FAGAN et al v. FISCHER et al

Filing 127

OPINION filed. Signed by Chief Judge Freda L. Wolfson on 10/30/2019. (jdb)

*NOT FOR PUBLICATION*
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
TINA FAGAN and MICHAEL FAGAN,
Plaintiffs,
v.
K. SCOTT FISCHER, VERONIKA M.
FISCHER, BRIAN E. CARROLL, BRUCE
W.
BREITWEISER,
FISCHER
INVESTMENT CAPITAL, LLC, BYANA,
LLC, PRIVATE CAPITAL, LLC,
FUNDER, LLC, BOWDER, LLC,
WEALTH CAPITAL GROUP, LLC,
DUNBAR BREITWEISER & COMPANY,
LLP, JOHN/JANE DOES 1-5, fictitious
individuals to be named after discovery, and
ABC CORPS. 1-5, fictitious corporate
entities to be named after discovery,
Defendants.

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Civ. Action No.: 14-7013 (FLW)(TJB)
OPINION

WOLFSON, U.S. Chief District Judge:
This case arises from a failed business relationship between Plaintiffs Tina Fagan and
Michael Fagan (collectively, “Plaintiffs” or “the Fagans”) and Defendant K. Scott Fischer (“Scott
Fischer”). Plaintiffs allege that Scott Fischer controlled various corporate entities, many of which
are defendants in this action, which he utilized as vehicles to operate a fraudulent real estate
investment scheme and loan program. In that regard, Plaintiffs further allege that they were duped
into making debt and equity investments, totaling over $2 million dollars, in the Derbyshire
Project, a real estate development project in North Carolina, and entities associated with Scott
Fischer. Defendants Scott Fischer; Bowder, LLC (“Bowder”); Byana, LLC (“Byana”); Brian E.

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Carroll; Veronika M. Fischer; Fischer Investment Capital, Inc. 1 (“FIC”); Funder, LLC (“Funder”);
Private Capital, LLC (“Private Capital”); Wealth Capital Group, LLC (“Wealth Capital”)
(collectively, “Defendants”) now move for partial summary judgment on Counts I (Federal RICO),
II (conspiracy to violate RICO), III (New Jersey RICO), IV (Violation of Section 10(b) of the
Securities’ Exchange Act and Securities Rule 10b-5), V (the New Jersey Uniform Securities Act),
VI (Common Law Fraud/Fraud in the Inducement), VII (Aiding and Abetting Common Law
Fraud), VIII (Equitable Fraud), IX (Conversion), X (Unjust Enrichment), XI (Breach of Contract
as to Defendant Scott Fischer only), and XIV (Breach of Fiduciary Duty) of the Second Amended
Complaint pursuant to Federal Rule of Civil Procedure 56. For the reasons set forth below,
Defendants’ motion is GRANTED IN PART and DENIED IN PART. Summary Judgment is
GRANTED in favor of defendants Veronika Fischer, Bowder, Funder, and Wealth Capital, on all
of the claims against them, and those defendants are dismissed from the lawsuit. Summary
Judgment is GRANTED in favor of Defendants Scott Fischer, Brian E. Carroll, Private Capital,
FIC, and Byana on Counts I (Federal RICO), II (conspiracy to violate RICO), III (NJ RICO), IV
(Violation of Section 10(b) of the Securities’ Exchange Act and Securities Rule 10b-5), V (the
New Jersey Uniform Securities Act), VIII (Equitable Fraud), IX (Conversion), X (Unjust
Enrichment), and XIV (Breach of Fiduciary Duty). Defendants Scott Fischer, Brian E. Carroll,
Private Capital, FIC, and Byana’s Motion for Summary Judgment as to Counts VI (Common Law
Fraud/Fraud in the Inducement), and VII (Aiding and Abetting Common Law Fraud) is DENIED.
Scott Fischer’s Motion for Summary Judgment on Count XI (Breach of Contract) is also DENIED,
but this claim is limited as outlined in this Opinion.

1

Defendant Fischer Investment Capital, Inc. was improperly pled as Defendant Fischer
Investment Capital, LLC.
2

I.

Factual Background and Procedural History
A.
The Creation of Byana and the Related Fischer Entities
The following facts are not disputed, unless otherwise noted. Byana, a Delaware LLC, was

formed by Defendants Scott Fischer and Brian E. Carroll, and Dan Taylor, a non-party, on August
22, 2006. ECF No. 120-2, Defendants’ Statement of Material Facts (“SOMF”) ¶14. Byana was
created for the purpose of “acquir[ing], develop[ing] and sell[ing] parcels of land located in
Columbus, North Carolina” for the Derbyshire Project. SOMF ¶14. Byana is owned by its
members, including Plaintiff Tina Fagan, Defendants Funder and Wealth Capital, and other nonparty members. SOMF. ¶5. Approximately one month after creating Byana, Scott Fischer formed
Private Capital, another Delaware LLC, to serve as the developer of the Derbyshire Project.
SOMF. ¶15. Scott Fischer is the managing member of Defendant Private Capital, which is, in
turn, the managing member of Byana. SOMF ¶6. Private Capital is owned by Defendants Funder
and Weiss Capital. SOMF ¶7. Funder is owned jointly by Scott Fischer and his wife, Veronika
Fischer. SOMF ¶3-4.
Throughout September and November 2006, in a series of transactions, Byana acquired a
total of 181.74 acres of undeveloped land in North Carolina, 133.63 acres of which was subject to
mortgage, to be used for the Derbyshire Project. SOMF ¶¶16-22. Purchasing the properties cost
Byana approximately $2,517,900, which it financed primarily through debt and equity
investments. SOMF ¶20. From its inception, Byana was leveraged; in order to fund the initial
land purchase, Scott Fischer and several Fischer related entities made non-interest-bearing loans
to Byana, totaling approximately $1.15 million, in or around October 2006. SOMF ¶81-83. The
loans do not appear to have been formally documented in a loan agreement, and Plaintiff disputes
the legitimacy of the loans. In November 2006, Byana utilized funds of approximately $915,144
which it obtained from investors to acquire two additional properties, totaling 48.11 acres. SOMF

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¶84. After procuring those properties, Byana borrowed $4 million from Macon Bank to fund land
development and operating costs. SOMF ¶126. The loan from Macon Bank was secured by the
real estate which Byana owned. Id. Some of the funds, approximately $900,003.13, that Scott
Fischer and the Fischer-related entities loaned to Byana to finance the initial 2006 land purchases
were repaid by Byana in December 2006. SOMF ¶¶86-87, 94. The remaining funds due were
reclassified from a loan to a capital contribution by Funder. SOMF ¶88.
B.

The Fagans’ Investments in Byana and the Related Fischer-Entities

In 2006, Scott Fischer contacted Plaintiffs about potentially investing in the Derbyshire
Project, and subsequently, sent them a confidential investment offering (the “Investment
Offering”), as well as a copy of the Byana Operating Agreement, and an accredited investor
questionnaire via email on October 9, 2006. SOMF ¶¶23-24. 26. In the email, Scott Fischer
indicated that “we have closed on the largest parcel [for the project] and have advanced over $1.1
million.” SOMF ¶24. At the time, the Fagans were purportedly unaware what Scott Fischer meant
by “advanced” and did not know that it referred to the approximately $1.15 million in funds which
Byana had received from Scott Fischer and the Fischer-related entities. ECF No. 122-1, Plaintiffs’
Responsive Statement of Facts (“Pl. Resp. SOMF”) ¶25.
The overview portion of the Investment Offering stated, in pertinent part:
Private Capital’s investment objective is to acquire the land
and complete the infrastructure necessary to sell the
improved lots. Private Capital is working to find equity
investors to co-invest in the acquisition and provide
additional equity as needed for the land infrastructure
improvements. This can be achieved on a leveraged or unleveraged basis. Total capital requirements for the
transaction are approximately $6 million. Initial land costs
are $2.5M with estimated infrastructure costs of $2.5M.
Additional costs will include marketing, selling and
carrying costs. Private Capital has designed both a debt and
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equity investment structure. Upon completion of the
project, the debt investor will receive the return of their
investment plus 12% simple interest. In addition, they will
receive a 5% discount on their choice of lot for each
$100,000 invested (ex. $200,000 investment earns 10%
discount). The equity investor will receive the return of
their investment capital plus 1% of the net profit for each
$100,000 invested (ex. $400,000 investment earns 4% of
net profit).
SOMF ¶29; see also ECF No.120-5, Certification of K. Scott Fischer Cert, Ex. L, Investment
Offering. The Investment Offering also included a disclaimer which provided that the document
was prepared “solely for informational purposes” and did not constitute “all or any part of an offer
or contract” and that
Private Capital LLC strongly recommends first that each
potential investor review the information contained in this
Investment Offering with its accountants, attorneys and tax
advisors. While the information contained herein is from
sources deemed reliable, it has not been independently
verified by Private Capital, LLC nor the owner makes any
representations or warranties, express or implied, with
respect to the information.
SOMF ¶33; see also Investment Offering.
After reviewing the Byana Operating Agreement and investment materials, Mr. Fagan
and Scott Fischer had a follow up-conversation regarding the Derbyshire Project on October 12,
2006. SOMF ¶48. Plaintiffs assert, and Defendants dispute, that prior to investing in the project,
Scott Fischer and Brian Carroll, a friend of Mr. Fischer’s and a member of the Development Team
for the Derbyshire Project, assured Mrs. Fagan that her investment would be fully protected from
loss. Plaintiffs aver that they were told that the Derbyshire Project was a “no brainer” as an
investment and that the investors would own the land “free and clear, debt free.” See ECF No.
122-3, Certification of Michael A. Baldassare (“Baldassare Cert”), Ex. M, Deposition Testimony
of Michael Fagan of October 18, 2017 (“M. Fagan Dep.”) 93:6-8. Plaintiffs also claim that Scott

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Fischer represented that in the worst-case scenario “an asteroid lands on [the property], and nothing
happens, and we have to sell the land, we’ll always get our money back.” Id. Thereafter, the
Fagans made the decision to invest in the project, and on October 31, 2006, Mrs. Fagan executed
the Byana Operating Agreement, and completed the accredited investor questionnaire. SOMF
¶¶50-51.

The “Member Representations and Warranties” section of the Byana Operating

Agreement included a provision regarding the “Investment Experience” of the member which
provides:
undersigned represents that he, she or it (i) has such knowledge and
experience in financial and business matters as to be capable of
evaluating the merits and risks of investment in interest in the
Company and protecting his, her or its own interest in connection
with the investment and has obtained, in his, her or its judgment
sufficient information from the Manager to evaluate the merits and
risks of an investment in interests in the Company, (ii) has not relied
in [sic] any representations or warranties of the Company, the
Manager, any Affiliate thereof or any officer, employee or agent of
any of the foregoing with respect to the value of the interests of the
Company, (iii) has the financial ability to bear the economic risk of
an investment in the Company (including possible loss), has
adequate means for providing for his, her or its currents needs and
personal contingencies and has no need for liquidity with respect to
the investment, (iv) has determined that the interests in the Company
are suitable for him, her or it and that at this time he, she or it could
bear the economic risk of the investment
Fischer Cert., Ex. B, Byana Operating Agreement (“Byana Operating Agreement”) ¶11.3. The
accredited investor questionnaire also inquired about the investor’s experience and included
questions about the investor’s estimated net worth and taxable income for the next year. See
Fischer Cert., Exhibit M, Accredited Investor Questionnaire (“Investor Questionnaire”).

In

response to the inquiries on the questionnaire, Mrs. Fagan indicated that she had “never” invested
in privately placed securities before but, she responded “yes” as to the fact that she had “sufficient
knowledge and experience in financial and business matters to be able to evaluate the merits and

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risks of tax-oriented private placement investments, without relying upon the advise [sic] of an
attorney, accountant or other advisor to make a final decision.” Id.
Neither Mr. nor Mrs. Fagan consulted with an attorney, tax advisor, nor financial consultant
regarding their investment or the materials provided to them by Scott Fischer. SOMF ¶54. During
his deposition Mr. Fagan indicated that he did not know the purpose of the Investor Questionnaire.
SOMF ¶66. The Fagans contend in this suit that they did not understand the risks of a private
placement investment, or the representations made in the Investor Questionnaire, and that “the
Investment Offering . . . has express misrepresentations regarding the (1) owner of the property,
(2) the value of the property, and (3) the debt associated with the property.” Pl. Resp. SOMF. ¶29,
73.
Although Mr. Fagan was heavily involved in the initial discussions with Scott Fischer
regarding the Derbyshire Project, the Investor Questionnaire lists Mrs. Fagan as the investor, and
she was the only one who signed the Byana Operating Agreement. The parties dispute why Mrs.
Fagan was the sole individual listed on the documents, but nonetheless, it is clear that she made
two equity investments in Byana, totaling $1,000,000, using her own funds, in exchange for a10%
membership interest in Byana. SOMF ¶¶80, 124. On November 6, 2006, Mrs. Fagan invested an
initial $300,000 in Byana prior to visiting the properties. SOMF ¶¶74, 76. Thereafter, the Fagans
visited North Carolina in November or December 2006, and allegedly met with Brian Carroll who
showed them the undeveloped property. SOMF ¶76; Pl. Resp. SOMF ¶76. Plaintiffs allege that
during the course of their visit, Brian Carroll “promot[ed] the Derbyshire Project as a low-risk
investment opportunity.” Compl. ¶57-59. After the trip, Mrs. Fagan made another $700,000
investment in Byana. Id. At the time Mrs. Fagan made both investments, she had not yet made a
determination as to whether the funds would be treated as debt or equity and was afforded 60 days

