Boodram et al v. Coomes et al

Filing 99

MEMORANDUM OPINION & ORDER: Defendant Scott Crabtrees Motion to Dismiss 85 is GRANTED in part and DENIED in part. It is GRANTED as to dismissal of Counts IV, VIII, XIII, and XIV. It is DENIED as to all other claims. Plaintiffs shall file a s ur-reply no later than 20 days from the entry of this order regarding their claim for fraud by omission. Defendant Ronald Coomes Motion to Dismiss 84 is GRANTED in part and DENIED in part. It is GRANTED as to Count III and DENIED as to Count VIII. Signed by Chief Judge Joseph H. McKinley, Jr on 3/17/2015. cc: Counsel (JBM)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
BOWLING GREEN DIVISION
CIVIL ACTION NO. 1:12CV-00057-JHM
BOODNARINE BOODRAM
a/k/a MIKE BOODRAM, ET AL.

PLAINTIFFS

VS.
RONALD GLENN COOMES, ET AL.

DEFENDANTS

MEMORANDUM OPINION AND ORDER
This matter is before the Court on Defendant Ronald Coomes’ Motion to Dismiss [DN
84] and Defendant Scott Crabtree’s Motion to Dismiss [DN 85]. Fully briefed, these matters are
ripe for review.
I. BACKGROUND
In 2010, Defendant Ronald Coomes (“Coomes”) sought buyers for his company Philmo,
Inc., a duct tape manufacturer located in Franklin, Kentucky. Coomes was motivated to sell due
to the fact that “Philmo was low on cash and in need of additional operating funds.” [Second
Am. Compl., DN 77, at ¶ 13]. Soon after Coomes began his search for a potential buyer,
Boodnarine Boodram a/k/a Mike Boodram,1 owner and operator of Apollo Manufacturing
Group, Inc. (“Apollo”) located in Suwanee, Georgia, contacted Coomes concerning his interest
in acquiring Philmo. As a result of these negotiations and Coomes’ promise to sell Philmo to
him, Boodram closed his tape converting business in Gainesville, Georgia. Id. at ¶¶ 16-17.

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Mike Boodram’s wife, Shelleza Boodram, is also identified as a plaintiff in this action, but it does not appear that
she had much of a role in the facts of this case, other than the signing of one document. Therefore, in order to avoid
confusion, Mike Boodram will be identified as “Boodram,” and collectively, Mike and Shelleza Boodram will be
referred to as “Plaintiffs,” unless otherwise indicated.

Ultimately, discussions between Coomes and Boodram culminated in the parties
executing a Letter of Intent on December 9, 2010, which detailed Boodram’s plan to purchase
Philmo for $2,305,000.00 in a leveraged buyout. [Letter of Intent, DN 1-1]. As described by the
Letter of Intent, the acquisition of Philmo involved two phases: Boodram would immediately
purchase 49% of Philmo’s stock for $200,000, and then, starting in 2015, Boodram would begin
scheduled payments of $1,492,055.90 for the remaining 51% of the stock. Id. After signing the
Letter of Intent, Boodram transferred $200,000 in cash and assets to Coomes.
In addition to a stock purchase, the parties agreed that Mike Boodram would work at
Philmo as the Director of Operations. [Second Am. Compl., DN 77, at ¶ 24]. As Director of
Operations, Mike Boodram implemented significant changes at Philmo, including bringing in
new customers, negotiating beneficial contracts with existing customers, and developing brands
held by Philmo. Id. at ¶¶ 26-30. In particular, Boodram renegotiated Philmo’s contract with 3M
and improved “Patriot Tapes,” an underdeveloped brand held by Philmo. Id. Also, while at
Philmo, Boodram noticed that Coomes took certain actions that threatened the financial wellbeing of the company. Plaintiffs identify four specific instances of Coomes’ harmful conduct:
a. Coomes owned a controlling interest in Patriot Gage, LLC a separate
company. Coomes was running the payroll of Patriot Gage, LLC through
Philmo;
b. Coomes allowed Patriot Gage, LLC to use a substantial portion of Philmo’s
property rent-free.
c. Coomes used the assets of Philmo to pay expenses related to real estate that
was not owned by Philmo.
d. Coomes sold the assets of Philmo, including seconds (duct tape that fails to
meet the specifications of its customers), on the secondary market and did not
record the sales on Philmo’s books.
Id. at ¶ 31.

