18 KT.TV, LLC v. Entest Biomedical, Inc. et al
Filing
22
MEMORANDUM and ORDER granting in part and denying in part 10 Motion to Dismiss ; GRANTED re Counts VII and VIII, and Dfts' motion to strike pltf's request for punitive damages ; and DENIED in all other respects. Signed by Honorable James M. Munley on 11/7/11 (sm, )
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
18 KT.TV, LLC,
:
No. 3:11cv244
Plaintiff
:
:
(Judge Munley)
:
v.
:
:
ENTEST BIOMEDICAL, INC.;
:
BIO-MATRIX SCIENTIFIC GROUP,
:
INC.; and DAVID R. KOOS,
:
Defendants
:
::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::
MEMORANDUM
Before the court is defendants’ motion to dismiss and strike pursuant to
Federal Rule of Civil Procedure 12. (Doc. 10). The issues have been fully briefed
and the parties appeared before the court for oral argument. For the following
reasons, defendants’ motion will be granted in part and denied in part.
Background
This case arises out of a business dispute between the parties. Plaintiff
18KT.TV, LLC (hereinafter “plaintiff”) is a financial consulting firm based in W ilkesBarre, PA. (Doc. 7, Am. Compl. (hereinafter “A.C.”) ¶ 1). Craig Fischer is plaintiff’s
sole member. (Id. ¶ 2). On August 11, 2009, plaintiff entered into a twelve month
written contract with Defendant Bio-Matrix Scientific Group, Inc. (hereinafter “BioMatrix”) for consulting and web-based marketing services (hereinafter the “Bio-Matrix
Agreement”). (Id. ¶¶ 21-22). Fischer entered the Bio-Matrix Agreement on behalf of
plaintiff and Defendant David R. Koos (hereinafter “Koos”), Bio-Matrix’s corporate
president, chief executive, and chairman of the board, executed the contract on
behalf of Bio-Matrix in his capacity as a corporate officer. (Doc. 7-1, Ex. A, BioMatrix Scientific Group, Inc. Consulting Services Agreement (hereinafter “Bio-Matrix
Agreement”) at 9; A.C. ¶ 10).
The services plaintiff promised to perform under the Bio-Matrix Agreement are
as follows:
(a) Identify catalysts and value propositions, as they relate to the
Company’s growth strategy;
(b) Facilitate the establishment and distribution of SEC compliant press
releases to relay growth strategy to the financial community;
(c) Distribute an investment profile for the Company on Consultant’s
website, www.EquityDigest.com.
(d) Investor relations advice;
(e) Schedule and facilitate strategic shareholder calls with the
management of the Company;
(f) Coordinate opt-in e-mail notifications; and
(g) Evaluate and provide an updated investor relations plan at 90-day
intervals.
(Bio-Matrix Agreement at 1). The Bio-Matrix Agreement provides that plaintiff
receives 1.5 million shares of restricted Bio-Matrix common stock for its services.
(A.C. ¶¶ 23-24). Plaintiff alleges that it fully performed its obligations under the BioMatrix Agreement, but has not been paid the promised compensation of 1.5 million
restricted Bio-Matrix common shares. (A.C. ¶¶ 25-27). Plaintiff alleges that BioMatrix has no justification for its breach and that it is entitled to 1.5 million Bio-Matrix
common shares.
On August 25, 2009, plaintiff and Defendant Entest Biomedical, Inc.
(hereinafter “Entest”) entered into a twelve-month consulting contract (hereinafter the
2
“Entest Agreement”). (Id. ¶ 30). The services subject to the Entest Agreement are
identical to Bio-Matrix Agreement. (Doc. 7-1, Ex. B, Entest BioMedical Inc.
