Gordon et al v. Dailey et al
Filing
143
OPINION FILED. Signed by Judge Joseph H. Rodriguez on 3/27/18. (js)
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
BRANDON GORDON, et al.,
:
:
Plaintiffs,
v.
Hon. Joseph H. Rodriguez
Civil Action No. 14-7495
:
OPINION
ZACHARY DAILEY and LAB RAT
DATA PROCESSING, LLC.,
:
Defendants.
:
This matter is before the Court on Defendant’s Motion to Dismiss the Second
Amended Complaint [Dkt. No. 126]. The Court has considered the written submissions
of the parties pursuant to Fed. R. Civ. P. 78 (b). For the reasons that follow, Defendant’s
motion is denied.
I.
Background
Plaintiffs Brandon Gordon, Curtis Green, Jakub Vondrak, Jesse Lobb, Derek
Piper, Christopher Galido, Mark Boehler, Merlin Fisher-Levine, Nathanael Flachsbart,
and Russ Henderson bring this action against Defendant Zachary Dailey (“Defendant”)
for claims arising out of Defendant’s sale of alleged securities, in the form of bonds
issued by administratively terminated Defendant Lab Rat Data Processing, LLC.1
Investment in the bonds allowed Plaintiff Brandon Gordon (“Plaintiff”) to participate in
a Bitcoin related initial public offering. The Bonds purchased by Plaintiff are attached to
the Second Amended Complaint.
1
The only remaining Plaintiff in this action is Brandon Gordon. The others were dismissed from the case
on May 29, 2017. Zachary Dailey is the only remaining Defendant to this action as Lab Rat Data
Processing, LLC was administratively terminated after it filed a suggestion of bankruptcy on November
18, 2015 [Dkt. No. 81].
1
The Second Amended Complaint, like its predecessors, alleges violations Section
12(a)(1) and 12(a)(2) of the Securities Act of 1933 (The 1933 Act), 15 U.S.C. § 77l and
Section 10(b) of the Securities Exchange Act of 1934 (The 1934 Act), and Rule 10b-5
promulgated thereunder, codified at 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5, for
Defendant’s misrepresentations in connection with the sale of the Bonds. These are the
only federal claims plead. The remainder of the claims assert violations of New Jersey
and Florida state laws, arising out of the same operative facts as the federal claims set
forth above, for violations of the New Jersey Uniform Securities Law, N.J. Stat. Ann. §§
49:3-47, et. seq. and violations of the Florida Securities and Investor Protection Act, Fla.
Stat. § 517.301, common law fraud, negligent misrepresentations, fraudulent
inducement, breach of contract, and unjust enrichment.
In support of the motion to dismiss, Defendant reargues some of the points
already addressed in the previous motion to dismiss and in opposition of the motion to
amend. In short, Defendant claims that the Second Amended Complaint should be
dismissed for the following reasons: 1) Plaintiff has failed to plead a claim under Section
10 (b) of the Securities Act of 1934; 2) the Complaint fails to plead facts that support any
claim; 3) the Complaint fails to state a claim under state law; 4) the Complaint fails to
state a claim of common law fraud pursuant to Fed. R. Civ. P. 9 (b); 5) Plaintiff’s fraud,
negligent representation and unjust enrichment claims are barred by the economic loss
doctrine; 6) the Complaint fails to state a claim for unjust enrichment and/or breach of
contract; and 7) Counts XXI through XXIII should be dismissed based upon Plaintiff’s
voluntary dismissal of these claims.2
2
Plaintiff agrees that the claims related to the plaintiffs dismissed on May 29, 2017 who are no longer in
the case is proper, but asks the Court to forgo dismissing them a second time. To the extent that these
claims are no longer operative, Defendant’s motion is granted in this regard.
2
II.
Standard of Review
A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1) may
involve either a facial challenge to subject matter jurisdiction or a factual challenge to
the jurisdictional allegations. Gould Elec., 220 F.3d at 176. If the defendant’s attack is
facial—i.e., “asserting that the complaint, on its face, does not allege sufficient grounds
to establish subject matter jurisdiction”—a court must accept all allegations in the
complaint as true. Taliaferro v. Darby Twp. Zoning Bd., 458 F.3d 181, 188 (3d Cir.
