Penn, LLC et al v. Prosper Business Development Corporation, et al

Filing 31

ORDER granting 7 the Law Firm Defendants' Motion to Dismiss; granting in part and denying in part 8 Defendant Proper's Motion for Judgment on the Pleadings and the Motion to Dismiss for Lack of Subject Matter Jurisdiction. Signed by Judge Gregory L Frost on 5/27/11. (sem1)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION

PENN, LLC, et al.,
Plaintiffs,

Case No. 2:10-cv-993
JUDGE GREGORY L. FROST
Magistrate Judge Terence P. Kemp

v.
PROSPER BUSINESS DEVELOPMENT
CORPORATION, et al.,
Defendants.

OPINION AND ORDER
This matter is before the Court on Defendants James E. Arnold & Associates, LPA and
James E. Arnold’s (“Law Firm Defendants(’)”) Motion to Dismiss (ECF No. 7), Defendant
Prosper Business Development Corporation’s (“Prosper(’s)) Motion for Judgment on the
Pleadings and Motion to Dismiss for Lack of Subject Matter Jurisdiction (ECF No. 8), Plaintiffs’
Combined Memorandum in Opposition to Defendant Prosper’s Motion for Judgment on the
Pleadings and Motion to Dismiss for Lack of Subject Matter Jurisdiction and the Law Firm
Defendants’ Motion to Dismiss (ECF No. 22), the Law Firm Defendants’ Reply in Support of
Motion to Dismiss (ECF No. 27), and the Reply Memorandum in Support of Prosper’s Motion
for Judgment on the Pleadings and Motion to Dismiss for Lack of Subject Matter Jurisdiction
(ECF No. 26). For the reasons that follow, the Court GRANTS the Law Firm Defendants’
Motion to Dismiss and GRANTS in part and DENIES in part Prosper’s Motion for Judgment
on the Pleadings and Motion to Dismiss for Lack of Subject Matter Jurisdiction.

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I. Background
Unless otherwise indicated, the allegations in this section were taken from the complaint
and the exhibits attached to or referred to in the complaint. (ECF No. 2.)
Plaintiff Penn, LLC (“Penn”) filed this action on behalf of itself and derivatively on
behalf of BigResearch, LLC (“BigResearch”) for restitution and damages. Plaintiff BigResearch
is a Delaware limited liability company primarily engaged in the business of market research.
Plaintiff Penn and Defendant Prosper created BigResearch.
In October 2000, Penn and Prosper entered into an Operating Agreement that would
control the affairs of BigResearch. The “day to day” management of the business and affairs of
BigReseach was delegated to Prosper and the other decisions were delegated to BigResearch’s
Board of Members (“Board”). (ECF No. 2.1 at 4-5; Operating Agreement §§ 5.01 and 5.02.)
That Board consisted of three individuals: two representatives of Prosper and one representative
of Penn. Id. Prosper’s representatives were Gary Drenik and Philip Rist, owners of Prosper and
Prosper Technologies, LLC (“Prosper Technologies”).
When formed, BigResearch was owned equally by Penn and Prosper. After its inception,
BigResearch sold 5.22% ownership equity to outside investors such that Penn and Prosper were
diluted to each owning 47.39% of BigResearch. At some point, Prosper purchased some of the
outside investors’ stock, making it currently the holder of 50.71% of BigResearch’s stock. Penn
alleges that it should have been permitted to purchase some of the outside investors’ stock. In its
briefing, Prosper explains that one outside investor, Robert Kamerschen, remained a 1.9% equity
holder.
The relationship between Penn and Prosper deteriorated and in 2004 BigResearch’s

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Board passed several resolutions, including one that removed Penn as a member and divested
Penn of its ownership interest in BigResearch. Penn believed these actions were illegal and on
May 6, 2004, Penn submitted a demand for arbitration to BigResearch.
In the month prior to Penn’s arbitration demand, April 2004, BigResearch entered into a
business relationship with MarketStar Corporation (“MarketStar”). That relationship ultimately
deteriorated and on February 2, 2007, Drenik and Rist, acting on their own behalf and through
their company Prosper, filed a notice of arbitration based on the contractual relationship with
MarketStar. The parties then arbitrated the dispute (“MarketStar Arbitration”).
On April 9, 2007, Defendant Prosper engaged the Law Firm Defendants to represent it in
connection with the MarketStar Arbitration. During the arbitration, Drenik, Rist, and the Law
Firm Defendants allegedly represented that “BigResearch and Prosper were one in the same.”
(ECF No. 2 ¶ 41.) As a result of the arbitration, Prosper was awarded $4,750,000 on January
23, 2009 (“MarketStar Arbitration Award”). This award was confirmed by the Common Pleas
Court of Franklin County, Ohio on September 4, 2009 and a judgment was entered in favor of
Prosper against MarketStar in the amount of $4,750,000.
Penn alleges that the business opportunity from which the MarketStar Arbitration Award
and judgment arose belonged to BigResearch, not Prosper. Penn avers that Drenik, Rist,
Prosper, and the Law Firm Defendants concealed from Penn the business opportunity from
which the MarketStar Arbitration Award came. Penn alleges that Drenik, Rist, and Prosper
fraudulently self-dealt in prosecuting the MarketStar Arbitration on behalf of Prosper, rather than
on behalf of BigResearch. Penn further alleges that Drenik, Rist, and Prosper paid their legal
expenses incurred in pursuing the MarketStar Arbitration from BigResearch.

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The arbitration requested by Penn in May 2004 did not come on for a hearing until May
2008. The arbitrator issued his initial arbitration award on September 15, 2008. In that award,
the arbitrator agreed with Penn that several resolutions of BigResearch’s Board had no legal
force, including the resolution that divested Penn of its ownership interest in BigResearch and
removed Penn’s representative from BigResearch’s Board. The Penn arbitrator ordered
BigResearch to pay Penn its proportionate distributions that BigResearch had paid to other
members during the period that Penn was purportedly divested of its membership interest. The
arbitrator appointed a Special Master to determine the amount BigResearch owed to Penn. The
Special Master’s report was completed in November 2009 and submitted to the arbitrator.
In December 2009, BigResearch’s Board voted two-to-one to allow 1.9% equity holder
Kamerschen to withdraw from BigResearch, with Drenik and Rist voting to allow withdraw and
Penn’s representative voting to prohibit withdraw. Once Kamerschen was removed, the Board
voted on dissolution of BigResearch. In another two-to-one vote that mirrored the Kamerschen
withdraw vote, Drenik and Rist voted to dissolve BigResearch and Penn’s representative voted
against dissolution. Prosper then initiated the process of dissolving BigResearch.
On February 24, 2010, Penn filed suit in the Court of Common Pleas in Franklin County,
Ohio, to enjoin the dissolution and winding up of the affairs of BigResearch and requested an
order requiring BigResearch to turn over all of its business books for an accounting. See Penn
LLC v. BigResearch, No. 10-CV-2909. The Court takes judicial notice of that lawsuit. Penn
named as defendants in the lawsuit, BigResearch, Prosper, Rist, and Drenik. BigResearch filed a
motion for partial summary judgment, which is currently pending.
On May 5, 2010, the arbitrator of the Penn Arbitration issued a decision awarding Penn