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In March of 2011, Coomes presented Plaintiffs with a Stock Purchase Agreement
(“SPA”), drafted by counsel for Philmo, Defendant Scott Crabtree. Mike Boodram and Shelleza
Boodram executed the SPA on March 8, 2011 and March 6, 2011, respectively. However,
Coomes did not sign the SPA on either date. [Second Am. Compl., DN 77, at ¶¶ 35-37]. After
Plaintiffs had signed the SPA, Coomes informed them that because he had previously entered
into a contract with a broker for the sale of Philmo, he could not sign the SPA and convey stock
to Plaintiffs until the end of the contractual period. Further, Coomes explained that he “needed
to execute a Promissory Note in Plaintiffs’ favor so as to avoid paying a commission to his
broker. . . .” and that “it was just a formality, and it did not affect or change their agreement.” Id.
at ¶¶ 39-40. On March 31, 2011, Coomes executed the Promissory Note [DN 1-3], drafted by
Crabtree, which set forth the re-payment of $200,000 plus interest Plaintiffs had previously paid
to Coomes.
Despite issues with closing the sale of Philmo, Boodram continued to comply with the
“parties’ agreement” by winding down his tape conversion business and contributing $215,000
in equipment and inventory to Philmo. [Second Am. Compl., DN 77, at ¶ 48]. Also, “[a]s
compensation for Coomes’ unilateral delay of the closing, Philmo agreed to pay rent for
Plaintiffs’ equipment.” Id. at ¶ 49. This only lasted for two month though. During the entire
process of closing his business and transferring assets to Philmo, Boodram avers that he
repeatedly sought to complete the transaction with Coomes. Id. at ¶¶ 44, 50. “[D]espite Plaintiff
Mike Boodram’s repeated requests, Defendants refused to close on the agreement or convey the
stock.” Id. at ¶ 50.
In addition to problems with closing the deal, issues arose concerning Boodram’s role as
Director of Operations at Philmo. According to Boodram, in June of 2011, Coomes started

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taking steps to prevent him from performing his work at Philmo by denying him access to
Philmo’s business records and excluding him from important meetings. Specifically, Coomes
stopped Boodram from attending a significant meeting with 3M even though Boodram had
helped Coomes prepare for it. In the end, this soured relationship resulted in Boodram receiving
his final paycheck from Philmo in June of 2011.
Soon after being excluded from Philmo, Boodram contacted Coomes in order to resolve
problems with the deal. Boodram claims that Coomes avoided his phone calls, texts, and email.
Finally, in October of 2011, Boodram received a copy of the SPA, which had been executed by
Coomes. Plaintiffs describe the SPA as having particularly unfavorable terms. For example,
although the Letter of Intent originally called for an amortized payment for the remaining 51% of
stock to start in 2015, the SPA required a balloon payment of $1.1 million by August 31, 2012.
[Second Am. Compl., DN 77, at ¶ 70].

In addition to an altered payment schedule, the SPA

provided a stock buy-back provision which allowed Coomes to “unilaterally” determine that
Boodram failed to actively participate in Philmo and to repurchase the stock from Boodram at
half the price it was sold to him. Id. at ¶ 71.
Plaintiffs surmise that Coomes signed and notarized the SPA at some point after April 13,
2011, not on March 31, 2011 as indicated on the document sent to them in October of 2011.
Further, Plaintiffs contend that Coomes was aware that Boodram had closed his company in June
of 2011 and that his creditors were pressuring him to close on the Philmo deal. As a result,
“Coomes and Crabtree conspired to sign and notarize this SPA to limit Coomes’ liability and/or
extract a more favorable settlement from Mike Boodram.” Id. at ¶ 67.
Plaintiffs filed suit on April 27, 2012 against Defendants Coomes and Philmo. [DN1].
On November 20, 2014, Plaintiffs filed their Second Amended Complaint joining Crabtree as a

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defendant. [DN 77]. Since the filing of their suit, Plaintiffs note that Defendants have continued
to misrepresent the date that Coomes signed the SPA in their pleadings. Id. at ¶¶ 82-86.
II. STANDARD OF REVIEW
Upon a motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6),
a court “must construe the complaint in the light most favorable to plaintiffs,” League of United
Latin Am. Citizens v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007) (citation omitted), accepting
all of the plaintiffs' allegations as true. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). Under this
standard, the plaintiffs must provide the grounds for their entitlement to relief, which “requires
more than labels and conclusions, and a formulaic recitation of the elements of a cause of
action.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).
III. ANALYSIS
Defendants Coomes and Crabtree each move to dismiss specific claims alleged against
them pursuant to Fed. R. Civ. P. 12(b)(6).

