Pixler v. Huff et al
Filing
68
MEMORANDUM OPINION AND ORDER by Chief Judge Joseph H. McKinley, Jr. on 7/30/2012 granting in part and denying in part 59 60 Motions to Dismiss. The Huff Defendants' Motion to Dismiss is DENIED as to Plaintiff's breach of fiduciary duty claim against Defendants A. Huff, S. Huff, Brown, and Russo, and Plaintiff's fraud and breach of contract claims against Defendants A. Huff, S. Huff, and Brown. It is GRANTED as to all other claims. Defendant Sly's Motion to Dismiss is DENIED as to Plaintiff's breach of fiduciary duty claim and is GRANTED as to all other claims. cc: Counsel (CDF)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CIVIL ACTION NO. 3:11-CV-00207-JHM
ROXANN PIXLER
PLAINTIFF
V.
ANTHONY HUFF, et. al.
DEFENDANTS
MEMORANDUM OPINION AND ORDER
This matter is before the Court on Defendants Anthony Huff, Sheri Huff, Michele Brown,
Anthony Russo, River Falls Investments, LLC, Oxygen Unlimited, LLC, River Falls Equities, LLC,
SDH Realty, Inc., W.A. Huff, LLC, The Huff Grandchildren Trust, and Huff Farm (Horsebranch)
Inc.’s (collectively “the Huff Defendants”) Motion to Dismiss [DN 59], and Defendant Brian N.
Sly’s Motion to Dismiss [DN 60]. Fully briefed, these matters are ripe for decision.
I. 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 plaintiff,” League of United Latin
Am. Citizens v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007) (citation omitted), “accept all well-pled
factual allegations as true[,]” id., and determine whether the “complaint states a plausible claim for
relief[,]” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1950 (2009). Under this standard, the plaintiff must
provide the grounds for its entitlement to relief, which “requires more than labels and conclusions,
and a formulaic recitation of the elements of a cause of action.” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555 (2007). A plaintiff satisfies this standard only when it “pleads factual content that
allows the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Iqbal, 129 S.Ct. at 1949. A complaint falls short if it pleads facts “merely consistent with
a defendant’s liability” or if the alleged facts do not “permit the court to infer more than the mere
possibility of misconduct.” Id. at 1949, 1950. Instead, the allegations must “‘show[ ] that the
pleader is entitled to relief.’” Id. at 1950 (quoting Fed. R. Civ. P. 8(a)(2)).
II. BACKGROUND
This case centers around the creation and operation of Midwest Merger Management, LLC
(“MMM”). In 2001, Plaintiff Roxann Pixler’s husband, Danny Pixler, and Anthony Huff (“A.
Huff”) formed MMM. Pixler and A. Huff placed their shares in the company in their respective
wives’ names, making Plaintiff and Sheri Huff (“S. Huff”) the only members of the LLC, with each
holding a 50% interest. On July 20, 2001, MMM filed its Articles of Organization, which listed two
members, Plaintiff and S. Huff. Simultaneously, Plaintiff executed a Management Agreement,
naming Pixler and A. Huff the managers of MMM. Throughout the time that Plaintiff maintained
an interest in MMM, it appears that the company was run entirely by Pixler and A. Huff, and that
Plaintiff had no involvement with the operations of the company. In its 2002 annual report filed
with the Kentucky Secretary of State, MMM listed an additional member and/or manager, Michele
Brown. In 2006, Anthony Russo became a manager of MMM, and at some point, Brian Sly also
served as either a manager and/or employee of MMM.
MMM was established as a “risk manager.” In this line of work, MMM would collect
premiums and fees from clients and would in turn pay premiums to insurance carriers that provided
workers’ compensation insurance coverage. In 2001, MMM acquired Certified Services, Inc., which
itself acquired several subsidiaries. A. Huff and Pixler ran all of these companies, along with several
other Kentucky LLCs, using the same working capital and regularly commingling funds. These
entities were used to funnel money from MMM for the personal benefit of A. Huff, S. Huff, Pixler,
2
Brown, Russo, Sly and others. This was done without Plaintiff’s knowledge or consent.
On May 12, 2005, the scheme began to unravel as Certified filed for Chapter 11 bankruptcy.
In 2006, Pixler and A. Huff told Plaintiff that MMM had no value, but that A. Huff would still buyout Plaintiff’s share in the company. Plaintiff then accepted $170,000 from A. Huff for her interest
in MMM. At this point, and potentially even earlier, MMM, Certified, Huff, and many of the other
individual Defendants were engulfed in litigation. See, e.g., S.E.C. v. Huff, 758 F. Supp. 2d 1288
(S.D. Fl. 2010). In 2007, after she had sold her interest, Plaintiff requested a copy of MMM’s
financial records from Brown, but was told that they were currently unavailable because they were
being audited. In 2008, Plaintiff obtained a copy of MMM’s financials and discovered a litany of
accounting discrepancies demonstrating how the Defendants had used MMM to misappropriate its
assets for their own personal gain. While many of the Defendants had received assets, funds or
benefits from MMM, Plaintiff only received one distribution from the LLC, for approximately
$60,000 in 2004. This distribution was used entirely to pay the tax liability associated with MMM.
Notwithstanding the fact that Plaintiff was a member of MMM in name only, contributed no
capital or service to the LLC to obtain her interest, and was eventually paid $170,000 for that
interest, Plaintiff now contends that the Defendants defrauded her out of her contractual right to
share in the profits and financial gain of MMM.1 In an effort to rectify this alleged wrong, Plaintiff
1
The Court notes that in separate litigation, where Plaintiff was a relief defendant, the
Securities Exchange Commission requested that Plaintiff be disgorged of any illegally obtained
profits received from MMM. The Southern District of Florida found that because Roxann Pixler
only received one $60,000 distribution from MMM and she “paid the money she received from
Midwest to the federal government in taxes without enjoying a corresponding income or other
benefit from Midwest, the Court concludes that disgorgement is not appropriate.” Huff, 758 F.