Consulting Services Agreement (hereinafter “Entest Agreement”) at 1). The Entest
Agreement provides plaintiff with 250,000 shares of Entest restricted common stock
for its services. (A.C. ¶¶ 32-33). Entest issued 50,000 shares to Craig Fischer, and
these shares paid a dividend of $200,000 in 2009. (Id. ¶ 36; Doc. 7-1, Ex. C, Entest
Biomedical, Inc. Stock Certificate; Ex. D, Form 1099-DIV). Fischer and Koos signed
the Entest Agreement, like the Bio-Matrix Agreement, in their professional
capacities. (Entest Agreement at 9). Plaintiff alleges that it fully performed its
obligations under the Entest Agreement and is entitled to the unpaid shares of
Entest stock. Plaintiff also claims that Entest must lift the restrictive legend affixed to
the shares it has already issued to Craig Fischer.
Entest and Bio-Matrix are in the biomedical research industry. (A.C. ¶¶ 4, 6).
Bio-Matrix is purported to be
a biotechnology research and development company with facilities
including two secure cryogenic stem cell banks, three research
laboratories, aseptic cellular/tissue class 10,000/100 processing lab,
hematology, microbiology and flow cytometry laboratories available for
processing, culturing and storage of specimens; Bio-Matrix is ostensibly
pursuing relationships with hospitals, medical institutes, research firms
and biotechnology companies to assist in stem cell research, cell
culturing and Regenerative Medicine therapies.
(Id. ¶ 6). Entest purports to be a “biomedical research company specializing in new
procedures, treatments and medical devices including the development of immunotherapeutic treatments that address illnesses and maladies in both veterinary and
3
human medicine.” (Id. ¶ 4).
Bio-Matrix is alleged to be the majority shareholder of Entest. (Id. ¶ 7). Koos,
a citizen of California, is alleged to completely dominate Bio-Matrix and Entest. (Id.
¶¶ 8-11). Plaintiff avers that “Koos dominates and controls Entest and Bio-Matrix to
such an extent that these companies are merely his alter ego.” (Id. ¶ 11). W ith
respect to Koos’s dominance in the transaction at issue, plaintiff further alleges that
Koos “executed both the Entest Agreement and Bio-Matrix Agreement as CEO of
the respective companies, notice under both the Entest Agreement and Bio-Matrix
Agreement is to be sent to the attention of Koos and Koos is the only
person/individual purporting to be an agent of Entest or Bio-Matrix with whom the
Plaintiff was ever engaged relevant the (sic) Entest Agreement and Bio-Matrix
Agreement.” (Id. ¶ 14). Koos is alleged to be the impetus behind the two
agreements and he allegedly caused the defendant corporations to breach the
agreements. (Id. ¶ 16).
Plaintiff filed a complaint on February 3, 2011 (Doc. 1) and an amended
complaint on April 18, 2011 (Doc. 7). Plaintiff’s amended complaint alleges breach
of contract, unjust enrichment and implied in fact contract claims against Bio-Matrix
and Entest in Counts I through VI. Plaintiff alleges in Counts VII and VIII that Koos is
personally liable under the participation theory and the equitable doctrine of piercing
the corporate veil, respectively. Plaintiff seeks compensatory damages, punitive
damages and attorneys fees. Defendants filed a motion under Federal Rule of Civil
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Procedure 12 to dismiss all of plaintiff’s claims except for plaintiff’s breach of an
express contract claims. In their Rule 12 motion, defendants also seek to strike
plaintiff’s request for punitive damages and attorney’s fees. For the following
reasons, defendants’ motion will be granted in part and denied in part.
Jurisdiction
The court has jurisdiction pursuant to the diversity statute, 28 U.S.C. § 1332.
Plaintiff is a Pennsylvania Limited Liability Corporation and its sole member, Craig
Fischer, is a citizen of Pennsylvania. (A.C. ¶¶ 1-2). Defendant Bio-Matrix Scientific
Group, Inc. is a Delaware corporation with a business address in California. (Id. ¶
5). Defendant Entest Biomedical, Inc. is a Nevada corporation with a business
address in California. (Id. ¶ 3). Defendant David R. Koos is a resident and citizen of
California. (Id. ¶ 8). Because complete diversity of citizenship exists between the
parties and the amount in controversy exceeds $75,000.00, the court has jurisdiction
over the case. See 28 U.S.C. § 1332. Because we are sitting in diversity, the
substantive law of Pennsylvania shall apply to the instant case. Chamberlain v.
