Tunne v. Hendrick et al
MEMORANDUM OPINION AND ORDER: The motions by Defendants, Wayne Shelton, Student Loan X-Press, and Jarrod Ashley Turner, to strike surreplies filed by Plaintiff 112 , 113 and 114 are denied. The motions by Defendants, Wayne Shelton and Laxma iah Manchikanti, to dismiss all claims asserted by Plaintiff against them for failure to state a claim 56 and 60 are granted. Plaintiffs claims are dismissed without prejudice. The motion by Defendants, Student Loan X-Press, Paul Maynard Hendrick , and Jarrod Ashley Turner, to dismiss for failure to state a claim 63 , 66 and 74 are granted in part and denied in part. The motions by Hendrick, Turner, and SLX to dismiss Plaintiffs claims for federal and state antitrust violations are deni ed. The motion by Hendrick and Turner to dismiss Plaintiffsclaims for common law fraud are denied. All Plaintiffs remaining claims are dismissed without prejudice. Signed by Chief Judge Joseph H. McKinley, Jr on 8/24/12. cc:counsel, Mark Tunne (pro se), Paul Maynard Hendrick (pro se) (JBM)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
CIVIL ACTION NO. 5:10CV-00181-JHM
MARK TUNNE, pro se
PAUL MAYNARD HENDRICK, et al.
MEMORANDUM OPINION AND ORDER
This matter is before the Court on motions by Defendants, Wayne Shelton, Laxmaiah
Manchikanti, Student Loan X-Press, Paul Maynard Hendrick, Jarrod Ashley Turner, to dismiss for
failure to state a claim [DN 56, DN 60, DN 63, DN 66, DN 74] and on motions by Defendants,
Wayne Shelton, Student Loan X-Press, and Jarrod Ashley Turner, to strike surreplies filed by
Plaintiff [DN 112, DN 113, DN 114]. These matters are ripe for decision.
On October 12, 2010, Plaintiff, Mark Tunne, pro se, filed his original complaint. Plaintiff
is a former student at the American Justice School of Law (“AJSL”), a for-profit law school, later
known as the Barkley School of Law (“BSL”). AJSL opened in the fall of 2005. AJSL had
approximately 250 students, full and part-time. The AJSL Charter Class was scheduled to graduate
in May of 2008. The ABA Council on Law School Accreditation denied AJSL’s first application
for accreditation in April of 2007 and its second application for accreditation in August of 2007.
On or about November 17, 2007, Thomas Osborne, a minority shareholder of AJSL, filed a
derivative action against Paul Maynard Hendrick, Dean, President, and Owner of AJSL; Jarrod
Ashley Turner, Assistant Dean and Secretary of AJSL; CPA Wayne Shelton, Treasurer of AJSL and
law professor. The action alleged misconduct by Hendrick, Turner, and Shelton, involving misuse
of student loan monies, misappropriation of SBA dues, kickbacks on student law books,
manipulation of student grades, and providing false information to the ABA Committee on
Accreditation. On February 18, 2008, an order was entered in that action indicating the parties had
settled the action. As a result of the settlement, Hendrick, Turner, and Shelton transferred their
shares of stock to Laxmaiah Manchikanti and resigned their offices and positions with AJSL. In
March of 2008, the shareholders of the AJSL changed its name to the Barkley School of Law. The
Barkley School of Law ultimately closed in December of 2008.
On October 12, 2010, Plaintiff instituted this action against Paul Maynard Hendrick; Jarrod
Ashley Turner; CPA Wayne Shelton; Thomas L. Osborne, Chairman of the AJSL Board, Owner of
BSL, and a law professor; Dr. Laxmaiah Manchikanti, subsequent Owner of BSL and its chief
investor; Student Loan X-Press (“SLX”), the sole, private, student loan provider to AJSL; and John
and Jane Does. In his complaint and amended complaint, Plaintiff alleges violations of various
federal and state laws surrounding Defendants’ alleged financial abuse and fraudulent use of
students’ loan proceeds and the law school’s funds; mismanagement of the law school’s operations;
and corruption and fraud. Specifically, Plaintiff’s claims include: (1) criminal and civil violations
of the Racketeering and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(c); (2) wire fraud, 18
U.S.C. § 1443; (3) mail fraud, 18 U.S.C. § 1441; (4) bank fraud, 18 U.S.C. § 1344(2); (5) extortion
in violation of 18 U.S.C. § 1951(a); (6) embezzlement/failure to make required disposition of
property in violation of KRS § 514.070; (7) conspiracy in violation of 18 U.S.C. § 371; (8) tax fraud,
26 U.S.C. § 7206; (9) Unfair, False, Misleading and Deceptive Acts in the conduct of any trade
under KRS § 367.170-175; (10) false statements to American Bar Association in violation of 18
U.S.C. § 1001; (11) negligence and gross negligence; (12) violation of the Civil Rights Act, 42
U.S.C. § 1983 and § 1985; (13) fraud; (14) conversion; (15) breach of fiduciary duty; (16) for an
accounting; (17) breach of contract; (18) breach of the covenant of good faith and fair dealing; (19)
violations of the Kentucky Consumer Protection Act; (20) intentional infliction of emotional
distress; and (21) assorted constitutional violations. Additionally, in his amended complaint,
Plaintiff requests certification as a class action on behalf of all former students of AJSL and clarifies
the relief sought.
Because Plaintiff is proceeding in forma pauperis, the Court reviewed the complaint and
amended complaint pursuant to 28 U.S.C. § 1915(e)(2). By Memorandum Opinion and Order
entered May 2, 2011, the Court dismissed Plaintiff’s claims based on 42 U.S.C. § 1983, 42 U.S.C.
§ 1985, 42 U.S.C. § 1986, and the Federal Tort Claims Act. In addition, the Court dismissed all
claims asserted by Plaintiff based upon federal criminal statutes including alleged violations of 26
U.S.C. § 7206 (tax fraud), 18 U.S.C. § 371 (conspiracy to commit offense or to defraud United
States); 18 U.S.C. § 1341, § 1343, and § 1344(2)(mail fraud, wire fraud, and bank fraud); 18 U.S.C.