7

to make such an election. Pl. Resp. SOMF. ¶76. Ultimately, she elected to have the investment
treated as equity, and received the aforementioned 10% membership interest in Byana. Pl. Resp.
SOMF ¶76.
In addition to Mrs. Fagan’s equity investments in Byana, Plaintiffs also made various debt
investments in entities associated with Scott Fischer. In April 2007, May 2007, and July 2007,
Plaintiffs made three separate loans of $250,000 to FIC, totaling $750,000, (collectively, the “FIC
Promissory Notes”) pursuant to various promissory notes. SOMF ¶¶100-102; see also Fischer
Cert., Ex. V, W, C. The loans, together with all accrued interest at a rate of 8.25%, were to be
repaid by June 30, 2008, September 30, 2008, and December 31, 2008, respectively. Id. At the
time the first promissory note was issued, Mr. Fagan requested that Scott Fischer personally
guarantee the loans, but Scott Fischer refused. SOMF ¶¶106-107.
In July and October 2007, Plaintiffs also made two loans to Byana (collectively, the “Byana
Notes”) of $250,000 each, to be repaid in July and October 2009, with interest payments of 12%
($2,500) to be paid to Plaintiffs on a monthly basis. SOMF ¶¶113-116. FIC and Byana both failed
to repay their respective loans on the due dates. Accordingly, in or around January 2009, Scott
Fischer sought to modify the terms of the FIC Promissory Notes and the Byana Promissory Notes
because “there wasn’t much money left, and the sales weren’t happening so they had to modify
them.” SOMF ¶¶117-18. The Fagans assert, and Defendants dispute, that Scott Fischer and Brian
Carroll reassured Plaintiffs of the financial health of Byana, FIC, and the Derbyshire Project at
that time. ECF No. 51, Second Amended Complaint (“Compl.”) ¶¶80-81. As a result, Plaintiffs
and Scott Fischer modified the payment schedule for the Byana and FIC loans by decreasing the
interest payments, which were to be made monthly, and extending the maturity date of the loans
through 2010. SOMF ¶121. At the time of the loan modification, Mr. Fagan was removed from

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the promissory notes, and was not included as a party to the modification agreements. SOMF ¶123.
On October 6, 2010, Mrs. Fagan received the final Byana interest check; thereafter, Byana and
FIC ceased making interest payments and ultimately, defaulted on the loan. Around that same time
period, Scott Fischer informed Plaintiffs that Macon Bank was demanding repayment of the $3.8
million development loan, and that the bank would foreclose on the properties if the loan was not
repaid. SOMF ¶128. Subsequently, the Derbyshire Project collapsed.
The Fagans contend that Scott Fischer and Brian Carroll made various misrepresentations
to Plaintiffs regarding the nature of the investment, and the liabilities owed by Byana. Further,
although the parties agree that Plaintiffs were aware that there would be other investors in the
Derbyshire Project, Plaintiffs contend that they “were never aware until it was too late that there
were other Fischer entity investors.” Pl. Resp. SOMF 30. Further, the Fagans dispute the
legitimacy of the transactions between the Fischer-related entities. Pl. Resp. SOMF ¶¶81-97.
Consequently, Plaintiffs filed the instant lawsuit against Defendants, asserting claims for
violations of state and federal Racketeer Influenced and Corrupt Organizations Act (“RICO”)
statutes, conspiring to commit RICO violations, common law fraud, aiding and abetting common
law fraud, equitable fraud, conversion, unjust enrichment, breach of contract, and breach of
fiduciary duty. Defendants now move for summary judgment on various counts. 2
II.

Standard of Review
Summary judgment is appropriate “if the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that there is no

2

In addition to the counts addressed in this Opinion, Defendants have moved for summary
judgment on Counts Four and Five. In their Opposition Brief, Plaintiff voluntarily agreed to
dismiss those counts Pl. Br. at n. 2; Pl. Br. n. 10. Accordingly, summary judgment is granted as
to Counts Four and Five.

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genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter
of law.” Fed. R. Civ. P. 56(c). A factual dispute is genuine only if there is “a sufficient evidentiary
basis on which a reasonable jury could find for the non-moving party,” and it is material only if it
has the ability to “affect the outcome of the suit under governing law.” Kaucher v. County of
Bucks, 455 F.3d 418, 423 (3d Cir. 2006); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
248 (1986). Disputes over irrelevant or unnecessary facts will not preclude a grant of summary
judgment. Anderson, 477 U.S. at 248. “In considering a motion for summary judgment, a district
court may not make credibility determinations or engage in any weighing of the evidence; instead,
the non-moving party’s evidence ‘is to be believed and all justifiable inferences are to be drawn in
his favor.’” Marino v. Indus. Crating Co., 358 F.3d 241, 247 (3d Cir. 2004) (quoting Anderson,
477 U.S. at 255); see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587,
(1986); Curley v. Klem, 298 F.3d 271, 276-77 (3d Cir. 2002).
The party moving for summary judgment has the initial burden of showing the basis for its
motion. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). “If the moving party will bear the
burden of persuasion at trial, that party must support its motion with credible evidence . . . that
would entitle it to a directed verdict if not controverted at trial.” Id. at 331. On the other hand, if
the burden of persuasion at trial would be on the nonmoving party, the party moving for summary
judgment may satisfy Rule 56’s burden of production by either (1) “submit[ting] affirmative
evidence that negates an essential element of the nonmoving party’s claim” or (2) demonstrating
“that the nonmoving party’s evidence is insufficient to establish an essential element of the
nonmoving party’s claim.” Id. Once the movant adequately supports its motion pursuant to Rule
56(c), the burden shifts to the nonmoving party to “go beyond the pleadings and by her own
affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate

10

specific facts showing that there is a genuine issue for trial.” Id. at 324; see also Matsushita, 475
U.S. at 586; Ridgewood Bd. of Ed. v. Stokley, 172 F.3d 238, 252 (3d Cir. 1999). In deciding the
merits of a party’s motion for summary judgment, the court’s role is not to evaluate the evidence
and decide the truth of the matter, but to determine whether there is a genuine issue for trial.
Anderson, 477 U.S. at 249. Credibility determinations are the province of the factfinder. Big
Apple BMW, Inc. v. BMW of N. Am., Inc., 974 F.2d 1358, 1363 (3d Cir. 1992).
There can be “no genuine issue as to any material fact,” however, if a party fails “to make
a showing sufficient to establish the existence of an element essential to that party’s case, and on
which that party will bear the burden of proof at trial.” Celotex, 477 U.S. at 322-23. “[A] complete
failure of proof concerning an essential element of the nonmoving party’s case necessarily renders
all other facts immaterial.” Id. at 323; Katz v. Aetna Cas. & Sur. Co., 972 F.2d 53, 55 (3d Cir.
1992).
III.

Analysis
A.
Standing
As an initial matter, the Court must determine whether Mr. Fagan has standing to pursue

the current litigation. This Court has previously expressed concern regarding standing, and
directed the Fagans to amend their Complaint to “specifically identify who owns each investment,
including the debt investments” in order for the Court to determine who has been injured by
Defendants’ alleged actions, and, accordingly, who has standing to sue for the alleged injuries.
See ECF No. 46, January MTD Opinion at 3 n.2.
In a footnote in the brief in support of their motion for summary judgment, Defendants contend
that Mr. Fagan lacks standing to bring this action because “the funds at issue were Tina Fagan’s,
who also is the only Plaintiff that executed the accredited investor questionnaire and the Byana
Operating Agreement. Accordingly, although the action was brought by both Tina Fagan and

11

Michael Fagan, the purportedly harmed party in interest is Tina Fagan.” Def. Br. at 2 n. 1.
Plaintiffs did not address Defendants’ standing argument in their opposition brief.
“[T]he plaintiff bears the burden of establishing the elements of standing, and each element
must be supported in the same way as any other matter on which the plaintiff bears the burden of
proof, i.e., with the manner and degree of evidence required at the successive stages of the
litigation.” Ballentine v. United States, 486 F.3d 806, 810 (3d Cir. 2007). Federal Rule of Civil
Procedure 12(b)(1) provides for the dismissal of a complaint for lack of standing. Fed. R. Civ. P.
12(b)(1). Article III of the Constitution limits the jurisdiction of federal courts to “Cases” and
“Controversies.” Lance v. Coffman, 549 U.S. 437, 439 (2007). Indeed, “[s]tanding to sue is a
doctrine rooted in the traditional understanding of a case or controversy.” Spokeo, Inc. v. Robins,
136 S. Ct. 1540, 1547 (2016). “The standing inquiry ... focuse[s] on whether the party invoking
jurisdiction had the requisite stake in the outcome when the suit was filed.” Constitution Party of
Pa. v. Aichele, 757 F.3d 347, 360 (3d Cir. 2014) (quoting Davis v. FEC, 554 U.S. 724, 734 (2008)
(alterations original).
To show standing, a plaintiff must establish: “(1) an injury-in-fact, (2) a sufficient causal
connection between the injury and the conduct complained of, and (3) a likelihood that the injury
will be redressed by a favorable decision.” In re Nickelodeon Consumer Privacy Litig., 827 F.3d
262, 272 (3d Cir. 2016) (quoting Finkelman v. Nat’l Football League, 810 F.3d 187, 193 (3d Cir.
2016))(internal quotation marks and citations omitted). To allege injury-in-fact, “a plaintiff must
claim the invasion of a concrete and particularized legally protected interest resulting in harm that
is actual or imminent, not conjectural or hypothetical.” Nickelodeon, 827 F.3d at 272 (quoting
Finkelman, 810 F.3d at 193 (internal quotation marks omitted).

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Mr. Fagan has failed to show that he has a “legally protected interest” implicated in the
funds at issue, and therefore, does not have standing to pursue the instant litigation. At the outset
of this lawsuit, Plaintiffs alleged that they “collectively suffere[ed] losses in an amount at least
$2,000,000.” Compl. ¶16. However, at this stage, it is undisputed that the funds invested in Byana
belonged solely to Mrs. Fagan, and thus, were not marital property. See SOMF ¶124. At her
deposition, Mrs. Fagan explained that she and her husband “reached an understanding together, an
agreement, that we wanted to invest . . . with Scott.” Fischer Cert., Ex. E, Deposition of Tina
Fagan (“T. Fagan Dep.”) 26:17-22. According to Mrs. Fagan, it was her understanding that she
and her husband made the investment in Byana jointly: “I think we just put it under my name, but
it was . . . together.” Id. 27:6-11. However, she clarified that the money utilized for the
investments, which came from a prior marriage, belonged solely to her. Id. 26:17-22. Although
Mrs. Fagan believed that she and her husband were joint investors in Byana, Mrs. Fagan, alone,
signed the Investment Questionnaire and the Byana Operating Agreement, and, as such, Mrs.
Fagan – not Mr. Fagan – has an interest in Byana.
Similarly, Mr. Fagan has no interest in the Byana and FIC promissory notes. The initial
promissory notes were payable to “Mike and/or Tina Fagan,” however, when the loans were
modified in 2009, Mr. Fagan requested to be removed from promissory notes. SOMF ¶123.
Consequently, he was omitted from the loan modification agreements. Id. Although the FIC Loan
Modification Agreement lists the “lenders” as “Mike & Tina Fagan” and provides a signature line
for each of them, only Mrs. Fagan signed the document. See Fischer Cert, Exs. BB, CC. Further,
the Byana Loan Modification Agreement lists “Tina Fagan” as the lender and she, alone, signed
the documents. Id. Accordingly, Mr. Fagan is not a party to any of the contracts – the promissory
notes and the Byana Operating Agreement – at issue in this litigation. It is axiomatic that “[o]ne

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who is not a party to a contract has no status to sue upon it if he be a person with whom the
contracting parties never meant to come into contractual relations.” Crown Fabrics Corp. v. Assur.
Co., 10 A.2d 750, 752–53 (N.J. 1940). Accordingly, Mr. Fagan lacks standing to participate in
this lawsuit, and he is dismissed as a plaintiff. 3
B.

Choice of Law

The parties disagree regarding which state’s law governs the state law fraud and breach of
contract claims. Defendants contend that under the terms of the Byana Operating Agreement, this
matter is governed by Delaware law. The operating agreement provides:
THIS AGREEMENT IS GOVERNED BY AND SHALL BE
CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE
OF DELAWARE EXCLUDING ANY CONFLICT OF LAW RULES OR
PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE
CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF
ANOTHER JURISDICTION. ALL ACTIONS BROUGHT TO
INTERPRET OR ENFORCE THIS PROVISION SHALL BE BROUGHT
IN THE COURTS LOCATED IN THE STATE OF DELAWARE, AND
THE PARTIES HERETO AGREE TO WAIVE ANY CLAIM BASED
ON LACK OF PERSONAL JURISDITION, INAPPROPRIATE VENUE
OR FORUM NONCONVEINES”
Operating Agreement, Section 10.6. “In a federal question case, a district court entertaining
pendent state claims should follow the choice of law rules of the forum state.” Weikel v. Tower
Semiconductor Ltd., 183 F.R.D. 377, 400 (D.N.J. 1998). The choice-of-law rules of the forum
state govern “which body of substantive law to apply to a contract provision, even where a contract
contains a choice-of-law clause.” Collins v. Mary Kay, Inc., 874 F.3d 176, 183 (3d Cir. 2017). In
New Jersey, “effect [is given] to contracting parties' private choice of law clauses unless they
conflict with New Jersey public policy.” General Motors Corp. v. New A.C. Chevrolet, Inc., 263

3

As Mr. Fagan has been dismissed from the lawsuit, the remainder of this Opinion will refer to
Mrs. Fagan as the sole plaintiff.
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F.3d 296, 331 n.21 (3d Cir. 2001) (citing Instructional Sys., Inc. v. Computer Curriculum Corp.,
614 A.2d 124, 133 (N.J. 1992)).
However, whether a choice of law provision in a contract also governs the parties’ noncontractual claims, such as tort and fraud claims, turns on the breadth of the provision. See e.g,
Sullivan v. Sovereign Bancorp Inc., 33 F. App’x 640, 642 (3d Cir. 2002)(explaining that where an
agreement’s choice of law provision is “broad and all-encompassing,” the provision “encompasses
all tort claims that may arise from the [agreement].”); Pro v. Hertz Equip. Rental Corp., No. 063830, 2008 WL 5218267, at *5 (D.N.J. Dec. 11, 2008)(“Choice of law clauses that use the
language ‘governed and construed by,’ . . . are considered to be broad capturing both contract and
tort claims, particularly tort claims that relate to the contract. By contrast, choice of law clauses
that use narrower language such as ‘construed under’ are sometimes limited to contract claims and
generally do not apply to tort claims that arise independent of the contract.”); Demmick v. Cellco
P'ship, No. CIV.A. 06-2163, 2010 WL 3636216, at *3 (D.N.J. Sept. 8, 2010)(finding that
contract’s choice of law provision was sufficiently broad to govern fraud claims where contract
provided that it was “governed by” New Jersey law, and fraud claims shared the same factual basis
as breach of contract claims”). Here, the relevant question is whether the choice of law provision
in the Byana Operating Agreement encompasses Plaintiff’s non-contractual claims. The Court
finds that it does not.
In Black Box Corp. v. Markham, 127 F. App’x. 22 (3d Cir. 2005), a merger agreement
between the parties contained a choice of law provision, which stated the agreement “will be
governed by, and construed and enforced in accordance with, the laws of the Commonwealth of
Pennsylvania.” Id. at 23 n.1. The Third Circuit found that the language utilized was “narrowly
drafted to encompass only the underlying merger agreement itself, and not necessarily the entire

