The Bur-Cam Group, LLC v. Pearson et al

Filing 11

MEMORANDUM and ORDER denying 2 Motion to Dismiss Signed by Honorable James M. Munley on 4/19/10 (sm, )

IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA THE BUR-CAM GROUP, LLC, Plaintiff : No. 3:10cv240 : : (Judge Munley) : : v. : : SAMUEL E. PEARSON, III; : EDWARD G. LANG; : JOHN RECKLING; : DEBRA RECKLING; and : COMMERCIAL CONCEPTS, LTD., : Defendants : ::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::
M E M O R AN D U M B e fo re the court is Defendant Edward G. Lang's motion to dismiss. Having been fully briefed, the matter is ripe for disposition. B a c k g ro u n d T h is case arises out of a real-estate deal between the Plaintiff The Bur-Cam G ro u p , Inc. ("Bur-Cam") and Defendants John and Debra Reckling ("the Recklings"). (See Complaint (hereinafter "Complt.") Exh. A to Notice of Removal (Doc. 1)). On or a b o u t January 30, 2008 plaintiff purchased real estate located at 1451 North Elmira S tre e t in Athens Township, Pennsylvania. (Id. at ¶ 7). Plaintiff paid the Recklings $ 1 ,3 0 0 ,0 0 0 for this property. (Id.). The property contained an improved commercial s tru c tu re where a Jiffy Lube operated. (Id. at ¶ 8). A t the time of plaintiff's purchase, the Jiffy Lube on the premises was operated

by Peanut Oil, LLC, a Pennsylvania limited liability company. (Id. at ¶ 9). Peanut Oil o p e ra te d Jiffy Lube stores in New York and Pennsylvania. (Id. at ¶ 10). The c o m p a n y has three members: Defendants Samuel Pearson and Edward Lang and D e b o ra h L. Pickett. (Id.). Pickett has filed a Chapter 7 bankruptcy petition in the U n ite d States District Court for the Middle District of Pennsylvania and is not named in the instant lawsuit. (Id.). Plaintiff financed the real estate purchase through a $1,300,000 mortgage with In d ia n a First Savings Bank of Indiana, Pennsylvania. (Id. at ¶ 12). A twenty-year le a s e between Bur-Cam and Peanut Oil was part of this real estate transaction. (Id. a t ¶ 11). Monthly lease payments started at $10,833.33 at the beginning of the le a s e . (Id.). Peanut Oil paid the first monthly lease payment to plaintiff, though s u b s ta n tia lly later than the lease agreement required. (Id. at ¶ 13). Beginning in M a rc h 2008, Peanut Oil did not make another lease payment. (Id. at ¶ 14). On June 1 6 , 2008, Peanut Oil filed for Chapter 7 bankruptcy protection in the United States D is tric t Court for the Middle District of Pennsylvania. (Id.). The property remained va c a n t at the time plaintiff filed its complaint. (Id. at ¶ 15). Plaintiff has been unable to sell or lease the property. (Id.). Plaintiff alleges that Bur-Cam became interested in purchasing the property in q u e s tio n in late 2007, when the Recklings owned the property. (Id. at ¶ 16). The R e c k lin g s had recently purchased the site, paying $1,100,000 in October 2007. (Id.). The proposed real estate transaction was coordinated by Defendant Andrew

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M. Bronsac, the president of Defendant Commercial Concepts, a firm specializing in c o m m e rc ia l real estate. (Id. at ¶ 17). Commercial Concepts had an extensive b u s in e s s relationship with Defendants Pearson "and/or" Lang, as well as with P ic k e tt. (Id. at ¶ 18). This relationship also involved various business entities, such a s Peanut Oil, Vipergas, LLC and JDSK Oil, LLC. (Id.). Commercial Concepts was d ire c tly involved in the purchase and sale of these businesses. (Id.). Commercial Concepts and Bronsac were involved directly in the transaction h e re in question. (Id. at ¶ 19). Plaintiff alleges that "Brosnac and Commerical C o n c e p ts acted as a conduit for passing information from and to the Plaintiff and In d ia n a First from and to the Recklings and Peanut Oil, LLC." (Id.). These actions in c lu d e d , "deliver[ing] financial and other information from Peanut Oil to Bur-Cam a n d Indiana First, assist[ing] in getting the Lease Agreement signed between BurC a m and Peanut Oil and coordinat[ing] getting documents approved and signed by th e Recklings." (Id.). Plaintiff also contends that a similar relationship existed b e tw e e n Pearson, Pickett and/or Lang and Commercial Concepts in other financial tra n s a c tio n s . (Id. at ¶ 20). Bronsac "had direct contact with Pearson and Pickett a n d had access to financial information" shared with potential purchasers in this d e a l. (Id. at ¶ 21). A similar relationship existed between Commercial Concepts and th e Recklings. (Id. at ¶ 21). Before purchasing the property, plaintiff and Indiana First Bank performed a d e ta ile d financial analysis of the business. (Id. at ¶ 23). They did so based on the

