest Communities USA,
LLC, 637 F. Supp. 2d 1045, 1055 (S.D. Fla. 2009) (“As the Eleventh Circuit has noted, there is a
general rule that a non-party to a contract may not invoke the contract”) (internal quotation marks
omitted); Brown v. Earthboard Sports USA, Inc., 481 F.3d 901, 921 (6th Cir. 2007) (declining to
create a “per se rule with respect to non-reliance clauses” and finding it “noteworthy that the
appellees were not themselves parties to the subscription agreement containing the non-reliance
Furthermore, the language of the Share Purchase Agreement is not so strong as to mandate
a finding that Quail’s reliance on the Defendants’ statements was unreasonable as a matter of law.
In cases holding that a plaintiff is barred as a matter of law from relying on statements outside a
contract, the language of the contract is usually extremely detailed or exceptionally clear. In Harsco
Corp. v. Segui, 91 F.3d 337 (2d Cir. 1996), the issue before the court was “whether parties who
negotiate at arm’s length for the sale and purchase of a company can define the transaction in a
writing so as to preclude a claim of fraud based on representations not made, and explicitly
disclaimed, in that writing.” Id. at 339. In concluding that the parties could preclude such a claim,
the Second Circuit noted the extensive amount of representations actually bargained for within the
Harsco bought Section 2.04's fourteen pages of representations. Unlike
a contractual provision which prohibits a party from suing at all, the
contract here reflects in detail the reasons why Harsco bought
MultiServ—in essence, Harsco bought the representations and, according
to Sections 2.05 and 7.02, nothing else. This means that there are
fourteen pages of representations, any of which, if fraudulent, can be the
basis of a fraud action against the seller. But Harsco specifically agreed
that representations not made in those fourteen pages were not made.
Thus, it is not fair to characterize Sections 2.05 and 7.02 as having
prevented Harsco from protecting its substantive rights. Harsco
rigorously defined those rights in Section 2.04.
Id. at 344. The Second Circuit, however, noted that the “analysis becomes a question of degree and
context,” and cautioned that in different circumstances, a “‘no other representations’ clause might
be toothless.” Id. The language of the Share Purchase Agreement in the present case falls far short
of the level of detail in the agreement discussed above, and, accordingly, should not preclude Quail
from relying on the Defendants’ misrepresentations as a matter of law.
Finally, the extent and nature of the alleged fraud counsels against invoking the language of
the Share Purchase Agreement to bar Quail’s claim at this time. Quail not only contends that the
Defendants made fraudulent misstatements and omissions, but also that the Defendants influenced
LRNA, the classification society responsible for inspecting the Pacific, “to withdraw, revise, extend
or delete Conditions of Class against the Vessel . . . to inflate the value of the Vessel in advance of
the sale of Templeton stock.” Am. Compl. ¶ 56. In a transaction such as this one, it is reasonable
to rely on the results of surveys and inspections conducted by entities such as LRNA, as continued
classification after periodic inspections and surveys represents that a vessel is seaworthy and fit for
its intended purpose. See Am. Compl. at ¶ 34. Here, however, Quail alleges that the results of
LRNA’s inspections and surveys—which should have informed Quail of the Pacific’s true
condition—were inaccurate and in fact part of the fraud itself. If Quail relied on such inspections
and surveys, Quail may have had little reason to question the “as is where is” language or other
clauses of the Share Purchase Agreement. It may not have sought better protection for itself in terms
of the contract with Flameck because it was under the reasonable assumption that it could rely on
LRNA’s pre-sale surveys and inspections as an accurate statement of Pacific’s condition.
Accordingly, the “as is where is” language and other clauses in the Share Purchase Agreement
should be considered in light of all of the circumstances of this case and at a more appropriate stage
of these proceedings. See Bruschi v. Brown, 876 F.2d 1526, 1529 (11th Cir. 1989) (“Determinations
of whether an investor’s reliance was justified requires the consideration of all relevant factors,
including: (1) the sophistication and experience of the plaintiff in financial and security matters; (2)
the existence of long standing business or personal relationships between the plaintiff and the
defendant; (3) the plaintiff’s access to relevant information; (4) the existence of a fiduciary
relationship owed by the defendant to the plaintiff; (5) concealment of fraud by the defendant; (6)
whether the plaintiff initiated the stock transaction or sought to expedite the transaction; and (8) the
generality or specificity of the misrepresentations. No single factor is dispositive; all most be
considered and balanced in determining whether reliance was justified.”). For these reasons, and the
reasons stated above, Quail’s securities fraud claim survives the Defendants’ Motion to Dismiss.
