CITY OF ATLANTIC CITY v. ZEMURRAY STREET CAPITAL, LLC et al

Filing 91

OPINION FILED. Signed by Judge Robert B. Kugler on 6/13/16. (js)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
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CITY OF ATLANTIC CITY,
Plaintiff,
v.
ZEMURRAY STREET CAPITAL, LLC,
et al.
Defendants.

Civil. No 14-5169 (RBK/AMD)
OPINION

KUGLER, United States District Judge:
This case arises from the allegedly fraudulent behavior of Defendant Zemurray Street
Capital, LLC (“Zemurray”) and its managing partner, Defendant W. Wesley Drummon
(“Drummon”), (collectively, “Defendants”). Presently before the Court is Defendants’ Motion to
Dismiss Count Five (“Defendants’ Motion” [Dkt. No. 55]). For the reasons that follow, the
Defendants’ Motion will be GRANTED.

I.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY
On or around May 22, 2013, the City of Atlantic City (the “City”) authorized the

execution of a Memorandum of Understanding (“MOU”) between the City and Zemurray, the
terms of which implemented and administered the Atlantic City Community Loan Development
Program (the “Loan Program”). (First Am. Compl. (“FAC”) [Dkt. No. 48] ¶ 1.) The Loan
Program was intended to “provid[e] small business financing and residential mortgage financing
to certain eligible business and residents of Atlantic City.” (Id. ¶ 29.) Under the terms of the
MOU, the City was to provide $3,000,000.00 in loan funds to the Loan Program, which
Zemurray would them implement and oversee. (Id. ¶ 2.) Specifically, Zemurray would oversee
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loan originations administered by lender Tennessee Business and Industrial Development
Corporation (“BIDCO”), whom Zemurray selected, and Zemurray would then provide the City
with quarterly reports accounting for the loan funds. (Id. ¶¶ 2, 30, 34.)
The MOU also required that the loan funds be deposited into an escrow account and only
released in accordance with the terms of the escrow agreement. (Id. ¶¶ 31–33, 37–38.) On July
19, 2013, the City, Zemurray, and City National Bank executed an escrow agreement creating an
escrow account for the Loan Program funds and establishing City National Bank as the escrow
agent. (Id. ¶ 39.) The escrow agreement gave Zemurray the authority to give City National
Bank instructions with respect to the funds in the escrow account. (Id. ¶ 41.)
About a month after, on August 23, 2013, Zemurray transferred the whole of the
$3,000,000.00 from the escrow account to a bank account at another bank belonging to BIDCO.
(Id. ¶ 6.) Zemurray then failed to provide quarterly report accounting, and there is no indication
from the sole status reports provided by Zemurray where the $3,000,000.00 was located or how
the funds were spent. (Id. ¶ 8.)
The City alleges that before and after execution of the MOU, Zemurray misrepresented to
the City the nature of its relationship with BIDCO. (Id. ¶ 3.) Zemurray represented to the City
that BIDCO would serve as the loan originator for the Loan Program, knowing that BIDCO had
not agreed to do so. (Id. ¶ 85.) Further, Zemurray represents on its website that it is a “specialty
finance investment company created to be a source of capital to small and medium sized
businesses, including emerging businesses,” and also represents that “SBA guaranteed loans are

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originated by ZSC’s subsidiary, TN BIDCO, an SBA licensed ‘Preferred Lender.’” (Id. ¶ 86
(quoting Zemurray’s website).)1
When Zemurray failed to provide the quarterly reports, the City decided to investigate
Zemurray. (Id. ¶¶ 87–88.) Once the City learned of Defendants’ misrepresentations, the City
sought to invalidate the MOU and demanded prompt return of the Loan Program funds to the
City. (Id. ¶ 88.)
The City then filed this suit against Zemurray and Drummon, Zemurray’s managing
member in the Superior Court of New Jersey, Atlantic County, Law Division. (See Notice of
Removal [Dkt. No. 1].) Zemurray and Drummon then removed the case to this Court. (See id.)
Subsequently, the City filed its FAC, bringing claims against Gary A. Lax, whom the City
alleges is a member of Zemurray; BIDCO, now a subsidiary of Zemurray; Michael J. Lax, an
executive officer of BIDCO; Latan Family Trust 1,2 a member of Zemurray; and Taipan
Holdings, LLC, a member of Zemurray; in addition to Zemurray and Drummon. (See generally
FAC.) The only motion presently before the Court is that of Zemurray and Drummon to dismiss
Count V of the FAC, which alleges a violation of the New Jersey Consumer Fraud Act
(“NJCFA”), N.J.S.A. 56:8-1, et seq. Having been briefed by the parties, Defendants’ Motion is
now ripe for review.

