Integrity Dominion Funds, LLC v. Lazy Deuce Capital Co., LLC et al

Filing 29

ORDER granting in part and denying in part 9 Motion to Dismiss; granting 18 Motion to Dismiss. (Written Opinion). Signed by Judge Richard H. Kyle on 07/12/12. (kll)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA

Integrity Dominion Funds, LLC,

Civ. No. 12-254 (RHK/JSM)

Plaintiff,
MEMORANDUM OPINION
AND ORDER
v.
Lazy Deuce Capital Co., LLC, et al.,
Defendants.
________________________________________________________________________
Lucas J. Thompson, Aaron D. Hall, Twin Cities Law Firm, LLC, Minneapolis,
Minnesota, for Plaintiff.
Brian L. McMahon, McMahon Law Firm LLC, Saint Paul, Minnesota, for Defendants
Lazy Deuce Capital Co., LLC, Lazy Deuce Development Co., LLC, Semita Partners
LLC, and Frank W. Delahanty, III.
Robert M. Gardner, Gardner Law Office, Burnsville, Minnesota, for Defendant Brent
Johnson.

INTRODUCTION
This case arises out of investments Plaintiff Integrity Dominion Funds, LLC
(“Integrity”), a private investment fund, made with Defendant Lazy Deuce Capital Co.,
LLC (“Lazy Deuce”), an investment company. According to the Amended Complaint,
Lazy Deuce’s principals Brian Baldwin and Brent Johnson pitched investment
opportunities to Thomas Barrett and George Bakalov, principals of Integrity. They
presented Lazy Deuce as possessing unique experience in securing hard-to-value
collateral and financing lawsuits for profit, and Defendant Frank W. Delahanty III, Lazy

Deuce’s chief compliance officer, attested to the company’s compliance with regulations.
Integrity invested in Lazy Deuce through several short-term, high-interest loans. Lazy
Deuce, in turn, invested that money in a fund controlled by Dblaine Capital, LLC
(“Dblaine”), on the condition that Dblaine channel some of the funds to Defendant
Semita Partners LLC (“Semita”), a niche investment company. Semita funneled the
money back to Lazy Deuce, which disbursed the funds to its principals.
Shortly thereafter, Integrity discovered that Baldwin had left Lazy Deuce and
started a new investment company. At roughly the same time, Lazy Deuce defaulted on
its loans with Integrity. Integrity then brought the instant action, asserting various fraudbased claims. Presently before the Court are two Motions to Dismiss under Federal
Rules of Civil Procedure 9(b) and 12(b)(6) – one by Delahanty and Semita, and one by
Johnson. For the reasons that follow, the former Motion will be granted and the latter
Motion will be granted in part and denied in part.
BACKGROUND
Integrity is a small private investment fund incorporated in Delaware and based in
Florida. (Am. Compl. ¶ 1.) Lazy Deuce is a Minnesota corporation specializing in highinterest, short-term loans. (Id. ¶ 2.) Baldwin and Johnson are principals of Lazy Deuce.
(Id. ¶¶ 5-6.) Baldwin is also a principal of Semita (id. ¶ 5), and Delahanty is the chief
compliance officer of both Lazy Deuce and Semita (id. ¶ 7).
According to the Amended Complaint, Baldwin and Johnson presented Lazy
Deuce to Barrett and Bakalov, two of Integrity’s officers, as a unique investment firm
specializing in securing hard-to-value collateral for short-term, high-interest loans and
2