2006). Alternatively, a defendant may “challenge a federal court’s jurisdiction by
factually attacking the plaintiff's jurisdictional allegations as set forth in the complaint.”
Mortensen v. First Fed. Sav. & Loan Ass’n, 549 F.2d 884, 891 (3d Cir. 1977). A factual
challenge attacks the existence of a court’s subject matter jurisdiction apart from any of
the pleadings and, when considering such a challenge, a presumption of truthfulness
does not attach to a plaintiff's allegations.” Id.; see also Martinez v. U.S. Post Office, 875
F. Supp. 1067, 1070 (D.N.J. 1995).
Alternatively, Federal Rule of Civil Procedure 12(b)(6) allows a party to move for
dismissal of a claim based on “failure to state a claim upon which relief can be granted.”
Fed. R. Civ. P. 12(b)(6). A complaint should be dismissed pursuant to Rule 12(b)(6) if
the alleged facts, taken as true, fail to state a claim. Fed. R. Civ. P. 12(b)(6). When
deciding a motion to dismiss pursuant to Rule 12(b)(6), ordinarily only the allegations
in the complaint, matters of public record, orders, and exhibits attached to the
complaint, are taken into consideration.3 See Chester County Intermediate Unit v. Pa.
3
“Although a district court may not consider matters extraneous to the pleadings, a document integral to
or explicitly relied upon in the complaint may be considered without converting the motion to dismiss
into one for summary judgment.” U.S. Express Lines, Ltd. v. Higgins, 281 F.3d 383, 388 (3d Cir. 2002)
(internal quotation marks and citations omitted) (emphasis deleted).
3
Blue Shield, 896 F.2d 808, 812 (3d Cir. 1990). It is not necessary for the plaintiff to
plead evidence. Bogosian v. Gulf Oil Corp., 561 F.2d 434, 446 (3d Cir. 1977). The
question before the Court is not whether the plaintiff will ultimately prevail. Watson v.
Abington Twp., 478 F.3d 144, 150 (2007). Instead, the Court simply asks whether the
plaintiff has articulated “enough facts to state a claim to relief that is plausible on its
face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).
“A claim has facial plausibility4 when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550
U.S. at 556). “Where there are well-pleaded factual allegations, a court should assume
their veracity and then determine whether they plausibly give rise to an entitlement to
relief.” Iqbal, 556 U.S. at 679.
The Court need not accept “‘unsupported conclusions and unwarranted
inferences,’” Baraka v. McGreevey, 481 F.3d 187, 195 (3d Cir. 2007) (citation omitted),
however, and “[l]egal conclusions made in the guise of factual allegations . . . are given
no presumption of truthfulness.” Wyeth v. Ranbaxy Labs., Ltd., 448 F. Supp. 2d 607,
609 (D.N.J. 2006) (citing Papasan v. Allain, 478 U.S. 265, 286 (1986)); see also Kanter
v. Barella, 489 F.3d 170, 177 (3d Cir. 2007) (quoting Evancho v. Fisher, 423 F.3d 347,
351 (3d Cir. 2005) (“[A] court need not credit either ‘bald assertions’ or ‘legal
conclusions’ in a complaint when deciding a motion to dismiss.”)). Accord Iqbal, 556
U.S. at 678-80 (finding that pleadings that are no more than conclusions are not
4This plausibility standard requires more than a mere possibility that unlawful conduct has occurred.
“When a complaint pleads facts that are ‘merely consistent with’ a defendant’s liability, it ‘stops short of
the line between possibility and plausibility of ‘entitlement to relief.’’” Id.
4
entitled to the assumption of truth). Further, although “detailed factual allegations” are
not necessary, “a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitlement to
relief’ requires more than labels and conclusions, and a formulaic recitation of a cause of
action’s elements will not do.” Twombly, 550 U.S. at 555 (internal citations omitted).
See also Iqbal, 556 U.S. at 678 (“Threadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice.”).
Thus, a motion to dismiss should be granted unless the plaintiff’s factual
allegations are “enough to raise a right to relief above the speculative level on the
assumption that all of the complaint’s allegations are true (even if doubtful in fact).”