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$1,488,000 in distributions from BigResearch (“Penn Arbitration Award”). On May 17, 2010,
BigResearch filed an action in the Franklin County Court of Common Pleas, requesting vacation
and/or modification of the Penn Arbitration Award. See BigResearch v. Penn LLC, No 10-CV7420. The Court takes judicial notice of that lawsuit. On November 1, 2010, the court issued a
judgment entry modifying the Penn Arbitration Award to $777,917.13. In their briefing,
Defendants asserts that BigResearch paid this amount to Penn on November 10, 2010.
On November 5, 2010, Penn filed the instant action against Prosper, Prosper
Technologies, Rist, Drenik, and the Law Firm Defendants. Penn alleges that Defendants
engaged in a fraudulently induced scheme in which business opportunities, assets, and revenue
of BigResearch were transferred and diverted from BigResearch to Prosper and that Defendants
fraudulently concealed evidence of the scheme and conspiracy. Penn alleges the following
claims for relief:
Count One: Corrupt activity and conspiracy to engage in a corrupt activity under the
Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. §1962 (c) and (d) (“RICO”),
which is filed against all defendants;
Count Two: Fraud/concealment, which is filed against all defendants;
Count Three: Conversion and unjust enrichment, which are filed against Rist, Drenik,
Prosper, and the Law Firm Defendants; and
Count Four: Breach of fiduciary duties filed against Rist, Drenik, Prosper, and the Law
Firm Defendants;
The Law Firm Defendants filed a motion to dismiss all of the claims filed against them
and Prosper filed a combined motion to dismiss and motion for judgment on the pleadings,

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which addresses Counts One, Two, and Three. Both of these motions are ripe for review.
II. Standards
A. Fed. R. Civ. P. 12(b)(6)1
To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6) of the
Federal Rules of Civil Procedure a complaint must contain sufficient factual matter, accepted as
true, to “state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly , 550
U.S. 544, 570 (2007); Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) (clarifying the plausibility
standard articulated in Twombly). “A claim has facial plausibility when the plaintiff pleads
factual content that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.” Iqbal, 129 S. Ct. at 1949. The factual allegations of a pleading
“must be enough to raise a right to relief above the speculative level . . . .” Twombly, 550 U.S. at
555. “The court must ‘accept all the . . . factual allegations as true and construe the complaint in
the light most favorable to the Plaintiff[].’ ” Louisville/Jefferson County Metro Gov’t v.
Hotels.com, L.P., 590 F.3d 381, 384 (6th Cir. 2009) (citing Gunasekera v. Irwin, 551 F.3d 461,

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The Court notes that Penn argues under a now defunct standard, i.e., a complaint “should
not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can
prove no set of facts in support of his claim which would entitle him to relief.” Conley v.
Gibson, 355 U.S. 41, 45-46 (1957). As the Sixth Circuit explained in 2007:
In [Twombly], the Court disavowed the oft-quoted Rule 12(b)(6) standard of
Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957)
(recognizing “the accepted rule that a complaint should not be dismissed for
failure to state a claim unless it appears beyond doubt that the plaintiff can prove
no set of facts in support of his claim which would entitle him to relief”),
characterizing that rule as one “best forgotten as an incomplete, negative gloss on
an accepted pleading standard.” Twombly, 550 U.S. at 563.
Ass’n of Cleveland Fire Fighters v. City of Cleveland, Ohio, 502 F.3d 545, 548 (6th Cir. 2007).
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466 (6th Cir. 2009)).
B. Fed. R. Civ. P. 12(b)(1)
“A Rule 12(b)(1) motion can either attack the claim of jurisdiction on its face, in which
case all allegations of the plaintiff must be considered as true, or it can attack the factual basis
for jurisdiction, in which case the trial court must weigh the evidence and the plaintiff bears the
burden of proving that jurisdiction exists.” DLX, Inc. v. Kentucky, 381 F.3d 511, 516 (6th Cir.
2004) (citing RMI Titanium Co. v. Westinghouse Electric Corp., 78 F.3d 1125; 1133-35 (6th Cir.
1996); see also Howard v. Whitbeck, 382 F.3d 633, 636 (6th Cir. 2004). Here, both Prosper and
the Law Firm Defendants mount a facial challenge to Plaintiffs’ claim of jurisdiction. No party
calls on the Court to resolve any factual disputes.
C. Fed. R. Civ. P. 12(c)
The Court reviews motions made under Rule 12(c) of the Federal Rules of Civil
Procedure in the same manner it would review a motion made under Rule 12(b)(6). Vickers v.
Fairfield Med. Ctr., 453 F.3d 757, 761 (6th Cir. 2006). Accordingly, to survive a defendant’s
motion for judgment on the pleadings, the plaintiff’s complaint must state a claim to relief that is
plausible on its face, as explained in more detail above. See Twombly, 550 U.S. 544; Iqbal, 129
S. Ct. 1937.
III. Discussion
Defendant Prosper requests dismissal of three of the four claims filed against it and the
Law Firm Defendants request dismissal of each of Plaintiffs’ claims against them.
A. Penn’s Derivative Claim on Behalf of BigResearch
Rule 23.1 of the Federal Rules of Civil Procedure provides in relevant part:

