Oneida Savings Bank et al v. Uni-Ter Underwriting Management Corporation et al
Filing
56
MEMORANDUM-DECISION AND ORDER granting in part and denying in part 33 Motion to Dismiss for Failure to State a Claim; granting in part and denying in part 35 Motion to Dismiss for Failure to State a Claim; granting 44 Motion to Amend/Correct : The Court hereby ORDERS that Defendants' motions to dismiss (Dkt. Nos. 33, 35) are GRANTED in part and DENIED in part; and the Court further ORDERS that Plaintiffs' cross-motion to amend (Dkt. No. 44) is GRANTED; and the Court further ORD ERS that each of Plaintiffs' claims as to Defendants Davies and UCSC are DISMISSED; and the Court further ORDERS that Plaintiffs' constructive trust claim is DISMISSED; and the Court furtherORDERS that Plaintiffs' request for punitive damages is DISMISSED; and the Court further ORDERS that Plaintiffs shall file and serve their Amended Complaint within fourteen (14) days of this order in accordance with the Local Rules. Signed by U.S. District Judge Mae A. D'Agostino on 09/18/2014. (ban)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
____________________________________________
ONEIDA SAVINGS BANK;
MARQUIS COMPANIES I, INC.;
PINNACLE HEALTHCARE, INC.;
ROHM SERVICES CORPORATION;
HEATHWOOD HEALTH CARE CENTER, INC.;
EAGLE HEALTHCARE, INC.,
Plaintiffs,
vs.
5:13-CV-746
(MAD/ATB)
UNI-TER UNDERWRITING MANAGEMENT
CORPORATION; UNI-TER CLAIMS SERVICES
CORPORATION; U.S. RE COMPANIES, INC.;
SANFORD ELSASS; DONNA DALTON;
JONNA MILLER; RICHARD DAVIES,
Defendants.
____________________________________________
APPEARANCES:
OF COUNSEL:
HISCOCK & BARCLAY, LLP
One Park Place
300 South State Street
Syracuse, New York 13202-2078
Attorneys for Plaintiffs
DAVID G. BURCH, JR., ESQ.
GABRIEL M. NUGENT, ESQ.
KAREN S. SOUTHWICK, ESQ.
CARLTON FIELDS, P.A.
405 Lexington Avenue, 29th Floor
New York, New York 10174-0002
Attorneys for Defendants
Uni-Ter Underwriting Management Corporation,
Uni-Ter Claims Services Corporation,
U.S. RE Companies, Inc.,
Jonna Miller, and
Richard Davies
BRIAN ROSNER, ESQ.
NATALIE A. NAPIERALA, ESQ.
JUSTAN CALEAF BOUNDS, ESQ.
WALTER HOLLOWAY BUSH, ESQ.
MORRISON & FOERSTER, LLP
250 West 55th Street
New York, New York 10019
Attorneys for Defendants
Sanford Elsass and Donna Dalton
Mae A. D'Agostino, U.S. District Judge:
JAMIE A. LEVITT, ESQ.
JAMES J. BEHA, II, ESQ.
MEMORANDUM-DECISION AND ORDER
I. INTRODUCTION
On June 25, 2013, Plaintiffs commenced this action alleging claims under the federal
securities laws and state common law arising out of Defendants' alleged false representations,
which Plaintiffs claim induced them to make additional investments in a now-defunct insurance
company. See Dkt. No. 1 ("Complaint"). Presently before the Court are Defendants separate but
similar motions to dismiss the Complaint, see Dkt. Nos. 33, 35, and Plaintiffs' cross-motion to
amend the Complaint, see Dkt. No. 44. For the reasons stated below, the motions to dismiss are
granted in part and denied in part, and the cross-motion to amend is granted.
II. BACKGROUND
A.
Plaintiffs' Allegations1
Plaintiffs Oneida Savings Bank ("Oneida"), Marquis Companies I, Inc. ("Marquis"),
Pinnacle Healthcare, Inc. ("Pinnacle"), Rohm Services Corporation ("Rohm"), Heathwood
Healthcare Center, Inc. ("Heathwood"), and Eagle Healthcare, Inc. ("Eagle") (collectively,
"Plaintiffs"), allege that Defendant Uni-Ter Underwriting Management Corporation ("Uni-Ter"),
at the direction of its co-Defendant and parent company U.S. Re Companies, Inc. ("U.S. Re"),
fraudulently and unlawfully induced Plaintiffs to invest $2,200,000 in convertible debentures in
Lewis & Clark LTC Risk Retention Group, Inc. ("Lewis & Clark"). Dkt. No. 44-1, Exh. A
("Proposed Amended Complaint") ¶¶ 1-3.
During the time period at issue here, Defendants Sanford Elsass and Donna Dalton were
This background is derived from the allegations in Plaintiffs' proposed amended
complaint. These allegations are presumed to be true only for the purposes of this motion, and do
not constitute findings of fact by the Court.
1
2
the President and Chief Executive Officer, and Chief Operating Officer and Chief Financial
Officer, respectively, of Uni-Ter. Id. ¶¶ 16-17. Defendant Jonna Miller was the Vice President of
Claims at Uni-Ter, and Defendant Richard Davies was the Chief Financial Officer of U.S. Re. Id.
¶¶ 18-19.
Lewis & Clark is an insurance company that provides professional liability insurance to
nursing homes, assisted living facilities, and other long-term care ("LTC") facilities through a risk
retention group structure. Risk retention group entities are similar to captive insurance
companies, except for the following differences: risk retention groups include multiple
policyholders, rather than a single policyholder; policyholders must be equity owners in risk
retention groups; risk retention groups are limited to providing only liability coverage; and risk
retention groups retain liability for small claims risk and reinsure against large losses. Under a
risk retention group model, a "shell" insurance company is created, which in turn contracts with
third-party organizations to provide management services, underwriting services, claims
management services, risk management services, and reinsurance. Id. ¶¶ 24-27.
In 2004, following a series of discussions between an affiliate of Plaintiff Oneida, Bailey
& Haskell Associates, Inc., and Defendant Elsass, Oneida agreed to provide capital for the
creation of a LTC risk retention group. Thereafter, Uni-Ter formed an entity known as Henry
Hudson Risk Retention Group, Inc., whose market for the sale of general and professional
liability insurance to LTC facilities was New York State north of Westchester County. At the
beginning of 2004, Uni-Ter also formed Lewis & Clark to sell the same products in the states of
Washington, Oregon, and Idaho. In early 2005, Henry Hudson and Lewis & Clark merged their
operations under Lewis & Clark. At that time, Oneida provided capital to Lewis & Clark in the
amount of $1.75 million in the form of a subordinated debenture ("Onieda Debenture"). Each of
3
the Plaintiffs appointed an individual to represent them on Lewis & Clark's Board of Directors.
Id. ¶¶ 36-45.
Lewis & Clark, which has no employees of its own, engaged Uni-Ter pursuant to a
management agreement to provide all of the insurance company services necessary to run it,
including the placement of reinsurance with third parties. Pursuant to the terms of the
management agreement, Uni-Ter was to act as a fiduciary of Lewis & Clark and manage its
business. In addition, Uni-Ter and its co-Defendant Uni-Ter Claims Services Corporation
("UCSC") were to receive management fees in the form of commissions, claims handling fees,
and a profit sharing bonus. In 2010 and 2011, Uni-Ter earned at least $1.5 million and $1.0
million, respectively, in management fees. The management agreement also obligated Uni-Ter
and UCSC to provide complete and accurate information regarding the operations of Lewis &
Clark to Plaintiffs. Id. ¶¶ 28-32, 46.
Lewis & Clark operated successfully and profitably in each of the four calendar years
from 2007-2010. In July 2009, Lewis & Clark, at Uni-Ter’s direction, accepted two Californiabased, multi-site LTC operators as policyholders. This decision was a divergence from the
established business model of Lewis & Clark in several respects: it was the first time Lewis &
Clark chose to insure a large multi-facility operator; these LTC operators had historical loss
records outside Lewis & Clark's typical underwriting range; and one of the contracts contained an
unprecedented provision that limited the claims exposure of Lewis & Clark on an aggregate level
rather than on a claim-specific level. Id. ¶¶ 48-51.
In the first three quarters of calendar year 2011 ending September 30, 2011, Lewis &
Clark experienced a net loss of $3.1 million. The principal reason for this loss, along with
increases in claims reserves for other insureds, was that the two new California-based insureds
4
had passed on significant losses to Lewis & Clark in the two policy years from July 2009 to July
2011. Lewis & Clark did not renew coverage for the two new California-based insureds in July
2011. Id. ¶¶ 52, 54.
On or about September 1, 2011, Defendants Elsass and Dalton sent a memorandum to the
Lewis & Clark Board of Directors to outline the recent events causing financial difficulties and
"Uni-ter's proposed action plan." Included in that action plan memorandum was a representation
that Uni-Ter would hire "[a] consultant . . . to do a complete analysis of the claims process of
[UCSC]" and that "[w]e should have his [sic] report to share with the board at the September 21st
meeting.["] Prior to the September 21, 2011 Board of Directors meeting, Defendant Dalton
transmitted a package of materials to each member of the Board of Directors, which included a
report from the consultant retained by Uni-Ter, Praxis Claims Consulting ("Praxis"), dated
September 15, 2011. Id. ¶¶ 59, 63.