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information provided by Peanut Oil through Commercial Concepts. (Id.). Their a n a lys is convinced plaintiff that the deal was financially sound. (Id.). The deal e n d e d up being a bad one; Peanut Oil had misrepresented its financial condition, as w e ll as the financial condition of the Jiffy Lube on the site. (Id. at ¶ 24). The Jiffy L u b e could not sustain enough business to pay the rent charged by plaintiffs, making th e property worth much less than the sale price of $1.3 million. (Id. at ¶ 25). Plaintiff points to several misrepresentations made about Peanut Oil's financial c o n d itio n before the sale. (Id. at ¶ 26). First, balance sheets for December 24, 2007 a n d December 31, 2007 provided by Peanut Oil list real estate assets of $4.48 m illio n and cash on hand at $342,332. (Id. at ¶ 26A). W h e n Peanut Oil filed for b a n k ru p tc y, no real estate assets were listed, and cash on hand amounted to only $ 4 ,0 0 0 . (Id.). The company's balance sheet for December 31, 2007 shows accounts re c e iva b le of $45,765; the bankruptcy schedules show accounts receivable of $ 8 ,8 2 3 .3 1 . (Id. at 26B). The balance sheet from December 31, 2007 shows e q u ip m e n t valued at more than $1.7 million, but the bankruptcy schedules show m a c h in e ry and equipment of $12,000. (Id. at ¶ 26C). Income statements from the J iffy Lube showed an annual net operating profit of no less than $82,000 and rent p a ym e n ts of $112,500. (Id. at ¶ 26D). These statements did not reflect the truth, s in c e the Jiffy Lube could not and did not ever generate sales which would justify s u c h statements. (Id.). Plaintiff alleges that Bur-Cam relied on the information p ro vid e d by defendants and their agents in deciding to purchase the property in

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question. (Id. at ¶ 30). Plaintiff paid substantially more than the real estate was w o rth . (Id.). Though plaintiff paid $1,300,000 for the property, its actual value was a p p ro x im a te ly $250,000. (Id. at ¶ 31). Plaintiff also alleges that Pearson and Lang, Peanut Oil principals, knew of the c o m p a n y 's poor financial position. (Id. at ¶ 33). Despite this knowledge, they p ro vid e d plaintiffs with false financial information about the business and agreed to le a s e premises from plaintiffs when they knew they could not afford the rent. (Id. at ¶ 34). Pearson and Lang made these statements to ensure that the deal went th ro u g h . (Id.). Plaintiff alleges that Pearson and Lang benefitted directly from the s a le , as did the Recklings, because the Recklings owed Peanut Oil more than $ 4 0 0 ,0 0 0 from past real estate transactions. (Id. at ¶ 35). The Recklings repaid th e ir debt to Peanut Oil after selling the subject property. (Id. at ¶ 36). Plaintiff also c o n te n d s that the fraudulent actions by Pearson and Lang were the "substantial and p ro xim a te reasons" for the sale of the real estate. (Id. at ¶ 37). Plaintiff would not h a ve purchased the property but for the actions and promises of Pearson and Lang. (Id. at ¶ 38). Plaintiff filed the initial complaint in this action in the Court of Common Pleas o f Bradford County, Pennsylvania on November 25, 2009. The complaint raises th re e counts of fraud. Count I is raised against Defendants Lang and Pearson, a lle g in g that they knew of Peanut Oil's poor financial condition, yet supplied false fin a n c ia l information to plaintiff and plaintiff's lender to convince them to approve of

