Iafrate, Sr. et al v. Angelo Iafrate, Inc. et al
ORDER granting in part 25 Motion to Dismiss and Remanding Case to State Court. Signed by District Judge Arthur J. Tarnow. (MLan)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
ANGELO IAFRATE, SR., ET AL.,
Case No. 18-11150
SENIOR U.S. DISTRICT JUDGE
ARTHUR J. TARNOW
U.S. MAGISTRATE JUDGE R.
ANGELO IAFRATE, INC., ET AL.,
ORDER GRANTING IN PART DEFENDANTS’ MOTION TO DISMISS ; AND
REMANDING CASE TO STATE COURT
Before the Court is Defendant Angelo Iafrate, Inc. and Defendant Robert
Adcock’s Motion to Dismiss  filed on September 19, 2018. On April 16, 2019,
the Court held a hearing on the Motion. For the reasons explained below, the Court
GRANTS in part Defendants’ Motion with respect to Plaintiffs’ securities fraud
claims and REMANDS Plaintiffs’ state law claims to the 16th Judicial Circuit
Court in Macomb County.
In 1969, Plaintiff Angelo Iafrate, Sr. (“Angelo Sr.”) established the Angelo
Iafrate Construction Company (“AICC”), a road-building construction company
serving metro-Detroit. AICC issued shares to Angelo Sr. and to his three sons,
Plaintiff Dominic Iafrate, Plaintiff Angelo E. Iafrate (“Angelo Jr.”), and John
Iafrate,1 all of whom had worked for the business at different times.
Around the year 2000, Angelo Sr., Dominic, and John moved to Florida.
Angelo Jr. remained in Michigan to run AICC. In 2002, Angelo Jr. became AICC’s
President and Executive Director. At the time, Defendant Robert Adcock was
serving as AICC’s Executive Vice President.
In 2011, Plaintiffs began to discuss the possibility of selling AICC. After
consulting with AICC’s CPA and corporate counsel, Plaintiffs agreed to sell their
interest in AICC to the Company’s employees via an Employee Stock Ownership
In March 2013, AICC established an ESOP Exploratory Committee of
which Adcock was a member. In July 2013, Plaintiffs were given a presentation
outlining the terms on which the ESOP would purchase their stock in AICC, the
proposed fair market value price, and the risks involved with seller financing an
The presentation also provided information regarding an internal rate of
return, which included the issuance of warrants as additional compensation. “[T]he
Warrant[s] entitle[d] the holder to its proportional share of the increase in value, if
Plaintiff John Iafrate Irrevocable Trust was established for the benefit of Angelo Sr.’s
son, John Iafrate. Angelo Sr. is its trustee.
any, of the per share price of common stock in excess of the Exercise Price.”
Amend. Compl. ¶ 26.
Ultimately, Plaintiffs agreed to finance 100% of the purchase price at below
bank market interest rates. Plaintiffs’ loan to the Company was secured by a stock
pledge. The parties negotiated a purchase price of $36.7 million. A new company
was formed to which Plaintiffs contributed their stock in AICC in exchange for
30,000 shares. Thereafter, the new company (“the Company”) formed an ESOP
which purchased all 30,000 of Plaintiffs’ shares in exchange for $36.7 million. On
December 6, 2013, to finalize the transaction, the Company delivered Senior and
Junior Promissory Notes (“Notes”) to each Plaintiff, which totaled $36.7 million
and provided for quarterly interest payments over ten a period of years. Defs.’ Ex.
B; Ex. C.
The Notes contained mandatory prepayment provisions, § 1.3, which
required partial prepayments on an annual basis if the Company had excess funds.
The Notes also contained discretionary prepayment provisions, § 1.4, which
allowed for prepayment of all or part of the principal at any time. These
prepayment provisions authorized only pro rata payments to each Plaintiff.
In addition to the Notes, the Company issued Common Stock Warrants
(“Warrants”) to each Plaintiff. The Warrants entitled each Plaintiff, as holder, the
option to: purchase shares from the Company at the $225.00 Exercise Price per
share; or, redeem shares for cash payment in the amount of the share price in effect
as of such date (“Strike Price”) less the Exercise Price. The Warrants also
contained a Warrant Term provision which provided that they “terminate on, and
may no longer be exercised on or after, the date that is 60 days after the date that
the Company has paid in full both the Senior Promissory Note and Junior
Promissory Note issued by the Company in favor of the Holder.” Common Stock
Warrant, Defs.’ Ex. A, ¶ 3.
Plaintiffs also entered into an Intercreditor Agreement between themselves
which provided that their security interests would have equal priority and would be
equally enforced for their pro rata benefit.
