RS-ANB Fund, LP v. KMS SPE LLC et al
Filing
165
MEMORANDUM DECISION AND ORDER granting in part and denying in part 140 Motion to Dismiss; granting 142 Joinder and Memorandum in Support; granting 143 Motion to Dismiss. RS shall file a Second Amended Complaint asserting only claims not dismissed herein so that the complaint conforms to this decision by 5/1/2012. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (cjm)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
RS-ANB FUND, LP,
Lead Case No. 4:11-cv-00175-BLW
Plaintiff/Counterdefendant,
v.
KMS SPE LLC, LIZ AIR 6 LLC, JERALD M. MEMORANDUM DECISION
SPILSBURY, KINGSTON PROPERTIES L.P., AND ORDER
MIKE KINGSTON, PAUL E. AVERY, BERT
BOECKMANN AND JANE BOECKMANN,
TRUSTEES OF THE BOECKMANN
FAMILY REVOCABLE TRUST, ANDARY
INVESTMENTS 2 LLC AND RGRCM LLC,
Defendants/Counterclaimants.
KMS SPE, LLC,
Consolidated Case No. 4:11-cvPlaintiff/Counterdefendant,
00179-BLW
v.
RS-ANB Funds, LP,
Defendant/Counterclaimant.
MEMORANDUM DECISION AND ORDER — 1
RS-ANB FUND, LP,
Consolidated Case No. 4:11-mc-
Plaintiff,
07113-BLW
v.
DAVID ORVILLE KINGSTON,
Defendant.
INTRODUCTION
The Court has before it the following motions: (1) Defendant David Kingston and
Kingston Properties, LP.’s Motion to Dismiss (Dkt. 140), (2) Defendant KMS SPE
LLC’s Joinder in David Kingston and Kingston Properties, LP.’s Motion to Dismiss
(Dkt. 142), and (3) all remaining Defendants’ Joinder in David Kingston and Kingston
Properties, L.P.’s Motion to Dismiss (Dkt. 143).
Defendant Kingston Properties, LP renews its Rule 12(b)(6) motion as to
Plaintiff’s Securities Exchange Act fraud claim, its Idaho Securities Act fraud claim, and
its fiduciary-duty claims (Claims 1, 2, 4, and 7 of the amended complaint), and to dismiss
the balance of Case No. 4:11-cv-00175-BLW under Rule 12(b)(1) for lack of subjectmatter jurisdiction, if the 10b-5 claim is dismissed. In addition, David Orville Kingston
moves to dismiss the amended adversary complaint RS filed on December 5,
2011, as plaintiff in Case No. 4:11-mc-07113-BLW (Docket No. 128). Defendant KMS
SPE LLC joins in Kingston Properties’ motion to dismiss as to the federal and state
MEMORANDUM DECISION AND ORDER — 2
securities fraud claims. All remaining defendants also join in Kingston Properties’
motion to dismiss the lead case in its entirety under Rule 12(b)(1).
The Court has reviewed the parties’ submissions and determined that oral
argument will not significantly assist the decisional process. For the reasons set forth
below, Kingston Properties’ Motion to Dismiss is granted in part and denied in part, and
all joinder requests in Kingston Properties’ Motion are granted. David Kingston’s
Motion to Dismiss the amended Adversary Complaint will be granted. As to the
dismissed claims, the Court finds that RS has been afforded sufficient opportunity to
amend its complaint, and that any further amendments would be futile; therefore, these
claims are dismissed with prejudice.
RS shall file an amended complaint asserting only claims not dismissed below, so
that the complaint conforms to this decision.
BACKGROUND
The facts of this case are as stated in the previous Memorandum Decision and
Order issued in this case on November 7, 2011 (Dkt. 116), and need not be repeated at
length here.
In sum, Plaintiff RS-ANB Fund, LP (RS) asserts federal and state securities fraud
claims against David Kingston, in the Adversary Complaint, and against Kingston
Properties (Properties) and KMS SPE LLC (KMS) in this case (the lead case). RS
alleges that these parties fraudulently concealed the insolvency of David Kingston, who
holds a controlling interest in each, so as to induce RS into purchasing a 25% interest in a
failed bank’s commercial construction loan portfolio. Additionally, RS brings fiduciary
MEMORANDUM DECISION AND ORDER — 3
duty claims against David Kingston, and against “all defendants” in Claims Four and
Seven of this case.
