Muncy v. Intercloud Systems, Inc. et al
Filing
82
MEMORANDUM OPINION & ORDER: It is ordered that 75 MOTION for Summary Judgment is DENIED. It is further ordered that NLT 11/22/2016, parties shall file a Joint Status Report. Signed by Judge David L. Bunning on 11/1/2016.(SCD)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION
AT LEXINGTON
CIVIL ACTION NO. 14-111-DLB-REW
ROBERT MUNCY
v.
PLAINTIFF
MEMORANDUM OPINION AND ORDER
INTERCLOUD SYSTEMS, INC.
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DEFENDANT
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This matter is before the Court on Defendant InterCloud Systems, Inc.’s Motion for
Summary Judgment. (Doc. # 75). Plaintiff Muncy having filed his Response (Doc. # 79)
and InterCloud having filed its Reply (Doc. # 80), this matter is ripe for review. Having
reviewed the parties’ briefing, and the Court being otherwise sufficiently advised,
InterCloud’s Motion for Summary Judgment will be denied for the reasons stated herein.
I.
FACTUAL AND PROCEDURAL BACKGROUND
In October 2012, Plaintiff Robert Muncy, D.M.D., met with former-Defendants1 Billy
Caudill and Russell Cornett at a restaurant in Lexington, Kentucky. (Doc. # 11 at ¶ 12).
Caudill is the former President of Genesis Group Holdings, Inc. (“Genesis”), which changed
its name to InterCloud Systems, Inc. (“InterCloud”) in January 2013. (Doc. # 20, Exs. A,
D). InterCloud is a Delaware Corporation that engages in internet data storage and has
its principal office in New Jersey. (Doc. # 11 at ¶ 3). Caudill joined Genesis in 2010 when
1
All claims against Caudill and Cornett were dismissed by agreement. (Docs. # 19 and
47).
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it acquired Digital Comm, Inc. (“Digital”). (Doc. # 20, Ex. B, p. 1). At all relevant times,
Caudill has served as Digital’s Chief Executive Officer and Cornett as Digital’s Vice
President of Public Relations. (Doc. # 11 at ¶¶ 5-6). In September 2012, approximately
one month before the meeting in Lexington, Genesis terminated Caudill and sold a majority
of its Digital shares. (Doc. # 20, Exs. A, B).
Muncy knew Caudill and Cornett from high school, but had not seen them since
graduation. (Doc. # 75 at Ex. A). In October 2012, he ran into them at a Lexington
restaurant. Id. During that meeting, Caudill and Cornett informed Muncy of their positions
at Digital. (Doc. # 11 at ¶ 12). They provided Muncy with business cards that corroborated
their titles and listed Digital as a “Genesis Group Holdings Company.” Id. According to
Muncy, Caudill and Cornett represented that they were authorized to speak on Genesis’s
behalf. Id. They told Muncy that they were giving him an opportunity to invest in Genesis
before it undertook an initial public offering (“IPO”) in 2013 and that Muncy would “realize
a substantial profit.” Id. at ¶ 13.
On October 24, 2012, Muncy signed a Subscription Agreement and Confidential
Investor Questionnaire. Id. The agreement was also signed by Caudill, and stated that it
was accepted by Digital, “a division of Genesis.” Id. at ¶ 18. The original date on the
agreement, “2011," was crossed-out and “2012" was written by hand. Id. at Ex. B. Muncy
purchased 500,000 shares of Genesis stock at 10¢ per share. Id. at ¶ 17. A few days later,
Muncy met Caudill and Cornett at the Bluegrass Field Airport with a $50,000 check, which
he made out to Caudill, personally. (Doc. # 75 at Ex. D). Genesis mailed a stock certificate
to Muncy’s home in Lexington, KY, which evidenced his ownership of 500,000 shares of
Genesis stock. (Doc. # 11 at ¶ 20). It appears from the evidence that the shares Muncy
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purchased had belonged to Caudill’s wife, and that the transaction was handled by
Corporate Stock Transfer, Inc., InterCloud’s transfer agent. (Doc. # 75-1, Ex. G, H, & I).
In October 2013, after Genesis changed its name to InterCloud, it underwent an IPO on the
NASDAQ. (Doc. # 20 at Ex. E).
Muncy contends that Caudill and Cornett’s statements were false, and that they
omitted material facts necessary to keep their statements from being misleading. (Doc. #
11 at ¶¶ 14, 16). First, Muncy contends that Caudill and Cornett’s statements regarding
the IPO were misleading, because InterCloud was already a publicly-traded company on
the Over the Counter Market. (Doc. # 79, p. 6). Second, Muncy claims that Caudill and
Cornett made a material omission by failing to disclose the fact that the shares they were
selling were not registered with the Commonwealth of Kentucky. Id. Muncy claims that
because the shares are not registered, he has been unable to sell them and has effectively
lost all of the money he invested. Id.