However, before discussing their grounds for

dismissing based on Rule 12(b)(6), the Court must address Defendant Crabtree’s initial assertion
that Plaintiffs’ claims must be dismissed for lack of jurisdiction based on Fed. R. Civ. P.
12(b)(1). Crabtree notes that Boodram filed for bankruptcy protection in the United States
Bankruptcy Court in the Northern District of Georgia in 2013 and explains that Boodram’s
claims against him are barred due to that filing. Crabtree argues that although Boodram listed
the present action on his schedule of assets, he failed to identify the claims specifically alleged
against him on the schedule. As such, the claims against Crabtree remain with the Boodram’s
bankruptcy estate.
A. Crabtree’s Dismissal of Claims Based on Fed. R. Civ. P. 12(b)(1)
A bankruptcy estate, with some exceptions, comprises of “all legal or equitable interests
of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541. As part of the
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required filings for bankruptcy, a debtor is obligated to provide a schedule of these assets. 11
U.S.C. § 521. Causes of action are included in the “legal and equitable interests of the debtor”
that must be filed in the schedule of assets. In re Cannon, 277 F.3d 838, 853 (6th Cir. 2002).
For causes of action that are included in the bankruptcy estate, “only the bankruptcy trustee has
standing to pursue pre-petition causes of action.” Tyler v. DH Capital Mgmt., Inc., 736 F.3d 455,
461 (6th Cir. 2013) (citing In re Cannon, 277 F.3d at 853). However, property of the estate can
be deemed “abandoned” and returned to the debtor if it is “not otherwise administered at the time
of the closing of a case.” 11 U.S.C.A. § 554(c). But, “[i]t is clear that an asset must be properly
scheduled in order to pass to the debtor through abandonment under 11 U.S.C. § 554.” In re
Cundiff, 227 B.R. 476, 479 (B.A.P. 6th Cir. 1998) (citation omitted).
Plaintiff Boodram acknowledges the affirmative duty to disclose all assets in filing for
bankruptcy, including this present suit. Boodram’s amended schedule of assets, filed on August
28, 2013, contains the following:
Debtor amends Schedule B to list the potential damages from the Civil Suit
Boodnarine Boodram a/k/a Mike Boodram, Et Al. v. Ronald Glenn Coomes, Et.
Al., Civil Action No. 1:12-CV-57-M, filed in United States District Court,
Western District of Kentucky, Bowling Green Division.
In re Boodnarine Mike Boodram, 13-63780-MHM, Doc. No. 12 (Bankr. N.D. Ga. Aug. 28,
2013).2
The parties dispute whether the description provided in Boodram’s amended schedule
actually identifies claims against Crabtree as a potential asset because Plaintiffs did not formally
join Crabtree as a party until the Second Amended Complaint was filed on November 20, 2014.
Therefore, absent being informally told by Boodram, the trustee administering the estate would
not have known about the joinder of Crabtree until 2014 [Mot. to Amend Compl., DN 54], and

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Neither party actually submitted the amended schedule for the Court; however, there appears to be no dispute
concerning the contents of the filings, and thus, the Court will take notice of them.

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the order discharging Boodram’s bankruptcy case was filed in October of 2013.

In re

Boodnarine Mike Boodram, 13-63780-MHM, Doc. No. 16 (Bankr. N.D. Ga. Oct. 7, 2013).
Unfortunately, 11 U.S.C. § 521 offers little guidance as to the level of specificity required in
identifying assets in the schedule. In re Bonner, 330 B.R. 880 (B.A.P. 6th Cir. 2005) (“[T]here
are ‘no bright-line rules for how much itemization and specificity is required [under § 521(1)]’
and that ‘[w]hat is required is reasonable particularization under the circumstances.’” (quoting In
re Mohring, 142 B.R. 389, 395, quoted in In re Kromer, 202 F.3d 268, 2000 WL 32022, at *2
(6th Cir. 2000) (unpublished table decision)).
To support their position that the listing of the suit in the schedule was sufficient to
provide notice to the trustee, Plaintiffs rely on In re Bonner. In Bonner, the bankruptcy court
granted the Chapter 7 trustee’s motion to reopen the debtors’ case to administer a personal injury
claim. In re Bonner, 330 B.R. at *1. Although the debtors had listed “Auto Accident Claim” on
their schedule, the chapter 7 trustee successfully argued to the bankruptcy court that the
description only encompassed a personal property claim, not a personally injury claim. Id. at *4.
Reversing the bankruptcy court, the Bankruptcy Appellate Panel noted that it was not incumbent
on the debtors to identify every potential claim that may arise out of the auto accident, and it was
clear that the debtors did not attempt to hide this claim from the trustee. Id. *4-5. Further, the
Panel’s reversal seemed to be motivated by the fact that 11 U.S.C. § 704 requires trustees to
investigate assets, and in that particular case, the trustee should have been placed on at least
“inquiry notice” of the possibility that the debtors may have a personal injury claim based on the
fact that the debtors had listed “Auto Accident Claim” on the schedule of assets. Id. at *5.
Plaintiffs also cite to Eun Joo Lee v. Forster & Garbus LLP, 926 F. Supp. 2d 482
(E.D.N.Y. 2013). Procedurally, the facts of Eun Joo Lee mirror much of those found here. In

