Mandel v. Howard et al

Filing 25

ORDER denying 10 Motion to Dismiss for Failure to State a Claim; granting in part and denying in part 12 Motion to Dismiss. Signed by Judge Marcia G. Cooke on 3/28/2012. (tm)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
Case No. 11-23620-Civ-COOKE/TURNOFF
DAVID S. MANDEL, as Receiver of
COMMODITIES ONLINE, LLC and
COMMODITIES ONLINE
MANAGEMENT LLC,
Plaintiff,
vs.
JAMES C. HOWARD, III, et al.,
Defendants.
_________________________________/
OMNIBUS ORDER ON DEFENDANTS’ MOTIONS TO DISMISS
THIS MATTER is before me on Defendant Louis N. Gallo’s Motion to Dismiss (ECF
No. 10) and Defendant Martin Vegas’ Motion to Dismiss (ECF No. 12). I have reviewed the
arguments, the record, and the relevant legal authorities. For the reasons explained in this Order,
Defendant Louis N. Gallo’s Motion to Dismiss is denied, and Defendant Martin Vegas’ Motion
to Dismiss is granted in part and denied in part.
I. BACKGROUND
Plaintiff David S. Mandel is the Receiver for Commodities Online, LLC (“COL”) and
Commodities Online Management, LLC (“COM”). The Court appointed Mandel as Receiver on
April 1, 2011, in a related case pending before this Court, Securities and Exchange Commission
v. Commodities Online, LLC, et al., Case No. 11-60702 (S.D. Fla.) (the “SEC enforcement
action”). Mandel alleges that, from January 26, 2010, to April 1, 2011, Defendant Louis N.
Gallo, COL’s Vice President and Director of Sales, operated a Ponzi scheme that allowed him
and others to steal and misappropriate COL funds. As part of the scheme, Gallo and others

solicited investors by promising significant returns from commodities contracts negotiated and
made available through COL. The representations made to investors were false, as COL never
made a business profit and relied on new investor funds to pay returns to early investors. Mandel
alleges that, in order to make the scheme difficult to detect, Gallo and others regularly
transferred COL funds from one related entity to another. According to Mandel, Gallo and
others controlled the entities used to move the funds. Mandel claims there was no other business
purpose for transferring funds in this manner.
Mandel instituted this action on October 6, 2011. Mandel asserts causes of action against
Gallo and Vegas for conversion and breach of fiduciary duty. Each defendant filed a separate
motion to dismiss. Gallo moves to dismiss the Complaint on the grounds that (1) Mandel has
failed to join indispensible parties, (2) the Complaint fails to state a cause of action for
conversion, and (3) the Complaint fails to state a cause of action for breach of fiduciary duty.
Vegas moves to dismiss the Complaint on the following grounds: (1) lack of subject matter
jurisdiction; (2) lack of personal jurisdiction; (3) failure to state a claim for conversion;
(4) failure to state a claim for breach of fiduciary duty; and (5) failure to join an indispensible
party. The Court will address each of these grounds for dismissal.
II. LEGAL STANDARDS
A. Rule 12(b)(1)
A district court is powerless to hear a matter where subject matter jurisdiction is lacking.
Bochese v. Town of Ponce Inlet, 405 F.3d 964, 974-75 (11th Cir. 2005) (citing Univ. of S. Ala. v.
Am. Tobacco Co., 168 F.3d 405, 410 (11th Cir. 1999)).

A plaintiff bears the burden of

establishing subject matter jurisdiction. Sweet Pea Marine, Ltd. v. APJ Marine, Inc., 411 F.3d
1242, 1248 n.2 (11th Cir. 2005). A defendant bringing a motion to dismiss under Rule 12(b)(1)