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Derivative Actions
(a) Prerequisites. This rule applies when one or more shareholders or members of
a corporation or an unincorporated association bring a derivative action to enforce
a right that the corporation or association may properly assert but has failed to
enforce. The derivative action may not be maintained if it appears that the plaintiff
does not fairly and adequately represent the interests of shareholders or members
who are similarly situated in enforcing the right of the corporation or association.
(b) Pleading Requirements. The complaint must be verified and must:
(1) allege that the plaintiff was a shareholder or member at the time of the
transaction complained of, or that the plaintiff’s share or membership later
devolved on it by operation of law;
(2) allege that the action is not a collusive one to confer jurisdiction that the court
would otherwise lack; and
(3) state with particularity:
(A) any effort by the plaintiff to obtain the desired action from the directors or
comparable authority and, if necessary, from the shareholders or members;
and
(B) the reasons for not obtaining the action or not making the effort.
Fed. R. Civ. P. 23.1.
Prosper and the Law Firm Defendants argue that Penn has not complied with the
procedural requirements of Rule 23.1, which, they contend, deprives Penn of standing to file a
derivative action. Specifically, Prosper and the Law Firm Defendants argue that Penn has not
complied with Rule 23.1 because it does not fairly and adequately represent the interests of
shareholders who are similarly situated in enforcing the rights of BigResearch, that it made no
effort to obtain the desired action from the BigResearch’s Board, and that the complaint was not
properly verified. Penn argues that technical failure to comply with Rule 23.1 does not deprive a
plaintiff of standing to sue derivatively and that, in any case, it has complied with Rule 23.1.
This Court agrees.
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With regard to the arguments regarding standing, the Court notes that there is a
disagreement in this District on this issue. Compare Davis v. DCB Fin. Corp., 259 F. Supp. 2d
664, 670 (S.D. Ohio 2003) (J. Graham) (citing to Franklin County, Ohio appellate case and
stating: “Where a plaintiff does not comply with the requirements of Rule 23.1, the plaintiff has
no standing to bring suit.”) with Plumbers & Pipefitters Local 572 Pension Fund v. Cook, No.
1:03cv168, 2004 WL 5349589 (S.D. Ohio Sept. 22, 2004) (J. Rice) (“Since the decision of the
Franklin County Court of Appeals does not convince this Court that Plaintiffs are without
standing in this litigation, the Court does not agree with Judge Graham’s conclusion that failure
to meet the pleading requirements of Rule 23.1 deprives a federal court of subject matter
jurisdiction.”). This Court, however, need not resolve this dispute because Penn has met the
pleading requirements set forth in Rule 23.1, rendering the standing argument irrelevant in this
instance.
1. Fair and Adequate Representation
Prosper and the Law Firm Defendants argue that Penn does not fairly and adequately
represent the interests of shareholders or members who are similarly situated in enforcing the
rights of BigResearch.
The issue of whether a stockholder can fairly and adequately represent the
corporation and other stockholders in a derivative action under Rule 23.1 addressed
itself to the sound discretion of the court. The action of the district court will not be
set aside by this court unless we have a definite and firm conviction that the court
below committed a clear error of judgment in the conclusion it reached upon a
weighing of the relevant factors.
Owen v. Modern Diversified Industries, Inc., 643 F.2d 441, 443 (6th Cir. 1981) (citations
omitted). The burden of proof on the issue of the named plaintiff’s adequacy to represent the
interest of the other shareholders is on the defendants. Lewis v. Curtis, 671 F.2d 779, 788 (3d
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Cir. 1982); Halsted Video, Inc. v. Guttillo, 115 F.R.D. 177, 179 (N.D. Ill 1987); Fradkin v.
Ernst, 98 F.R.D. 478, 484, 36 Fed. R. Serv. 2d (Callaghan) 1352, Fed. Sec. L. Rep. (CCH) P99,
271 (N.D. Ohio 1983). “In reviewing [the] defendants’ arguments, this Court ‘must be wary of a
defendant’s efforts to defeat representation of a class on grounds of inadequacy when the effect
may be to eliminate any class representation.’ ” Fradkin, 98 F.R.D. at 484 (quoting Kline v.
Wolf, 702 F.2d 400, Fed. Sec. L. Rep. (CCH) P99, 120 at p. 95, 375-76 (2d Cir. 1983) and citing
to Cook Investment Co. v. Harvey, 20 F.R.Serv. 2d 612, 613-14 (N.D. Ohio 1975)). “The courts
have examined several factors or elements in determining whether a particular derivative
plaintiff can provide the requisite fair and adequate representation.” Davis v. Comed, Inc., 619
F.2d 588, 593 (6th Cir. 1980).
Among the elements which the courts have evaluated in considering whether the
derivative plaintiff meets Rule 23.1’s representation requirements are: economic
antagonisms between representative and class; the remedy sought by plaintiff in the
derivative action; indications that the named plaintiff was not the driving force
behind the litigation; plaintiff’s unfamiliarity with the litigation; other litigation
pending between the plaintiff and defendants; the relative magnitude of plaintiff’s
personal interests as compared to his interest in the derivative action itself; plaintiff’s
vindictiveness toward the defendants; and, finally, the degree of support plaintiff was
receiving from the shareholders he purported to represent.
Id. at 593-94.
Here, Prosper admits that it is reasonable to conclude that Penn is the driving force
behind this litigation and is familiar with this litigation. This Court agrees. With regard to the
remaining six factors the Court must consider, the parties disagree.
As to economic antagonism, Prosper argues that it exists between at least part of the
class, i.e., between Penn and Prosper, because Prosper is an adverse party to Penn in this action
and in two other lawsuits. Penn, however, is not similarly situated to Prosper and “Rule 23.1

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does not require a derivative action plaintiff to represent the interests of shareholders with whom
he is not similarly situated.” Halsted Video, 115 F.R.D. at 180. “Similarly situated shareholders
do not include majority shareholders opposed to the derivative action, for otherwise a derivative
suit could not be brought if the interests of the controlling shareholders coincided with those of
the defendants.” 5 James Wm. Moore et al., Moore’s Federal Practice ¶ 23.0.09[4] (3d ed. 1997)
(citing Schupack v. Covelli, 512 F. Supp. 1310, 1312 (W.D. Pa. 1981)). Indeed, courts have
accepted “legitimate class[es] of one” in closely held corporation situations when the majority
shareholders were alleged to be engaged in self-dealing leaving only one minority shareholder to
request derivative action representative status. Halsted Video, 115 F.R.D. at 180 (quoting Nixon
v. Adm’r of General Services, 433 U.S. 425, 472, 53 L. Ed. 2d 867, 97 S. Ct. 2777 (1977)). That
is the situation in the case sub judice. That is, the majority shareholder, Prosper, opposes a
derivative action and the only other shareholder, Kamerschen, was permitted to withdraw from
BigResearch. This leaves only Penn as a potential derivative action representative. Thus, the
Court finds that this factor weighs heavily in favor of allowing Penn to represent BigResearch in
a derivative action.
As to the factors related to other litigation between the parties and the relative magnitude
of Penn’s personal interests as compared to the derivative action itself, these too favor Penn’s
position. Related to these two factors, Prosper argues:
The “derivative” action Penn has asserted amounts to nothing more than one more
iteration of Penn’s continuing effort at avenging itself on [Prosper], Drenik, Rist,
and, now, [Prosper]’s counsel. To the extent that Penn succeeds in its “derivative”
action, it will receive no more than it would if it were to successfully prosecute a
direct action against [Prosper], the majority member in BigResearch. In short, there
is simply no significant difference in Penn’s purportedly distinct interests as the
representative of all members and as a party that has, for years, been seeking redress
against BigResearch, [Prosper] and its principals. Given that identity of interests
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between Penn as a derivative “representative” and Penn as the lone “aggrieved”
member in a close corporation, allowing Penn to pursue this action derivatively on
behalf of BigResearch makes no sense.
(ECF No. 26 at 7.) The Law Firm Defendants also argue that the lawsuits and arbitrations
involving Penn, Prosper, BigResearch, Drenik, and Rist work to disqualify Penn as a
representative because Penn is acting exclusively in its own self-interest and not the interest of
BigResearch and Prosper. Specifically, the Law Firm Defendants contend that Penn’s effort at
preventing the dissolution of BigResearch and the winding up of its affairs is draining
BigResearch of its remaining assets through this litigation. The Law Firm Defendants’ and
Prosper’s arguments are not well taken.
If Penn were to succeed in its derivative action it will not only receive what it would if it
were to successfully prosecute a direct action against Prosper. Nor would Penn’s efforts, if
successful, drain BigResearch of its remaining assets. The derivative action alleges that the
MarketStar business deal and the MarketStar Arbitration Award belong to BigResearch, not
Prosper. If the derivative suit is successful, BigResearch would be awarded the MarketStar
Arbitration Award, i.e., $4,750,000. That Award, and the business it reflects, is beneficial not
only to Penn but also to BigResearch. Further, the influx of business and capital certainly
reflects on whether BigResearch is a successful going concern, which ultimately reflects on its
ability to wind up its business and the amount of distributions due to Penn before and after
winding up. As the Sixth Circuit has explained, “ ‘[i]n prosecuting a derivative claim a
shareholder acts in the stead of the corporation, as a corporate surrogate seeking vindication of a
corporate right.’ ” Comed, 619 F.2d at 593 (quoting Sweet v. Bermingham, 65 F.R.D. 551, 553,
20 Fed. R. Serv. 2d (Callaghan) 454; Fed. Sec. L. Rep. (CCH) P94, 956 (S.D. N.Y.1975)).

