He et al v. Rom et al
Filing
184
Opinion & Order signed by Judge James S. Gwin on 10/3/16. The Court, for the reasons set forth in this order, grants in part and denies in part plaintiffs' motion for summary judgment, denies defendants' motion for summary judgment, grants defendant companies IIP Cleveland Regeneration and IIP Cleveland Regeneration 2 motion for summary judgment, and grants plaintiffs' motion to compel. (Related Docs. 141 , 145 , 146 , 150 , 152 , 153 , 154 , 156 , 157 , 160 , 165 , and 166 ) (D,MA)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
-----------------------------------------------------RUI HE, et al.,
Plaintiffs,
vs.
DAVOR ROM, et al.,
Defendants.
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CASE NO. 15-cv-1869
OPINION & ORDER
[Resolving Docs. 141, 145, 146, 150,
152, 153, 154, 156, 157, 160, 165,
166]
-----------------------------------------------------JAMES S. GWIN, UNITED STATES DISTRICT JUDGE:
Plaintiffs Rui He, Xiaoguang Zheng, and Zhenfen Huang are Chinese investors who say
they were defrauded by American real estate businessman Defendant Davor Rom and his
companies Investor Income Properties, LLC, IIP Ohio, IIP Management,1 IIP Cleveland
Regeneration, LLC, IIP Cleveland Regeneration 2, LLC, Assets Unlimited, LLC, and IIP Akron,
LLC (collectively, “Defendant Companies”).
The parties have filed dueling motions for summary judgment. 2 Defendant Companies
IIP Cleveland Regeneration and IIP Cleveland Regeneration 2 filed a separate motion for
summary judgment, which the Plaintiffs oppose. 3 The Plaintiffs also filed a motion to compel
discovery, which the Defendants oppose.4
For the following reasons, this Court GRANTS IN PART and DENIES IN PART
Plaintiffs’ motion for summary judgment; DENIES the Defendants’ motion for summary
judgment; GRANTS Defendant Companies IIP Cleveland Regeneration and IIP Cleveland
Regeneration 2’s motion for summary judgment; and GRANTS the Plaintiffs’ motion to compel.
1
On September 18, 2016, Plaintiffs and Defendant IIP Management settled. Doc. 170.
Docs. 141, 150, 152 and Docs. 145, 154, 157.
3
Docs. 146, 153, 156.
4
Docs. 160, 165, 166.
2
Case No. 15-cv-1869
Gwin, J.
I.
Background
Between 2013 and 2015, Chinese citizens Plaintiffs He, Zheng, and Huang purchased
Ohio real properties (the “Properties”) from Defendant Rom. Defendant Rom used the Chinese
website Fang.com to advertise the properties to the Plaintiffs.5 In those advertisements, the
Defendants marketed a “hands-off real estate investment”6 where buyers purchased real estate
from the Defendants and then the Defendants managed the properties. The Defendants’ mission
statement promised “a comprehensive process for the acquisition, stabilization, management, and
performance of investment properties with 10-20% [return on investment].” 7 The all-in-one real
estate investments had obvious attraction for foreign investors.
The Plaintiffs each purchased property in Ohio from the Defendants, but they never
received double digit returns. 8 The Plaintiffs say that when they asked the Defendants about the
missing returns, the Defendants gave excuses for payment delays, requested more money, or just
ignored the Plaintiffs’ questions on why they were not receiving the returns the advertising had
described.9 When the anticipated income never arrived, the Plaintiffs brought this lawsuit.10
The Plaintiffs sued the Defendants for fraudulent inducement, negligent
misrepresentation, securities fraud, unlicensed sale of securities, breach of fiduciary duty,
violation of Ohio’s deceptive trade practices act, and conversion. Plaintiffs also sought to pierce
the corporate veil.11
5
E.g, Doc. 5-15.
Doc 139-12 at 2, 3.
7
Doc. 141-20 at 2.
8
Doc. 86 ¶¶ 48, 57, 62.
9
Id. ¶¶ 49–51, 57, 63.
10
Doc. 141 at 5.
11
Doc. 86.
6
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Gwin, J.
The Plaintiffs now move for summary judgment on five issues material to their claims. 12
The Defendants filed a cross motion asking for summary judgment on all of the Plaintiffs’
claims.13 Defendant Companies IIP Cleveland Regeneration and IIP Cleveland Regeneration 2
filed an additional motion for summary judgment saying that they had no connection to the
Plaintiffs’ transactions.14 The Plaintiffs also move to compel additional discovery. 15
II. Legal Standard
Under Federal Rule of Civil Procedure 56, “[s]ummary judgment is proper when ‘there is
no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of
law.’”16 The moving party must first demonstrate that there is an absence of a genuine dispute as
to a material fact entitling it to judgment. 17 Once the moving party has done so, the non-moving
party must set forth specific facts in the record—not its allegations or denials in pleadings—
showing a triable issue. 18 The existence of some doubt as to the material facts is insufficient to
defeat a motion for summary judgment. 19 But the Court views the facts and all reasonable
inferences from those facts in favor of the non-moving party.20
When parties present competing versions of the facts on summary judgment, a district
court adopts the non-movant’s version of the facts unless the record before the court directly
contradicts that version. 21 Otherwise, a district court does not weigh competing evidence or make
credibility determinations. 22
12
Docs. 141, 152.
Doc. 145.
14
Doc. 146.
15
Doc. 160
16
Killion v. KeHE Distribs., LLC, 761 F.3d 574, 580 (6th Cir. 2014) (quoting Fed. R. Civ. P. 56(a)).
17
See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).
18
See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
19
Id. at 586.
20
Killion, 761 F.3d at 580 (internal citations omitted).
21
See Scott v. Harris, 550 U.S. 372, 380 (2007).
22
Koren v. Ohio Bell Tel. Co., 894 F. Supp. 2d 1032, 1037 (N.D. Ohio 2012) (citing V & M Star Steel v. Centimark
Corp., 678 F.3d 459, 470 (6th Cir. 2012)).
13
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Gwin, J.
III.