Giampapa, 210 F.3d 154, 158 (3d Cir. 2000) (citing Erie R.R. v. Tompkins, 304 U.S.
64, 78 (1938)).
Legal Standard
Defendants’ Rule 12 motion attacks the complaint on two grounds. In the first,
defendant seeks the dismissal of certain claims for failure to state a claim upon
which relief can be granted. See F ED. R. C IV. P. 12(b)(6). W hen a 12(b)(6) motion
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is filed, the sufficiency of the allegations in the complaint is tested. All well-pleaded
allegations of the complaint 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 may be entitled to relief.’” Colburn v. Upper Darby Twp., 838
F.2d 663, 665-66 (3d Cir. 1988) (quoting Estate of Bailey by Oare v. Cnty. of York,
768 F.2d 503, 506 (3d Cir. 1985)). The plaintiff must describe “‘enough facts to raise
a reasonable expectation that discovery will reveal evidence of’ [each] necessary
element” of the claims alleged in the complaints. Phillips v. Cnty. of Allegheny, 515
F.3d 224, 234 (3d Cir. 2008) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556
(2007)). Moreover, the plaintiff must allege facts that “justify moving the case
beyond the pleadings to the next stage of litigation.” Id. at 234-35. In evaluating the
sufficiency of a complaint the court may also consider “matters of public record,
orders, exhibits attached to the complaint and items appearing in the record of the
case.” Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 n.2 (3d
Cir. 1994) (citations omitted). The court does not have to accept legal conclusions
or unwarranted factual inferences. See Curay-Cramer v. Ursuline Acad. of
W ilmington, Del., Inc., 450 F.3d 130, 133 (3d Cir. 2006) (citing Morse v. Lower
Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997)).
The federal rules require only that plaintiff provide “‘a short and plain
statement of the claim showing that the pleader is entitled to relief,’” a standard
which “does not require ‘detailed factual allegations,’” but a plaintiff must make “‘a
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showing, rather than a blanket assertion, of entitlement to relief’ that rises ‘above the
speculative level.’” McTernan v. City of York, 564 F.3d 636, 646 (3d Cir. 2009)
(quoting Twombly, 550 U.S. at 555). The “complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Twombly, 550 U.S. at 570).
Such “facial plausibility” exists “when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). “[T]he factual detail in a
complaint [cannot be] so undeveloped that it does not provide a defendant the type
of notice of claim which is contemplated by Rule 8.” Phillips, 515 F.3d at 232
(citation omitted).
The Supreme Court has counseled that a court examining a motion to dismiss
should, “begin by identifying pleadings that, because they are no more than
conclusions, are not entitled to the assumption of truth.” Iqbal, 129 S. Ct. at 1950.
Next, the court should make a context-specific inquiry into the “factual allegations in
[the] complaint to determine if they plausibly suggest an entitlement to relief.” Id. at
1951.
Defendants also attack plaintiff’s complaint in their Rule 12 motion by seeking
to strike portions of plaintiff’s amended complaint. See F ED. R. C IV. P. 12(f). Under
Rule 12(f), “[t]he court may strike from a pleading an insufficient defense or any
redundant, immaterial, impertinent, or scandalous matter.” F ED. R. C IV. P. 12(f).
7
“Indeed, striking a pleading ‘is a drastic remedy to be resorted to only when required
for the purposes of justice’ and should be used ‘sparingly.’ The Court has
‘considerable discretion’ in disposing of a motion to strike under Rule 12(f).” DeLa
Cruz v. Piccari Press, 521 F. Supp. 2d 424, 428 (E.D. Pa. 2007) (quoting N. Penn
Transfer, Inc. v. Victaulic Co. of Am., 859 F. Supp. 154, 158 (E.D. Pa. 1994)). The
basis of a court’s determination on a motion to strike is limited to the pleadings. N.
Penn, 859 F. Supp. at 159.