This Court previously dismissed RS’s federal securities claims primarily because
RS “failed to plead falsity and scienter with adequate particularity” under the heightened
pleading standards applicable to fraud. Order dated Nov. 7, 2011 at 17, Dkt. 116. The
parallel state securities fraud claim was dismissed because the Complaint failed to allege
a compensable loss under the Idaho Securities Act. Id. at 17. The Court also dismissed
the fiduciary duty claims brought against Kingston Properties because the Complaint
failed to allege even the existence of a fiduciary duty in Kingston Properties toward RS,
much less that any such duty was breached. Id. at 20.
Similarly, the Court found that the Adversary Complaint failed to allege facts
establishing the existence of a fiduciary relationship between David Kingston and RS.
Id. at 20-21. Ultimately, the Court dismissed all four of the claims brought against David
Kingston in the Adversary Complaint for all these same reasons. Id. at 23.
In response to these setbacks, RS provided this Court with an Amended Complaint
(Dkt. 131) and an Amended Adversary Complaint (Dkt. 128). All Defendants again seek
dismissal of the fraud and fiduciary duties claim asserted against them, respectively, for
failure to state a claim for which relief can be granted, and all Defendants named in the
lead case seek dismissal of all the claims therein for lack of subject matter jurisdiction
should the federal securities fraud claim be dismissed (Dkts. 140, 142, and 143).
MEMORANDUM DECISION AND ORDER — 4
LEGAL STANDARD
Federal Rule of Civil Procedure 8(a) (2) requires only “a short and plain statement
of the claim showing that the pleader is entitled to relief,” in order to “give the defendant
fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 555 (2007). While a complaint attacked by a Rule
12(b)(6) motion to dismiss “does not need detailed factual allegations,” it must set forth
“more than labels and conclusions, and a formulaic recitation of the elements of a cause
of action will not do.” Id. at 555. To survive a motion to dismiss, a complaint must
contain sufficient factual matter, accepted as true, to “state a claim to relief that is
plausible on its face.” Id. at 570. 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. Id. at 556. The plausibility standard is not akin to a
“probability requirement,” but it asks for more than a sheer possibility that a defendant
has acted unlawfully. Id. Where a complaint pleads facts that are “merely consistent
with” a defendant's liability, it “stops short of the line between possibility and plausibility
of ‘entitlement to relief.’ ” Id. at 557.
In a more recent case, the Supreme Court identified two “working principles” that
underlie Twombly. See Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). First, the tenet that
a court must accept as true all of the allegations contained in a complaint is inapplicable
to legal conclusions. Id. “Rule 8 marks a notable and generous departure from the hypertechnical, code-pleading regime of a prior era, but it does not unlock the doors of
discovery for a plaintiff armed with nothing more than conclusions.” Id. at
MEMORANDUM DECISION AND ORDER — 5
1950. Second, only a complaint that states a plausible claim for relief survives a motion
to dismiss. Id. “Determining whether a complaint states a plausible claim for relief will . .
. be a context-specific task that requires the reviewing court to draw on its judicial
experience and common sense.” Id.
A dismissal without leave to amend is improper unless it is beyond doubt that the
complaint “could not be saved by any amendment.” Harris v. Amgen, Inc., 573 F.3d 728,
737 (9th Cir. 2009) (issued 2 months after Iqbal).1 The Ninth Circuit has held that “in
dismissals for failure to state a claim, a district court should grant leave to amend even if
no request to amend the pleading was made, unless it determines that the pleading could
not possibly be cured by the allegation of other facts.” Cook, Perkiss and Liehe, Inc. v.
Northern California Collection Service, Inc., 911 F.2d 242, 247 (9th Cir. 1990). The
issue is not whether plaintiff will prevail but whether he “is entitled to offer evidence to
support the claims.” Diaz v. Int’l Longshore and Warehouse Union, Local 13, 474 F.3d
1202, 1205 (9th Cir. 2007)(citations omitted).