Discussion
Regarding Plaintiffs’ motion for summary judgment, this Court first finds that the
Plaintiffs have standing to sue under the Ohio Deceptive Trade Practices Act. The Court denies
the Plaintiffs’ motion for summary judgment as to all other issues. Second, the Court denies the
Defendants’ motion for summary judgment dismissing the Plaintiffs’ conversion claim, and
denies the Defendants’ other arguments for summary judgment. Third, the Court grants
Defendant Companies IIP Cleveland Regeneration and IIP Cleveland Regeneration 2’s motion
for summary judgment. Finally, the Court grants the Plaintiff’s motion to compel.
A. This Court grants in part and denies in part the Plaintiffs’ motion for summary judgment
First, this Court finds there is a material disputed issue regarding whether the Defendants’
double digit returns representations were material representations. Second, the Court finds that
the Plaintiff has standing under the Ohio Deceptive Trade Practices Act. Third, this Court finds
there is a materially disputed issue regarding whether Defendant Rom exercised complete control
over the Defendant Companies. Finally, we determine that there is a material disputed issue
whether the Defendants sold investment contracts, and, therefore, we also refuse to grant
summary judgment finding the Defendants sold securities without a license.
1. Whether the Defendants’ advertisements that the Properties would generate double digit
returns were “material representations” presents a genuine dispute
Plaintiff seek summary judgment finding that Defendants made materially false
statements to induce investments. The Plaintiffs sued the Defendants for fraudulently inducing
them to purchase the Properties.23 The Plaintiffs say that the Defendants made representations
23
Doc. 86 ¶ 94–107.
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that the Properties would generate double digit returns,24 and that these representations were
material to their decision to purchase the Properties. 25 The Defendants counter that these
advertisements were opinions—not actionable representations—about future events. 26
Alternatively, the Defendants argue that the representations were not material. 27
A plaintiff alleging fraud in the inducement must establish that a defendant “made a false
representation concerning a fact . . . material to the transaction.” 28 “As a general rule, fraud
cannot be predicated upon representations concerning future events because they are more in the
nature of predictions or opinions about what the future may hold.” 29 However, “a promise made
with a present intention not to perform constitutes a misrepresentation of existing fact even if the
promised performance is to occur in the future.” 30 Proof of nonperformance does not, alone,
prove a lack of intent to perform. 31
The Plaintiffs say that the Defendants made material representations by promising the
Properties would generate double digit returns on investments (ROIs).32 However, Plaintiffs
Zheng and Huang point to advertisements that do not guarantee double digit ROIs, but instead
offer “projected” or “estimated” ROIs.33 Therefore, a jury could reasonably conclude that these
24
Docs. 141-16, 141-17, 141-18.
Doc. 141 at 12–13.
26
Doc. 150 at 4.
27
Id. at 5–6.
28
Micrel, Inc. v. TRW, Inc., 486 F.3d 866, 874 (6th Cir. 2007) (emphasis added). Under Ohio law, a fraudulent
inducement claim requires a plaintiff to establish “(1) a false representation concerning a fact or, in the face of a
duty to disclose, concealment of a fact, material to the transaction; (2) knowledge of the falsity of the representation
or utter disregard for its truthfulness; (3) intent to induce reliance on the representation; (4) justifiable reliance upon
the representation under circumstances manifesting a right to rely; and (5) injury proximately caused by the
reliance.” Id.
29
Id. (citing Link v. Leadworks Corp., 607 N.E.2d 1140, 1145 (Ohio Ct. App. 1992)).
30
Id. An Ohio appeals court explained that fraud occurs when “an individual makes a promise concerning a future
action, occurrence, or conduct and, at the time he makes it, has no intention of keeping the promise.” Williams v.
Edwards, 717 N.E.2d 368, 374 (Ohio Ct. App. 1998).
31
Captiva, Inc. v. Viz Commc'ns, Inc., 85 F. App’x 501, 506 (6th Cir. 2004) (citations omitted).
32
Docs. 141-16, 141-17, 141-18.
33
Docs. 141-17, 141-18.
25
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Gwin, J.
ROI figures were merely opinions about the future, not material representations supporting a
fraud claim.
On the other hand, evidence suggests that the Defendants knew that the Properties would
almost certainly never produce the projected ROIs. For instance, the Defendants projected a
13.04% ROI on a Woodcliff townhome they sold to Plaintiff Zheng. 34 The Plaintiffs allege that
“high crime, rodent and pest infestations, gushing sewage are among the issues that have plagued
[Woodcliff townhomes] for years.” 35 A jury could reasonably conclude that the Defendants
knew that the advertised ROIs would never occur, and that the Defendants’ predictions were
material representations supporting the Plaintiffs’ fraudulent inducement action.
There are genuine disputes over the materiality of the Defendants’ assertions about the
Properties. Therefore, this Court denies the Plaintiffs’ request for summary judgment regarding
whether Defendants’ representations were material.
2. The Plaintiffs have standing under Ohio’s Deceptive Trade Practices Act
The Plaintiffs ask this Court for summary judgment declaring that they have standing to
sue under Ohio’s Deceptive Trade Practices Act (“ODTPA”).36 The Defendants respond that
Plaintiffs lack standing for two reasons. Defendants first argue that the ODTPA provides a cause
of action for commercial actors, not individual consumers. 37 Second, Defendants say that even if
34
Doc. 141-17.
Doc. 86 ¶ 35. A 2013 Columbus Dispatch article corroborates Plaintiffs’ characterization. Lori Kurtzman,
Whitehall condo complex still stands as its owners, city wrangle, Columbus Dispatch (Aug. 23, 2013, 6:47 AM),
http://www.dispatch.com/content/stories/local/2013/08/23/condo-complex-still-stands-as-its-owners-citywrangle html (describing Woodcliff residents complaining of “untreated sewage gushing into basements and rats
living among stinking piles of trash outside”).
36
Doc. 141 at 13–15.
37
Doc. 150 at 6–7.
35
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the Plaintiffs were commercial actors, Ohio’s Deceptive Trade Practices Act does not cover real
estate transactions.38
Ohio’s Deceptive Trade Practices Act prohibits representing that “goods or services have
. . . characteristics . . . uses, benefits, or quantities that they do not have.”39 The Sixth Circuit has
held that ODTPA protects persons engaged in commerce, not individual consumers. 40
Therefore, “a person who seeks recovery under the DTPA must also be engaged in some type of
commercial activity” as part of a “business, vocation, or occupation.”