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“Moreover, as the Supreme Court has noted, ‘The proceeds of the action belong to the
corporation and it is bound by the result of the suit. The heart of the action is the corporate
claim.’ ” Id. (citing Ross v. Bernhard, 396 U.S. 531, 538-39, 90 S. Ct. 733, 738, 24 L. Ed. 2d
729 (1970)).
In the instant action, this Court “must be wary” of Prosper’s efforts to defeat
representation of a class because the effect will most certainly be to eliminate any class
representation. See Fradkin, 98 F.R.D. at 484. In the circumstances before this Court, there is
no other candidate to protect the rights of BigResearch as it relates to the MarketStar business
and the MarketStar Arbitration Award except for Penn. Thus, accepting Prosper’s and the Law
Firm Defendants’ arguments here would leave BigResearch without a remedy for the alleged
misconduct of Prosper, Drenik, and Rist. See Halsted Video, 115 F.R.D. at 180 (“Accepting
defendants’ argument would leave both Mastro and Halsted Video without a remedy for the
defendants’ alleged misconduct.”).
Finally, the Court notes that the lawsuit and arbitration in which Penn named
BigReserach as a defendant were not antagonistic to BigResearch in a way that is relevant here.
That is, BigResearch was named as a defendant because the distributions were made from it.
The distributions, however, were found to be improperly made by Drenik and Rist, and Penn was
only seeking to retain the benefit of its ownership in BigResearch. Penn was not adverse to
BigResearch in relevant ways such as attempting to compete for its business, attempting to take
over the corporation, or to use the suits/arbitration as leverage in other cases. See e.g., Comed,
619 F.2d at 597-98 (conflict of interest disqualified plaintiff shareholder from filing derivative
action because of potential that derivative suit would be used as leverage in several other suits

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against same defendant); Hall v. Aliber, 614 F. Supp. 473, 475-76 (E.D. Mich. 1985)
(representative plaintiff was inadequate when suit challenged corporation’s sale of stock
allegedly made for the purpose of thwarting takeover attempt by the plaintiff). Nor is Penn
adverse to BigResearch in a relevant way such as participating in the wrongdoing against the
corporation. See e.g., Maxwell v. Stein, No. 93 Civ. 2830, 1993 U.S. Dist. LEXIS 17013, at *1618 (S.D. N.Y. Dec. 3, 1993) (shareholder representative was disqualified because fraudulent acts
had been committed while shareholder was in control of corporations at issue and shareholder
had been adjudicated as defrauder); Bartels v. Newirth v. Newirth, No. 75 Civ. 5664, 1976 U.S.
Dist. LEXIS 13311, at *9-10 (S.D. N.Y. Sept. 9, 1976) (controlling shareholders did not provide
fair and adequate representation because they participated in transactions that were subject of
derivative action).
As to the remaining two factors: Penn’s vindictiveness toward all of the defendants and
the degree of support Penn is receiving from the shareholders it purports to represent, they too
favor Penn’s position. The minority shareholder, Kamerschen, has requested to withdraw from
BigResearch and BigResearch’s Board permitted such withdraw.2 Consequently, the Court
cannot reasonably anticipate a recently withdrawn equity member to support a derivative action.
As to Penn’s vindictiveness, while the individual members of Prosper and Penn certainly seem to
have animosity toward each other, the Court finds that this relationship does not rise to the level

2

Prosper’s arguments in this regard are confusing. On the one hand, Prosper contends
that BigResearch’s Board voted to permit the one minority equity holder, Kamerschen, to
withdraw. On the other hand, Prosper argues that Penn is not a “suitable representative of the
interests of either BigResearch or all of its members. . . . especially [considering] that Penn is
receiving no support in this litigation from the other minority member [Kamerschen] in
BigResearch.” (ECF No. 26 at 8.) This issue, however, is irrelevant to the Court’s decision
related to the appropriateness of Penn as the representative in a derivative action.
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of vindictiveness as that term is used in a legal sense.
Accordingly, the Court concludes that Penn can fairly and adequately represent the
interests of shareholders or members who are similarly situated in enforcing the rights of the
corporation or association.
2. Demand
Under Federal Rule 23.1, a derivative plaintiff must demand that the board of directors
take the desired action prior to filing suit, or set forth with particularity the reasons for not doing
so. Whether the failure to make a demand is excused is determined under the substantive law of
the state of incorporation, here Delaware. Kamen v. Kemper Fin. Services, Inc., 500 U.S. 90,
108-09, 114 L. Ed. 2d 152, 111 S. Ct. 1711 (1991). Prosper and the Law Firm Defendants argue
that Penn did not make any demand upon BigResearch’s Board, nor did Penn set forth in its
complaint any reason for such failure. Penn, however, argues that it need only allege
particularized factual allegations that create a reasonable doubt that, as of the time the complaint
is filed, a majority of BigResearch’s Board could have properly exercised its independent and
disinterested business judgment in responding to a demand. This Court agrees.
The Sixth Circuit, interpreting Delaware law, explains:
Under Rales [v. Blasband, 634 A.2d 927, 932 (Del. 1993)) then, the court must
determine “whether or not the particularized factual allegations . . . create a
reasonable doubt that, as of the time the complaint is filed, [a majority of] the board
of directors could have properly exercised its independent and disinterested business
judgment in responding to a demand.” Rales, 634 A.2d at 934. To establish a
reasonable doubt, plaintiffs are not required to plead facts that would be sufficient
to support a judicial finding of demand futility. Grobow v. Perot, 539 A.2d 180, 186
(Del. 1988). Nor must plaintiffs demonstrate a reasonable probability of success on
the merits. Rales, 634 A.2d at 934. Further, whether plaintiffs have alleged facts
sufficient to create a reasonable doubt concerning the disinterestedness and
independence of a majority of the Board must be determined from the accumulation
of all the facts taken together. See Harris v. Carter, 582 A.2d 222, 229 (Del. Ch.
15