On or about September 21, 2011, the Lewis & Clark Board of Directors held a meeting in
Las Vegas, Nevada. At that meeting, which was attended in person or by phone by each of the
Directors representing Plaintiffs, as well as Defendants Elsass, Dalton, Miller, and Davies,
Uni-Ter presented the amount of the expected claims and the amount of the significantly
increased claims reserves to the Board. Defendant Elsass informed the Board that the revised
claims reserves were adequate to cover existing and anticipated claims. At that time, Defendants
Elsass and Dalton both represented to the Plaintiffs that the one-time operating loss would not
result in a financial disruption of Lewis & Clark and that it retained sufficient capital to support
its operations and payment of the Oneida Debenture. A representative of Praxis also presented its
September 15, 2011 report and raised no concerns with Lewis & Clark's claims reserves. The
Praxis report reviewed the reserve methodology in a sample of nine claim files, and did not find
5
fault with any of those claims or recommend any addition to the loss reserve for any of those
claims.
Also during the September 21, 2011 meeting, Defendant Dalton presented the "GAAP
Proforma Financial Statement for Period Ending December 31, 2011" that Uni-Ter had prepared
for Lewis & Clark. This financial statement did not raise any question as to Lewis & Clark's
ability to continue as a going concern and reflected a healthy capital structure, including only the
existing claims reserves. During the September 21, 2011 meeting, the Directors (Plaintiffs'
representatives) asked Uni-Ter's representatives, Defendants Elsass and Miller, whether there
were any claims developments not previously reported. Ms. Miller replied that there were none,
and Mr. Elsass agreed—stating that there were none. Mr. Davies of U.S. Re said nothing. Ms.
Dalton also remained silent. Ultimately, Defendant Elsass requested that Plaintiffs make
additional investments in Lewis & Clark in order to, inter alia, preserve Lewis & Clark’s good
standing with the Nevada Department of Insurance and an acceptable premium-to-equity ratio.
Id. ¶¶ 55-58, 60-66.
Subsequently, on November 7, 2011, the Board of Directors held a telephonic meeting to
discuss the requested additional investment, and Defendants Elsass and Dalton again reassured
the Plaintiffs, with Mr. Davies and U.S. Re’s acquiescence, that this capital infusion would satisfy
Lewis & Clark’s capital needs and that the claims reserves were adequate. With the assurances
from Uni-Ter and U.S. Re at the Board of Directors meetings on September 21, 2011, and
November 7, 2011, Plaintiffs committed to invest an aggregate of $2,200,000 in Lewis & Clark
through additional debentures ("November 2011 Debentures"). Id. ¶¶ 67-68.
Despite Defendants Elsass' and Dalton's earlier representation on September 1, 2011 that
Praxis had been retained to do a complete claims analysis, the Lewis & Clark Board of Directors
6
later learned that Uni-Ter and U.S. Re limited the scope of Praxis' initial engagement (which
resulted in the September 15, 2011 report) to a review of claims-related processes and of a small
sample size of nine specific claims reserves. In late November 2011, Uni-Ter, at U.S. Re's
direction, conducted a full-scale internal review of all claims reserves and subsequently engaged
Praxis to also conduct a full-scale review. The internal review was initiated based on Uni-Ter’s
and U.S. Re’s concerns raised in the September 15, 2011 Praxis report about the adequacy of
claims reserves. Before the September 21, 2011 meeting, U.S. Re, Uni-Ter, Mr. Elsass, Ms.
Dalton, Ms. Miller, and Mr. Davies knew that Praxis was going to be evaluating the amount of
Lewis & Clark’s loss reserves because it was likely that the reserves needed to be materially
larger. They intentionally misrepresented this material claims development information to
Plaintiffs' representatives at the September 21, 2011 meeting. Id. ¶¶ 75, 77-78
U.S. Re required Uni-Ter to retain Praxis in December 2011 to complete its full claims
review, because U.S. Re had doubts about the adequacy of Lewis & Clark's reserves based on the
significantly adverse findings of the internal review. Neither Uni-Ter nor U.S. Re disclosed these
doubts to the Plaintiffs despite U.S. Re's knowledge at the time that Uni-Ter's internal review was
very negative. The December 2011 review found that Uni-Ter had understated the sampled
claims in the September 15 report by a net $1,200,000. At some point following the December
review performed by Praxis, Uni-Ter and U.S. Re informed the Lewis & Clark Board of Directors
on a conference call that, in fact, an increase of $5 million to the claims reserves was necessary
based on the Praxis full-scale review. This significantly increased the net loss of Lewis & Clark
on a full 2011 year basis and further decreased Lewis & Clark’s capital to an unacceptable level
for operational, regulatory, and rating purposes. Id. ¶¶ 64, 79-81
At the time of their additional investments on November 7, 2011, Plaintiffs were not
7
aware of the significant reserve concerns raised to Uni-Ter and U.S. Re by Praxis in September
2011, but not expressed to the Lewis & Clark Board of Directors. Further, Plaintiffs were led to
believe by Uni-Ter that the September Praxis report represented a complete review of the claims
process (not just the sample size review reported upon by Praxis), giving them comfort in
Uni-Ter's and U.S. Re's representations at the September 21 Board Meeting that claims reserves
were adequate. Id. ¶ 82.
Uni-Ter's and U.S. Re's motive for making these misrepresentations and omitting these
material facts was to delay Lewis & Clark's insolvency and increase its capital available to pay
claims before Lewis & Clark's reinsurance policy was triggered. U.S. Re, as a broker of
reinsurance, had brokered Lewis & Clark's reinsurance through policy issuer BeazelyRe.
Increasing Lewis & Clark's capital by $2,200,000 lowered the exposure of the reinsurance policy
U.S. Re had brokered by a similar amount, mitigated any claims of self-dealing BeazelyRe may
have against U.S. Re for self-dealing in a policy U.S. Re knew would be triggered, and protected
U.S. Re's reputation in the reinsurance business. The delay of insolvency also allowed Uni-Ter to
continue receiving management fees for its services to Lewis & Clark and to expand its market
share to new policyholders. Id. ¶¶ 85-87.
Immediately after Plaintiffs executed the November 2011 Debentures, Uni-Ter prepared
and issued an Offering Memorandum seeking additional equity investments in Lewis & Clark
("November 2011 Offering"). Uni-Ter issued the Offering Memorandum to LTC facilities, home
health care business, and others in an attempt to sell securities to additional insured parties. At
the time Uni-Ter prepared and issued the Offering Memorandum, it knew that the Offering
Memorandum failed to disclose material adverse information, such as the existence of the review
by Praxis. The Offering Memorandum concealed the true financial position of Lewis & Clark.
8
For example, it stated:
The Company has experienced signification [sic] underwriting
losses in 2011 and has increased its capital by $2,220,000 as a result
of surplus note contributions and, as a result, had a capital and
surplus of approximately $3.7 million as of September 30, 2011
(See "Additional Financing")[.] A summary of the Company's most
recent financial statement is attached hereto as Exhibit E.
It is expected that the net proceeds generated from this Offering of
the Company's Shares will provide additional funds for the
Company to continue operations and to comply with all applicable
capitalization requirements under the laws of Nevada.
Uni-Ter had told the Plaintiffs that once the Plaintiffs paid for the November 2011 Debentures,
the capital of Lewis & Clark would be sufficient to continue operations. Id. ¶¶ 89-93.
Uni-Ter, as a manager of other risk retention groups servicing the same market as Lewis
& Clark, was in a position to capture additional business for its other risk retention groups from
the new insured parties obtained through the November 2011 Offering, which was made possible
only by the November 2011 Debentures. The November 2011 Debentures also delayed the
inevitable dissolution of Lewis & Clark long enough for Uni-Ter to expand its market share and
gain additional insured parties that it could simply service through the other risk retention groups
Uni-Ter controlled after Lewis & Clark dissolved. Id. ¶ 95
During a December 20, 2011 telephonic Board of Directors meeting, Uni-Ter and U.S. Re
informed Plaintiffs of Praxis' full claims review, its findings, and the adverse financial
developments of Lewis & Clark. Citing to the Praxis audit findings, Uni-Ter and U.S. Re
informed the Lewis & Clark Board of Directors that Lewis & Clark's reserves were inadequate
and that urgent action was required to preserve Lewis & Clark's capital structure. Id. ¶¶ 99-100.
None of Uni-Ter's or U.S. Re's subsequent efforts to preserve Lewis & Clark's capital
structure succeeded, and it ultimately entered a dissolution proceeding under Nevada law on or
9
about November 11, 2012. All of Plaintiffs' investments in Lewis & Clark, including November
2011 Debentures, have been lost. Id. ¶¶ 103-104.
Based on the foregoing allegations, Plaintiffs have made the following claims for relief:
(1) a violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") against
Defendants Uni-Ter, Elsass, Dalton, Miller, and Davies; (2) a violation of Section 20(a) of the
Exchange Act against Defendant U.S. Re; (3) common law fraud against all Defendants; (4)
constructive fraud against all Defendants; (5) negligent misrepresentation against all Defendants;
(6) fraudulent inducement against all Defendants; and (7) constructive trust against Defendants
Uni-Ter and UCSC. Plaintiffs also claim that they are entitled to punitive damages by virtue of
Defendants' willful, fraudulent, malicious, and oppressive conduct. Id. ¶¶ 106-159.
B.
Defendants' Motions to Dismiss
Defendants Uni-Ter, UCSC, U.S. RE, Miller, and Davies (collectively, the "Uni-Ter
Defendants") move to dismiss pursuant the Complaint to Fed. R. Civ. P. 12(b)(6) for failure to
state a claim. Dkt. No. 35-1. Defendant Miller individually moves to dismiss the Complaint
pursuant to Fed. R. Civ. P. 12(b)(2) for lack of personal jurisdiction. Id. The Uni-Ter Defendants
first argue that Plaintiffs fail to state a claim under Section 10(b) of the Exchange Act. Id. at 1120. Specifically, they contend that the Complaint does not adequately allege a misstatement or
omission made by each of the defendants. They also contend that the Complaint does not plead
facts supporting a strong inference of scienter for each relevant defendant. The Uni-Ter
Defendants further contend that the Complaint does not allege reasonable reliance on any alleged
misrepresentation or omission, and does not adequately plead facts alleging loss causation.