15

relationship between [the parties].” Id. at 25. Similarly, the choice of law provision at issue in
this case is also narrowly drafted and provides that the agreement shall be governed by and
construed in accordance with Delaware law, and does not purport to cover issues beyond the four
corners of the agreement. The agreement’s choice of law provision, by its plain terms, clearly only
applies to actions brought to interpret or enforce the operating agreement; the instant case is not
such a suit. Indeed, Plaintiff has not alleged a breach of the Byana Operating Agreement 4, or
alleged any claims which stems directly from the operating agreement, itself. Rather, Plaintiff’s
lawsuit involves RICO and tort claims which do not require interpreting the terms of the contract
and, as such, the claims fall outside the scope of the Byana Operating Agreement. Thus, the
contractual choice-of law-provision does not control.
Because the choice of law provision does not govern the instant matter, the Court turns to
New Jersey’s choice of law rules. Under those rules, the Court must determine whether there is
an actual conflict between the relevant laws of New Jersey and those of the other state at issue
(here, Delaware). P.V. ex rel. T.V. v. Camp Jaycee, 962 A.2d 453, 460 (N.J. 2008); Lebegern v.
Forman, 471 F.3d 424, 430 (3d Cir. 2006). If there is not an actual conflict, the inquiry ends and
New Jersey law must be applied. Id. In the event a conflict exists, the court must determine which
state’s law has the “most significant relationship” to the claim at issue. Camp Jaycee, 962 A.2d at
455. This test is applied “on an issue-by-issue basis” and “is qualitative, not quantitative.” Id. at

4

Although Count XI of Plaintiff’s Second Amended Complaint is a breach of contract claim,
Plaintiff alleges breaches of the Byana and FIC Promissory Notes. Those claims do not stem from
the Byana Operating Agreement, and, accordingly, they are not governed by the choice of law
provision in the Byana Operating Agreement. The Byana and FIC Promissory Notes each contain
their own choice of law provisions which provide for the application of Delaware and North
Carolina law, respectively. Neither party has suggested that those choice of law provisions govern
the non-contractual claims in this litigation.

16

460. In this case, Defendants have not alleged that there is any conflict between New Jersey law
and Delaware law regarding the common law claims, and therefore, New Jersey law applies. 5
C.

RICO violations
1.
The Federal RICO claims

Plaintiff asserts violations of 18 U.S.C. §1962(c) and (d), the Federal RICO Act.
Defendants contend that Plaintiff’s Federal RICO claims are barred by the Private Securities
Litigation Reform Act (PSLRA), because the alleged acts of wire fraud and mail fraud in Plaintiff’s
Second Amended Complaint are essentially securities fraud claims. Def. Br. at 6. Plaintiff does
not challenge Defendants’ contention that the PSLRA preludes RICO claims premised on acts of
wire fraud which would otherwise be actionable as securities fraud. Rather, Plaintiff argues that
neither the debt nor equity investments constituted securities. Pl. Br. at 8-15. Further, Plaintiff
notes that Defendants had ample opportunity to raise this legal issue, and their delay in doing so
is indicative of bad faith. Pl. Br. at 13. 6
In 1995, Congress enacted the PSLRA which amended the RICO statute to eliminate
securities fraud as a predicate act for a RICO claim. Mathews v. Kidder, Peabody & Co., 161 F.3d
156, 157 (3d Cir. 1998). The amended language of the RICO Act explicitly states:
Any person injured in his business or property by reason of a
violation of section 1962 of this chapter may sue therefor in any
appropriate United States district court and shall recover threefold
the damages he sustains and the cost of the suit, including a
reasonable attorney’s fee, except that no person may rely upon any
5

Both Plaintiff and Defendants acknowledge that there is no difference between New Jersey and
Delaware law regarding fraud or the other state law claims. Defendants’ reply brief relies on both
Delaware and New Jersey law in support of its arguments as to those claims. See generally ECF
No. 123, Defendants’ Reply Brief (“Def. Reply Br.”)
6
As an initial matter, the Court rejects Plaintiff’s argument that Defendants’ alleged delay in
raising this issue is indicative of bad faith or otherwise undercuts the merits of Defendants’
position. The determination as to whether an LLC interest and/or a promissory note constitutes a
security is both legally and factually complex, and is the appropriate purview of a summary
judgment motion, after Plaintiff has had the benefit of discovery.
17

conduct that would have been actionable as fraud in the purchase
or sale of securities to establish a violation of section 1962.
18 U.S.C. § 1964(c) (emphasis added).
Furthermore, the amended statute prevents a plaintiff from artfully “pleading mail fraud,
wire fraud and bank fraud as predicate offenses in a civil RICO action if the conduct giving rise to
those predicate offenses amounts to securities fraud.” Bald Eagle Area Sch. Dist. v. Keystone Fin.,
Inc., 189 F.3d 321, 330 (3d Cir. 1999). To determine whether particular conduct may serve as the
basis for a RICO predicate offense, a court must analyze “whether the conduct pled as predicate
offenses is ‘actionable’ as securities fraud.” Id. at 330.
Accordingly, the threshold question, is whether Mrs. Fagan’s 10% membership interest in
Byana and the debt investments in Byana and FIC constitute securities under the Exchange Act.
If both the equity and debt investments constitute securities, then the RICO action is precluded by
the PSLRA. Section 3(a)(10) of the Securities Exchange Act of 1934 defines a “security” as
follows:
any note, stock, treasury stock, security future, security-based swap,
bond, debenture, certificate of interest or participation in any profitsharing agreement or in any oil, gas, or other mineral royalty or
lease, any collateral-trust 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's 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.

18

15 U.S.C. § 78c(10).
a)

The Howey Test

Although an LLC membership interest is not explicitly included in the Securities Exchange
Act’s definition of a security, courts routinely consider the possibility that LLC membership
interests may be considered an “investment contract.” See e.g., Wen v. Willis, 117 F. Supp. 3d
673, 685 (E.D. Pa. 2015)(analyzing whether LLC membership interest constituted an “investment
contract”); Sync Labs LLC v. Fusion Mfg., No. 11-03671, 2014 WL 37124, at *4 (D.N.J. Jan. 6,
2014) (analyzing whether LLC interest constituted either an “investment contract” or “stock”). In
S.E.C. v. W.J. Howey Company., the Supreme Court determined that an investment instrument is
an “investment contract,” and therefore subject to securities laws, if it involves: (1) “an investment
of money,” (2) “in a common enterprise,” (3) “with profits to come solely from the efforts of
others.” 328 U.S. 293, 301 (1946); see also Steinhardt Grp. Inc. v. Citicorp, 126 F.3d 144, 151 (3d
Cir. 1997). The Howey test is a “flexible rather than a static principle, one that is capable of
adaptation to meet the countless and variable schemes devised by those who seek the use of the
money of others on the promise of profits.” Howey, 328 U.S. at 299.
Here, Mrs. Fagan indisputably invested $1 million in Byana, which constitutes an
investment of money, satisfying the first prong of the Howey test. 328 U.S. at 301. SOMF. ¶74.
The second prong of the Howey test can be established by showing “horizontal commonality,”
which “is characterized by a pooling of investors’ contributions and distribution of profits and
losses on a pro-rata basis among investors.” S.E.C. v. Infinity Grp. Co., 212 F.3d 180, 187-88 (3d
Cir. 2000) (internal quotation marks omitted) (quoting Steinhardt, 126 F.3d at 151). Plaintiff does
not dispute that her investment in Byana was characterized by horizontal commonality. Indeed,
Mrs. Fagan’s funds were pooled with that of other investors in Byana and she shared in both the

19

profits and losses of the entity pursuant to her pro-rata 10% equity interest in Byana. SOMF ¶¶84,
93. Thus, there is no genuine dispute of material fact as to whether Mrs. Fagan’s funds were
invested “in a common enterprise.” Howey, 328 U.S. at 301.
The third prong of the Howey test looks to “whether the purchaser be attracted to the
investment by the prospect of a profit on the investment rather than a desire to use or consume the
item purchased.” Steinhardt, 126 F.3d at 152. In applying the third Howey factor in the context
of LLCs and partnerships, courts in this circuit look at “whether the investor has meaningfully
participated in the management of the [entity] in which it has invested such that it has more than
minimal control over the investment’s performance.” Id. at 153; Rossi v. Quarmley, 604 F. App'x
171, 173 (3d Cir. 2015); Wen, 117 F. Supp. 3d at 685; Great Lakes Chemical Corp. v. Monsanto
Co., 96 F. Supp. 2d 376 (D. Del. 2000). Courts consider “the transaction as a whole, considering
the arrangements the parties made for the operation of the investment vehicle in order to determine
who exercised control in generating profits for the vehicle.” Steinhardt, 126 F.3d at 153. Further,
courts “consider both the facts of the relationship and the text of the agreements governing the
transaction.” Rossi, 604 F. App'x at 173–74.
In Steinhardt Group., the plaintiff, an investment firm, held a 98.79% interest in a limited
partnership that was formed to create an investment vehicle for issuing debt and equity securities
to investors. Id. at 145–46. The Third Circuit affirmed the district court's dismissal of the
plaintiff’s complaint, which alleged violations of federal securities law, finding that the plaintiff’s
investment in a limited partnership did not constitute an “investment contract.” Id. at 145. The
Third Circuit explained that the plaintiff could not “be deemed a passive investor under Howey
and its progeny” because it had retained certain rights and powers giving it control over its
investment. Id. at 145. Looking to the terms of the partnership agreement, the Third Circuit held

20

that it was irrelevant whether or not the plaintiff actually exercised its rights, because the relevant
inquiry was what “legal rights and powers [were] enjoyed by the investor.” Id. (quoting Goodwin,
730 F.2d at 107). The court explained that “the rights and powers assigned to Steinhardt under the
[Limited Partnership Agreement],” which outlined the powers of the partners, “were not nominal,
but rather were significant and, thus, directly affected the profits it received from the Partnership.”
Id. at 155. Accordingly, Steinhardt was not a passive investor and the partnership was not an
investment contract under federal securities law. Id. at 154.
Similarly, in Great Lakes Chemical Corporation, the district court considered whether a
membership interest in a LLC constituted an investment contract under federal securities law. 96
F. Supp. 2d at 391–92. The court explained that “to determine whether a member's profits are to
come solely from the efforts of others, it is necessary to consider the structure of the particular
LLC at issue, as provided in its operating agreement.” Id. There, the members retained the power
to remove the manager and dissolve the LLC. Id. Thus, the court concluded that although the
members had no authority to directly manage the entity's business, the plaintiff had retained
significant powers that directly affected the profits it received from the LLC, precluding the
membership interest from being a security. Id.
Here, Mrs. Fagan did not exercise meaningful control over Byana and thus, clearly
anticipated that her profits would be derived from the effort of others. The Investment Offering
offered investors, such as Mrs. Fagan, the opportunity to contribute money to Byana to develop
residences, which would be managed and sold by Private Capital. The Investment Offering
includes a description of the “Development Team” for the Derbyshire Project and emphasizes the
team members’ extensive finance and real estate experience. Notably, Plaintiff did not have the
ability to develop the properties, herself, and she was clearly relying on the experience of Private

21

Capital’s Development Team, which included both Scott Fischer and Brian Carroll, individuals
experienced with professional management of real estate projects, homebuilding, and financing,
to manage the project. Plaintiff and her husband, professedly, did not understand many of the terms
of the Investment Offering or the Byana Operating Agreement, thus she could not have anticipated
meaningful participation in the Derbyshire Project. SOMF ¶¶59, 66-67, 70. Furthermore, even if
Plaintiff had the relevant experience to actively participate in the management of the project, she
did not have the authority to do so. The Byana Operating Agreement designated Private Capital
as Byana’s manager and vested in it “sole and exclusive direction and control” of Byana, in
addition to a variety of other enumerated powers. See Operating Agreement, Section 4.1. None
of the other LLC members, including Mrs. Fagan, were agents of the company or had the authority
to act on Byana’s behalf. Id. Unlike in Steinhardt and Great Lakes, Plaintiff was a passive investor
who did not have the ability to exercise meaningful control over the LLC. Plaintiff was completely
dependent on Defendants to seek investors, manage the invested funds, and develop the subject
properties. C.f. Wen, 117 F. Supp. 3d at 685-6. (holding that LLC membership interest was not a
security where plaintiff was one of the two member-managers of the LLC, had the ability to bind
the LLC to a contract, and the majority of the LLC’s business-related transactions required
Plaintiff’s consent). Further, Plaintiff had no ability to effect any change on the structure or
existence of the LLC itself.
Nevertheless, Plaintiff argues that there is a genuine dispute of material fact as to whether
she anticipated that the profits from the investment were “to come solely from the efforts of
others,” because the Fagans assisted Scott Fischer in attempting to locate potential new lenders for
the Derbyshire Project, after the Macon Bank loan came due. Pl. Br. at 18. Thus, in Plaintiff’s
view, because she took on duties on behalf of the company, she was not a passive investor. Id.