Under Rule 12(b)(6), the Court may consider matters that are subject to judicial
notice. Mullis v. United States Bank, 828 F.2d 1385, 1388 (9th Cir. 1987). The Court may
take judicial notice “of the records of state agencies and other undisputed matters of
public record” without transforming the motions to dismiss into motions for summary
judgment. Disabled Rights Action Comm. v. Las Vegas Events, Inc., 375 F.3d 861, 866
(9th Cir. 2004). The Court may also examine documents referred to in the complaint,
although not attached thereto, without transforming the motion to dismiss into a motion
for summary judgment. See Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005).
MEMORANDUM DECISION AND ORDER — 6
ANALYSIS
1.
Rule 10b-5
To establish a valid claim under Rule 10b–5, RS must satisfy five elements: “(1) a
material misrepresentation or omission of fact, (2) scienter, (3) a connection with the
purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss.”
In re Daou Sys. Inc., Sec. Litig., 411 F.3d 1006, 1014 (9th Cir.2005).
Federal securities fraud complaints under Section 10(b) also must satisfy stringent
pleading requirements. First, the complaint must include a short and plain statement of
the plaintiff's claim. See Fed.R.Civ.P. 8(a). Next, “in alleging fraud or mistake, a party
must state with particularity the circumstances constituting fraud or mistake ....”
Fed.R.Civ.P. 9(b); See Vess v. Ciba–Geigy Corp., 317 F.3d 1097, 1106 (9th Cir. 2003).
Under Rule 9(b), “[a]verments of fraud must be accompanied by the who, what, when,
where, and how of the misconduct charged.” Vess, 317 F.3d at 1106.
In addition, the Private Securities Litigation Reform Act (“PSLRA”) requires a
complaint to “plead with particularity both falsity and scienter.” Zucco Partners, LLC v.
Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009) (internal quotation marks omitted).
“Thus, to properly allege falsity, a securities fraud complaint must now ‘specify each
statement alleged to have been misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement or omission is made on
information and belief, state with particularity all facts on which that belief is formed.’”
MEMORANDUM DECISION AND ORDER — 7
Id. at 990-91 (ellipsis points omitted) (quoting 15 U.S.C. § 78u-4(b)(1)). “To adequately
plead scienter, the complaint must now ‘state with particularity facts giving rise to a
strong inference that the defendant acted with the required state of mind,’” or scienter.
Id. at 991 (emphasis added) (quoting 15 U.S.C. § 78u-4(b)(2)).
The required state of mind is either that the defendant acted intentionally or with
“deliberate recklessness.” Daou Sys., 411 F.3d at 1014–15. For a securities claim under
Section 10(b), “recklessness only satisfies scienter” when it “reflects some degree of
intentional or conscious misconduct.” In re Silicon Graphics Sec. Litig., 183 F.3d 970,
977 (9th Cir. 1999). To adequately plead deliberate recklessness, plaintiff must allege “a
highly unreasonable omission, involving not merely simple, or even inexcusable
negligence, but an extreme departure from the standards of ordinary care, and which
presents a danger of misleading buyers or sellers that is either known to the defendant or
is so obvious that the actor must have been aware of it.” In re Silicon Graphics Inc. Sec.
Litig., 183 F.3d 970, 976 (9th Cir. 1999)
To survive a motion to dismiss, the inference of scienter must be “cogent and at
least as compelling as any opposing inference one could draw from the facts alleged.”
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007). In determining
the cogency of the allegations, federal courts are required to consider 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. In
other words, courts may not rely “exclusively on a segmented analysis of scienter.”
MEMORANDUM DECISION AND ORDER — 8
Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009). Instead,
courts must “consider the totality of the circumstances,” Id. at 992 (citing South Ferry
LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008)).
Ninth Circuit law also demands that a federal district court “conduct a dual
inquiry.” Id. First a court must “determine whether any of the plaintiff's allegations,
standing alone, are sufficient to create a strong inference of scienter; second, if no
individual allegations are sufficient,” the court must “conduct a ‘holistic’ review of the
same allegations to determine whether the insufficient allegations combine to create a
strong inference of intentional conduct or deliberate recklessness.” Id
Applying these standards, the sole issue before the Court as to the federal
securities fraud claims is whether the amended Complaints, read most favorably to RS
but considering all reasonable inferences, allege particular facts giving rise to a strong
inference that Kingston Properties, David Kingston and/or KMS SPE made fraudulent
representations or omissions, either with knowledge of their falsity or with deliberate
recklessness.
A.
