APPLEBAUM v. FABIAN et al
Filing
120
OPINION. Signed by Judge Kevin McNulty on 4/13/2021. (ams, )
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
EDITA APPLEBAUM,
Civ. No. 18-11023 (KM)(JSA)
Plaintiff,
OPINION
v.
WILLIAM P. FABIAN, ET AL.
Defendants.
KEVIN MCNULTY, U.S.D.J.:
Plaintiff Edita Applebaum initiated this action against eleven regular
employees and two professional employees of the Todd Harris Company
(“THC”). Plaintiff asserts that Defendants conspired to prevent her from
inheriting millions of dollars which were due her under the will of her late
husband, Todd Harris Applebaum, and that they used the estate’s funds for
illicit purposes.
On June 25, 2018, Plaintiff filed an eleven-count Complaint asserting
violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”),
common law fraud, violations of the New Jersey Conscientious Employee
Protection Act, violations of Title VII, violations of the Employee Retirement
Income Security Act, intentional infliction of emotional distress, tortious
interference with prospective economic advantage, defamation, retaliation, and
negligence. (See generally Compl.). Defendants filed a motion (DE 27) to
dismiss for failure to state a claim under Federal Rule of Civil Procedure
12(b)(6). In response, Plaintiff filed a First Amended Complaint (“1AC”). (DE 39).
Defendants again moved (DE 53) to dismiss and Plaintiff filed a cross-motion
(DE 59) for leave to file a second amended complaint.
On January 25, 2019, Judge Jose L. Linares administratively terminated
Defendants’ motion to dismiss pending the outcome of Plaintiff’s cross-motion
1
to amend, and referred that cross-motion to Magistrate Judge Joseph A.
Dickson. (DE 64). On March 26, 2019, Judge Dickson found that Plaintiff’s
Proposed Second Amended Complaint (“P2AC”) failed to meet the requirements
of Local Civil Rule 15.1(a)(2) and was “rife with formatting” anomalies that
made it “nearly impossible for the Court to determine precisely what material
Plaintiff [proposed] to add or remove.” (DE 70). Plaintiff then filed a second
P2AC. (DE 72). The Court held oral argument on the matter on August 12,
2019. (DE 89).
As will be explained in more detail, on October 30, 2020, Judge Dickson
granted in part and denied in part Plaintiff’s cross-motion to amend. (DE 114,
DE 115). Plaintiff now appeals. For the reasons provided herein, I will affirm
the Magistrate Judge’s well-reasoned decision.
I.
Summary1
Judge Dickson summarized the salient facts in his October 30 decision. I
recount them here.
The allegations in the First Amended Complaint focus predominantly on
Defendant William Fabian, who was a business associate of Plaintiff’s late
husband and is the administrator of Mr. Applebaum’s estate. (1AC Preliminary
Statement ¶66). Plaintiff alleges that Mr. Fabian is “the principal of the RICO
enterprise” and “facilitate[d] payment of disputed, undocumented, and
potentially illicit ‘loans’ and ‘consulting’ fees purportedly owed him by Mr.
Applebaum and/or [THC].” (Id.).
Citations to the record will be abbreviated as follows. Citations to page numbers
refer to the page numbers assigned through the Electronic Court Filing system, unless
otherwise indicated:
1
“DE” = Docket entry number in this case.
“Compl.” = Plaintiffs’ Complaint (DE 1)
“1AC” = Plaintiff’s First Amended Complaint (DE 39)
“P2AC” = Plaintiff’s Prosed Second Amended Complaint (DE 72)
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a. THC’s Involvement with Sun National Bank and Wells Fargo Bank
A number of the allegations involve THC’s attempt to secure loans from
Sun National Bank and Wells Fargo to repay its debts to Defendant Fabian.
Prior to Mr. Applebaum’s passing, he was the sole owner of THC. (1AC
Count I ¶3). After Mr. Applebaum died, Defendant Frank Rajs became
president of the company. (Id. at ¶18). Mr. Rajs then “place[d] defendant
Fabian on the THC payroll at a rate of two thousand dollars per week.” (Id.).
Additionally, Plaintiff alleges that Mr. Rajs, together with Defendants Fabian
and Cecelia Keh, withdrew $420,000 from THC’s line of credit with Sun
National Bank by forging Mr. Applebaum’s signature, to reimburse Mr. Fabian
for his previous loans to THC and consulting fees. (Id. at ¶¶19-23, 36).
Plaintiff submits that withdrawal “led to a fraud lawsuit” initiated by
Sun National Bank against THC. (Id. at 20). According to the First Amended
Complaint, Sun National Bank initiated its suit on June 25, 2013, alleging that
“the very passing of Mr. Applebaum rendered the Sun Bank withdrawals per se
fraudulent” because his passing “represents an event of default.” (Id. at ¶¶2122). Then, on June 27, 2013, THC held a “crisis meeting,” which “numerous
parties,” including Plaintiff and Defendants Gold and Capece, attended. (Id.)
The First Amended Complaint alleges that the parties “openly discussed more
than one conspiracy to commit fraud and they also candidly admitted they had
in fact committed fraud in the solicitation of the Sun Bank line of credit.” (Id.).
At that meeting, Mr. Fabian allegedly agreed to provide a nearly $300,000
“bailout” loan secured by “plaintiff’s personal guarantee, a lien on THC
accounts receivables, and a promissory note executed by THC.” (Id. at ¶¶4445).