Twombly, 550 U.S. at 556. “[W]here the well-pleaded facts do not permit the court to
infer more than the mere possibility of misconduct, the complaint has alleged-but it has
not ‘shown’-‘that the pleader is entitled to relief.’” Iqbal, 556 U.S. at 679.
Further, Rule 9(b) provides that “[i]n alleging fraud or mistake, a party must
state with particularity the circumstances constituting fraud or mistake. Malice, intent,
knowledge, and other conditions of a person's mind may be alleged generally.” Fed. R.
Civ. P. 9(b). Pursuant to Rule 9(b), a plaintiff must plead “with particularity ‘the
circumstances of the alleged fraud in order to place the defendants on notice of the
precise misconduct with which they are charged, and to safeguard defendants against
spurious charges of immoral and fraudulent behavior.’ ” Lum v. Bank of Am., 361 F.3d
217, 223–24 (3d Cir. 2004) (quoting Seville Indus. Mach. Corp. v. Southmost Mach.
Corp., 742 F.2d 786, 791 (3d Cir. 1984)).
There are two ways to satisfy the particularity requirement. See Lum, 361 F.3d at
224. First, a plaintiff may plead the “date, place or time” of the fraudulent act. Id.
(quoting Seville, 742 F.2d at 791) (internal quotations omitted) (emphasis added).
5
Second, a plaintiff may use “alternative means [to] inject [ ] some measure of
substantiation into their allegations of fraud.” Id. (internal quotations omitted). Still, the
plaintiff must plead enough to substantiate the allegations of fraud being made and may
not rely on “conclusory statements.” NN & R, Inc. v. One Beacon Ins. Group, 362
F.Supp.2d 514, 518 (D.N.J. 2005) (quoting Mordini v. Viking Freight, Inc., 92 F.Supp.2d
378, 385 (D.N.J. 1999)). At a minimum, a plaintiff “must allege who made a
misrepresentation to whom and the general content of the misrepresentation.” Lum, 361
F.3d at 224. Significantly, the heightened pleading standard required by Rule 9(b)
applies to claims of fraud brought under New Jersey law. Frederico v. Home Depot, 507
F.3d 188, 200 (3d Cir. 2007).
III.
Analysis
As a preliminary matter, the Court will not consider the large declaration
Defendant appends to his motion to dismiss. Given the posture of the Court under Fed.
R. Civ. P. 12 (b) (6), only the allegations in the complaint, matters of public record,
orders, and exhibits attached to the complaint, are taken into consideration. See Chester
County Intermediate Unit v. Pa. Blue Shield, 896 F.2d 808, 812 (3d Cir. 1990); see also
U.S. Express Lines, Ltd. v. Higgins, 281 F.3d 383, 388 (3d Cir. 2002) (“Although a
district court may not consider matters extraneous to the pleadings, a document integral
to or explicitly relied upon in the complaint may be considered without converting the
motion to dismiss into one for summary judgment.” ) (internal quotation marks and
citations omitted) (emphasis deleted). The Court finds that Defendant’s motion asks the
Court to consider evidence not properly before the Court in this posture.
In the Court’s Opinion granting Plaintiffs’ Motion to Amend, the Court found that
the proposed Second Amended Complaint addressed concerns raised with respect to
6
jurisdiction and permitted the amendment because the proposed, now operative,
Second Amended Complaint was not futile. The Court will address Defendant’s
arguments as follows.
1.
Plaintiffs have plead a claim under Section 10 (b) of the Securities Act of 1934
and the motion to dismiss Counts V-VI is denied.
Section 10(b) of the Securities Exchange Act prohibits the use of “any manipulative
or deceptive device or contrivance in contravention of such rules and regulations as the
[Securities and Exchange] Commission may prescribe ....” 15 U.S.C. § 78j(b). The SEC
has in turn promulgated Rule 10b–5, which makes it unlawful for any person to “make
any untrue statement of a material fact or to omit to state a material fact necessary in
order to make the statements made, in the light of the circumstances under which they
were made, not misleading ... in connection with the purchase or sale of any security.” 17
C.F.R. § 240.10b–5. OFI Asset Mgmt., 834 F.3d at 493.