22

However, the Third Circuit has held that “an investment contract can exist where the investor is
required to perform some duties, as long as they are nominal or limited and would have ‘little
direct effect upon receipt by the participant of the benefits promised by the promoters.’ ” Lino v.
City Investing Co., 487 F.2d 689, 692 (3d Cir. 1973) (quoting Sec. & Exch. Comm’n Release
Notice, Release No. 5211 (Nov. 30, 1971)). Here, Plaintiff’s attempts to assist with locating
additional investors does not appear to have been a requirement of her investment and was clearly
limited in time and scope activity.
Finally, Plaintiff contends that irrespective of the analysis of the Howey factors, her interest
in Byana should not constitute a security because: 1) she was permitted to choose whether she
would like her investment to be a debt investment or equity investment, thus the “process of
investment hardly resembles the sale of a security as envisioned by federal securities laws,” Pl.
Br. at 17; 2) Scott Fischer is not licensed to sell securities, Id.; and 3) Defendants did not register
the securities as required by Section 5 of the Securities Act of 1933, Pl. Br. at 15. None of these
facts impact the Court’s analysis of the Howey factors, and Plaintiff has not cited case law
suggesting that those additional circumstances are determinative of whether an investment
constitutes a security; therefore, the Howey factors control.

Accordingly, Defendants have

established that there is no genuine dispute of material fact as to whether Plaintiff’s membership
interest in Byana constitutes a security.
b)

The Reves Test

Next, the Court must determine whether the Byana and FIC promissory notes also
constitute securities. Although the Securities Exchange Act definition of a security includes “any

23

note,” 7 the Supreme Court has explained that the phrase “should not be interpreted to mean literally
‘any note,’ but must be understood against the backdrop of what Congress was attempting to
accomplish in enacting the Securities Acts.” Reves v. Ernst & Young, 494 U.S. 56, 63 (1990); see
also 15 U.S.C. § 78c(10).
To determine whether a “note” is a security, under federal securities law, courts apply
the “family resemblance” test. Reves, 494 U.S. at 67. Under that test, every note is presumed to
be a security, but this presumption can be overcome if the note satisfies either step of a two-tiered
analysis. Id. at 65. Under the first step, courts compare the note in question to the other types of
notes that the Supreme Court has specifically stated are not securities, such as
the note delivered in consumer financing, the note secured by a
mortgage on a home, the short-term note secured by a lien on a small
business or some of its assets, the note evidencing a “character” loan
to a bank customer, short-term notes secured by an assignment of
accounts receivable, or a note which simply formalizes an openaccount debt incurred in the ordinary course of business ...[and]
notes evidencing loans by commercial banks for current operations.
Id. at 65. When applying the family resemblance test, courts are to consider the following four
factors: (1) the parties' motivations for entering into the transaction; (2) the plan of distribution of
the instrument; (3) the reasonable expectations of the investing public; and (4) whether some factor
such as the existence of another regulatory scheme significantly reduces the risk of the instrument,
thereby rendering the protections of the Securities Exchange Act unnecessary. Id. at 66-67.
“Failure to satisfy one of the factors is not dispositive since they are considered as a whole.” Robyn
Meredith, Inc. v. Levy, 440 F. Supp. 2d 378, 384 (D.N.J. 2006) (citing McNabb v. SEC, 298 F.3d

7

Exempt from the definition of “securities” is “any note ... 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.” 15 U.S.C. § 78c(a)(10). Here, the Byana and FIC
Promissory Notes each had terms longer than nine months, thus do not fall within the scope of the
exemption.
24

1126, 1132-33 (9th Cir. 2002)). However, if the analysis of the Reves factors reveals that the note
does not share any characteristics with an item on the list of enumerated non-securities, then the
note will not be classified a “security.” Reves, 494 U.S. at 67. The court then moves on to step
two, which is deciding whether a new category should be added to the list of non-securities. Id. at
67.
Here, Defendants do not identify a specific non-security note which they claim the Byana
and FIC Promissory Notes resemble; rather, they argue that under the Reves factors, these notes
are securities because 1) Mrs. Fagan was induced to make the loans in order in order to generate
income via the interest payments she would receive; 2) each note had a term greater than six
months; and 3) the reasonable expectation of the investing public would be that the notes
constituted securities. Def. Br. at 10.
Under the first Reves factor, “[i]f the seller’s purpose is to raise money for the general use
of a business enterprise or to finance substantial investments and the buyer is interested primarily
in the profit the note is expected to generate, the instrument is likely to be a ‘security.’” Reves,
494 U.S. at 66. “If the note is exchanged to facilitate the purchase and sale of a minor asset or
consumer good, to correct for the seller’s cash-flow difficulties, or to advance some other
commercial or consumer purpose, on the other hand, the note is less sensibly described as a
‘security.’ ” Id. Here, the Promissory Notes were clearly executed to raise money for Byana and
FIC, respectively. The Investment Offering explained that Private Capital was seeking “investors
to co-invest in the acquisition and provide additional equity as needed for the land infrastructure
improvements.” Investment Offering. The initial iteration of the promissory notes provided for
8.25% to 12% to be paid to Plaintiff and the modifications of the agreements also provided for

25

interest payments. Reves, 494 U.S. at 68 n. 4 (“profit” in the context of notes, we mean “a valuable
return on an investment,” which undoubtedly includes interest.”).
Under the second Reves factor, the Court must “determine whether it is an instrument in
which there is common trading for speculation or investment.” Reves, 494 U.S. at 66 (citation and
internal quotation marks omitted). “[T]he requisite ‘common trading’ in an instrument” is
established if the instrument is “ ‘offered and sold to a broad segment of the public.’” Id. at 68.
The parties have not elaborated on the plan of distribution for the Byana and FIC Promissory
Notes, however, they do not appear to have been broadly distributed to the public, which would
weigh against classifying the notes as “securities.” However, the notes do not prevent sale or
transfer to another individual, thus Plaintiff could have resold them, making them available to a
broader segment of the public, if she so desired. Compare Robyn Meredith, Inc. v. Levy, 440 F.
Supp. 2d 378, 386 (D.N.J. 2006) (finding that note did not constitute a security because “the note
here was not issued to multiple parties, and neither party solicited the other in an attempt to raise
money for general capital to trade commodities. The note was “nonnegotiable” and was “offered
to a single party in connection with a specific commercial transaction.”) with Stoiber v. S.E.C.,
161 F.3d 745, 750–51 (D.C. Cir. 1998)(finding second factor to be of “no clear direction” where
the terms of the notes did not preclude trading in a secondary market, but “none have been resold
and there is no indication that anyone has considered reselling them.”); see also Fox v. Dream
Tust., 743 F. Supp. 2d 389, 400 (D.N.J. 2010) (finding second Reves factor to be neutral where the
note “was apparently not marketed to anyone but plaintiff's family” but plaintiff was also “exactly
the kind of individual investor that securities law seeks to protect, a point commonly considered
under the second factor because the fact of common trading goes to the level of sophistication of

26

potential buyers.”). Accordingly, the second factor is neutral and weighs neither for nor against
finding the promissory notes to be securities.
Under the third Reves factor, the Court examines “the reasonable expectation of the
investing public” to see if the public would view the notes as securities. Reves, 494 U.S. at 66.
When a note seller calls a note an investment, in the absence of contrary indications “it would be
reasonable for a prospective purchaser to take the [offeror] at its word.” Reves, 494 U.S. at 69.
The Investment Offering explained that Private Capital had designed “both a debt and equity
investment structure” and promised debt investors 12% simple interest. SEC v. Stoiber, 161 F.3d
745, 751 (D.C. Cir. 1998) (“Whether notes are reasonably perceived as securities generally turns
on whether they are reasonably viewed by purchasers as investments.”). Based on the Investment
Offering’s plain language, the public would reasonably view these notes as securities.
The final Reves factor also weighs in favor of finding that the promissory notes are
securities because the promissory notes were not protected by collateral and there is no other
federal regulatory scheme that reduces the risk of these notes.

See Reves, 494 U.S. at

69 (describing potential risk-reducing factors rendering a note a non-security such as collateral,
insurance provided by the Federal Deposit Insurance Corporation, and regulation under the
Employee Retirement Income Security Act).
Plaintiff has not overcome the presumption that the Byana and FIC Promissory Notes are
securities. The notes do not resemble any of the categories of notes which the Supreme Court has
previously determined are not securities. Moreover, all of the Reves factors, with the exception of
the plan of distribution factor, suggest that the notes should not be treated as a new non-security
category. Because both the debt and equity investments at issue in this litigation constitute

27

securities, Plaintiff’s federal RICO claim (Count I) and RICO Conspiracy claim (Count II) are
barred by the PSLRA.
2.

The New Jersey RICO Claims

Plaintiff has also alleged violations of N.J. Stat. Ann. 2C:41-2(c) and -2(d). Unlike the
Federal RICO statute, the New Jersey RICO statute includes securities fraud as a predicate act. 8
See N.J. Stat. Ann. 2C:41-1(a)(p)(designating “fraud in the offering, sale or purchase of securities”
as “racketeering activity”). Thus, Plaintiff’s New Jersey RICO claim, unlike her federal claim is
not rendered infirm by virtue of the fact that the Byana and FIC Promissory Notes and Plaintiff’s
Byana membership interest are securities. However, Defendants nonetheless contend that Plaintiff
cannot establish a pattern of racketeering activity, thus the New Jersey RICO claims should be
dismissed. Def. Br. at 39.
The New Jersey RICO statute states, “[i]t shall be unlawful for any person employed by or
associated with any enterprise engaged in or activities of which affect trade or commerce to
conduct or participate, directly or indirectly, in the conduct of the enterprise’s affairs through a
pattern of racketeering activity.” N.J. Stat. Ann. 2C:41–2(c). Generally, the New Jersey RICO
statute prohibits a person from being “employed by or associated with ‘an enterprise’ and to engage
or participate or become involved in the business of the enterprise ‘through a pattern of
racketeering activity.’” State v. Ball, 661 A.2d 251, 263 (N.J. 1995)(quoting N.J. Stat. Ann. 2C:412b and 2c). To state a New Jersey RICO claim, a plaintiff must allege “(1) the existence of an
enterprise; (2) that the enterprise engaged in or its activities affected trade or commerce; (3) that
defendant was employed by, or associated with the enterprise; (4) that he or she participated in the

8

Defendants initially contended that the PSLRA ban precluded the state law RICO claims, as
well. However, in their reply brief, Defendants withdrew their argument that the PSLRA ban
applies to the NJ RICO claim. Def. Reply Br. at 1.
28

conduct of the affairs of the enterprise; and (5) that he or she participated through a pattern of
racketeering activity.” Id. Here, Defendants take issue with the last element.
The New Jersey RICO statute defines a pattern of racketeering activity as:
(1) Engaging in at least two incidents of racketeering conduct one of which
shall have occurred after the effective date of this act and the last of which
shall have occurred within 10 years (excluding any period of imprisonment)
after a prior incident of racketeering activity; and
(2) A showing that the incidents of racketeering activity embrace criminal
conduct that has either the same or similar purposes, results, participants or
victims or methods of commission or are otherwise interrelated by
distinguishing characteristics and are not isolated incidents.
N.J. Stat. Ann. 2C:41-1(d)(1-2). “[New Jersey] RICO was not designed to punish mere repeated
offenses,” thus, the key inquiry in ascertaining whether a pattern of racketeering activity exists is
“relatedness.” Ball, 661 A.2d at 265. Relatedness “calls for the application of a broad standard
involving the totality of all relevant circumstances, which may include ‘continuity.’” Id. In Ball,
the New Jersey Supreme Court explained that “some degree of continuity, or threat of continuity,
is required and is inherent in the ‘relatedness’ element of the ‘pattern of racketeering activity.’”
Id. Thus, New Jersey courts apply a “totality of the circumstances’ approach in applying the
federal ‘continuity plus relationship’ test for determining the existence of a pattern of racketeering
activity.” Id. (citations omitted). In applying the totality of circumstances test, courts consider:
“the number of unlawful acts, the length of time over which the acts were committed, the similarity
of the acts, the number of victims, the number of perpetrators, and the character of the unlawful
activity.” Id. (quoting United States v. Zauber, 857 F.2d 137, 149 (3d Cir. 1988)). Further, where
appropriate, the New Jersey RICO statute should be interpreted consistent with the Federal RICO
statute. See In re Schering–Plough Corp. Intron/Temodar Consumer Class Action, 678 F.3d 235,
245 (3d Cir. 2012)(analyzing state and federal RICO claims concurrently “because the two RICO
statutes are intended to be coextensive”); State v. Cagno, 49 A.3d 388, 400 (N.J. 2012)(“because

29

our New Jersey RICO statute is modeled upon its federal counterpart, it is appropriate to accept
guidance from the federal RICO cases.”).
The parties primarily dispute the application of the continuity requirement. Defendants
contend that, at best, Plaintiff’s allegations establish “a single alleged scheme against a single
alleged victim” and fail to give rise to a RICO violation. Def. Reply Br. at 18. Relying primarily
on federal law, Defendants reason that Plaintiff cannot establish a pattern of predicate racketing
activities, and even if she could, she would not satisfy the continuity requirement because Mrs.
Fagan made her first $300,000 equity investment on November 1, 2006 and her final debt
investment on October 18, 2007. Def. Br. at 33-36. Thus, Defendants argue that Plaintiff cannot
establish that the pattern of racketeering existed for at least twelve months, as required by federal
law. Id. Further, Defendants contend, solely as to Veronika Fischer, that Plaintiffs have not
identified a single wrongful act on Mrs. Fischer’s part and have acknowledged that Plaintiff never
met Mrs. Fischer and did not communicate with her. Def. Br. at 33. n. 12, 38.
In response, Plaintiff contends that, unlike under federal law, New Jersey does not have a
“freestanding continuity requirement,” Pl. Br. at 29, and further, that discovery has revealed
evidence of multiple victims, namely, “the Fagans, Christine Sheffield, those in the Weiss
Litigation, as well as those who, according to Scott Fischer’s deposition testimony, settled claims
in exchange for property in Byana),” and “multiple schemes (e.g., Byana, the promissory notes).”
Pl. Br. at 27 n. 11. Plaintiff argues that those victims evidence a pattern of racketeering. Id. As
to Veronika Fischer, Plaintiff contends that she is liable as a co-conspirator irrespective of the fact
that she never directly interacted with the Fagans. Pl. Br. at 27.
In total, the similarly of the acts alleged, the character of the unlawful activity, and the
number of unlawful acts, all support that Plaintiff is unable to demonstrate that Defendants