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the real estate transaction. Lang and Pearson benefitted from this agreement by h a vin g the debt repaid to them by Peanut Oil after the sale. Count II alleges that B ro s n a c and Commerical Concepts engaged in fraud by participating in the d e fe n d a n ts ' scheme to sell property at inflated prices. Count III alleges that D e fe n d a n ts John and Debra Reckling likewise engaged in fraud in these tra n s a c tio n s . Before Lang was formally served with the complaint, and before other d e fe n d a n ts were served, Lang removed the case to this court. (See Notice of R e m o v a l (Doc. 1) at ¶¶ 5-6). Lang then filed the instant motion to dismiss. (Doc. 2). The parties briefed the issue, bringing the case to its present posture. J u r is d ic tio n P la in tiff Bur-Cam Group, LLC is a limited liability company organized and b a s e d in Pennsylvania. The individual members of that company are all P e n n s ylva n ia citizens. The individual defendants are citizens of other states. Defendant Commercial Concepts, Ltd. is a dissolved corporation that was in c o rp o ra te d in California and had its principal place of business in that state. The a m o u n t in controversy exceeds $75,000. As such, the court has jurisdiction p u rs u a n t to 28 U.S.C. § 1332. The court is sitting in diversity, and therefore the s u b s ta n tiv e law of Pennsylvania shall apply. Chamberlain v. Giampapa, 210 F.3d 1 5 4 , 158 (3d Cir. 2000) (citing Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938)). Legal Standard D e fe n d a n t seeks dismissal of the complaint pursuant to both Federal Rule of 6

Civil Procedure 12(b)(6) and Federal Rule of Civil Procedure 9(b). W h e n a d e fe n d a n t files a motion pursuant to Rule 12(b)(6), all well-pleaded allegations of the c o m p la in t must be viewed as true and in the light most favorable to the non-movant to determine whether "under any reasonable reading of the pleadings, the plaintiff m a y be entitled to relief." Colburn v. Upper Darby Township, 838 F.2d 663, 665-66 (3 d Cir. 1988) (citing Estate of Bailey by Oare v. County of York, 768 F.3d 503, 506 (3 d Cir. 1985), (quoting Helstoski v. Goldstein, 552 F.2d 564, 565 (3d Cir. 1977) (per c u riu m )). The court may also consider "matters of public record, orders, exhibits a tta c h e d to the complaint and items appearing in the record of the case." Oshiver v. L e vin , Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 n.2 (3d Cir. 1994) (citations o m itte d ). The court does not have to accept legal conclusions or unwarranted fa c tu a l inferences. See Curay-Cramer v. Ursuline Acad. of W ilm in g to n , Del., Inc., 4 5 0 F.3d 130, 133 (3d Cir. 2006) (citing Morse v. Lower Merion Sch. Dist., 132 F.3d 9 0 2 , 906 (3d Cir. 1997)). The federal rules require only that plaintiff provide "`a short and plain s ta te m e n t of the claim showing that the pleader is entitled to relief,'" a standard w h ic h "does not require `detailed factual allegations,'" but a plaintiff must make "`a s h o w in g , rather than a blanket assertion, of entitlement to relief' that rises `above the s p e c u la tiv e level.'" McTernan v. City of York, 564 F.3d 636, 646 (3d Cir. 2009) (q u o tin g Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56 (2007)). The "c o m p la in t must contain sufficient factual matter, accepted as true, to `state a claim

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to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (q u o tin g Twombly, 550 U.S. at 570). Such "facial plausibility" exists "when the p la in tiff pleads factual content that allows the court to draw the reasonable inference th a t the defendant is liable for the conduct alleged." Id. F e d e ra l Rule of Civil Procedure 9(b) provides that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or m is ta k e . Malice, intent, knowledge, and other conditions of a person's mind may be a lle g e d generally." FED. R. CIV. P. 9(b). Under the rule, "plaintiffs must plead with p a rtic u la rity `the circumstances of the alleged fraud in order to place the defendants o n notice of the precise misconduct with which they are charged, and to safeguard d e fe n d a n ts against spurious charges of immoral and fraudulent behavior." Lum v. B a n k of America, 361 F.3d 217, 223-224 (3d Cir. 2004) (quoting Seville Indus. Mach. C o rp . v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984)). "Plaintiffs may s a tis fy this requirement by pleading the `date, place or time' of the fraud, or through `a lte rn a tiv e means of injecting precision and some measure of substantiation into th e ir allegations of fraud.'" Id. at 224. In addition, a plaintiff must allege "who made th e representation to whom and the general content of the misrepresentation." Id. D is c u s s io n D e fe n d a n t urges dismissal on two grounds. The court will address each in tu rn . i. Sufficiency of Fraud Allegations