The Defendants contend, however, that even if Quail’s federal securities fraud claim
survives, and the Court, therefore, is not required to dismiss the entire case, the Court should, at the
very least, dismiss certain aspects of Quail’s claims. First, the Defendants request that the Court
dismiss Quail’s claim for recklessness (Count IV) for failure to state a cause of action. The
Defendants simply state that because the Court previously dismissed this count for failure to state
a cause of action, and because Quail brought this claim again in its Amended Complaint “without
significantly changing its contours,” the Court should dismiss the claim again. See Defs.’ Mot. to
Dismiss at 8–9. The Defendants, however, do not elaborate on this argument. While the Defendants
raise this argument in the introductory sections of the Motion to Dismiss, it is not mentioned
whatsoever in the memorandum of law and analysis that follows. And, although a comparison of
the initial Complaint and the Amended Complaint reveals that Quail revised its maritime
recklessness claim to contain more detailed factual allegations and to incorporate the revised
introductory allegations of the Amended Complaint, the Defendants fail to identify any factual
allegation within this count that is insufficient or otherwise explain to this Court why Quail’s revised
recklessness claim should not survive. Without sufficient argument from the Defendants on this
point, the Court is not in a position to grant their request to dismiss Quail’s recklessness claim.
The Defendants also urge this Court to strike certain paragraphs of Quail’s claim for
negligence and negligent misrepresentation (Count V). The Defendants contend that this Court
should strike paragraphs 145 and 150 because this Court previously noted that “the alleged wrongful
conduct is more accurately described as misrepresentations made in connection with a contract for
the sale of [a] vessel,” and these two paragraphs “appear to allege negligence apart from the
misrepresentations.” Defs.’ Mot. to Dismiss at 9. Again, the Defendants do not elaborate on this
argument. Review of this Court’s August 6, 2010 Order on Motions to Dismiss Amended Complaint
(D.E. #148), however, reveals that this Court made the above statement in addressing Quail’s failure
to meet the test for maritime jurisdiction. This Court stated:
A plaintiff may not artificially create federal jurisdiction by creatively
defining the relief sought or the claim asserted in an attempt to bring the
claim within traditional maritime jurisdiction. Quail attempts to
characterize its maritime claims as arising out of the pre-sale
management, repair, and classification of the Pacific. However, the
alleged wrongful conduct is more accurately described as
misrepresentations made in connection with a contract for sale of that
vessel. Quail cannot invoke federal admiralty jurisdiction by recasting
a fraudulent sale claim as a claim for damages to the vessel.
Order on Mots. to Dismiss Am. Compl. at 8 (emphasis added) (internal citations omitted). In
context, it is evident that the Court made this statement to distinguish this case from the types of
actions or activities typically required to bring a case within this Court’s admiralty jurisdiction. It
should not, however, be read to limit Quail’s claims once the jurisdiction of this Court has been
established. See Quail Cruises Ship Mgmt. Ltd., 645 F.3d at 1311 (noting that, “because [Quail’s
putative maritime tort claims] form ‘part of the same case or controversy’ as Quail’s securities fraud
claim, the district court has, at the very least supplemental jurisdiction over those claims”) (internal
quotation marks omitted).
At this stage of the litigation, Quail has adequately set forth the requisite elements of its
claims and has done so, where necessary, with the specificity required by Rule 9(b) and the PSLRA.
The misstatements and omissions alleged in the Amended Complaint are sufficient to withstand the
Motion to Dismiss. Furthermore, the mere fact that the Share Purchase Agreement contains “as is
where is” language and an integration clause is, at this time, insufficient to render Plaintiff’s reliance
on Defendants’ allegedly fraudulent statements unreasonable as a matter of law. Accordingly, for
the reasons set forth above, the Defendants’ Motion to Dismiss is DENIED.
DONE AND ORDERED in Chambers, Miami, Florida, January 24, 2012.
Paul C. Huck
United States District Judge
Copies furnished to:
Counsel of record
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