After closing, Adcock became the president of the Company and co-Trustee
of the ESOP. Plaintiffs Dominic and Angelo Jr. remained on the Company’s Board
In March 2016, Adcock announced that he had sought permission from a
bonding company to make a $4 million prepayment in accordance with the Notes.
At that time, despite the agreements’ pro rata clauses, Angelo Jr. told Adcock that
he wanted his portion of prepayment on the Notes paid to his father, Angelo Sr.,
because of his age.
In November 2016, Adcock obtained approval for a $5.4 million prepayment
on Angelo Sr.’s Notes. On December 20, 2016, Adcock directed the Company to
make a $5.4 million payment directly to Angelo Sr. Angelo Sr. held the money in
trust for all Plaintiffs.
After the payment to Angelo Sr., the Company’s executives questioned
Adcock about whether Angelo Sr. had exercised his Warrant. Plaintiffs allege that
“at that point, if not sooner, Adcock became aware that the Company could take
the position that a Warrant-triggering event had occurred[.]” Amend. Compl. ¶ 84.
On February 17, 2017, Adcock directed the Company to make payments to
Dominic and John Iafrate Trust in the amounts of $9.7 million and $3.3 million,
respectively. Dominic and John Iafrate Trust held the $13 million in trust pursuant
to the Intercreditor Agreement.
On February 2, 2018, Adcock directed the Company to make a payment of
$8.9 million to Angelo Jr. Following the final payment to Angelo Jr., the entire
indebtedness evidenced by the Notes, plus interest, had been paid in full.
On March 20, 2018, all Plaintiffs attempted to exercise their Warrants for
cash. The Company, however, refused to make payments to Angelo Sr., John
Iafrate Trust, and Dominic, claiming that their Warrants had expired sixty days
after the Company had paid the outstanding principal balances on their respective
Notes. The Company honored Angelo Jr.’s Warrant because he exercised his
Warrant within sixty days of his Notes’ payments. In its Warrant distribution to
Angelo Jr., the Company valued each share at $856.50.
On April 11, 2018, Plaintiffs commenced this action alleging securities fraud
and breach of contract. On July 5, 2018, Plaintiffs filed an Amended Complaint
 alleging: securities violations under § 10b(5) (Counts I and II); and state law
claims for breach of contract (Count III), reformation (Count IV), unjust
enrichment (Count V), and fraud (Count VI).
The Company and Robert Adcock filed a Motion to Dismiss  on
September 19, 2018. Plaintiffs filed a Response  on October 31, 2018.
Defendants filed a Reply  on December 7, 2018. The Court held a hearing on
the Motion on April 16, 2019.
Defendants move to dismiss the Amended Complaint pursuant to Fed. R.
Civ. P. 12(b)(6). “To survive a motion to dismiss, [Plaintiffs] must allege ‘enough
facts to state a claim to relief that is plausible on its face.’” Traverse Bay Area
Intermediate Sch. Dist. v. Mich. Dep’t of Educ., 615 F.3d 622, 627 (6th Cir. 2010)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). On a Rule
12(b)(6) motion to dismiss, the Court must “assume the veracity of [Plaintiffs’]
well-pleaded factual allegations and determine whether [they are] entitled to legal
relief as a matter of law.” McCormick v. Miami Univ., 693 F.3d 654, 658 (6th Cir.
2012) (citing Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009)).
The gravamen of the Amended Complaint is Plaintiffs’ claim that Adcock
misrepresented the Company’s position concerning the exercisability of the
Warrants during the ESOP transaction and payment distribution process in
violation of federal securities laws.
Section 10(b) of the Securities Exchange Act 1934 provides: “It is unlawful
for any person . . . [t]o use or employ, in connection with the purchase or sale of
any security . . . any manipulative or deceptive device or contrivance in
contravention of such rules and regulations . . . .” Ernst & Ernst v. Hochfelder, 425
U.S. 185, 195 (1976) (quoting 15 U.S.C. 78j).
“To state a securities fraud claim under Section 10(b), [Plaintiffs] must
allege, in connection with the purchase or sale of securities, the misstatement or
omission of a material fact, made with scienter, upon which [Plaintiffs] justifiably
relied and which proximately caused [Plaintiffs’] injury.” Frank v. Dana Corp.,
547 F.3d 564, 569 (6th Cir. 2008) (internal citation and quotation marks omitted).2
Defendants also cite the heightened pleading standard for securities fraud claims
set forth in Rule 9(b) and the Private Securities Litigation Reform Act (“PSLRA”)
which requires that the Amended Complaint “allege the time, place, and content of
the alleged misrepresentation [or omission] on which [Plaintiffs] relied [and] the
fraudulent scheme . . . .” In re Omnicare, Inc. Sec. Litig., 769 F.3d 455, 461, 470
(6th Cir. 2014) (noting that to satisfy this heavy burden, “plaintiffs must identify
each misleading or false statement and explain how it is misleading . . . .”).