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of the Federal Rules of Civil Procedure may assert a “facial attack” to jurisdiction whereupon the
court will look to the complaint to determine whether the plaintiff has sufficiently alleged subject
matter jurisdiction. Lawrence v. Dunbar, 919 F.2d 1525, 1529 (11th Cir. 1990). “On a facial
attack, a plaintiff is afforded safeguards similar to those provided in opposing a Rule 12(b)(6)
motion-the court must consider the allegations of the complaint to be true.” Id. at 1529. A
defendant may also bring a “factual attack” challenging “‘the existence of subject matter
jurisdiction in fact, irrespective of the pleadings . . . .’” Id. (quoting Menchaca v. Chrysler
Credit Corp., 613 F.2d 507, 511 (5th Cir.), cert. denied, 449 U.S. 953 (1980)).
B. Rule 12(b)(2)
“A plaintiff seeking the exercise of personal jurisdiction over a nonresident defendant
bears the initial burden of alleging in the complaint sufficient facts to make out a prima facie
case of jurisdiction.” United Techs. Corp. v. Mazer, 556 F.3d 1260, 1274 (11th Cir. 2009). A
defendant challenging personal jurisdiction must present evidence to counter the plaintiff’s
allegations. Internet Solutions Corp. v. Marshall, 557 F.3d 1293, 1295 (11th Cir. 2009). Once
the defendant has presented sufficient evidence, “the burden shifts to the plaintiff to prove
jurisdiction by affidavits, testimony or documents.” Id.
C. Rule 12(b)(6)
A complaint “must contain . . . a short and plain statement of the claim showing that the
pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). A plaintiff must articulate “enough facts to
state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007) (abrogating Conley v. Gibson, 355 U.S. 41 (1957)). “A claim has facial plausibility when
the plaintiff pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009).

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Detailed factual allegations are not required, but a pleading “that offers ‘labels and conclusions’
or a ‘formulaic recitation of the elements of a cause of action will not do.’” Id. at 1949 (quoting
Twombly, 550 U.S. at 555). “[O]nly a complaint that states a plausible claim for relief survives a
motion to dismiss.” Id. at 1950.
When considering a motion to dismiss filed under Rule 12(b)(6), the court must accept all
of the plaintiff’s allegations as true and construe them in the light most favorable to the plaintiff.
Pielage v. McConnell, 516 F.3d 1282, 1284 (11th Cir. 2008). A court’s consideration when
ruling on a motion to dismiss is limited to the complaint and any incorporated exhibits. See
Grossman v. Nationsbank, N.A., 225 F.3d 1228, 1231 (11th Cir. 2000).
D. Rule 12(b)(7)
Pursuant to Rule 12(b)(7), a party may move for dismissal for “failure to joint a party
under Rule 19.” Rule 19 requires joinder of an indispensable party. Fed. R. Civ. P. 19. Under
Rule 19, a court must employ a two-part test to determine whether a party is indispensable.
“First, the court must ascertain under the standards of Rule 19(a) whether the person in question
is one who should be joined if feasible. If the person should be joined but cannot be (because,
for example, joinder would divest the court of jurisdiction) then the court must inquire whether,
applying the factors enumerated in Rule 19(b), the litigation may continue.” Focus on the
Family v. Pinellas Suncoast Transit Auth., 344 F.3d 1263, 1279-80 (11th Cir. 2003).
III. DISCUSSION
A. Subject Matter Jurisdiction
Vegas contends that this Court does not have subject matter jurisdiction over the present
action because it lacks an independent basis for jurisdiction.

A district court possesses

supplemental jurisdiction over “all other claims that are so related to claims in the action within