1990).
McCall v. Scott, 239 F.3d 808, 816-17 (6th Cir. 2001) (omission in original) (“We agree with
plaintiffs that the district court, in adopting the magistrate judge’s report and recommendation,
erred by viewing the factual allegations separately and by refusing to draw reasonable inferences
in plaintiffs’ favor.”).
Disinterested “means that directors can neither appear on both sides of a transaction
nor expect to derive any personal financial benefit from it in the sense of
self-dealing, as opposed to a benefit which devolves upon the corporation or all
stockholders generally . . . . Independence means that a director’s decision is based
on the corporate merits of the subject before the board rather than extraneous
considerations or influences.”
Bakerman v. Sidney Frank Importing Co., Inc., No. Civ.A. 1844-N, 2006 WL 3927242, at *7
(Del. Ch. Oct. 10, 2006) (citing In re J.P. Morgan Chase & Co., No. Civ.A. 531-N, 2005 WL
1076069, at *8 (Del. Ch. Apr. 29, 2005), Aronson v. Lewis, 473 A.2d 805, 812, 816 (Del. 1984),
and Rales, 634 A.2d at 936).
In the instant action, Drenik and Rist could not be considered disinterested or
independent in relation to the MarketStar business deal, in which they allegedly participated and
approved of a transaction that would benefit their company, Prosper. Drenik and Rist are the
sole owners of Prosper, the entity that allegedly usurped the business opportunity and the
resultant $4,750,000 MarketStar Arbitration Award. If the derivative suit is successful, that
award will be taken from Prosper and given to BigResearch, thereby requiring distributions from
the proceeds to go not only to Prosper but also to Penn. See e.g., Lewis v. Curtis, 671 F.2d 779,
785 (3d Cir. 1982) (demand is futile when complaint alleges that all directors participated in and
approved of self-interested transaction); Johnson v. Hui, 752 F. Supp. 909, 913 (N.D. Cal. 1990)
(demand excused when suit accused six members of eight-person board of insider trading);
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Papilsky v Berndt, 59 F.R.D. 95, 17 Fed. R. Serv. 2d (Callaghan) 214, Fed. Sec. L. Rep. (CCH)
P93, 902 (S.D. N.Y. 1973) (complaint is sufficient if it alleges that all affiliated directors who
controlled and directed corporation at time of wrongs alleged participated in or acquiesced in
challenged transactions and are liable therefor).
Thus, the Court finds that Penn has made particularized factual allegations that are
sufficient to create a reasonable doubt that, as of the time the complaint was filed, a majority of
BigResearch’s Board, i.e., Prosper owners Drenik and Rist, could not have properly exercised
their independent and disinterested business judgment in responding to a demand that Prosper
relinquish the MarketStar business relationship and resultant economic benefits to BigResearch.
3. Verification
Prosper and the Law Firm Defendants argue that Penn has failed to meet Rule 23.1’s
verification requirement. Penn, in its memorandum in opposition, admits that it failed to verify
the complaint and, therefore, submits an affidavit from counsel verifying the complaint. Prosper,
in its reply memorandum, contends that verification by counsel is insufficient. Instead, it
contends that the verification must be made by the named plaintiff, Penn. This Court disagrees.
The leading case on the requirements for verification is Surowitz v. Hilton Hotels Corp.,
383 U.S. 363, 15 L. Ed. 2d 807, 86 S. Ct. 845 (1966) (requirement analyzed under predecessor to
Fed. R. Civ. P. 23.1(b)). The Surowitz Court explained that the verification requirement of Rule
23.1 is intended only to clear the Court of “strike suits” and not to be a general impediment to
shareholder derivative actions. Thus, courts regularly find that the failure to verify is a technical
defect curable by amendment. Halsted, 115 F.R.D. at 180 (allowing amendment to verify and
stating that, “while Mastro’s complaint must be verified, his mere failure to do so does not entitle

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the defendants to summary judgment.”); Weisfeld v. Spartans Indus., Inc., 58 F.R.D. 570, 578,
17 Fed. R. Serv. 2d (Callaghan) 331; Fed. Sec. L. Rep. (CCH) P93, 719 (S.D. N.Y. 1972) (court
ordered plaintiff to file an affidavit verifying the complaint and serve it upon the defendants
within ten days); Porte v. Home Federal Sav. & Loan Assoc., 409 F. Supp. 752, 754 (N.D. Ill.
1976) (court granted defendants’ motion to compel plaintiff to verify his complaint within thirty
days).
Hence, the issue for the Court to determine is whether verification by counsel is
sufficient. In Surowitz, concurring separately, Justice Harlan stated that the rule directs that “in
derivative suit ‘the complaint shall be verified by oath’ but nothing dictates that the verification
be that of the plaintiff shareholders.” Surowitz, 383 U.S. at 374 (citation omitted). “In Justice
Harlan’s view, the affidavit of Mrs. Surowitz’ counsel would be adequate for the purposes of the
rule. Professor Moore has endorsed Judge Harlan’s view.” Fradkin, 98 F.R.D. at 483, n.4
(citing 3B Moore’s Federal Practice P23.1.16 at 62 n.22 (2d ed. 1982)). Thus, this Court too
finds counsel’s verification sufficient. And, in this instance, the facts verified by counsel’s
affidavit sufficiently indicate that Penn has investigated the charges and found them to be of
substance.
4. Conclusion - Derivative Action
Based on the foregoing, the Court concludes that Penn is the proper party to file a
derivative claim on behalf of BigResearch. Consequently, the Court DENIES Prosper’s Motion
for Judgment on the Pleadings and Motion to Dismiss for Lack of Subject Matter Jurisdiction in
this regard.

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B. RICO
Prosper and the Law Firm Defendants contend that Plaintiffs have failed to state
plausible RICO claims against them. This Court agrees.
Plaintiffs allege RICO claims under 18 U.S.C. § 1962(c) and (d). Section 1962(c)
provides that “[i]t shall be unlawful for any person through a pattern of racketeering activity or
through collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest
in or control of any enterprise which is engaged in, or the activities of which affect, interstate or
foreign commerce.” 18 U.S.C. § 1962(c). Section 1962(d) states that “[i]t shall be unlawful for
any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this
section.” 18 U.S.C. § 1962(d).
A complaint asserting a RICO claim must allege the (1) conduct (2) of an enterprise (3)
through a pattern (4) of racketeering activity. Sedima, SPRL v. Imrex Co., 473 U.S. 479, 496, 87
L. Ed. 2d 346, 105 S. Ct. 3275 (1985); Kenty v. Bank One, Columbus, N.A., 92 F.3d 384, 389
(6th Cir. 1996). To establish a “racketeering activity,” a plaintiff must allege a predicate act.
Advocacy Org. for Patients & Providers v. Auto Club Ins. Ass’n, 176 F.3d 315, 322 (6th Cir.
1999) (quoting Kenty, 92 F.3d at 389). As to Plaintiffs’ second claim, “to prove a RICO
conspiracy under 18 U.S.C. § 1962(d), the [plaintiff] must establish, in addition to the
aforementioned elements, the existence of an illicit agreement to violate the substantive RICO
provision.” United States v. Sinito, 723 F.2d 1250, 1260 (6th Cir. 1983) (citation omitted).
Here, Plaintiffs allege mail fraud and/or wire fraud as the necessary predicate acts. Civil
RICO claims based on alleged mail or wire fraud fall under Rule 9(b) of the Federal Rules of
Civil Procedure and must be pleaded with particularity. Kenty, 92 F.3d at; Berent v. Kemper