41
The Plaintiffs respond that they are not individual consumers, but rather persons engaged
in commercial activity. 42 They say that they purchased the Properties “for the commercial
purpose of producing revenue,”43 a purpose distinguishable from other “plainly consumer
transactions” 44 where courts have declined to find standing for plaintiffs purchasing vodka,
personal training sessions, or cigarettes.45
This Court agrees.
The Plaintiffs bought the Properties and management services to make money. This was a
purely a commercial endeavor, different from consumer purchases like vodka or personal
training.
38
Id. at 7–8.
Ohio Rev. Code § 4165.02.
40
Holbrook v. Louisiana-Pac. Corp., 533 F. App’x 493, 498 (6th Cir. 2013); Phillips v. Philip Morris Companies
Inc., 290 F.R.D. 476, 483– 485 (N.D. Ohio 2013); Robins v. Glob. Fitness Holdings, LLC, 838 F. Supp. 2d 631, 650
(N.D. Ohio 2012). The Northern District uses the Latham Act to interpret the ODTPA because the ODTPA is
“substantially similar to the federal Lanham Act, and it generally regulates trademarks, unfair competition, and false
advertising.” Id.
41
Gascho v. Glob. Fitness Holdings, LLC, 863 F. Supp. 2d 677, 698 (S.D. Ohio 2012)
42
Doc. 141 at 14.
43
Doc. 152 at 5.
44
Doc. 141 at 15
45
See, e.g., Holbrook, 533 F. App’x at 494 (homeowners sue over quality of a home improvement product);
Phillips, 290 F.R.D. at 483– 485 (cigarette smokers sue of labeling); Gascho, 863 F. Supp. 2d at 683 (gym members
sue over personal training); Terlesky v. Fifth Dimension, Inc., 2015 WL 7254189, at *1 (S.D. Ohio Nov. 17, 2015)
(vodka drinkers sue over quality of the liquor).
39
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Gwin, J.
The Defendants argue that even if the Plaintiffs purchases were commercial, Ohio’s
Deceptive Trade Practices Act does not apply to real estate transactions. 46 However, ODTPA
applies when a party “represents that goods or services have . . . characteristics . . . benefits, or
qualities that they do not have.” 47
The Plaintiffs purchase of the Properties was inextricably linked to the Defendants’
management services. The Defendants’ mission statement promotes their “comprehensive
process for the acquisition, stabilization, management, and performance of investment properties
with 10-20% ROI.” 48 As already discussed, the Plaintiffs offer evidence that this management
service was not as the Defendants represented it to be.
Therefore, this Court grants the Plaintiffs motion for summary judgment declaring that
the Plaintiffs have standing to sue under Ohio’s Deceptive Trade Practices Act.
3. There are still genuine disputes as to whether Defendant Rom exercised complete control
over the Defendant Companies
The Plaintiffs ask for summary judgment finding that Defendant Rom exercised complete
control over the various Defendant Companies involved in this lawsuit. 49 Defendants respond
that the Plaintiffs lack sufficient evidence demonstrating Rom’s total control of the Defendant
Companies.50 The parties contest this point because the Plaintiffs must establish Rom’s
complete control over the Defendant Companies to win on their efforts to pierce the Defendant
Companies’ corporate veil.51
46
Doc. 150 at 7.
Ohio Rev. Code § 4165.02.
48
Doc. 141-20 at 2.
49
Doc. 141 at 10–15.
50
Doc. 150 at 8–10.
51
Doc. 86 ¶ 151–162.
47
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Limited liability shields a company’s shareholders from personal liability to a company’s
creditors. However, the Sixth Circuit allows plaintiffs to pierce a company’s corporate veil (its
limited liability protections) when “two or more coexisting [companies] are in fact one business,
separated only in form.” 52 Thus, under Ohio law, “the corporate form may be disregarded and
individual shareholders held liable for corporate misdeeds when (1) control over the corporation
by those to be held liable was so complete that the corporation has no separate mind, will, or
existence of its own, (2) control over the corporation by those to be held liable was exercised in
such a manner as to commit fraud or an illegal act against the person seeking to disregard the
corporate entity, and (3) injury or unjust loss resulted to the plaintiff from such control and
wrong.”53
The Plaintiffs ask for summary judgment only on the first prong of the test for piercing
the corporate veil: whether the corporation had a “separate mind, will, or existence of its own.” 54
Under this prong, a plaintiff must show that a corporation and its owner are “fundamentally
indistinguishable” alter egos of one another. 55
In determining whether a corporation possesses its own identity or is merely an alter ego
of its owner, Ohio courts consider factors such as whether (1) corporate formalities are observed,
(2) corporate records are kept, and (3) the corporation is financially independent. 56 The Sixth
Circuit has also instructed courts to consider other factors, including, “(1) sharing the same
employees and corporate officers; (2) engaging in the same business enterprise; (3) having the
same address and phone lines; (4) using the same assets; (5) completing the same jobs; (6) not
52
UAW v. Aguirre, 410 F.3d 297, 301 (6th Cir. 2005).
Taylor Steel, Inc. v. Keeton, 417 F.3d 598, 605 (6th Cir. 2005) (citing Belvedere Condominium Unit Owners’
Assn. v. R.E. Roark Cos., Inc., 617 N.E.2d 1075, 1086 (Ohio 1993).
54
Id.
55
Id.
56
Estate of Thomson ex rel. Estate of Rakestraw v. Toyota Motor Corp. Worldwide, 545 F.3d 357, 363 (6th Cir.
2008).
53
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maintaining separate books, tax returns and financial statements; and (7) exerting control over
the daily affairs of another corporation.” 57
The Plaintiffs argue that Rom had complete control over the Defendant Companies. For
instance, Rom is the sole owner of Assets Unlimited58 and Assets Unlimited owns 100% of
Defendant Companies IIP Ohio and Investor Income Properties, and 99% of IIP management.59
Employees at six of the eight Defendant Companies all share the same email domain name:
“@investorincomeproperties.com.”60 After at least one sale, Rom instructed escrow agents to
pay him directly, rather than pay the company that had made the sale.61 Plaintiffs also allege that
Rom funneled profits to Assets Unlimited for personal benefit. 62
Defendants respond that this evidence fails to establish that Rom was in complete control
of the Defendant Companies. Although Defendant Rom fully owned Assets Unlimited, Assets
Unlimited only owned 50% of two Defendant Companies.63 Therefore, Rom’s control over
Assets Unlimited does not establish total control over all Defendant Companies.