Non-disclosure of Kingston’s Insolvency
As the Court made clear in its previous ruling on the issue of scienter, the mere
fact that a creditor in David Kingston’s 2011 bankruptcy had a lawsuit pending against
Kingston on the date the Participation Agreement was signed is insufficient, standing
alone, to support a reasonable inference that he was insolvent on the date the
Participation Agreement was executed. Order dated Nov. 7, 2011 at 14, Dkt. 116. The
Court explained, further, that if insolvency cannot reasonably be inferred from the facts
MEMORANDUM DECISION AND ORDER — 9
alleged, then it cannot be said that Kingston, or any of the entities under his control, acted
with the required scienter in failing to reveal the existence of pending lawsuits to RS at
the relevant time, since nothing in the record suggests that Kingston or any other
defendant was under any duty to disclose the existence of such a suit.1 Id.
In response to the Court’s concerns, RS amended its federal securities fraud counts
in both the lead case and the adversary proceeding. It did so chiefly by (1) retooling its
argument that the Zeiger lawsuit, filed shortly before the Participation Agreement was
signed, evidenced Kingston’s insolvency at that time; RS’s Amd. Compl. ¶¶ 54-66, Dkt.
131; (2) making a new, but similar, argument that a guarantee executed by Kingston and
a creditor in his bankruptcy (“Corus”) in 2007 had been triggered prior to the signing of
the Agreement, further evidencing Kingston’s insolvency; Id. at ¶¶ 67-77; and (3)
arguing, in essence, that the triggering of the Corus guaranty and Kingston’s insolvency
generally can be inferred from his involvement in Las Vegas real estate ventures during
the apex of the real estate crash. Id. at ¶¶ 70-77.
Unfortunately, none of these arguments brings anything particularly new to the
table. The retooled Zeiger theory merely alleges that Kingston, at the time the lawsuit
was filed and at least by the time the Participation Agreement was executed, necessarily
knew that the cost of defending the lawsuit would, several years later, materially
contribute to his slide into bankruptcy, and thus Kingston, as well as any other defendant
with knowledge of his personal finances, should have concluded Kingston was insolvent
1
Contrary to RS’s suggestion, the Court finds nothing in any of the relevant contracts, as contained in the record,
that purports to require Kingston or any entity under his control to disclose the existence of a pending lawsuit
against Kingston, or which makes the mere filing of such a suit against Kingston a dissolution event or breach. RS’s
Opp’n at xiii, Dkt. 147.
MEMORANDUM DECISION AND ORDER — 10
and notified RS at the appropriate time. Even setting aside the questionable premise that
litigation costs can be as reliably estimated as RS alleges, the fact that Kingston went on
to fund his defense of the suit for almost two years and spent several hundred thousand
dollars doing so belies the claim that scienter can be inferred from his silence, or that of
the entities he allegedly controlled. In fact, Kingston’s conduct in the aftermath of the
Zeiger suit more strongly supports the opposing inference – that Kingston believed he
could prevail, and did not foresee his later bankruptcy until well after the Participation
Agreement was executed. Under such circumstances, the inference of scienter at the
relevant time cannot be drawn. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 976
(9th Cir. 1999) (stating that the inference of scienter must be at least as strong as any
opposing inference that could be drawn from the relevant facts.)
RS next argues that the Corus guaranty (also apparently revealed to RS by perusal
of Kingston’s bankruptcy schedules) further evidences Kingston’s insolvency in or
around April of 2009. This is essentially its Zeiger argument in thin disguise. Even
setting aside the question of precisely when the guaranty was triggered, as well as the
precise amount of the liability in question, this Court has already stated that the existence
of a contingent liability several years prior to a bankruptcy filing is insufficient to support
an inference that the debtor was insolvent when the contingent liability first arose. The
fact that the record does not even reflect to any degree of certainty that the guaranty was
triggered prior to the execution of the Participation Agreement weakens the argument
even further.
MEMORANDUM DECISION AND ORDER — 11
Finally, RS asserts that the historic drop in real estate values occurring from 20072009, especially in the Las Vegas area, in combination with Kingston’s exposure to the
market during that time as evidenced by his bankruptcy filings, supports an inference that
he became insolvent at some point during this period and remained so in April 2009,
when the Participation Agreement was executed. While the bursting of the real estate
bubble probably contributed to Mr. Kingston’s bankruptcy filing in 2011, and may even
have been its proximate cause, it cannot reasonably be inferred from these premises that
Mr. Kingston was insolvent in 2009, nearly two years before his bankruptcy.