Supp. 2d at 1362. To the extent Plaintiff now claims that she was entitled to additional
distributions, the Court is unsure that she would be entitled to keep any award representing lost
profits or distributions from MMM. However, as this is only a motion to dismiss, the Court
3
filed her original Complaint alleging seven claims against fourteen defendants. (See Compl. [DN
1].) Following the filing of Defendant Sly’s first motion to dismiss, Plaintiff amended her
Complaint as a matter of course under Rule 15(a)(1)(B). (See First Am. Compl. [DN 28].)
Thereafter, the Court issued a Memorandum, Opinion and Order dated November 17, 2011 [DN 50].
In that Opinion, the Court dismissed, without prejudice, all claims against Defendants Sly, Thomas
Bean, and Huff Farm (Horsebranch) Inc.; granted the Huff Defendants’ motion for a more definite
statement; and granted Plaintiff leave to amend, once more, to cure the defects in her pleadings. On
December 17, 2011, Plaintiff filed her Second Amended Complaint. (See Sec. Am. Compl. [DN
52].) The Second Amended Complaint not only attempts to salvage the claims contained in the First
Amended Complaint, but it also names twenty-one (21) new defendants and alleges four new claims.
Defendant Sly and the Huff Defendants have now moved to dismiss the claims against them
contained in Plaintiff’s Second Amended Complaint.
III. DISCUSSION
A. Standing
The Huff Defendants first challenge Plaintiff’s standing to bring all ten claims asserted in
the Second Amended Complaint in her individual capacity. The Huff Defendants contend that nine
of Plaintiff’s ten claims are derivative claims that must be brought on behalf of MMM so that all
MMM creditors and stakeholders may benefit from any recovery. In support of this theory, the Huff
Defendants contend that the Court should apply the general rule regarding Kentucky corporations
that a shareholder may only bring a direct or individual suit where he can show a violation of a duty
owed directly to him. See Watkins v. Stock Yards Bank & Trust Co., ---S.W.3d---, 2012 WL
reserves this issue for another day.
4
2470692, at *5 (Ky. Ct. App. June 29, 2012). Plaintiff contends that the Huff Defendants have used
the wrong standard because members of an LLC are more like partners in a partnership than
shareholders in a corporation. However, Plaintiff does not proffer a different or alternative test to
determine standing in the LLC context.
Neither the Court’s research nor the parties’ briefs have uncovered Kentucky case law
addressing the determination of whether an action is direct or derivative in an LLC context. Since
the Kentucky Supreme Court has not addressed the issue, this Court must predict how the Kentucky
Supreme Court would resolve it. Stanek v. Greco, 323 F.3d 476, 478 (6th Cir. 2003). As limited
liability corporations are relatively recent creatures of statute in the state of Kentucky, there is little
case law addressing their governance. Patmon v. Hobbs, 280 S.W.3d 589, 593 (Ky. Ct. App. 2009).
When faced with establishing matters of first impression regarding LLCs, the court in Patmon noted
that “[a] limited liability company is a hybrid business entity having attributes of both a corporation
and a partnership.” Id. The court then applied both partnership and corporation principles,
specifically adopting the use of the corporate opportunity doctrine, to determine whether members
in an LLC owe fiduciary duties to the LLC and each other. See id. at 595–96. Accordingly, the
Court finds that given LLCs’ hybrid nature, it may be appropriate to apply the law of corporations
or partnerships in determining whether an action is direct or derivative.
In the context of corporations, the general rule is “‘that a shareholder of a corporation does
not have a personal or individual right of action for damages based solely on an injury to the
corporation.’” Watkins, ---S.W.3d---, 2012 WL 2470692, at *5 (quoting 2815 Grand Realty Corp.
v. Goose Creek Energy, Inc., 656 F. Supp. 2d 707, 716 (E.D. Ky. 2009)).
“There is, however, a well-recognized exception to this rule . . . . “[W]here the
shareholder suffers an injury separate and distinct from that suffered by other
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shareholders,” or the corporation as an entity, the shareholder may maintain an
individual action in his own right. A depreciation or diminution in the value of a
shareholder’s corporate stock is generally not recognized, however, as the type of
direct, personal injury which is necessary to sustain a direct cause of action. The
reasoning behind this rule is that a diminution in the value of corporate stock
resulting from some depletion of or injury to corporate assets is a direct injury only
to the corporation; it is merely an indirect or incidental injury to an individual
shareholder.”
Id. (quoting Goose Creek, 656 F. Supp. 2d at 715–16) (citations omitted). While derivative actions
are also available in the partnership context, see K.R.S. § 362.511, there is an absence of case law
addressing when a partner may bring a direct suit or when he must bring a derivative suit. As the
only articulable test for this determination is the one used in the corporations context, the Court finds
that Kentucky courts are likely to apply the test outlined in Watkins to claims made in the LLC
context.
Therefore, Plaintiff may maintain her claims against the Defendants only where she has
suffered an injury that is separate and distinct from that which would be suffered by other members
or the LLC as an entity. The Court finds that Plaintiff’s claims of fraud (Count I), breach of
fiduciary duty (Count VI), breach of contract (Count VII), and promissory estoppel (Count IX) each
allege an injury by Plaintiff that is separate and distinct from any injury suffered by MMM or the
other members. Thus, these claims are direct claims that may be brought by Plaintiff in her
individual capacity.