Second, the Uni-Ter Defendants argue that Plaintiffs' "control person" claim pursuant to
Section 20(a) of the Exchange Act should be dismissed because that claim is dependent on a
10
Section 10(b) claim, which Plaintiffs have failed to adequately allege. Id. at 20-23. The Uni-Ter
Defendants further assert that the Section 20(a) claim is subject to dismissal for Plaintiffs' failure
to plead facts supporting a reasonable inference of control by U.S. Re of Uni-Ter. Moreover, the
Uni-Ter Defendants contend that the Complaint fails to plead with particularity that U.S. Re knew
or should have known that the primary violators (i.e., the Defendants against whom the first claim
for relief is interposed) were engaged in fraudulent conduct.
Third, the Uni-Ter Defendants argue that all of Plaintiffs' remaining state law claims
should be dismissed. Id. at 23-30. They assert that, assuming the federal claims are dismissed,
the Court should decline to exercise supplemental jurisdiction over the state law claims. Even if
the Court does not dismiss the federal claims or decides to exercise supplemental jurisdiction, the
Uni-Ter Defendants contend that the state law claims should be dismissed because of Plaintiffs'
failure to allege a material misrepresentation or reasonable reliance thereon. The Uni-Ter
Defendants also contend that Plaintiffs' common law fraud and fraudulent inducement claims fail
for lack of adequate pleading of scienter, and that the constructive trust claim fails because there
is a valid and enforceable agreement between the parties and for lack of any allegation that
Defendants were unjustly enriched at Plaintiffs' expense.
Fourth, the Uni-Ter Defendants argue that Plaintiffs' claim for punitive damages must be
dismissed because Plaintiffs have not alleged an "egregious tort directed at the public at large."
Id. at 30-31 (citation omitted).
Finally, Defendant Miller asserts that all of Plaintiffs' claims against her should be
dismissed for lack of personal jurisdiction. Id. at 31-37.
Defendants Elsass and Dalton also seek dismissal of each of Plaintiffs' claims against
them, raising many of the same issues as the Uni-Ter Defendants. First, Elsass and Dalton argue
11
that Plaintiffs' fraud and negligent misrepresentation claims, which are both governed by Fed. R.
Civ. P. 9(b)'s particularity requirements, fail to adequately allege the "who, what, where, when" of
any alleged misstatements. Dkt. No. 33-1 at 14-18. Specifically, Elsass and Dalton contend that
the Complaint does not allege who made any of the alleged misstatements, and instead refers to
alleged misstatements made by "Uni-Ter" or the "defendants" generally. Elsass and Dalton also
contend that the Complaint does not allege precisely what was actually said, nor does it allege
that they knew Miller's statement that there were no claims developments not previously reported
was false and that they had a duty to correct that statement. Next, Elsass and Dalton contend that
the Complaint fails to allege why and how any of the alleged misstatements were false and
misleading.
Second, Elsass and Dalton argue that Plaintiffs' fraud claims fail to allege facts supporting
a strong inference of scienter by way of either (a) motive and opportunity or (b) conscious
misbehavior or recklessness. Id. at 18-24. In particular, Elsass and Dalton assert that the
Complaint does not identify any concrete benefits realized by Elsass or Dalton as a result of any
false statements or wrongful nondisclosures, nor does the Complaint allege any individualized
motive to do so. With respect to recklessness, Elsass and Dalton assert that the Complaint does
not sufficiently allege that they had specific contradictory information at the time they made the
allegedly false statements. Elsass and Dalton further assert that Uni-Ter's own investment in
Lewis & Clark at the time of the allegedly fraudulent misstatements negates any inference of
scienter. Elsass and Dalton also assert that the allegations in the Complaint actually give rise to a
"non-fraudulent inference." Id. at 23. That is, Uni-Ter promptly disclosed all negative
information and attempted in good faith to save the business of Lewis & Clark.
Last, Elsass and Dalton argue that Plaintiffs' claim for punitive damages should be
12
dismissed because Plaintiffs do not allege an "egregious tort directed at the public at large," as
required under New York law. Id. at 25.
C.
Plaintiffs' Cross-Motion to Amend
Plaintiffs maintain that Defendants' motions to dismiss should be denied in all respects. In
the alternative, Plaintiffs seek leave to file an amended complaint. Dkt. Nos. 44; 45 at 45-46.
The Proposed Amended Complaint does not seek to add any new claims or parties. Rather, it
adds additional detail regarding certain elements of Plaintiffs' claims. Plaintiffs argue that the
motion should be granted because the Federal Rules provide that leave to amend should be "freely
given," and because amendment at this stage of the litigation would not require Defendants to
expend additional resources, nor would amendment delay resolution of the dispute.
III. DISCUSSION
A.
Legal Standards
1.
Motion to Dismiss Pursuant to Fed. R. Civ. P. 12(b)(6)
A motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) of the Federal
Rules of Civil Procedure tests the legal sufficiency of the party's claim for relief. See Patane v.
Clark, 508 F.3d 106, 111-12 (2d Cir. 2007). In considering the legal sufficiency, a court must
accept as true all well-pleaded facts in the pleading and draw all reasonable inferences in the
pleader's favor. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007)
(citation omitted). This presumption of truth, however, does not extend to legal conclusions. See
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949-50 (2009) (citation omitted). Although a court's review
of a motion to dismiss is generally limited to the facts presented in the pleading, the court may
consider documents that are "integral" to that pleading, even if they are neither physically
attached to, nor incorporated by reference into, the pleading. See Mangiafico v. Blumenthal, 471
13
F.3d 391, 398 (2d Cir. 2006) (quoting Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d
Cir. 2002)).
To survive a motion to dismiss, a party need only plead "a short and plain statement of the
claim," see Fed. R. Civ. P. 8(a)(2), with sufficient factual "heft to 'sho[w] that the pleader is
entitled to relief[,]'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007) (quotation omitted).
Under this standard, the pleading's "[f]actual allegations must be enough to raise a right of relief
above the speculative level," see id. at 555 (citation omitted), and present claims that are
"plausible on [their] face," id. at 570. "The plausibility standard is not akin to a 'probability
requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully."
Iqbal, 129 S. Ct. at 1949 (citation omitted). "Where a complaint pleads facts that are 'merely
consistent with' a defendant's liability, it 'stops short of the line between possibility and
plausibility of "entitlement to relief."'" Id. (quoting [Twombly, 550 U.S.] at 557, 127 S. Ct. 1955).
Ultimately, "when the allegations in a complaint, however true, could not raise a claim of
entitlement to relief," Twombly, 550 U.S. at 558, or where a plaintiff has "not nudged [its] claims
across the line from conceivable to plausible, the[] complaint must be dismissed[,]" id. at 570.
2.
Motion to Dismiss Pursuant to Fed. R. Civ. P. 12(b)(2)
On a Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction, the "plaintiff bears
the burden of establishing that the court has jurisdiction over the defendant." In re Magnetic
Audiotape Antitrust Litig., 334 F.3d 204, 206 (2d Cir. 2003). However, when the issue is decided
"[p]rior to discovery, a plaintiff challenged by a jurisdiction testing motion may defeat the motion
by pleading in good faith . . . legally sufficient allegations of jurisdiction, i.e., by making a prima
facie showing of jurisdiction." Jazini v. Nissan Motor Co., 148 F.3d 181, 184 (2d Cir. 1998)
(citations and internal quotation marks omitted); see PDK Labs, Inc. v. Friedlander, 103 F.3d
14
1105, 1108 (2d Cir. 1997). "In deciding [a] pretrial motion to dismiss for lack of personal
jurisdiction, the court has considerable discretion." Landry v. Price Waterhouse Chartered
Accountants, 715 F. Supp. 98, 100 (S.D.N.Y. 1989).
3.
Motion to Amend Pursuant to Fed. R. Civ. P. 15(a)
A motion for leave to amend a complaint is governed by Rule 15 of the Federal Rules of
Civil Procedure, which states that leave to amend a complaint should be freely given "when
justice so requires." Fed. R. Civ. P. 15(a)(2); Foman v. Davis, 371 U.S. 178, 182 (1962); Manson
v. Stacescu, 11 F.3d 1127, 1133 (2d Cir. 1993). Pursuant to Fed. R. Civ. P. 15(a)(2), leave to
amend a complaint should be freely given in the absence of any apparent or declared reason to not
grant leave to amend, such as undue delay, bad faith or dilatory motive on the part of the movant,
repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the
opposing party by virtue of allowance of the amendment, or futility of amendment. See Foman,
371 U.S. at 182; S.S. Silberblatt, Inc. v. E. Harlem Pilot Block–Bldg. 1 Hous., 608 F.2d 28, 42 (2d
Cir. 1979); Meyer v. First Franklin Loan Servs, Inc., No. 08–CV–1332, 2010 WL 277090, *1
(N.D.N.Y. Jan. 19, 2010); Jones v. McMahon, No. 98–CV–0374, 2007 WL 2027910, *10
(N.D.N.Y. July 11, 2007). Where, as here, plaintiffs seek to amend their complaint while a
motion to dismiss is pending, a court "has a variety of ways in which it may deal with the pending
motion to dismiss, from denying the motion as moot to considering the merits of the motion in
light of the amended complaint." Roller Bearing Co. of Am., Inc. v. Am. Software, Inc., 570 F.