§ 1512 (tampering with a witness, victim, or an informant); and 18 U.S.C. § 1951 (extortion). The
Court also denied Plaintiff’s request for certification as a class action.
The Court permitted Plaintiff’s federal antitrust and civil RICO claims and all state law
claims to proceed beyond initial review under 28 U.S.C. § 1915(e)(2). Defendants, Wayne Shelton,
Laxmaiah Manchikanti, SLX, Paul Maynard Hendrick, and Jarrod Ashley Turner, have now filed
motions to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(b). Additionally,
Defendants, Wayne Shelton, SLX, and Jarrod Ashley Turner, filed motions to strike Plaintiff’s
surreplies filed in this matter. While Plaintiff attempted to contact counsel for the Defendants to
request permission to file the surreplies, Plaintiff failed to obtain leave of Court to do so. In
response to the motions to strike, Plaintiff filed corrected surreplies requesting leave of Court to file
the tendered surreplies [DN 115, DN 116, DN 117]. Given the complicated nature of the case and
given Plaintiff’s pro se status, the Court grants Plaintiff leave to file these surreplies. Therefore,
Defendants’ motions to strike the surreplies are denied. The remainder of this Opinion will address
the Defendants’ motions to dismiss.
II. STANDARD OF REVIEW
Upon a motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6), the
Court “must construe the complaint in the light most favorable to plaintiffs, accept all well-pled
factual allegations as true,” League of United Latin American Citizens v. Bredesen, 500 F.3d 523,
527 (6th Cir. 2007), and determine whether the “complaint states a plausible claim for relief.”
Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). Under this standard, the plaintiff must provide the
grounds for his or her 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). A plaintiff satisfies this standard only when he or she “pleads factual content
that allows the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged.” Iqbal, 556 U.S. at 678. 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 678, 679. Instead, the allegations must “‘show[ ] that the
pleader is entitled to relief.’” Id. at 679 (quoting Fed. R. Civ. P. 8(a)(2)). Since Plaintiff is
proceeding pro se, the Court is mindful that pro se complaints are liberally construed and are held
“to less stringent standards than formal pleadings drafted by lawyers.” Williams v. Curtin, 631 F.3d
380, 383 (6th Cir. 2011).
Defendants, Shelton, Manchikanti, SLX, Hendrick, and Turner, filed motions to dismiss all
claims against them for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6). Plaintiff did not
respond to Defendant Manchikanti’s motion to dismiss Plaintiff’s claims based upon conversion,
breach of contract, breach of fiduciary duty, intentional infliction of emotional distress, violations
of KRS § 367.080-085, KRS § 525.020, KRS § 524.040 and KRS § 524.050; state and federal antitrust laws, and RICO claims. Similarly, Plaintiff did not respond to the motions by Defendants,
Wayne Shelton and SLX, to dismiss Plaintiff’s claims based upon conversion, breach of contract,
and violations of KRS § 524.020, KRS § 524.040, and KRS § 524.050. Therefore, after examining
the complaint and amended complaint under the standard set forth pursuant to Fed. R. Civ. P.
12(b)(6), the Court grants Manchikanti, Shelton, and SLX’s motion to dismiss with respect to these
Fraudulent misrepresentation requires proof of six elements: “(1) that the declarant made a
material representation to the plaintiff, (2) that this representation was false, (3) that the declarant
knew the representation was false or made it recklessly, (4) that the declarant induced the plaintiff
to act upon the misrepresentation, (5) that the plaintiff relied upon the misrepresentation, and (6) that
the misrepresentation caused injury to the plaintiff.” Flegles, Inc. v. TruServ Corp., 289 S.W.3d
544, 549 (Ky. 2009) (citing United Parcel Service Co. v. Rickert, 996 S.W.2d 464, 468 (Ky. 1999));
Republic Bank & Trust Co. v. Bear Stearns & Co, Inc., 683 F.3d 239, 248 (6th Cir. 2012).
When a plaintiff pleads fraud or mistake, those claims are subject to the heightened pleading
standard of Federal Rule of Civil Procedure 9(b), which provides that “[i]n alleging fraud or mistake,
a party must state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ.
P. 9(b). “At a minimum, the Sixth Circuit requires the allegations to contain the ‘time, place, and
content of the alleged misrepresentation on which he or she relied; the fraudulent scheme; the
fraudulent intent of the defendants; and the injury resulting from the fraud.’” Our Lady of
Bellefonte Hosp., Inc. v. Tri–State Physicians Network, Inc., 2007 WL 2903231, *6 (E.D. Ky. Sept.
27, 2007)(quoting Coffey v. Foamex L.P., 2 F.3d 157, 161-62 (6th Cir. 1993)). “Generalized and
conclusory allegations that the Defendants’ conduct was fraudulent do not satisfy Rule 9(b).” Bovee
v. Coopers & Lybrand C.P.A., 272 F.3d 356, 361 (6th Cir. 2001).
1. Wayne Shelton
In his complaint and amended complaint, Plaintiff alleges that Shelton made false,
misleading reports to the ABA and that the Defendants failed to tell the Plaintiff and others the truth
regarding the ABA report (Complaint ¶ 11); issued a false report to the district court regarding the
financial management of the law school in a 2006 case (Id. ¶ 14); filed a false tax return (Id. at ¶
177); filed a false statement of investment with the ABA regarding the library (Id. at ¶¶ 237-241);
filed false statement with the ABA regarding investors (Id. at ¶ 338); filed a false statement for
AJSL with Banterra Bank (Id. at ¶¶ 367-406, ¶¶ 421-424); issued false report to Osborne regarding
the financial status of AJSL (Id. at ¶ 409-414); and advised Plaintiff and the students of the financial
health of AJSL as being stable and good (Id. at ¶ 483). Plaintiff alleges that “CPA Shelton’s
representation was false and was made for the purpose of inducing Students and Tunne to become
involved with AJSL and to stay with AJSL.” (Id. at ¶ 412; see also ¶ 476.) Additionally, Plaintiff
alleges that the students relied upon the misrepresentations and suffered economic loss. (Id. at ¶¶
Much of Plaintiff’s allegations of fraud stem from representations made to third-parties such
as the ABA, banks, the I.R.S., and Defendant Osborne. While Kentucky courts have permitted
plaintiffs to sue for injuries resulting from misrepresentations made to or intended for third parties,
Kentucky Laborers Dist. Council Health and Welfare Trust Fund v. Hill & Knowlton, 24 F. Supp.