30

engaged in a pattern of racketeering. Ball, 661 A.2d at 265. Plaintiff’s New Jersey RICO claim is
premised on several predicate acts stemming from alleged misrepresentations made by Scott
Fischer in soliciting Plaintiff’s funds: proffering false and misleading statements relating to the
value of Plaintiff’s investment in the Derbyshire project, in violation of N.J. Stat. Ann. 2C:204(a)(theft by deception). See Compl. ¶¶162-169. Plaintiff has also alleged that Defendants made
numerous interstate telephone calls, emails, and faxes to Plaintiffs and utilized United States mail
and DHL to mail or receive from Plaintiffs copies of investment documents, loan documents,
checks for interest payments, and checks for partial loan repayments, which all furthered their
scheme to defraud Plaintiff of her money. Id. Plaintiff alleges that those acts were directed at
defrauding Plaintiff of her investment and were not “isolated” or “sporadic” criminal incidents.
Ball, 661 A.2d at 263. Nonetheless, they do not satisfy the pattern of racketeering requirement
because the alleged acts lack continuity.
Although Plaintiff has identified a number of mailings, emails, and wire transfers that are
related to her claims, the alleged acts of deceit – the misrepresentations made by Mr. Fischer and
Brian Carroll – occurred at the outset of their business relationship, on a handful of instances.
Gannon v. Cont'l Ins. Co., 920 F. Supp. 566, 587 (D.N.J. 1996)(explaining that when analyzing
continuity “[t]he instances of deceit, rather than the number of mailings, is the critical factor.”).
Furthermore, Plaintiff is the only identified victim of the scheme. Although Plaintiff alleges that
Defendants also sought to defraud other investors, she simply has not pointed to any specific
information in that regard. For example, Plaintiff alleges that, among other victims, Lee Weiss
was an investor who wired money to Scott Fischer to invest in Private Capital, and he eventually
filed a lawsuit (the “Weiss Litigation”) against Private Capital. See Compl. ¶¶110-113. However,
Plaintiff has not explained the claims at issue in that lawsuit or whether the facts indicate that

31

defendants’ fraudulent conduct, to the extent any was alleged in that litigation, had similar
purposes, perpetrators, methods of commission, or were otherwise related to the instant lawsuit,
such that it could demonstrate a pattern of continuity under the totality of circumstances test
outlined in Ball. In fact, Plaintiff has failed to produce such evidence regarding any of the other
victims which she claimed were similarly subject to Defendants’ fraudulent conduct. Discovery
in this case has long-ended and without such information, this Court cannot find that the Weiss
Litigation – or any other alleged victims –were part of a “pattern of racketeering.”
At best, based upon Plaintiff’s submissions, Plaintiff has demonstrated that Defendants
devised a single scheme to deprive her of her funds; however, it “is well-settled that allegations of
a single fraudulent scheme designed to deprive a single plaintiff of property does not adequately
allege a RICO violation.” Leeder v. Feinstein, No. 318-12384, 2019 WL 2710794, at *9 (D.N.J.
June 28, 2019) (dismissing New Jersey state RICO claim for failure to demonstrate a pattern of
racketeering where complaint alleged that defendant engaged in a scheme to defraud other victims,
but did not provide specifics of the frauds perpetrated on those victims) c.f. Ross v. Celtron Int’l,
Inc., 494 F. Supp. 2d 288, 303 (D.N.J. 2007) (granting summary judgment in favor of Defendant
on New Jersey RICO claim where plaintiff alleged an “isolated incident of fraud” to deprive a
single victim of property, and did not demonstrate that any other person or entity was impacted by
the scheme, thus plaintiff did not establish a pattern of racketeering activity); see also Emcore
Corp. v. PricewaterhouseCoopers LLP, 102 F. Supp. 2d 237, 255 (D.N.J. 2000)(finding that
plaintiff’s allegation that defendants committed “repeated acts of mail and wire fraud, directed at
numerous victims, all with the same goals (retaining clients and profits) satisfy New Jersey’s
pattern test.”). Thus, Plaintiff’s New Jersey RICO claim (Count Three) is dismissed for failure to
establish a pattern of racketeering.

32

D.

The Fraud Claims
a) Common Law Fraud in the Inducement and Aiding and Abetting
Common Law Fraud

Plaintiff asserts that Scott Fischer and Brian Carroll made a number of false statements
which induced her to invest in the Derbyshire Project and make the loans to FIC and Byana. Those
representations include: the Derbyshire Project was a “no brainer,” compl. at ¶3; Plaintiff would
only lose money on the investment “if ‘toxic waste’ or an ‘oil spill’ were found on the land or an
‘asteroid’ crashed into it,” compl. at ¶4; the land for the Derbyshire Project had been obtained
through a “cash purchase” and Byana owned the land “outright” and “debt free” without any
encumbrances, compl. at ¶¶5,9,47, that the Derbyshire Project was a “low-risk investment,” compl.
at ¶58; and that FIC’s “financials were ‘strong’” and that default was “highly unlikely,” compl. at
¶7. Plaintiff was purportedly unaware that Byana was in debt to the Fischer-related entities at the
time of her investment, and contends that Defendants misled her as to the meaning of the $1.1
million advance referred to in Scott Fischer’s October 9, 2006 email. Plaintiff was allegedly
unaware that Byana did not own the Derbyshire Properties debt-free, and that Byana was in debt
until 2010 when Scott Fischer informed Mr. Fagan that the $4 million Macon Bank loan was due
and that Byana would need to pay the loan and find additional investors to repay the funds, or risk
foreclosure. SOMF ¶128.
Defendants dispute that the alleged statements were made by any of the defendants, but
contend that even if they were, as a matter of law, Plaintiff cannot succeed on her common-law
fraud claim because the alleged fraudulent statements are 1) contradicted under the express terms
of the Byana Operating Agreement, rendering Plaintiff’s reliance on the statements unreasonable
and 2) barred by the parole evidence rule. Def. Br. at 23. Similarly, Defendants contend that the

33

aiding and abetting common law fraud claims must be dismissed, because there was no fraud. Def.
Br. at 30.
A plaintiff asserting a claim of common-law fraud must establish: “(1) a material
misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of
its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereupon by the
other person; and (5) resulting damages.” Triffin v. Automatic Data Processing, Inc., 926 A.2d
362, 368 (N.J. App. Div. 2007) (citing Gennari v. Weichert Co. Realtors, 691 A.2d 350, 367 (N.J.
1997)). “Fraud is not presumed; it must be proven through clear and convincing evidence.”
Stochastic Decisions, Inc. v. DiDomenico, 565 A.2d 1133 (N.J. App. Div. 1989). Generally, “the
alleged fraudulent representation must relate to some past or presently existing fact and cannot
ordinarily be predicated upon matters in future.” Ocean Cape Hotel Corp. v. Masefield Corp., 63
N.J. Super. 369, 380 (N.J. App. Div. 1960). For example, “statements that can be categorized as
‘puffery’ or ‘vague and ill-defined opinions’ are not assurances of fact and thus do not constitute
misrepresentations.” Alexander v. CIGNA Corp., 991 F. Supp. 427, 435 (D.N.J.), aff'd, 172 F.3d
859 (3d Cir. 1998).
Similarly, to establish aiding and abetting fraud under New Jersey common law, “(1) the
party whom the defendant aids must perform a wrongful act that causes an injury; (2) the defendant
must be generally aware of his role as part of an overall illegal or tortious activity at the time that
he provides the assistance; [and] (3) the defendant must knowingly and substantially assist the
principal violation.” New Jersey, Dep't of Treasury, Div. of Inv. ex rel. McCormac v. Qwest
Commc'ns Int'l, Inc., 904 A.2d 775, 784 (N.J. App. Div. 2006).
Here, as an initial matter, Defendants’ parole evidence argument does not defeat Plaintiff’s
fraud claims, because Plaintiff’s claim is one for fraudulent inducement. In New Jersey, “[t]he

34

parole evidence rule prohibits the introduction of oral promises which tend to alter or vary an
integrated written instrument.” Seidenberg v. Summit Bank, 91 A.2d 1068, 1075 (N.J. App. Div.
2002). However, “a party to an agreement cannot, simply by means of a provision in the written
instrument, create an absolute defense or prevent the introduction of parole evidence in an action
based on fraud in the inducement to contract.” Walid v. Yolanda for Irene Coutoure, Inc., 40 A.3d
85, 94 (N.J. 2012) (quoting Bilotti v. Accurate Forming Corp., 188 A.2d 24, 36 (N.J. 1963)).
Although the Byana Operating Agreement provides that it “constitutes the entire agreement of the
Members and their Affiliates relating to the Company and supersedes all prior contracts or
agreements with respect to the Company, whether oral or written” that does not preclude Plaintiff’s
fraudulent inducement claim. Byana Operating Agreement, ¶10.22l; see Walid, 40 A.3d at 94 (“A
party perpetrating a fraud may not invoke a general ‘no representation’ clause to preclude evidence
of earlier explicit misrepresentations, if the specific facts misrepresented are peculiarly within that
party's knowledge and were, in fact, intentionally misrepresented”); McConkey v. AON Corp., 804
A.2d 572, 587 (N.J. App. Div. 2002)(finding that Plaintiff’s fraud claim was not barred by the
parole evidence rule because it was “not a case where the contract provisions contradicted oral
assurances on the same subject, thereby nullifying all prior oral and written agreements between
the parties.”). Accordingly, the parole evidence rule does not bar Plaintiff’s claims.
Here, Defendants only challenge the first and fourth elements of the fraud in the
inducement analysis: whether there was “a material misrepresentation of a presently existing or
past fact” and the reasonableness of Plaintiff's reliance upon the alleged misrepresentations. Triffin,
926 A.2d at 368. As to the first element, I find that only the alleged misrepresentations regarding
the purchase of the land for the Derbyshire Project could conceivably constitute the basis for
Plaintiff’s fraud claim; specifically, the statements that the land for the Derbyshire Project had

35

been obtained through a “cash purchase” and Byana owned the land “outright” and “debt free”
without any encumbrances, compl. at ¶¶5,9,47. Those statements were present statements of facts
which would have been material to Plaintiff’s assessment of the investment in Byana and the
potentials risks posed by it. Triffin, 926 A.2d at 368. However, the statements that the Derbyshire
Project was a “no brainer”; that Plaintiff would only lose money on the investment “if ‘toxic waste’
or an ‘oil spill’ were found on the land or an ‘asteroid’ crashed into it”; and that FIC was unlikely
to default on its loans are not actionable as fraud because they are not “misrepresentations.” Rather
they constitute puffery or forward-looking statements. See Alexander., 991 F. Supp. at 435
(holding that defendant’s statements that contractual relationship between the parties “would be
long lasting,” and that the “agreement one in ‘perpetuity’” were merely predictions of future events
and could not form basis for a fraud claim); VT Investors v. R & D Funding Corp., 733 F. Supp.
823, 838 (D.N.J.1990) (holding that statements that company in which plaintiffs invested would
soon generate positive cash flow in excess of $60,000 per month characterized were not actionable
misrepresentations but rather mere “puffery”).
Furthermore, there is a genuine issue of material fact as to the reasonableness of Plaintiff’s
reliance. Triffin, 926 A.2d at 368. Neither the Byana Operating Agreement nor the Investment
Offering expressly contradict the alleged misrepresentations that Byana was “debt free” or that the
initial land purchases were funded with cash. Plaintiff acknowledges that she and her husband
reviewed the Investment Offering and the Byana Operating Agreement — with Mrs. Fagan
executing the latter — prior to making her initial $300,000 equity investment on November 1,
2006, and her subsequent $700,000 investment on December 26, 2006. See SOMF ¶¶24, 26, 56,
57, 59, 128. Both the Investment Offering and the Byana Operating Agreement repeatedly warned
Plaintiff that the investment posed potential risks. Defendants contend that courts around the

36

country have “held that a plaintiff claiming reliance on alleged material misstatements will be
charged with knowledge of warnings in the offering materials concerning the investment risks,
thus making reliance unreasonable.” Def. Br. at 17 (collecting cases). However, Plaintiff has not
merely alleged that she was generally unaware of the risks incident to the investment, but that Scott
Fischer deliberately misled her by informing her that Byana was debt-free and owned the
properties free and clear. Neither the Investment Offering nor the Operating Agreement clearly
state that Byana was indebted to the other Fischer-related entities at the time of Plaintiff’s
investment. In that regard, the Byana Operating Agreement explained that the Members desire “to
form a limited liability company . . . . in order to provide a vehicle through which the Members
will own the real properties which consist of approximately 180 acres of land located in Tryon,
Columbus Township, Polk County, North Carolina, which land has been or will be purchased by
the Company (the “Investment”),” but does not indicate whether any of the properties which had
been obtained or which were to be obtained would be subject to a mortgage. Thus, it does not
expressly contradict Scott Fischer’s assertions that Byana owned the Derbyshire properties “debt
free.” Accordingly, his representations were not expressly contradicted by either document.
On the other hand, there is some evidence in the record from which Plaintiff could have
gleaned Mr. Fischer’s representations were untrue. The Investment Offering indicates that Private
Capital was seeking both debt and equity investors, and that the purchase of the land for the project
could “be achieved on a leveraged or un-leveraged basis” and evidence of the mortgage on 133.63
acres of the parcels owned by Byana was recorded in the Polk County Register of Deeds which is
available online. SOMF ¶¶18, 29; see also Investment Offering. Further, the Byana Operating
Agreement also noted that Private Capital, as Byana’s manager, had the unfettered right to
encumber the property as necessary. SOMF ¶36. However, whether these statements were

37

sufficient to place Plaintiff on notice that Byana was not in fact “debt free,” such that Plaintiff’s
reliance on Scott Fischer’s representations was unreasonable, is a question of fact. Since there are
disputed issues of material fact relating to the reasonableness of Plaintiff’s reliance and whether
Defendants made material misrepresentations of presently existing or past facts, Defendants’
Motion for summary judgment as to the common-law fraud claim (Counts VI) is denied.
Furthermore, since Defendants’ only argument in support of summary judgment on the aiding and
abetting common law fraud claim is that there was no fraud, Defendants’ motion on that claim
(Count VII) claims is denied, as well. 9
b)