Supp. 2d 376, 384 (D. Conn. 2008) (internal quotation marks and alteration omitted).
"An amendment to a pleading is futile if the proposed claim could not withstand a motion
to dismiss pursuant to Fed. R. Civ. P. 12(b)(6)." Annunziato v. Collecto, Inc., 293 F.R.D. 329,
333 (E.D.N.Y. 2013) (citing Lucente v. Int'l Bus. Machs. Corp., 310 F.3d 243, 258 (2d Cir.
15
2002)). "Therefore a proposed amendment is not futile if it states a claim upon which relief can
be granted." Waltz v. Board of Educ. of Hoosick Falls Cent. School Dist., No. 1:12–CV–0507,
2013 WL 4811958, *4 (N.D.N.Y. Sept. 10, 2013) (citations omitted).
As Defendants have had sufficient opportunity to respond to the proposed amended
complaint, and Plaintiffs do not seek to add new defendants or claims, the merits of the motion to
dismiss will be considered in light of the proposed amended complaint. See Haag v. MVP Health
Care, 966 F. Supp. 2d 137, 140 (N.D.N.Y. 2012). If the proposed amended complaint cannot
survive the motion to dismiss, then Plaintiffs' cross-motion to amend will be denied as futile. See
Dougherty v. Town of N. Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 88 (2d Cir. 2002).
B.
Exchange Act Claims
1.
Section 10(b)
As noted, Plaintiffs' principal securities fraud claims are brought pursuant to section 10(b)
of the Exchange Act, 15 U.S.C. § 78j(b), which makes it unlawful "[t]o use or employ, in
connection with the purchase or sale of any security . . . or any securities-based swap agreement[,]
any manipulative or deceptive device or contrivance in contravention of such rules and
regulations as the [Securities and Exchange] Commission may prescribe as necessary or
appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b) (footnote
omitted). Rule 10b–5, promulgated by the Securities and Exchange Commission pursuant to
Section 10(b), provides:
It shall be unlawful for any person, directly or indirectly, by the use
of any means or instrumentality of interstate commerce, or of the
mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to
defraud,
(b) To make any untrue statement of a material fact
16
or to omit to state a material fact necessary in order
to make the statements made, in the light of the
circumstances under which they were made, not
misleading, or
(c) To engage in any act, practice, or course of
business which operates or would operate as a fraud
or deceit upon any person, in connection with the
purchase or sale of any security.
17 C.F.R. § 240.10b–5.
To state a claim based on a misrepresentation or omission in violation of Rule 10b–5,
plaintiffs must allege that a defendant "(1) made misstatements or omissions of material fact; (2)
with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs
relied; and (5) that plaintiffs' reliance was the proximate cause of their injury." Lentell v. Merrill
Lynch & Co., 396 F.3d 161, 172 (2d Cir. 2005) (quoting In re IBM Corp. Sec. Litig., 163 F.3d
102, 106 (2d Cir. 1998) (internal quotation marks omitted)), cert. denied, 546 U.S. 935 (2005).
The Private Securities Litigation Reform Act ("PSLRA") requires a complaint to "specify
each statement alleged to have been misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement or omission is made on information and
belief, . . . all facts on which that belief is formed," 15 U.S.C. § 78u–4(b)(1), and further requires
that the complaint "state with particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind," Dura Pharms., Inc. v. Broudo, 544 U.S. 336,
345 (2005). Similarly, Rule 9(b) of the Federal Rules of Civil Procedure requires a "securities
fraud complaint based on misstatements [to] (1) specify the statements that the plaintiff contends
were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and
(4) explain why the statements were fraudulent." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493
F.3d 87, 99 (2d Cir. 2007).
17
a.
Misstatement or omission of material fact
As noted above, to sufficiently allege material misrepresentations or misstatements as part
of a Section 10(b) claim, Plaintiffs must satisfy the heightened pleading standards of both Rule
9(b) and the PSLRA and "(1) specify the statements that the plaintiff contends were fraudulent,
(2) identify the speaker, (3) state where and when the statements were made, and (4) explain why
the statements were fraudulent." Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004); see also
15 U.S.C. § 78u–4(b)(1, 2) (delineating requirements for PSLRA fraud actions). "[The]
materiality requirement is satisfied when there is a substantial likelihood that the disclosure of the
omitted fact would have been viewed by the reasonable investor as having significantly altered
the 'total mix' of information made available." Matrixx Initiatives, Inc. v. Siracusan, 131 S.Ct.
1309, 1318 (2011) (internal quotation marks and citation omitted).
Here, Defendants contend that Plaintiffs have failed to allege who made each alleged
misstatement and, correspondingly, failed to allege a misstatement or omission on the part of each
defendant. Defendants also contend that Plaintiffs' vague allegations regarding each defendant's
alleged misstatement does not sufficiently identify what was actually said by each defendant.
Nor, according to Defendants, do Plaintiffs allege why any of the alleged misstatements were, in
fact, false.
To plead a claim against individual defendants under Section 10(b), a plaintiff must allege
that the particular defendant "'made' the material misstatements." Janus Capital Grp., Inc. v.
First Derivative Traders, 131 S.Ct. 2296, 2301 (2011) (quoting 17 C.F.R. § 240.10b–5(b)).
Specifically, "'[w]here multiple defendants are asked to respond to allegations of fraud, the
complaint should inform each defendant of the nature of his alleged participation in the fraud.'"
DeBlasio v. Merrill Lynch & Co., Inc., No. Civ. 318, 2009 WL 2242605, *10 (S.D.N.Y. July 27,
18
2009) (quoting DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir.
1987)); see also Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993). A plaintiff
"may not rely upon blanket references to acts or omissions by all of the defendants, for each
defendant named in the complaint is entitled to be [apprised] of the circumstances surrounding the
fraudulent conduct with which he individually stands charged." DeBlasio, 2009 WL 2242605, at
*13 (internal quotation marks omitted); see also Filler v. Hanvit Bank, Nos. 01 Civ. 9510, 02 Civ.
8251, 2003 WL 22110773, *3 (S.D.N.Y. Sept. 12, 2003) (holding that the plaintiffs had failed to
meet the requirements of Rule 9(b) because they failed to "make allegations with respect to each
defendant, but instead refer[red] only generally to the defendants as 'the Banks' or 'the Korean
Banks'").
In the present matter, the Court finds that Plaintiffs have alleged in sufficient detail to
meet the pleading requirements of Rule 9(b) and the PSLRA that Defendants Uni-Ter, Elsass,
Dalton, and Miller each made material misrepresentations. Plaintiffs allege that Mr. Elsass
informed the Lewis & Clark Board of Directors at the September 21, 2011 board meeting "that
the revised claims reserves were adequate to cover existing and anticipated claims," and that he
and Ms. Dalton both represented that "the one-time operating loss would not result in a financial
disruption of Lewis [&] Clark and that Lewis & Clark retained sufficient capital to support its
operations and payment of the Oneida Debenture." According to Plaintiffs, Ms. Dalton also
presented a financial statement for Lewis & Clark at the September 21, 2011 board meeting,
which reflected a healthy capital structure and included only the existing claims reserves.
Plaintiffs also allege that in response to their question at that meeting whether there were any
claims developments not previously reported, Ms. Miller replied that there were none and Mr.
Elsass agreed and stated that there were none. Moreover, Plaintiffs allege that at the November 7,
19
2011 teleconference, Mr. Elsass and Ms. Dalton again "reassured Plaintiffs that the capital
infusion from the November 2011 Debentures would satisfy Lewis & Clark's capital needs and
that the claims reserves were adequate." These representations were false, Plaintiffs allege,
because Mr. Elsass, Ms. Miller, and Ms. Dalton knew "it was likely that the reserves needed to be
materially larger. . . [and] intentionally misrepresented this material claims development
information to the representatives of the Plaintiffs at the September 21, 2011 meeting." Plaintiffs
further allege that Praxis raised significant concerns to Uni-Ter and U.S. Re regarding the claims
reserves in September 2011 based upon its initial review, but that those concerns were not
reported to Plaintiffs. In addition, Plaintiffs have alleged that Mr. Elsass and Ms. Dalton
represented on September 1, 2011, that Praxis had been retained to do a complete claims analysis,
which would be reported at the September 21, 2011 board meeting, while that review was limited
to a review of claims-related processes and a sample of nine specific claims reserves. Plaintiffs
have also alleged that Elsass, Dalton, and Miller made these misstatements in their respective
capacities as officers of Uni-Ter. Finally, Plaintiffs allege that they would not have made the
investments in the form of the November 2011 Debentures but for Defendants' misrepresentations
and omissions.
For the purposes of surviving a motion to dismiss pursuant to Rule 9(b) and 12(b)(6),
these allegations sufficiently identify the speaker of each alleged misstatement, where and when
the misstatements were made, and the content of the misstatement, including why the statement
was false. See DiVittorio v. Equidyne Extractive Industries, 822 F.2d 1242, 1247 (2d Cir. 1987)
(allegations of fraud should specify "the time, place, speaker, and content of the alleged
misrepresentations"). However, Plaintiffs have failed allege specific facts regarding any material
misstatements or omissions made by Defendant Davies. Plaintiffs allege that Mr. Davies attended
20
the September 21, 2011 board meeting, and that he said nothing when Plaintiffs asked if there
were any claims developments not previously reported and Elsass and Miller stated that there
were none. Plaintiffs also allege that Mr. Davies acquiesced during the November 7, 2011
teleconference when Elsass and Dalton reassured Plaintiffs that the capital infusion from the
November 2011 Debentures would satisfy Lewis & Clark's capital needs and that the claims
reserves were adequate. Thus, Plaintiffs do not allege that Davies made any statements, false or
not.