RS also argues that the requisite scienter can be inferred from Properties’ and
Kingston’s failure to disclose their intention to breach the terms of the Agreement and to
breach their various contractual and common-law duties. Order dated Nov. 7, 2011 at
15-16, Dkt. 116. To the extent RS made any amendments to these allegations at all, such
amendments are not responsive to the Court’s concern that “RS offer[ed] no facts to
demonstrate the existence of intent [not to adhere to the Participation Agreement]” or to
demonstrate that any named defendant misrepresented the portfolio purchase price.2
Order dated Nov. 7, 2011 at 15-16, Dkt. 116. They are therefore insufficient to the task
of salvaging RS’s federal securities fraud claim.
B.
Conclusion
As amended, the Complaint still fails to plead adequate factual matter to support a
strong inference of scienter on the part of David Kingston, Properties, or KMS SPE LLC.
2
The assertion that “[b]ecause Mr. Kingston was insolvent . . . he knew he would be required to fund his personal
expenses from the cash flow from the liquidation of the Portfolio” supplies no new facts, but merely suggests an
inference from an inference that this Court had already deemed unreasonable (e.g. that Mr. Kingston was insolvent.)
Amd. Compl. at ¶ 85, Dkt. 131.
MEMORANDUM DECISION AND ORDER — 12
The Court therefore concludes that RS’s amended Rule 10b-5 claim in both the lead case
and the adversary proceeding should be dismissed with prejudice, because the Court
perceives no means by which a further round of amendments could salvage the claim.3
2.
Idaho Securities Act
RS chose not to amend its state securities fraud claim, arguing instead that it is
entitled to actual losses in the alternative to rescission. However, this Court already
indicated that RS’s profit on its investment in the portfolio, however disappointing it
might be in proportion to RS’s expectation, makes the recovery of actual damages
untenable under the formula set forth in I.C. § 30-14-509(b)(3). Nevertheless, RS argues
that its income stream from the portfolio has been impaired as a result of Kingston’s
insolvency, and maintains that it should be allowed to recover the amount of any
impairment as “benefit of the bargain” damages. Plf.’s Resp. at 8-10, Dkt. 147.
However, RS has cited to no Idaho cases that would allow the recovery of “benefit of the
bargain” damages as “actual damages,” and the Court can find none; nor is the Court
persuaded that the federal precedents cited by RS are applicable to the state law issue
raised here.
3
In drawing the conclusion that further amendments to this claim would be futile, the Court notes that the scienter
problem extends much further than the Plaintiff’s failure to adequately support its charge that Kingston was
insolvent. RH’s scienter theory is built upon a veritable house of cards: first, that Kingston was in fact rendered
insolvent by the events underlying the Zeiger litigation and the triggering of the Corus guaranty; second, that he
recognized himself to be insolvent when the Agreement was signed, or legally should have had such recognition;
third, that his personal insolvency actually constituted a dissolution event or event of default under the relevant
agreements, such that it was actually capable of impacting the revenue stream generated from the Portfolio; fourth,
that he recognized that his personal insolvency constituted such an event, and would therefore be of material interest
to the investors; and, finally, that he then intentionally, or with deliberate recklessness, concealed his insolvency so
as to induce RS to enter into a real estate venture which quickly turned a profit despite the poor economy.
MEMORANDUM DECISION AND ORDER — 13
Moreover, Properties is correct to point out that actual damages are not
recoverable by a purchaser who retains ownership of the security, as is the case here. Id.
§ 30-14-509(b)(2). In any event, RS has not indicated that it has any intention to tender
or sell its security, so the issue appears to be moot.
For all these reasons, and because it appears that any further amendment would be
futile on this record, Claim Two of the amended Complaint and, likewise, Claim Two of
the amended adversary Complaint are dismissed with prejudice.
3.