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Eun Joo Lee, the debtor only listed Fair Debt Collection Practices Act (“FDCPA”) claims against
NCOP XI, LLC (“NCOP”) on her schedule of assets. Eun Joo Lee, 926 F. Supp. 2d at 489. The
trustee chose not to administer the claims against NCOP during the bankruptcy case. Id. After
the bankruptcy discharge, Eun Joo Lee3 filed an action against both NCOP and Forster & Garbus
LLP (“Forster”) based on the same claims abandoned by the trustee. As a result, Forster moved
to dismiss plaintiff’s claims on the grounds that she failed to list the claims against them on her
schedule of assets. Id.

Before rendering a decision, the district court succinctly noted the

important interests at stake:
[I]t is sensible to require debtors to provide enough information for the trustee to
be able to determine whether it is in the best interests of the estate to pursue the
claim. If the trustee cannot evaluate the claim, then the estate's creditors may be
deprived of a valuable asset. On the other hand, if the trustee has enough
information to decide that the claim is not worth pursuing and no claim is
brought, the creditors and the courts can be assured that the trustee made a
purposeful decision to abandon the claim.
Id. at 490. The court concluded that even though the schedule only listed claims against NCOP,
it sufficed in providing enough notice to the trustee that there might also be a claim against
Forster. Id. In fact, the court found that the trustee would have discovered with “minimal
investigation” facts to have uncovered FDCPA claims against Forster. Id.
Although Eun Joo Lee is only persuasive authority, it stands for the same proposition as
discussed in Bonner. Namely, the debtor is clearly under an obligation to be forthcoming with a
list of assets on his schedule, but this does not excuse a lack of investigation on the part of the
trustee—a proposition supported by § 704. 11 U.S.C. § 704 (requiring the trustee to “investigate
the financial affairs of the debtor”). In the present action, the Court finds no evidence to suggest
that Boodram attempted to conceal claims against Crabtree by waiting to amend the complaint in
2014.

Therefore, the only question is whether the trustee in Boodram’s case could have

3

Although Eun Joo Lee was a class action, this played no role in the final decision reached by the court.

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discovered potential claims against Crabtree. The Court believes that he could have. Though it
is clear that at the time of Boodram’s bankruptcy filing that this case was at its infancy, Plaintiffs
had already started to detail issues concerning the SPA and the role of “accounting and legal
advisors” in the creation of the document in the First Amended Complaint filed in 2012. [DN
23]. There is no reason that the trustee could not have investigated the matter and uncovered
potential liability for Crabtree.4 Therefore, Court finds that the trustee abandoned all of Plaintiff
Boodram’s claims, and Plaintiffs have standing to assert claims against Defendant Crabtree.
B. Crabtree’s Dismissal of Claims Based on Fed. R. Civ. P. 12(b)(6) [DN 85]
As an alternative ground for dismissal of claims, Defendant Crabtree moves to dismiss
five of the counts alleged against him for failure to state a claim pursuant to Fed. R. Civ. P.
12(b)(6). Specifically, Crabtree argues that the Court must dismiss Plaintiffs’ claims for fraud,
negligent misrepresentation, state and federal securities violations, and aiding and abetting a
breach of the covenant of good faith and fair dealing. Crabtree maintains that Plaintiffs do not
satisfy the heightened pleading standards for the fraud, negligent misrepresentation, and
securities claims. As to the aiding and abetting a breach of the covenant of good faith and fair
dealing, Crabtree asserts that the cause of action does not exist under Kentucky law.
1. Fraud [Count II] and Negligent Misrepresentation [Count VIII]
The elements of fraud in Kentucky are as follows: a) material representation b) which is
false c) known to be false or made recklessly d) made with inducement to be acted upon e) acted
in reliance thereon and f) causing injury. UPS v. Rickert, 996 S.W .2d 464, 468 (Ky. 1999).
Kentucky adopted the tort of negligent misrepresentation in Presnell Const. Managers, Inc. v. EH

4

The Court is not oblivious to the fact that Defendant Crabtree is attempting to convert bankruptcy protections that
are meant for creditors into a shield from liability for himself. The likelihood of the trustee in Boodram’s case
attempting to reopen the proceeding is slim, and even slimmer that he would be successful.

