RedHawk Holdings Corp., et al v. Schreiber, et al
Filing
122
ORDER AND REASONS GRANTING 74 Motion for Summary Judgment and Alternatively Judgment on the Pleadings, as set forth in document. Signed by Judge Ivan L.R. Lemelle on 10/9/2018. (jls)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
REDHAWK HOLDINGS CORP., ET AL
CIVIL ACTION
VERSUS
NO. 17-819
DANIEL J. SCHREIBER, ET AL
SECTION: “B”(3)
ORDER AND REASONS
Before the Court is Defendants’ Motion for Summary Judgment
and
Alternatively
Judgment
on
the
Pleadings
(Rec.
Doc.
74),
Plaintiffs’ Response and Memorandum in Opposition (Rec. Doc. 76),
and Defendants’ Reply Memorandum (Rec. Doc. 80). For the reasons
discussed below,
IT IS ORDERED that the motion is GRANTED.
FACTS AND PROCEDURAL HISTORY
This case is about an unsuccessful business venture between
two
experienced
businessmen.
Plaintiff
RedHawk
Holdings
Corporation (“RedHawk”) is a Nevada corporation with its principal
place of business in Lafayette Parish, Louisiana. See Rec. Doc. 1
at 1. Plaintiff Beechwood Properties, LLC (“Beechwood”) is a
Louisiana limited liability company with its principal place of
business in Lafayette Parish, Louisiana. See id. G. Darcy Klug is
the CFO and majority shareholder of both Plaintiffs. See Rec. Doc.
74-1 at 9. Defendant Daniel J. Schreiber is the former CEO and a
former Director of RedHawk. See id. Defendant Schreiber is also
1
the trustee and beneficial owner of at least some of the securities 1
held by Defendant Schreiber Living Trust – DTD 2/08/95. See Rec.
Doc. 76-1 at 1-2.
In March 2014, American Medical Distributors, Inc. (“AMD”)
entered into an Asset Purchase Agreement (“APA”) with RedHawk. See
Rec. Doc. 1 at 2. RedHawk agreed to issue AMD or its designees
approximately
half
of
RedHawk’s
shares.
See
id.
at
2-3.
In
exchange, AMD agreed to pay RedHawk $60,000 and to assign RedHawk
all of AMD’s assets and property. See id. at 3. The principal asset
was exclusive distribution rights of non-contact thermometers in
North, Central, and South America. See Rec. Doc. 74-1 at 12.
The transaction, known as the AMD-RedHawk Transaction, was
executed as provided in the APA. See Rec. Doc. 1 at 4. Plaintiff
Beechwood and Defendants provided AMD $60,000; thereafter, AMD
paid $60,000 to RedHawk and assigned RedHawk all of its assets
including the distribution rights of the non-contact thermometers.
See id. In exchange, RedHawk assigned the agreed-upon shares to
four designees of AMD. See id. The four designees were Beechwood,
Schreiber Trust, Howard Taylor, and Paul Rachmuth. See id.
All stemming from the executed transaction, Plaintiffs allege
numerous fraudulent misrepresentations and omissions and contract
1
There is a dispute as to which securities are held by Defendant Schreiber.
Defendants contend that Defendant Schreiber holds all of them. See Rec. Doc.
76-1 at 1-2. Plaintiffs contend that he only holds certain ones. See id.
2
breaches by Defendant Schreiber. See Rec. Doc. 74-1 at 9. There
are three main allegations that give rise to their cause of action.
First, Plaintiffs allege that Defendant, along with Paul Rachmuth
who served as a counsel for AMD and Beechwood in the transaction,
failed to disclose possible patent infringement litigation that
significantly
impaired
the
value
of
the
distribution
rights
assigned to RedHawk. See Rec. Doc. 1 at 4. Second, Defendant
Schreiber failed to uphold his agreement with Beechwood to split
RedHawk’s expenses on a 50/50 basis and contribute to other assets.
See id. at 11-14. Third, Defendant Schreiber failed to disclose
his past SEC issues to RedHawk and its investors. See Rec. Doc. 76
at 7-8. 2
On January 31, 2017, Plaintiffs filed a six-claim Complaint.
See Rec. Doc. 1. Specifically, Plaintiffs allege (1) Securities
Fraud under Sections 10B and 20 of the Exchange Act and SEC Rule
10b-5; (2) Securities Fraud under Sections 18 and 20 of the
Exchange Act; (3) Fraud under State Law; (4) By Beechwood for
Breach of Contract; (5) By Beechwood for Unjust Enrichment; and
(6) By RedHawk for Defendant Schreiber’s Breach of Fiduciary
Duties. See id. at 19-29.