Equitable Fraud

Defendants’ arguments in favor of summary judgment on Plaintiff’s equitable fraud claim
largely mirror their arguments as to dismissal of the common law fraud claims: that Plaintiff’s
reliance on Defendants’ misrepresentations was unreasonable, in light of the language of the Byana
Operating Agreement. Def. Br. at 31-32. Moreover, Defendants contend that Plaintiff should not
be permitted to rely on an equitable doctrine, because Plaintiff misrepresented her experience in
the Investor Questionnaire, and thus, Plaintiff has unclean hands. Id.
In New Jersey, a claim of equitable fraud requires proof of: (1) a material misrepresentation
of a presently existing or past fact; (2) the maker’s intent that the other party rely on it; and (3)
detrimental reliance by the other party. Jewish Ctr. of Sussex Cty. v. Whale, 432 A.2d 521, 524
(N.J. 1981) (citation omitted). Unlike a claim for legal fraud, there need not be proof that the
statement was made with knowledge that it was false. Id. However, as a general rule, the

9

Summary judgement on the fraud claims is denied only as to defendants Scott Fischer, Brian
Carroll, Byana, FIC, and Private Capital. For reasons discussed more fully later in this Opinion,
all claims against defendants Veronika Fischer, Funder, Bowder, and Wealth Capital are
dismissed.
38

application of equitable principles “follows the common law precept that no one shall be allowed
to benefit by his own wrongdoing. Thus, where the bad faith, fraud or unconscionable acts of a
petitioner

form

the

basis

of

his

lawsuit,

equity

will

deny

him

its

remedies.” Rolnick v. Rolnick, 674 A.2d 1006, 1011 (N.J. App. Div. 1996). Furthermore, “[a]s
an equitable doctrine, application of unclean hands rests within the sound discretion of the trial
court.” In re New Valley Corp., 181 F.3d 517, 525 (3d Cir. 1999).
It is well-recognized that “[i]n an action for equitable fraud, the only relief that may be
obtained is equitable relief, such as rescission or reformation of an agreement and not monetary
damages.” Enright v. Lubow, 493 A.2d 1288, 1296 (N.J. App. Div. 1985); see also Daibo v.
Kirsch, 720 A.2d 994, 998 (N.J. App. Div. 1998)(reversing trial court’s grant of money damages
for equitable fraud claim); Luong v. Nguyen, No. A-1450-09T3, 2011 WL 1376316, at *9 (N.J.
App. Div. Apr. 13, 2011)(affirming the dismissal of plaintiff’s equitable fraud claim because
plaintiff sought “only monetary damages, which are not permitted in a successful equitable fraud
claim”). Here, Plaintiff’s complaint expressly seeks money damages, which are not permitted in
an equitable fraud action. See Compl. Count VIII (seeking damages “for an exact amount to be
determined at trial, but in any event, at least $2,000,000.00, together with prejudgment interest,
reasonable attorneys’ fees and costs, punitive damages, and for all other relief this Court finds just
and equitable.”). Accordingly, Defendants’ motion for summary judgment on the equitable fraud
claim (Count VIII) is granted.
E.

Conversion

Defendants contend that Plaintiff’s conversion claim is precluded due to the existence of a
contractual relationship between Plaintiff and Defendants. Def. Br. at 48. The common law tort
of conversion in New Jersey is defined as the “intentional exercise of dominion or control over a

39

chattel which so seriously interferes with the right of another to control it that the actor may justly
be required to pay the other the full value of the chattel.” Chicago Title Ins. Co. v. Ellis, 978 A.2d
281, 287 (N.J. App. Div. 2009), cert. denied, 983 A.2d 1113 (N.J. 2009). While conversion was
“originally intended to protect title to chattels, conversion today may be applied to money,
bonds, promissory notes, and other types of securities, as long as the plaintiff has an actual interest
in the security and it is capable of misuse in a way that would deprive the plaintiff of its benefit.”
Cargill Glob. Trading v. Applied Dev. Co., 706 F. Supp. 2d 563, 578 (D.N.J. 2010). However, in
order “to prevent breach of contract claims from turning into tort claims,” the application of the
doctrine is generally limited to situations “where there is an obligation to return ‘the identical
money’ . . . it does not lie where there is merely a debtor/creditor relationship.” Id. (quoting
Advanced Enterprises Recycling, Inc. v. Bercaw, 869 A.2d 468, 473 (N.J. App. Div. 2005); Scholes
Elec. & Commc'ns, Inc. v. Frasor, No. 04–3898, 2006 WL 1644920, at *5 (D.N.J. 2006) (“When
money, as opposed to tangible property, is the subject of a conversion claim, New Jersey courts
require that a plaintiff show something more than a contractual obligation on the part of a defendant
to pay the plaintiff to establish conversion.”).

Additionally, the converted funds must be

identifiable, and the injured party must establish that the tortfeasor exercised dominion over the
money and repudiated the superior rights of the owner. Id.
Here, Plaintiff alleges that Defendants’ interference deprived her of the possession or use
of personal property in the form of the $2,250,000.00 debt and equity investments in Byana and
FIC. Compl. ¶229. In Plaintiff’s view, Defendants are liable for conversion because the money
Plaintiff wired to Byana came out of the entity and was transferred to other Fischer-related entities
for Scott Fischer’s benefit. Pl. Br. at 32. Furthermore, Plaintiff relies on Federal Ins. Co. v. Smith,
63 F. App’x. 630, 635 (4th Cir. 2003), an out-of-circuit, unreported opinion, in support of her

40

argument that “Veronika Fischer is properly subject to direct liability for conversion and other
claims” even though Mrs. Fischer never interacted with Plaintiff or her husband during the course
of their investment. Id.
The relationship between the parties is governed purely by contract. This is not an instance
where Defendants exercised unauthorized dominion over the property of another. Rather, Plaintiff
voluntarily tendered funds to Byana, and FIC pursuant to the Byana Operating Agreement and the
Promissory Notes. c.f. First Am. Title Insurace Co. v. Sadek, No. 11-1302, 2017 WL 6663899, at
*5 (D.N.J. Dec. 29, 2017) (granting summary judgment in favor of plaintiff on conversion claim
where defendants received proceeds from sale of mortgaged property, and did not utilize sale
proceeds to repay balance of outstanding mortgage but rather deposited and retained funds in their
own bank account); Am. Rubber & Metal Hose Co., No. 11-1279, 2011 WL 3022243, at *6–7
(D.N.J. July 22, 2011) (dismissing conversion claim where “the alleged failure to fulfill the
requirements of the purchase of said assets sounds in contract, not tort.”). As such Plaintiff’s
conversion claim fails. To the extent Plaintiff claims that Defendants never intended to 1) re-pay
Plaintiff for the promissory notes, 2) pay to Plaintiff dividends from her equity investment in
Byana, or 3) manage Byana such that Plaintiff’s investment would provide returns, the appropriate
mechanism for seeking relief lies in Plaintiff’s fraud and breach of contract claims, not in a
conversion action.
Furthermore, Smith, upon which Plaintiff relies is distinguishable. There, a wife received
funds that her husband had obtained by fraud, and the Fourth Circuit, applying Virginia law, held
that the wife, a third-party who personally benefitted from converted funds without knowledge of
the fraud, could be liable for conversion. 63 F. App’x at 635. As an initial matter, the Smith court
was interpreting Virginia law and Plaintiff has not proffered any case law suggesting that a New

41

Jersey court would interpret New Jersey law in a similar fashion. Furthermore, Plaintiff has not
pled a theory of conversion premised on the receipt of fraudulently obtained funds. Rather,
Plaintiff’s Complaint clearly alleges that “Defendants [including Mrs. Fischer] intentionally
interfered with Plaintiffs’ monies and exercised dominion and control over those monies,” and,
importantly, it does not allege that Plaintiff is seeking to hold Mrs. Fischer liable for conversion
based, simply, on the receipt of funds fraudulently obtained by her husband. Compl. ¶228. And,
Plaintiff cannot now amend her complaint in her briefing. See Coles v. New Jersey Dep't of Human
Servs., No. 13-3987, 2014 WL 2208142, at *8 (D.N.J. May 28, 2014)(“Arguments made in
briefing cannot amend the pleadings.”).
Additionally, even if Plaintiff had pled a Smith theory of conversion, it is unclear whether
Mrs. Fischer actually received any of Byana’s funds, as the funds, unlike in Smith, were not
transferred to her directly. Rather, funds from Byana were transferred to defendant entities -- FIC,
Funder, and Private Capital -- in which Mrs. Fischer owns an interest. Mrs. Fischer currently has
a 90% membership interest in Funder and owns 51% of FIC. SOMF ¶9-10. Her ownership stake
in the companies has increased significantly over the years. Mrs. Fischer owned 0% of FIC from
2006 through 2009, when Mrs. Fagan initially invested in the Byana, and 51% from 2010 through
the present. SOMF ¶9. Mrs. Fischer owned 1% of Funder from 2006 through 2009, 60% in 2010,
72% from 2011 through 2014, and 90% from 2015 to the present. SOMF ¶4 Funder, in turn, has
ownership stakes in Private Capital and Bowder, which are both members of Byana. ECF No.
125, Plaintiff’s Supplemental Statement of Disputed Fact (“Pl. Supp. SOF.”) ¶¶12; SOMF ¶¶ 67. Furthermore, Mrs. Fischer also receives a salary from FIC. Pl. Supp. SOF. at ¶15. The parties
dispute whether Byana had a legitimate basis for transferring funds to the Fischer-related entities
and whether Mrs. Fischer was a bona-fide employee of FIC. However, Plaintiff has not submitted

42

evidence to show that any of the transferee entities, were devoid of funds of their own, such that
any funds from those entities that made their way to Mrs. Fischer, in the form of a salary or
otherwise, are clearly traceable to the alleged fraudulent funds acquired by Mr. Fischer. As the
Smith court, itself, noted “[i]n order to recover in conversion for money that has changed forms, .
. . the proceeds must be traceable to the original conversion.” Smith, 63 F. App'x at 633. Because
Plaintiff cannot show that there was such a transfer, the Court grants summary judgment in favor
of Defendants on Plaintiff’s conversion claim (Count IX).
F.

Unjust Enrichment

Plaintiff alleges that Defendants were unjustly enriched by the retention of her
$2,250,000.00 debt and equity investments in Byana and FIC, in light of their alleged illegal acts.
See Compl ¶¶231-237. Defendants contend that Plaintiff’s “claim for unjust enrichment fails as a
matter of law because there was a binding contractual relationship between Plaintiffs and
Defendants pursuant to the Operating Agreement.” Def. Br. at 49. Plaintiff contends that it only
had a direct contractual relationship with Byana, thus, regardless of the contractual agreements, it
may allege an unjust enrichment claim as to the other defendants because they were not parties to
the Byana Operating Agreement or the FIC and Byana Promissory Notes. Pl. Br. at 33.
To establish a claim for unjust enrichment, a plaintiff must prove that (1) at plaintiff’s
expense; (2) defendant received benefit; (3) under circumstances that would make it unjust for
defendant to retain said benefit without paying for it. Maniscalco v. Brother Intern. Corp. (USA),
627 F. Supp. 2d 494, 505 (D.N.J. 2009). Retention of a benefit without payment is not unjust
unless “the plaintiff expected remuneration from the defendant, or if the true facts were known to
plaintiff, he would have expected remuneration from defendant, at the time the benefit was
conferred.” Assocs. Comm. Corp. v. Wallia, 511 A.2d 709, 711 (N.J. App. Div. 1986) (quoting

43

Callano v. Oakwood Park Homes Corp., 219 A.2d 332, 335 (N.J. App. Div. 1966)). Thus, unjust
enrichment cases “involve[] either a direct relationship between the parties or a mistake on the part
of the person conferring the benefit.” Fasching v. Kallinger, 211 510 A.2d 694, 700 (N.J. App.
Div. 1986).
“Unjust enrichment is not an independent theory of liability, but is the basis for a claim of
quasi-contractual liability.” Goldsmith v. Camden Cty. Surrogate’s Office, 408 N.J. Super. 376,
382 (N.J. App. Div. 2009) (citation and internal quotation marks omitted). “Because unjust
enrichment is an equitable remedy resorted to only when there was no express contract providing
for remuneration, a plaintiff may recover on one or the other theory, but not both.” Caputo v.
Nice–Pak Prod., Inc., 693 A.2d 494, 499 (N.J. App. Div. 1997); see Amgro, Inc. v. Lincoln Gen.
Ins. Co., 361 F. App’x 338, 346 (3d Cir. 2010) (affirming summary judgment of the plaintiff’s
unjust enrichment claim, where an express contract governed the parties’ relationship); Simonson
v. Hertz Corp., No. 10–1585, 2011 WL 1205584, at *6 (D.N.J. Mar. 28, 2011) (“[A] plaintiff may
not recover on both a breach of contract claim and an unjust enrichment claim ....”).
Here, Plaintiff cannot succeed on her unjust enrichment claims against FIC and Byana,
because the allegedly unjust remuneration obtained by Defendants was proffered by Plaintiff
pursuant to the Byana Operating Agreement and the FIC and Byana Promissory Notes. Plaintiff
alleges that Defendants have been unjustly enriched by virtue of the $1 million investment in the
Derbyshire project, and the $1.25 million loans to Byana and Fischer Capital. Compl. ¶240. Thus,
Plaintiff’s claim for unjust enrichment stems entirely from the contractual relationships between
Plaintiff, Byana, and Fischer Capital. A party cannot state a claim for unjust enrichment where a
contract expressly covers the dispute between the parties. See Amgro, 361 F. App’x at 346;
Caputo, 693 A.2d. at 499; Simonson, 2011 WL 1205584 at *6.