2d 755, 772 (W.D. Ky. 1998)(citing Highland Motor Transfer Co. v. Heyburn Building Co., 35
S.W.2d 521, 523–24 (Ky. 1931); Graham v. John R. Watts & Son, 36 S.W.2d 859, 861–63 (Ky.
1931)), Kentucky law requires direct reliance by a plaintiff on the defendants’ statements. Goldman
Services Mechanical Contracting, Inc. v. Citizens Bank and Trust Co. of Paducah, Inc., 1993 WL
428641, *3 (6th Cir. Oct. 21, 1993)(citing Wilson v. Henry, 340 S.W.2d 449, 451 (Ky. App.1960)
(“The very essence of actionable fraud or deceit is the belief and reliance upon the statements of the
party who seeks to perpetrate the fraud.”); Compressed Gas Corp. v. United States Steel Corp., 857
F.2d 346, 352 (6th Cir.1988)(“Kentucky law requires that the party claiming fraud show that he or
she relied on the alleged misrepresentation, not a third party.”). Plaintiff failed to allege direct
reliance on these statements made by Shelton to third-parties; and therefore, Plaintiff’s allegations
of fraud set forth in the complaint and amended complaint are insufficient pursuant to Fed. R. Civ.
In his response to Shelton’s motion to dismiss, Plaintiff states that “Mr. Shelton has
misrepresented, concealed, and deceived Plaintiff and other AJSL students in [November of 2007]
in open public meetings about his prior knowledge of Hendrick and Turner, and their true intentions
when he, along with Hendrick and Turner, falsely told Plaintiff and students there were no ‘oral’
contract with SLX to be the sole, exclusive, student loan lender for AJSL.” (Plaintiff’s Opposition
to Shelton’s Motion to Dismiss at 14.) Additionally, Plaintiff alleges that Hendrick, Turner, and
Shelton also denied any wrongdoing regarding financial mismanagement, the law library, and false
representations to the first and second ABA site teams. Plaintiff maintains that these actions and
representations induced Plaintiff and other students to remain at AJSL.
While pro se complaints are liberally construed and are held “to less stringent standards than
formal pleadings drafted by lawyers,” Haines v. Kerner, 404 U.S. 519, 520 (1972), pro se complaints
must also satisfy the “facial implausibility” standard articulated in Twombly and Iqbal. Stanley v.
Vining, 602 F.3d 767, 771 (6th Cir. 2010). See also Davis v. Solis, 2011 WL 831562, *3 (M.D.
Tenn. March 3, 2011). Furthermore, only well-pled factual allegations contained in the complaint
and amended complaint are considered on motions to dismiss pursuant to Fed. R. Civ. P. 12(b)(6).
See Weiner v. Klais and Co., Inc., 108 F.3d 86, 89 (6th Cir. 1997)(Sixth Circuit follows the general
rule that “[m]atters outside the pleadings are not to be considered by a court in ruling on a 12(b)(6)
motion to dismiss.”). Therefore, the Court will not consider the new factual allegations contained
in Plaintiff’s response.
Accordingly, accepting all well-pled factual allegations in the complaint and amended
complaint as true, the Court finds that the Plaintiff has failed to plead sufficient facts to support a
plausible claim for fraud against Shelton, and the motion by Shelton to dismiss the fraud claim is
2. Paul Maynard Hendrick and Jarrod Ashley Turner
In his complaint and amended complaint, Plaintiff alleges that both Hendrick and Turner
made false, misleading reports to the ABA and that the Defendants failed to tell the Plaintiff and
others the truth regarding the ABA report (Complaint ¶¶ 11, 193); Turner made false statements to
Plaintiff personally concerning the library’s readiness for ABA standards (Id. at ¶¶ 17, 19); Turner
made false statements regarding students’ discounts for purchasing books from Law Books for Less
(Id. at ¶¶ 75, 169, ); Hendrick and Turner made false statements to the ABA regarding the financial
stability of AJSL, the condition of the library, work hours of library staff, membership of the board
of directors, role faculty played in school governance and development (Id. at ¶¶ 78, 237-266, 272295, 340-343); Hendrick and Turner made false statements to Plaintiff and other students regarding
their academic and professional credits (Id. at ¶¶ 91-97 ); Hendrick told Plaintiffs and other students
that accreditation would be delayed 10 months and the school could then file another application in
July 2008 and that they had been through all of this before when they started up Florida Coastal
School of Law (Id. at ¶¶ 189, 190, 191); Hendrick and Turner falsely told students they did not
qualify for a one-year sabbatical (Id. at ¶ 191); Hendrick falsely represented the accreditation status
of the school to the Student Bar Association Accreditation Committee (Id. at ¶333); Hendrick filed
false statement with the ABA regarding investors (Id. at ¶¶ 337- 338); and Hendrick and Turner
made false representations of the school’s short term financial position to Osborne (Id. at ¶ 475).
As with Shelton, some of Plaintiff’s allegations of fraud stem from representations made to
third-parties such as the ABA, Student Bar Association Accreditation Committee, and Defendant
Osborne. Plaintiff has failed to allege direct reliance on these statements made by Defendants to
third-parties and, therefore, his allegations of fraud regarding these statements are insufficient
pursuant to Fed. R. Civ. P. 9. See, e.g., Kentucky Laborers Dist. Council, 24 F. Supp. 2d at 772
(citing Highland Motor Transfer Co., 35 S.W.2d at 523–24 ).