2
In 2009, following allegations of bribery to the Securities and Exchange
Commission (“SEC”), Defendant Schreiber entered into a consent judgment with
the SEC and agreed to pay a civil penalty. See Rec. Doc. 76-1 at 3. In November
2015, the FINRA denied RedHawk’s request to change its stock symbol because of
its affiliation with Defendant Schreiber. See Rec. Doc. 74-1 at 12.
3
On June 15, 2018, Defendants filed a Motion for Summary
Judgment and Alternatively Judgment on the Pleadings (Rec. Doc.
74-1). On July 19, 2018, Plaintiffs filed a Response and Memorandum
in Opposition (Rec. Doc. 78). On August 2, 2018, Defendants filed
a Reply Memorandum (Rec. Doc. 80).
LAW AND ANALYSIS
A. Summary Judgment Standard
Under Federal Rule of Civil Procedure 56, summary judgment is
appropriate
when
interrogatories,
“the
and
pleadings,
admissions
on
depositions,
file,
answers
together
with
to
the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to judgment as
a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 322
(1986) (quoting Fed. R. Civ. P. 56(c)); see also TIG Ins. Co. v.
Sedgwick James of Wash., 276 F.3d 754, 759 (5th Cir. 2002). A
genuine issue of material fact exists if the evidence would allow
a reasonable jury to return a verdict for the nonmoving party. See
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The
court
should
view
all
facts
and
evidence
in
the
light
most
favorable to the non-moving party. See United Fire & Cas. Co. v.
Hixson
Bros.
conclusory
Inc.,
453
allegations
F.3d
283,
285
(5th
are
insufficient
to
Cir.
2006).
defeat
Mere
summary
judgment. See Eason v. Thaler, 73 F.3d 1322, 1325 (5th Cir. 1996).
4
The
movant
must
point
to
“portions
of
‘the
pleadings,
depositions, answers to interrogatories, and admissions on file,
together
with
the
affidavits,
if
any,’
which
it
believes
demonstrate the absence of a genuine issue of material fact.”
Celotex, 477 U.S. at 323. If and when the movant carries this
burden, the non-movant must then go beyond the pleadings and
present other evidence to establish a genuine issue. See Matsushita
Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586
(1986). However, “where the non-movant bears the burden of proof
at trial, the movant may merely point to an absence of evidence,
thus shifting to the non-movant the burden of demonstrating by
competent summary judgment proof that there is an issue of material
fact warranting trial.” Lindsey v. Sears Roebuck & Co., 16 F.3d
616, 618 (5th Cir. 1994). “This court will not assume in the
absence of any proof that the nonmoving party could or would prove
the necessary facts, and will grant summary judgment in any case
where critical evidence is so weak or tenuous on an essential fact
that it could not support a judgment in favor of the [non-movant].”
McCarty v. Hillstone Rest. Grp., 864 F.3d 354, 357 (5th Cir. 2017).
B. Defendants are entitled to summary judgment on all claims.
a. Defendants are entitled to summary judgment on Claim
1, Claim 2, and Claim 3 because Plaintiffs’ claims
are prescribed as a matter of law as Plaintiffs knew
of Defendant Schreiber’s SEC issues in August 2014.
5
Plaintiffs offer several theories in their attempt to satisfy
Claim 1, Claim 2, and Claim 3. See Rec. Doc. 76 at 13-17. This
section analyzes the theory that is based on Defendant Schreiber’s
alleged failure to disclose his FINRA fraud and SEC issues. The
other theories are addressed, and disposed of, in the latter
sections.
Claims under Sections 10 and 20 “may be brought no later than
the
earlier
of
(1)
2
years
after
discovery
of
the
facts
constituting the violation; or (2) 5 years after such violation.”
28
U.S.C.
§
1658(b).
Claims
under
Section
18
shall
not
be
maintained to enforce liability “unless brought within one year
after the discovery of the facts constituting the cause of action
and within three years after such cause of action accrued.” 15
U.S.C. § 78r(c). Fraud under Louisiana state law is subject to
“liberative prescription of one year.” La. C.C. Art. 3492.
Generally, under federal law, the running of a prescriptive
period starts when the aggrieved party has knowledge of the facts
forming
the
basis
of
their
cause
of
action.
See
Jensen
v.
Snellings, 841 F.2d 600, 606 (5th Cir. 1988) (stating that this
rule is applicable to actions for securities fraud). Specifically,
with securities fraud, the controlling date for the commencement
of the running of statute of limitations is when a purchaser of
securities knew or, in the exercise of reasonable diligence, should
6
have known of the alleged wrongdoing. See Rowten v. Wall St.