However, Plaintiff’s claims of fraudulent conveyance (Count II), civil conspiracy (Count III),
conversion (Count IV), negligence (Count V), constructive trust (Count VIII), and gross negligence
(Count X) are derivative and may only be brought by MMM or on MMM’s behalf. The crux of
these six claims is that MMM’s assets and funds were misappropriated by the various Defendants,
depriving Plaintiff of her contractual percentage of MMM’s business profits. These claims are
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actually asserting an injury to MMM, the diminution/theft/misappropriation of its assets, which in
turn resulted in an injury to Plaintiff, the deprivation of Plaintiff’s contractual share of the profits
from MMM. In this chain, Plaintiff’s injury is only an incidental one that runs from her status as
a member of the LLC, not from the Defendants’ tortious actions against her individually. Moreover,
these injuries would be felt by all members of the LLC, not just Plaintiff. The claim that Plaintiff
was damaged by the misappropriation of MMM’s assets is similar to the “diminution in the value
of corporate stock resulting from some depletion of or injury to corporate assets[,]” which Kentucky
courts have found does not permit a direct cause of action. Accordingly, under the test articulated
in Watkins, the Court finds that these claims are derivative.
The Huff Defendants contend that these derivative claims must be dismissed because they
do not satisfy the pleading requirements of Fed. R. Civ. P. 23.1. Under Rule 23.1, when “one or
more . . . members of a corporation or an unincorporated association bring a derivative action[,]”
the plaintiff must allege that she fairly and adequately represents the interests of similarly situated
members of the association. Furthermore,
The complaint must be verified and must:
(1) allege that the plaintiff was a shareholder or member at the time of the transaction
complained of, or that the plaintiff’s share or membership later devolved on it by
operation of law;
(2) allege that the action is not a collusive one to confer jurisdiction that the court
would otherwise lack; and
(3) state with particularity:
(A) any effort by the plaintiff to obtain the desired action from the directors
or comparable authority and, if necessary, from the shareholders or members;
and
(B) the reasons for not obtaining the action or not making the effort.
Fed. R. Civ. P. 23.1(b). Plaintiff’s Second Amended Complaint fails Rule 23.1 on several grounds,
including the fact that it is not verified. The Court also has concerns regarding whether Plaintiff was
7
a member of MMM at the time of each transaction about which she complains.2 As Plaintiff’s
fraudulent conveyance, civil conspiracy, conversion, negligence, constructive trust, and gross
negligence claims are derivative, belonging to MMM, Plaintiff lacks standing to assert them in her
individual capacity. Moreover, Plaintiff has failed to plead these derivative claims in accordance
with Rule 23.1. Therefore, the Court finds that they must be dismissed.
B. Statute of Limitations
The Huff Defendants and Defendant Sly each contend that Plaintiff’s Second Amended
Complaint should be dismissed for the failure to plead facts avoiding a time bar. The Sixth Circuit
has found that “[s]ince Rule 9(f) makes allegations of time material, . . . the defense of the statute
[of limitations] may be raised on a motion to dismiss under Rule 12(b)(6) when it is apparent from
the face of the complaint that the time limit for bringing the claim has passed.” Hoover v. Langston
Equip. Assocs., Inc., 958 F.2d 742, 744 (6th Cir. 1992) (quoting 5 Wright and Miller, Federal
Practice and Procedure, § 1357, pp. 350–54 (West 1990)). Defendants argue that Plaintiff was
“bought out” in 2006, thus her claims accrued no later than 2006. They further argue that because
she filed this action in 2011, many of her claims appear to be time barred.
Plaintiff contends that she has pled sufficient facts to demonstrate “fraudulent concealment,”
which tolls the statute of limitations. “The Sixth Circuit has adopted the view, at least in cases
where the face of the complaint discloses a failure to file within the time allowed, that the plaintiff
may come forward with allegations explaining why the statute of limitations should be tolled.” Id.
at 744. One manner in which a plaintiff may do so, is by asserting “fraudulent concealment.” This
2
These concerns are based on the fact that Plaintiff has based her claims on actions that
occurred in 2007 and 2008, (see id. at ¶¶ 67-71), but she has admitted that she sold her interest in
MMM in 2006, (Sec. Am. Compl. ¶ 64).
8
requires the plaintiff to plead three elements: “(1) wrongful concealment of their actions by the
defendants; (2) failure of the plaintiff to discover the operative facts that are the basis of his cause
of action within the limitations period; and (3) plaintiff’s due diligence until discovery of the facts.”
Dayco Corp. v. Goodyear Tire and Rubber Co., 523 F.2d 389, 394 (6th Cir. 1975). Plaintiff asserts
that she has pled these necessary elements by pleading that the Defendants concealed their actions
through deception and lies, that she tried to retrieve MMM’s accounting books but was denied
access to the books, and that she finally received a copy of MMM’s books in 2008. Thus, Plaintiff
argues that her cause of action did not accrue until 2008 when she was able to investigate MMM’s
books and discover the massive fraud perpetrated by Defendants.
Defendants counter by claiming that Plaintiff was deposed regarding fraudulent activities
involving MMM as early as 2004, and should have been on notice at that time to investigate any
potential claims she might possess regarding the operation of MMM. While this may ultimately
prove to be true, at this stage of the proceeding, the Court is bound to accept each of Plaintiff’s wellpled factual allegations as true. Accordingly, the Court finds that Plaintiff has pled sufficient facts
to demonstrate fraudulent concealment, which tolled the running of the statute of limitations on each
of her claims until approximately 2008. As the remaining four claims are subject to at least a five
year limitations period, the Court finds that the Plaintiff’s Second Amended Complaint has pled
sufficient facts to avoid a time bar at this stage of the proceedings.