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Corp., 780 F. Supp. 431, 448 (E.D. Mich. 1991) (“Courts have repeatedly held in RICO cases
alleging mail fraud and wire fraud as the ‘predicate acts,’ the underlying fraudulent activities
must be pled with particularity.”). Indeed, “[c]ourts have been particularly sensitive to Fed. R.
Civ. P[.] 9(b)’s pleading requirements in RICO cases in which the ‘predicate acts’ are mail fraud
and wire fraud, and have further required specific allegations as to which defendant caused what
to be mailed (or made which telephone calls), and when and how each mailing (or telephone call)
furthered the fraudulent scheme.” Berent, 780 F. Supp. at 448 (emphasis in original); FRC Int’l.,
Inc. v. Taifun Feuerloschgeratebau Und Vertriebs Gmbh, 2002 U.S. Dist. LEXIS 17559, RICO
Bus. Disp. Guide P10357 (N.D. Ohio Sept. 4, 2002); Paycom Billing Servs. v. Payment Res.
Int’l, 212 F. Supp. 2d 732, 736, RICO Bus. Disp. Guide P10277 (W.D. Mich. 2002). Thus, here,
Plaintiffs “must make specific allegations as to which defendant made which telephone calls or
mailings, and how each call or mailing furthered the fraudulent scheme.” Carr v. Countrymark
Cooperative, Inc., No. C-2-96-1246, 1998 U.S. Dist. LEXIS 23000, at *9 (S.D. Ohio Jan. 29,
1998) (citing Eby v. Producers Co-op, 959 F. Supp. 428, 431 (W.D. Mich 1997)). “A plaintiff
must also plead with particularity the false statement the defendant made and upon which the
plaintiff relied.” Id. (citing Kenty, 92 F.3d at 390).
The complaint in the instant case fails to satisfy the above pleading standards.
1. Racketeering Activity
With regard to racketeering activity, Plaintiffs have failed to sufficiently allege the
predicate acts of mail and wire fraud. Plaintiffs’ complaint is replete with conclusory allegations
regarding Prosper’s and the Law Firm Defendants’ alleged participation in a RICO enterprise.
Plaintiffs, however, fail to provide any facts identifying the persons involved, or the time, place,

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or content of the allegedly fraudulent mail and/or wire communications. See e.g., Compl. ¶ 43
(“fraudulent representations were sent via wire and/or United States mail”). Plaintiffs’
allegations fall far short of the required particularity with which the predicate acts of mail and
wire fraud must be pleaded. See Eby, 959 F. Supp. at 431 (in RICO cases in which the predicate
acts are mail fraud and wire fraud, specific allegations must be pleaded as to which defendant
caused what to be mailed (or made which telephone calls), and when and how each mailing (or
telephone call) furthered the fraudulent scheme).
The Court finds that Plaintiffs failed to plead with particularity the predicate acts that
form the basis of Plaintiffs’ RICO claims against Prosper and the Law Firm Defendants.
Because of this conclusion, Plaintiffs’ conspiracy claim under § 1962(d) of RICO must also be
dismissed because it too depended on adequate allegations of mail fraud and/or wire fraud.
2. Conduct
As to Plaintiffs’ allegations related to Prosper’s and the Law Firm Defendants’ conduct,
RICO only prohibits the racketeering activities of those persons employed by or associated with
an enterprise and that conducts or participates in the conduct of such enterprise’s affairs. See 18
U.S.C. § 1962(c). In interpreting this language, the United States Supreme Court has adopted
the “operation and management” test, which requires the defendant to have had “some part in
directing the enterprise’s affairs.” Reves v. Ernst & Young, 507 U.S. 170, 179 (1993) (emphasis
in original). Specifically, the Reves Court explained:
Once we understand the word “conduct” to require some degree of direction and the
word “participate” to require some part in that direction, the meaning of § 1962(c)
comes into focus. In order to “participate, directly or indirectly, in the conduct of
such enterprise’s affairs,” one must have some part in directing those affairs. Of
course, the word “participate” makes clear that RICO liability is not limited to those
with primary responsibility for the enterprise’s affairs, just as the phrase “directly or
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indirectly” makes clear that RICO liability is not limited to those with a formal
position in the enterprise, but some part in directing the enterprise’s affairs is
required. The “operation or management” test expresses this requirement in a
formulation that is easy to apply.
Reves, 507 U.S. at 179 (emphasis in original).
Plaintiffs here have merely alleged involvement by Prosper and the Law Firm
Defendants, which is insufficient. Plaintiffs fail completely to allege that Prosper and/or the Law
Firm Defendants directed any of the alleged enterprise’s affairs. Indeed, just the opposite.
Plaintiffs allege that Prosper and the Law Firm Defendants were “under the exclusive control of
Drenik and Rist,” acted at the “behest” of Drenik and Rist, “carr[ied] out [the] directives” of
Drenik and Rist, and “operate[d] pursuant to [the] directives” of Drenik and Rist. (ECF No. 2 ¶¶
119(a), (b), and (c); ¶¶ 29-49 (also alleging these defendants’ involvement with, but not direction
of, the alleged enterprises affairs). See also Hager v. ABX Air, Inc., No. 2:07-cv-317, 2008 WL
819293, at *15, RICO Bus.Disp.Guide 11,464 (S.D. Ohio March 25, 2008) (dismissing two
defendants for failure to state a plausible RICO claim because the plaintiff failed “to allege facts
supporting a conclusion that [two of the defendants] had some part in directing [the] hypothetical
enterprise’s affairs, not merely that [these two defendants] acquiesced to or went along with the
enterprise”).
With regard to the Law Firm Defendants, Plaintiffs’ complaint is particularly deficient.
That is, neither the complaint nor Penn’s memorandum in opposition to Prosper’s and the Law
Firm Defendants’ motion to dismiss and for judgment on the pleadings contain any facts
suggesting that the Law Firm Defendants’ involvement in the alleged enterprise constituted
anything more than the provision of traditions legal services. Courts agree that the provision of
traditional legal services does not constitute the “operation or management” of an enterprise for
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purposes of RICO liability. See e.g., Azrielli v. Cohen Law Offices, 21 F.3d 512, 521-522 (2d
Cir. 1994) (dismissing RICO claim against attorney who “acted as no more than [an] attorney”);
Nolte v. Pearson, 994 F.2d 1311, 1316-1317 (8th Cir.1993) (affirming directed verdict in favor
of law firm that drafted documents sent to prospective clients based on information provided by
client did not establish RICO liability; no evidence that firm participated in conduct of the affairs
of the enterprise);Baumer v. Pachl, 8 F.3d 1341, 1344 (9th Cir. 1993) (dismissing RICO claim
against an attorney whose “role was limited to providing legal services”); Rolfes v. MBNA Am.
Bank N.A., 416 F. Supp. 2d 745, 752 (D. S.D. 2005) (dismissing plaintiff’s RICO claim against
attorneys who provided “ordinary professional assistance”); Petri v. Gatlin, 997 F. Supp. 956,
986 (N.D. Ill. 1997) (although an accountant, like an attorney, “manages” several aspects of its
client’s matters, that type of “management” is not synonymous with the “operation or
management” of an enterprise required to sustain a RICO claim; collecting cases); Walter, 538
F.3d at 1249 (dismissing RICO claim against attorney and her law firm because “[o]ne can be
‘part’ of an enterprise without having a role in its management and operation. Simply
performing services for the enterprise does not rise to the level of direction, whether one is
‘inside’ or ‘outside.’ ”); Menuskin v. Williams, 940 F. Supp. 1199, 1210 (E.D. Tenn. 1996)
(dismissing RICO claim against attorney who did not do “anything more than provide standard,
routine services for [plaintiff]”); Bailey v. Trenam Simmons, Kemker, Scharf, Barkin, Frye &
O’Neill, P.A., 938 F. Supp. 825, 827 (S.D. Fla. 1996) (“[P]roviding standard legal services does
not create RICO liability under the operation and management standard.”); Gilmore v. Berg, 820
F. Supp. 179, 183 (D. N. J. 1993) (lawyer’s preparation of allegedly misleading tax opinion letter
merely constituted the rendition of legal services, not participation in the direction of the affairs