Notwithstanding, the Plaintiff identifies various alleged misrepresentations made by these
Defendants on which he relied. Furthermore, Plaintiff alleges that these Defendants knew the
representations were false at the time they made them. For example, Plaintiff alleges that these
statements were intended to give students, including him, a false time line to keep them committed
to the AJSL program of education (Id. at ¶ 191) and to induce Plaintiff and other students to continue
to pay tuition (Id. at ¶ 476). Additionally, Plaintiff alleges that he and the other students relied upon
the misrepresentations and suffered economic loss. (Id. at ¶¶ 452-453, 476-477.) These allegations
comply with the pleading requirements of Rule 9(b) and are sufficient to state a claim for fraud
under Kentucky law. Therefore, Defendants Hendrick and Turner’s motions to dismiss as to the
claims based upon common law fraud will be denied.
3. Dr. Laximah Manchikanti
Plaintiff alleges that Manchikanti misrepresented and deceived Plaintiff and other AJSL
students on April 27, 2008 when he informed them that he had or could secure financial backers to
bail out the debts left behind by the previous administration. Plaintiff contends that Manchikanti
concealed that he had no financial banks, or lending institutions, investors, or financial backers of
any kind to help pay off AJSL/BSL’s severe financial debts.
In order to state a claim against Manchikanti under a fraud theory, the Plaintiff must allege
facts that, if established at trial, would satisfy all six elements of the tort of fraud under Kentucky
law. See Flegles, 289 S.W.3d at 549. However, Plaintiff has failed to plead sufficient facts to
support the elements of inducement, reliance, and resulting damages as a result of the statements
Manchikanti allegedly made on April 27 and 28, 2008. Manchikanti first became involved with
AJSL by entering into an agreement to purchase part of the stock of the school on February 15,
2008. The agreement was negotiated to settle a lawsuit pending in the United States District Court,
Western District of Kentucky, Rust v. Hendrick, 5:07CV-191-TBR. The record reflects that Plaintiff
received no student loan funds after February 2008 and he withdrew as a student at the law school
in May of 2008. Therefore, the alleged statements by Manchikanti occurred more than four months
after Plaintiff received any disbursements of student loan funds from SLX. Therefore, Plaintiff did
not rely upon any representations by Manchikanti when applying for and receiving the funds in
question. Furthermore, Plaintiff withdrew from the law school within a month of the statements in
question. For these reasons, the motion by Defendant Manchikanti to dismiss the fraud claim is
As stated above, in order to state a claim against SLX under a fraud theory, the Plaintiff must
allege facts that, if established at trial, would satisfy all six elements of the tort of fraud under
Kentucky law. See Flegles, 289 S.W.3d at 549. Plaintiff has failed to do so in his complaint and
amended complaint. Specifically, Plaintiff fails to allege that SLX made a material representation
to the Plaintiff that was false.
In response to the motion to dismiss, Plaintiff claims that he contacted SLX prior to
accepting his student loan in 2006, inquired about any complaints or investigations lodged against
SLX, and was informed by customer service representative that SLX was in good standing when,
according to Plaintiff, they were not since SLX had entered into settlements with state Attorneys
General. Plaintiff argues that had this information been released to Plaintiff, Plaintiff would not
have signed the student loan agreement and would have withdrawn from AJSL. (Plaintiff’s
Opposition to SLX’s Motion to Dismiss at 16; Surreply at 4-5.) For the reasons discussed above,
the Court will not consider the new factual allegations contained in Plaintiff’s response in deciding
the motion to dismiss. Weiner, 108 F.3d at 89.
Thus, accepting all well-pled factual allegations in the complaint and amended complaint
as true, the Court finds that the Plaintiff has failed to plead sufficient facts to support a plausible
claim for fraud against SLX. See Stanley v. Vining, 602 F.3d 767, 771 (6th Cir. 2010)(pro se
complaints must also satisfy the “facial implausibility” standard articulated in Twombly and Iqbal.).
Accordingly, the motion by Defendant Shelton to dismiss the fraud claim is granted.
B. Negligence and Gross Negligence
In his complaint and amended complaint, Plaintiff alleges that Shelton was negligent and
grossly negligent in his provision of accounting services to AJSL and Mr. Osborne. He also claims
that Shelton committed professional negligence with respect to Plaintiff. (Complaint ¶¶ 425-431,
432-436, 425-436, 483-486.) Additionally, in his response to the motion to dismiss1, Plaintiff
As he did with the fraud claims against Shelton and SLX, Plaintiff alleges additional
facts in his responses to support his claims for negligence and intentional infliction of emotional
alleges that Shelton was negligent because he did not file, register, or maintain electronic or paper
accounting ledger records of all of AJSL’s account receivables and payable and because he did not
keep accurate tax records. (Plaintiff’s Opposition to Defendant Shelton’s Motion to Dismiss at 18,
DN 95.) With respect to Hendrick and Turner, Plaintiff claims that they were both negligent and
grossly negligent in the mishandling of all of AJSL’s daily and financial operations due to their lack
of experience in running a law school. (Complaint ¶ 454). Finally, Plaintiff alleges that
Manchikanti was both negligent and grossly negligent in purchasing stock in AJSL, failing to assess
all of AJSL true debts, and failing to report “the whole truth to Plaintiff and other students of what
he knew to be true concerning the severe financial debts left behind by Hendrick, Turner, and
Osborne that could never be financially paid or repaired.” (Plaintiff’s Opposition to Defendant
Manchikanti’s Motion to Dismiss at 11.)
To succeed on a claim of negligence the plaintiff must establish that (1) the defendant owed
a duty of care to the plaintiff, (2) the defendant breached its duty, and (3) the breach proximately
caused the plaintiff’s damages. Pathways, Inc. v. Hammons, 113 S.W.3d 85, 88 (Ky. 2003) (citing
Mullins v. Commonwealth Life Ins. Co., 839 S.W.2d 245 (Ky. 1992)). Whether a duty exists is a
question of law to be determined by the court. Id. A claim for gross negligence further requires “an
element either of malice or willfulness or such an utter and wanton disregard of the rights of others
as from which it may be assumed that the act was malicious or willful.” Phelps v. Louisville Water
Co., 103 S.W.3d 46, 51 (Ky. 2003).