C. Brian Sly
Defendant Sly has challenged Plaintiff’s Complaint on a number of grounds. Defendant Sly
has moved for dismissal under Fed. R. Civ. P. 12(b)(2) for lack of personal jurisdiction, under Fed.
R. Civ. P. 9(b) for failure to plead fraud with particularity, and under Fed. R. Civ. P. 12(b)(6) for
9
failure to state a claim upon which relief can be granted. Of Plaintiff’s four remaining claims, only
two of them have been alleged against Defendant Sly, fraud (Count I) and breach of fiduciary duty
(Count VI). Therefore, the Court will only address Defendant Sly’s arguments as to those claims.
1. Lack of Personal Jurisdiction
In a diversity case, a federal court determines whether personal jurisdiction exists over a nonresident defendant by applying the law of the state in which it sits. Third Nat’l Bank v. WEDGE
Group Inc., 882 F.2d 1087, 1089 (6th Cir. 1989). The Court applies a two-step inquiry to determine
whether it may exercise personal jurisdiction over a non-resident defendant: “(1) whether the law
of the state in which the district court sits authorizes jurisdiction, and (2) whether the exercise of
jurisdiction comports with the Due Process Clause.” Brunner v. Hampson, 441 F.3d 457, 463 (6th
Cir. 2006).
If the court determines the jurisdictional issue on written submissions only, the plaintiff
“need only make a prima facie showing of jurisdiction.” Compuserve, Inc. v. Patterson, 89 F.3d
1257, 1262 (6th Cir. 1996). When making such a determination without an evidentiary hearing,
“the court must consider the pleadings and affidavits in a light most favorable to the plaintiff.” Id.
Furthermore, the court must “not consider facts proffered by the defendant that conflict with those
offered by the plaintiff.” Neogen Corp. v. Neo Gen Screening, Inc., 282 F.3d 883, 887 (6th Cir.
2002).
Looking first to Kentucky’s long-arm statute, the Kentucky Supreme Court has found the
statute requires a two-prong showing before a court can exercise personal jurisdiction over a nonresident. Caesars Riverboat Casino, LLC v. Beach, 336 S.W.3d 51, 57 (Ky. 2011). First, the court
must find that a non-resident’s conduct or activities fall within one of nine enumerated provisions
10
in K.R.S. § 454.210. Only three of those provisions are applicable to the facts underlying the
present motion against Defendant Sly; K.R.S. § 454.210(2)(a)(1), (3), and (4).3 If this first prong
is satisfied then the second prong requires the Court to determine if the plaintiff’s claim arises from
the defendant’s actions. See K.R.S. § 454.210(2)(b) (“When jurisdiction over a person is based
solely upon this section, only a claim arising from acts enumerated in this section may be asserted
against him.”) Accordingly, “even when the defendant’s conduct and activities fall within one of
the enumerated categories, the plaintiff’s claim still must ‘arise’ from that conduct or activity before
long-arm jurisdiction exists.” Caesars, 336 S.W.3d at 56. This requires that there be “a reasonable
and direct nexus between the wrongful acts alleged in the complaint and the statutory predicate for
long-arm jurisdiction[.]” Id. at 59. This analysis should be undertaken on a case by case basis,
“giving the benefit of the doubt in favor of jurisdiction.” Id.
3
The long-arm statute states in pertinent part that
(2)(a) A court may exercise personal jurisdiction over a person who acts directly
or by an agent, as to a claim arising from the person's:
1. Transacting any business in this Commonwealth;
...
3. Causing tortious injury by an act or omission in this
Commonwealth;
4. Causing tortious injury in this Commonwealth by an act or
omission outside this Commonwealth if he regularly does or
solicits business, or engages in any other persistent course of
conduct, or derives substantial revenue from goods used or
consumed or services rendered in this Commonwealth, provided
that the tortious injury occurring in this Commonwealth arises out
of the doing or soliciting of business or a persistent course of
conduct or derivation of substantial revenue within the
Commonwealth[.]
K.R.S. § 454.210(2)(a).
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Plaintiff contends that she has alleged sufficient facts to demonstrate that Defendant Sly
transacted business in Kentucky under K.R.S. § 454.210(2)(a)(1). Considering the pleadings in the
light most favorable to Plaintiff, the Court agrees. Plaintiff has alleged that Defendant Sly loaned
MMM approximately $3.9 million dollars and that he owned and sold an equity interest in MMM
to A. Huff for approximately $15 million dollars. The Court finds that these actions demonstrate
that Defendant Sly transacted business in the Commonwealth, and that there is “a reasonable and
direct nexus” between these transactions, including the ownership and sale of an equity interest in
MMM, and Plaintiff’s claims of fraud and breach of fiduciary duty.
Furthermore, the exercise of personal jurisdiction over Defendant Sly conforms with due
process. “The relevant inquiry is whether the facts of the case demonstrate that the nonresident
defendant possesses such minimum contacts with the forum state that the exercise of jurisdiction
would comport with ‘traditional notions of fair play and substantial justice.’” Theunissen, 935 F.2d
1454, 1459 (6th Cir. 1991) (quoting Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)). The
Sixth Circuit has identified three criteria for determining whether specific in personam jurisdiction
may be exercised.
First, the defendant must purposefully avail himself of the privilege of acting in the
forum state or causing a consequence in the forum state. Second, the cause of action
must arise from the defendant’s activities there. Finally, the acts of the defendant or
consequences caused by the defendant must have a substantial enough connection
with the forum state to make the exercise of jurisdiction over the defendant
reasonable.