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of the enterprise).
3. Remedy of the Deficiencies in the Complaint
In their memorandum in opposition to Prosper’s and the Law Firm Defendants’ motions
to dismiss and motion for judgment on the pleadings, Plaintiffs provide an affidavit that they
claim remedies the deficiencies in the complaint. However, even if the Court were to consider
Plaintiffs’ affidavit, it fails to remedy the above noted deficiencies in the complaint. Thus, to the
extent Plaintiffs suggest that amendment to the complaint would somehow remedy its
deficiencies, this Court disagrees.
Plaintiffs also suggests that they should be entitled to discovery to obtain the information
they need to remedy the deficiencies in the complaint because the information they needs is in
the control of Prosper and the Law Firm Defendants. Plaintiffs’ suggestion is not well taken.
Indeed, another Judge in this District, Judge George C. Smith, has already rejected an almost
identical argument, relying upon Eby v. Producers Co-op, and stating:
The Court in Eby rejected the identical argument in a strikingly similar case, stating:
Plaintiffs claim that they should not be required to plead with
specificity because information is under the Defendant’s control. In
Berent v. Kemper [Corp.], 780 F. Supp. 431 (E.D. Mich. 1991), aff’d,
973 F.2d 1291 (6th Cir. 1992)] the court rejected a plaintiff’s claim
that [it] should be entitled to pursue discovery rather than comply
with the requirements of Rule 9(b). The court quoted NL Industries,
Inc. v. Gulf & Western Industries, Inc., 650 F. Supp. 1115 (D. Kansas
1986) : “[Rule 9(b)’s] requirement of greater specificity is intended
to protect defendants from the harm that results from charges of
serious wrongdoing, and to give defendants notice of the conduct
complained of. Complaints alleging fraud should seek redress for a
wrong, rather than attempt to uncover unknown wrongs.” Berent,
780 F. Supp. at 448-449, quoting NL Industries, Inc., 650 F. Supp. at
1129-30.
959 F. Supp. at 431. The reasoning of Eby is sound, and the Court likewise rejects
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plaintiffs’ argument in the instant case.
Carr, 1998 U.S. Dist. LEXIS 23000, at *9-10. Like Judge Smith found in Carr, this Court too
finds the reasoning of Eby sound, and likewise rejects Plaintiffs’ argument in the case sub judice.
4. Conclusion - RICO
Based on the foregoing the Court concludes that, even when accepting as true all of
Plaintiffs’ allegations and construing the complaint in the light most favorable to Plaintiffs,
Plaintiffs have failed to state a plausible RICO claim against Prosper or the Law Firm
Defendants. Therefore the Court GRANTS the Law Firm Defendants’ Motion to Dismiss and
Prosper’s Motion for Judgment on the Pleadings and Motion to Dismiss for Lack of Subject
Matter Jurisdiction as they relate to this claim.
C. Fraudulent Concealment
For the same reasons the Court explained supra regarding Plaintiffs’ allegations of RICO
violations based on the predicate acts of mail fraud and wire fraud, the Court finds here that
Plaintiffs have failed to state a claim for common law fraud that is plausible on its face.
Although the Sixth Circuit reads Federal Rule of Civil Procedure 9(b)’s pleading requirement
liberally, it still requires “at a minimum” allegations of “the time, place, and content of the
alleged misrepresentation on which [the plaintiffs] relied; the fraudulent scheme; the fraudulent
intent of the defendants; and the injury resulting from the fraud.” Coffey, 2 F.3d at 161-62.
Plaintiffs have failed to meet these pleading requirements.
Accordingly, even when viewing the complaint in the light most favorable to Plaintiffs
and accepting all factual allegations as true, Plaintiffs have failed to state a common law fraud
claim against Prosper or the Law Firm Defendants that is plausible on its face. Consequently,

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the Court GRANTS the Law Firm Defendants’ Motion to Dismiss and Prosper’s Motion for
Judgment on the Pleadings and Motion to Dismiss for Lack of Subject Matter Jurisdiction as
they relate to this claim.
D. Conversion/Unjust Enrichment
Prosper and the Law Firm Defendants assert that Plaintiffs’ conversion and unjust
enrichment claims fail to state a claim upon which relief can be granted.
1. The Law Firm Defendants
a. Unjust enrichment
In Ohio, a claim of unjust enrichment requires a plaintiff to establish (1) a benefit
conferred by the plaintiff upon a defendant, (2) the defendant’s knowledge of the benefit, and (3)
the defendant’s retention of the benefit under circumstances where it would be unjust to do so
without payment. Cantwell Mach. Co. v. Chicago Mach. Co., 184 Ohio App. 3d 287, 290, 2009
Ohio 4548, 920 N.E.2d 994 (2009). The Law Firm Defendants argue that Plaintiffs have failed
to allege a plausible claim for unjust enrichment against them because Penn makes no allegation
that it conferred a benefit upon the Law Firm Defendants and because Plaintiffs make no
allegation that the Law Firm Defendants’ retention of the benefit conferred upon it by
BigResearch would be unjust. The Law Firm Defendants’ arguments are well taken.
With regard to conferring a benefit upon the Law Firm Defendants, these defendants
correctly argue that there is a legal distinction between a limited liability company, like
BigResearch, and its members. In Ohio, an attorney’s duties to a limited liability company run
only to the company itself and not to its members. See Ohio Rev. Code § 1705.61 (“Absent an
express agreement to the contrary, a person providing goods to or performing services for a