Having reviewed the complaint and amended complaint, the Court finds that Plaintiff’s
negligence claims against the Defendants fail to state a plausible claim for relief. First, Plaintiff
distress against the Defendants. For the reasons discussed above, the Court will not consider the
new factual allegations contained in Plaintiff’s responses. See, infra, Section III(A).
failed to allege a specific duty owed to him by Defendants Hendrick, Turner, and Manchikanti.
Additionally, when faced with the motions to dismiss, Plaintiff failed to identify the legal origin or
nature of the duty owed to him by these Defendants. Second, with respect to Defendant Shelton,
the majority of the alleged duties breached by Mr. Shelton were duties owed to AJSL or Defendant
Osborne. Liability on the basis of negligence presupposes that the individual owed a duty to the
injured party. With respect to Plaintiff’s allegation of professional negligence by Shelton toward
Plaintiff, Plaintiff provides no allegation of a contractual relationship between he and Shelton
pursuant to which Shelton was to perform accounting services for Plaintiff. Absent evidence of this
accountant-client relationship, Plaintiff has failed to establish a recognized duty owed to him by
With respect to SLX, SLX provided student loans to Plaintiff pursuant to a written contract
between SLX and Tunne. Plaintiff cannot state a claim for negligence because he cannot
demonstrate that SLX owed any duty to him outside of its contractual loan obligations. See Mims
v. Western-Southern Agency, Inc., 226 S.W.3d 833, 836 (Ky. Ct. App. 2007)(holding failure to
perform a contract does not give rise to liability in tort unless plaintiff can demonstrate an
independent legal duty).
Finally, there are no allegations that support any claim for gross negligence under Kentucky
law against any of the Defendants, and therefore, any such claims against the Defendants are
For these reasons, the motion by Defendants to dismiss the negligence and gross negligence
claims are granted.
C. Conversion Claims Against Hendrick and Turner
Conversion is “the wrongful exercise of dominion and control over property of another.”
State Auto. Mut. Ins. Co. v. Chrysler Credit Corp., 792 S.W.2d 626, 627 (Ky. Ct. App. 1990). To
state a claim for conversion, it must be alleged that “‘(1) the plaintiff had legal title to the converted
property; (2) the plaintiff had possession of the property or the right to possess it at the time of the
conversion; (3) the defendant exercised dominion over the property in a manner which denied the
plaintiff’s rights to use and enjoy the property and which was to the defendant’s own use and
beneficial enjoyment; (4) the defendant intended to interfere with the plaintiff’s possession; (5) the
plaintiff made some demand for the property’s return which the defendant refused; (6) the
defendant’s act was the legal cause of the plaintiff’s loss of the property; and (7) the plaintiff
suffered damage by the loss of the property.’” Meade v. Richardson Fuel, Inc., 166 S.W.3d 55, 58
(Ky. Ct. App. 2005) (quoting Kentucky Ass’n of Counties All Lines Fund Trust v. McClendon, 157
S.W.3d 626, 632 n. 12 (Ky. 2005)).
Here, Plaintiff alleges that Hendrick and Turner took students tuition and fee monies and
converted them to their own use “by ignoring the program of legal education” and by failing “to
develop a high quality institution.” (Complaint ¶¶ 440, 443) In other words, Plaintiff alleges that
Hendrick and Turner converted “AJSL corporate funds for [their] personal and private enrichment”
and that “a small part of these funds were monies given to the AJSL by Plaintiff in the form of
tuition.” (Plaintiff’s Opposition to Defendant Hendrick’s Motion to Dismiss at 22.) The Plaintiff’s
conversion claims against Hendrick and Turner fail because there is no allegation that Plaintiff had
possession of the loan proceeds at the time of the conversion. In fact, Plaintiff repeatedly notes in
his complaint that AJSL collected from SLX the student loans in question and that AJSL failed to
distribute the loan proceeds properly. Therefore, AJSL would potentially have the conversion claim
against Hendrick and Turner for the alleged conversion, not Plaintiff. Additionally, in as much as
Plaintiff asserts a claim for conversion based on allegations that loan proceeds earmarked for living
expenses were withheld from the students for sixty days in the Spring of 2007, this claim is properly
asserted against AJSL who, according to Plaintiff, is the “trustee of the student’s funds.” (Complaint
¶ 143.) Therefore, the motions to dismiss the conversion claims against Hendrick and Turner are
D. Breach of Contract
Plaintiff alleges that “Hendrick, Turner, and CPA Shelton’s acts constitute a breach of
contract under Kentucky law.” (Complaint ¶ 446.)
To recover for breach of contract under
Kentucky law, a plaintiff must “show the existence and the breach of a contractually imposed duty.”
Lenning v. Commercial Union Ins. Co., 260 F.3d 574, 581 (6th Cir. 2001); Strong v. Louisville &
Nashville R. Co., 43 S.W.2d 11, 13 (Ky. 1931). The elements of a breach of contract are: (1) the
existence of a valid contract; (2) breach of the contract; and (3) damages or loss to plaintiff. Id.
Plaintiff has not alleged that he entered into a contractual relationship with Hendrick, Turner, or
Shelton. Absent the existence of a valid contract, the motions to dismiss are granted. Similarly,
Plaintiff’s claim for breach of the covenant of good faith and fair dealing is likewise dismissed
because no contract existed between Hendrick, Turner, or Shelton and the Plaintiff upon which to
impose the implied covenant of good faith and fair dealing. See Farmers Bank and Trust Co. of
Georgetown, Kentucky v. Willmott Hardwoods, Inc., 171 S.W.3d 4, 11 (Ky. 2005); McMullin v.
McMullin, 338 S.W.3d 315, 323 (Ky. Ct. App. 2011).