Southern Mach. Co. v. Mohasco Indus., Inc., 401 F.2d 374, 381 (6th Cir. 1968).
Taking all reasonable inferences in favor of Plaintiff, the pleadings sufficiently allege that
Defendant Sly purposefully availed himself of the privilege of acting in the Commonwealth by not
only loaning MMM $3.9 million dollars, but also by purchasing an equity interest in MMM and then
12
selling it for approximately $15 million dollars. These are not random, fortuitous or attenuated
contacts, but are instead purposefully direct and deliberate actions on behalf of Defendant Sly that
created continuing obligations between himself and the Commonwealth. The Court has already
found that the Plaintiff’s claims “arise” from these actions, thus satisfying the second Mohasco
prong. As for the final prong, the Court finds that infusing nearly $4 million dollars into the
Commonwealth through a loan, and maintaining and selling an equity interest in a Kentucky LLC
demonstrate sufficient effects within Kentucky to make the exercise of personal jurisdiction over
Defendant Sly reasonable. The Court again notes that this determination at the motion to dismiss
stage does not preclude Defendant Sly from raising the defense again after discovery. See Serras
v. First Tenn. Bank Nat’l Assoc., 875 F.2d 1212, 1214–15 (6th Cir. 1989).
2. Failure to State a Claim of Fraud
Having found that it has personal jurisdiction over Defendant Sly, the Court will now address
the merits of Plaintiff’s fraud and breach of fiduciary duty claims. Under Kentucky law, a plaintiff
must allege the following six elements to plead a viable claim of fraud: “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.” United Parcel Serv. Co. v. Rickert, 996 S.W.2d
464, 468 (Ky. 1999). The Federal Rules of Civil Procedure require that “[i]n alleging fraud . . . a
party must state with particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b). The
Sixth Circuit has made clear that under Rule 9(b), a “Plaintiff[’s] complaint must ‘(1) specify the
statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and
when the statements were made, and (4) explain why the statements were fraudulent.’” Frank v.
Dana Corp., 547 F.3d 564, 570 (6th Cir. 2008) (quoting Gupta v. Terra Nitrogen Corp., 10 F. Supp.
13
2d 879, 883 (N.D. Ohio 1998)). “At a minimum, [a] Plaintiff[ ] must allege the time, place and
contents of the misrepresentations upon which [she] relied.” Id. (citing Bender v. Southland Corp.,
749 F.2d 1205, 1216 (6th Cir. 1984)).
Plaintiff contends that she is entitled to plead her fraud claim under a relaxed Rule 9(b)
standard because she has pled her claim with sufficient specificity to place Defendants on notice as
to the nature of the claim. The Court disagrees. The manner in which the Second Amended
Complaint has been drafted does not adequately place the Defendants on notice of the nature of the
claim against each of them, but instead relies upon generalities in an effort to include as many
Defendants as possible in each claim. Plaintiff also argues that given the number of corporate
defendants involved in the fraudulent scheme that she “cannot be required to recite each fact of fraud
in minute detail.” The Court again disagrees. The number of corporate defendants involved in this
lawsuit is a product of Plaintiff’s decision to name an additional twenty-one corporate defendants
after she was granted leave to amend her complaint a second time. Plaintiff should not escape her
pleading requirements because she has chosen to name numerous corporate entities as defendants.
Furthermore, while such an argument may be applicable to the fraud claims against the corporate
defendants, there is no reason that Plaintiff cannot satisfy the Rule 9(b) pleading standard for the
claims against the individual Defendants. Accordingly, the Court will apply the pleading standard
outlined above in Frank v. Dana Corp.
Looking to the allegations contained within the Second Amended Complaint, the Court finds
that Plaintiff’s fraud claim against Defendant Sly fails to state a claim upon which relief can be
granted. To the extent that Plaintiff’s claim is based upon Defendant Sly’s alleged representation
that MMM was being operated lawfully, (Sec. Amend. Compl. ¶ 63), Plaintiff has failed to identify
14
the time, place, or manner of this representation. Thus, it does not satisfy Rule 9(b).
Plaintiff next contends that she has pled a sufficient fraud claim by alleging that Defendant
Sly, through his agent A. Huff, represented that the transfers of assets out of MMM were for valid
business purposes. This allegation also suffers from Plaintiff’s failure to identify the time, place and
content of A. Huff’s representations. More importantly, the Second Amended Complaint does not
plead sufficient facts to demonstrate the existence of a valid agency relationship. While the Court
is bound to accept all well-pled factual allegations, the existence of an agency relationship is a legal
determination that is not entitled to the same presumption. See Papasan v. Allain, 478 U.S. 265, 286
(1986) (“Although for the purposes of this motion to dismiss we must take all the factual allegations
in the complaint as true, we are not bound to accept as true a legal conclusion couched as a factual
allegation.”). When attempting to plead liability through agency, “a claimant must plead facts that
would support a finding that the alleged agents had actual or apparent authority to act on behalf of
another.” In re Commercial Money Ctr., Inc., 2005 WL 2233233, at *19 (N.D. Ohio Aug. 19, 2005)
(internal quotation marks omitted). Plaintiff has failed to plead sufficient facts to demonstrate the
existence of an agency relationship between Defendant Sly and A. Huff. Accordingly, Plaintiff has
failed to demonstrate that this alleged material misrepresentation is attributable to Defendant Sly.