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such original jurisdiction that they form part of the same case or controversy under Article III of
the United States Constitution.” 28 U.S.C. § 1367. Courts have long recognized a federal
court’s supplemental jurisdiction over actions related to a receivership established in federal
court. See, e.g., Pope v. Louisville, N.A. & C. Ry., 173 U.S. 573, 577 (1899); Robb Evans &
Assocs., LLC v. Holibaugh, 609 F.3d 359, 363 (4th Cir. 2010); Haile v. Henderson Nat’l Bank,
657 F.2d 816, 822 (6th Cir. 1981); Tcherepnin v. Franz, 485 F.2d 1251, 1255 (7th Cir. 1973);
Wiand v. Buhl, No. 10-CV-75-T-17MAP, 2011 WL 6048829, at *2-3 (M.D. Fla. Nov. 3, 2011)
(collecting cases).
The complaint in the SEC enforcement action alleges that COL and COM violated
numerous federal securities laws through the operation of a Ponzi scheme. In that case, the
Court appointed Mandel as Receiver, and directed him to:
[i]nvestigate the manner in which the affairs of the Defendants were conducted
and institute such actions and legal proceedings, for the benefit and on behalf of
the Defendants and their investors and other creditors, as the Receiver deems
necessary against those individuals, corporations, partnerships, associations
and/or unincorporated organizations, which the Receiver may claim have
wrongfully, illegally, or otherwise improperly misappropriated or transferred
monies or other proceeds directly or indirectly traceable from investors . . . .
(Order Appointing Receiver at 2, Case No. 11-60702, ECF No. 5). The instant action aims to
recover COL funds that Gallo, Vegas, and others allegedly wrongfully misappropriated or
transferred, which are directly or indirectly traceable to investors. Mandel instituted the present
action in furtherance of his duties as Receiver in the SEC enforcement action. This Court can
properly assert supplemental jurisdiction over the present action pursuant to 28 U.S.C. § 1367.

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B. Personal Jurisdiction
Vegas argues that this Court lacks personal jurisdiction over him because he “is not
alleged to have committed an act in Florida.”1 (Vegas Reply at 2). Vegas does not develop this
argument with any facts or citation to law. Generally, a “litigant who fails to press a point by
supporting it with pertinent authority, or by showing why it is sound despite a lack of supporting
authority or in the face of contrary authority, forfeits the point.” Phillips v. Hillcrest Med. Ctr.,
244 F.3d 790, 800 (10th Cir. 2001) (internal quotation omitted); McPherson v. Kelsey, 125 F.3d
989, 995-96 (6th Cir. 1997) (“Issues adverted to in a perfunctory manner, unaccompanied by
some effort at developed argumentation, are deemed waived. It is not sufficient for a party to
mention a possible argument in the most skeletal way, leaving the court to put flesh on its
bones.” (internal quotation omitted)). This Court will not make Vegas’ arguments for him.
In any case, the Complaint appears legally sufficient.

See Venetian Salami Co. v.

Parthenais, 554 So. 2d 499, 502 (Fla. 1989). Mandel alleges that Vegas resides in Florida and
works at COL, a Florida corporation. The alleged conversion and breach of fiduciary duty
allegedly occurred while Vegas worked at COL. The Complaint provides sufficient facts for this
Court to find it has personal jurisdiction over Vegas.
C. Joinder
Gallo asserts that a number of third parties should have been joined in this litigation,
including the Mexican companies and individuals that Mandel alleges are transferees of certain
COL funds.2 Vegas joins Gallo in this motion.
1

Vegas withdrew his objections to service of process.

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Gallo does not address joinder of the companies he allegedly owns, American Financial and Minjo. Gallo does not
respond to Mandel’s assertion that Minerales Yacimientos y Reservas is a fictitious company, which by law cannot
be joined. See Grover City v. US Postal Service, 391 F. Supp. 982 (C.D. Cal 1975). Thus, the Court will only
address joinder issues regarding: Terracerias y Pavimentos, Grupo Minero Leecota, Jorge Ortega Balderas, Diego
Diaz Ceballos Torre, and Franscisco Javier Ortiz Gonazelz (collectively, the “Mexican companies and individuals”).