Also at the crisis meeting, THC personnel, including Defendants Capece
and Fabian, decided to apply for an “emergency” line of credit with Wells Fargo
Bank, while “deliberately conceal[ing]” Mr. Fabian’s $300,000 bailout loan in
applying for that line of credit. (1AC Preliminary Statement ¶26). Plaintiff
further submits that “the primary purpose in soliciting the quarter-million3
dollar ‘emergency’ line of credit from Wells Fargo” was to repay THC’s
“indebtedness to defendant Fabian.” (1AC Count I ¶113). Ultimately, Wells
Fargo denied the loan because, inter alia, Plaintiff refused to provide a personal
guarantee. (1AC Preliminary Statement ¶29).
b. Other Allegations of Fraud
In addition to the bank fraud described above, Plaintiff alleges that
Defendants misappropriated the proceeds of Mr. Applebaum’s 401K and
engaged in payroll fraud.
Plaintiff alleges that at the time of his passing, Mr. Applebaum’s 401K
account contained approximately $100,000, and that, as the surviving spouse,
she “was entitled to the full value of the policy unless she signed an express
waiver of rights, which she did not.” ((1AC Count I ¶¶229-230). The First
Amended Complaint further alleges that Defendants Fabian and Keh
misappropriated the funds “through false pretenses” by transferring them to
Mr. Applebaum’s estate. (Id. at ¶¶229, 233-236).
Plaintiff also alleges that Defendants engaged in payroll fraud by adding
Mr. Fabian to the payroll of THC and Toben Investments, Inc. (“Toben”), a
company in which Mr. Applebaum owned a 51% interest. (Id. at ¶3) The
purpose of this act was to reimburse Mr. Fabian for his “disputed and
undocumented decades-old ‘loans,’ as well as his ‘consulting’ fees.” (Id. at
¶213).
c. Plaintiff’s Employment with THC and THC’s Alleged Retaliation
Plaintiff alleges that THC hired her in December 2012 “so that she could
‘stay connected’” to her late husband. (1AC Count IV ¶¶3-7). Plaintiff “was
given no formal assignments or title.” (Id. at ¶4). During her employment,
Plaintiff allegedly engaged in whistleblowing activities regarding fraud and
mismanagement within THC. (Id. at ¶¶24-25).
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THC discharged Plaintiff one year later, on December 4, 2013 (Id. at ¶3),
allegedly in retaliation for Plaintiff’s complaints.2 (Id. at ¶¶ 27-28, 37). The First
Amended Complaint submits that a group of “affiant” defendants (“Michael
Lackey, Gerald Macko, Derk Schumacher, Jimmy Samayoa, Garrett
Applebaum, and Youssef Abdulah Youssef”) later colluded with Defendants
Capece, Fabian, and Rajs in concocting false affidavits as post facto
justification for Plaintiff’s termination. (Id. at ¶¶48-58). Those Defendants
stated, inter alia, that Plaintiff would “destroy” THC if she remained and that
the late Mr. Applebaum “wanted [her] kept away from the company financials.”
(Id. ¶¶ at 11-14, 50).
d. Allegations involving the “Linden Property”
The First Amended Complaint alleges that Defendants used Toben as a
“shell company” to sell a commercial property in Linden, New Jersey (the
“Linden Property”).
In late 2011, Toben purchased the “lucrative” Linden Property from a
company called Morey La Rue, Inc., of which Defendant Fabian had been
employed and the alleged “de facto owner.” (Id. at ¶¶343-44, 347). Plaintiff
submits that property was “[t]he sole asset once owned by Toben” and was
appraised at 1.5 million dollars in 2014. (Id. at ¶339). However, after the June
27, 2013 crisis meeting, “Defendants knowingly sold this commercial property
under false pretenses, after the appraisal was issued, at approximately one half
of the appraised value.” (Id. at ¶¶340, 375). Plaintiff submits that Defendants
used the proceeds of the sale as repayment to Mr. Fabian for the
aforementioned loans and consulting services. (Id. at ¶¶375-79). Plaintiff
further submits that Defendants falsely justified the decision to sell the Linden
Property for half its value on the basis that environmental damage would
The First Amended Complaint also alleges that, early on in Plaintiff’s
employment with THC, the company and its employees “reject[ed]” her due to her
gender and ethnicity. (1AC Count IV ¶9). Plaintiff alleges in addition that her
termination was partly based on her “failure to participate in the Wells Fargo bank
fraud.” (Id. at ¶43).
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render the property unrentable in the future. (Id. at ¶¶384-85). The First
Amended Complaint alleges that the fraudulent sale caused Plaintiff financial
harm because she stands to inherit 51% of Toben’s assets. (Id. at ¶398).
e. Allegations involving the “State Court Litigation”
Finally, the First Amended Complaint asserted claims of fraud and other
unlawful activities in connection with Plaintiff’s pending state court action in
the Superior Court of New Jersey, which she filed in March 2014 (the “State
Court Litigation”).3
Since the initiation of the State Court Litigation, which is still in the
discovery phase, “[o]ver one dozen depositions have been conducted,”
“thousands of interrogatories,” and “[d]ozens of subpoenas and related
discovery devices have produced over thirty thousand documents.” (1AC
¶¶238-39). Plaintiff submits that Defendants have attempted to hide evidence
by, inter alia, using a “frivolous” non-disclosure agreement “to withhold the
most significant fraud-related discovery” and “to forestall key discovery
regarding fraud”; refusing to comply with discovery request “citing ‘privacy’
concerns and ‘confidential’ financial information”; and filing “a frivolous
motion, under false pretenses, to quash a lawful subpoena which had been
served to obtain the file related to the ‘emergency’ line of credit from Wells
Fargo.” (Id. at ¶¶258-68).