Discussion
Defendants seek the dismissal of several of the counts in plaintiff’s amended
complaint, including the claims alleging unjust enrichment, implied in fact contract,
and the claims against Koos as an individual. Defendants also seek to strike
plaintiff’s requests for punitive damages and attorneys’ fees. For the following
reasons, defendants’ motion will be granted and denied in part.
A.
Motion to Dismiss Implied in Fact Contract (Counts II, V)
Defendants first contend that plaintiff’s implied in fact contract claims against
Entest and Bio-Matrix should be dismissed. Defendant contends that these claims
“fail to state a claim for breach of implied contract since written contracts already
exist between the Plaintiff and Bio-Matrix . . . and Entest . . . .” (Doc. 10, Defs.’ Mots.
to Dismiss Pl.’s Am. Compl. at 2). Defendants also argue that the implied in fact
contract claims “fail to meet the minimum pleading requirements of Fed. R. Civ. P.
8(a) since they do no more than aver conclusory allegations to plead these claims
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for breach of implied contract.” (Id.)
Plaintiff responds that it is too early in the litigation process to dismiss the
implied in fact contract claims as inconsistent with pleading an express written
contract. Plaintiff contends that the implied in fact contract claim is sufficiently
supported by the facts pled, namely the allegations of the services rendered and
partial payment. The court agrees with plaintiff that it is too early in the litigation to
dismiss plaintiff’s claims in the alternative and that plaintiff has pled sufficient facts to
satisfy Rule 8(a).
An implied in fact contract is an actual contract where the parties agree, but
their intention is inferred from their conduct in the light of the surrounding
circumstances, instead of being expressed in words. Elias v. Elias, 237 A.2d 215,
217 (Pa. 1968) (citing Cameron v. Eynon, 3 A.2d 423, 424 (Pa. 1939)). An implied
in fact contract is a “true contract arising from mutual agreement and intent to
promise, but where the agreement and promise have not been verbally expressed.”
In re Pa. Cent. Transp. Co., 831 F.2d 1221, 1228 (3d Cir. 1987) (citing Balt. O.R.R.
v. United States, 261 U.S. 592, 597 (1923); Bloomgarden v. Coyer, 479 F.2d 201,
208 (D.C. Cir. 1973); 1 S. W ILLINGSTON ON C ONTRACTS § 3 (3d ed. 1957)).
Defendants’ first argument focuses on the mutually exclusive nature of implied
and express contracts. As a contract that is inferred from the conduct of the parties
rather than formed via express language, an implied contract cannot, by definition,
exist within the same transaction as an express contract. On this subject, the Third
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Circuit has held that “[t]here cannot be an implied-in-fact contract if there is an
express contract that covers the same subject matter.” Baer v. Chase, 392 F.3d
609, 616-17 (3d Cir. 2004) (citing In re Pa. Transp. Cent. Co., 831 F.2d at 1229-30;
Klebe v. United States, 263 U.S. 188, 191-92 (1923)). However, express and
implied contracts become mutually exclusive once the express contract is
conclusively established. In Baer v. Chase, the Third Circuit reviewed a district court
decision on a motion for summary judgment in which the defendant accepted the
plaintiff’s assertion of an oral agreement as true. Id. at 614.
The instant case differs from Baer because defendants do not concede the
validity of the contracts in question and it has yet to be proven to govern the dispute.
Furthermore, the court notes that other courts have allowed claims of implied
contracts and express contracts to proceed, in the alternative, beyond the motion to
dismiss stage. See, e.g., Slapikas v. First Am. Title Ins. Co., 250 F.R.D. 232, 245-46
(W .D. Pa. 2008) (finding that a claim of implied contract, made in the alternative to a
claim of breach of an express contract, is a common question of law among
members of a class); Masterson v. Fed. Express Corp., 07-CV-2241, 2008 W L
4415700 (M.D. Pa. Sept. 26, 2008) (denying the defendant’s motion to dismiss the
plaintiff’s complaint that contained claims for express and implied contracts in the
alternative).