26

limited liability company owes no duty to, incurs no liability or obligation to, and is not in
privity with the members or creditors of the limited liability company by reason of providing
goods to or performing services for the limited liability company.”). Thus, here, the benefit of
being paid for its legal services was a benefit conferred upon the Law Firm Defendants by
BigResearch, not Penn. Penn therefore, could only file this claim derivatively on behalf of
BigResearch.
As to the Law Firm Defendants’ retention of the benefit of payment for its legal services,
the Court finds that Plaintiffs’ fail to allege “circumstances where it would be unjust” for these
defendants to retain that benefit. Plaintiffs provide nothing but conclusory allegations regarding
the Law Firm Defendants and a request to engage in a fishing expedition to determine if these
defendants engaged in illegal conduct. Consequently, Plaintiffs have failed to state an unjust
enrichment claim upon which relief can be granted against the Law Firm Defendants on behalf
of Penn or derivatively on behalf of BigResearch.
b. Conversion
Conversion is “a wrongful exercise of dominion over property in exclusion of the right of
the owner, or withholding it from his possession under a claim inconsistent with his rights.”
Zacchini v. Scripps-Howard Broad. Co., 47 Ohio St. 2d 224, 226, 351 N.E.2d 454 (1976),
overruled on other grounds, 433 U.S. 562, 578, 97 S. Ct. 2849, 53 L. Ed. 2d 965 (1977). To
prove conversion, a plaintiff must show: “(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.” Haul Transp. of VA, Inc. v. Morgan,
No. CA 14859, 1995 Ohio App. LEXIS 2240, at *9 (Ohio Ct. App. June 2, 1995) (citation

27

omitted).
In the instant action, Plaintiffs have failed to sufficiently allege any wrongful act that
permitted the Law Firm Defendants to convert Plaintiffs’ property. As stated throughout this
Opinion and Order, Plaintiffs merely speculate that the Law Firm Defendants were somehow
involved in the alleged frauds committed against Penn and BigResearch by Rist, Drenik,
Prosper, and Prosper Technologies.
c. Conclusion - unjust enrichment and conversion
The Court concludes that even when accepting all of Plaintiffs’ factual allegations as true
and viewing the complaint in the light most favorable to them, they have failed to state a
plausible claim for unjust enrichment or conversion against the Law Firm Defendants.
Accordingly, the Court GRANTS the Law Firm Defendants’ Motion to Dismiss as it relates to
those two claims.
2. Prosper
Prosper argues that the Operating Agreement that governs the affairs of BigResearch
controls the dispute between Plaintiffs and Prosper. Review of the Operating Agreement,
Prosper contends, shows that the wrongs allegedly committed by Prosper were permissible.
Further, Prosper argues that, under Delaware law, which by agreement of the parties governs the
Operating Agreement, “to assert a tort claim along with a contract claim, the plaintiff must
generally allege that the defendant violated an independent legal duty apart from the duty
imposed by contract.” (ECF No. 8 at 21-22) (quoting Kuroda v. SPJS Holdings, L.L.C., 971
A.2d 872, 889-90 (Del. Ch. 2009)). Prosper concludes that, because the rights Plaintiffs seek to
assert arise only under the Operating Agreement, its tort claims must be dismissed. This Court

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disagrees.
First, in assessing Plaintiffs’ conversion and unjust enrichment claims, Prosper
determined that they are based upon the allegations that Penn was not permitted the opportunity
to purchase a minority shareholder’s stocks when they were sold. This conclusion, however, is
inaccurate. The complaint specifically alleges that Prosper deprived BigResearch and Penn
“from benefitting from the business opportunities, trade secrets, clients, assets, funds,
documents, records, metadata and information of BigResearch.” (ECF No. 2 ¶ 138.) Read in
concert with the other factual allegations made in the complaint, the Court easily concludes that
Plaintiffs sufficiently alleged that Prosper converted business opportunities that belonged to
BigResearch and that Prosper was unjustly enriched by that conversion.
Further, Prosper’s claim that Delaware law prohibits “a tort claim along with a contract
claim,” is irrelevant here. Plaintiffs do not allege a breach of contract claim. Nor does it appear,
at this stage of the proceedings, that the Operating Agreement governs that relationship between
the parties that gives rise to the unjust enrichment and conversion claims. Prosper invites the
Court to review the contract to determine whether “Penn’s allegations proceed from duties that
arise under the Operating Agreement[.]” (ECF No. 26 at 15.) This inquiry, however, is not one
that is appropriate at this juncture. The Court here must accept the factual allegations in the
complaint as true and determine whether those allegations state a plausible claim for relief.
Under this standard, the Court concludes that Plaintiffs have stated plausible claims for relief for
unjust enrichment and conversion against Prosper.
Accordingly, the Court DENIES Prosper’s Motion for Judgment on the Pleadings and
Motion to Dismiss for Lack of Subject Matter Jurisdiction as it relates to Plaintiffs’ conversion

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and unjust enrichment claims.
E. Fiduciary Duty Claim
The Law Firm Defendants argue that Penn’s claim of breach of fiduciary duty should be
dismissed as implausible because in Ohio an attorney representing a limited liability company
does not owe fiduciary duties to the members of that company. Penn agrees that it has failed to
state a claim for breach of fiduciary duty against the Law Firm Defendants. Instead, Plaintiffs
argue that the claim is a derivative claim that is filed on behalf of BigResearch and it is one for
aiding and abetting a breach of a fiduciary duty. The Law Firm Defendants reply that Plaintiffs
did not allege a claim for aiding and abetting a breach of fiduciary duty claim and that, even if
they did, that allegation does not rise above the speculative level. This Court agrees.
First, the Court notes that Plaintiffs certainly did not make clear that they were pursuing a
claim for aiding and abetting a breach of fiduciary duty. To the extent that Plaintiffs have
alleged such a claim, that claim cannot survive the Law Firm Defendants’ Motion to Dismiss.
All relevant parties agree that any claim for a breach of a fiduciary duty claim arises from
the rights and responsibilities of the parties set forth in Operating Agreement, which dictates
Delaware law is applicable to this claim. Under Delaware law, a plaintiff must allege that the
defendant non-fiduciary (here, the Law Firm Defendants) “knowingly participated in a breach.”
Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC, 2009 Del. Ch. LEXIS 54, at *40
(Del. Ch. April 20, 2009) (citations omitted). Penn has made no such allegation. The complaint
is devoid of any facts suggesting that the Law Firm Defendants intentionally or knowingly
participated in a breach of any duty. To the contrary, the complaint alleges that the Law Firm
Defendants did nothing more than act as legal counsel for Prosper and BigResearch and acted

30

only pursuant to the directives of Drenik and Rist.
Consequently, Plaintiffs have failed to state a plausible aiding and abetting a breach of
fiduciary duty claim even when the Court accepts all of the complaint’s factual allegations as
true and views those facts in the light most favorable to Plaintiffs. Therefore, the Court
GRANTS the Law Firm Defendants’ Motion to Dismiss as it relates to this claim.
IV. Conclusion
For the reasons set forth above, the Court GRANTS the Law Firm Defendants’ Motion
to Dismiss (ECF No. 7) and GRANTS in part and DENIES in part Prosper’s Motion for
Judgment on the Pleadings and Motion to Dismiss for Lack of Subject Matter Jurisdiction (ECF
No. 8). Specifically, the Court GRANTS Prosper’s motion as it relates to the RICO and
fraudulent concealment claims and DENIES it as it relates to the conversion and unjust
enrichment claims and as it relates to Penn’s ability to act as a derivative plaintiff on behalf of
BigResearch on any of the remaining claims.
IT IS SO ORDERED.
/s/ Gregory L. Frost
GREGORY L. FROST
UNITED STATES DISTRICT JUDGE

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