financing lawsuits. (Id. ¶¶ 19-20.) Johnson told Barrett that these lawsuits provided the
bulk of Lazy Deuce’s funding. (Id. ¶ 27.) Baldwin and Johnson represented that Lazy
Deuce only lent money when it could secure multiple times the amount of its investment
with collateral that it could easily liquidate. (Id. ¶¶ 23, 25.) They also represented that
Lazy Deuce did not have to fear that its borrowers would default because it had both (a)
excellent collateral in its borrowers and (b) a large pool of reserve capital with which it
could pay its investors. (Id. ¶¶ 24, 28.) It remains largely unclear who said what exactly,
and to whom. (See id. ¶¶ 19-29.) Relying on these representations, Integrity made
several short-term, high-interest loans to Lazy Deuce totaling $2,350,000 (between
November 12, 2010 and May 26, 2011). (Id. ¶¶ 38, 45-46, 64, 90, 95.)
March 10, 2011 Meeting
Throughout their relationship, Lazy Deuce’s principals met with Integrity’s
principals regarding the safety of Lazy Deuce’s operations. (Id. ¶ 52.) One such meeting
occurred on March 10, 2011, when Barrett and Bakalov met with Baldwin, Johnson, and
Delahanty. (Id. ¶ 53.) Integrity specifically inquired whether Lazy Deuce’s loans to
Dblaine, an investment-advisory company, presented any risks to Integrity. (Id. ¶ 54.)
Lazy Deuce’s representatives stated that the company had a $2 million lien on Dblaine’s
assets, reassured Integrity that these liens and Lazy Deuce’s reserve pool protected its
interests, and “claimed that Delahanty ensure[d] the compliance and integrity of [Lazy
Deuce’s] lending activities.” (Id. ¶¶ 55-59.) One Integrity representative asked if any
scenario existed in which Integrity would not get its money back, and “Baldwin, Johnson,
and Delahanty answered ‘no.’” (Id. ¶¶ 61-62.) Although this meeting was recorded,
3

Integrity has not submitted a transcript indicating what was said by each of the Lazy
Deuce representatives.
Fallout
According to the Amended Complaint, Lazy Deuce was borrowing from Integrity
at 3% to 4% monthly interest and lending money to Dblaine at 15% to 18% annual
interest. 1 (Id. ¶ 70; see also id. Ex. F.) Almost all of Lazy Deuce’s investment capital
was invested in Dblaine. (Id. ¶ 68.) As a condition of its loans to Dblaine, Lazy Deuce
required Dblaine to invest in Semita, a “niche investment company” incorporated in 2010
“by several principals and agents of Lazy Deuce, including Baldwin and Delahanty.” (Id.
¶¶ 4, 72.) The Amended Complaint alleges that when Dblaine tried to liquidate its
investment in Semita, it learned that Semita had funneled its money back to Lazy Deuce,
which had distributed it to Lazy Deuce’s owners. (Id. ¶¶ 74-75.) Around the same time,
Lazy Deuce defaulted on more than $1,500,000 in loans from Integrity. (Id. ¶¶ 64, 76.)
Just before this default, Baldwin left Lazy Deuce and started another investment
company that claimed to be “powered by Lazy Deuce Development” and “copyrighted 2
by Lazy Deuce.” (Id. ¶¶ 78-79.) Integrity alleges that Baldwin and Johnson continued to
operate in tandem, pocketing Integrity’s money and moving to other investment schemes
under the new company’s banner. (Id. ¶ 80.)

1

The obvious tenor of these allegations is that it would have been impossible for Lazy Deuce to
make money using this investment plan.
2