The court agrees with plaintiff and finds that, until the express contract has
been conclusively established, plaintiff can plead an implied contract in the
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alternative to an express contract. To allow otherwise would be inconsistent with the
rules of civil procedure, which allow the pleading of multiple claims regardless of
consistency. See F ED. R. C IV. P. 8(d).
Defendants’ second argument challenges the sufficiency of plaintiff’s factual
pleadings with respect to the implied contract claim. Defendants essentially argue
that plaintiff must plead that the express written contract is somehow ambiguous or
void to also plead a claim for implied contract. (See Doc. 21, Oral Arg. Tr.
(hereinafter “Tr.”) at 4-5). The court disagrees. Plaintiff pled sufficient facts to
establish a “facial plausibility” for its implied contract claims because plaintiff has
pled facts that indicate that the parties’ conduct gave rise to a contract. Plaintiff has
pled that it performed a number of services for defendants. (See Bio-Matrix
Agreement at 1; Entest Agreement at 1). Plaintiff pled that defendants accepted
these services. (A.C. ¶¶ 74, 83). And plaintiff pled that defendant provided partial
payment for these services. (A.C. ¶ 36). These facts are sufficient to draw the
reasonable inference that the parties engaged in conduct giving rise to an implied in
fact contract; therefore, plaintiff’s implied in fact contract claims satisfy the pleading
requirements described in Twombly and Iqbal. For the above-stated reasons, the
court will deny defendants’ motion to dismiss plaintiff’s implied in fact contract
claims.
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B.
Motion to Dismiss Unjust Enrichment Claims (Counts III, VI)
Defendants advance nearly identical arguments in support of their motion to
dismiss plaintiff’s unjust enrichment claims as they asserted in support of their
motion to dismiss the implied contract claims. Defendants first argue that the unjust
enrichment claims must be dismissed under Rule 12(b)(6) because plaintiff has also
pled the existence of a valid written contract. Defendants proffer a second ground
for dismissal, that the unjust enrichment claims do not meet the Rule 8 pleading
requirements as explained in Twombly and Iqbal. W e do not agree with either
argument and the motion to dismiss plaintiff’s unjust enrichment claims will be
denied.
A claim for unjust enrichment arises in the absence of a contract. See
Commonwealth v. TAP Pharma. Prods., Inc., 885 A.2d 1127, 1137 (Pa. Commw. Ct.
2005). Pennsylvania courts have held that “‘[u]njust enrichment’ is essentially an
equitable doctrine.” Styer v. Hugo, 619 A.2d 347, 350 (Pa. Super Ct. 1993). A
plaintiff alleging unjust enrichment “must establish the following: (1) plaintiff
conferred a benefit on the defendant; (2) the defendant appreciated the benefit; and
(3) acceptance and retention by the defendant of the benefits, under the
circumstances, would make it inequitable for the defendant to retain the benefit
without paying for the value of the benefit.” TAP Pharma. Prods., 885 A.2d at 1137
(citing Styer, 619 A.2d at 350).
As discussed above, Federal Rule of Civil Procedure 8(d) allows for the
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pleading of alternative theories in the same complaint, even if those theories are
inconsistent. Similar to implied in fact contracts, claims for unjust enrichment can be
pled in the alternative to breach of contract claims. Defendants argue that plaintiff
has lost the ability to plead unjust enrichment in the alternative because plaintiff has
also proffered a purportedly valid express contract; however, such pleadings are not
inconsistent until the plaintiff has established the contract as valid and governing the
dispute. See Reynolds v. Univ. of Pa., 747 F. Supp. 2d 522, 542 (E.D. Pa. 2010)
(noting that the express contract must be found to be enforceable for an unjust
enrichment claim to be excluded); Masterson, 2008 W L 4415700 (finding that Rule
8(e)(2) allows for the pleading of unjust enrichment and breach of contract).
Here, plaintiff has yet to establish the validity of any express contract and
defendant has not conceded that the alleged contract is valid. Thus, even though
plaintiff has pled that a contract existed, discovery may reveal that the contract was
invalid, making an unjust enrichment claim necessary for recovery. The court will
not dismiss plaintiff’s unjust enrichment claim on this ground as discovery will reveal
whether contract or unjust enrichment is the proper cause of action.