Following these revelations, Muncy attempted to have InterCloud rescind his stock
purchase to no avail. (Doc. # 11 at ¶ 24). He brought suit against InterCloud alleging
violations of § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Kentucky’s
Blue Sky Laws, KRS §§ 292.320, 292.330, 292.340, and 292.480.
(Doc. # 11).
Additionally, he asserted state law claims for fraud, negligent misrepresentation, unjust
enrichment, and civil conspiracy. Id. InterCloud moved to dismiss Muncy’s complaint for
failure to state a claim and lack of personal jurisdiction. (Doc. # 20). This Court denied the
motion for lack of personal jurisdiction, granted the motion to dismiss Count I (Federal
Securities Fraud), Count IV (Negligent Misrepresentation), Count V (Unjust Enrichment),
and Count VI (Civil Conspiracy), granted the motion to dismiss Count II as it relates to KRS
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§ 292.320, and denied the motion to dismiss Count II as it relates to KRS §§ 292.330,
292.340, and 292.480. (Doc. # 30). Therefore, the only claims remaining are those
relating to Kentucky’s Blue Sky Laws. Specifically, Plaintiff’s claims under KRS §§
292.330,2 292.340,3 and 292.4804 are currently before the Court. InterCloud has moved
for summary judgment on the remaining claims. (Doc. # 75). That motion is ripe for
review.
II.
ANALYSIS
A.
Applicable Law
Federal courts sitting in diversity apply federal procedural law. Hanna v .Plumer, 380
U.S. 460, 465 (1965). The substantive law of the forum state governs the claims asserted.
Erie R. Co. v. Tompkins, 304 U.S. 64 (1938); Moore v. Coffey, 992 F.2d 1439 (6th Cir.
1993); Gafford v. Gen. Elec. Co., 997 F.2d 150, 165 (6th Cir. 1993). Accordingly, the Court
will evaluate the instant Motion in accordance with the Federal Rules of Civil Procedure and
apply Kentucky law to Muncy’s claims.
B.
Standard of Review
Summary judgment is appropriate when there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P.
2
KRS § 292.330 makes it unlawful to transact business in Kentucky as an agent unless the
individual is registered as an agent or is otherwise exempt.
3
KRS § 292.340 makes it unlawful for any person to offer or sell any security in Kentucky
unless the security is registered, or the security or transaction is exempt, or the security is a
covered security.
4
Under KRS § 292.480, any person who offers or sells a security in violation of KRS
Chapter 292, or sells a security by means of an untrue statement or omission of a material fact, is
liable to the person buying the security from him.
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56(a). If there is a dispute over facts that might affect the outcome of the case under
governing law, then entry of summary judgment is precluded. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986). The moving party has the ultimate burden of persuading
the court that there are no disputed material facts and that he is entitled to judgment as a
matter of law. Id. Once a party files a properly supported motion for summary judgment
by either affirmatively negating an essential element of the non-moving party’s claim or
establishing an affirmative defense, “the adverse party must set forth specific facts showing
that there is a genuine issue for trial.” Id. at 250. “The mere existence of a scintilla of
evidence in support of the [non-moving party’s] position will be insufficient; there must be
evidence on which the jury could reasonably find for the [non-moving party].” Id. at 252.
C.
Muncy’s Claims
Muncy’s claims against InterCloud are viable under a theory of apparent authority.
(Doc. # 30). The first claim arises under KRS § 292.330(3), which makes it unlawful “to
transact business in this state as an agent unless the individual is registered ... as an agent
or is exempt.” See Myers v. OTR Media, Inc., No. 1:05–CV–101, 2008 WL 695357, at *2
(W.D. Ky. Mar. 12, 2008). Muncy alleges that Caudill and Cornett sold him stock and were
not registered agents. The second remaining claim is under KRS § 292.340, which makes
it “unlawful for any person to offer or sell any security in this state, unless the security is
registered under this chapter, or the security or transaction is exempt under this chapter,
or the security is a covered security.” Muncy alleges that when he bought the stock it was
not registered and there was no exemption. (Doc. # 11 at ¶ 21). The final claim relates to
KRS § 292.480, which requires proof of three elements: “(1) offer or sale of a security; (2)
by means of an untrue statement or omission concerning a material fact; (3) that the seller
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knew or should have known was untrue or misleading.” Republic Bank & Trust Co., 683
F.3d at 262. The Court found in its prior Order that Caudill and Cornett made a material
omission that they should have known was misleading when they failed to inform Muncy
that the shares were not registered. (Doc. # 30). For each of these claims, InterCloud is
potentially liable for Caudill and Cornett’s actions under the theory of apparent authority.