Defendants also draw a line between “ability to control” a company and “exercising
control” over one.64 They argue that the Plaintiffs fail to show that Rom actually exercised
control over the Defendant Companies. Finally, Defendants say that Rom “operated in a manner
that is proper for an officer of a small llc.” 65
The Defendants’ arguments win. Material issues exist regarding Rom’s control.
57
Id.
Doc. 141-23 at 1.
59
Doc. 141-4; 141-22 at 11. Assets Unlimited also owns 50% of Defendant Company IIP Akron.
60
Doc. 142-1 at 122.
61
Doc. 141 at 19. Doc. 141-12.
62
Doc. 141 at 19
63
Doc. 150 at 10.
64
Id.
65
Id.
58
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The question of Rom’s control over the Defendant Companies is fundamentally factbased and best decided by a jury. For instance, the parties offer competing explanations for the
structures and behavior of Defendant Companies.66 The litigants also assign different meanings
to Defendant Rom’s compensation structure.67 Ohio courts and the Sixth Circuit provide
extensive factors for determining whether a corporation possesses its own identity or is merely
an alter ego.68 A jury is best positioned to consider the competing evidence, weigh these factors,
and determine if Defendant Rom exercised total control over Defendant Companies.
The Court denies the Plaintiffs’ request for summary judgment declaring that Defendant
Rom exercised complete control over Defendant Companies.
4. Whether Defendants sold investment contracts presents a genuine dispute
The Plaintiffs sued the Defendants for the unregistered sale of securities. 69 To establish
an element of this claim, the Plaintiffs ask for summary judgment finding that the Defendants
sold securities, specifically investment contracts.70 The Defendants respond that they sold real
estate, not investment contracts.71
Under the Ohio Securities Act, an “investment contract” is a security, but real estate is
not.72
Compare Doc. 141 at 13 (“Davor Rom would then appoint himself as ‘President’ of each of the Defendant
Companies.”) with Doc 150 at 10 (“Rom is not the president of either IIP Cleveland Regeneration or IIP Cleveland
Regeneration 2.”).
67
Compare Doc. 141 at 14 (“In 2013 Davor Rom received $134,000 in salary, $33,500 in pension, $17,171.89 in
member distributions . . . .”) with Doc 150 at 10 (“Plaintiffs’ resort to twisting simple facts, such as Rom being paid
a salary by his employer, [Assets Unlimited], or Rom receiving a pension, or Rom receiving a “member
distribution” from [Assets Unlimited] in light of his role as the sole member of [Assets Unlimited].”).
68
Belvedere Condominium Unit Owners’ Assn. v. R.E. Roark Cos., Inc., 617 N.E.2d 1075, 1086 (Ohio 1993); Estate
of Thomson ex rel. Estate of Rakestraw v. Toyota Motor Corp. Worldwide, 545 F.3d 357, 363 (6th Cir. 2008).
69
Doc. 86 ¶ 125-130.
70
Doc 141 at 15–17.
71
Doc. 150 11–14.
72
Ohio Rev. Code § 1707.01(B).
66
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Two Ohio cases provide the framework for distinguishing between an investment
contract and real estate. In State v. Silberberg, the Ohio Supreme Court stated that “the principal
test is the individual control which the purchaser has over the property or business venture.”73 “If
the purchaser [of real estate] is to share in the gross proceeds or net profits of operations
managed by the one who is disposing of the interest,” then it is generally an investment
contract.74 On the other hand, “if the purchaser of real property with others is to occupy the
premises and conduct the enterprise,” then it is generally a real estate transaction.75
In State v. George, an Ohio Appellate court updated the Silberberg test to reflect “modern
day business ingenuity.”76 Under George, an instrument is an investment contract when:
(1) an offeree furnishes initial value to an offeror, and (2) a portion of this initial
value is subjected to the risks of the enterprise, and (3) the furnishing of the initial
value is induced by the offeror’s promises or representations which give rise to a
reasonable understanding that a valuable benefit of some kind, over and above the
initial value, will accrue to the offeree as a result of the operation of the
enterprise, and (4) the offeree does not receive the right to exercise practical and
actual control over the managerial decisions of the enterprise.” 77
This Court finds that there are still issues of material fact regarding whether the
Defendants sold investment contracts, particularly as to the third and fourth prongs of the George
test.
The third prong of George requires the purchaser of an investment contract to have a
“reasonable understanding . . . that a valuable benefit over and above the initial value will accrue
to the benefit of the investor as a result of the operation of the enterprise.”78 Plaintiffs say that
73
State v. Silberberg, 139 N.E.2d 342, 342 (Ohio 1956).
Id.
75
Id.
76
State v. George, 362 N.E.2d 1223, 1227 (Ohio Ct. App. 1975).
77
Id.
78
Id.
74
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the Defendants “indisputably” represented that the properties would produce rental income. 79
The Defendants respond that Plaintiffs signed purchase agreements expressly representing that
the Plaintiffs were not relying on any representations made by the Defendants. 80 Consequently,
according to the Defendants, the Plaintiffs had no reasonable expectation of any valuable benefit
above the Properties’ purchase price.81
Although the Defendants advertised double digit ROI on the Properties, the Plaintiffs
signed purchase agreements stating that they were not relying on the Defendants’
representations. A jury could reasonably find the Plaintiffs were not expecting income beyond
the Properties purchase price.
Under the fourth George prong, an investment contract does not give its purchaser “the
right to exercise practical and actual control over the managerial decisions of the enterprise.” 82
The Plaintiffs say that they bought the Properties with the expectation that the Defendants would
manage and control the properties. 83 They point to the management contracts that the Plaintiffs
signed for each property purchased from the Defendants as evidence of their expectation.84
Defendants respond that the Plaintiffs always had the right to take control over
managerial decisions of the Properties.85 They say that the management contracts demonstrate
that the Plaintiffs hired the Defendants to manage the Properties and then fired the Defendants
when the Plaintiffs became dissatisfied with the Defendants’ management. 86 They argue that the
79
Doc. 141 at 22.
See, e.g. Doc. 150-2 ¶ 12. “ PURCHASER’S ACKNOWLEDGMENTS: . . . Seller has not made any
representations concerning the property upon which Purchaser has relied, except as specifically set forth in this
agreement.”