It is unclear what is meant by “copyrighted.”
4

Integrity filed the instant action on January 31, 2012, asserting claims against Lazy
Deuce, Lazy Deuce Development, Semita, Johnson, Baldwin, and Delahanty for
(I) breach of contract, (II) fraudulent misrepresentation, (III) negligent misrepresentation,
(IV) deceptive trade practices in violation of Minn. Stat. § 325D.44, (V) fraud in
connection with the sale of securities in violation of Minn. Stat. Chapter 80A, (VI) fraud
in connection with the sale of securities under § 10(b) of the Securities Exchange Act of
1934, (VII) fraud in connection with the sale of securities under § 12 of the Securities Act
of 1933, (VIII) RICO claims under 18 U.S.C. §§ 1962 and 1964, (IX) fraudulent transfer
under Minn. Stat. §§ 513.44 and 513.45, (X) alter-ego and piercing the corporate veil,
and (XI) joint liability. Johnson now moves to dismiss Claims II, III, V, VI, VII, and
VIII against him (Doc. No. 9), and Defendants Semita and Delahanty move to dismiss all
of Integrity’s claims (Doc. No. 18). The issues have been fully briefed, the Court heard
oral argument on June 6, 2012, and the Motions are now ripe for disposition.
STANDARD OF DECISION
The Supreme Court set forth the standard for evaluating a Rule 12(b)(6) motion in
Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). To avoid dismissal, a complaint
must include “enough facts to state a claim to relief that is plausible on its face.” Id. at
547. A “formulaic recitation of the elements of a cause of action” will not suffice. Id. at
555; accord Ashcroft v. Iqbal, 556 U.S. 662, 677 (2009). Rather, the complaint must set
forth sufficient facts to “nudge[] the[] claim[] across the line from conceivable to
plausible.” Twombly, 550 U.S. at 570. Stated differently, the plaintiff must “assert facts
that affirmatively and plausibly suggest that [he] has the right he claims . . . , rather than
5

facts that are merely consistent with such a right.” Stalley v. Catholic Health Initiatives,
509 F.3d 517, 521 (8th Cir. 2007) (citing Twombly, 550 U.S. at 554–57).
When reviewing a motion to dismiss, the Court “must accept [the] plaintiff’s
specific factual allegations as true but [need] not . . . accept a plaintiff’s legal
conclusions.” Brown v. Medtronic, Inc., 628 F.3d 451, 459 (8th Cir. 2010) (citing
Twombly, 550 U.S. at 556). The complaint must be construed liberally, and any
allegations or reasonable inferences arising from the complaint must be interpreted in the
light most favorable to the plaintiff. Twombly, 550 U.S. at 554-56. A complaint should
not be dismissed simply because the Court is doubtful that the plaintiff will be able to
prove all of the necessary factual allegations. Id. at 556. “Ultimately, evaluation of a
complaint upon a motion to dismiss is ‘a context-specific task that requires the reviewing
court to draw on its judicial experience and common sense.’” Braden v. Wal-Mart
Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009) (quoting Iqbal, 556 U.S. at 679).
In addition, the gravamen of the instant Motions is that the Amended Complaint
fails to satisfy the strictures of Federal Rule of Civil Procedure 9(b), 3 which requires “all
averments of fraud” to be pleaded with particularity. “Conclusory allegations that a
defendant’s conduct was fraudulent . . . are not sufficient to satisfy the rule.” BJC Health
Sys.v. Columbia Cas. Co., 478 F.3d 908, 918 (8th Cir. 2007) (citation omitted). The Rule
requires a plaintiff to plead the “circumstances constituting fraud, including such matters
3

Such a challenge “typically is packaged with a motion to dismiss” under Rule 12(b)(6), since
Rule 9(b) does not expressly authorize a motion for its enforcement. 5A Charles Alan Wright &
Arthur R. Miller, Federal Practice & Procedure: Civ. 3d § 1300 (2004); accord Kia Motors Am.,
Inc. v. Autoworks Distrib., Civ. No. 06-156, 2006 WL 2943306, at *3 (D. Minn. Sept. 28, 2006)
(Frank, J.).
6