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Const., LLC., 134 S.W.3d 575, 581 (Ky. 2004). The relevant elements of negligent
misrepresentation are as follows:
One who, in the course of his business, profession or employment, or in any other
transaction in which he has a pecuniary interest, supplies false information for the
guidance of others in their business transactions, is subject to liability for
pecuniary loss caused to them by their justifiable reliance upon the information, if
he fails to exercise reasonable care or competence in obtaining or communicating
the information.
Id. at 580 (adopting Restatement (Second) of Torts § 552).
Under the notice pleading standard of Fed. R. Civ. P. 8(a), plaintiff must simply set forth
a short and plain statement of the claim showing that the pleader is entitled to relief. Rule 9(b)
augments the notice requirement of Rule 8(a) in certain cases, requiring that in “all averments of
fraud or mistake, the circumstances constituting fraud or mistake shall be stated with
particularity.” Fed. R. Civ. P. 9(b). For practical purposes of satisfying Rule 9(b), the Sixth
Circuit requires that the pleading “specify 1) what the fraudulent statements were, 2) who made
them, 3) when and where the statements were made, and 4) why the statements were fraudulent.”
Morris Aviation, LLC v. Diamond Aircraft Indus., Inc., 536 F. App'x 558, 562 (6th Cir. 2013)
(citing Republic Bank & Trust Co. v. Bear Stearns & Co., 683 F.3d 239, 247 (6th Cir. 2012)).
The heightened pleading standard for fraud similarly applies to a claim for negligent
misrepresentation under Kentucky law. Id.
Plaintiffs identify two specific instances of alleged fraud by misrepresentation and
negligent misrepresentation within their responsive brief to Crabtree’s Motion to Dismiss. Only
the claim concerning Crabtree’s alleged participation in fraudulently executing and notarizing
the SPA applies in this instance.5 Plaintiffs’ Second Amended Complaint avers that “[f]rom

5

Plaintiffs also discuss Coomes’ alleged misrepresentation concerning the expiration of the broker contract.
However, there is no suggestion that Crabtree misrepresented any information about the broker contract or even had
anything to do with the broker contract.

10 

October 25, 2011 through the summer of 2014 Crabtree . . . repeatedly presented the SPA as
being duly executed by Coomes on March 31, 2011.” [Second Am. Compl., DN 77, at ¶ 79].
This allegation provides the necessary elements to satisfy the heightened pleading standard as it
contains the speaker, the misrepresentation, the approximate time that the statement was made,
and how the statement was fraudulent.
Defendant Crabtree next argues that Plaintiffs fail to plead how Crabtree’s alleged
fraudulent statement concerning the execution of the SPA induced them to act Plaintiffs, i.e., the
reliance element for fraud.6 Under Kentucky law, both negligent misrepresentation and fraud
require Plaintiffs to prove reliance on the false statement and injuries resulting from that reliance.
Rickert, 996 S. W.2d at 468; Presnell, 134 S.W.3d at 580. In response, Plaintiffs consistently
argue that they do not need to provide every fact or detail their whole case in their complaint—
an undeniably true assertion. But Plaintiffs manage to avoid discussing how they could have
relied on Crabtree’s statement concerning the SPA made on October 25, 2011 (or after). To
demonstrate reliance, Plaintiffs would need to show how they changed position based on
Crabtree’s alleged misrepresentation after October of 2011. Rickert, 996 S.W.2d at 469 (“[A]
claimant may establish detrimental reliance in a fraud action when he acts or fails to act due to
fraudulent misrepresentations.”). However, by the time Crabtree made any statement concerning
the SPA, Plaintiffs had already acted by signing the SPA and winding down their other
businesses.

Plaintiff’s claim is implausible for this very fact, and therefore, Plaintiffs are

foreclosed from pursuing this theory of fraud against Crabtree.

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Crabtree, in part, attempts to refute this allegation by introducing deposition testimony obtained in prior discovery.
Under Fed. R. Civ. P. 12(d), the Court is permitted to convert a motion to dismiss to a motion for summary
judgment and consider “matters outside the pleadings,” but “[a]ll parties must be given a reasonable opportunity to
present all the material that is pertinent to the motion.” Fed. R. Civ. P. 12. Crabtree did not discuss the deposition
until his reply brief, and thus, Plaintiffs lacked the opportunity to discuss this evidence. As a result, the Court will
only look to the Plaintiffs’ Second Amended Complaint for any facts necessary for analyzing this claim.