81
Doc 150 at 13–14.
82
State v. George, 362 N.E.2d 1223, 1227 (Ohio Ct. App. 1975).
83
Doc. 141 at 21-22. The webpage for Income Investment Properties read “You bring the capital, we take care of
everything else.”
84
Doc. 141-19.
85
Doc. 150 at 14.
86
Id.
80
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power to hire and fire management companies shows that the Plaintiffs exercised control over
the managerial decisions of the Properties.87
The Defendants’ arguments that material issues exist win.
Although the Defendants marketed the Properties as a “hands-off real estate investment,”
a jury could reasonably conclude that the Plaintiffs retained sufficient managerial power over the
Properties.88 For instance, the Plaintiffs were not bound to hire the Defendants to manage the
Properties and were free to terminate the Defendants. This final decision making power over the
Properties could persuade a jury that the Plaintiffs had managerial control over the Properties,
sufficient to show that Defendants did not sell investment contracts.
Therefore, this Court denies the Plaintiffs’ request for summary judgment declaring that
the Defendants sold investment contracts.
5. There are still genuine disputes regarding whether Defendants sold unregistered securities
without licenses
Plaintiffs ask for summary judgment declaring that the Defendants sold unregistered
securities without licenses in violation of O.R.C. 1707.44(A)(1). In order to prevail on this
claim, the Plaintiffs need to establish that the Properties sold by the Defendants were investment
contracts. Because this Court already decided that there are still genuine disputes over whether
the Defendants sold investment contracts, the Plaintiffs’ request is denied.89
87
Id.
Doc. 139-12 at 2-3.
89
See Section III.A.4.
88
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B. This Court denies the Defendants’ motion for summary judgment
First, this Court refuses to grant the Defendants summary judgment prohibiting the
Plaintiffs from piercing the corporate veil. Second, this Court declines to find that the
Defendants owed the Plaintiffs no fiduciary duty. Third, the Court denies the Defendants
summary judgment over the conversion claim. After that, the Court respectively denies the
Defendants summary judgment motions over the fraudulent inducement, negligent
misrepresentation, and securities fraud claims. Finally, the Court finds that the Plaintiffs have
standing under Ohio’s Deceptive Trade Practices Act.
1. There are genuine disputes over whether the Plaintiffs can pierce the Defendants’
corporate veil
Like Plaintiffs, Defendants request summary judgment on the corporate veil issue. In
contrast to the Plaintiffs, the Defendants ask the Court to find that the veil cannot be pierced. 90
As discussed in Section III.A.3, the Court has already found a genuine dispute on this
question. The Defendants’ request is denied.
2. Whether Defendants owed the Plaintiffs a fiduciary duty presents a genuine dispute
The Plaintiffs sued the Defendants for breaching a fiduciary duty Plaintiffs claim the
Defendants owed to the Plaintiffs. 91 The Defendants ask the Court for summary judgment
finding that the Defendants owed no fiduciary duty to the Plaintiffs.92
90
Doc. 157 at 12.
Doc. 86 ¶ 131–137.
92
Doc. 145 at 19–21.
91
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Under Ohio law, the Plaintiffs must show the following elements to prove a breach of
fiduciary duty: “(1) the existence of a duty arising from a fiduciary relationship; (2) a failure to
observe the duty; and (3) an injury resulting proximately therefrom.” 93
Defendants focus on the first element, asserting that no fiduciary relationship existed
between them and Plaintiffs.
A “fiduciary relationship” is one “in which special confidence and trust is reposed in the
integrity and fidelity of another and there is a resulting position of superiority or influence,
acquired by virtue of this special trust.” 94 “A fiduciary relationship need not be created by
contract; it may arise out of an informal relationship where both parties understand that a special
trust or confidence has been reposed.”95
The Defendant Companies argue that they sold real estate and property-management
services in arms-length transactions that did not create a fiduciary relationship.96 Defendant Rom
says he has no fiduciary relationship with the Plaintiffs because he was not a party to any
contracts with the Plaintiffs. 97
The Plaintiffs counter that the Defendants marketed a “full circle buying process” where
they promised to manage the Properties they sold to the Plaintiffs. 98 Plaintiffs say that selling
this investment package created a fiduciary relationship. Additionally, the Plaintiffs argue that
Defendant Rom controlled the Defendant Companies so thoroughly that he also had a fiduciary
relationship with the Plaintiffs.
93
Pasqualetti v. Kia Motors Am., Inc., 663 F. Supp. 2d 586, 597 (N.D. Ohio 2009) (citing Werthmann v. DONet,
Inc., No. 20814, 2005 WL 1490372, at *7 (Ohio Ct. App. June 24, 2005).
94
In re Termination of Emp. of Pratt, 321 N.E.2d 603, 609 (Ohio 1974).
95
Stone v. Davis, 419 N.E.2d 1094, 1098 (Ohio 1981).
96
Doc. 154 at 20; Doc. 157 at 2.
97
Doc. 154 at 20.
98
Doc. 154.
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The Plaintiffs arguments win. Material issues exist on this breach of fiduciary duty
claim.
A reasonable juror could conclude that the parties shared a “special trust” that created a
fiduciary relationship. This special trust grew from the package of real estate sales and services
sold by the Defendants. For instance, the Defendants’ mission statement promised “a
comprehensive process for the acquisition, stabilization, management, and performance of
investment properties.” 99 The Defendants’ “full circle buying process” shows their business
model was selling investment packages that included the selection, closing, and management of
properties.100 In terms of managing the Properties, the Defendants told Plaintiffs to “sit back and
enjoy the rental income.” 101 Due to the scope of the Defendants services, a reasonable juror
could conclude that the Defendants and Plaintiffs shared a fiduciary relationship.
Finally, as discussed in Section III.A.3, a reasonable jury might decide to pierce the
Defendants’ corporate veil. This act would make Defendant Rom personally liable to the
Plaintiffs. Consequently, this Court will not grant summary judgment for Defendant Rom, even
if he personally was not a party to any management or real estate contract.
This Court denies the Defendants’ request for summary judgment on the Plaintiffs’ claim
for breach of fiduciary duty.