as the time, place and contents of false representations, as well as the identity of the
person making the misrepresentation and what was obtained or given up thereby.” Id.
(quoting Fed. R. Civ. P. 9(b) and Abels v. Farmers Commodity Corp., 259 F.3d 910, 920
(8th Cir. 2001)); accord United States ex rel. Costner v. URS Consultants, Inc., 317 F.3d
883, 888 (8th Cir. 2003) (complaint must identify the “who, what, where, when, and
how” of alleged fraud). “The level of particularity required depends on, inter alia, the
nature of the case and the relationship between the parties.” BJC Health Sys., 478 F.3d at
917 (citing Payne v. United States, 247 F.2d 481, 486 (8th Cir. 1957)). Where a plaintiff
alleges a systematic perpetration of fraud over an extended period of time, the plaintiff
need not allege the specific details of every fraudulent act, but still “must allege some
representative examples of the fraudulent conduct with particularity.” Allstate Ins. Co. v.
Linea Latina De Accidentes, Inc., 781 F. Supp. 2d 837, 846 (D. Minn. 2011) (Ericksen,
J.) (citing United States ex rel. Joshi v. St. Luke’s Hosp., Inc., 441 F.3d 552, 557 (8th Cir.
2006)).
ANALYSIS
Johnson seeks dismissal of (a) Claims II, III, V, VI, and VII for not satisfying
Rule 9(b)’s particularity requirement, and (b) Claim VIII because Integrity cannot prove
that he engaged in a pattern of racketeering. Delahanty and Semita move to dismiss (a)
Claims II-IX for failing to satisfy Rule 9(b)’s particularity requirement, and (b) Claims II,
III, IV, V, VI, VII, VIII, X, and XI for failing to state a claim upon which relief can be
granted. In its Response Memorandum, Integrity has agreed to dismiss Claim III

7

(negligent misrepresentation). (Mem. in Opp’n at 17.) The remaining claims are
addressed below.
I.

Fraud Pleading Requirement
A plaintiff alleging a long-term fraudulent scheme must “provide some

representative examples of [the defendants’] alleged fraudulent conduct, specifying the
time, place, and content of their acts and the identity of the actors” in order to “enable
[the defendants] to respond specifically to [the plaintiff’s] allegations.” St. Luke’s Hosp.,
441 F.3d at 557 (emphasis in original). Defendants argue that Integrity’s fraud claims
should be dismissed because the Amended Complaint does not satisfy this particularity
requirement as it fails to identify who uttered the allegedly fraudulent statements.
Specifically, Johnson makes this argument with respect to Claims II, V, VI, and VII, and
Delahanty and Semita make it with respect to Claims II-IX. 4 Integrity responds that it
alleges a systematic practice of Defendants’ fraudulent scheme, using the March 10
meeting as a representative example, and therefore Rule 9(b) has been satisfied.
Where, as here, a case involves multiple defendants, “the complaint should inform
each defendant of the nature of [its] alleged participation in the fraud.” Vicom, Inc. v.
Harbridge Merch. Servs., Inc., 20 F.3d 771, 778 (7th Cir. 1994); accord Mills v. Polar
Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993) (“Rule 9(b) is not satisfied where the
complaint vaguely attributes the alleged fraudulent statements to ‘defendants.’”); Weimer
v. Int’l Flavors & Fragrances, Inc., 240 F.R.D. 431, 437 (N.D. Iowa 2007) (“[W]here a

4

It is undisputed that Rule 9(b)’s heightened pleading requirement applies to each of these
claims.
8

plaintiff’s complaint accuses multiple defendants of participating in the scheme to
defraud, the plaintiff must take care to identify which of them was responsible for the
individual acts of fraud.”). Otherwise, a defendant could only guess which allegations in
the complaint were pleaded against him, rendering it difficult (if not impossible) to
adequately frame a response and eviscerating Rule 9(b)’s requirement to plead fraud with
particularity. See Bank of Montreal v. Avalon Capital Grp., Inc., 743 F. Supp. 2d 1021,
1028 (D. Minn. 2010) (Davis, C.J.).
Throughout the Amended Complaint, Integrity alleges that Lazy Deuce or its
representatives made particular representations, with almost no mention of the individual
speakers. (See, e.g., Am. Compl. ¶¶ 31, 34, 35, 39.) It uses the March 10 meeting as a
specific example, alleging that “each of the Defendants present at [the] meeting shared
complete culpability for each false statement that they either uttered or silently let stand,
knowing its falsehood.” (Mem. in Opp’n at 6 (emphasis in original).) Even though this
general allegation provides some notice of the core of Integrity’s claims against
Defendants, see Commercial Prop. Invs., Inc. v. Quality Inns Int’l, Inc., 61 F.3d 639, 646
(8th Cir. 1995), it ignores that the Amended Complaint also contains numerous
allegations of fraudulent statements that have not been attributed to any specific
Defendant. Only once does Integrity come close to identifying a speaker at the March 10
meeting: in response to Barrett’s question whether there existed any scenario in which
Integrity would not get repaid from Lazy Deuce, “Baldwin, Johnson, and Delahanty
answered ‘no.’” (Am. Compl. ¶ 62.) Despite Integrity’s attempt to specify those three
Defendants, it remains unclear whether it alleges that each of them said “no” individually
9