Notwithstanding the absence of any statements attributable to Mr. Davies, Plaintiffs
appear to argue that he can be held liable for the statements of others. At least one of the cases
cited by Plaintiffs in their opposition relied upon the "group-pleading doctrine" to "circumvent the
general pleading rule that fraudulent statements must be linked directly to the party accused of the
fraudulent intent." In re Bear Stearns Companies, Inc. Sec., Deriv., and ERISA Litig., 763 F.
Supp. 2d 423, 485 (S.D.N.Y. 2011) (citation omitted). The group-pleading doctrine is
inapplicable here, however, because it does not apply to oral statements. Camofi Master LDC v.
Riptide Worldwide, Inc., No. 10 Civ. 4020, 2011 WL 1197659, *9 (S.D.N.Y. Mar. 25, 2011)
(observing that "the [group pleading] doctrine is limited to group-published documents, . . . [i]t
does not apply to oral statements"); Defer LP v. Raymond James Financial, Inc., 654 F. Supp. 2d
204, 214 (S.D.N.Y. 2009) (discussing the group pleading doctrine and noting "[t]hat limited
exception applies only to . . . group-published information that may be presumed to be the
collective work of corporate insiders with direct involvement with the everyday business of the
company[, but] does not apply to oral statements"). Moreover, to the extent that Plaintiffs
contend that Mr. Davies' silence was a material misleading omission, it is well settled that, in the
case of an omission, "[s]ilence, absent a duty to disclose, is not misleading under Rule 10b–5."
21
Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988). Although some courts in this Circuit have
found that high-ranking company officials can be held liable for failing to correct statements
made in their presence and known to be false, see Freudenberg v. E*Trade Fin. Corp., 712 F.
Supp. 2d 171, 195 (S.D.N.Y. 2010) (citations omitted), such a holding would be in tension with
the Supreme Court's decision in Janus. In Janus, the Supreme Court held that only the person
who "makes" the misstatement is ultimately liable for a section 10(b) violation. Janus, 131 S.Ct.
at 2302. "Since each party is liable only for their own misstatements, Janus implies that each
party is only liable for their own omissions as well." Ho v. Duoyuan Global Water, Inc., 887 F.
Supp. 2d 547, 572 n.13 (S.D.N.Y. 2012); see also In re UBS AG Securities Litigation, No. 07 Civ.
11225, 2012 WL 4471265, *10 (S.D.N.Y. Sept. 28, 2012). Accordingly, the Uni-Ter Defendants'
motion to dismiss Plaintiffs' Section 10(b) claim against Defendant Davies is granted.
b.
Scienter
"The requisite state of mind in a section 10(b) and Rule 10b–5 action is an intent to
deceive, manipulate, or defraud." ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP
Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009) (internal quotation marks omitted).
Scienter may be established by alleging with particularity: "(1) that defendants had the motive
and opportunity to commit fraud, or (2) strong circumstantial evidence of conscious misbehavior
or recklessness." Glasser v. The9, Ltd., 772 F. Supp. 2d 573, 586 (S.D.N.Y. 2011) (internal
quotation omitted). In determining whether a plaintiff has pled "a strong inference of scienter," a
reviewing court must evaluate all the facts alleged collectively. Local No. 38 IBEW Pension
Fund v. Am. Express Co., 724 F. Supp. 2d 447, 458 (S.D.N.Y. 2010) (quoting Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 323 (2007)).
In order to raise a strong inference of scienter through the "motive and opportunity"
22
prong, plaintiffs must allege that a defendant "benefitted in some concrete and personal way from
the purported fraud." Novak v. Kasaks, 216 F.3d 300, 307–08 (2d Cir. 2000). Motives that are
common to most corporate officers, such as the desire for the corporation to appear profitable and
the desire to keep stock prices high to increase officer compensation, do not constitute "motive"
for purposes of this inquiry. Id. at 307; Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001).
Rather, the "motive" showing is generally met when corporate insiders allegedly make a
misrepresentation in order to sell their own shares at a profit. Novak, 216 F.3d at 308. A
defendant corporation or corporate officer is generally assumed to have the opportunity to commit
fraud. In re MF Global Holdings Ltd. Secs. Litig., 982 F. Supp. 2d 277, 306 (S.D.N.Y. 2013)
(collecting cases).
On the other hand, Plaintiffs who solely rely on allegations of "conscious misbehavior or
recklessness," bear a "correspondingly greater" burden. In re Citigroup Inc. Sec. Litig., 753 F.
Supp. 2d 206, 233 (S.D.N.Y. 2010) (internal quotations omitted). Recklessness means "'conduct
which is highly unreasonable and which represents an extreme departure from the standards of
ordinary care . . . to the extent that the danger was either known to the defendant or so obvious
that the defendant must have been aware of it.'" Novak, 216 F.3d at 308 (quoting Rolf v. Blyth,
Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978)).
The Second Circuit has observed that:
[a]t least four circumstances may give rise to a strong inference of
the requisite scienter: where the complaint sufficiently alleges that
the defendants (1) benefitted in a concrete and personal way from
the purported fraud; (2) engaged in deliberately illegal behavior; (3)
knew facts or had access to information suggesting that their public
statements were not accurate; or (4) failed to check information
they had a duty to monitor.
ECA, 553 F.3d at 199 (internal quotation marks omitted).
23
The Supreme Court has held that for an inference of the requisite scienter to be "strong" in
accordance with § 78u–4(b)(2)(A), it must be "more than merely 'reasonable' or 'permissible'—it
must be cogent and . . . at least as compelling as any opposing inference one could draw from the
facts alleged." Tellabs, 551 U.S. at 324. That inquiry cannot be conducted in a vacuum, but is
"inherently comparative"—i.e., "a court must consider plausible, nonculpable explanations for the
defendant's conduct, as well as inferences favoring the plaintiff." Id. at 323–24. Thus, while the
inference of scienter "need not be irrefutable . . . or even the most plausible of competing
inferences," it must be "strong in light of other explanations." Id. at 324 (internal quotation marks
omitted).
In the present matter, the Court finds that Plaintiffs have sufficiently alleged scienter with
respect to Defendants Uni-Ter, Elsass, Dalton, and Miller. While Plaintiffs have not alleged that
the individual defendants, Elsass, Dalton, and Miller, benefitted in some concrete and personal
way from the purported fraud, Plaintiffs do allege that they knew facts or had access to
information suggesting that their statements were not accurate and failed to check information
they had a duty to monitor. As such, Plaintiffs have adequately alleged facts giving rise to a
strong inference of scienter as to these defendants under the conscious misbehavior or
recklessness prong.
As to Uni-Ter, Plaintiffs have sufficiently alleged scienter through both the motive and
opportunity and the conscious misbehavior and recklessness prongs.2 In Teamsters Local 445
Defendants encourage the Court to consider certain facts not contained in the pleadings.
In particular, Defendants reference declarations submitted in support of their motions to dismiss
which purport to establish that Uni-Ter itself invested $500,000 in Lewis & Clark during the time
period at issue here. According to Defendants, this investment defeats any inference of scienter.
The Court declines to consider this information in resolving the instant motions to dismiss. See
S.E.C. v. Simonson, No. 96 CIV. 96952000 WL 781084, *1 (S.D.N.Y. June 19, 2000).
2
24
Freight Div. Pension Fund v. Dynex Capital Inc., the Second Circuit held:
When the defendant is a corporate entity, this means that the
pleaded facts must create a strong inference that someone whose
intent could be imputed to the corporation acted with the requisite
scienter. In most cases, the most straightforward way to raise such
an inference for a corporate defendant will be to plead it for an
individual defendant. But it is possible to raise the required
inference with regard to a corporate defendant without doing so
with regard to a specific individual defendant.
531 F.3d 190, 195 (2d Cir. 2008). Thus, Plaintiffs here have raised a strong inference of UniTer's intent by virtue of their allegations with respect to the Defendants Elsass', Dalton's, and
Miller's recklessness. With respect to the motive and opportunity prong, although the Court has
found Plaintiffs' allegations as to the individual defendants to be deficient, this determination does
not automatically render Plaintiffs' allegations with respect to the corporate defendant Uni-Ter
deficient as well. "To carry their burden of showing that a corporate defendant acted with
scienter, plaintiffs in securities fraud cases need not prove that any one individual employee of a
corporate defendant also acted with scienter. Proof of a corporation's collective knowledge and
intent is sufficient." In re Worldcom, Inc. Sec. Litig., 352 F. Supp. 2d 472, 497 (S.D.N.Y. 2005).
"While [plaintiffs] may be able to show that individual . . . employees acted with scienter with
respect to individual issues, [they are] also entitled to show that [the corporate defendant] as a
firm was reckless . . . through the sum of its employees' activities and knowledge." Id. at
499-500. Plaintiffs here have alleged that Uni-Ter's motive was to delay Lewis & Clark's
insolvency and increase the capital available to pay claims before Lewis & Clark's reinsurance
policy was triggered. Plaintiffs also allege that by fraudulently inducing Plaintiffs into the
November 2011 Debentures, Uni-Ter was able to delay the dissolution of Lewis & Clark long
enough to expand its market share and gain additional insured parties that it could ultimately
service through its other risk retention groups. In addition, Plaintiffs allege that the delay of
25
Lewis & Clark's insolvency allowed Uni-Ter to continue receiving management fees for its
services to Lewis & Clark. Based on the foregoing, the Court finds these allegations of Uni-Ter's
motive to be sufficient to withstand Defendants' motions to dismiss.
c.