The Second Amended Complaint in subsection C, sets forth with sufficient
particularity as to Plaintiff Gordon, a claim under Section 10(b) of the Securities
Exchange Act. See Sec. Amen. Compl. ¶¶ 37-61. To state a claim for securities fraud
under Section 10 of the Exchange Act and Rule 10b–5, a plaintiff must plead the
following: “(1) a material misrepresentation or omission by the defendant; (2) scienter;
(3) a connection between the misrepresentation or omission and the purchase or sale of
a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and
(6) loss causation.” Amgen, Inc. v. Conn. Retirement Plans & Trust Funds, 568 U.S. 455,
133 S.Ct. 1184, 1192, 185 L.Ed.2d 308 (2013) (internal citation omitted).
7
Scienter is a “mental state embracing intent to deceive, manipulate, or defraud.”
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 218 n.12, 96 S.Ct. 1375, 47 L.Ed.2d 668
(1976). In evaluating scienter's “strong inference” requirement, courts must weigh
“plausible nonculpable explanations for the defendant's conduct” against the “inferences
favoring the plaintiff.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324,
127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). A “strong inference” of scienter is one that is
“cogent and at least as compelling as any opposing inference of nonfraudulent intent.”
Id. at 314, 127 S.Ct. 2499; see also id. at 324, 127 S.Ct. 2499 (“The inference that the
defendant acted with scienter need not be irrefutable, i.e., of the ‘smoking gun’ genre, or
even the most plausible of competing inferences.” (Internal quotation marks omitted.)).
The pertinent question is “whether all of the facts alleged, taken collectively, give rise to
a strong inference of scienter, not whether any individual allegation, scrutinized in
isolation, meets that standard.” Id. at 323, 127 S.Ct. 2499; see also id. at 326, 127 S.Ct.
2499 (“[T]he court's job is not to scrutinize each allegation in isolation but to assess all
of the allegations holistically.”).
“[I]n cases alleging securities fraud, plaintiffs must ‘satisfy the heightened pleading
rules codified in’ the [Private Securities Litigation Reform Act, or] PSLRA.” OFI Asset
Mgmt. v. Cooper Tire & Rubber, 834 F.3d 481, 493 (3d Cir. 2016) (quoting Institutional
Investors Grp. v. Avaya, Inc., 564 F.3d 242, 252 (3d Cir. 2009)). To satisfy this
heightened pleading standard, a plaintiff must state the circumstances of his alleged
cause of action with “sufficient particularity to place the defendant on notice of the
‘precise misconduct with which [it is] charged.’ ” Frederico v. Home Depot, 507 F.3d
188, 200 (3d Cir. 2007) (quoting Lum v. Bank of America, 361 F.3d 217, 223–24 (3d Cir.
2004)). Specifically, the plaintiff must plead or allege the “date, time and place of the
8
alleged fraud or otherwise inject precision or some measure of substantiation into a
fraud allegation.” Frederico, 507 F.3d at 200 (citing Lum, 361 F.3d at 224). The Third
Circuit has advised that, at a minimum, a plaintiff must allege the “essential factual
background that would accompany ‘the first paragraph of any newspaper story’—that is,
the ‘who, what, when, where and how’ of the events at issue.” In re Suprema Specialties,
Inc. Sec. Litig., 438 F.3d 256, 276–77 (3d Cir. 2006) (quoting In re Rockefeller Ctr.
Prop., Inc. Sec. Litig., 311 F.3d 198, 216 (3d Cir. 2002)).
The PSLRA provides two distinct pleading requirements, both of which must be met
in order for a complaint to survive a motion to dismiss. Avaya, 564 F.3d at 252. First,
under 15 U.S.C. § 78u–4(b)(1), the complaint must “specify each allegedly misleading
statement, why the statement was misleading, and, if an allegation is made on
information and belief, all facts supporting that belief with particularity.” Winer Family
Trust v. Queen, 503 F.3d 319, 326 (3d Cir. 2007) (construing 15 U.S.C. § 78u–4(b)(1)).
Second, the complaint must, “with respect to each act or omission alleged to violate this
chapter, state with particularity facts giving rise to a strong inference that the defendant
acted with the required state of mind.” 15 U.S.C. § 78u–4(b)(2). Under the PSLRA's
second pleading requirement for Exchange Act claims, a plaintiff must “state with
particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind.” 15 U.S.C. § 78u–4(b)(2).