E. Breach of Fiduciary Duty
Defendants also move to dismiss Plaintiff’s claim for breach of fiduciary duty. Kentucky
law describes fiduciary duty as “one founded on trust or confidence reposed by one person in the
integrity and fidelity of another and which also necessarily involves an undertaking in which a duty
is created in one person to act primarily for another’s benefit in matters connected with such
undertaking.” Hinton Hardwoods, Inc. v. Cumberland Scrap Processors Transport LLC., 2008 WL
5429569, *6 (Ky. Ct. App. Dec. 31, 2008) (quoting Steelvest, Inc. v. Scansteel Service Center, Inc.,
807 S.W.2d 476, 485 (Ky. 1991)). In order to prevail on a claim for breach of fiduciary duty, a
plaintiff must establish that (1) the defendant owes a fiduciary duty to him; (2) the defendant
breached that duty; and (3) the plaintiff suffered damages as a result of the breach. Id. (citing Sparks
v. Re/Max Allstar Realty, Inc., 55 S.W.3d 343, 348 n. 15 (Ky. Ct. App. 2000)).
In the complaint, Plaintiff alleges that Hendrick, Turner, Shelton, and Manchikanti “violated
their fiduciary duties to Plaintiff and more importantly to the paying students of AJSL and BSL by
using deceptive and fraudulent means of enticing Plaintiff and students to pay tuition fees into a
failing, mismanaged operation, with no proper notices given to the Plaintiff and students when each
defendant knew that the law school was facing an upward total of more than $5 million dollars in
debt that could not be cured prior to the first and second ABA site visits.” (Complaint ¶ 482.)
Plaintiff claims that these Defendants “owed the students a fiduciary duty on the management of
student funds.” (Id. at ¶450.) Plaintiff further alleges that payment of his tuition to AJSL qualifies
him as an investor in AJSL. (Complaint ¶ 478.) Finally, Plaintiff asserts that Shelton violated
fiduciary duties as a certified public accountant by failing to monitor, record, and advise the AJSL
regarding its finances and failing to budget funds appropriately. (Complaint ¶ 74.; Plaintiff’s
Opposition to Shelton’s Motion to Dismiss at 18.)
Plaintiff does not have the requisite relationship of trust and confidence with Hendrick,
Turner, Shelton, and Manchikanti that gives rise to a fiduciary relationship. See Thomas v. Nova
Southeastern University, 468 Fed. Appx. 98, 100 (3rd Cir. 2012). Plaintiff has not cited, nor has
the Court found, any authority supporting the conclusion that Hendrick, Turner, Shelton, or
Manchikanti owed Plaintiff a fiduciary duty under the circumstances of this case. In fact, “the
student-administrator relationship is not generally a fiduciary relationship.” McFadyen v. Duke
University, 786 F. Supp. 2d 887, 986 (M.D. N.C. 2011). Furthermore, contrary to Plaintiff’s
suggestion, payment of tuition by a student to a private for-profit school does not transform the
student into an investor or a stockholder of that corporation permitting a derivative suit for the
fraudulent management of the law school. Having failed to establish a fiduciary relationship,
Plaintiff has failed to state a claim for breach of a fiduciary duty. Abney v. Amgen, Inc., 2005 WL
1630154, *9 (E.D. Ky. July 8, 2005). Thus, this claim is properly dismissed against Hendrick,
Turner, Shelton, and Manchikanti.
Plaintiff’s claim against SLX for breach of a fiduciary duty is likewise dismissed because
he has not pled facts indicating the existence of a fiduciary relationship between him and SLX.
Instead, the relationship between SLX and Plaintiff is a relationship between a creditor and a debtor.
While Plaintiff alleges that all of SLX’s transactions with Plaintiff and AJSL students constitutes
a breach of their fiduciary duties, the pleadings do not allege any special circumstances or any
agreement which establishes a fiduciary relationship between SLX and Plaintiff. The creditor-debtor
relationship is generally not fiduciary in nature. Vinson, 56 Fed. Appx. 220, 223 (6th Cir. 2003);
In re Sallee, 286 F.3d 878, 885 (6th Cir. 2002); see also Steelvest, 807 S.W.2d at 485 (noting that
courts typically do not impose a fiduciary duty of disclosure on banks in debtor/creditor
relationships). Thus, this claim is properly dismissed against SLX as well.
F. Intentional Infliction of Emotional Distress
To prevail on a claim of intentional infliction of emotional distress or outrage in Kentucky,
a plaintiff must show that: (1) the defendant’s conduct was intentional or reckless; (2) the conduct
was outrageous and intolerable; (3) there is a causal connection between the conduct and the
plaintiff’s emotional distress; and (4) the emotional distress suffered by the plaintiff is severe.
Gilbert v. Barkes, 987 S.W.2d 772, 777 (Ky.1999); Kroger Co. v. Willgruber, 920 S.W.2d 61 (Ky.
1996). “A party asserting a claim for intentional infliction must allege conduct that is ‘so outrageous
in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be
regarded as atrocious, and utterly intolerable in a civilized community.’” Prather v. Providian Nat.
Bank, 2006 WL 1868335, *6 (Ky. Ct. App. July 7, 2006)(quoting Humana of Kentucky, Inc. v.
Seitz, 796 S.W.2d 1, 3 (Ky. 1990)). The level of outrage required by Kentucky courts for an
intentional infliction of emotional distress claim is a high level “For example, Kentucky courts
declined to find that a nurse [who] told a patient who had just delivered a stillborn baby to ‘shut up,’
or a citizen who erected a billboard in his yard declaring that his neighbor was a child molester,
acted outrageously, intolerably, or ‘beyond all decency.’” Miller v. Reminger Co., L.P.A., 2012 WL
2050239, *5 (W.D. Ky. June 6, 2012)(quoting Brown v. Lexington-Fayette Urban County
Government Dept. , 2010 WL 1529410,* 5 (E.D. Ky. April 15, 2010).