Lastly, Plaintiff argues that she has alleged a viable fraud claim on account of Defendant’s
agents material misrepresentations in the financial records of MMM. This claim suffers from the
same defect regarding insufficient pleading of an agency relationship. Moreover, Plaintiff has
admitted that her interest in MMM was bought out in 2006, (Sec. Amend. Compl. ¶¶ 64-65), and
that she was first able to review MMM’s financial records in 2008, (id. at ¶ 71). These facts, as
pled, indicate that Plaintiff could not have relied on the misrepresentations in the financial records
15
to her detriment, as she no longer had an interest in MMM at the time these misrepresentations were
relayed to her. Therefore, the Court finds that Plaintiff has failed to produce facts upon which her
claim for fraud against Defendant Sly can be granted. Accordingly, Defendant Sly’s motion to
dismiss Plaintiff’s fraud claim is GRANTED.
3. Failure to State a Claim for Breach of Fiduciary Duty
Defendant Sly next contends that Plaintiff’s breach of fiduciary duty claim should be
dismissed. A breach of fiduciary duty claims requires that a plaintiff allege that (1) the defendant
owes a fiduciary duty to the plaintiff; (2) the defendant breached that duty; and (3) the plaintiff
suffered damages as a result of that breach. Fastenal Co. v. Crawford, 609 F. Supp. 2d 650, 665
(E.D. Ky. 2009). In the Court’s November 17, 2011 Memorandum, Opinion, and Order, the Court
found that Plaintiff had failed to establish that Defendant Sly owed a fiduciary duty to Plaintiff,
where the First Amended Complaint only contained allegations that Defendant Sly was a lender to
MMM. Plaintiff was granted leave to amend, and in her Second Amended Complaint she has
alleged that not only was Defendant Sly a lender to MMM, but that he was also a manager and/or
employee of MMM.4 And, as such, that he “owed a fiduciary duty to MMM and Plaintiff.” (See
Sec. Am. Compl. ¶ 150–51.)
4
Defendant Sly cries foul at this sudden “factual” addition. However, the Court is bound
to accept all well-pled factual allegations as true at this stage of the litigation. Notwithstanding,
the Court reminds all parties that “there must be a reasonable basis for a plaintiff’s complaint.
Attorneys who take advantage of the liberal pleading provisions of Rule 8 by commencing a
lawsuit in a desperate attempt to unearth a cause of action through discovery must be checked by
the ethics provisions of Fed. R. Civ. P. 11[.]” Michaels Bldg. Co. v. Ameritrust Co., N.A., 848
F.2d 674, 680 (6th Cir. 1988) (emphasis in original). The Sixth Circuit’s warning in Michaels is
equally applicable to the instant case: “after discovery has been launched, if plaintiffs are still
unable to plead a sufficient factual basis for the allegations made against defendants, the spectre
of Rule 11 sanctions should guide the actions of plaintiffs’ counsel.” Id. at 681.
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Defendant Sly argues that this claim should be dismissed because it fails to establish that he
owed a fiduciary duty to Plaintiff. The Kentucky Court of Appeals has found that “Kentucky limited
liability companies, being similar to Kentucky partnerships and corporations, impose a common-law
fiduciary duty on their officers and members in the absence of contrary provisions in the limited
liability company operating agreement.” Patmon v. Hobbs, 280 S.W.3d 589, 594 (Ky. Ct. App.
2009) (emphasis added). Plaintiff has alleged that Defendant Sly was a manager of MMM, which
is sufficient for her claim to survive this motion to dismiss.5 Therefore, Defendant Sly’s motion to
dismiss the breach of fiduciary duty claim is DENIED.
B. The Huff Defendants
The Huff Defendants have moved to dismiss each of Plaintiff’s claims. As the Court has
found that Plaintiff only has standing to assert her fraud, breach of fiduciary duty, breach of contract,
and promissory estoppel claims, the Court will only address the Huff Defendants’ arguments as to
those claims.
1. Failure to State a Claim of Fraud
The Huff Defendants have identified six misrepresentations in Plaintiff’s Second Amended
Complaint. First, Plaintiff alleges that “[d]uring the course of the Plaintiff’s part-ownership of
MMM, she relied on the representations of . . . A. Huff, Brown, [and] Russo, . . . that the company
5
Although a fiduciary duty exists between an employee and his employer, see Fastenal
Co. v. Crawford, 609 F. Supp. 2d 650, 665 (E.D. Ky. 2009) (citing Henkin, Inc. v. Berea Bank &
Trust Co., 566 S.W.2d 420, 423 (Ky. Ct. App. 1978)), it is unclear if an employee owes a
fiduciary duty to the shareholders or members of his employer-company. If, as the Court
suspects, an employee’s fiduciary duty is to the employer itself, and not the individual
shareholders or members, then any breach of fiduciary duty claim against Defendant Sly as an
employee of MMM would belong to MMM and not Plaintiff. However, the Court need not
reach this issue in the present context, because Plaintiff has alleged that Defendant Sly was a
manager of MMM.
17
was being operated lawfully.” In her response, Plaintiff contends that this representation satisfies
Rule 9(b) because it was made “as part of the Operating Agreement and the Management
Agreement[,]” (Pl.’s Resp. to Huff Defs.’ Mot. to Dismiss 9), thus demonstrating the time, place,
and manner of the misrepresentation. The Court finds that this is sufficient to allege a claim of fraud
against Defendants A. Huff, S. Huff, and Brown. (See Sec. Am. Compl. ¶¶ 39–40, 156.) However,
Russo is not alleged to have been a party to these agreements executed on July 20, 2001. (See id.)
Therefore, this allegation cannot support a claim of fraud against Defendant Russo.