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Although much of Defendant Crabtree’s initial argument concerning the dismissal of the
fraud and negligent misrepresentation claims revolves around alleged misrepresentations, he also
seeks to preclude Plaintiffs from pursuing a theory of fraud by omission.

The elements of

fraudulent omission slightly differ from those of fraudulent misrepresentation as the former only
requires plaintiff to prove: “(a) a duty to disclose a material fact; (b) a failure to disclose a
material fact; and (c) that the failure to disclose a material fact induced the plaintiff to act and, as
a consequence, (d) to suffer actual damages.” Waldridge v. Homeservices of Kentucky, Inc., 384
S.W.3d 165, 171 (Ky. Ct. App. 2011) (citing Rivermont Inn, Inc. v. Bass Hotels & Resorts, Inc.,
113 S.W.3d 636, 641 (Ky. Ct. App. 2003)).
As indicated by the Second Amended Complaint, Plaintiffs believe Crabtree omitted the
fact that Coomes had no intention of actually selling Philmo even though he signed the Letter of
Intent and the SPA. Crabtree responds by noting that even if he was aware of this fact, he had no
duty to disclose this information. The Court is hesitant to address this particular issue as
Crabtree waited until his reply brief to really raise this basis for dismissal. Therefore, the Court
will provide Plaintiffs an opportunity to respond to this issue before the Court addresses the
merits.
For the reasons stated above, Plaintiffs are prohibited from pursuing a theory of
fraudulent misrepresentation as to Defendant Crabtree. However, the Court is unwilling to fully
dismiss the fraud claim against Defendant Crabtree until Plaintiffs are given a fair chance to
respond to Crabtree’s argument concerning the duty to disclose. Plaintiffs have 20 days to file a
sur-reply. Finally, Plaintiffs’ negligent misrepresentation claim is dismissed in full because the
claim is identical to a fraudulent misrepresentation claim.

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2. Violations of Section 10(b) of the Securities Exchange Act [Count XIII] and Section
292.320 of the Kentucky Blue Sky Law [Count XIV]
To assert a claim under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.
§ 78j(b), “a plaintiff must allege, in connection with the purchase or sale of securities, the
misstatement or omission of a material fact, made with scienter, upon which the plaintiff
justifiably relied and which proximately caused the plaintiff's injury.”

Ashland, Inc. v.

Oppenheimer & Co., 648 F.3d 461, 468 (6th Cir. 2011) (quoting Frank v. Dana Corp., 547 F.3d
564, 569 (6th Cir. 2008)) (internal quotation marks omitted). Further, as mandated by the
Private Securities Litigation Reform Act of 1995 (“PSLRA”), a plaintiff must plead scienter in a
more exacting nature than what is even required under Fed. R. Civ. P. 9(b). Ricker v. Zoo
Entm't, Inc., 534 F. App'x 495, 499 (6th Cir. 2013) (citation omitted). This means that a plaintiff
must plead a “strong inference” of scienter, which “must be more than merely plausible or
reasonable it must be cogent and at least as compelling as any opposing inference of
nonfraudulent intent.” Id. (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,
313, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007)) (internal quotations omitted). The pleading
requirements for violation of KRS 292.320 mirrors that Section 10(b) as the two statutes are
“virtually identical.” Brown v. Earthboard Sports USA, Inc., 481 F.3d 901, 917 (6th Cir. 2007).
In analyzing a private securities claim under Section 10(b), the Court must follow the
three-step roadmap outlined by Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127
S. Ct. 2499, 168 L. Ed. 2d 179 (2007). First, “courts must, 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, 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, in particular, documents incorporated into the complaint by reference, and
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matters of which a court may take judicial notice.” Id. (citation omitted). At this stage, “the
court's job is not to scrutinize each allegation in isolation but to assess all the allegations
holistically.” Id. at 325. Finally, the strength of the inference must be gauged by considering
“plausible, nonculpable explanations for the defendant's conduct, as well as inferences favoring
the plaintiff.” Id. at 310.
Turning to the present matter, Plaintiffs claim that Crabtree prepared documents for the
sale of Philmo with the knowledge that Coomes had no intention of going through with the deal.
Plaintiffs fail to articulate any misrepresentation made by Crabtree within their Second Amended
Complaint. As Plaintiffs’ securities claims solely involve an omission, the question is whether
the omission of this fact,7 that Coomes had no intention of completing the sale of stock,
sufficiently presents a strong inference of scienter. Here, Plaintiffs do not allege any action on
Crabtree’s part that is probative of scienter. In fact, Plaintiffs’ responsive brief is devoid of any
explanation as to how their Second Amended Complaint provides the necessary strong inference
to demonstrate scienter. The mere fact that Crabtree prepared the documents is not compelling
enough to overcome the much more reasonable rival explanation that Crabtree had no knowledge
of Coomes’ alleged plan.