In the complaint and amended complaint, Plaintiff does not allege that Defendants engaged
in any conduct specifically intended to cause him mental anguish. In fact, Defendants correctly note
that the complaint and amended complaint are devoid of any allegation that Plaintiff suffered severe
emotional distress. Considering the complaint and amended complaint as a whole, the Court finds
that Defendants’ actions do not rise to the level of outrageous conduct as defined under Kentucky
law. Thus, the motions to dismiss the intentional infliction of emotional distress claim are granted.
G. Claims for Violations of KRS § 524.020, KRS § 524.040, and KRS § 524.050
Plaintiff alleges that the Defendants Hendrick and Turner violated KRS § 524.020 (bribing
a witness), KRS § 524.040 (intimidating a participant in a legal process), and KRS § 524.050
(tampering with a witness) by meeting with students enrolled at AJSL in an attempt to influence the
students’ prospective testimony, intimidate students, and tamper with students’ testimony.
(Complaint at ¶¶ 345-362.). KRS § 446.070 permits a person injured by the violation of any statute
to “recover from the offender such damages as he sustained by reason of the violation . . . .”
The Court grants the Defendants’ motions to dismiss these claims. Plaintiff failed to address
these claims in response to the motions to dismiss. Additionally, Plaintiff failed to allege that he was
one of the students who Hendrick and Turner subjected to intimidation at the alleged meetings.
H. Section 2 of the Kentucky Constitution
In Count 58 of his complaint, Plaintiff alleges that the Defendants actions violate the due
process of law secured by Section 2 of the Kentucky Constitution. “Section Two of the Kentucky
Constitution . . . protects citizens from the arbitrary exercise of power over life, liberty, or property
by the Commonwealth.” Hummeldorf v. Hummeldorf, 616 S.W.2d 794, 797 (Ky. Ct. App. 1981).
“[N]o cause of action may lie against a private individual for subjecting a citizen to arbitrary action
in violation of Kentucky Constitution, Section 2.” Gritton v. Disponett, 2007 WL 3407459, *12
(E.D. Ky. Nov. 14, 2007). No where in the complaint or amended complaint does Plaintiff allege
that Defendants are state actors or engaged in any activity attributable to the state. Accordingly, the
motions by Defendants to dismiss this claim are granted.
I. Federal and State Antitrust Statutes
Plaintiff’s complaint and amended complaint allege that the Defendants violated federal and
state antitrust laws. Admittedly, Plaintiff’s complaint and amended complaint are not a model of
clarity. However, in reviewing these pleadings as a whole, the Court finds that Plaintiff asserts that
Defendants violated Section 1 of the Sherman Act, 15 U.S.C. § 1, Section 2 of the Sherman Act, 15
U.S.C. § 2, and Kentucky’s antitrust statute, KRS § 367.175. (See, e.g., Complaint at ¶¶ 31-33, 71,
100-104, 167.) Plaintiff alleges that in or around January of 2006, SLX and the Defendants entered
into an agreement whereby SLX compensated them for making SLX the exclusive provider of
private loans to AJSL students. While Plaintiff includes all the Defendants in this claim, the
substantive allegations reflect claims against Hendrick, Turner, Osborne, and SLX.
considering the arguments of the parties and the complaint and amended complaint, the Court
dismisses the federal and state antitrust claims against Defendants Shelton and Manchikanti.
SLX litigated similar antitrust claims related to the same underlying factual allegations
present in this case in Brown v. Student Loan XPress, Inc., Civil Action No. 5:11CV-00090-TBR.
In that case, two former students at AJSL brought claims against AJSL and Hendrick under Section
1 and 2 of the Sherman Act, Section 3 of the Clayton Act, and Kentucky’s antitrust statute, KRS §
367.175. In Brown, as here, SLX filed a motion to dismiss the federal and state antitrust claims
against it. Examining the factual allegations in light of the case law, the district court in Brown
denied SLX’s motion to dismiss the claims brought pursuant to the Sherman Act and KRS §
367.175. Having considered the arguments of the parties, and for the reasons set forth in Brown v.
Student Loan XPress, Inc., 2012 WL 1029467 (W.D. Ky. March 26, 2012), the Court denies the
motions by Defendants Hendrick, Turner, and SLX to dismiss the federal and state antitrust claims
in the present case. Plaintiff has alleged sufficient facts to make a violation of Section 1 and Section
2 of the Sherman Act plausible on its face. Id. at *3-5. Additionally, in as much as Plaintiff alleges
a violation of Kentucky’s antitrust statute, KRS § 367.175, against Turner related to the “law books
for less” conduct, the Court declines to dismiss this allegation at this time. This claim is better
considered at the summary judgment stage.
J. RICO CLAIMS
Section 1962(c) of the Racketeer Influenced and Corrupt Organizations Act makes it
“unlawful for any person employed by or associated with any enterprise engaged in” activities
affecting “interstate or foreign commerce . . . to conduct or participate, directly or indirectly, in the
conduct of such enterprise’s affairs through a pattern of racketeering activity. . . .” 18 U.S.C. §
1962(c). In order to prove a violation of this section of the RICO Act, a plaintiff must plead “(1)
conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Sedima, S.P.R.L. v.
Imrex Co., Inc., 473 U.S. 479, 496 (1985) (footnote omitted); see also Moon v. Harrison Piping
Supply, 465 F.3d 719, 723 (6th Cir. 2006). To plead a pattern of racketeering activity, the plaintiff
must allege at least two predicate acts, although that may not be sufficient. Estate of Wyatt v.
WAMU/JP Morgan Chase Bank, 2012 WL 933289 (E.D. Mich. March 20, 2012)(citing Brown v.
Cassens Transp. Co., 546 F.3d 347, 354 (6th Cir. 2008)). “Only those acts itemized in 18 U.S.C.
§ 1961(1) can constitute predicate offenses for RICO violations.” Frank v. D’Ambrosi, 4 F.3d 1378,
1385 (6th Cir.1993).