Plaintiff also alleges that Defendants A. Huff, S. Huff, Brown and Russo represented,
through the Operating Agreement, Management Agreement and yearly tax information, that the
company would be operated lawfully, that Plaintiff would share in any profits, and that MMM assets
would not be misappropriated. (See id. at ¶ 114.) This allegation is similar to the one previously
discussed, therefore, the Court will only address the addition of representations made in the yearly
tax documents. Plaintiff has failed to allege how these misrepresentations were contained in the
yearly tax documents, which Defendants made them in what years, or that these representations were
made with the intent to induce Plaintiff to rely upon them. Accordingly, the Court finds that this
allegation fails to plead a claim of fraud.
Plaintiff next alleges that in 2006 Defendant A. Huff misrepresented the value of MMM, and
then bought out her interest for less than its actual value. (See id. at ¶¶ 64, 116.) The Court finds
that this is sufficient to allege a claim of fraud against Defendant A. Huff.
Plaintiff alleges that Defendants A. Huff, Brown, and Russo misrepresented several
transactions involving MMM assets by retroactively changing MMM’s financial records. (See id.
at ¶108.) However, Plaintiff has admitted that her interest in MMM was bought out in 2006, (id. at
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¶¶ 64-65), and that she was first able to review MMM’s financial records in 2008, (id. at ¶ 71).
These facts, as pled, indicate that Plaintiff could not have relied on the misrepresentations in the
financial records to her detriment, as she no longer had an interest in MMM at the time these
misrepresentations were relayed to her.
Plaintiff alleges that all Defendants, through their agent, A. Huff, represented that the
transfers of MMM assets to numerous other entities and individuals were for valid business
purposes. (See id. at 119.) This allegation fails to identify the time, place and content of A. Huff’s
representations and, therefore, does not meet Rule 9(b)’s specificity requirement. Moreover, as
discussed above, the Second Amended Complaint does not plead sufficient facts to demonstrate the
existence of a valid agency relationship between A. Huff and any other Defendant. See supra Part
II.C.2.i. Accordingly, the Court finds that this allegation cannot support a claim of fraud.
Lastly, Plaintiff alleges that all Defendants either directly misrepresented these transfers or
willfully concealed material facts regarding the transfers that they were under a duty to disclose to
Plaintiff. Plaintiff’s claim that all Defendants directly misrepresented the transfers to Plaintiff is not
supported by sufficient facts to plead a claim for relief. This statement fails to identify which
Defendant made a representation, the content of the representation, that the Defendant knew it to
be false, or that it was made with inducement to be acted upon by Plaintiff. This statement further
fails Rule 9(b)’s specificity requirement. To the extent that Plaintiff has alleged fraud by omission,
she is still under an obligation to “specify ‘the who, what, when where, and how’ of the alleged
omission.” Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239, 255–56 (6th Cir.
2012). This allegation fails to even approach such a standard of pleading. Accordingly, the Court
finds that this allegation cannot support a claim of fraud.
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2. Failure to State a Claim for Breach of Fiduciary Duty
The Huff Defendants contend that Plaintiff’s breach of fiduciary duty claim against A. Huff,
S. Huff, Brown and Russo is subject to the heightened pleading of Rule 9(b) and should be
dismissed for its failure to satisfy that standard. The Huff Defendants cite Steelvest Inc. v. Scansteel
Service Center, Inc. for the proposition that a breach of fiduciary duty is “equivalent to fraud.” See
Steelvest, 807 S.W.2d 476, 487 (Ky. 1991). However, several courts have found that this statement
is limited by the facts of Steelvest to cases involving attorney-client privilege. See Bariteau v. PNC
Fin. Servs. Grp., Inc., 285 F. App’x 218, 223–24 (6th Cir. 2008); Anderson v. Old Nat. Bancorp.,
675 F. Supp. 2d 701, 712–13 (W.D. Ky. 2009); Gundaker/Jordan Am. Holdings, Inc. v. Clark, 2009
WL 2390162, at *7 (E.D. Ky. Aug. 4, 2009). The Court agrees and finds that Steelvest is limited
to its facts, and does not apply to the determination of the pleading standard in the present case.
Under a breach of fiduciary duty claim, a plaintiff is required to allege that (1) the defendant
owes a fiduciary duty to the plaintiff; (2) the defendant breached that duty; and (3) the plaintiff
suffered damages as a result of that breach. Fastenal, 609 F. Supp. 2d at 665. Plaintiff has alleged
that S. Huff and Brown owed her a duty as members of MMM, (see Sec. Am. Compl. ¶ 42), and that
A. Huff and Russo owed her a duty as managers of MMM, (see id. at ¶¶ 41, 74); that these
Defendants violated that duty by failing to disclose critical information regarding the improper
transfer of MMM’s assets, (see id. at ¶¶ 121, 152); and that she was damaged by this failure to
disclose, (see id. at ¶ 153). In Kentucky, managers and members of an LLC owe a fiduciary duty
to one another. See Patmon v. Hobbs, 280 S.W.3d at 594–95. Thus, Plaintiff has sufficiently pled
a claim for breach of fiduciary duty, and the Huff Defendants’ motion to dismiss this claim is
DENIED.
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3. Failure to State a Claim of Breach of Contract
The Huff Defendants next seek to dismiss Plaintiff’s breach of contract claim premised on
Defendants’ violations of the Operating and Management Agreements. The Huff Defendants
contend K.R.S. § 275.165 vests power to manage an LLC in a manager, which voids any
management agreements, precluding a breach of contract. Contrary to the Huff Defendants’
interpretation of K.R.S. § 275.165, the Court finds nothing in the statutory text that precludes
members of an LLC from executing a management agreement. In fact, as Plaintiff notes, the default
management of an LLC actually falls to the members, see K.R.S. § 275.165(1), who are free “to
delegate by an agreement to other persons” their “powers to manage or control the business affairs
of the limited liability company[.]” K.R.S. § 275.165(3).