The First Amended Complaint alleges that Defendants committed
“widespread, prevalent, and compelling” perjury throughout the State Court
Litigation. (Id. at ¶277). The perjury allegedly “consisted primarily of
defendant’s efforts to conceal from plaintiff, and the Court, the nature of the
fraudulent payroll payments [to] Mr. Fabian.” (Id. at ¶279).
Among other things, Plaintiff requested the removal of Mr. Fabian as the
executor of Mr. Applebaum’s estate. (1AC Count I ¶241). Thus far, Plaintiff’s “various
requests” to remove Mr. Fabian have been denied. (Id. at ¶ 242).
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Finally, Plaintiff submits that Defendants used the State Court Litigation
to further their goal of “disinherit[ing]” her in retaliation for her whistleblowing
activities. (Id. at ¶¶326-330, 403-05).
II.
Legal Standards
Judge Dixon’s decision on the motion to amend boiled down to the
application of the ordinary Rule 12(b)(6) standard to the Proposed Second
Amended Complaint.
a. Appeal of motion to amend
Motions to amend a complaint are considered non-dispositive. Marinac v.
Mondelez Int’l, Inc., No. 14-7606, 2019 WL 1767345, at *1 (D.N.J. Apr. 22,
2019) (citing Cont’l Cas. Co. v. Dominick D’Andrea, Inc., 150 F.3d 245, 251 (3d
Cir. 1998)). A District Court will reverse a Magistrate Judge’s decision on a
non-dispositive motion only if it is “clearly erroneous or contrary to law.” Fed.
R. Civ. P. 72(a); L. Civ. R. 72.1(c)(1)(A).
A finding is clearly erroneous when although there is evidence to
support it, the reviewing court on the entire evidence is left with
the definite and firm conviction that a mistake has been
committed. . . . A ruling is contrary to law if the magistrate judge
has misinterpreted or misapplied applicable law.
Id. (alteration in original) (quoting Bobian v. CSA Czech Airlines, 222 F.Supp.2d
598, 601 (D.N.J.2002)). The appealing party bears the burden making such
showing. See Sang Geoul Lee v. Won II Park, 2015 WL 1523066, at *2 (D.N.J.
Apr. 2, 2015). I treat this motion to amend as primarily involving a legal ruling;
no evidence or fact finding as such is involved.
Here, Plaintiff appeals Judge Dickson’s order granting in part and
denying in part her motion for leave to file a second amended complaint. Under
Federal Rule of Civil Procedure 15(a)(2), a court should give leave for a plaintiff
to amend her pleading “when justice so requires.” The Court may deny a
motion to amend the pleadings where there is: (1) undue delay, (2) bad faith or
dilatory motive, (3) undue prejudice, (4) futility of amendment, or (5) repeated
failure to correct deficiencies. Foman v. Davis, 371 U.S. 178, 182 (1962); Long
7
v. Wilson, 393 F.3d 390, 400 (3d Cir.2004). Because Defendants did not argue
grounds (1), (2), (3), or (5) were present, Judge Dickson focused his analysis on
the futility of amendment. (DE 113 at 11). A proposed amendment “is futile if
the amended complaint would not survive a motion to dismiss” under Rule
12(b)(6). County of Hudson v. Janiszewski, 351 F. App’x 662, 666 (3d Cir. 2009)
(quoting Alvin v. Suzuki, 227 F.3d 107, 121 (3d Cir. 2000)). I therefore briefly
set forth the Rule 12(b)(6) standard applied by Judge Dixon.
b. Rule 12(b)(6) Standard
Federal Rule of Civil Procedure 8(a) does not require that a complaint
contain detailed factual allegations. Nevertheless, “a plaintiff’s obligation to
provide the ‘grounds’ of his ‘entitlement to relief’ requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will
not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); see Phillips v.
Cnty. of Allegheny, 515 F.3d 224, 232 (3d Cir. 2008) (Rule 8 “requires a
‘showing’ rather than a blanket assertion of an entitlement to relief.” (citation
omitted)). Thus, the complaint’s factual allegations must be sufficient to raise a
plaintiff’s right to relief above a speculative level, so that a claim is “plausible
on its face.” Twombly, 550 U.S. at 570; see also West Run Student Hous.
Assocs., LLC v. Huntington Nat. Bank, 712 F.3d 165, 169 (3d Cir. 2013).
That facial-plausibility standard is met “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). While “[t]he plausibility standard
is not akin to a ‘probability requirement’ . . . it asks for more than a sheer
possibility.” Id.
Rule 12(b)(6) provides for the dismissal of a complaint if it fails to state a
claim upon which relief can be granted. The defendant, as the moving party,
bears the burden of showing that no claim has been stated. Animal Science
Products, Inc. v. China Minmetals Corp., 654 F.3d 462, 469 n.9 (3d Cir. 2011).
For the purposes of a motion to dismiss, the facts alleged in the complaint are
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accepted as true and all reasonable inferences are drawn in favor of the
plaintiff. New Jersey Carpenters & the Trustees Thereof v. Tishman Const. Corp.
of New Jersey, 760 F.3d 297, 302 (3d Cir. 2014).
III.