1

As noted by the City in its opposition to Defendants’ Motion, Zemurray’s website is now
defunct. (City Opp. [Dkt. No. 58] at 11 & n.1.) However, for the purposes of this motion, the
fact as pleaded in the FAC is accepted by the Court as true.
2

In its answer, Latan Family Trust 1 explains that the correct name is actually Lantana Family
Trust 1. (See Answer and Counterclaim [Dkt. No. 72] ¶ 15 n.1.) However, counsel then signed
the document on behalf of “Latana Family Trust 1”. (See id. at 19.) To avoid confusion, the
Court will use the name in the documents provided by the moving defendants and the name in
the FAC.
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II.

JURISDICTION
The City brings claims against all Defendants based solely on New Jersey state law. In

invoking this Court’s jurisdiction by removing the action, Defendants initially only certified that
Zemurray was a Delaware Limited Liability Company with its principal place of business in
New York. (See Notice of Removal ¶ 2.) The Court found this allegation deficient, and ordered
Defendants to file an amended notice of removal that would adequately plead the citizenship of
the defendant LLC. (See Order (Sept. 9, 2014) [Dkt. No. 4].)
In its Amended Notice of Removal, Zemurray established that it is a citizen of the states
of New York, Tennessee, Maryland, and Florida, as well as the country of Australia based on the
citizenship of its members.3 (Am. Notice of Removal [Dkt. No. 5] ¶¶ 8–11.) The Amended
Notice of Removal also establishes that Latan Family Trust 1 is a citizen of Tennessee and that
Taipan Holdings LLC is a citizen of the states of Maryland and Florida as well as the country of
Australia. (Id.) The FAC alleges that Gary A. Lax is a citizen of Washington, D.C., Michael J.
Lax is a citizen of Tennessee, and BIDCO was a Tennessee corporation with a principal place of
business in Tennessee which then became a subsidiary of Zemurray. (FAC ¶¶ 14, 16–17.)4 The

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The Amended Notice of Removal actually asserts that Zemurray is a citizen of Connecticut and
Washington, D.C. as well, and neglects to mention citizenship in Maryland. The Court is unclear
whether Zemurray is actually a citizen of Washington, D.C. because Zemurray does not identify
Gary A. Lax as a member of Zemurray, but the FAC alleges that Gary A. Lax is a member of
Zemurray. What is clear is that Zemurray is not a citizen of Connecticut, because no member is
a citizen of Connecticut, even though one member who is also an unincorporated association is
organized under the laws of Connecticut. The Court is satisfied that at minimum, Zemurray is
not a citizen of New Jersey.
4

The FAC fails to include a numbered paragraph alleging the citizenship of Michael J. Lax.
However, his citizenship is nominally alleged on page 2 of the FAC, indicating that he is a
citizen of Tennessee. (See FAC at 2.) The Court is satisfied that at minimum, Michael J. Lax is
not a citizen of New Jersey.
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sole plaintiff, the City, is a New Jersey municipal corporation. (See id. at 2.) The action was
timely removed pursuant to 28 U.S.C. §§ 1441 and 1446.
The Court is satisfied that it has jurisdiction over the claims of the FAC pursuant to 28
U.S.C. § 1332(a)(3) based on the above recited citizenships demonstrating that no defendant is a
citizen of the state of New Jersey, citizens of a foreign state are parties, and the amount in
controversy exceeds $75,000.

III.

LEGAL STANDARD
Rule 12(b)(6) allows a court to dismiss an action for failure to state a claim upon which

relief can be granted. Fed. R. Civ. P. 12(b)(6). When evaluating a motion to dismiss, “courts
accept all factual allegations as true, construe the complaint in the light most favorable to the
plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff
may be entitled to relief.” Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009)
(quoting Phillips v. Cty. of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008)). In other words, a
complaint is sufficient if it contains enough factual matter, accepted as true, to “state a claim to
relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007). It is not for courts to decide at this point whether the
moving party will succeed on the merits, but “whether they should be afforded an opportunity to
offer evidence in support of their claims.” In re Rockefeller Ctr. Prop., Inc., 311 F.3d 198, 215
(3d Cir. 2002). Yet, while “detailed factual allegations” are not necessary, a “plaintiff’s
obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do.”
Twombly, 550 U.S. at 555; see also Iqbal, 556 U.S. at 678–79.