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A person must be joined as a party if (1) the court cannot accord complete relief in its
absence, (2) the person has an interest relating to the subject of the action and the person’s
absence may impede the person’s ability to protect their interest, or (3) the person’s absence will
leave an existing party subject to a substantial risk of multiple or inconsistent obligations. Fed.
R. Civ. P. 19(a)(1). Gallo and Vegas bear the burden of showing that the Mexican companies
and individuals are necessary or indispensible parties. See West Peninsular Title Co. v. Palm
Beach Cnty., 41 F.3d 1490, 1492 (11th Cir. 1995); BFI Waste Sys. of N. Am. v. Broward Cnty.,
209 F.R.D. 509, 514 (S.D. Fla. 2002).
The Defendants first argue that the Mexican companies and individuals are necessary
parties because failure to join them will require him to face multiple lawsuits. They argue that,
should Mandel succeed in this suit, he may obtain a double recovery by suing the Mexican
companies and individuals for the same wrong. The Mexican corporations and individuals will
then seek indemnification from the Defendants, exposing them to “impermissible double
recovery and imposition of double liablity.” The fact that the Defendants may be liable in a
hypothetical future action for indemnification is not enough to make the Mexican companies and
individuals necessary to this suit. See Davis Co. v. Emerald Casino, Inc., 268 F.3d 477, 484-85
(7th Cir. 2001); Hochuli v. Delgado, No. 09-23225, 2011 WL 844240, at *2 (S.D. Fla. Mar. 8,
2011); United States v. Janke, No. 09-14044, 2009 WL 2525073, at *2 (S.D. Fla. Aug. 17,
2009); Rotec Indus. v. Aecon Grp., Inc., 436 F. Supp. 2d 931, 937 (N.D. Ill. 2006).
Gallo next argues that the Mexican companies and individuals are necessary because
COL has a contractual relationship with these entities. Mandel’s claims against Gallo and Vegas
are based in tort, not contract. Rule 19 does not require the joinder of joint tortfeasors. See 7
Charles A. Wright, Arthur R. Miller, & Mary K. Kane, Federal Practice and Procedure § 1623

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(3d ed. 2001); see also Brown v. Reed Elsevier, Inc., No. 08-81574, 2009 WL 3064751, at *3 &
n.4 (S.D. Fla. Sept. 22, 2009) (“[A] party to a contract is only indispensable when the terms of
contract are actually at issue.”).
Further, a person is not necessary to the action if existing parties are able to adequately
protect the interests of the nonparty. See Ramah Navajo Sch. Bd. v. Babbitt, 87 F.3d 1338, 1351
(D.C. Cir. 1996); Brown, 2009 WL 3064751, at *3. If the Mexican companies or individuals
have any interest in this litigation,3 it is in the transferred COL funds, which Gallo and Vegas
allegedly converted. It appears that the Mexican companies and individuals have the same
property interest as Gallo and Vegas, and the Defendants have not put forth any facts showing
why they are unable to adequately defend this interest.
Because the Defendants have not met their burden of showing that the Mexican
companies and individuals are necessary parties, I need not consider whether the nonparties can
be feasibly joined or are indispensible parties to this action.
D. Conversion Claims
Gallo and Vegas both contend that Mandel’s Complaint fails to allege sufficient facts to
state a claim for conversion. “Conversion is an unauthorized act which deprives another of his
property permanently or for an indefinite time.” Nat’l Union Fire Ins. Co. of Pa. v. Carib
Aviation, Inc., 759 F.2d 873, 878 (11th Cir. 1985) (quoting Senfeld v. Bank of Nova Scotia Trust
Co. (Cayman), 450 So. 2d 1157, 1160-61 (Fla. Dist. Ct. App. 1984)) (internal quotation marks
omitted). “The essence of the tort is not the acquisition of the property; rather, it is the wrongful
deprivation.” Id. Under Florida law, to succeed on a claim for conversion of money, a plaintiff
must establish that an unauthorized act deprived plaintiff of his right to possess specific and
3

There appears to be a factual dispute regarding whether or not the Mexican companies and individuals currently
hold the allegedly converted funds. Whether they do or not is not determinative because Mandel seeks a legal
remedy, not an equitable remedy.

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identifiable money. See Tambourine Comerico Internacional SA v. Solowsky, 312 F. App’x 263,
271-72 (11th Cir. 2009). Further, the general rule is that, when the act alleged amounts to
conversion regardless of whether demand is made, demand and refusal are unnecessary to the
claim. See id. at 272 (quoting Goodrich v. Malowney, 157 So. 2d 829, 832 (Fla. Dist. Ct. App.
1963)).
Mandel alleges sufficient facts to state a claim for conversion against Gallo and Vegas.
Mandel alleges that Gallo and Vegas each converted COL funds for his own use and benefit.
These funds were misappropriated from investors as part of the Defendants’ Ponzi scheme. As
to Gallo, Mandel identifies eight transactions by the date the transaction occurred, the specific
amount of money transferred, and the company or person who received the transfer. As to
Vegas, Mandel identifies the transaction in which Vegas allegedly converted COL funds by time
period and amount of money.

