Leed HR, LLC v. Redridge Finance Group, LLC

Filing 12

MEMORANDUM OPINION AND ORDER signed by Senior Judge Thomas B. Russell on 8/3/13. For reasons set forth 6 Motion to Dismiss is DENIED; 9 Motion to Strike is rendered MOOT by this memorandum opinion and order.. cc:counsel (SJS)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CASE NO. 3:12-CV-00797
LEED HR, LLC

PLAINTIFF

v.
REDRIDGE FINANCE GROUP, LLC

DEFENDANT

MEMORANDUM OPINION AND ORDER
This matter comes before the Court on the Defendant’s motion to dismiss. (Def.’s Mot.,
Docket Number (“DN”) 6.) The Plaintiff responded. (Pl.’s Resp., DN 7.) The Defendant
replied. (Def.’s Reply, DN 8.) Fully briefed, the matter is now ripe for adjudication. For the
following reasons, the Defendant’s motion is DENIED.
I.
In this action, Plaintiff LEED HR, LLC (“LEED”), seeks to rescind a contract and
recover $150,000 it paid to Defendant RedRidge Finance Group, LLC (“RedRidge”) for a due
diligence investigation RedRidge performed in conjunction with a proposed credit lending
transaction. LEED’s primary theory of recovery involves several provisions of the Securities
Exchange Act of 1934 (“the ʼ34 Act”).

First, LEED contends that RedRidge is a “broker” as

that term is defined in § 3(a)(4)(A) of the ʼ34 Act. Second, § 15(a)(1) of the ʼ34 Act makes it
unlawful for a broker to transact in or attempt to transact in securities if the broker is not
registered with the Securities and Exchange Commission (“SEC”). Finally, § 29(b) of the ʼ34
Act states that any contract made in violation of any provision of the Act is void. Accordingly,
LEED contends that the contract made by RedRidge is void because RedRidge, as an
unregistered broker, attempted to transact in securities in conjunction with the credit lending
transaction. Therefore, LEED claims that the contract may be rescinded, allowing it to recover
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the $150,000 it paid to RedRidge for the due diligence assessment. LEED also brings state law
claims for breach of contract and unjust enrichment.
RedRidge moves to dismiss all of LEED’s causes of action. First, RedRidge contends
that LEED has failed to state a claim under the terms of the ʼ34 Act because RedRidge is not a
“broker” as defined therein. Second, RedRidge argues that once the Court dismisses LEED’s
federal cause of action, the state law causes of action must also be dismissed for lack of
jurisdiction because LEED has failed to sufficiently plead the requirements of diversity
jurisdiction.
Upon consideration of the pleading, the exhibits thereto, and the parties arguments, the
Court finds that LEED has stated a plausible claim for relief under the ʼ34 Act and that this
action should proceed to discovery. Simply stated, there is insufficient information before the
Court to determine whether there RedRidge Financial Group, LLC, and another company, RFG
Fund I, LLC, are the same or distinct entities. If distinct, it is plausible that RedRidge was an
unregistered broker of securities and the agreement between it and LEED for the due diligence
assessment is void.
II.
LEED is the majority owner of General Employment Enterprises, Inc. (“GEE”). In that
role, LEED hired RedRidge to assist it in obtaining financing and working capital for GEE. An
engagement letter sent to LEED by RedRidge on September 5, 2012, memorializes the proposed
relationship between the entities. (Engagement Letter, DN 1-1.) In multiple places, the letter
notes that its terms are a “proposal only,” are “for discussion purposes only,” do “not imply in
any way a commitment,” and are merely “a proposal to proceed with further review.” (Id. at pp.
1, 7.) In short, the engagement letter is a working framework between LEED and RedRidge that

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outlines a potential credit facility by which GEE will receive financing and working capital. The
letter in no way created an obligation to actually lend money.
The letter states that RedRidge “is pleased to advise [LEED] that RFG Fund I, LLC or an
affiliate will consider establishing a credit facility under the terms and conditions” proposed in
the engagement letter. (Id. at p. 1.) Although the specific terms of the credit facility are not
important for resolution of the motion currently under consideration, it appears that RFG Fund I,
LLC (“the RFG Fund”), contemplated lending GEE a total of $16.5 million. Had the loan been
made, it would have been repaid under various conditions and at different interest rates, the
details of which are unimportant here. In addition to the repayment terms, the engagement letter
provides that “[i]n consideration of the credit accommodation described herein, Borrower[,
GEE,] shall issue to RFG, or a nominee, on the Closing Date, a Warrant evidencing the right to
purchase at least 12% of the common voting stock of such company.” (Id. at p. 6.)
In preparation of the proposed credit facility, GEE agreed to pay “[a]ll costs associated
with establishing the [credit facility] including, but not limited to, [the RFG Fund’s] out-ofpocket expenses associated with the transaction, professional fees, underwriting fees of [the RFG
Fund], appraisal fees, recording fees and filing fees.” (Id. at p. 7.) These expenses were to be
paid by GEE “regardless of whether the transaction closes.” (Id.) Furthermore, upon acceptance
of the engagement letter, GEE agreed to “remit a $150,000 deposit, which deposit shall be
applied to such due diligence expense but [GEE] acknowledges that such fees and expenses for
which [GEE] is obligated may exceed such deposit.” (Id.)
The engagement letter was accepted by LEED on September 7, 2012, and the $150,000
deposit followed shortly thereafter. RedRidge then proceeded to perform its due diligence
assessment of the proposed credit facility. For undisclosed reasons, the parties never formalized