Discussion
In addition to the eleven counts asserted in the First Amended
Complaint, Proposed Second Amended Complaint asserts five new claims. I will
discuss those five additional claims in turn.4
1. Proposed Count XII – Section 10b-5
i. Proposed allegations
In Proposed Count XII, Plaintiff alleges that Defendant Fabian and
proposed Defendant Thomas S. Howard, Esq., counsel for Mr. Applebaum’s
estate, violated 17 C.F.R. § 240.10b-5 (“Section 10b-5”) by filing “frivolous”
applications in the State Court Litigation to “disinherit” Plaintiff. (P2AC Count
1 ¶¶318-32; Proposed Count XII ¶¶2-8). Specifically, Count XII alleges that
Defendant Fabian and Mr. Howard attempted to sell Plaintiff’s 40% stake in
THC, which Mr. Applebaum had devised to her “by way of the residuary clause
of his last will and testament.”5 (P2AC Proposed Count XII ¶2).
ii. Judge Dickson’s decision
Judge Dickson found that amendment to add the Section 10b-5 claim
would be futile for two reasons.
First, relying on the Third Circuit precedent, Judge Dickson concluded
that “only a purchaser or seller of a security has standing to bring a private
10b-5 securities fraud action for money damages.” (DE 113 at 13 (quoting
As indicated by Judge Dickson, the sufficiency of Plaintiff’s existing allegations
is not currently before the Court. (DE 113 at 22). His decision was confined to the
sufficiency of the claims that were newly alleged in the Proposed Second Amended
Complaint
4
Plaintiff alleges that in August 2017and October 2018, Mr. Fabian, as executor
of Mr. Applebaum’s estate, filed verified complaints seeking leave to sell Plaintiff’s 40%
shares in THC because Plaintiff’s continued status as shareholder damages the
company. (1AC Count I ¶¶467-68). Plaintiff submits that Mr. Fabian relied on the false
affidavits prepared by THC employees as proof that her shareholder status “damages”
THC. (Id.)
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9
Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts Inc., 140 F.3d 478, 485
(3d Cir. 1998)). Here, Plaintiff does not allege that she purchased or sold the
stock in question—only that she would have inherited it but for Defendants’
intervention. (P2AC ¶¶38, 57, 63).
Second, even accepting Plaintiff’s theory that she qualifies as a “de facto
seller” or “forced seller,” and assuming that Section 10b-5 applies to such a
seller, Plaintiff’s theory would trigger the “probate exception” to federal
jurisdiction. (DE 113 at 13-14). Relying on Three Keys Ltd. v. SR Utility Holding
Co., 540 F.3d 220, 226 (3d Cir. 2008), Judge Dickson concluded that (1) “for
the Court to apply Plaintiff’s ‘de facto seller’ concept, it would have to make a
threshold determination that she was entitled to THC shares from Mr.
Applebaum’s Estate (and thus in a position to ‘sell’ them)” and (2) such task
would require the Court to engage in a “probate function” that triggers the
exception. (DE 113 at 14).
iii. Analysis
The Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Section
10b-5 of the accompanying regulation “make it unlawful to commit fraud in
connection with the purchase or sale of a security.” U.S. Small Bus. Admin. v.
Katawczik, 107 F. App’x 281, 285 (3d Cir. 2004)
Section 10b-5 provides:
It shall be unlawful for any person, directly or indirectly, by the
use of any means or instrumentality of interstate commerce, or of
the mails or of any facility of any national securities exchange,
(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.
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17 C.F.R. § 240.10b-5 (emphasis added).
In Blue Chip Stamps v. Manor Drug Stores, the Supreme Court held that
only a purchaser or seller of a security has standing to assert a claim under
Section 10b-5 for money damages. 421 U.S. 723, 755 (1975); Trump Hotels,
140 F.3d at 485. That case represented the Supreme Court’s adoption of the
Second Circuit’s purchaser/seller rule that was announced long ago in
Birnbaum v. Newport Steel Corp., 193 F.2d 461(2d Cir. 1952). Blue Chip, 421
U.S. at 731; Trump Hotels, 140 F.3d at 485. Five years prior to Blue Chip,
however, the Third Circuit held that “despite the Birnbaum rule, Second Circuit
jurisprudence allowed a non-purchasing or non-selling plaintiff to bring an
action for injunctive relief under 10b–5.” Trump Hotels, 140 F.3d at 485 (citing
Kahan v. Rosenstiel, 424 F.2d 161 (3d Cir.1970)). In Kahan, the Third Circuit
held that
[n]either the language of § 10(b) and Rule 10 b–5 nor the policy
they were designed to effectuate mandate adherence to a strict
purchaser-seller requirement so as to preclude suits for
[injunctive] relief if a plaintiff can establish a causal connection
between the violations alleged and the plaintiff's loss.
Id. at 485 (alterations in original) (quoting Kahan, 424 F.2d at 173).
In Trump Hotels, the Third Circuit expressly left open the question
whether Kahan’s relaxed-standing rule for injunctive relief survived Blue Chip.
Id. There, the plaintiff, Trump Hotels & Casino Resort, Inc., sought to enjoin
the sale of bonds that were to finance construction of a highway near its
property, a highway that would benefit the business of a competitor. Id. at 484.
The plaintiff argued that the issuance of such bonds would violate, inter alia,
Section 10b-5. Id. The Court found the purported causal link between the sale
of the bonds and economic injury to Trump Hotels was too attenuated to
establish standing. Id. at 487. (“Admittedly, there is a highly attenuated
connection between the funding scheme and Trump’s claimed ‘injury’.