Brokerage L.L.C., 2016 U.S. App. LEXIS 7363 *1, *8 (5th Cir. Tex.
2016) citing to Topalian v. Ehrman, 954 F.2d 1125, 1133 (5th Cir.
1992).
It is undisputed that Plaintiffs were aware of Defendant
Schreiber’s SEC issues in August 2014. 3 Plaintiffs argue that the
commencement of the running is “well into 2016” because that is
when Plaintiff realized Defendant Schreiber’s state of mind as to
his SEC’s issues. See Rec. Doc. 76 at 19. This argument is
unconvincing. See Topalian, 954 F.2d at 1133-1134 (stating that
general allegations suggesting concealment of fraud are not enough
to survive summary judgment). Plaintiffs also argue that it was
not until March 2016 that they knew RedHawk would be restricted
because of its affiliation with Defendant Schreiber. See Rec. Doc.
76 at 19. Plaintiffs may have not known the extent of Defendant
Schreiber’s issues or that his issues would limit their operation.
But, that does not negate the fact that Plaintiffs knew of the
facts forming the basis of their claims. Plaintiffs should have
inquired
further
into
Defendant
Schreiber’s
issues
and
their
consequences. See Rowten, 2016 U.S. App. LEXIS 7363 at *8 (5th
3
“Plaintiffs do not dispute that Klug was informed of the need to disclose
[Defendant] Schreiber’s past SEC issues in connection with Red[H]awk in August
2014, or that Red[H]awk disclosed these issues in its 10-k filing for the fiscal
year ending January 31, 2015.” Rec. Doc. 80 at 2 citing to “Plaintiffs’ Response
to Defendants’ Statement of Uncontested Material Facts at 5.”
7
Cir. Tex. 2016)(“If a reasonable person would inquire further, a
plaintiff
must
proceed
with
a
reasonable
and
diligent
investigation of the facts the plaintiff has learned and is charged
with the knowledge of all facts such an investigation would have
disclosed.”). 4 Throughout their pleadings, Plaintiffs state that
Defendant Schreiber continuously mislead them from the start of
the transaction. Klug stated in an email that he had been “building
a file” since 2014.
Rec. Doc. 74-1 at 29. Plaintiffs were not
free to ignore these facts. See Conwill v. Greenberg Traurig,
L.L.P., 2010 U.S. Dist. LEXIS 76824 *1, *7 (E.D. La. 2002) citing
to Jensen v. Snellings, 841 F.2d 600, 607 (5th Cir. 1988) (stating
that plaintiffs are not allowed to leisurely discover the full
details of the alleged scheme).
The prescriptive period began to run in August 2014, allowing
Plaintiffs to bring Claim 1 no later than August 2016, Claim 2 no
later than August 2015, and Claim 3 no later than August 2015.
Plaintiffs filed their complaint in January 2017, well after the
time required by law. Therefore, summary judgment as to Claim 1,
Claim 2, and Claim 3 is necessary.
b. Even if Plaintiffs can establish the existence of an
oral contract, Defendants are entitled to summary
4
Plaintiffs suggest collusion between Defendant Schreiber and Paul Rachmuth
(who served as a counsel for AMD and Beechwood in the transaction).
Specifically, Plaintiffs suggest that Defendant Schreiber ordered Paul Rachmuth
to not conduct due diligence on the transaction. See Rec. Doc. 76 at 4.
8
judgment on Claim 4 because Plaintiff
ratified the alleged fraud and breaches.
Beechwood
Ratification occurs when one, induced by fraud, enters a
contract and continues to accept benefits under the contract after
he becomes aware of the fraud. See LHC Nashua P'ship, Ltd. v. PDNED
Sagamore Nashua, L.L.C., 659 F.3d 450, 461 (5th Cir. 2011) citing
to Olney Sav. & Loan Assoc. v. Trinity Banc Sav. Assoc., 885 F.2d
266, 271 (5th Cir. 1989). To prove ratification, a defendant must
establish that the plaintiff (1) had full knowledge of the fraud
or
breach
intentional
at
the
choice
time
to
of
ratification
ratify
the
and
conduct
in
(2)
a
light
voluntary
of
such
knowledge. See McKinney/Pearl Rest. Partners, L.P. v. Metro. Life
Ins. Co., 241 F. Supp. 3d 737, 759 (N.D. Tex. 2017). If acts of
ratification are genuinely disputed, the issue of ratification
becomes one for the trier of fact to establish. See id.