3. Plaintiffs sufficiently support Plaintiffs’ conversion claim
The Plaintiffs sued the Defendants for conversion, alleging that the Defendants failed to
pay them large amounts of rental income earned by the Properties.102 The Defendants ask for
99
Doc. 141-20 at 2.
Doc. 139-3.
101
Doc. 141 at 8.
102
Doc. 86 at 26–27.
100
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summary judgment on the conversion claim, saying that the Plaintiffs have not shown the rental
income in question was “earmarked” for the Plaintiffs.103
In Ohio, “[t]he elements of a conversion cause of action are (1) plaintiff’s ownership or
right to possession of the property at the time of the conversion; (2) defendant’s conversion by a
wrongful act or disposition of plaintiff’s property rights; and (3) damages.”104 “An action
alleging conversion of cash lies only where the money involved is ‘earmarked’ or is specific
money capable of identification, e.g., money in a bag, coins or notes that have been entrusted to
the defendant’s care, or funds that have otherwise been sequestered, and where there is an
obligation to keep intact and deliver this specific money rather than to merely deliver a certain
sum.”105
The Plaintiffs point to specific amounts of rental income that they say the Defendants
should have paid them.106 The Defendants respond that the Plaintiffs have not shown that the
income in question was “earmarked” or “specific money.”107
The Defendants’ arguments lose.
The parties agreed that Defendant management companies would collect rental monies,
would pay certain expenses, would receive certain management compensation and would remit
the balance to Plaintiffs. By contract, Defendants held the rental monies in trust for the Plaintiff.
The Plaintiffs sufficiently support their conversion claim. The Plaintiffs say evidence
shows the rental properties generated more income than the Defendants paid to them. If this is
103
Doc. 145 at 21–22.
Dice v. White Family Cos., 878 N.E.2d 1105, 1109 (Ohio Ct. App. 2007) (citation omitted).
105
Moore v. Caliber Home Loans, Inc., No. 1:14-CV-852, 2015 WL 5162482, at *8 (S.D. Ohio Sept. 3, 2015)
(citing Fairbanks Mobile Wash, Inc. v. Hubbell, 2009 WL 294936, at *6 (Ohio Ct. App. Feb. 9, 2009)).
106
See, e.g., Doc. 154 at 23. (“Plaintiff He received only $2,076.23 from IIP Management during this period. This
leaves $6,642.10 unaccounted for.”).
107
Doc. 157 at 4.
104
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true, the Plaintiffs present evidence that this money—as in the actual dollars they would have
received—was earmarked for payment to them.
Therefore, this Court denies the Defendants’ request for summary judgment on the
Plaintiffs’ conversion claim.
4. There are genuine disputes over whether Defendants made negligent misrepresentations
to the Plaintiffs
The Defendants ask for summary judgment on Plaintiffs’ claim that they negligently
misrepresented the “condition, maintenance of, management of, expenses of, and income from
their investment properties.” 108
To succeed on a negligent misrepresentation claim, the Plaintiffs must first establish that
the Defendants “in the course of [their] business . . . provide[d] false information.” 109 The false
information must relate to a “representation as to past or existing facts.” 110 Defendants in the
“business of supplying information for the guidance of others” are liable for negligent
misrepresentation.111
The Plaintiffs say that the Defendants made several negligent misrepresentations about
the Properties after Defendants conveyed the Properties.112
108
Doc. 86 ¶ 110.
Buescher v. Baldwin Wallace University, 86 F. Supp. 3d 789, 807 (N.D. Ohio 2015) (citing Miller v. Med. Mut.
of Ohio, 2013 WL 3817850 at *5 (Ohio Ct. App. July 18, 2013). The full test for negligent misrepresentation is:
109
“ (1) a party who, in the course of his business, profession or employment, or in any other
transaction in which he has a pecuniary interest, provides false information; (2) for the guidance of
another party in its business transaction, (3) causing the other party to suffer pecuniary loss, (4) as
a result of justifiable reliance on the information, (5) if the one providing the information failed to
exercise reasonable care or competence in obtaining and communicating the information.”
110
GEM Indus., Inc. v. Sun Trust Bank, 700 F. Supp. 2d 915, 923 (N.D. Ohio 2010) (citing Telxon Corp. v. Smart
Media of Delaware, Inc., 2005 WL 2292800 at *13 (Ohio Ct. App. Sept. 21, 2005).
111
Hamilton v. Sysco Food Servs. of Cleveland, Inc., 866 N.E.2d 559, 563 (Ohio Ct. App. 2006).
112
Doc. 86 ¶¶ 108–114.
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The Defendants made false statements to Plaintiff Huang about why Plaintiff had not
received rental income from one of his properties. During discovery, the Plaintiffs uncovered
emails suggesting that the Defendants had serious concerns about the validity of several tenants’
leases in one of Plaintiff Huang’s Properties.113 Instead of disclosing the problem to Huang, the
Defendants falsely stated that his “Section 8 rent monies were held up while the transfer of
ownership forms were pending.” 114 This false statement sufficiently qualifies as a negligent
misrepresentation.
The Defendants maintain they are still entitled to summary judgment, saying that they are
not in the business of supplying advice.115 Defendants also say the Plaintiffs contracted away the
right to sue for negligent misrepresentation.116
These arguments lose.
A reasonable juror could conclude that the Defendants are professionals in supplying
information in the real estate management business. For instance, IIP Management’s website
states that “Knowing our city, knowing our tenants, and knowing our investors means that we are
always a step ahead and able to deal with any and all real estate issues quickly, efficiently and
proactively.” 117 Public statements like this show that the Defendants held themselves out as
sophisticated advisors for real estate management.
This Court also rejects the Defendants’ argument that the Plaintiffs contracted away their
right to sue for negligent misrepresentation.
113
Doc. 154-19 at 2.
Id. at 5.
115
Doc. 145 at 28. Defendants also say that they do not have a fiduciary relationship with the Plaintiffs. However,
this Court already decided in Section III.B.2 that there are genuine disputes as to wh ether a fiduciary relationship
linked the parties.
116
Id. at 28–29.
117
IIP Management, http://iipmgmt.us/ (last visited, 9/27/2016 at 10:06 am).
114
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First, Defendants say that Plaintiffs agreed not to sue IIP Management “except in cases of
willful misconduct or gross negligence.” 118 However, the Defendants’ statements about Plaintiff
Huang’s rental income suggest the Defendants willfully misled the Plaintiffs.