Mandel sufficiently alleges that these transactions were

unauthorized. At this stage, Mandel is not required to prove his case for conversion, but only to
state a plausible claim for relief. The facts he puts forth are sufficient to state a claim for
conversion.
E. Breach of Fiduciary Duty Claims
To establish a claim for breach of fiduciary duty, a plaintiff must show that (1) the
defendant owed a fiduciary duty to the plaintiff, (2) the defendant breached that duty, and (3) the
defendant’s breach proximately caused the plaintiff’s damages. Gracey v. Eaker, 837 So. 2d
348, 353 (Fla. 2002). “Florida law has long recognized that corporate officers and directors owe
duties of loyalty and a duty of care to the corporation.” In re Aqua Clear Techs., Inc., 361 B.R.
567, 575 (Bankr. S.D. Fla. 2007) (citing Cohen v. Hattaway, 595 So. 2d 105 (Fla. Dist. Ct. App.
1992); B & J Holding Corp. v. Weiss, 353 So. 2d 141 (Fla. Dist. Ct. App. 1978)). Corporate

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directors and officers must act in good faith and in the best interest of the corporation. Cohen,
595 So. 2d at 107. However, a “mere employee” of a corporation generally does not occupy a
position of trust and owe a fiduciary duty unless he also serves as its agent. Renpak, Inc. v.
Oppenheimer, 104 So. 2d 642, 644 (Fla. Dist. Ct. App. 1958).
Mandel asserts that Gallo, as COL’s Vice President, owed a fiduciary duty to COL and
its investors to safeguard and prudently manage COL funds. Mandel alleges several breaches of
that duty, including: (1) personally stealing and misappropriating COL funds; (2) transferring
funds to Mexico without assuring that COL was authorized to do business there; (3) continuing
to solicit money from new investors and wire funds after being warned by legal counsel to not do
so; and (4) transferring funds without adequate controls and documentation to insure the
company’s assets and funds. (Compl. ¶¶ 42-46). He asserts that as a result of these various
breaches, COL suffered losses of $3 million. Mandel pleads sufficient facts to state a claim that
Gallo breached his fiduciary duty to COL and its investors.4
Vegas contends that he does not owe any fiduciary duties to COL because he is a mere
employee of the company. Mandel alleges that Vegas was the “Procurement Director” for COL.
Vegas’ title alone does not give this Court an indication of whether or not this is a controlling
position or a position of trust. Mandel’s allegation that “Howard, Gallo, and Vegas were
controlling individuals and/or officers and employees of COL” is not sufficiently definite for this
Court to determine that Vegas was a controlling individual or officer at COL. Mandel does not
allege that Vegas serves as COL’s agent. For these reasons, Mandel’s claim for breach of
fiduciary duty against Vegas is dismissed without prejudice.

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Gallo asserts that Florida’s “business judgment rule” protects him from this claim. “The application of the
business judgment rule for the purposes of a motion to dismiss is questionable,” as such a defense generally involve
factual determinations. F.D.I.C. v. Stahl, 840 F. Supp. 124, 128 (S.D. Fla. 1993). The Court will not consider the
affirmative defense at this stage of the proceedings.

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IV. CONCLUSION
For the foregoing reasons, it is ORDERED and ADJUDGED that Defendant Gallo’s
Motion to Dismiss (ECF No. 10) is DENIED and Defendant Vegas’ Motion to Dismiss (ECF
No. 12) Plaintiff Mandel’s Complaint is GRANTED in part and DENIED in part. Plaintiff’s
claim for breach of fiduciary duty is DISMISSED without prejudice. Plaintiff’s claim for
conversion remains. Plaintiff may file an Amended Complaint within twenty-one days of this
Order.
DONE and ORDERED in chambers, at Miami, Florida, this 28th day of March 2012.

Copies furnished to:
William C. Turnoff, U.S. Magistrate Judge
Counsel of record

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