An Exchange Act plaintiff must also plead a connection between the
misrepresentation or omission and the purchase or sale of a security and reliance.
Amgen, 133 S.Ct. at 1192; Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct.
1917, 44 L.Ed.2d 539 (1975). Rule 10b–5, promulgated by the Securities and Exchange
Commission, makes it unlawful:
9
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light
of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person, in connection with the
purchase or sale of any security.
17 C.F.R. § 240.10b–5 (emphasis added); In re Westinghouse Secs. Litig., 90 F.3d 696,
710 (3d Cir. 1996). As a result, before a plaintiff can invoke the protections of the antifraud provisions of the federal securities laws, a plaintiff must show that the alleged
misconduct involves a purchase or sale of securities. See Steinhardt Grp. Inc. v. Citicorp,
126 F.3d 144, 150 (3d Cir. 1997); Scattergood v. Perelman, 945 F.2d 618, 622 (3d Cir.
1991) (fraud under the Exchange Act and Rule 10b–5 must concern the purchase or sale
of a “security”).
Here, Defendant sold Bonds in his company under the guise that the bonds were
not securities but complied with all regulations. Under The Exchange Act, a “security” is
defined as:
any note, stock, treasury stock, security future, security-based swap, bond,
debenture, certificate of interest or participation in any profit sharing
agreement or in any oil, gas, or other mineral royalty or lease, any collateraltrust certificate, preorganization certificate or subscription, transferable
share, investment contract, voting-trust certificate, certificate of deposit for
a security, any put, call, straddle, option, or privilege on any security,
certificate of deposit, or group or index of securities (including any interest
therein or based on the value thereof), or any put, call, straddle, option, or
privilege entered into on a national securities exchange relating to foreign
currency, or in general, any instrument commonly known as a “security”; or
any certificate of interest or participation in, temporary or interim
certificate for, receipt for, or warrant or right to subscribe to or purchase,
any of the foregoing; but shall not include currency or any note, draft, bill
of exchange, or banker acceptance which has a maturity at the time of
issuance of not exceeding nine months, exclusive of days of grace, or any
renewal thereof the maturity of which is likewise limited.
10
15 U.S.C. § 78c (a)(10) (emphasis added). “[T]he term ‘security’ was meant to include
‘the many types of instruments that in our commercial world fall within the ordinary
concept of a security,’ ... the scope of federal securities laws is not without limitation,
and Congress did not intend to create a federal cause of action for common fraud.”
Goodwin v. Elkins & Co., 730 F.2d 99, 102 (3d Cir. 1984) (citation omitted). The Bonds
at issue here are described as investment contracts, a term that has not been defined by
Congress. In SEC v. W.J. Howey Co., the Supreme Court identified three elements
which indicate whether an investment qualifies as a security: (1) “an investment of
money,” (2) “in a common enterprise,” and (3) “with profits to come solely from the
efforts of others.” SEC v. W.J. Howey Co., 328 U.S. 293, 298–99, 66 S.Ct. 1100, 90 L.Ed.
1244 (1946).
At this stage, Plaintiff’s complaint sufficiently sets forth a claim under the
Exchange Act. Plaintiff alleges that Dailey intentionally and falsely represented that the
Bonds complied with all legal and regulatory requirements and knew that the issuance
of the Bonds violated federal and state securities laws. Sec. Am. Compl. at ¶¶ 34, 37-52,
56-65, 104-110, 126-130. In addition, the Complaint sets forth facts that strongly infer
that Dailey had incentive and motive to mislead and, therefore, acted with the required
state of mind. See 15 U.S.C. § 78u–4(b)(2). See, e.g., Gargiulo v. Isolagen, Inc., 527 F.
Supp. 2d 384, 390 (E.D. Pa. 2007) (holding that “Plaintiffs, by establishing motive and
opportunity, have met their burden and pled facts with sufficient particularity to give
rise to a strong inference of scienter”).