However, that ‘injury’ is much too tenuous to be regarded as arising from the
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alleged securities fraud. The injury results from the highway that will bring
traffic to Trump’s competitor.”). Because Trump Holds was neither a purchaser
nor seller, it could not establish standing under Blue Chip. Id. at 484. And
because the causal link between the alleged securities fraud and the injury was
too attenuated, it could not support its claim for injunctive relief under Kahan.
Id. Thus, the Third Circuit did not need to address whether Kahan remains
good standing law.
Plaintiff submits that Kahan’s relaxed-standing rule survived Blue Chip
and that she has standing to sue under Section 10b-5 as a beneficiary of Mr.
Applebaum’s will. (DE 116 at 17-20). In that regard, Plaintiff relies on the
Seventh Circuit decision in Norris v. Wirtz, 719 F.2d 256 (7th Cir. 1983). There,
the Court addressed whether the beneficiary of a trust established a claim
under Section 10b-5 “where the actual sales of the securities held in trust were
made by the co-executors of plaintiff’s father’s estate, and not by plaintiff.”
Norris v. Wirtz, 719 F.2d 256, 259 (7th Cir. 1983). The Court held that because
“plaintiff’s approval was required under the will, plaintiff fits within the
contours of the Birnbaum rule and has stated a cause of action by alleging
misrepresentations ‘in connection with’ the sale of securities.”6 Id. 261.
Assuming arguendo that the Third Circuit would adopt Norris, that
decision would not apply to these facts, for two reasons: (1) it is not clearly
alleged that the securities in question were actually sold at all; and (2) it is not
clear that Plaintiff had or has any right to object to such sale.
The Proposed Second Amended Complaint vacillates between alleging
that Defendants “attempt[ed] to disinherit” Plaintiff by filing “frivolous”
6
The Norris Court explained:
The will provisions establishing plaintiff’s trust provide that the trustee is
generally to have full and unquestioned power to make investment
decisions regarding the trust property. But the will does give James
Norris’ daughter, plaintiff here, the power to approve the sale of any
stock in the closely-held corporations beneficially owned by plaintiff
when the purchaser is the individual trustee.
719 F.2d at 260.
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applications in the State Court Litigation and alleging that Defendants
“succeeded in selling [her] shares.” (P2AC Proposed Count XII ¶¶1-8 (emphasis
added)). The distinction is critical because without at least a sale by somebody,
Section 10b-5 does not apply. See 17 C.F.R. § 240.10b-5.
Further, the Proposed Second Amended Complaint departs from the facts
in Norris because it does not allege that Plaintiff’s approval is required before
Defendant Fabian, as executor, can sell THC’s shares. In her briefing, however,
Plaintiff submits that “New Jersey case law clearly requires a beneficiary’s
specific objection to in-kind distribution before a fiduciary is allowed to
distribute in-cash.” (DE 116 at 20 (citing In re the Estate of Hope, 916 A.2d 469
(N.J. Super. Ct. App. Div. 2007)).
In Estate of Hope, the Appellate Division addressed a challenge to an
administrator’s decision to sell estate property and distribute the proceeds
among four heirs where the heirs “requested that the administrator distribute
one-half of the property to them in kind.” Estate of Hope, 916 A.2d at 471. The
court noted that the operative will was “silent as to whether distribution shall
be in kind or whether the property should be sold and the proceeds distributed
in cash.” Id. at 473. Because there was no express distribution preference, the
court examined N.J. Stat. Ann. § 3B:23-3, which “provides that distribution in
kind is warranted ‘if there is no objection to the proposed distribution and it is
practicable to distribute undivided interests[;] otherwise[,] those assets shall be
converted into cash for distribution.’” Id. (quoting N.J. Stat. Ann. § 3B:23-3;
alteration in original). The court concluded that this provision demonstrates
New Jersey’s “preference for in-kind distributions.” Id. However, the court made
clear that such a preference “does not mean . . . that in-kind distribution is
warranted under all circumstances.” Id. Instead, “if any devisee of a particular
asset objects to the in-kind distribution of that asset, distribution in kind of
that asset is not required” and “the mode of distribution is subject to the
equitable discretion of the personal representative of the estate, and ultimately,
of the court.” Id. at 474 (emphasis added).
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Thus, contrary to Plaintiff’s assertion, Estate of Hope does not “clearly”
require a specific objection to in-kind distribution before in-cash distribution is
permitted. The Hope court first looked to the language of the will. Having
determined the will did not provide for a specific method of distribution, the
court noted New Jersey’s preference for in-kind devises. Importantly, however,
the court determined that the appropriate distribution method is dependent
upon the circumstances. See id. Here, the circumstances that would, as
Plaintiff would have it, require a particular form of distribution are not clearly
alleged.
Based on the foregoing, I find the Proposed Second Amended Complaint
does not establish a Section 10b-5 claim. Therefore, I will affirm the Magistrate
Judge’s decision with regard to Proposed Count XII.
Alternatively, Judge Dickson also found that Proposed Count XII would
trigger the probate exception to federal jurisdiction. Here, too, I agree.
“The probate exception is a jurisdictional limitation on the federal courts
originating from the original grant of jurisdiction in the Judiciary Act of 1789.”
Three Keys, 540 F.3d at 226. Jurisdiction conferred by that Act “did not extend
to probate matters.” Id. (internal quotation marks omitted) (quoting Markham v.
Allen, 326 U.S. 490, 490 (1946)). Interpreting Supreme Court precedent, the
Third Circuit laid out the contours of the exception: “unless a federal court is
endeavoring to (1) probate or annul a will, (2) administer a decedent’s estate, or
(3) assume in rem jurisdiction over property that is in the custody of the
probate court, the probate exception does not apply.” Id. at 227.