Breach of Fiduciary Duty (All Defendants)
The Court was highly specific in its dismissal of RS’s fiduciary duty claims
against Properties, as original investor: “RS will be given the opportunity to amend its
Complaint to state specific facts establishing that [Properties] and RS had a special
relationship such that [Properties] had a [fiduciary duty to RS], and [Properties] breached
[these duties] . . .” Order dated Nov. 7 2011 at 20, Dkt. 116. The Court noted that each
of the fiduciary duty claims brought in the lead case was directed at KMS SPE and David
Kingston, with nary a mention of Properties or any other “original investor.” Id. The
Court also described the transaction resulting in the Participation Agreement as one
occurring at “arms-length,” based upon the facts in the record, but indicated its
willingness to entertain additional facts that might indicate the existence of a fiduciary
relationship between RS and any of the parties named in Claims Four and Seven of the
Complaint, and Claim Three of the Adversary Proceeding. Id. For this round of motions,
KMS SPE and the original investors join in Properties’ Motion to Dismiss, and adopt
Properties’ arguments in opposition to the existence of any fiduciary duty as their own
MEMORANDUM DECISION AND ORDER — 14
where applicable. Joinder of KMS SPE LLC at 2, Dkt. 142; Joinder of Original Investors
at 2, Dkt. 143.
The Court will again dismiss the fiduciary duty claims, this time as to all
defendants named in the lead case, in light of the joinder of KMS SPE and the original
investors. Id. Instead of supplying any additional facts, RS merely re-submitted its
fiduciary duty claims in precisely the same form as before. Remarkably, RS still fails to
actually allege the existence of a fiduciary duty in any party other than KMS SPE, even
though the “Claim” headings purport to include all named defendants, including all the
original investors. Amd. Compl. at 22-23, 25-30, Dkt. 131.
In lieu of adding more factual allegations, RS chose to extensively brief fiduciary
law, in the process raising anew various arguments that the Court previously rejected in
the absence of those same missing facts. RS does make one argument that might be
considered new: it argues that parties which exercised control over the consideration it
paid to effectuate the Participation Agreement owed it fiduciary duties by virtue of that
control. RS’s Opp’n at 11, Dkt. 147. When this Court rejected RS’s analogy of the
relationship between Properties and itself to that of a broker/principal relationship, it did
so because no facts were alleged which suggested that Properties “provided investment
advice to RS, or acted as RS’s agent in connection with the Participation Agreement.”
This remains true in the amended Complaint, not only of Properties, but also of every
other defendant, including David Kingston. A bare allegation of control over
consideration paid cannot supply the factual indicia required for the finding of a fiduciary
duty between parties to a contract negotiated at arms-length, even if the transaction
MEMORANDUM DECISION AND ORDER — 15
involves an “investment opportunity.” Id. at 12. See Wade Baker & Sons Farms v. Corp.
of Presiding Bishop of the Church of Jesus Christ of Latter-Day Saints, 42 P.3d 715, 721
(Idaho Ct. App. 2002) (Noting that fiduciary duties are not ordinarily created by arm’s
length transactions.)
Since the complaint still fails to allege sufficient facts from which a fiduciary
relationship between RS and any defendant could reasonably be inferred, and RS is
clearly not in possession of the kind of facts needed to state a claim for breach of
fiduciary duty under the pleading standards outlined above, Claims Four and Seven of the
Amended Complaint are dismissed with prejudice.
Additionally, with respect to Claim Three in the Adversary Complaint, the Court
agrees with Kingston that RS failed to link the holdings in the various cases it cited with
the facts contained in the record. David Kingston may indeed be a fiduciary with respect
to some or all of the defendants named in the lead case, by virtue of his control over the
entities in which they are shareholders. But, as Kingston argues, RS has failed to plead
any facts to suggest that RS is, literally or figuratively, a limited partner, shareholder, or
member of KMS SPE LLC or of any entity allegedly controlled by Kingston.
In short, while RS does an adequate job in its briefing of arguing that Kingston is a
fiduciary to someone, it failed to supply the facts needed to establish itself as a party to
whom such duties are owed. For that reason, and because the record does not disclose
any other means by which Kingston might have assumed a fiduciary role with respect to
RS, Claim Three of the Adversary Complaint (Dkt. 128) is dismissed with prejudice in
light of the evident futility of any future amendments.
MEMORANDUM DECISION AND ORDER — 16
4.