The Huff Defendants next argue that Plaintiff has failed to allege that she was damaged.
Plaintiff has clearly alleged damages from the breach of the operating agreement including that she
was disenfranchised and squeezed out of the business. The Court finds that Defendants’ argument
on this issue is without merit.
Lastly, the Huff Defendants contend that there are insufficient facts to allege that Defendant
Russo was a party to either the Operating Agreement or the Management Agreement. The court
agrees. Plaintiff has alleged that an operating agreement was executed on July 20, 2001 between
A. Huff, S. Huff, Pixler, Brown and Plaintiff, (see Sec. Am. Compl. ¶ 156), and a management
agreement was executed at the same time between A. Huff, Pixler and Plaintiff, (see id. at ¶ 157).
Plaintiff has failed to allege that Defendant Russo was a party to either of these agreements.
Therefore, the Huff Defendants’ motion to dismiss the breach of contract claim is GRANTED IN
PART and DENIED IN PART. It is GRANTED as to Defendant Russo, and DENIED in all other
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respects.
4. Failure to State a Claim of Promissory Estoppel
Under the doctrine of equitable estoppel, “[a] promise which the promisor should reasonably
expect to induce action or forbearance on the part of the promisee or a third person and which does
induce such action or forbearance is binding if injustice can be avoided only by enforcement of the
promise.” Meade Constr. Co. v. Mansfield Commercial Elec., Inc., 579 S.W.2d 105, 106 (Ky. 1979)
(quoting Restatement (Second) of Contracts § 90 (1965)). In Kentucky, a claim of promissory
estoppel requires “‘(1) a promise; (2) which the promisor should reasonably expect to induce action
or forbearance of a definite and substantial character on the part of the promisee; (3) which does
induce such action or forbearance; and (4) injustice can be avoided only by enforcement of the
promise.’” Abney v. Amgen, Inc., 443 F.3d 540, 549 (6th Cir. 2006) (quoting Bergman v. Baptist
Healthcare Sys., Inc., 344 F. Supp. 2d 998, 1003 (W.D. Ky. 2004)).
Plaintiff has alleged that Defendant A. Huff made the promise to operate MMM lawfully for
the benefit of its members (which included Plaintiff), that Plaintiff would share in any profits and
financial gain pursuant to her membership interest, and that the assets of MMM would not be
misappropriated. (See Sec. Am. Compl. ¶ 170.) Plaintiff further alleges that she reasonably relied
on these statements, (see id. at ¶ 172), and acquiesced in permitting Defendant A. Huff to control
MMM and accepted less value from MMM and Defendant than she was entitled to receive, (id.).
Essentially, Plaintiff alleges that she was induced into making A. Huff the manager of MMM based
on his promise that Plaintiff would share in the profits pursuant to her membership interest, that she
did in fact make Defendant A. Huff the manager of MMM, but did not receive her fair share of
profits.
22
However, “estoppel cannot be the basis for a claim if it represents the same performance
contemplated under a written contract.” Tractor and Farm Supply, Inc. v. Ford New Holland, Inc.,
898 F. Supp. 1198, 11206 (W.D. Ky. 1995). “[I]t is a ‘widely accepted principle that promissory
estoppel is applicable only in the absence of an otherwise enforceable contract[.]’” Shane v. Bunzl
Distrib. USA, Inc., 200 F. App’x 397 (quoting Heating & Air Specialists, Inc. v. Jones, 180 F.3d
923, 934 (8th Cir. 1999)) (predicting that the Kentucky Supreme Court would adopt this principle).
Plaintiff has asserted a breach of contract claim seeking recovery for the same failed performance
on the part of Defendant A. Huff. As such, Plaintiff’s promissory estoppel claim fails as a matter
of law, and it must be dismissed. See, e.g., Gonzalez v. Imaging Advantage, LLC, 2011 WL
6092469, at *2 (W.D. Ky. Dec. 7, 2011) (dismissing promissory estoppel claim due to presence of
written contract and rejecting argument that claim should survive dismissal “in case the contract is
‘somehow deemed unenforceable.’”). Accordingly, the Huff Defendants’ motion to dismiss this
claim is GRANTED.
IV. CONCLUSION
For the reasons set forth above, IT IS HEREBY ORDERED that Defendants Anthony Huff,
Sheri Huff, Michele Brown, Anthony Russo, River Falls Investments, LLC, Oxygen Unlimited,
LLC, River Falls Equities, LLC, SDH Realty, Inc., W.A. Huff, LLC, The Huff Grandchildren Trust,
and Huff Farm (Horsebranch) Inc.’s (collectively “the Huff Defendants”) Motion to Dismiss [DN
59] is GRANTED IN PART and DENIED IN PART. It is DENIED as to Plaintiff’s breach of
fiduciary duty claim against Defendants A. Huff, S. Huff, Brown, and Russo, and Plaintiff’s fraud
and breach of contract claims against Defendants A. Huff, S. Huff, and Brown. It is GRANTED
as to all other claims.
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IT IS FURTHER ORDERED that Defendant Brian N. Sly’s Motion to Dismiss [DN 60]
is GRANTED IN PART and DENIED IN PART. It is DENIED as to Plaintiff’s breach of
fiduciary duty claim and is GRANTED as to all other claims.
July 30, 2012
cc: counsel of record
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