A. Failure to disclose the Company’s position on warrant-triggering events
In Count I, Plaintiffs allege that Adcock had a duty to disclose the
Company’s position that payment of an individual Plaintiff’s notes was a warranttriggering event. Plaintiffs further allege that Adcock devised a scheme to
intentionally conceal this position in April 2017 when Angelo Sr.’s warrant term
Plaintiffs’ argument that Defendants made a material omission in connection
with the ESOP transaction by failing to disclose their view that the warrant clock
began ticking upon payment of an individual holder’s notes is unavailing. By
Plaintiffs’ own admissions, Adcock could not have omitted this information “in
connection with” the ESOP transaction because the Company had not even
adopted this position by the date of closing. Adcock is alleged to have devised a
scheme to formulate and conceal the Company’s position after Angelo Sr.’s Notes
had been paid in full, nearly four years after the close of the ESOP transaction.
Moreover, Adcock owed no duty to disclose to Plaintiffs—creditors in the
ESOP transaction—the Company’s interpretation of the Warrant Term provision.
As Defendants pointed out at the hearing, it would be absurd to impose on Adcock,
who was acting as trustee of the ESOP, a duty to tell Plaintiffs how to interpret
their Warrants in a way that would harm the very group of employees he
represents. And even if, as Plaintiffs suggest, Adcock had “a duty to disclose [new
information which] render[ed] a prior disclosure objectively inaccurate,
incomplete, or misleading[,]” In re Omnicare, 769 F.3d at 471, Adcock’s
subjective interpretation of a contractual provision would not fall within these
disclosure requirements. Adcock did not discover new information which would
have rendered any aspect of the ESOP transaction misleading—at most, he
changed his interpretation of a single clause in the Common Stock Warrant to the
benefit of ESOP participants.
B. Adcock’s misrepresentation regarding the fair market value of the stock
In Count II, Plaintiffs allege that Adcock manipulated the Company’s
financial statements and intentionally undervalued the share price of the Company
in its warrant distribution to Angelo Jr. Plaintiffs further allege that, in February
2018, Adcock admitted as much to Angelo Jr. when he stated, “I am not going to
bullshit a bullshitter, we undervalued the stock.” Amend. Compl. ¶ 111.
Even if the Court were to construe Adcock’s statement as having been made
in connection with Angelo Jr.’s exercise of his Warrant for cash, Plaintiffs have not
shown that Angelo Jr. justifiably relied on Adcock’s statements in electing cash
payment in lieu of shares for purposes of stating a § 10b-5 claim. As Defendants
point out, Adcock confessed to Angelo Jr. that he had undervalued the stock in
February 2018, well in advance of March 20, 2018, the date on which Angelo Jr.
exercised his Warrants. That Angelo Jr. exercised his Warrants notwithstanding the
fact that he knew Adcock had undervalued the market price of the stock
undermines Plaintiffs’ claim that Angelo Jr. justifiably relied on Adcock’s
Plaintiffs have failed to state a plausible claim for relief under § 10(b)-5.
Accordingly, the Court will dismiss Counts I and II of the Amended Complaint.
Remaining in this action are Plaintiffs’ Michigan law claims. Where, as here,
the Court’s jurisdiction “originally [is] premised on a federal claim and that claim
subsequently [is] dismissed, remand to the state court [is] a matter of discretion.”
Harper v. AutoAlliance Intern., Inc., 392 F.3d 195, 211 (6th Cir. 2004). In
determining “whether to resolve a pendent state claim on the merits . . . . [the
Court] should consider the interests of judicial economy and the avoidance of
multiplicity of litigation and balance those interests against needlessly deciding
state law issues.” Id. (internal citations and quotation marks omitted).
At its core, this case is a breach of contract dispute that belongs in state
court. Plaintiffs’ attempt to persuade the Court that this action concerns “plain
vanilla securities fraud” is unavailing. That the case involves the sale of securities
is not dispositive of the inquiry under § 10(b)-5. The Court need not, and will not,
resolve Plaintiffs’ state claims on the merits, but will instead remand to the 16th
Judicial Circuit Court.
For the reasons explained above,
IT IS ORDERED that Defendants’ Motion to Dismiss  is GRANTED in
part as to Counts I and II.
IT IS FURTHER ORDERED that this case is HEREBY REMANDED to the
Macomb County 16th Judicial Circuit Court.
Dated: April 25, 2019
s/Arthur J. Tarnow
Arthur J. Tarnow
Senior United States District Judge
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