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the agreement and no loan was made to GEE as contemplated in the proposal. Thereafter, LEED
instituted this litigation to recover the $150,000 deposit it paid for RedRidge’s due diligence
investigation.
As explained above, LEED claims that the contract under which it made the deposit is
void because RedRidge was acting as an unregistered broker in violation of the ʼ34 Act.
RedRidge moves to dismiss for failure to state a claim on grounds that it is not a “broker” as that
term is defined in the ʼ34 Act.
III.
The Federal Rules of Civil Procedure require that pleadings, including complaints,
contain a “short and plain statement of the claim showing that the pleader is entitled to relief.”
Fed. R. Civ. P. 8(a)(2). A complaint may be attacked for failure “to state a claim upon which
relief can be granted.” Fed. R. Civ. P. 12(b)(6). When considering a Rule 12(b)(6) motion to
dismiss, the court will presume that all the factual allegations in the complaint are true and will
draw all reasonable inferences in favor of the non-moving party. Total Benefits Planning Agency
v. Anthem Blue Cross & Blue Shield, 552 F.3d 430, 434 (6th Cir. 2008) (citing Great Lakes Steel
v. Deggendorf, 716 F.2d 1101, 1105 (6th Cir. 1983)). “The court need not, however, accept
unwarranted factual inferences.” Id. (citing Morgan v. Church’s Fried Chicken, 829 F.2d 10, 12
(6th Cir. 1987)). Additionally, “[w]hen a court is presented with a Rule 12(b)(6) motion, it may
consider the Complaint and any exhibits attached thereto . . . and exhibits attached to the
defendant’s motion to dismiss so long as they are referred to in the Complaint and are central to
the claims contained therein.” Bassett v. Nat’l Collegiate Athletic Ass’n, 528 F.3d 426, 430 (6th
Cir. 2008) (citing Amini v. Oberlin Coll., 259 F.3d 493, 502 (6th Cir. 2001)).
Even though a “complaint attacked by a Rule 12(b)(6) motion to dismiss does not need

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detailed factual allegations, a plaintiff’s obligation to provide the grounds of his entitlement to
relief requires more than labels and conclusions, and a formulaic recitation of the elements of a
cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations
omitted). Instead, the plaintiff’s “[f]actual allegations must be enough to raise a right to relief
above the speculative level on the assumption that all the allegations in the complaint are true
(even if doubtful in fact).” Id. (citations omitted). A complaint should contain enough facts “to
state a claim to relief that is plausible on its face.” Id. at 570. A claim becomes plausible “when
the plaintiff pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009)
(citing Twombly, 550 U.S. at 556). If, from the well-pleaded facts, the court cannot “infer more
than the mere possibility of misconduct, the complaint has alleged – but has not ‘show[n]’ – ‘that
the pleader is entitled to relief.’” Id. at 1950 (citing Fed. R. Civ. P. 8(a)(2)). “[O]nly a complaint
that states a plausible claim for relief survives a motion to dismiss.” Id.
IV.
A brief overview of certain sections of the ʼ34 Act is necessary to understand LEED’s
first cause of action. Section 3(a)(4)(A) defines a “broker” as “any person engaged in the
business of effecting transactions in securities for the account of others.”

15 U.S.C. §

78c(a)(4)(A). Under § 15(a)(1), it is unlawful for any broker to “effect any transactions in, or to
induce or attempt to induce the purchase or sale of, any security . . . unless such broker is
registered” with the SEC. Id. § 78o(a)(1). Finally, § 29(b) provides that “[e]very contract made
in violation of any provision of this chapter or of any rule or regulation thereunder . . . shall be
void” subject to certain exceptions not applicable in this case. Id. § 78cc(b). Section 29(b)
“contemplates civil suits for relief by way of rescission and damages where the transactions are

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void.” Eastside Church of Christ v. Nat’l Plan, Inc., 391 F.2d 357, 362 (5th Cir. 1968) (citations
omitted). Where a broker is not registered with the SEC, it has been held that the broker violated
§ 15(a)(1) of the ʼ34 Act by effecting transactions in securities and that the contracts related to
those transaction were void. See id. In the present case, LEED contends that the contract under
which it paid RedRidge $150,000 for the due diligence assessment is void for this very reason.
V.
Under the proposed credit facility, GEE was prepared to give the RFG Fund a warrant for
12 percent of GEE’s common stock at closing. Neither party disputes that this warrant was a
“security” as defined under the applicable securities laws. Therefore, one who engaged in the
business of effecting or attempting to effect a transaction in the warrant for the account of
another would be considered a “broker” under the ʼ34 Act. The heart of RedRidge’s motion to
dismiss is that “even if the parties had entered into a financing deal that contained [the warrant
terms], the fact that RedRidge was the party receiving the warrants means that it was not engaged
in a securities transaction ‘for the account of others.’ Consequently, nothing about RedRidge’s
role in the proposed financing transaction fits with the [ʼ34 Act’s] definition of the term
‘broker.’” (Def.’s Reply, DN 8, p. 3.)
RedRidge’s argument in favor of dismissal appears to be that, had the proposed loan
taken place, it would have been the party receiving the warrant for 12 percent of GEE’s common
stock. Since RedRidge, itself, would have been the recipient of the warrant, it could not be a
“broker” because it was not effecting or attempting to effect that transaction “for the account of
others” but rather for itself. While RedRidge’s theory may ultimately prove true, the Court finds
that LEED has pleaded a plausible claim for relief under the ʼ34 Act and that the motion to
dismiss must be denied.

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CONCLUSION
Defendant RedRidge Financial Group, LLC, moved to dismiss the complaint by Plaintiff
LEED HR, LLC. For all of the foregoing reasons, IT IS HEREBY ORDERED that the motion
is DENIED. IT IS FURTHER ORDERED that LEED’s motion to strike RedRidge’s reply
(DN 9) is rendered MOOT by this memorandum opinion and order.

August 3, 2013

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