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To make this determination, a court conducts a three-part analysis. Santiago v.
Warminster Twp., 629 F.3d 121, 130 (3d Cir. 2010). First, the court must “tak[e] note of the
elements a plaintiff must plead to state a claim.” Id. (quoting Iqbal, 556 U.S. at 675). Second,
the court should identify allegations that, “because they are no more than conclusions, are not
entitled to the assumption of truth.” Id. at 131 (quoting Iqbal, 556 U.S. at 680). Finally, “where
there are well-pleaded factual allegations, a court should assume their veracity and then
determine whether they plausibly give rise to an entitlement for relief.” Id. This plausibility
determination is a “context-specific task that requires the reviewing court to draw on its judicial
experience and common sense.” Iqbal, 556 U.S. at 679. A complaint cannot survive where a
court can infer only that a claim is merely possible rather than plausible. Id.

IV.

DISCUSSION
Defendants move to dismiss Count V of the FAC, arguing that the City has failed to state

a claim under the NJCFA because the MOU is not a service sold to the public at large. (See
Defs.’ Mot. Br. [Dkt. No. 55-1] at 3–4.) The City responds that Zemurray was offering loan
administration services to the general public, not just the MOU, and so its conduct falls within
the NJFCA. (See City Opp. at 10–11.)

A.

An Overview of the NJCFA

The NJCFA “is intended to protect consumers by eliminating sharp practices and
dealings in the marketing of merchandise and real estate.” Cetel v. Kirwan Fin. Grp., Inc., 460
F.3d 494, 514 (3d Cir. 2006) (quoting Lemelledo v. Beneficial Mgmt. Corp., 150 N.J. 255, 263
(1997)). New Jersey courts have repeatedly emphasized that “the [NJ]CFA seeks to protect
consumers who purchase ‘goods or services generally sold to the public at large.’” Id. (quoting
Marascio v. Campanella, 298 N.J. Super. 491, 499 (App. Div. 1997)). As such, the Third Circuit
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has concluded that “the [NJ]CFA is not intended to cover every transaction that occurs in the
marketplace, but, rather, its applicability is limited to consumer transactions which are defined
both by the status of the parties and the nature of the transaction itself.” Id. (internal quotations
and alterations omitted) (quoting Arc Networks, Inc. v. Gold Phone Card Co., 333 N.J. Super.
587, 590 (Law Div. 2000)). Nevertheless, “[t]he language of the [NJ]CFA evinces a clear
legislative intent that its provisions be applied broadly in order to accomplish its remedial
purpose, namely, to root out consumer fraud.” Lemelledo, 150 N.J. at 264; see also Real v. Radir
Wheels, Inc., 198 N.J. 511, 520 (2009) (“The CFA is recognized to be remedial legislation which
should be construed liberally.” (internal quotation marks omitted)).
In relevant part, the NJCFA provides:

The act, use or employment by any person of any unconscionable commercial
practice, deception, fraud, false pretense, false promise, misrepresentation, or the
knowing, concealment, suppression, or omission of any material fact with intent
that others rely upon such concealment, suppression or omission, in connection
with the sale or advertisement of any merchandise or real estate, or with the
subsequent performance of such person as aforesaid, whether or not any person has
in fact been misled, deceived or damaged thereby, is declared to be an unlawful
practice.
N.J.S.A. 56:8-2 (emphasis added).
The NJCFA also defines many of the terms in a broader sense than a lay person may
otherwise interpret the term. “Sale” is defined as “any sale, rental or distribution, offer for sale,
rental or distribution or attempt directly or indirectly to sell, rent or distribute.” N.J.S.A. 56:81(e). “Advertisement” is defined as “the attempt directly or indirectly by publication,
dissemination, solicitation, indorsement or circulation or in any other way to induce directly or
indirectly any person to enter or not enter into any obligation or acquire any title or interest in
any merchandise or to increase the consumption thereof or to make any loan.” N.J.S.A. 56:87

1(a). Finally, “merchandise” is defined as “any objects, wares, goods, commodities, services or
anything offered, directly or indirectly to the public for sale.” N.J.S.A. 56:8-1(c).

B.