44

Plaintiff’s unjust enrichment claims against the other defendants fails as well. The
requirement that a plaintiff must confer a benefit on the defendant “has been interpreted by New
Jersey courts as a requirement that ‘the plaintiff allege a sufficiently direct relationship with the
defendant to support the claim.’ ” Snyder v. Farnam Companies, Inc., 792 F. Supp. 2d 712, 724
(D.N.J. 2011) (quoting Nelson v. Xacta 3000 Inc., No. 08–5426, 2009 WL 4119176, at *3 (D.N.J.
Nov. 24, 2009)). Here, Plaintiff wired her funds to Scott Fischer on behalf of FIC and Byana,
respectively. Plaintiff did not have any direct relationship with any of the other defendants, at the
time she made her investments. Neither did Plaintiff directly confer a benefit upon the other
defendants, and thus, she cannot sustain an unjust enrichment claim against them. Dzielak v.
Whirlpool Corp., 26 F. Supp. 3d 304, 330 (D.N.J. 2014) (dismissing “unjust enrichment claim as
against [the manufacturer] only, because the [p]laintiffs conferred no direct benefit on [the
manufacturer]” where product was purchased from retailer); Snyder, 792 F. Supp. 2d at 724
(dismissing unjust enrichment claim because plaintiffs “failed to allege that they purchased the
Products directly from [d]efendants, they cannot rightfully expect any remuneration from
[d]efendants, since they never directly conferred a benefit on [d]efendants.”). Accordingly,
Defendants’ motion for summary judgment on the unjust enrichment claims (Count XI) is granted.
G.

Breach of Fiduciary Duty

Count XIV of Plaintiff’s Complaint alleges a breach of fiduciary duty by Defendant Scott
Fischer. Defendant has moved for summary judgment on the breach of fiduciary duty claim,
contending that it is barred by the terms of the Byana Operating Agreement. Def. Br. at 45.
To prove a breach of fiduciary duty, the plaintiff must prove: (1) a fiduciary relationship
existed between the parties, (2) a breach of the duty imposed by that relationship, and (3) harm to

45

the plaintiff. ACE Am. Ins. Co. v. Wachovia Ins. Agency Inc., No. 08–4369, 2008 WL 4630486,
at * 6 (D.N.J. Oct. 17, 2008) (citing McKelvey v. Pierce, 800 A.2d 840, 859–60 (N.J. 2002)).
Here, the critical inquiry is whether there was a fiduciary relationship between Plaintiff
and Scott Fischer. The Court finds that the Byana Operating Agreement expressly disclaims the
existence of any fiduciary duties between its members, thus that document cannot form the basis
for Plaintiff’s alleged fiduciary relationship with Scott Fischer. Because Byana is a Delaware
LLC, Delaware law 10 applies to the interpretation of the entity’s formation document and whether
the Byana Operating Agreement gave rise to a fiduciary relationship between the parties. Fagin
v. Gilmartin, 432 F.3d 276, 282 (3d Cir. 2005) (“Under New Jersey's choice-of-law rules, the law
of the state of incorporation governs internal corporate affairs.”).
Under Delaware law, an LLC agreement may eliminate or limit liability for breach of
fiduciary duties by the members or managers. 6 Del. C. § 18-1101(e)(“A limited liability company
agreement may provide for the limitation or elimination of any and all liabilities for breach of
contract and breach of duties (including fiduciary duties) of a member, manager or other person to
a limited liability company or to another member or manager or to another person that is a party
to or is otherwise bound by a limited liability company agreement[.]”). Here, the Byana Operating
Agreement includes such a waiver:
To the fullest extent permitted by the Act, the Members: (i)
acknowledge their intention to be governed solely by the contractual
rights and obligations set forth in this Agreement; and (ii) as an
10

Furthermore, as previously discussed, the Byana Operating Agreement contains a choice-oflaw provision that provides for its interpretation under Delaware law. To the extent Plaintiff’s
fiduciary duty claim is based on the Byana Operating Agreement, Delaware law applies; however,
consistent with New Jersey’s choice of law rules, and because the parties have not suggested that
there is any difference between New Jersey or Delaware law on this issue, the Court will apply
New Jersey law to the analysis of whether Scott Fischer owed Mrs. Fagan a fiduciary duty
independent from that imposed by the Byana Operating Agreement or their joint membership in
Byana.
46

inducement to the Manager to permit their admission to the
Company, hereby waive any claim of fiduciary duties arising from
the relationships between the Members (including the relationships
between the Manager and the non-Managers) created by this
Agreement.
Byana Operating Agreement, Section 4.8, Waiver of Fiduciary Duty. Thus, the Byana Operating
Agreement expressly disclaims the existence of a fiduciary duty between Plaintiff and Scott
Fischer. Accordingly, to the extent Plaintiff’s fiduciary duty argument is based on Scott Fischer’s
status as a member of Byana, Plaintiff’s breach of fiduciary duty claim fails as a matter of law.
Plaintiff also appears to contend that Scott Fischer owed her a fiduciary duty, separate and
apart from any obligations they owed to each other as members of Byana, because “Mr. and Mrs.
Fagan . . . relied upon Scott Fischer to give them investment advice.” Pl. Br. at 25. Accordingly,
the Court must analyze, under New Jersey law, whether Scott Fischer owed Mrs. Fagan an
independent fiduciary duty.
“A fiduciary relationship arises between two persons when one person is under a duty to
act for or give advice for the benefit of another on matters within the scope of their relationship.”
F.G. v. MacDonell, 696 A.2d 697, 704 (N.J. 1997). A hallmark of a fiduciary relationship is one
party's placement of “trust and confidence in another.” Big M, Inc. v. Dryden Advisory Group,
No. 08–3567, 2009 WL 1905106, at *24 (D.N.J. June 30, 2009) (“A fiduciary obligation exists
whenever one person places special trust and confidence in another person upon whom the person
relies to exercise discretion and expertise upon behalf of that person”). Typically, one side in a
fiduciary relationship has a “dominant and controlling position” that prevents the parties from
dealing on equal terms. Alexander, 991 F. Supp. at 437. In other words, a fiduciary relationship
“does not exist where the parties deal on terms of equality.” Id. (quoting In re Stroming's Will, 79
A .2d 492, 495 (N.J. App. Div. 1951)).

47

Here, there is no indication from the interactions between Plaintiff (or her husband, who
did much of the negotiating regarding the investment) and Scott Fischer that the parties’
relationship was characterized by trust or confidence, or that they were unable to compete on equal
terms. 11 Scott Fischer provided the Fagans with information about a potential investment, and
three weeks later, with ample time to seek advice from others, if the Fagans so desired, Plaintiff
chose to invest in Byana. The hallmarks of a fiduciary relationship are notably absent here; this
was nothing more than a business transaction between the parties, which generally precludes a
finding of a fiduciary relationship. See Alexander, 991 F. Supp. 427, 438 (“fiduciary duties are
not imposed in ordinary commercial business transactions.”).
Plaintiff’s deposition testimony that she “trusted” Scott Fischer and “relied” on him is
insufficient to transform the business transaction at issue into a fiduciary relationship. See e.g.,
Shogen v. Glob. Aggressive Growth Fund, Ltd., No. 04-5695, 2007 WL 2264978, at *4 (D.N.J.
Aug. 3, 2007)(finding that “plaintiff's deposition testimony after the fact that she relied on

11

While the parties have not explained, in this motion, how the Fagans came to meet Scott Fischer
or the exact nature of the relationship between the parties, it appears that Scott Fischer is a friend
of Mr. Fagan’s brother-in-law. See M. Fagan Dep. 254:3 to 254:24; 257:23 to 259:24 (explaining
that Mr. Fagan reached out to Scott Fischer directly, introduced himself as Ted Sedelmaier’s
brother–in-law, and stated that he was interested in speaking to Scott Fischer about his business
ventures). However, it is unclear whether Plaintiff and Scott Fischer were friends, and in that
regard, Plaintiff has not argued that she had a personal connection with Scott Fischer such that
Scott Fischer owed Plaintiff a fiduciary duty on that basis. Regardless, a friendly or collegial
relationship with an individual – absent indicia of “trust and confidence” and an expressed intent
to rely on the fiduciary’s advice – does not give rise to a fiduciary relationship. Big M, Inc., No.
08–3567, 2009 WL 1905106, at * 24 (“A fiduciary obligation exists whenever one person places
special trust and confidence in another person upon whom the person relies to exercise discretion
and expertise upon behalf of that person”); see e.g., Crestwood Farm Bloodstock v. Everest
Stables, Inc., 751 F.3d 434, 443 (6th Cir. 2014)(“That the two were friends, even close friends,
may well explain why they did business together. Many friends do business together. But not all
friends are fiduciaries.”); Stinnett v. Colorado Interstate Gas Co., 227 F.3d 247, 253 (5th Cir.
2000)(“Fiduciary duties do not abound in every, or even most, arms-length contractual
relationships, even those among trusting friends.”)

48

defendants’ advice does not constitute sufficient evidence that she expressly reposed a trust and
confidence in them at the time she was seeking a stock pledge loan” thus defendants were entitled
to summary judgment on plaintiff’s claim for breach of fiduciary duty). Furthermore, there is no
indication that Scott Fischer was aware, or had reason to know, of Plaintiff’s professed reliance on
him. To the contrary, in signing the Byana Operating Agreement, Plaintiff attested that she “ha[d]
not relied in [sic] any representations or warranties of the Company, the Manager, any Affiliate
thereof or any officer, employee or agent of any of the foregoing with respect to the value of the
interests of the Company.” Byana Operating Agreement. Additionally, the investment materials,
provided by Scott Fischer, encouraged Plaintiff to seek counsel from “accountants, attorneys and
tax advisors” to act as fiduciaries to Plaintiff. See Investment Offering. A fiduciary relationship
cannot be created via one party’s unilateral and unexpressed belief that such a relationship exists.
Vent v. MARS Snackfood US, LLC, 350 F. App'x 533, 535 (2d Cir. 2009)(“fiduciary or confidential
relationships also require both parties' agreement. A fiduciary relationship cannot be created
unilaterally when one person entrusts another with confidential information.”); see also Shogen,
No. 04-5695 SRC, 2007 WL 2264978, at *4 (noting that there was “no evidence here that the
[defendants] knew that Plaintiff would rely on them and follow their advice. Rather, Defendants
testified that they believed Plaintiff would be acting with counsel on her own behalf. Plaintiff never
told them otherwise and has not pointed to any testimony indicating her reliance by stating, for
instance, that she told the [defendants] that she would rely on their advice.”). Apart from her
professed reliance on Mr. Fischer, Plaintiff has not pointed to evidence suggesting that he was in
a “dominant and controlling position” over Plaintiff during the investment discussions.

49

Accordingly, Plaintiff has not demonstrated that she had a fiduciary relationship with Scott
Fischer, and thus, she cannot succeed on her claim for breach of fiduciary duty. The motion for
summary judgment on the breach of fiduciary duty claim (Count XIV) is granted.
H.

Breach of Contract

Plaintiff alleges that Defendants Scott Fischer, Byana, and FIC have breached the terms of
the Byana and FIC Promissory Notes. See Compl. ¶¶243-251. In support of her claims against
Scott Fischer, Plaintiff relies on a piercing the corporate veil theory arguing that Scott Fischer was
the alter ego of Defendants Byana and FIC, by misusing their corporate forms and freely
transferring funds between the entities, and thus he is personally liable on the Promissory Notes.
Id. In that regard, Plaintiff contends that there are disputed material facts as to whether Scott
Fischer was the alter ego of Byana and FIC, and that her piercing the corporate veil theory has
“only gained support through discovery.” Pl. Br. at 34.
Defendant Scott Fischer argues that because he was not a signatory to the notes, they were
solely corporate obligations. Def. Br. at 50. Scott Fischer contends that since Plaintiff has not
identified the legal authority on which she relies, or the factual evidence which would support a
piercing the corporate veil theory of liability, Plaintiff’s breach of contract claims against Scott
Fischer should be dismissed. Def. Reply. Br. at 23.
Each of the FIC Promissory Notes was signed by “K. Scott Fischer” in his capacity as
president of FIC. See Fischer Cert, Exs. V, W, X. The Byana Promissory Notes were signed by
“K. Scott Fischer” in his capacity as a member of Byana LLC. See Fischer Cert, Exs, Z, AA.
Accordingly, Defendant contends that because Scott Fischer signed the notes solely in his
capacities as the President of FIC, and a member of Byana, he cannot be held personally liable on
the notes. Def. Br. at 52. While Defendant’s contentions are true as to the initial Promissory

50

Notes, the FIC Loan Modification Agreement entered into on January 5, 2009, which modifies the
July 30, 2007 and April 30, 2007 FIC Loans, list “Kevin S. Fischer” as a “Guarantor”. 12 See
Fischer Cert., Exs. BB, CC. Accordingly, there is a genuine dispute of material fact as to whether
Scott Fischer is personally liable on the FIC Promissory Notes, and the Court will allow the breach
of contract claim against Scott Fischer to proceed as to the FIC Promissory Notes.
In contrast, neither the Byana Promissory Notes, nor the Byana Loan Modification
Agreements, designate Scott Fischer, or anyone else, as a guarantor. Accordingly, for Plaintiff to
hold Scott Fischer personally liable on the Byana Promissory Notes, Plaintiff must rely on a
piercing the corporate veil theory of liability.
Under New Jersey law 13, two elements must be shown to pierce the corporate veil: “First,
there must be such unity of interest and ownership that the separate personalities of the corporation
and the individual no longer exist. Second, the circumstances must indicate that adherence to the

12

Presumably “K. Scott Fischer” and “Kevin S. Fischer” both refer to Defendant Scott Fischer.