Supplemental Jurisdiction over the Remaining Claims
As indicated previously, all the defendants named in the lead case have asked this
Court to dismiss the balance of the case for lack of subject-matter jurisdiction if the
federal securities fraud claim is dismissed. For the reasons explained below, the Court
declines to do so, and will instead exercise its discretion so as to retain supplemental
jurisdiction over the remaining state-law claims in the lead case of this consolidated
action.
A.
28 U.S.C. § 1367(a), (c).
A federal district court’s ability to claim supplemental jurisdiction over a state
law claim lacking an independent jurisdictional basis is derived from its Article III
judicial powers and from 28 U.S.C. § 1367, which essentially codifies the holdings of the
Supreme Court in United Mine Workers v. Gibbs, 338 U.S. 715 (1966). In considering
whether to exercise its discretion in taking supplemental jurisdiction over such claims,
courts conduct a two-step analysis, asking: (1) do the state and federal claims derive from
“a common nucleus of operative facts?”; and (2) if they are sufficiently related, do
“considerations of judicial economy, convenience and fairness to litigants” and the duty
to “avoid needless decisions of state law” counsel for, or against, the court taking or
retaining such jurisdiction? Gibbs, 338 U.S. at 726; 28 U.S.C. § 1367(c).
Notwithstanding the Gibbs factors, should the court decide to decline jurisdiction
it must ground its decision on one of the four bases provided under § 1367(c) – “(1) the
[state law] claim raises a novel or complex issue of state law; (2) the [state law] claim
substantially predominates over the claim or claims over which the district court has
MEMORANDUM DECISION AND ORDER — 17
original jurisdiction; (3) the district court has dismissed all claims over which it has
original jurisdiction; or (4) in exceptional circumstances, there are other compelling
reasons for declining jurisdiction.” 28 U.S.C. § 1367(c)(1)-(4).
With respect to the third scenario under § 1367(c), that in which the court has
dismissed all claims over which it has original jurisdiction, the Gibbs factors will
generally weigh in favor of dismissal of the pendent state-law claims, especially when
such dismissal has occurred before trial. Gibbs, 383 U.S. at 726. However, dismissal is
not automatically required merely because such a scenario has taken place. Acri v.
Varian Assoc., 114 F.3d 999, 1000 (9th Cir. 1997) (citing Carnegie-Mellon Univ. v.
Cohill, 484 U.S. 343, 350 n. 7, (1988)). Indeed, the 9th Circuit has long recognized that
the prevention of waste and duplicative litigation are often of central importance to the
decision whether to retain jurisdiction over pendent claims after dismissal of all federal
claims. See, e.g., Schneider v. TRW, Inc., 938 F.2d 986, 994-995 (noting that “we have
consistently upheld decisions to retain pendent claims on the basis that returning them to
state court would be a waste of judicial resources,” and noting the central importance of
judicial economy to the decision whether to retain the pendent claims); see also Otto v.
Heckler, 802 F.2d 337, 338 (9th Cir. 1986).
B.
Defendants’ Motion under FRCP 12(b)(1)
With the foregoing principles in mind, the Court will deny Defendants’ motion
under Rule 12(b)(1) to dismiss the balance of the case for lack of subject-matter
jurisdiction, and will instead exercise its discretion to retain its supplementary jurisdiction
over those state-law claims which have not been dismissed herein under Rule 12(b)(6).
MEMORANDUM DECISION AND ORDER — 18
First, the Court concludes that its initial exercise of supplementary jurisdiction
over the state-law claims in the lead case was proper under § 1367(a). The Court notes
that even though it has now dismissed the federal securities fraud claim upon which its
original jurisdiction was premised, the Court has not gone so far as to suggest that the
claim amounted to nothing more than a jurisdictional gambit or other artifice. Rather, it
appears that RS simply cannot meet the high burden imposed upon plaintiffs in fraud
cases. Under those circumstances, the Court must concede that the action was properly
filed in federal court as an initial matter.
Second, the supplementary state-law claims are properly viewed as merely another
facet of the same controversy: RS’s belief that it has not received its full entitlement
under the Participation Agreement. Whether the theory by which RS seeks its recovery is
labeled fraud, breach of contract, breach of fiduciary duty, or something else, each claim
in the lead case is derived from a common nucleus of operative facts surrounding the
Participation Agreement and its implementation. Defendants, especially, have made it
plain that they view the fraud claim as a doppelganger of the breach of contract claim,
see, e.g., KMS SPE LLC’s Reply at 9, Dkt. 157, and RS itself practically conceded as
much when it stated that the measurement of its fraud damages was the same as that of its
contract damages. RS’s Opp’n at 10, Dkt. 147. For all these reasons, the Court
concludes that the state law claims are part of the same case or controversy as the federal
claim, such that the requirements of § 1367(a) are satisfied, and that it may therefore
retain supplemental jurisdiction in the exercise of its discretion.