D.
Apparent Authority
The common-law theory of agency allows a principal to be held liable for the acts
of his agent when the agent is acting on his behalf. See Restatement (Third) of Agency §
2.01. A principal may be bound when the agent is acting under actual or apparent
authority. Actual authority is created when a principal expressly grants the agent authority
to act on its behalf. See Kindred Nursing Centers Ltd. Partnership v. Brown, 411 S.W.3d
242, 249 (Ky. Ct. App. 2011).
Apparent authority, on the other hand, is not created by an express grant of
authority. An apparent agent “is one whom the principal, either intentionally or by want of
ordinary care, induces third persons to believe to be his agent, although he has not, either
expressly or by implication, conferred authority upon him.” Middleton v. Frances, 77
S.W.2d 425, 426 (Ky. 1934). There is no requirement that the principal have direct contact
with the party asserting apparent authority. Dierg v. Lees Leisure Industries, Ltd., No. 11125-DLB-JGW, 2012 WL 669968, at *6 (E.D. Ky. Feb. 28, 2012) (citing Papa John’s Int’l,
Inc. V. McCoy, 244 S.W.3d 44, 58 (Ky. 2008) (Lambert, C.J., dissenting)).
The Kentucky Supreme Court has defined apparent authority as follows:
Apparent authority . . . is created by a person’s manifestation that another
has authority to act with legal consequences for the person who makes the
manifestation, when a third party reasonably believes the actor to be
authorized and the belief is traceable to the manifestation.
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Mark D. Dean, P.S.C. v. Commonwealth Bank & Trust Co., 434 S.W.3d 489, 499 (Ky.
2014) (citing Restatement (Third) of Agency § 3.03 (2006)).
Accordingly, apparent authority is established where (1) the principal represents that
the agents have the authority to act on its behalf; (2) the third party reasonably believes the
agents have such authority; and (3) the third party’s belief is traceable to the principal’s
representations. Id. at 500. While “apparent authority is a legal conclusion, its elements
are chiefly factual matters.” Orchard Group, Inc. v. Konica Med. Copr., 135 F.3d 421, 426
n. 1 (6th Cir. 1998).
1.
Representation by the principal
When apparent authority is at issue, the court must look not to the purported agent’s
manifestations, but to the principal’s manifestations that the purported agent had authority
to act on his behalf. Ping v. Beverly Enterprises, Inc., 376 S.W.3d 581 (Ky. 2012). Muncy
argues that InterCloud issued business cards to Caudill and Cornett, thereby creating the
appearance that they were authorized to act on InterCloud’s behalf. Muncy has not alleged
that InterCloud made any representations of authority aside from issuing the business
cards and Subscription Agreement.5
(Doc. # 11).
Thus, the question is whether
InterCloud, by issuing those documents, represented that Caudill and Cornett had authority
to act on its behalf.
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In his response to InterCloud’s Motion for Summary Judgment, Muncy asserts that
InterCloud manifested its apparent grant of authority to Caudill through actions taken after the
transaction at issue. (Doc. # 79). Correspondences sent after Muncy purchased the stock,
however, are not relevant to the inquiry surrounding Caudill and Cornett’s apparent authority at the
time of the transaction. See Dean, 434 S.W.3d at 500, n. 12; U.S. v. Kimber, 395 F. App’x 237, 245
(6th Cir. 2010). Therefore, InterCloud’s actions following the transaction will not be considered.
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a.
A question of fact exists as to whether InterCloud issued
the business cards
InterCloud claims that it did not issue the business cards used by Caudill and
Cornett. (Doc. # 75-1, p. 16). In support, it offers testimony from Lawrence Sands, Vice
President of Genesis/InterCloud, in which he claims that he does not recall InterCloud
issuing the business cards, and that the company would not have played a role in
approving the cards if Caudill made them on his own. Id. at Ex. G. Sands also contends
that any business cards issued by InterCloud would not have borne the logo of Digital, a
wholly-owned subsidiary of InterCloud. Id. While Sands’s testimony should be considered,
it is not dispositive where all inferences must be drawn in Muncy’s favor.