13

Neither party has conducted a choice of law analysis as to Plaintiff’s piercing corporate veil
claim. Although the Byana Promissory Notes provide that the Agreement is to be governed by the
laws of the State of North Carolina, see Fischer Cert, Exs, Z, AA, the choice of law provision does
not determine which state’s law applies to the piercing the corporate veil analysis. Dassault Falcon
Jet Corp. v. Oberflex, Inc., 909 F. Supp. 345, 348 (M.D.N.C. 1995)(“a choice of law provision in
a contract is not binding on what law to apply for piercing the corporate veil. The reason for this
is that the issue of piercing the corporate veil is collateral to and not part of the parties' negotiations
or expectations with respect to the contract.”); see also Linus Holding Corp. v. Mark Line Indus.,
LLC, 376 F. Supp. 3d 417, 424 (D.N.J. 2019)(explaining that courts within this district often look
to “the state that has the most significant connection with the parties and the transaction” in order
to determine which state’s law governs the piercing the corporate veil analysis). Accordingly, the
veil-piercing analysis may be governed by either Delaware, where Byana was formed; New Jersey,
where Scott Fischer and Plaintiff both reside, or North Carolina law. Nonetheless, because the
parties have not addressed the matter, and New Jersey’s veil-piercing framework is substantially
similar to that of North Carolina and Delaware, the Court will apply New Jersey law. See e.g.,
Linus Holding Corp., 376 F. Supp. at 424 (applying New Jersey law to veil-piercing claim because
“New Jersey's veil-piercing framework is substantially similar to the veil-piercing framework
under the laws of Florida and Utah”).
51

fiction of separate corporate existence would sanction a fraud or promote injustice.” State Capital
Title & Abstract Co. v. Pappas Bus. Servs., LLC, 646 F. Supp. 2d 668, 679 (D.N.J. 2009)
(quotations and citations omitted). However, even in instances where one individual shareholder
or director dominates the corporate entity, “liability generally is imposed only where the [dominant
party] has abused the privilege of incorporation by using the [corporate form] to perpetrate a fraud
or injustice, or otherwise to circumvent the law.” State Dept. of Environmental Protection v.
Ventron Corp., 468 A.2d 150, 165 (N.J. 1983). In determining whether a unity of interest and
ownership exists under the first prong, the Third Circuit, applying New Jersey law, has utilized six
non-binding factors to guide this inquiry: “[1] gross undercapitalization . . .; [2] the failure to
observe corporate formalities, non-payment of dividends, [3] the insolvency of the debtor
corporation at the time, [4] siphoning of funds of the corporation by the dominant stockholder, [5]
non-functioning of other officers or directors, absence of corporate records, and [6] the fact that
the corporation is merely a facade for the operations of the dominant stockholder or stockholders.”
Linus Holding Corp. v. Mark Line Indus., LLC, 376 F. Supp. 3d 417, 425 (D.N.J. 2019)(quoting
Craig v. Lake Asbestos of Quebec, Ltd., 843 F.2d 145, 150 (3d Cir. 1988) (citations omitted).
Ultimately, “the party seeking an exception to the fundamental principle that a corporation is a
separate entity from its principal bears the burden of showing that the court should disregard the
corporate entity.” Tung v. Briant Park Homes, Inc., 670 A.2d 1092, 1096 (N.J. App. Div. 1996).
In Linus Holding Corporation, the plaintiff, a real estate developer, brought suit against a
LLC, with which it had contracted, and sought to pierce the corporate veil of the company in order
to exercise personal jurisdiction over affiliated entities and officers of the company. 376 F. Supp.
3d at 427. The plaintiff alleged that the defendant-entity had transferred funds, totaling $1.5
million, to affiliated entities, rendering the defendant entity “undercapitalized” and that the

52

individual officers served in a managerial capacity over both the defendant entity and its affiliates;
those facts, plaintiff alleged, were sufficient to support piercing. Id. The court declined to pierce
the corporate veil, finding that plaintiff’s allegations were insufficient to demonstrate an alter ego
relationship between the defendant entity and its affiliates or the officers. Id. As an initial matter,
the court explained that “common ownership and common management alone are insufficient for
veil-piercing purposes,” particularly in the context of an LLC, because such entities “are
‘deliberately provided with ‘organizational flexibility.’” Id. (quoting Coty US LLC v. 680 S. 17th
St. LLC, No. 122-13, 2015 WL 1011664, at *15 (N.J. App. Div. Feb. 26, 2015). Furthermore, the
court noted that the defendant entity “maintained its own financial statements, [o]perating
[a]greement, hired employees, and filed separate tax documents. Thus, [p]laintiff's allegations do
not adequately demonstrate that [the defendant entity] functioned as a dummy or shell
corporation.” Id. at 428. The court also rejected plaintiff’s contention that the company’s
insolvency was indicative of undercapitalization, as the inquiry into whether a company is
undercapitalized is “‘highly factual and may vary substantially with the industry, company, size
of the debt, account methods employed, and like factors,’” and plaintiff had not alleged any
information regarding the appropriate level of capital for a business of defendant’s size in the same
industry. Id. at 426 (quoting Trs. of the Nat'l Elevator Indus. Pension, Health Benefit & Educ.
Funds v. Lutyk, 332 F.3d 188, 197 (3d Cir. 2003)). Ultimately, the court concluded that “[a]t best,
[p]laintiff’s allegations demonstrate[d] a misuse or mismanagement of corporate funds that
ultimately resulted in [defendant entity’s] inability to sustain its business operations,” rather than
the type of “specific, unusual circumstances” which are required for veil-piercing purposes.” Id.
at 429.

53

Here, Plaintiff has provided nothing but conclusory allegations that Defendant Scott
Fischer “misused the corporate form in failing to observe corporate formalities in managing
Defendants Byana and [FIC]” and “operated Defendants Byana and Fischer Investment Capital
from his home address and used numerous bank accounts to transfer funds freely between and
among Defendants Byana and Fischer Investment Capital, together with various other Fischerrelated entities.” Compl. ¶¶239-246.
The record currently before this Court indicates that Byana made approximately $900,000
in transfers to the Fischer-related entities as follows 14: in early December 2006, two wire transfers
of $150,000.13 and $100,000 were made from Byana to FIC, SOMF ¶90; and on December 26,
2006, the same day as Tina Fagan’s second equity investment of $700,00, a wire transfer of
$650,000 was made from Byana to FIC, SOMF ¶93; on April 1, 2009, land was transferred to
Private Capital pursuant to an installment sale, SOMF ¶98.
The parties dispute the purpose of the transfers; Plaintiff contends that they were fraudulent
conveyances, while Mr. Fischer contends that they were repayments for the “$1 million advance”
which the Fischer-related entities made to Byana in order for Byana to purchase the properties
upon which the Derbyshire Project would be built. Irrespective of the legitimacy of the transfers,
as the court explained in Linus Holding Corp., the mere showing that the related-entities received
transfers of funds from Byana is insufficient to satisfy the first prong of the veil-piercing inquiry 15.

14

Plaintiff has not disputed the existence of these transfers or that they were made to Fischerrelated entities rather than Mr. Fischer himself, however, Plaintiff disputes the facts “to the
extent Defendants suggest they acted legitimately.” Pl. Resp. SOMF ¶¶81-97.
15

While the inter-company transfers, alone, cannot satisfy the alter-ego inquiry, the transfers, in
light of the dispute as to their legitimacy, suggest that “adherence to the fiction of separate
corporate existence would sanction a fraud or promote injustice,” arguably satisfying the second,
but not the first, prong of the piercing the corporate veil analysis. State Capital Title & Abstract
Co. v. Pappas Bus. Servs., 646 F. Supp. 2d at 679.
54

Plaintiff, after years of discovery, has not provided documentary support, aside from bank records
evidencing various transfers between the entities, for her alter ego theory. 376 F. Supp. 3d at 427
(refusing to pierce the corporate veil because even assuming alleged transfers constituted a
disregard of corporate formalities, the plaintiff otherwise failed to demonstrate the presence of any
of the other factors relevant to a veil-piercing analysis). Instead, Plaintiff conclusorily asserts that
her allegations have “only gained support through discovery.” Pl. Br. at 34. But Plaintiff has not
cited any authority to stand for the proposition that the mere transfer of funds amongst related
entities is a sufficient basis to pierce the corporate veil; nor has Plaintiff demonstrated that Byana
was undercapitalized at its inception, or any of the other alter ego factors. Moreover, Plaintiff has
not proffered evidence indicating that any of the funds were transferred to Mr. Fischer’s personal
bank accounts. Indeed, Mr. Fischer’s common ownership in those entities, and entities’ common
headquarters, is insufficient to justify piercing. Compare Preferred Real Estate Invs., LLC v.
Lucent Techs., Inc., No. 07-5374, 2009 WL 1748954, at *4 (D.N.J. June 19, 2009) (declining to
pierce the corporate veil where plaintiff merely alleged “common ownership,” a “common place
of business,” between defendant entity and related entities and that principals of other entities
utilized personal funds to facilitate the defendant entity’s purchase of properties and noting that
provision of funds “may simply be an investment”) with Operative Plasterers & Cement Masons
Int'l Ass'n Local 8 v. AGJ Const., LLC, No. 08-6163, 2009 WL 2243900, at *7 (D.N.J. July 24,
2009)(finding piercing the corporate veil appropriate to hold individual defendants liable where
plaintiff alleged that corporation was undercapitalized, and failed to observe corporate formalities
or maintain corporate records). In short, Plaintiff’s allegations fall short of establishing that Scott
Fischer disregarded Byana’s corporate form such that “the corporation is merely a facade.” Linus
Holding Corp., 376 F. Supp. 3d at 425.

55

Accordingly, summary judgment is granted, as to the claim of breach of the Byana
Promissory Notes against Scott Fischer only. However, Plaintiff’s breach of contract claim as to
the FIC promissory notes may proceed, as Scott Fischer appears to have personally guaranteed the
FIC Loan Modification agreement. 16
I.

Dismissal of Defendants Veronika Fischer, Funder, Bowder and Wealth
Capital

Defendants Veronika Fischer, Funder, Bowder, and Wealth Capital contend that they are
entitled to summary judgment on all of Plaintiff’s claims. Def. Br. at 46-48 In support of their
argument, Defendants contend that, as to the entity defendants, Plaintiff and her husband testified
at their depositions, that they did not know what these entities were or what their relationship is to
Scott Fischer and Byana. Def. Br. at 47. As to Mrs. Fischer, Defendants contend that Plaintiffs
have failed to proffer any evidence suggesting her involvement in the alleged fraudulent scheme,
and that Plaintiffs do not know, and have never spoken to Mrs. Fischer. Def. Br. at 46.
Plaintiff’s only remaining claims, against these defendants, are the common law fraud, and
aiding and abetting common law fraud claims. As outlined in this Opinion, in order to succeed on
a claim of common law fraud, a plaintiff must establish “(1) a material misrepresentation of a
presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an
intention that the other person rely on it; (4) reasonable reliance thereupon by the other person;
and (5) resulting damages.” Triffin, 926 A.2d at 368. In order to succeed on a claim for aiding
and abetting fraud, a plaintiff must establish “(1) the party whom the defendant aids must perform
a wrongful act that causes an injury; (2) the defendant must be generally aware of his role as part

16

In addition to the claim against Scott Fischer, Count XI also alleges breach of contract claims
against Byana and FIC. See Compl. ¶¶238-246. Those defendants did not move for summary
judgment on that count. Accordingly, the breach of contract claims against Byana and FIC proceed.
56

of an overall illegal or tortious activity at the time that he provides the assistance; [and] (3) the
defendant must knowingly and substantially assist the principal violation.” State, Dep't of
Treasury, 904 A.2d at 784.
Here, Plaintiff has pointed to nothing more than common-ownership between some of the
defendant entities, and the receipt of funds from Byana. That is insufficient. As discussed in this
Opinion, Mrs. Fischer had an ownership stake in Funder, an entity which has ownership stakes in
Private Capital and Bowder, and funds from Byana were transferred to those entities. Furthermore,
Mrs. Fischer received a salary from FIC. The parties dispute the purpose and legitimacy of the
transfers and the propriety of Mrs. Fischer’s salary, but undisputedly the record shows that the
transfers and payments were initiated and orchestrated by Mr. Fischer. Indeed, Plaintiff has not
proffered any evidence suggesting that Mrs. Fischer or those entities had any direct involvement
in the alleged fraud, such that they could be directly liable. More particularly, nothing in the record
suggests that Mrs. Fischer and the defendant entities were “generally aware of [their] role as part
of an overall illegal or tortious activity” at the time Scott Fischer allegedly perpetrated his
fraudulent scheme, or that they “ knowingly and substantially assist[ed] the principal violation.”
N.J. Dep't of Treasury, 904 A.2d at 784. Moreover, Plaintiff has not even alleged -- let alone
proved – that these defendants made any “material misrepresentations of a presently existing or
past fact,” that would subject them to direct liability for fraud. Triffin, 926 A.2d at 368.
Accordingly, Plaintiff’s fraud claims against these defendants are dismissed. 17

17

Although these defendants cannot be held directly liable on Plaintiff’s fraud claims, this Opinion
does not address whether Plaintiff, in the event she obtains a judgment against Byana, FIC, or Scott
Fischer, could seek to recover any funds allegedly transferred to Veronika Fischer, Funder,
Bowder, or Wealth Capital, in a post-judgment lawsuit, based on the premise that any such
transfers were fraudulent conveyances.
57

IV.

CONCLUSION
For the reasons set forth above, Defendants’ Motion for Summary Judgment is GRANTED

IN PART and DENIED IN PART. Summary Judgment is GRANTED in favor of defendants
Veronika Fischer, Bowder, Funder, and Wealth Capital, on all of the claims against them, and
those defendants are dismissed from this lawsuit. Summary Judgment is also GRANTED in favor
of Scott Fischer, Brian E. Carroll, Private Capital, FIC, and Byana on Counts I (Federal RICO), II
(conspiracy to violate RICO), III (NJ RICO), IV (Violation of Section 10(b) of the Securities’
Exchange Act and Securities Rule 10b-5), V (the New Jersey Uniform Securities Act), VIII
(Equitable Fraud), IX (Conversion), X (Unjust Enrichment), XIV (Breach of Fiduciary Duty).
Defendants Scott Fischer, Brian E. Carroll, Private Capital, FIC, and Byana’s Motion for Summary
Judgment as to Counts VI (Common Law Fraud/Fraud in the Inducement), and VII (Aiding and
Abetting Common Law Fraud) is DENIED. Scott Fischer’s Motion for Summary Judgment
motion on Count XI (Breach of Contract) is DENIED, but the claim is limited to the Breach of
the FIC Promissory Note as outlined in this Opinion. Furthermore, Michael Fagan is dismissed as
a plaintiff due to lack of standing.

Date: October 30, 2019
/s/ Freda L. Wolfson
Hon. Freda L. Wolfson
U.S. Chief District Judge

58