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Under Pennsylvania law, "any definition of fraud necessarily includes a k n o w in g misrepresentation of a fact by one party which induced another party to act o r fail to act, which in the end caused damage to the party who relied upon the m is re p re s e n ta tio n ." Fletcher-Harlee Corp. v. Szymanski, 936 A.2d 87, 100 (Pa. S u p e r. Ct. 2007). Thus, fraud consists of five elements: "(1) misrepresentation of a m a te ria l fact; (2) scienter; (3) intention by the declarant to induce action; (4) ju s tifia b le reliance by the party defrauded upon the misrepresentation; and (5) d a m a g e to the party defrauded as a proximate result." Rizzo v. Michener, 584 A.2d 9 7 3 , 980 (Pa. Super. Ct. 1991). "A misrepresentation is material if it is of such c h a ra c te r that if it had not been misrepresented, the transaction would not have b e e n consummated." Colaizzi v. Beck, 895 A.2d 36, 39-40 (Pa. Super. Ct. 2006). As explained above, plaintiff alleges that defendants misrepresented the value o f the property and the rental income that could be obtained therefrom. Bur-Cam a ls o alleges that defendants knew that the value of the property was less than they re p re s e n te d to the plaintiff. Further, these misrepresentations were designed to c o n vin c e plaintiff to agree to a purchase price more than $1 million more than the a c tu a l value of the property. This misrepresentation led the plaintiff to purchase the p ro p e rty. Plaintiff suffered damage when the true value of the property became a p p a re n t and the rental property disappeared. Plaintiff has thus pled the elements of c o m m o n -la w fraud in Pennsylvania stated above. D e fe n d a n t Lang argues, however, that this pleading is not specific enough.

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Defendant first argues that the allegations against him are insufficient to meet Rule 9 (b )'s requirement of particularity. Defendant points to allegations that he m is re p re s e n te d Peanut Oil's financial condition because balance sheets provided to p la in tiff before the purchase represent a different financial condition for the company th a n do bankruptcy documents filed six months later. Such allegations are imprecise a n d amount merely to bald assertions and conclusory statements. Moreover, d e fe n d a n t contends, no allegations in the complaint point to specific conduct from D e fe n d a n t Lang that indicate he personally engaged in any fraudulent conduct, other th a n an allegation that he provided false financial information. Such an allegation la c k s the specificity required by the rule. In addition, even if plaintiff did plead a m is re p re s e n ta tio n from Lang, plaintiff does not allege that this representation was m a te ria l to the transaction, or that it relied on the misrepresentation. The court will deny the motion on these grounds. In the complaint, plaintiff a lle g e s that Lang, in concert with other Peanut Oil members, misrepresented the fin a n c ia l condition of Peanut Oil, which was to pay rent on the Jiffy Lube located in th e subject premises. They did so by providing financial statements about the c o m p a n y to plaintiff and its bank that they knew were false. W h ile plaintiff does not a s s e rt specifically which information Lang provided, the complaint nevertheless a lle g e s that he assisted in preparing false financial statements about Peanut Oil that m is le d plaintiff. Plaintiff alleges that defendants misrepresented the assets of the c o rp o ra tio n and the amount of cash on hand. Lang and the other defendants

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provided these statements as the parties negotiated about the purchase of land. They also relied on these misrepresentations in concluding that their investment c o u ld yield profit. Though these statements do not identify the exact date, time and p la c e of the alleged misrepresentations, they definitely are a "means of injecting p re c is io n and some measure of substantiation into their allegations of fraud." Lum, 3 6 1 F.3d at 224. They apprise the defendant of the specific fraudulent conduct a b o u t which plaintiff complains and thus meet the requirements of Rule 9(b). See P e tro -T e c h , Inc. v. W e s te rn Co. of N. America, 824 F.2d 1349, 1362 (3d Cir. 1987) (fin d in g that plaintiff had pled facts of fraud with sufficient particularity since "[p ]la in tiffs have alleged the acts involved and the people who they believe c o m m itte d them. At least at this stage of the case plaintiffs need not attribute each in d ivid u a l act to the individual defendant who committed it."); Seville Industrial M a c h in e ry Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir. 1984) (a lle g a tio n s of fraud were sufficient because "[t]he complaint sets forth the nature of th e alleged misrepresentations, and while it does not describe the precise words u s e d , each allegation of fraud adequately describes the nature and subject of the a lle g e d misrepresentation."). The court will therefore deny the motion on these g ro u n d s . ii. Limited Liability D e fe n d a n t also argues that he should be dismissed from the case because he c a n n o t be held personally liable for the actions of Peanut Oil, which is a limited