A jury weighing Muncy’s assertion that InterCloud issued the cards against Sands’s
inconclusive testimony could reasonably find that Caudill obtained the cards from Genesis
during the course of his employment. It is undisputed that Caudill served as President of
Genesis (now InterCloud) prior to September 2012. And while Cornett never worked for
InterCloud directly, it is also conceivable that InterCloud could have issued business cards
for an employee of its subsidiary. Thus, the question of whether InterCloud issued the
business cards to Caudill and Cornett is in dispute.
Muncy also claims that InterCloud issued the Subscription Agreement bearing
Genesis’s name, which created the appearance of agency. (Doc. # 79, p. 12). Again,
InterCloud offers testimony from Sands, in which he asserts that an agreement issued by
InterCloud would not have borne the Digital logo (Doc. # 80, p. 11). Sands also points to
the handwritten alteration to the date as evidence that InterCloud did not issue the
agreement. Id. As was the case with the business cards, this testimony is not conclusive.
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Thus, a question of fact exists as to the issuance of the business cards and the origin of
the Subscription Agreement.
b.
Issuance of the business cards is a material fact
Next, InterCloud argues that even if it did issue the business cards to Caudill and
Cornett, that fact is not material because it is insufficient to establish apparent authority.
InterCloud offers a number of cases from other jurisdictions to support its argument that the
presence of business cards alone does not create the appearance of authority. See, e.g.,
Asplund v. Selected Investments in Financial Equities, Inc., 86 Cal.App.4th 26 (Cal. Ct.
App. 2000) (holding that the issuance of a business card was insufficient to create apparent
authority); Cowburn v. Leventis, 366 S.C. 20 (S.C. Ct. App. 2005) (same); CSX Transp.,
Inc. v. Recovery Express, Inc., 415 F.Supp.2d 6 (D. Mass. 2006) (holding email domain
names were insufficient, on their own, to establish apparent authority).
However, other courts have found that business cards can be indicative of an
agency relationship. See Innotext, Inc. v. Petra’Lex USA Inc., 694 F.3d 581 (6th Cir. 2012)
(applying Michigan law to find that where an agent passed out business cards of the
principal reasonable minds could differ on agency relationship); Grinnell v. Carbide &
Carbon Chems. Corp., 276 N.W. 535, 541 (Mich. 1937) (relying on business cards as one
of the elements to establish an agency relationship); Randall v. J.A. Fay & Egan Co., 123
N.W. 574, 575 (Mich. 1909) (using letterheads as evidence of agency relationship).
The various conclusions surrounding the presence of business cards and company
letterhead illustrate the fact-specific nature of this inquiry. The Restatement (Third) of
Agency provides some guidance, explaining that “an agent’s possession of the principal’s
letterhead stationery does not in itself constitute such a manifestation, but may constitute
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evidence relevant to showing apparent authority.” Restatement (Third) of Agency § 3.11,
cmt. d. Accordingly, the Court must consider the presence of the business cards together
with all other evidence and surrounding circumstances.
The fact that Caudill and Cornett possessed the business cards and Subscription
Agreement bearing InterCloud’s name could lead a reasonable jury to find that Caudill and
Cornett did have authority to act on behalf of InterCloud. Moreover, the business cards
Caudill and Cornett possessed corroborated their titles as officers of the company. While
an employee’s possession of company letterhead alone may be insufficient to establish
apparent authority, the possession of documents naming that employee as an officer of the
company is more likely to create the appearance of authority. See Restatement (Third) of
Agency 3.03, cmt. e (“The apparent authority of a president or chief executive officer
encompasses transactions falling within the ordinary course of the corporation’s business”).
InterCloud asserts that the apparent authority attributable to an officer of a company
could not be attributed to Caudill, because he had been terminated from InterCloud prior
to engaging in the transaction with Muncy. Thus, InterCloud contends that if it did make
a representation of authority by issuing business cards to Caudill, that authority was
terminated along with his employment. Muncy claims that even though Caudill’s actual
authority ended upon termination, apparent authority remained as long as Caudill
possessed the business cards. (Doc. # 79, p. 18). It is true that the termination of actual
authority does not terminate apparent authority. See Herfurth v. Horine, 98 S.W.2d 21, 24
(Ky. 1936); Restatement (Third) of Agency § 3.11 (“The termination of actual authority does
not by itself end any apparent authority held by an agent”). Instead, “apparent authority
ends when it is no longer reasonable for the third party ... to believe that the agent
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continues to act with actual authority.” Restatement (Third) of Agency § 3.11(2). The
question of whether or not the termination of Caudill’s actual authority also terminated his
apparent authority depends on the reasonableness of Muncy’s belief.
Accordingly, the presence of the business cards and Subscription Agreement may
be a sufficient basis for apparent authority. Therefore, a question of material fact remains
as to whether InterCloud represented to Muncy that Caudill and Cornett were its agents.