Second, Defendant Company IIP Ohio says that the inclusion of “as is” clauses in the real
estate purchase agreements precludes the Plaintiffs’ negligent misrepresentation claim. 119 Under
Ohio law, when real estate is sold “as is,” the seller still retains the “duty to not commit
affirmative fraud.” 120 Because the question of affirmative fraud is in dispute,121 IIP Ohio
remains liable for negligent misrepresentation.
Therefore, this Court denies the Defendants’ request for summary judgment on the
Plaintiffs’ negligent misrepresentation claim.
5. There are genuine disputes over whether the Defendants fraudulently induced the
Plaintiffs to purchase the Properties
The Defendants ask for summary judgment on the claim that Defendants fraudulently
induced the Plaintiffs to buy the Properties. 122 As already discussed in Section III.A.1, genuine
disputes exist as to whether Plaintiffs fraudulently induced the Plaintiffs to purchase the
Properties.
However, the Defendants make two new arguments in their motion, so this Court
addresses them. First, the Defendants argue that “statements regarding the character of the
management services” were mere puffery that cannot support a fraudulent inducement claim.123
118
Doc. 145 at 29.
Id. at 28-29.
120 Stackhouse v. Logangate Prop. Mgt., 872 N.E.2d 1294, 1299 (Ohio Ct. App. 2007).
121
See Section III.A.1.
122
Doc. 145 at 29.
123
Id. at 30.
119
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Second, the Defendants say that the parol evidence rule bars the Plaintiffs’ fraudulent
inducement claim.124
The Defendants’ “puffery” argument misses the mark. Defendants argue that “a
statement like ‘professional management services’ . . . constitute[s] commercial puffery.” 125
Even if the Court accepts this as true, the argument does not address the double digit ROI
advertisements that are fundamental to the Plaintiffs’ fraudulent inducement claim.
Consequently, the Defendants are not entitled to judgment.
Finally, the parol evidence rule does not bar the Plaintiffs’ claim. Under Ohio law, the
parol evidence rule does not apply to a fraudulent inducement when “the contract, the terms of
which were not in dispute, was induced by the contractor’s fraudulent representation.” 126 Here,
the Plaintiffs do not object to the terms of the purchase agreements for the Properties. Rather,
they sue the Defendants over marketing double digit return on the Properties. Consequently, the
parol evidence rule does not bar the Plaintiffs fraudulent inducement claim.
This Court denies the Defendants’ request for summary judgment on the fraudulent
inducement claim.
6. There is a genuine dispute as to whether Defendants committed securities fraud or sold
unregistered securities
The Defendants ask for summary judgment over the claims that they committed securities
fraud and sold unregistered securities. In order to prevail on either claim, the Plaintiffs need to
establish that the Defendants sold investment contracts. This Court already concluded in Section
124
Id.
Doc. 157 at 10.
126
Katz, Teller, Brant & Hild, L.P.A. v. Farra, 2011 WL 1591286 at *5 (Ohio Ct. App. Apr. 22, 2011).
125
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III.A.4 that genuine disputes exist as to whether the Defendants sold investment contracts.
Therefore, this Court denies the Defendants’ request for judgment on this claim.
7. The Plaintiffs have standing to sue under the Ohio’s Deceptive Trade Policies Act
Defendants ask for summary judgment on the claim that they violated Ohio’s Deceptive
Trade Policies Act, arguing that the Plaintiffs do not have standing to sue. This Court already
determined that the Plaintiffs do have standing to sue in Section III.A.2, so the Defendants’
motion for summary judgment is denied.
C. This Court grants Defendant Companies IIP Cleveland Regeneration and IIP Cleveland
Regeneration 2’s motion for summary judgment as to all claims
Defendant Companies IIP Cleveland Regeneration and IIP Cleveland Regeneration 2
(together, “IIP Cleveland Companies”) filed a separate motion asking for summary judgment
over all claims asserted by the Plaintiffs. IIP Cleveland Companies say that they never had
contact with or “offered any kind of service . . . or sold any properties to any of the named
Plaintiffs.”127
When IIP Cleveland Companies filed their motion for summary judgment, the Plaintiffs
had a pending motion for class certification. In their response to the motion for summary
judgment, the Plaintiffs stated that IIP Cleveland Companies sold forty properties to various
other buyers.128 Plaintiffs asked this Court to withhold summary judgment because any decision
before class certification would be “premature” and might preclude potential class members.129
127
Doc. 146 at 2. Plaintiffs did not dispute this claim. Doc. 153.
Doc. 153 at 2.
129
Id.
128
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On July 25, 2016, this Court denied Plaintiffs motion for class certification. As these
Defendants only contacted with other non-party buyers, granting summary judgment is now
proper.
Furthermore, under Ohio law, “a plaintiff cannot pierce the corporate veil of one
corporation to reach its sister corporation.” 130 Therefore, even if a jury decided to pierce the
corporate veil of the Defendant Companies that sold or managed the Plaintiffs’ Properties,
limited liability would shield the IIP Cleveland Companies.
Therefore, this Court grants summary judgment to Defendant Companies IIP Cleveland
Regeneration and IIP Cleveland Regeneration 2 on all of the Plaintiffs’ claims.
IV.
This Court grants the Plaintiffs’ motion to compel discovery
On March 10, 2016, this Court granted the Plaintiffs’ motions to compel discovery from
the Defendants.131 The Plaintiffs now say that the Defendants have not complied with the order.
They filed another motion to compel,132 asking this Court to order the Defendants to produce:
emails from Shauna Wu’s “@investorincomeproperties.com” email account;
fully readable formatted versions of the balance sheets, general ledger reports,
general ledger detail reports, and income statements for the years 2012, 2013,
and 2014; and
balance sheets, general ledger reports, general ledger detail reports, income
statements, and tax returns for the year 2015.133
The Defendants oppose.134 They say that they (1) do not have Shauna Wu’s emails; (2)
would be prejudiced by reproducing readable documents; and (3) are not obligated to produce
130
Minno v. Pro-Fab, Inc., 905 N.E.2d 613, 617 (Ohio 2009).
Doc. 97.
132
Doc. 160.
133
Id. at 7.
134
Doc. 165.