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liability company. Peanut Oil has filed for bankruptcy, and thus no recovery is p o s s ib le from the company. In an attempt at recovery, plaintiff has named Lang as a n individual, but his limited liability in the company prevents him from being sued in p la c e of Peanut Oil. Since plaintiff has not sufficiently pled its fraud claim against L a n g , defendant cannot attempt to "pierce the corporate veil" and hold Lang in d ivid u a lly liable for the actions of a corporate entity. T h e defendant here argues that plaintiff attempts to make him liable for the w ro n g s of Peanut Oil, a corporation. In Pennsylvania, "a corporation . . . is normally re g a rd e d as a legal entity separate and distinct from its shareholders." Ashley v. A h s le y, 393 A.2d 637, 641 (Pa. 1978); see also, College W a te rc o lo r Group, Inc. v. W illia m H. Newbauer, Inc., 360 A.2d 200, 208 (Pa. 1976) (finding that a corporation c a n be an independent entity even if there is only a single shareholder). As such, "th e re is a strong presumption in Pennsylvania against piercing the corporate veil." Lumax Indus. v. Aultman, 669 A.2d 893, 895 (Pa. 1995). At the same time, "w h e n e ve r one in control of a corporation uses that control, or uses the corporate a s s e ts , to further his or her own personal interests, the fiction of the separate c o rp o ra te identity may properly be disregarded." Ashley, 393 A.2d at 641. Still, "[t]h e corporate entity or personality will be disregarded only when the entity [is] used to defeat public convenience, justify wrong, protect fraud or defend crime." Sams v. R e d e ve lo p m e n t Authority of New Kensington, 244 A.2d 779, 781 (Pa. 1968). The court will deny the motion on these grounds as well. In this case, the

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allegations are that Lang participated directly in the fraud allegedly perpetrated on th e plaintiff, and that he used the corporation as a means of executing this scheme. In Pennsylvania, "the corporate entity will be disregarded only when it is used to d e fe a t public convenience, justify wrong, perpetrate fraud, or defend crime." Brindley v. W o o d la n d Village Restaurant, 652 A.2d 865, 867 (Pa. Super. Ct. 1995). A s such, Lang could be liable, despite the existence of a corporate entity as a party to the sale. See W ic k s v. Milzoco Builders, Inc., 470 A.2d 86, 90 (Pa. 1983) (finding th a t "corporate officers may be held liable for misfeasance . . . [but not] for mere n o n fe a s a n c e ."); Zubik v. Zubik, 384 F.2d 267, 273 (3d Cir. 1967) ("[t]he defrauded c re d ito r or `victim' of a business transaction with an undercapitalized corporation, for in s ta n c e , often has a strong case for piercing the veil of a `sham' corporation. The c o n tro v e rs y in such cases invariably involves some degree of reliance by the p la in tiff, contributing to the fraud, or undue advantage or trick accenting the in ju s tic e .") (citation omitted). Conclusion F o r the reasons stated above, the court will deny the defendant's motion. An a p p ro p ria te order follows.

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IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA THE BUR-CAM GROUP, LLC, Plaintiff : No. 3:10cv240 : : (Judge Munley) : : v. : : SAMUEL E. PEARSON, III; : EDWARD G. LANG; : JOHN RECKLING; : DEBRA RECKLING; and : COMMERCIAL CONCEPTS, LTD., : Defendants : ::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::
ORDER AN D NOW, to wit, this 19th day of April 2010, Defendant Edward G. Lang's m o tio n to dismiss (Doc. 2) is hereby DENIED. B Y THE COURT:

s / James M. Munley JUDGE JAMES M. MUNLEY U N IT E D STATES DISTRICT COURT

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