The Court finds that Plaintiffs' factual allegations sufficiently plead that certain
statements Defendant made were false and misleading. The Second Amended
Complaint specifies what Dailey said, what the contract promised, and that his actions
11
constitute a violation of the securities laws. For the same reasons, Plaintiff has
sufficiently plead claims under New Jersey Uniform Securities Law, N.J. Stat. Ann. §§
49:3-47, et. seq. and violations of the Florida Securities and Investor Protection Act, Fla.
Stat. § 517.301.5
Dailey’s motion to dismiss Counts V-VI will be denied.
2. The Complaint satisfies Rule 9 (b) as to the claims of common law fraud and
Defendant’s motion to dismiss Count XI is denied.
The Court finds that the Second Amended Complaint pleads claims of fraud with
sufficient particularity to withstand scrutiny under Rule 9 (b). See Sec. Am. Compl. ¶¶
34, 37-52, 56-65, 104-110, 126-130. To establish a claim for common law fraud, there
must be “(1) a material misrepresentation of a presently existing or past fact; (2)
5
The elements of a claim under the Florida and New Jersey State securities laws are substantially similar
to Rule 10b–5 of the Exchange Act. Under Florida law, a violation of Section 517.301 requires a showing
that:
(2) Any person purchasing or selling a security in violation of s. 517.301, and every
director, officer, partner, or agent of or for the purchaser or seller, if the director, officer,
partner or agent has personally participated or aided in making the sale or purchase, is
jointly and severally liable to the person selling the security to or purchasing the security
from such person in an action for rescission, if the plaintiff still owns the security, or for
damages, if the plaintiff has sold the security.
A cognizable claim under Section 517.301 must allege that (1) a misrepresentation or omission of a
material fact; (2) justifiably relied on; (3) that the misrepresentation or omission was made in connection
with a purchase or sale of securities; (4) with scienter or reckless disregard as to the truth of the
communication; and (5) that the untruth was the direct proximate cause of the loss. Profilet v. Cambridge
Fin. Corp., 231 B.R. 373, 380 (S.D.Fla.1999) (citing First Union Brokerage v. Milos, 717 F.Supp. 1519,
1523 (S.D.Fla. 1989), aff'd, 997 F.2d 835 (11th Cir.1993)).
Under New Jersey Law, a claim pursuant to N.J. Stat. Ann. § 49:3–47, et seq. must allege “an[]
untrue statement of a material fact or to omit to state a material fact necessary in order to make the
statements made, in the light of the circumstance under which they are made, not misleading.” The
statute provides for a civil cause of action against persons who, in connection with the sale or purchase of
a security, make “any untrue statement of material fact or any omission to state a material fact necessary
in order to make the statements made, in light of the circumstances under which they are made, not
misleading.” N.J. Stat. Ann. § 49:3–71(c); § 49:3–52. As a result, Defendants motion to dismiss Counts
VII-X is denied.
12
knowledge or belief by the defendant of its falsity; (3) an intention that the other person
rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting
damages.” Gennari v. Weichert Co. Realtors, 148 N.J. 582, 610, 691 A.2d 350 (1997)
(citing Jewish Ctr. of Sussex County v. Whale, 86 N.J. 619, 624–25, 432 A.2d 521
(1981)). As previously stated, there is also a heightened pleading standard when alleging
fraud: “a party must state with particularity the circumstances constituting fraud or
mistake. Malice, intent, knowledge, and other conditions of a person's mind may be
alleged generally.” Fed.R.Civ.P. 9(b) (emphasis added).
Taking the allegations in the Complaint as true, as this Court must under a Rule
12(b)(6) motion, the elements of common law fraud are satisfied. The Complaint
provides that Defendant’s July 6, 2013 "Official Announcement" stated that the bonds
being offered were not regulated, that the bonds constituted an ownership interest, and
a payout scheme was set forth in the offering and the business plan. In addition Plaintiff
alleges that Dailey omitted the fact that he lacked the financial resources, knowledge,
experience, equipment and ability to distribute weekly dividends resulting from the BTC
mining operations managed by LRM or repay the BTC Plaintiffs provided to purchase
the LRM Bonds. Plaintiff further alleges that Dailey mischaracterized the manner in
which funds he collected from the plaintniffs would be used and that the funds were
actually diverted to a number of improper purposes. See Sec. Am. Compl., ¶¶ 34, 37-52,
56-65, 104-110, 126-130. Defendant’s motion to dismiss Count XI is denied.