Reasonable reliance
Defendants next argue that Plaintiffs have failed to plead with particularity that they
reasonably relied on any alleged misrepresentation or omission. In support of their argument,
Defendants attempt to interject factual information not alleged in the four corners of the
pleadings. As noted above, the Court declines to consider such information.
Defendants also assert that Plaintiffs were sophisticated investors who had representatives
on the Lewis & Clark Board of Directors who were aware of Lewis & Clark's troubled financial
condition and had access to information in that regard. "While defendants are certainly correct
that reasonable reliance can depend on the sophistication of the parties, the nature of the
transaction and a party's failure to make use of means of verification available to it, the resolution
of a dispute concerning such issues is rarely appropriate for a motion to dismiss." Sawabeh
Information Svs. Co. v. Brody, 832 F. Supp. 2d 280, 304 (S.D.N.Y. 2011); see also AIG Global
Secs. Lending Corp. v. Banc. of Am. Secs., No. 01 Civ. 11448, 2005 WL 2385854, *9 n.5
(S.D.N.Y. Sept. 26, 2005) ("[T]he issue of whether an investor reasonably relied on a defendant's
misrepresentations is a fact-intensive inquiry that cannot be decided on this motion to dismiss.").
Accordingly, the Court finds that Plaintiffs have adequately alleged reasonable reliance.
d.
Loss causation
Defendants argue, in cursory fashion, that Plaintiffs have failed to sufficiently allege loss
causation. Defendants' principal argument appears to be that the time lag between Plaintiffs'
purchase of the securities in November 2011 and the ultimate loss of that investment when Lewis
26
Clark dissolved a year later in November 2012 diminishes the plausibility of Plaintiffs' loss
causation theory.
When misrepresentations induce a buyer to purchase equity, and the losses suffered are a
foreseeable consequence of the misrepresentations, the misrepresentations proximately cause the
buyer's injuries. See Manufacturers Hanover Trust Co. v. Drysdale Securities Corp., 801 F.2d
13, 20–22 (2d Cir.1986), cert. denied, 479 U.S. 1066 (1987). Here, Plaintiffs have alleged that
Defendants fraudulently induced them into purchasing the November 2011 Debentures with
knowledge of Lewis & Clark's tenuous financial position, which investments were ultimately lost
when Lewis & Clark entered dissolution a year later. For the purposes of a motion to dismiss,
Plaintiffs' allegations with respect to loss causation are sufficient. While Defendants contend that
there may be certain intervening events other than their alleged misrepresentations which caused
Plaintiffs' losses, proof of such intervening events is more appropriately considered on summary
judgment. See Gordon v. Sonar Capital Mgmt. LLC, No. 11–cv–9665, 2014 WL 3900560, *3
(S.D.N.Y. Aug. 1, 2014). Accordingly, the Court finds that Plaintiffs have adequately alleged
loss causation.
2.
Section 20(a)
To establish a Section 20(a) "control person" claim, a plaintiff must allege: "(1) a primary
violation by the controlled person, (2) control of the primary violator by the defendant, and (3)
that the defendant was, in some meaningful sense, a culpable participant in the controlled person's
fraud." ATSI Commc'ns, 493 F.3d at 108. Control is only established when a "defendant
exercised actual control over the matters at issue." In re Fannie Mae 2008 Sec. Litig., 742 F.
Supp. 2d 382, 415 (S.D.N.Y. 2010).
As noted above, Plaintiffs have adequately alleged an underlying violation of the
27
Exchange Act by the controlled person, Uni-Ter. Plaintiffs have also alleged that Uni-Ter was a
wholly-owned subsidiary of U.S. Re, the alleged control person. Further, Plaintiffs have alleged
that Uni-Ter made the misrepresentations at issue at U.S. Re's direction, that Mr. Davies on behalf
of U.S. Re attended the September 21, 2011 board meeting, that a U.S. Re representative arranged
the September 15, 2011 Praxis audit, that U.S. Re required Uni-Ter to retain Praxis in December
2011 for the full claims review, and that U.S. Re had knowledge of the relevant underlying facts
which rendered Defendants Uni-Ter's, Elsass', Dalton's, and Miller's statements false. These
allegations are sufficient to support a claim for control-person liability as to U.S. Re under
Section 20(a).
C.
State Law Claims
1.
Common Law Fraud, Constructive Fraud, Negligent Misrepresentation, and
Fraudulent Inducement
Defendants' arguments in support of dismissal of each of Plaintiffs' state law claims are
largely the same as those made in support of dismissal of the claims based on federal securities
law. Specifically, Defendants contend that Plaintiffs' failure to adequately allege a material
misrepresentation, scienter, and reasonable reliance warrants dismissal of the state law claims, to
the extent each of those claims requires proof of such elements.
In light of the Court's determination that Plaintiffs have adequately pled their Section
10(b) claims, and the accompanying elements of misrepresentation, scienter, and reasonable
reliance, with respect to Uni-Ter, Elssas, Dalton, and Miller, the Court likewise rejects those
arguments as they pertain to the state law claims. See Stephenson v. PricewaterhouseCoopers,
LLP 768 F. Supp. 2d 562, 571 n.1 (S.D.N.Y. 2011) (noting the similar pleading standards for
fraud actions under the federal securities laws pursuant to the PLSRA and common law fraud
claims pursuant to Rule 9(b)). Likewise, since the Court has found Plaintiffs' Section 10(b)
28
allegations insufficient as to Mr. Davies, each of the state law claims against him are dismissed.
See Wang v. Bear Stearns Companies LLC, --- F. Supp. 2d --- , 2014 WL 1512032, *12 (Apr. 16,
2014) (dismissing the plaintiff's common law fraud claims where the complaint had failed to
allege Section 10(b) violations); Marini v. Adamo, 995 F. Supp. 2d 155, 197 (E.D.N.Y. 2014)
(noting that "[c]ourts have found that the elements necessary to establish a claim under 10(b) are
essentially the same as those for common law fraud in New York") (citation omitted).
Plaintiffs did not bring their first claim for relief pursuant to Section 10(b) of the
Exchange Act against Defendants U.S. Re or UCSC. As such, the Court has not determined in
the context of a Section 10(b) claim whether Plaintiffs' allegations that these particular entities
participated in the alleged fraud are sufficiently detailed. Accordingly, the Court must undertake
an independent review to determine whether Plaintiffs have adequately alleged each of the
elements of the state law claims with respect to U.S. Re and UCSC.
As discussed above, the Court has found that Plaintiffs adequately alleged control person
liability as to U.S. Re. Plaintiffs have not, however, sufficiently pled U.S. Re's direct
participation in the alleged fraud. In particular, there are no allegations that U.S. Re (or its
agents) made a material misstatement or omission (or, for that matter, any facts giving rise to a
strong inference that it acted with the required state of mind). The Court found that Plaintiffs
have failed to allege a misstatement of omission on the part of Mr. Davies, the only agent alleged
to have acted on behalf of U.S. Re., and dismissed the Section 10(b) claim against him. With
respect to UCSC, Plaintiffs have made no allegations that would indicated it played any role in
the events at issue. In fact, the only substantive allegations regarding UCSC are that it was to
receive management fees and provide financial information regarding Lewis & Clark pursuant to
29
the management agreement. Since Plaintiffs' common law fraud,3 constructive fraud,4 negligent
misrepresentation,5 and fraudulent inducement6 claims each require that Plaintiffs allege a
misstatement, these claims must be dismissed as to U.S. Re and UCSC.
2.
Constructive Trust
Defendants argue that Plaintiffs' constructive trust claim should be dismissed because such
claims are prohibited where the relationship between the parties is governed by an express
contract. In this case, Defendants contend, "all of the obligations of the parties were governed
either by the terms of the Management Agreement or the terms of the various debentures." See
Dkt. No. 35-1 at 29. Defendants also assert that Plaintiffs have failed to allege that Defendants
were unjustly enriched at Plaintiffs expense. Id.
Under New York law, the elements of a constructive trust are: "(1) a confidential or
Under New York law, a common law fraud claim has four elements: "(1) the defendant
made a material false representation, (2) the defendant intended to defraud the plaintiff thereby,
(3) the plaintiff reasonably relied upon the representation, and (4) the plaintiff suffered damage as
a result of such reliance." Banque Arabe et Internationale D' Investissement v. MD. Nat'l Bank,
57 F.3d 146, 153 (2d Cir. 1995).
3
A plaintiff alleging a claim for constructive fraud under New York law must establish
the same elements as a claim for fraud, "except that the element of scienter is replaced by a
fiduciary or confidential relationship between the parties." Burrell v. State Farm & Cas. Co., 226
F. Supp. 2d 427, 438 (S.D.N.Y. 2002).
4
The elements of a claim for negligent misrepresentation under New York law are: (1)
carelessness in imparting words; (2) upon which others were expected to rely; (3) and upon which
they did act or failed to act; (4) to their damage. Most relevant, the action requires that (5) the
declarant must express the words directly, with knowledge or notice that they will be acted upon,
to one to whom the declarant is bound by some relation or duty of care. Dallas Aerospace, Inc. v.
CIS Air Corp., 352 F.3d 775, 788 (2d Cir. 2003) (citation omitted).
5
Under New York law, the elements of a claim for fraudulent inducement are: (1)
defendant knowingly made a misrepresentation of a material fact; (2) with the intent to deceive
another party and induce that party to act on it; (3) plaintiff reasonably relied upon the
representation; and (4) as a result of such reliance plaintiff suffered damage. Universal Antiques,
Inc. v. Vareika, 826 F. Supp. 2d 595, 607 (S.D.N.Y. 2011) (citations omitted).