Here, Plaintiff asks the Court to (1) undermine the Probate Court’s
decision7 and determine that she is entitled to the THC shares in question
pursuant to Mr. Applebaum’s will and (2) that she is entitled to prevent the sale
of those shares. It is no exaggeration to state that Plaintiff asks this court to
The parties have not attached a copy of the Probate Court decision itself.
However, Plaintiff submits that she has not received what she regards as her
inheritance (DE 116 at 6), and the Probate Court’s order is currently being appealed
(DE 119 at 31).
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probate Mr. Applebaum’s will and administer his estate, apparently in
contradiction to the state court that is performing those functions. Under the
probate exception, the Court is not permitted to do so.8 See id.
I therefore affirm Judge Dickson’s ruling that amendment to add Count
XII should be denied as futile.
2. Proposed Count XIII – breach of fiduciary duty
i. Proposed allegations
The Proposed Second Amended Complaint alleges that Defendant
Fabian, as executor of Mr. Applebaum’s estate, owed Plaintiff a fiduciary duty
and breached that duty by: (1) “attempt[ing] to disinherit plaintiff by selling her
40% stake in THC”; (2) “fail[ing] to give plaintiff any monies from [Mr.
Applebaum’s] estate for six years, from 2012 through present”; and (3)
defaming Plaintiff “in stating that [she] is acting out of ‘anger,’ when in reality
her concerns stem from the Sun Bank Fraud lawsuit of 2013 as well as other
documented instances of fraud she witnessed (e.g. the payroll fraud).” (P2AC
Count XIII ¶¶1-4).
ii. Judge Dickson’s decision
Judge Dickson found that the first two contentions are barred by the
probate exception. (DE 113 at 15). In particular, Judge Dickson concluded that
to find Plaintiff suffered damages as a result of the alleged disinheritance
“would require this Court to probate Mr. Applebaum’s Estate.” (Id.) Such a
finding, he held, would “usurp the probate court’s role.” (Id.).
Regarding the alleged defamation, Judge Dickson also found such claim
would run afoul of the probate exception, at least at the stage of calculating
damages. (DE 113 at 15). Moreover, he found that the Proposed Second
Amended Complaint failed to plead a defamation claim because it does not
provide any factual details regarding Defendant Fabian’s alleged statement,
Plaintiff argues that the exception should not apply because the Appellate
Division and New Jersey Supreme Court denied her request to stay the decision of the
Probate Court. (DE 116 at 16; DE 116-7). However, Plaintiff has appealed the Probate
Court’s decision and that appeal remains pending.
8
15
“such as when he said it, or who he told.” (DE 113 at 15). And, if, as it appears
based on other factual allegations, that Plaintiff is referring to a statement
Fabian made in the State Court Litigation, those statements would be subject
to New Jersey’s litigation privilege. (DE 113 at 16 (citing Williams v. BASF
Catalysts LLC, 765 F.3d 306 (3d Cir. 2014)).
Plaintiff does not appeal these findings. (See DE 116). Finding no error
on my independent review, I will affirm Judge Dickson’s ruling that
amendment to add Count XIII should be denied as futile.
3. Proposed Count XV – Fraudulent concealment9
i. Proposed allegations
Proposed Count XV alleges that Defendants Fabian and Gold, as well as
a new proposed Defendant, Howard, engaged in fraudulent concealment of
evidence in the State Court Litigation. (See generally P2AC Count XV).
With respect to Mr. Howard, the Proposed Second Amended Complaint
asserts that he
(1) “knowingly filed a fraudulent employment agreement (‘EA’) in 2017
and 2018 to conceal defendant Fabian’s 600K payroll fraud”;
(2) “knowingly filed and/or drafted one or two certifications or affidavits
wherein defendant Fabian sought to deny or refute compelling prelitigation admissions of fraud”;
(3) “filed a certification in State Court, signed by him, in which he
knowingly explicitly set forth that the pivotal, material, and significant
Sun Bank Lawsuit of 2013 was never filed”;
(4) “once again set forth in an interlocutory appeal brief that the Sun
Bank lawsuit was never filed”;
(5) “knowingly misrepresented the status of discovery as having been
‘completed’ in order to forestall key discovery”; and
Proposed Count XIV, which contains an aiding and abetting claim, relates to
and is dependent on Count XV. It is therefore more convenient to discuss the
substantive claim first.
9
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(6) “twice knowingly misinterpreted and misrepresented in State Court
the pre-litigation certifications of the ‘affiants’ . . . by setting forth a
factual argument not specifically supported by said certifications.”
(P2AC Count XV ¶¶4-9). Plaintiff also asserts that Mr. Howard made various
misrepresentations to the probate court and the New Jersey Superior Court,
Appellate Division. (Id. ¶¶82-84).
Regarding Defendant Gold, the Proposed Second Amended Complaint
alleges that he fraudulently concealed (1) his knowledge of the Sun Bank
lawsuit and (2) the source of the “bailout” loan when applying for a loan from
Wells Fargo. (Id. at ¶¶78, 81, 84).
Finally, as to Defendant Fabian, the Proposed Second Amended
Complaint alleges that he provided false information, including false testimony,
to the state court concerning the alleged payroll fraud. (Id. at ¶¶88-92).
ii.