When pleading predicate acts of mail or wire fraud, in order to satisfy the heightened
pleading requirements of Rule 9(b), “a plaintiff 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.’” Heinrich v. Waiting Angels Adoption
Services, Inc., 668 F.3d 393, 404 (6th Cir. 2012)(quoting Frank v. Dana Corp., 547 F.3d 564, 570
(6th Cir. 2008)). “A RICO plaintiff is not required to plead or prove first-party reliance on an
allegedly false statement.” Id. (quoting Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 648
(2008)). “To allege a valid RICO claim, however, a plaintiff must show not only that the predicate
act was a ‘but for’ cause of plaintiff’s injuries, but also that it was a proximate cause.” Id. (citing
Holmes v. Securities Investor Prot. Corp., 503 U.S. 258, 268 (1992)). A plaintiff must show “some
direct relation between the injury asserted and the injurious conduct alleged.” Id.
Here, the RICO claims are found in paragraphs 72-88, 88-116, 121-125, 332-335, and 363366 of the original complaint. Plaintiff appears to allege as predicate acts mail and wire fraud, 18
U.S.C. §§ 1341 and 1343; bank fraud, 18 U.S.C. § 1344; witness tampering,18 U.S.C. § 1512;
common law fraud; and antitrust violations. The alleged predicate acts are legally insufficient to
support Plaintiff’s RICO claims.
First, the Plaintiff failed to plead the majority of the predicate acts of mail and wire fraud
with the particularity required by Rule 9(b). “Where a plaintiff makes only ‘loose references’ to
support its allegations of mail and wire fraud, but otherwise fails to identify the parties to those
transactions, circuit courts have upheld the dismissal of the RICO claims under both Rule 9(b) and
RICO itself.” Estate of Wyatt, 2012 WL 933289, *6 (E.D. Mich. March 20, 2012) (citing Jepson,
Inc. v. Makita Corp., 34 F.3d 1321, 1328 (7th Cir. 1994) (“[W]ithout an adequately detailed
description of the predicate acts of mail and wire fraud, a complaint does not provide either the
defendant or the court with sufficient information to determine whether or not a pattern of
racketeering activity has been established.”). A few of Plaintiff’s claims related to mail and wire
fraud do not even involve the use of the mails or wire to transmit the communication. Of the
predicate acts that recite a specific time, date, and content, Plaintiff fails to plead or show some
direct relation between the injury asserted and the predicate act. (See, e.g., Counts 41 and 42, ABA
Accreditation). “When a court evaluates a RICO claim for proximate causation, the central question
it must ask is whether the alleged violation led directly to the plaintiff’s injuries.” Anza v. Ideal Steel
Supply Corp., 547 U.S. 451, 461 (2006). For example, Plaintiff did not suffer any direct loss as a
result of Hendrick’s alleged false statements to ABA consultant Bucky Askew regarding potential
letters of credit available to AJSL. (Complaint ¶ 337.) Instead, the alleged injury suffered by
Plaintiff occurred from misappropriation of student loan proceeds or from the alleged antitrust
violations. As a result, the effort to cast those allegations as a RICO predicate act fails as a matter
of law. Similarly, Plaintiff fails to plead or show some direct relation between the injury asserted
and the predicate act of obstruction of justice/witness tampering,18 U.S.C. § 1512. (Complaint
Additionally, Plaintiff does not have standing to assert bank fraud as a predicate act of RICO
liability. “Only defrauded financial institutions have standing to assert bank fraud as a RICO
predicate.” Herrick v. Liberty League Intern., 2008 WL 2230702, *5 (S.D. Ohio 2008)(citing Ward
v. Nierlich, 617 F. Supp. 2d 1226, 1234 (S.D. Fla. Mar. 28, 2008) (stating that bank fraud was not
the proximate cause of the plaintiffs’ injuries, and therefore, the plaintiffs lacked standing to assert
bank fraud as a predicate act); Honorable v. Easy Life Real Estate System, Inc., 182 F.R.D. 553, 563
(N.D. Ill.1998) (stating that non-bank plaintiffs lacked standing because “[t]he [bank fraud] statute
is intended to protect financial institutions and not those who may be derivatively affected by fraud
committed upon a financial institution.”)). Moreover, even if Plaintiff could assert such a predicate
act, Plaintiff fails to allege that the bank fraud in question proximately caused Plaintiff’s damages.
See Anza, 547 U.S. at 461; Ward, 617 F. Supp. 2d at 1234.
Finally, the predicate acts alleged in the complaint and amended complaint based solely upon
common law fraud and antitrust violations fail to support the RICO claim. As a matter of law,
common law fraud and antitrust violations are not predicate acts under RICO. See Giuliano v.
Fulton, 399 F.3d 381, 388 (1st Cir. 2005); Jennings v. Emry, 910 F.2d 1434, 1438 (7th Cir. 1990).
Since none of Plaintiff’s claimed predicate acts of racketeering activity have been adequately
alleged, Plaintiff’s federal RICO claims fail as a matter of law because Plaintiff does not establish
the minimum of two predicate acts necessary to demonstrate a pattern. Thus, Plaintiff’s RICO
claims are dismissed.
For the reasons set forth above, IT IS HEREBY ORDERED:
(1) The motions by Defendants, Wayne Shelton, Student Loan X-Press, and Jarrod Ashley
Turner, to strike surreplies filed by Plaintiff [DN 112, DN 113, DN 114] are denied.
(2) The motions by Defendants, Wayne Shelton and Laxmaiah Manchikanti, to dismiss all
claims asserted by Plaintiff against them for failure to state a claim [DN 56, DN 60] are granted.
Plaintiff’s claims are dismissed without prejudice.
(3) The motion by Defendants, Student Loan X-Press, Paul Maynard Hendrick, and Jarrod
Ashley Turner, to dismiss for failure to state a claim [DN 63, DN 66, DN 74] is granted in part and
denied in part. The motions by Hendrick, Turner, and SLX to dismiss Plaintiff’s claims for federal
and state antitrust violations are denied. The motion by Hendrick and Turner to dismiss Plaintiff’s
claims for common law fraud are denied. All Plaintiff’s remaining claims are dismissed without
August 24, 2012
cc: Mark Tunne, pro se
counsel of record
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