or whether they said it as a unit, and thus it is equally unclear what role each Defendant
played in the fraud. In other words, Integrity “sets forth numerous factual allegations in
the . . . complaint; however, given [its] failure to differentiate between defendants, that
numerosity actually hinders clarity.” Haskin v. R.J. Reynolds Tobacco Co., 995 F. Supp.
1437, 1440 (M.D. Fla. 1998). Because Integrity’s multiple allegations lack the careful
specificity that Rule 9(b) requires, 5 the Court concludes that its fraud-based claims are
inadequately pleaded. 6
Defendants also argue that Integrity’s claims should be dismissed with prejudice.
Complaints dismissed under Rule 9(b) are almost always dismissed with leave to amend.
See, e.g., Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1435 (3d Cir. 1997); Waitt
v. Speed Control, Inc., No. C-00-4060, 2002 WL 1711817, at *25 (N.D. Iowa June 28,
2002). Nothing in the record persuades the Court that Integrity has acted in bad faith, and
it is not clear at present that allowing further amendment would be futile. See, e.g.,
Caputo v. Pfizer, Inc., 267 F.3d 181, 191 (2d Cir. 2001). In keeping with the liberal
precepts of the Federal Rules, the Court will grant Integrity leave to amend.
II.

Integrity’s RICO Claim Against Johnson
Johnson argues that Integrity’s RICO (Racketeer Influenced and Corrupt

Organizations) claim (Claim VIII) should be dismissed because Integrity cannot prove a
5

Integrity’s failure to differentiate among Defendants is particularly confusing in light of its
acknowledgement at oral argument that it possesses an audio recording of the March 10 meeting.
It would be simple to transcribe the recording and attach it as an exhibit to the Amended
Complaint, specifically denoting who said what.

6

Because Claims II-IX fail to meet Rule 9(b)’s particularity requirement, the Court need not
opine at this juncture whether relief can be granted on those claims.
10

pattern of racketeering. Under § 1962 of the RICO Act, it is “unlawful for any person
employed by or associated with any enterprise . . . to conduct or participate, directly or
indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering
activity or collection of unlawful debt.” 18 U.S.C. § 1962(c). To adequately plead a
RICO claim, Integrity must allege “(1) conduct (2) of an enterprise (3) through a pattern
(4) of racketeering activity.” Nitro Distrib., Inc. v. Alticor, Inc., 565 F.3d 417, 428 (8th
Cir. 2009) (internal quotation omitted). “[T]o prove a pattern of racketeering activity a
plaintiff . . . must show that the racketeering predicates are related, and that they amount
to or pose a threat of continued criminal activity.” H.J. Inc. v. Nw. Bell Tel. Co., 492
U.S. 229, 239 (1989) (emphasis in original); Lange v. Hocker, 940 F.2d 359, 361 (8th
Cir. 1991). Whether a threat of continued activity exists depends on the specific facts of
each case, but “[p]redicate acts extending over a few weeks or months and threatening no
future criminal conduct do not satisfy this requirement.” H.J. Inc., 492 U.S. at 242; see
also Primary Care Investors, Seven, Inc. v. PHP Healthcare Corp., 986 F.2d 1208, 1215
(8th Cir. 1993) (finding that an alleged scheme spanning ten or eleven months did not
satisfy the “substantial period” requirement for a RICO pattern). Johnson argues that
because the loans in question occurred over a six-and-a-half month period and the
association-in-fact of Johnson, Lazy Deuce, and the other Defendants has ended, no
pattern of racketeering exists. The Court disagrees.
According to the Amended Complaint, Baldwin and Johnson have been engaged
in a long-standing arrangement that involves setting up one company, eliciting money
from clients, dumping the money into another company under their control, and closing
11