Judge Dickson’s Decision
Judge Dickson held that the Count XV failed to state a claim for
fraudulent concealment, and that amendment should therefore be denied. (DE
113 at 18-21).
First, with respect to Proposed Defendant Howard, Judge Dickson found
that the complaint fails to allege that he “‘intentionally withheld, altered, or
destroyed’ any evidence.” (DE 113 at 18). Instead, “Plaintiff takes issue with
filings, statements, and arguments that Mr. Howard allegedly made during the
State Court Litigation, alleging that he knowingly provided inaccurate
information.” (Id.). And, even if the allegations were not protected by the
litigation privilege, Plaintiff failed to state claim for fraudulent concealment
because she “has not alleged that she was unable to obtain any of the
information Mr. Howard purportedly ‘withheld’ or ‘altered’ from other sources,
or that she had to rely on an evidentiary record devoid of appropriate evidence.”
(DE 113 at 18-19).
Regarding Defendant Gold, Judge Dickson found that the allegations
failed for the reasons asserted with respect to Mr. Howard. (DE 113 at 21).
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Additionally, Judge Dickson noted that “Plaintiff has not pled facts establishing
how an alleged misrepresentation to a bank at some point in time might
constitute the concealment of evidence in a later piece of litigation.” (Id.)
Finally, with respect to Defendant Fabian, Judge Dickon found that
because Plaintiff alleges that she was aware of and “had full details” regarding
the payroll fraud scheme, she cannot establish a fraudulent concealment
claim. (DE 113 at 21)
iii.
Analysis
In Rosenblit v. Zimmerman, the New Jersey Supreme Court clarified the
elements of the tort of fraudulent concealment. 766 A.2d 749, 757-58 (N.J.
2001). That tort has five essential elements:
(1) That defendant in the fraudulent concealment action had
a legal obligation to disclose evidence in connection with an
existing or pending litigation;
(2) That the evidence was material to the litigation;
(3) That plaintiff could not reasonably have obtained access
to the evidence from another source;
(4) That defendant intentionally withheld, altered or
destroyed the evidence with purpose to disrupt the litigation;
(5) That plaintiff was damaged in the underlying action by
having to rely on an evidential record that did not contain
the evidence defendant concealed.
Id. at 758.
Here, fatally, the Proposed Second Amended Complaint does not once
allege that Plaintiff could not access the allegedly concealed evidence. Instead,
it contains extensive details of the Sun Bank Lawsuit and the “bailout loan”
and contains alleged evidence of the payroll scheme—all of which was
apparently known to the Plaintiff and could have been introduced in evidence
in the state case. (See generally P2AC). Because, at all times, Plaintiff was
aware of the alleged fraud and had access to the evidence in question, her
fraudulent concealment claim must fail. See Rosenblit, 766 A.2d at 758.
18
I will affirm Judge Dickson’s ruling that amendment to add Count XV
should be denied as futile.
4. Proposed Count XIV – Breach of fiduciary duty, aiding and
abetting by non-fiduciary defendants
The Proposed Second Amended Complaint asserts an aiding and abetting
claim by “non-fiduciary Defendants” Howard, Rajs, Gold, Capece, and the
“affiant defendants.” (P2AC Count XIV ¶¶1-2). Those Defendants are allegedly
liable for aiding and abetting Defendant Fabian in his breach of fiduciary
duties and in his fraudulent concealment. (Id. at ¶2).
Judge Dickson found that those claims must fail because Plaintiff failed
to plead viable claims for breach of fiduciary duty or fraudulent concealment
against Defendant Fabian. (DE 113 at 22). Plaintiff does not appeal that
determination. (See generally DE 116). Finding no error on my independent
review, I will affirm Judge Dickson’s ruling that amendment to add Count XIV
should be denied as futile.
5. Proposed Count XVI – Civil conspiracy
i.
Proposed allegations
Finally, the Proposed Second Amended Complaint adds Count XVI, a
claim for civil conspiracy that incorporates Plaintiff’s existing RICO allegations,
adding the following:
(1) Defendants “agreed, along with defendant Fabian, to engage in the
bank fraud, the payroll fraud, and the litigation fraud, with the aim of
allowing Mr. Fabian to pay himself his disputed ‘off the books’
indebtedness, under the guise that they were ‘saving’ the company –
as depicted inter alia by the June 27, 2013 ‘crisis’ meeting”;
(2) Defendants “conspired to ‘disappear’ the Sun Bank Lawsuit of 2013,
and they conspired to misrepresent the nature of Mr. Fabian’s payroll
scheme”; and
(3) Defendants “conspired to prevent inter alia the deposition of company
account Laurence W. Gold and other discovery.”
19
(P2AC Count XVI ¶¶2-4). The Proposed Second Amended Complaint also
alleges that, after Plaintiff filed the State Court complaint, Mr. Howard
conspired with Defendant Fabian, “and others,” “to create specious affidavits”
by denying Defendant Fabian’s “prior compelling admissions of payroll fraud.”
(Id. at ¶5).
ii.
Judge Dickson’s Decision
Judge Dickson noted that the sufficiency of Plaintiff’s existing claims,
including her RICO claim, was not presently before the Court. (DE 113 at 22).
In the interest of judicial economy, Judge Dickson permitted Plaintiff “to amend
her Complaint to add a common law conspiracy claim based on the facts
underlying her existing RICO claims.” He declined, however, to allow Plaintiff’s
“proposed expansions on that conspiracy claim,” because the additional
allegations of the Proposed Second Amended Complaint either failed to
establish a conspiracy or made conclusory allegations. (DE 113 at 23-24).