6
30
fiduciary relationship; (2) a promise, express or implied; (3) a transfer made in reliance on that
promise; and (4) unjust enrichment." In re Ades and Berg Group Investors, 550 F.3d 240, 245
(2d Cir. 2008) (citing Sharp v. Kosmalski, 40 N.Y.2d 119, 121 (1976)). The Second Circuit has
noted that "[a]lthough these factors provide important guideposts, the constructive trust doctrine
is equitable in nature and should not be rigidly limited." Counihan v. Allstate Insurance Co., 194
F.3d 357, 362 (2d Cir. 1999) (internal quotations and citations omitted). To assert a viable claim
for unjust enrichment under New York law, a claimant must allege facts establishing: "(1) that the
defendant benefitted; (2) at the plaintiff's expense; and (3) that equity and good conscience
require restitution." Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir. 2000) (internal quotations
omitted).
"New York courts have clarified that '[a]s an equitable remedy, a constructive trust should
not be imposed unless it is demonstrated that a legal remedy is inadequate.'" In re First Central
Financial Corp., 377 F.3d at 215 (quoting Bertoni v. Catucci, 117 A.D.2d 892, 895, 498 N.Y.S.2d
902, 905 (1986)). Thus, "where a valid agreement controls the rights and obligations of the
parties, an adequate remedy at law typically exists," and a constructive trust should not be
imposed. Id.; see also Abraham v. Am. Home Mortgage Servicing, Inc., 947 F. Supp. 2d 222, 235
(E.D.N.Y. 2013) (noting that "[i]t is well established that the existence of a contract precludes a
claim for a constructive trust"). Under New York law, there can also be no cause of action for
unjust enrichment when there is a valid contract governing the same subject matter between the
parties. Clark-Fitzpatrick, Inc. v. Long Island R.R. Co., 516 N.E.2d 190, 193 (1987).
To state a claim for unjust enrichment, "[t]here is no requirement that the aggrieved party
be in privity with the party enriched at his or her expense." See Sperry v. Crompton Corp., 8
N.Y.3d 204, 215 (2007). An unjust enrichment claim, however, "requires some type of direct
31
dealing or actual, substantive relationship with a Defendant." Reading Int'l, Inc. v. Oaktree
Capital Mgmt., 317 F. Supp. 2d 301, 334 (S.D.N.Y. 2003). Where the connection between the
purchaser and the seller of a product is too attenuated, the claim for unjust enrichment must be
dismissed. Sperry, 8 N.Y.3d at 215 (2007); see Georgia Malone & Co., Inc. v. Rieder, 19 N.Y.3d
511, 519 (2012).
As an initial matter, the Court notes that Plaintiffs have not alleged any conduct
whatsoever on the part of UCSC from which the Court could infer that equity and good
conscience require restitution. On this basis alone, UCSC is entitled to dismissal of Plaintiffs'
unjust enrichment claim. Moreover, Plaintiffs have not alleged that Uni-Ter or UCSC benefitted
at Plaintiffs' expense. Rather, Plaintiffs' allege that Uni-Ter and UCSC benefitted in the form of
management fees paid by Lewis & Clark, which is far too attenuated a relationship to support a
claim for unjust enrichment or constructive trust. These conclusory assertions fail to satisfy
Plaintiffs' pleading burden. Accordingly, the Uni-Ter Defendants' motion to dismiss this claim is
granted.
D.
Punitive Damages
Plaintiffs have appended to their Section 10(b), Section 20(a), common law fraud, and
fraudulent inducement claims a demand for punitive damages. As an initial matter, punitive
damages are unavailable for claims of securities fraud under Section 10(b). See Boguslavsky v.
Kaplan, 159 F.3d 715, 721 (2d Cir.1998); see also Globus v. Law Research Serv., Inc., 418 F.2d
1276, 1283 (2d Cir. 1969) ("[p]unitive, or exemplary damages, as they are sometimes called, are
not available for violations of § 10(b) of the [Exchange] Act"). In addition, "[b]ecause under §
20(a), controlling persons are liable only jointly and severally with the primary violators for
damages caused by the primary violation, see 15 U.S.C. § 78t(a), [plaintiffs] can recover no more
32
from the defendants than the actual damages he suffered." Boguslavsky, 159 F.3d at 721.
Accordingly, Plaintiffs' request for punitive damages under their Exchange Act claims is
dismissed.
Under New York law, punitive damages are available in a tort action for "gross, wanton,
or willful fraud or other morally culpable conduct" to a degree sufficient to justify an award of
punitive damages. See Shanahan v. Vallat, No. 03 Civ. 3496, 2004 WL 2937805, *11 (S.D.N.Y.
Dec. 19, 2004) (citation omitted).7 Under New York law, punitive damages are not available in
"the ordinary fraud and deceit case." Shanahan, 2004 WL 2937805, at *11 (citing Walker v.
Sheldon, 10 N.Y.2d 401, 405 (1961). Punitive damages are ordinarily awarded in limited cases
involving "conduct that may be characterized as 'gross' and 'morally reprehensible,' and of "'such
wanton dishonesty as to imply a criminal indifference to civil obligations.'" Merrill Lynch & Co.
v. Allegheny Energy, Inc., 382 F. Supp. 2d 411, 421 n.10 (S.D.N.Y. 2003) (quoting New York
Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 315–16 (1995)); see also Waltree Ltd. v. ING
Furman Selz LLC, 97 F. Supp. 2d 464, 470–471 (S.D.N.Y. 2000) ("Under New York law,
punitive damages are available in a tort action where the wrongdoing is intentional or deliberate,
has circumstances of aggravation or outrage, has a fraudulent or evil motive, or is in such
conscious disregard of the rights of another that it is deemed willful and wanton."). Whether to
award punitive damages raises a question of fact. Waltree, 97 F. Supp. 2d at 470–471. However,
if a plaintiff fails to allege facts necessary to meet the standard for punitive damages, the issue can
Punitive damages are also available in which fraud is aimed at the public generally.
Rocanova v. Equitable Life Assurance Soc'y of the United States, 83 N.Y.2d 603, 613 (1994).
However, this line of cases relates to the "pleading elements required to state a claim for punitive
damages as an additional and exemplary remedy when the claim arises from a breach of contract."
Waltree Ltd. v. ING Furman Selz LLC, 97 F. Supp. 2d 464, 471 (S.D.N.Y. 2000) (quoting New
York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 316 (1995)). Since the allegations here do not
arise from breach of contract, it is unnecessary to address this element.
7
33
be dealt with on a motion to dismiss. See Shanahan, 2004 WL 2937805, at *11.
Although Plaintiffs have sufficiently pleaded a case for fraud, they have not alleged facts
that indicate high moral culpability or a gross, wanton, or willful fraud. Although Plaintiffs
allege that Defendants' misstatements and omissions induced them to invest an additional two
million dollars in Lewis & Clark, which they ultimately lost, Defendants do not appear to have
acted with any greater moral culpability than is involved in an ordinary fraud case. Accordingly,
Defendants' motion to dismiss Plaintiffs' request for punitive damages under their common law
fraud and fraudulent inducement claims is granted.
E.
Personal Jurisdiction as to Defendant Miller
Defendant Miller seeks dismissal of all claims against her on the grounds that the Court
lacks personal jurisdiction over her. Specifically, Defendant Miller argues that the New York
long-arm statute, N.Y. C.P.L.R. § 302, does not provide jurisdiction over her because she does
not transact business within the state. She further contends that the exercise of personal
jurisdiction over her would violate federal due process requirements. In response, Plaintiffs assert
that personal jurisdiction should be analyzed under the relevant provision of the Exchange Act,
which allows for worldwide service of process. Plaintiffs allege that Defendant Miller is a United
States resident, see Complaint ¶ 18, and have filed proof of service of the summons and complaint
on her, see Dkt. No. 16. Notably, Defendant Miller did not address Plaintiffs' asserted basis for
personal jurisdiction under the Exchange Act in her reply brief.
Section 27 of the Exchange Act, specifically 15 U.S.C. § 78aa, governs the exercise of
personal jurisdiction in securities cases.8 See also 15 U.S.C. § 77v (providing for worldwide
8
The section provides, in relevant part:
(continued...)
34
service of process). Because Section 27 "permits the exercise of personal jurisdiction to the limit
of the Due Process Clause of the Fifth Amendment," "the personal jurisdiction challenge raised
by [Miller] must be tested against due process standards." SEC v. Unifund SAL, 910 F.2d 1028,
1033 (2d Cir. 1990) (citations omitted).9
"The due process test for personal jurisdiction has two related components: the 'minimum
contacts inquiry' and the 'reasonableness' inquiry. The court must first determine whether the
defendant has sufficient contacts with the forum state to justify the court's exercise of personal
jurisdiction." Metro. Life Ins. Co. v. Robertson–Ceco Corp., 84 F.3d 560, 567 (2d Cir. 1996)
(citations omitted). "If such contacts are found, the court may assert personal jurisdiction so long
8
(...continued)
The district courts of the United States . . . shall have exclusive
jurisdiction of violations of this chapter or the rules and regulations
thereunder, and of all suits in equity and actions at law brought to
enforce any liability or duty created by this chapter or the rules and
regulations thereunder. Any criminal proceeding may be brought in
the district wherein any act or transaction constituting the violation
occurred. Any suit or action to enforce any liability or duty created
by this chapter or rules and regulations thereunder, or to enjoin any
violation of such chapter or rules and regulations, may be brought
in any such district or in the district wherein the defendant is found
or is an inhabitant or transacts business, and process in such cases
may be served in any other district of which the defendant is an
inhabitant or wherever the defendant may be found.