Count Five Fails to State a Claim Under the NJCFA

At this procedural juncture, accepting the facts as pleaded in the FAC, it is clear that the
MOU was not the product sold, as Defendants argue. Rather, Defendants’ ability to offer loan
administration services was the product, as the City submits. The MOU served as the reduction
to writing of the contract for the offered loan administration services. However, this is not
dispositive of the ultimate issue. The Court must turn to whether loan administration services
fall within the definition of “merchandise” under the NJCFA.
In evaluating claims under the NJCFA, relying on New Jersey court decisions, the Third
Circuit has determined that “complex tax-avoidance schemes” that were “necessarily marketed
to a discrete and specific class of capable investors—not the general public” did not fall within
the definition of “merchandise,” and so affirmed a district court’s dismissal of an NJCFA claim.
Cetel, 460 F.3d at 514–15.
Similarly, the Appellate Division has determined that a contract “for the installation and
implementation of a complex computer system . . . did not constitute a simple purchase of
computer software sold to the public at large.” Princeton Healthcare Sys. v. Netsmart N.Y., Inc.,
422 N.J. Super. 467, 473–74 (App. Div. 2011). The court in Princeton Healthcare reasoned that
“[t]he contract did not provide for simply the installation of a standardized computer software
program but rather the design of a custom-made program to satisfy [the purchaser]’s unique
needs and [the seller]’s active participation in implantation of this program.” Id. at 474. The
court also recognized the extensive negotiations between the parties to the contract and held that
“[t]his kind of heavily negotiated contract between two sophisticated corporate entities does not
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constitute a ‘sale of merchandise’ within the intent of the [NJ]CFA.” Id. (citing Finderne Mgmt.
Co., Inc. v. Barrett, 402 N.J. Super. 546, 570 (App. Div. 2008)).
Other courts have also dismissed NJCFA claims relying on services or goods that are
only offered to a select group of individuals. See, e.g., Centrum Fin. Servs., Inc. v. Chi. Title Ins.
Co., Civ. No. 09-3300 (SRC), 2010 WL 936201, at *4 (D.N.J. Mar. 12, 2010) (rejecting NJCFA
claim for title insurance); Khan v. Conventus Inter-Ins. Exchange, 440 N.J. Super. 372, 376–77
(Law Div. 2013) (rejecting NJCFA claim for medical malpractice insurance because physicians
only represent 0.27% of the general population in New Jersey).
On the other side of the issue, at least one judge in this district has determined that the
NJCFA can encompass claims for merchandise that is “expensive, uncommon, or only suited to
the needs of a limited clientele.” See, e.g., Prescription Counter v. AmerisourceBergen Corp.,
Civ. No. 04-5802 (SRC), 2007 WL 3511301, at *14 (D.N.J. Nov. 14, 2007). Similarly, the judge
in CDK Global, LLC v. Tulley Automotive Group, Inc., Civ. No. 15-3103 (KM), 2016 WL
1718100, at *6–7 (D.N.J. Apr. 29, 2016) found that the NJCFA would apply to the lease of
computer equipment when it was used during the regular course of business and alleged to be
marketed to thousands of businesses.
Additionally, the New Jersey Supreme Court has found that “a complex transaction . . .
combining the conveyance of title to the property, an agreement for real estate related services, a
trust with the authority to manage the property and a buy-back option is not exempt from the
[NJ]CFA by virtue of its unique combination of terms.” D’Agostino v. Maldonado, 216 N.J.
168, 187–89 (2013). The New Jersey Supreme Court has also found that the NJCFA applies to
the sale of credit, see Lemelledo, 150 N.J. at 256, although this does not carry the day for the
City, because Defendants were not the ones selling credit.

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The existence of substantial authority on both sides of this issue is not a new problem. In
recognizing this apparent conflict of authorities over a decade ago, Judge Greenaway, then
District Judge, reasoned that where courts permitted claims to go forward seemingly about goods
not available to the general public, those goods were generally standardized and did not require
individualized bargaining. Naporano Iron & Metal Co. v. Am. Crane Corp., 79 F. Supp. 2d 494,
509 (D.N.J. 1999). But where claims were not permitted to proceed, those usually dealt with
specific agreements and individualized negotiations. Id.
The Court agrees that the distinction drawn by Judge Greenaway in Naporano accurately
reflect the lines of cases, even accounting for the continued development in the case law since
Naporano was decided. Turning to the facts alleged here, the MOU was a contract for
Zemurray’s loan administration services. Loan administration services are a complex service
that will require individualization to suit the needs of the parties to the contract, and the general
consumer public is not seeking loan administration services.
While it is true that Zemurray’s website advertised services to the general consumer
public as alleged in the FAC, those services are distinct from the services the City actually
contracted for. Defendants on the website advertised their loan services to small businesses, a
business that is distinct from offering loan administration services to loan originators, which is
what the City contracted for. Under the facts as alleged in the FAC, the services do not fall
within the meaning of “merchandise” under the NJCFA, and so the FAC fails to state a claim
under the NJCFA. Accordingly, Defendants’ Motion will be granted.

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V.

CONCLUSION
For the foregoing reasons, the Defendants’ Motion will be granted, and Count Five of the

FAC will be dismissed. The City must file an amended complaint within fourteen (14) days that
removes Count Five and also affirmatively and accurately pleads citizenship of each named
defendant. An appropriate order accompanies this opinion.

Date: June 13th , 2016

s/ Robert B. Kugler
ROBERT B. KUGLER, U.S.D.J.

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