In particular, Judge Dickson noted that Plaintiff “contends that both
proposed Defendant Howard and Defendant Gold independently and knowingly
misrepresented the existence of the Sun National Bank lawsuit.” (DE 113 at
23). Only one person, however (Mr. Howard) was alleged to have “misled the
probate court regarding the state of discovery.” (DE 113 at 23-24). Finally,
Judge Dickson found legally insufficient the allegation that Mr. Howard
“conspired” with others in a “post-suit scheme” because (1) the Proposed
Second Amended Complaint provides no specifics to that conspiracy and (2) to
the extent that Plaintiff claims a conspiracy existed because “an attorney
worked with his client representative to prepare documents for filing in the
State Court Litigation, that conduct is protected by the litigation privilege.” (DE
113 at 24).
iii.
Analysis
New Jersey defines a civil conspiracy as “a combination of two or more
persons acting in concert to commit an unlawful act, or to commit a lawful act
by unlawful means, the principal element of which is an agreement between
the parties to inflict a wrong against or injury upon another, and an overt act
20
that results in damage.” Banco Popular N. Am. v. Gandi, 876 A.2d 253, 263
(2005) (internal quotation marks omitted) (quoting Morgan v. Union County Bd.
of Chosen Freeholders, 633 A.2d 985 (App.Div.1993)).
Here, the Proposed Second Amended Complaint provides no factual
allegations about any agreement among defendants to harm plaintiff or commit
any wrongdoing. (See generally P2AC). In Proposed Count XVI, Plaintiff states
in conclusory fashion that Defendants “agreed” to engage in bank, payroll, and
litigation fraud, but provides no facts about that alleged agreement. (P2AC
Proposed Count XVI ¶2). Similarly, Plaintiff states that Defendants “conspired”
to cover up the Sun Bank Lawsuit and to prevent the deposition of Defendant
Gold. (Id. at 3-4). Again, however, the Proposed Second Amended Complaint
contains no facts about any such agreement. (See id.). Finally, Plaintiff alleges
that Mr. Howard “conspired” with Defendant Fabian “and others” by filing
“specious affidavits.” (Id. at ¶5). Again, there are no facts about the formation
or existence of any such agreement. (See id.).
In briefing, Plaintiff argues that an agreement can be inferred based on
the pleadings relating to Defendants’ alleged plan to disinherit her. (DE 116 at
33). A motion to dismiss, however, is addressed to the allegations of the
complaint, and the Proposed Second Amended Complaint does not draw any
such connection. Therefore, I will affirm Judge Dickson’s decision to the extent
it found Plaintiff failed to establish a claim for civil conspiracy. I leave
undisturbed the decision to permit Plaintiff leave to seek further amend of the
complaint to assert a common law conspiracy claim based on her existing RICO
allegations.
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6. Proposed Defendants Gartenberg Howard LLP and Morey La Rue,
Inc.
The Proposed Second Amended Complaint adds three proposed
defendants: Mr. Howard; Gartenberg Howard LLP; and Morey La Rue, Inc.
Judge Dickson dismissed the claims against Howard, and I have affirmed
those decisions. Mr. Howard therefore will not be added as a defendant.
Judge Dickson also declined to allow the addition of the other two
defendants. Regarding Gartenberg Howard LLP, Judge Dickson found that
“Plaintiff has simply alleged Mr. Howard’s affiliation with the firm, and asserts
that the firm is liable for fraudulent concealment, but has not provided any
information as to what the firm itself either did or failed to do in connection
with this case.” (DE 113 at 24). Plaintiff does not specifically appeal Judge
Dickson’s ruling declining to permit amendment to add Gartenberg Howard
LLP, which is hereby affirmed.
With respect to Morey La Rue, Inc., “Plaintiff alleges that Toben
Investments, Inc. purchased the Linden Property from that entity in 2011,” and
alleges “that Defendant Fabian may have used Morey La Rue as a ‘shell’ to
commit ‘financial crimes,’” but did not “plead any facts connecting Morey La
Rue, Inc. to any of her claims in this matter.” (DE 113 at 24-25). Plaintiff urges
that the Proposed Second Amended Complaint “did plead – or will plead with
leave of Court – that shell company [Morey La Rue] is intimately connected to
this matter.” (DE 116 at 10). In essence, Plaintiff all but concedes that the
allegations as currently formulated are insufficient. While it is true that
Plaintiff alleges that Morey La Rule was created as a “shell company” used “for
the commission of financial crimes” (P2AC Count I ¶7), the Proposed Second
Amended Complaint never factually alleges any wrongdoing by the company in
connection with the proposed claims. The company is never mentioned with
respect to the Section 10b-5 claim, the breach of fiduciary claim, the aiding
and abetting claim, the fraudulent concealment claim, or the civil conspiracy
claim. (See P2AC Counts XII-XVI). I will therefore affirm Judge Dickson’s ruling
22
that amendment to add Morey LaRue as a defendant should be denied as
futile.10
IV.
Conclusion
For the reasons set forth above, I will affirm the Magistrate Judge’s
decision. An appropriate order follows.
Dated: April 13, 2021
/s/ Kevin McNulty
____________________________________
Kevin McNulty
United States District Judge
Judge Dickson also noted that the claims previously dismissed with prejudice
against Defendants Voya Financial Services, Inc.; Intac Actuarial Services, Inc; and
Acensus LLC, and Defendant Capece remain dismissed. (DE 113 at 25). Plaintiff does
not appeal that determination.
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