2.
Reasonable belief
Reasonableness is usually a question for the finder-of-fact. Dean, 434 S.W.3d at
500. Here, the Court cannot conclude as a matter of law whether or not Muncy’s belief that
Caudill and Cornett were acting under InterCloud’s apparent authority was reasonable.
Muncy contends that it was reasonable to believe that Caudill and Cornett’s
possession of business cards gave them the authority to sell shares of company stock.
Although the business cards listed the pair as officers of Digital, an InterCloud subsidiary,
the cards did include InterCloud’s name. Further, Caudill and Cornett used a Subscription
Agreement that listed Digital as a “division of Genesis.” (Doc. # 11 at ¶ 18). It could have
been reasonable for Muncy to believe that the presence of InterCloud’s name on the
documents along with the business cards corroborating the duo’s positions as officers
indicated that Caudill and Cornett were acting on behalf of InterCloud.
InterCloud argues that Muncy’s belief was not reasonable, in part because he did
not conduct diligent research prior to dealing with Caudill and Cornett. Indeed, courts have
cautioned that “the person claiming reliance on an agent’s apparent authority must take
heed to warnings and inconsistent circumstances.” U.S. Achievement Acad., LLC v. Pitney
Bowes, Inc., 458 F.Supp.2d 389, 396 (E.D. Ky. 2006); Savannah Sugar Refinery v. RC
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Canada Dry Bottling Co., 593 S.W.2d 880, 883 (Ky. Ct. App. 1980).
InterCloud asserts that diligent research would have revealed flaws with the
investment, such as the fact that InterCloud shares were already being traded on the Over
the Counter market. This, however, is irrelevant. The question is not whether Muncy’s
investment was reasonable, but whether his belief regarding Caudill’s authority was
reasonable. InterCloud claims that Muncy’s belief as to Caudill’s authority could also have
been remedied with research. But, InterCloud did not file public notice of Caudill’s
termination until after the transaction had occurred. (Doc. # 79 at Ex. C). Thus, Muncy’s
failure to do research was insubstantial, because it is not likely that research would have
revealed that Caudill had been terminated.
Next, InterCloud argues that the handwritten alterations to the Subscription
Agreement should have alerted Muncy to the possibility that InterCloud had not authorized
Caudill and Cornett’s actions. While it may be true that the handwritten alteration may have
raised red flags about the transaction, those alarms would not necessarily lead to the
conclusion that InterCloud had not approved the document. Ultimately, whether the
handwritten date made Muncy’s belief unreasonable is a question of fact.
Finally, InterCloud argues that Muncy could not have reasonably believed that
Caudill was acting as an agent of InterCloud because Muncy’s check was written to Caudill,
personally. This fact does weigh in InterCloud’s favor. It may have been unreasonable to
think that an agent acting on behalf of a company would receive personal payment in
exchange for the company’s shares of stock. But, again, this fact does not lead to only one
possible result.
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Facts have been presented to support both InterCloud and Muncy’s positions. While
there is some evidence that Muncy’s belief was not reasonable, the evidence is not so
overwhelming as to conclude that no jury could reasonably find otherwise. Thus, summary
judgment is not appropriate on this issue.
3.
Muncy’s belief was traceable to InterCloud’s representations
It is usually a question of fact whether a third party’s belief regarding apparent
agency is traceable to a manifestation of the principal. Pruitt v. Genie Industries, Inc., No.
3:10-81-DCR, 2013 WL 485966 at *5 (E.D. Ky. Feb. 6, 2013). Here, it would be reasonable
for a jury to find that Muncy’s belief was traceable to InterCloud’s representations. Muncy
contends that InterCloud represented that Caudill and Cornett were its apparent agents by
issuing business cards for their use and providing them with the Subscription Agreement.
Muncy’s belief that Caudill and Cornett were acting with apparent authority from InterCloud
was based on the presence of the business cards and Subscription Agreement. Thus, it
appears that Muncy’s belief was traceable to InterCloud’s representations.
III.
CONCLUSION
Accordingly, for the reasons stated herein,
IT IS ORDERED that Defendant InterCloud Systems, Inc.’s Motion for Summary
Judgment (Doc. # 75) is hereby DENIED;
IT IS FURTHER ORDERED that not later than November 22, 2016, the parties
shall file a Joint Status Report setting forth available dates in the Spring, 2017 for a final
pretrial conference and trial, and whether the parties would be amenable to mediation
before the Magistrate Judge.
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This 1st day of November, 2016.
K:\DATA\Opinions\Lexington\14-111 MOO denying MSJ.wpd
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