down the first company. For instance, Integrity alleges that soon after Lazy Deuce
defaulted, Baldwin started a new investment company called “Stone Path Financial”
through which he and Johnson continue to operate. Integrity also alleges that Baldwin
and Johnson have been engaged in a similar enterprise using various corporate forms for
about three years, and are planning to run the same scheme going forward. (See Am.
Compl. ¶¶ 48-51, 79-80.) This fits the type of long-term criminal conduct that concerned
Congress when it adopted the RICO statute. See, e.g., H.J. Inc., 492 U.S. at 242
(“Predicate acts extending over a few weeks or months and threatening no future criminal
conduct do not satisfy this requirement: Congress was concerned in RICO with longterm criminal conduct.”). These allegations suffice to adequately plead a civil RICO
claim, and accordingly Johnson’s Motion to dismiss this claim will be denied.
III.

Piercing the Corporate Veil and Joint-Liability Claims
Delahanty and Semita argue that Integrity’s last two claims, for “Alter-Ego and

Piercing of the Corporate Veil” (Claim X) and “Joint Liability” (Claim XI), should be
dismissed for failing to state a claim. Neither of these “claims” is an independent cause
of action; rather, each is a means by which a plaintiff can impose liability on a defendant
who did not directly cause the plaintiff’s harm. See Victoria Elevator Co. v. Meriden
Grain Co., 283 N.W.2d 509, 512 (Minn. 1979) (disregard of the corporate entity requires
not only that the corporation functioned as a mere instrumentality of the individuals
sought to be held personally liable, but also that an element of injustice or fundamental
unfairness exists); Cenveo Corp. v. S. Graphic Sys., Inc., 784 F. Supp. 2d 1130, 1136 (D.
Minn. 2011) (Tunheim, J.) (plaintiffs seeking to impose joint and several liability must
12

prove an underlying tort claim). Accordingly, the Court concludes that Claims X and XI
must be dismissed with respect to Delahanty and Semita for failing to state a claim.
CONCLUSION
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
ORDERED:
1.

Claim III (negligent misrepresentation) is DISMISSED WITH
PREJUDICE;

2.

Delahanty’s and Semita’s Motion to Dismiss (Doc. No. 18) is GRANTED,
and Claims II, III, IV, V, VI, VII, VIII, IX, X, and XI with respect to those
Defendants are DISMISSED WITHOUT PREJUDICE;

3.

Johnson’s Motion to Dismiss (Doc. No. 9) is GRANTED IN PART and
DENIED IN PART, and Claims II, V, VI, and VII with respect to Johnson
are DISMISSED WITHOUT PREJUDICE; and

4.

Integrity may file an Amended Complaint addressing the deficiencies
outlined above within 20 days of this Order. 7

Date: July 12, 2012

s/Richard H. Kyle
RICHARD H. KYLE
United States District Judge

7

The Court reminds Integrity that although it may replead its claims and do so with particularity,
Fed. R. Civ. P. 9(b), that does not grant it license to make a Second Amended Complaint prolix
or unnecessarily lengthy. See Fed. R. Civ. P. 8(a)(2). A Second Amended Complaint that fails
to meet Rule 9(b)’s particularity requirement would leave the Court disinclined to grant another
opportunity to replead. See also Fed. R. Civ. P. 11.
13