MEMORANDUM DECISION AND ORDER — 19
The Court is aware that Gibbs and its progeny, including the cases cited by
Properties in its briefing, generally counsel district courts to decline to retain
supplementary jurisdiction in the scenario presented here, in which the sole claim over
which the court has original jurisdiction is dismissed before trial. However, the Court
concludes, after considering the Gibbs factors, that considerations of judicial economy,
convenience, fairness, and the prevention of waste warrant its retention of the surviving
pendant claims. Although this case has not progressed very far in purely procedural
terms, the parties and the Court have invested considerable judicial resources already in
the conduct of the litigation, which is nearly a year old to this point. See, e.g., Mackey v.
Pioneer Nat’l Bank, 867 F.2d 520, 523 (9th Cir. 1989) (upholding a district court’s
retention of jurisdiction on judicial economy grounds despite the case having been in
federal court only four months.) In both the lead case and in the consolidated cases, the
Court has entertained numerous motions, including motions for judgment on the
pleadings, motions to dismiss, and motions for summary judgment; has entered and
amended a scheduling order; has authorized discovery; and has established a fund
administered by the court for deposit of contested sums during the litigation. Further, the
Court has rendered legal conclusions on the ambiguity of key provisions of the
Participation Agreement (Dkt. 79).4 Considering all these factors, judicial economy
would be best-served by the Court retaining its jurisdiction over the surviving claims in
the lead case.
4
Although the Court does not “merge” the consolidated cases for purposes of justifying supplemental
jurisdiction, in a purely practical sense the efforts undertaken in the consolidated cases assuredly do
“count” in the analysis of the Gibbs factors undertaken here.
MEMORANDUM DECISION AND ORDER — 20
In addition to this substantial commitment of time and resources, the Court has not
heard any reason why it would be unfair to the parties for it to retain jurisdiction in this
matter, and sees none. To the contrary, any unfairness would probably trend in the
opposite direction, given the hardship and expense that would accrue to the parties if they
were required to restart this litigation in state court.
Finally, the Court concludes that the interests of judicial economy outlined above
are sufficiently strong so as to outweigh the Court’s natural reluctance to decide matters
of state law. As indicated above, the Ninth Circuit has frequently upheld the retention of
jurisdiction in like situations in which the district court found that the goals of judicial
economy predominated. That is also the case here. For all these reasons, the Court will
deny Defendants’ motions to dismiss the surviving claims in the lead case under FRCP
12(b)(1).
ORDER
IT IS ORDERED THAT:
1. Defendant Kingston Properties, L.P.’s Motion to Dismiss (Dkt. 140) is
GRANTED IN PART and DENIED IN PART.
2. Defendant David Orville Kingston’s Motion to Dismiss (Dkt. 140) the Amended
Adversary Complaint RS filed on December 5, 2011, as plaintiff in Case No. 4:11mc-07113-BLW (filed as Dkt. 128 in lead case), is GRANTED.
3. Defendant KMS SPE, LLC’s Joinder in Kingston Properties, L.P.’s Motion to
Dismiss filed in lead case 4:11-cv-00175-BLW (Dkt. 142) is GRANTED.
MEMORANDUM DECISION AND ORDER — 21
4. The Joinder in Kingston Properties, L.P.’s Motion to Dismiss filed in lead case
4:11-cv-00175-BLW (Dkt. 143) by Defendants Liz Air 6, LLC, Jerald M.
Spilsbury, Mike Kingston, Paul E. Avery, Bert Boeckmann and Jane Boeckmann,
Andary Investments 2, LLC, and RGRCM LLC is GRANTED.
5. RS shall file a Second Amended Complaint asserting only claims not dismissed
herein so that the complaint conforms to this decision by May 1, 2012.
DATED: April 16, 2012
_________________________
B. Lynn Winmill
Chief Judge
United States District Court
MEMORANDUM DECISION AND ORDER — 22
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