131
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the 2015 materials.135 They also point out that the Plaintiffs failed to include a certificate of
good faith conferring when the Plaintiffs filed their motion to compel.136
A. Legal Standard
Parties may obtain discovery regarding any matter, not privileged, that is relevant to the
subject matter involved in the pending action.137 Rule 26(b)(1) of the Federal Rules of Civil
Procedure explains that “[i]nformation within this scope of discovery need not be admissible in
evidence to be discoverable.” However, the requests must be “proportional to the needs of the
case.”138 A party may request documents that are in the “possession, custody, or control of the
party upon whom the request is served.” 139
Rule 26 was amended in 2015 to include the “proportionality” requirement. However,
the 2015 amendments do not alter the basic tenet that Rule 26 is to be liberally construed to
permit broad discovery. 140
Parties may also petition the court for an order compelling disclosure or discovery. 141
Specifically, Rule 37(a)(2)(B) enables a court to enter an order “compelling an answer, or
designation, production, or inspection” for failure to respond to a Rule 33 interrogatory or a Rule
34 request for production. The rule also provides for sanctions against parties that do not
cooperate with discovery. For purposes of this rule, Rule 37(a)(4) instructs that an “evasive or
incomplete” answer must be treated as a complete failure to answer. 142
135
Id.
Id. at 1-2.
137
Fed R. Civ. P. 26(b)(1).
138
Id.
139
Fed. R. Civ. P. 34(a).
140
See United States v. Leggett & Platt, Inc., 542 F.2d 655, 657 (6th Cir. 1976) (commenting that the “Federal Rules
of Civil Procedure authorize ‘extremely broad’ discovery”).
141
Fed. R. Civ. P. 37.
142
Id.
136
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B. Analysis
This Court grants the Plaintiffs’ motion to compel. We address each of the Defendants’
objections in turn.
1. The Defendants must produce Shauna Wu’s emails
Davor Rom employed Shauna Wu at Investor Income Properties.143 Ms. Wu used the
email address shauna.wu@investorincomeproperties.com144 from which she allegedly
communicated with the Plaintiffs about the purchase and management of the Properties. 145
The Plaintiffs asked for Ms. Wu’s @investorincomeproperties.com emails in discovery.
Although the Defendants produced email chains that included emails from Ms. Wu, the
Defendants have not produced emails from Ms. Wu’s account itself. 146
The Defendants say that they have “produced all of the Shauna Wu e-mails within their
possession, custody, or control.” 147
This explanation is inadequate. The Defendants should have access to Ms. Wu’s
@investorincomeproperties.com emails. If they do not, they must explain how and why these
emails were lost or deleted.
Therefore, this Court grants the Plaintiffs’ request to compel the production of Shauna
Wu’s @investorincomeproperties.com emails.
Doc. 164-1 at 1-2; see also, Ex. 164-2 (IIP employee describing Shauna Wu as Rom’s “top agent”).
Doc. 164-1.
145
Doc. 86 ¶¶ 26, 45, 49, 54, 57, 60.
146
Doc. 160 at 4.
147
Doc. 165 at 4.
143
144
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2. The Defendants must reproduce the financial documents in readable form
The Defendants produced “balance sheets, general ledger reports, general ledger detail
reports, and income statements” from 2012, 2013, and 2014.148 However, some of these
documents contain “unreadable” text. 149
The Plaintiffs request that the Defendants reproduce these documents in readable form.
The Defendants say that reproduction would “subject Defendants to substantial burden and
expense.”
The Defendants’ argument is unpersuasive.
The Defendants will reproduce all relevant documents within fourteen days of this order
and they will bear the expense of the reproduction. The Defendants should only redact social
security numbers, medical information, and the names of children.
3. The Defendants must produce the requested 2015 financial documents
The Defendants argue that they should not have to produce certain 2015 financial
documents because they did not create these documents until 2016. 150 This argument loses.
In the Plaintiffs discovery request, they asked for the Defendants’ financial documents
from the January 1, 2012 to the present. 151 The Sixth Circuit permits supplemental productions
of responsive, relevant material when a discovery request is temporally open-ended.152 These
2015 financial documents are responsive to Plaintiffs’ discovery requests and relevant to their
claims.
148
Doc. 160 at 7.
Id. at 4.
150
Doc. 165 5-7.
151
Doc. 71-1.
152
See Rhein v. Smyth Automotive, Inc., 2012 WL 3150953, *2-3 (S.D. Ohio Aug. 2, 2012). See also, Taylor v.
Union Inst., 30 F. App'x 443, 451-52 (6th Cir. 2002) (holding that a Defendant did not have a duty to supplement
discovery because plaintiff requested discovery only over a specific ten year period).
149
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The Defendants must produce the requested 2015 financial information.
4. This Court grants the motion to compel despite the Plainitffs’ failure to include a
certificate of good faith
The Defendants note that the Plaintiffs failed to include a certification that the “movant
has conferred” with the opposing party before filing a motion to compel, as required by Federal
Rule of Civil Procedure 37(a)(1) and local rule 37.153 The Plaintiffs admit their omission, but
point to emails they sent the Defendants as evidence that they made a good faith attempt to
resolve this discovery dispute before involving this Court.154
Congress instructed courts to interpret the Federal Rules of Civil Procedure to “secure the
just, speedy, and inexpensive” resolution of disputes. 155 This Court finds that the Plaintiffs made
a good faith effort to resolve these discovery disputes before asking for judicial assistance. To
ask the Plaintiff to refile its motion to compel with a certification would cause unnecessary
expense and delay.
Therefore, this Court grants the Plaintiffs’ motion to compel.
IV. Conclusion
In summary, the Court GRANTS IN PART and DENIES IN PART the Plaintiffs’
motion for summary judgment, DENIES the Defendants’ motion for summary judgment,
GRANTS Defendant Companies IIP Cleveland Regeneration and IIP Cleveland Regeneration 2
motion for summary judgment, and GRANTS the Plaintiffs motion to compel.
153
Doc 165 at 1.
Doc. 166. at 4. Docs. 160-1; 160-2; 160-3.
155
Fed. R. Civ. P. 1.
154
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IT IS SO ORDERED.
Dated: October 3, 2016.
s/
James S. Gwin
JAMES S. GWIN
UNITED STATES DISTRICT JUDGE
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