It
is
undisputed
that
Plaintiff
Beechwood
continued
to
purchase RedHawk stock after learning of the issues that are the
source of this lawsuit. 5 Plaintiff purchased RedHawk stock days
after learning of patent infringement litigation against similar
thermometers (“Exergen litigation”). Plaintiff went on to purchase
enough stock to become majority shareholder of RedHawk within one
5
Defendants contend that “Klug acquired millions of shares throughout the time
[Defendant] Schreiber remained involved in [RedHawk], after [Defendant]
Schreiber’s removal, and most importantly, after this lawsuit was filed.” Rec.
Doc. 74-1 at 29.
9
month of alleged misrepresentations. Plaintiff Beechwood, through
Klug, continued to purchase stock on a regular basis for some time,
even after this lawsuit was filed. See Rec. Doc. 74-1 at 19.
Plaintiffs allege that the effects of the alleged fraud were
reflected in the share prices at the time of the purchases. This
is unconvincing and insufficient to overcome summary judgment.
Therefore, the Court finds, as a matter of law, that Plaintiff
Beechwood ratified any alleged misrepresentations or breaches and
summary
judgment
as
to
this
claim
is
warranted.
Plaintiff’s
conclusory allegations do not create disputed material facts.
c. Defendants are entitled to summary judgment on Claim
5 because Plaintiff Beechwood is precluded from
asserting an unjust enrichment claim.
In relevant part, the Louisiana Civil Code states that an
unjust enrichment claim shall not be available if another remedy
provided by law is available. See La. Civ. Code art. 2298. “The
unjust enrichment remedy is 'only applicable to fill a gap in the
law where no express remedy is provided.’” Walters v. MedSouth
Record Management, LLC, 38 So. 3d 243, 244 (La. 2010). Hence, if
a plaintiff brings a claim on an express or implied contract, that
claim precludes the application of an unjust enrichment theory
because the potential claim constitutes another remedy provided by
law. See Jackson v. Capitol City Family Health Ctr., 928 So. 2d
129, 133 (La. App. 1 Cir. 12/22/05); see also Richard v. WalmartMart Stores, Inc., 559 F. 3d 341, 346 (5th Cir. 2009) (stating
10
that unjust enrichment is subsidiary, correct in nature, and “will
only be allowed when there is no other remedy at law”). The outcome
of
the
potential
claim
is
irrelevant
to
preclusion
of
the
application. See Patterson v. Dean Morris, L.L.P., 2011 WL 1743617
(E.D. La. May 6, 2011) (stating that a plaintiff is not entitled
to recover under the theory of unjust enrichment because they are
unsuccessful on another available remedy).
Plaintiff Beechwood, through Claim 4, asserts a claim on an
express or implied contract. See Rec. Doc. 1. Therefore, their
unjust enrichment claim is precluded and summary judgment as to
this claim is necessary.
d. Defendants are entitled to summary judgment on Claim
6 because the patent infringement litigation against
the thermometer technology was speculative and there
is no duty to disclose speculative litigation.
To prevail on a claim for breach of fiduciary duty under
Louisiana law, a plaintiff must prove that there was a fiduciary
duty owed to them by the defendant, the defendant acted in a way
to violate that duty, and that the plaintiff was damaged as a
result of those actions. See Jobe v. ATR Mktg., Inc., 1998 U.S.
Dist. LEXIS 18171, *1, *22 (5th Cir. 1998). It is well established
that fiduciary duties are owed when there is a relationship between
a director or officer and a corporation. See id at 23. There is no
violation of fiduciary duties when there is no duty to disclose.
11
See In re Enron Corp. Secs., 235 F. Supp. 2d 549, 574 (S.D. Tex.
2002). There is no duty disclose speculative litigation. 6
It is undisputed that the patent infringement litigation
against
the
thermometer
technology
obtained
by
RedHawk
was
speculative. To date, there has been no patent infringement claims
brought
against
Defendant
RedHawk.
Plaintiffs
offer
only
conclusory allegations that RedHawk would have been sued had it
sold the thermometers. That is not enough. See Eason v. Thaler, 73
F.3d 1322, 1325 (5th Cir. 1996)(stating that mere conclusory
allegations are insufficient to defeat summary judgment); see also
FED. R. CIV. P. 9(b) (establishing that allegations of fraud must
be stated with particularity). Without pointing to more in the
pleadings or discovery materials, summary judgment as to Claim 6
is warranted.
New Orleans, Louisiana, this 9th day of October, 2018.
___________________________________
SENIOR UNITED STATES DISTRICT JUDGE
6
Fifth Circuit case law is lacking on this issue. Defendants offer several
Second Circuit cases to support their position. See Rec. Doc. 74-1 at 22-23.
Plaintiffs attempt to counter Defendants’ argument but the cases offered by
Plaintiff do not seem to be on point. See Rec. Doc. 76 at 24.
12
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