Therefore, Plaintiffs’ claims falling under Section 10(b) of the

Securities Exchange Act and KRS 292.320 are dismissed.
3. Aiding and Abetting a Breach of the Covenant of Good Faith and Fair Dealing [Count
IV]
Crabtree asserts that Plaintiffs cannot maintain a claim for aiding and abetting a breach of
the covenant of good faith and fair dealing because that claim does not exist under Kentucky
law. Plaintiffs argue that Kentucky law recognized aiding and abetting claims for contract

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Crabtree briefly mentions that he believes that this omission constitutes “soft information,” which “includes
matters of opinion and predictions.” Indiana State Dist. Council of Laborers & HOD Carriers Pension & Welfare
Fund v. Omnicare, Inc., 719 F.3d 498, 504 (6th Cir. 2013). This argument does not go far as it is objectively
verifiable whether or not Coomes actually intended to sell Philmo to Plaintiffs. 

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disputes in Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476 (Ky. 1991). Yet, as
pointed out by Crabtree, Steelvest involves a claim based on aiding and abetting a breach of a
fiduciary duty,8 not a breach of good faith and fair dealing. Steelvest, 807 S.W.2d at 485 (“As to
the claim of aiding and abetting, it has been held that a person who knowingly joins with or aids
and abets a fiduciary in an enterprise constituting a breach of the fiduciary relationship becomes
jointly and severally liable with the fiduciary for any profits that may accrue.”). Despite the lack
of case law to support their position, Plaintiffs posit that the Court can easily use the analysis for
aiding and abetting of a breach of fiduciary duty for examining the merits of a claim for aiding
and abetting a breach of the covenant of good faith and fair dealing. However, the Court
believes this issue may be resolved by scrutinizing the underlying claim, a breach of the
covenant of good faith and fair dealing.
For Plaintiffs’ claim of aiding and abetting a breach of the covenant of good faith and fair
dealing to survive, the underlying claim must actually constitute “tortious conduct.” Bariteau v.
PNC Fin. Servs. Grp., Inc., 285 F. App'x 218, 224 (6th Cir. 2008) (noting that Kentucky law
follows Restatement (Second) of Torts § 876 in permitting a claim for aiding and abetting
tortious conduct). The problem for Plaintiffs is that federal courts from both the Eastern and
Western District of Kentucky have predicted that Kentucky law does not have a cause of action
for the breach of the covenant of good faith and fair dealing outside the context of insurance
claims.

Peacock v. Damon Corp., 458 F. Supp. 2d 411, 419 (W.D. Ky. 2006) (citing

Advancmed, LLC v. Pitney Bowes Credit Corp., No. 05-464, 2006 WL 1007467 at *3 (E.D. Ky.
Apr. 17, 20060); Ennes v. H & R Block Eastern Tax Service, 2002 WL 226345 at *4 (W.D. Ky.

8

It should be noted that Plaintiffs have alleged a claim of aiding and abetting a breach of fiduciary duty against
Crabtree in Count XVIII of their Second Amended Complaint. [DN 77, at 29].

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Jan. 11, 2002)).9 Recently, the Kentucky Court of Appeals concluded the same as the federal
courts. J.S. v. Berla, 2015 WL 507414, at *4 (Ky. Ct. App. Feb. 6, 2015). Therefore, because
the underlying claim for breach of the covenant of good faith and fair dealing does not exist in
this context, a claim for aiding and abetting cannot lie.
Plaintiffs cite to two instances in which Kentucky courts reviewed a claim for breach of
good faith and fair dealing and disposed of the claim on factual grounds. First, in Farmers Bank
& Trust Co. of Georgetown, Kentucky v. Willmott Hardwoods, Inc., 171 S.W.3d 4, 11 (Ky.
2005), the question was whether the appellate court erred in reversing summary judgment as to
the claim of breach of the covenant of good faith and fair dealing. However, there is no
indication in either the opinion from the Kentucky Supreme Court or the Kentucky Court of
Appeals that the defendant ever raised the question as to whether Kentucky law allows for that
cause of action. Second, Plaintiff relies on Stelluti Kerr, LLC v. Bastian Material Handling,
LLC, 2012 WL 5305730, at *1 (Ky. Ct. App. Oct. 26, 2012) in which the court affirmed the
lower court’s dismissal of a claim for the breach of good faith and fair dealing. While it does
appear that both courts reviewed the facts of the case in coming to that decision, there, as with
Plaintiff’s previous citation, is no reason for the Court to believe that either court questioned
whether Kentucky law provides for such a claim. For those reasons, the Court is unwilling to
infer from either case that Kentucky adopted a claim for the breach of good faith and fair dealing