3. Plaintiff’s fraud, negligent representation and unjust enrichment claims are not
barred by the economic loss doctrine.
13
According to Dailey, Plaintiff’s common law fraud claims are barred by the economic
loss doctrine. In general terms, the economic loss doctrine “prohibits plaintiffs from
recovering in tort economic losses to which their entitlement flows only from a
contract.” Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 618 (3d Cir.
1995). The economic loss doctrine bars claims for negligence between parties to a
contract. SRC Const. Corp. of Monroe v. Atl. City Hous. Auth., 935 F. Supp. 2d 796, 800
(D.N.J. 2013). “Under New Jersey law, a tort remedy does not arise from a contractual
relationship unless the breaching party owes an independent duty imposed by law. ...
But mere failure to fulfill obligations encompassed by the parties' contract, including the
implied duty of good faith and fair dealing, is not actionable in tort.” Skypala v.
Mortgage Elec. Registration Sys., Inc., 655 F. Supp. 2d 451, 460 (D.N.J. 2009); Rost v.
Avelo Mortg., LLC, No. CV 15-3254, 2015 WL 6737026, at *5 (D.N.J. Nov. 3, 2015)
Here, Plaintiff alleges that Dailey falsely represented that the Bonds were not
securities and that the Bonds complied with all legal and regulatory requirements. In
addition, the Second Amended Complaint alleges that Dailey concealed that Dailey’s
corporation and former defendant Lab Rat Data Processing’s issuance, sale and delivery
of the unregistered Bonds constituted a violation of the federal securities laws. Finally,
when coupled with the many other alleged misrepresentations and omissions, especially
those set forth in Lab Rat Data Processing’s Official Announcement, Prospectus and
Business Plan, the alleged conduct goes beyond and is outside of the confines of the
contract between the parties. In other words, this fraud is independent from, and not
contained within, the four corners of the parties’ contracts.
The Court finds that as alleged, this misconduct is distinct from the breach of
contract and renders the economic loss rule inapplicable under both New Jersey and
14
Florida Law. See UBI Telecom Inc. v. KDDI Am., Inc., 2014 WL 2965705, at *15 (finding
that plaintiff’s fraudulent inducement claim was not barred by and could co-exist with a
breach of contract claim): G & F Graphic Servs., Inc. v. Graphic Innovators, Inc., No.
CIV 13-6482 JEI/AMD, 2014 WL 1818235 (D.N.J. May 8, 2014) (denying a motion to
dismiss where "the fraud alleged is not 'contained within the four corners of the
contract'"); Lithuanian Commerce Corp. v. Sara Lee Hosiery, 219 F. Supp. 2d 600, 608
(D.N.J. 2002) (holding the plaintiff's fraudulent inducement claim was premised upon
fraud that was extrinsic to the contract and that plaintiff was not barred from pursuing
simultaneous tort and contract claims); Florian Greenhouse, Inc. v. Cardinal IG Corp.,
11 F. Supp. 2d 521, 526 (D.N.J. 1998) (denying a motion to dismiss based on the
economic loss doctrine based on the court's finding that the fraud was extraneous to the
contract as it did not involve nonfulfillment of a warranty or guarantee contained within
the contract itself); Hilliard v. Black, 125 F.Supp.2d 1071 (N.D.Fla. 2000)(economic loss
rule does not bar claim of breach of fiduciary duty where breach of fiduciary duty claim
was independent of breach of contract claim); see also Russell v. Sherwin–Williams Co.,
767 So.2d 592 (Fla. 4th DCA 2000) (citing Bay Garden Manor Condominium Ass'n v.
Marks Associates, 576 So.2d 744 (1991); First State Savings Bank v. Albright & Assoc., of
Ocala, 561 So.2d 1326 (Fla. 5th DCA), review denied, 576 So.2d 284 (Fla. 1990)).
Dailey’s motion to dismiss on this basis is denied.
6. The Complaint states a claim for unjust enrichment and/or breach of contract and
Defendant’s motion to dismiss Counts XIV-XXII and XXIV is denied.