15 U.S.C. § 78aa(a).
Although Miller argues that the Court should analyze personal jurisdiction under the
provisions of New York's long-arm statute, N.Y. C.P.L.R. §§ 301 and 302, the Court need not
discuss the statute's applicability because "Congress meant [Section] 27 to extend personal
jurisdiction to the full reach permitted by the due process clause," and the N.Y. C.P.L.R. "could
reach no further." Leasco Data Processing Equipment Corp. v. Maxwell, 468 F.2d 1326, 1339
(2d Cir. 1972), abrogated on other grounds, Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247
(2010); cf. Unifund, 910 F.2d at 1033 ("Since the . . . Exchange Act permits the exercise of
personal jurisdiction to the limit of the Due Process Clause of the Fifth Amendment, the personal
jurisdiction challenge raised by [the defendant] must be tested against due process standards.”
(citations omitted)).
9
35
as 'it is reasonable [to do so] under the circumstances of the particular case.'" SEC v. Softpoint,
Inc., No. 95 Civ. 2951, 2001 WL 43611, *2 (S.D.N.Y. Jan. 18, 2001) (quoting Metro. Life Ins.
Co., 84 F.3d at 567); see Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (holding that due
process requires that each defendant must have "minimum contacts with [the forum] such that the
maintenance of the suit does not offend traditional notions of fair play and substantial justice")
(citation and internal quotation marks omitted).
1.
Minimum Contacts
In judging minimum contacts under the standard set forth in International Shoe and its
progeny, courts focus on "'the relationship among the defendant, the forum, and the litigation.'"
Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 775 (1984) (quoting Shaffer v. Heitner, 433 U.S.
186, 204 (1977)). "The leading Supreme Court cases defining the constitutional limits of the
initial minimum contacts inquiry arose in state courts or in federal diversity cases." Softpoint,
2001 WL 43611, at *3 (collecting cases); see, e.g., Burger King Corp. v. Rudzewicz, 471 U.S.
462, 471–76 (1985); World–Wide Volkswagen Co. v. Woodson, 444 U.S. 286, 293–94. "In those
circumstances, there is no question that the pertinent referent is the Fourteenth Amendment and
that the minimum contacts in question are those with the forum state." SEC v. Morton, No. 10
Civ. 1720, 2011 WL 1344259, *12 (S.D.N.Y. Mar. 31, 2011), report and recommendation
adopted, No. 10 Civ. 1720, Dkt. No. 102 (S.D.N.Y. Nov. 3, 2011). "When the jurisdictional issue
flows from a federal statutory grant that authorizes suit under federal-question jurisdiction and
nationwide service of process, however, the Fifth Amendment applies, and the Second Circuit has
consistently held that the minimum-contacts test in such circumstances looks to contacts with the
entire United States rather than with the forum state." Id. (collecting cases). "It has long been the
rule in this Circuit that" when a claim under the Exchange Act is involved, "Section 27 of [the
36
Act], which provides for nationwide service of process, confers personal jurisdiction over the
defendants served within the United States." Steinberg & Lyman v. Takacs, 690 F. Supp. 263,
265–66 (S.D.N.Y. 1988) (internal citation omitted); see also Kidder, Peabody & Co., Inc. v.
Maxus Energy Corp., 925 F.2d 556, 562 (2d Cir. 1991) ("Section 27 confers personal jurisdiction
over a defendant who is served anywhere within the United States.").
Here, Plaintiffs have alleged that Defendant Miller is a resident of the state of Georgia,
and have submitted proof that service of process was effected within the United States. As such,
the minimum contacts test is satisfied.
"Moreover, under the doctrine of pendent personal jurisdiction, where a federal statute
authorizes nationwide service of process, and the federal and state claims 'derive from a common
nucleus of operative fact,' the district court may assert personal jurisdiction over the parties to the
related state law claims even if personal jurisdiction is not otherwise available." IUE AFL-CIO
Pension Fund v. Herrmann, 9 F.3d 1049, 1056 (citing United Mine Workers v. Gibbs, 383 U.S.
715, 725 (1966)); see also International Controls Corp. v. Vesco, 593 F.2d 166, 175 (2d Cir.
1979) (authorizing pendent personal jurisdiction over related state law claims where federal
statute invoked is Section 27 Exchange Act) (citing Leasco Data Processing Equip. Corp. v.
Maxwell, 468 F.2d 1326 (2d Cir. 1972)), cert. denied, 442 U.S. 941 (1979). The Court has found
that it has personal jurisdiction over her under the Exchange Act, and (as Defendants concede) the
state law claims derive from a common nucleus of operative facts with the federal claims.
Therefore, the Court may exercise pendent jurisdiction over the state law claims and need not
reach the question whether personal jurisdiction over Defendant Miller as to the state law claims
is otherwise available.
2.
Reasonableness
37
"Once it has been decided that a defendant purposefully established minimum contacts
within the forum . . . , these contacts may be considered in light of other factors to determine
whether the assertion of personal jurisdiction would comport with 'fair play and substantial
justice,'" Burger King, 471 U.S. at 476, 105 S.Ct. 2174 (quoting Int'l Shoe, 326 U.S. at 320, 66
S.Ct. 154)—"that is, whether it is reasonable under the circumstances of the particular case,"
Metro. Life Ins., 84 F.3d at 568; see World–Wide Volkswagen, 444 U.S. at 292 (explaining that
the "fair play and substantial justice" standard is often described in terms of whether it would be
"fair" or "reasonable" to subject the defendant to litigation in the forum). In determining the
reasonableness of exercising jurisdiction in connection with a particular defendant, courts must
evaluate:
(1) the burden that the exercise of jurisdiction will impose on the
defendant; (2) the interests of the forum state in adjudicating the
case; (3) the plaintiff's interest in obtaining convenient and effective
relief; (4) the interstate judicial system's interest in obtaining the
most efficient resolution of the controversy; and (5) the shared
interest of the states in furthering substantive social policies.
Metro. Life Ins., 84 F.3d at 568 (citing Asahi Metal Indus. Co., Ltd. v.Super. Ct., 480 U.S. 102,
113–14 (1987)).
"While the exercise of jurisdiction is favored where the plaintiff has made a threshold
showing of minimum contacts at the first stage of the inquiry, it may be defeated where the
defendant presents 'a compelling case that the presence of some other considerations would
render jurisdiction unreasonable.'" Id. (citing Burger King, 471 U.S. at 477); see also Burger
King, 471 U.S. at 478 (explaining that the defendant must demonstrate that the assertion of
personal jurisdiction in the forum will "make litigation so gravely difficult and inconvenient that a
party unfairly is at a severe disadvantage in comparison to his opponent" (internal quotation
marks omitted)); Asahi, 480 U.S. at 116 (Brennan, J., concurring) (finding that only in "rare
38
cases" will inconvenience defeat the reasonableness of jurisdiction). "The reasonableness inquiry
is largely academic in non-diversity cases brought under a federal law which provides for
nationwide service of process because of the strong federal interests involved." SEC v.
Syndicated Food Servs. Int'l, Inc., No. 04 Civ. 1303, 2010 WL 3528406, *3 (E.D.N.Y. Sept. 3,
2010) (internal quotation marks omitted); accord Softpoint, 2001 WL 43611, at *5. "To date,
while most courts continue to apply the test as a constitutional floor to protect litigants from truly
undue burdens, few (and none in this Circuit) have ever declined jurisdiction, on fairness grounds,
in such cases." Syndicated Food Servs. Int'l, 2010 WL 3528406, at *3 (internal quotation marks
omitted).
Like each and every court in this Circuit to have applied the reasonableness standard after
determining that a given defendant has the requisite minimum contacts, this Court finds that this
is not the rare case where the reasonableness analysis defeats the exercise of personal jurisdiction.
The Court finds that the exercise of personal jurisdiction over Defendant Miller is not
unreasonable.
Accordingly, because Plaintiffs have established that Defendant Miller has minimum
contacts with the United States and that the exercise of personal jurisdiction over her would not
be unreasonable, the Court finds that Plaintiffs have met their burden at this stage of establishing
a prima facie case of personal jurisdiction over Defendant Miller. Therefore, Defendant Miller's
motion to dismiss for lack of personal jurisdiction is denied.
IV. CONCLUSION
After carefully reviewing the entire record in this matter, the parties' submissions and the
applicable law, and for the above-stated reasons, the Court hereby
ORDERS that Defendants' motions to dismiss (Dkt. Nos. 33, 35) are GRANTED in part
39
and DENIED in part10; and the Court further
ORDERS that Plaintiffs' cross-motion to amend (Dkt. No. 44) is GRANTED; and the
Court further
ORDERS that each of Plaintiffs' claims as to Defendants Davies and UCSC are
DISMISSED; and the Court further
ORDERS that Plaintiffs' constructive trust claim is DISMISSED; and the Court further
ORDERS that Plaintiffs' request for punitive damages is DISMISSED; and the Court
further
ORDERS that Plaintiffs shall file and serve their Amended Complaint within fourteen
(14) days of this order in accordance with the Local Rules; and the Court further
ORDERS that the Clerk of the Court shall serve a copy of this Memorandum-Decision
and Order on the parties in accordance with the Local Rules.
IT IS SO ORDERED.
Dated: September 18, 2014
Albany, New York
As a result of this Memorandum-Decision and Order, the remaining claims are the
Section 10(b), common law fraud, constructive fraud, negligent misrepresentation, and fraudulent
inducement claims against Defendants Uni-Ter, Elsass, Dalton, and Miller, and the Section 20(a)
claim against Defendant U.S. Re.
10
40
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?