9

In Plaintiffs’ responsive motion to Coomes’ Motion to Dismiss, they identify one case in the Eastern District of
Kentucky in which the court declined to dismiss the plaintiff’s claim for a breach of duty of good faith and fair
dealing. Advancmed, LLC v. Pitney Bowes Credit Corp., 2006 WL 1007467, at *3 (E.D. Ky. Apr. 17, 2006).
While the reasoning behind this decision is not entirely clear, it is clear that the comment in the Uniform
Commercial Code that the court relied on specifically stated that “[t]his section does not support an independent
cause of action for failure to perform or enforce in good faith.” Advancmed, 2006 WL 1007467, at *3 (quoting
U.C.C. § 1-304).

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outside the context of insurance law. Therefore, Plaintiffs’ claim for aiding and abetting a
breach of the covenant of good faith and fair dealing is dismissed.
C. Coomes’ Dismissal of Claims Based on Fed. R. Civ. P. 12(b)(6) [DN 84]
Defendant Coomes seeks to dismiss two of the claims against him, including negligent
misrepresentation (Count VIII) and the breach of the covenant of good faith and fair dealing
(Count III). The Court has already determined that there is no independent cause of action for a
breach of the covenant of good faith and fair dealing under Kentucky law, and therefore, that
claim is dismissed against Coomes. As to negligent misrepresentation, Coomes contends that
Plaintiffs fail to meet the pleading standard required under Fed. R. Civ. P. 9(b).
Unlike the negligent misrepresentation claim alleged against Crabtree, Plaintiffs’ Second
Amended Complaint contains multiple instances of alleged misrepresentations on the part of
Coomes. Based on the Second Amended Complaint, it appears as though Plaintiffs essentially
put forward three theories of recovery: (1) Coomes misrepresented the fact that he had no
intention to sell Philmo; (2) Coomes misrepresented information concerning the contract that he
had with the broker; and (3) Coomes continues to misrepresent the fact that he signed the SPA
on March 31, 2011. The last theory has already been discussed in the context of Crabtree, and it
is clear that Plaintiffs cannot establish reliance. As such, this leaves only the first two theories.
Defendant Coomes’ main contention in dismissing Plaintiff’s theories for negligent
misrepresentation is that Plaintiffs fail to state with particularity the exact statements that were
made. As to the sale of Philmo, it seems fairly clear that Coomes represented to Plaintiffs that he
intended to sell the company to them; the Letter of Intent along with the SPA make this fact very
clear. Further, Plaintiff avers that “[i]n reliance on Coomes promise to sell Philmo, Plaintiffs
closed a separate tape converting business in Gainesville, Georgia.” [Second Am. Compl., DN

17 

77, at ¶ 17]. These allegations are enough to satisfy the specificity required for a negligent
misrepresentation claim as they establish the who, what, when, and why of the alleged
misrepresentation.
Next, Plaintiffs’ Second Amended Complaint quite extensively details what Coomes told
Plaintiffs concerning the purpose of the Promissory Note. Specifically, Plaintiffs allege that
Coomes informed them that he needed to execute the Promissory Note in order to avoid the
broker’s commission. Additionally, Plaintiffs contend that Coomes misrepresented when the
contract with the broker would actually end. The Court finds that Plaintiffs supplied enough
facts in their Second Amended Complaint to meet the heightened pleading standard as to this
theory as well.

Therefore, Coomes’ motion to dismiss Plaintiff’s claim for negligent

misrepresentation against him is denied.
IV. CONCLUSION
For the foregoing reasons, Defendant Scott Crabtree’s Motion to Dismiss [DN 85] is
GRANTED in part and DENIED in part. It is GRANTED as to dismissal of Counts IV, VIII,
XIII, and XIV. It is DENIED as to all other claims.
IT IS FURTHER ORDERED that Plaintiffs shall file a sur-reply no later than 20 days
from the entry of this order regarding their claim for fraud by omission.
IT IS FURTHER ORDERED that Defendant Ronald Coomes’ Motion to Dismiss [DN
84] is GRANTED in part and DENIED in part. It is GRANTED as to Count III and
DENIED as to Count VIII.

cc: counsel of record
March 17, 2015

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