15
In order to properly plead a claim for a breach of contract, a plaintiff must allege “(1)
a contract; (2) a breach of that contract; (3) damages flowing therefrom; and (4) that the
party performed its own contractual duties.” Video Pipeline, Inc. v. Buena Vista Home
Entm't, Inc., 210 F.Supp.2d 552, 561 (D.N.J.2002). A claim for a breach of contract is
subject to the liberal notice pleading requirements found in Rule 8(a) of the Federal
Rules of Civil Procedure. See, e.g., St.-Val v. Domino's Pizza, LLC, Civil No. 06–4273,
2007 U.S. Dist. LEXIS 50518, at *4–5, 2007 WL 2049120 (D.N.J. July 12, 2007)
(applying Rule 8(a) to a plaintiff's breach of contract claim).
Defendant seeks the dismissal of Plaintiffs’ breach of contract claims in Counts XIV
and XXI because the Second Amended Complaint fails to identify the existence or
breach of the parties’ contracts. The Court disagrees. The Second Amended Complaint
sufficiently alleges that the parties entered into a Lab Rat Data Processing “Official
Contract” and the terms of the Plaintiff’s investment in the Bond were set forth in the
body of the complaint and attached thereto. See Sec. Am. Compl., ¶¶ 231-241 and 315325. In large measure, Plaintiff points to the fact that his actions solidified acceptance of
the offer.
An enforceable contract may occur where once party communicates an offer and
another party demonstrates acceptance. Importantly, acceptance may be shown by
words or conduct. See, e.g., Weichert Co. Realtors v. Ryan, 128 N.J. 427, 435 (1992)(“An
offeree may manifest assent to the terms of an offer through words, creating an express
contract, or by conduct, creating a contract implied-in-fact”); West Caldwell v. Caldwell,
26 N.J. 9, 24 (1958); Johnson & Johnson v. Charmley Drug Co., 11 N.J. 526, 538, 95
16
A.2d 391 (1953); N.J. Model Civil Instr. 4.10C6. Defendant’s motion to dismiss the
breach of contract claim is denied.
To establish unjust enrichment, “a plaintiff must show both that defendant received
a benefit and that retention of that benefit without payment would be unjust.” VRG
Corp. v. GKN Realty Corp., 135 N.J. 539, 641 A.2d 519, 554 (N.J. 1994). However, a
defendant will be liable only if the plaintiff shows that it “expected remuneration from
the defendant at the time it ... conferred a benefit on defendant and that the failure of
remuneration enriched defendant beyond its contractual rights.” Id. It has been
observed that quasicontract claims involve either some direct relationship between the
parties or a mistake on the part of the person conferring the benefit. See Callano v.
Oakwood Park Homes Corp., 91 N.J. Super. 105, 219 A.2d 332, 335 (N.J. Super. Ct. App.
Div. 1966).
Count XXIV of the Complaint states all of the elements of an unjust enrichment
claim. The claims are plead with Rule 9(b)’s required particularly as shown above with
respect to the securities claims, as Defendant has more than adequate notice of the
unjust and inequitable misconduct in fraudulently inducing Plaintiffs to invest in
6
The New Jersey Model Jury Instructions provide:
An offer occurs when one party communicates to another a willingness to enter into a
contract and does so under circumstances [that] justify the other party's understanding
that if the offer is accepted, an agreement would result. An offer must be reasonably
clear, definite and certain in all its essential terms.
An acceptance occurs when a party shows intent to agree to an offer. The acceptance may
be made by words or conduct. It must be made before the offer is withdrawn or lapses,
and it must match the terms of the offer exactly. A proposal to accept an offer on any
different terms is not an acceptance of the original offer. If any new or different terms are
proposed in response to the offer, the response is not an acceptance but rather a counteroffer. A counter-offer is a new offer by the party making that proposal. The new offer
must in turn be agreed to by the party who made the original offer for there to be an
acceptance.
17
unregistered securities that serves as the basis for Plaintiffs’ claim. Defendant’s motion
to dismiss the unjust enrichment claim is denied.
IV.
Conclusion
For the reasons set forth above, Defendant’s motion to dismiss is denied. An
appropriate Order shall issue.
Dated: March 27, 2018
s/ Joseph H. Rodriguez
Hon. Joseph H. Rodriguez,
UNITED STATES DISTRICT JUDGE
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