The court also finds that plaintiff’s pleadings with respect to unjust enrichment
meet the Rule 8 pleading requirements as explained in Twombly and Iqbal. Plaintiff
has plead that, over the course of a year, it performed at least seven services for
both Bio-Matrix and Entest. (See A.C. ¶¶ 22, 34-35; Bio-Matrix Agreement at 1;
Entest Agreement at 1). Plaintiff pled that these web-based marketing services were
13
accepted and that defendants benefitted by these services. (See A.C. ¶¶ 83-86,
109-113). Given these facts, the reasonable inference that defendants are liable to
plaintiff under the equitable theory of unjust enrichment can be drawn; thus satisfying
federal pleading standards. For the above stated reasons, the court will decline to
dismiss plaintiff’s unjust enrichment claims at such an early stage in the
proceedings.
C.
Motion to Dismiss Claims Against Defendant David Koos Made
Individually Under the Participation Theory (Count VII)
Defendants move to dismiss plaintiff’s claims made against Koos individually
under the participation theory of liability. Defendants contend that plaintiff fails to
meet federal pleading requirements because it does not plead any facts giving rise
to a reasonable inference that a claim under the participation theory is warranted.
Specifically, defendants contend that plaintiff makes conclusory statements about
“tortious and unlawful conduct” rather than alleging that defendants committed any
specific tort.
Plaintiff responded to defendants’ argument by clarifying that the participation
theory it asserts is based on Koo’s participation in the alleged breach of contract and
not the commission of a tort. At the oral argument on this motion, counsel for
plaintiff clarified that if the court finds that “the participation theory can only apply in a
strict tort sense, then I believe that . . . these claims - - the participation theory claim
must fail because strictly construing - - we don’t have a tort claim.” (Tr. at 22). The
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court agrees with defendants and will dismiss Count VII of the Amended Complaint
as a tort claims is necessary to maintain a claim under the participation theory.
Pennsylvania courts have articulated a theory of liability against corporate
officers that stands separate from the veil-piercing theory discussed below. Under
the “participation theory” of liability, the court imposes liability on the individual owner
or corporate officer as an actor and not as the owner. W icks v. Milzoco Builders,
Inc., 470 A.2d 86, 90 (Pa. 1983). Liability under the participation theory “is not
predicated on a finding that the corporation is a sham and a mere alter ego of the
individual corporate officer. Instead, liability attaches where the record establishes
the individual’s participation in the tortious activity.” Id. (citing Donsco, Inc. v. Casper
Corp., 587 F.2d 602, 606 (3d Cir. 1978)). As such, the participation theory provides
that “a corporate officer can be held for ‘misfeasance,’ i.e., the improper performance
of an act, but not for ‘mere nonfeasance,’ i.e., the omission of an act which a person
ought to do.” Brindley v. W oodland Vill. Rest., 652 A.2d 865, 868 (Pa. Super. Ct.
1995).
Here, without citing supporting case law, plaintiff contends that Koos’s
omission of not paying plaintiff and causing the corporations he controls to breach
their contracts is sufficient to impose individual liability under the participation theory.
The court disagrees. The participation theory is not as broad as plaintiff asserts, and
to hold that a corporate officer could be liable under this theory for his company’s
breach of a contract would be a great expansion of the doctrine. Therefore, the
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court will grant defendants’ motion to dismiss Count VII of the Amended Complaint.
D.
Motion to Dismiss Plaintiff’s Claim to Pierce the Corporate Veil (Count
VIII)
Defendants further contend in their Rule 12 motion that the court should
dismiss plaintiff’s claim that the court should pierce Entest and Bio-Matrix’s corporate
veils to hold Koos personally liable. Defendants assert that, if taken as true,
plaintiff’s averments with respect to piercing the corporate veil fail to meet the federal
pleading requirements. The court agrees with defendants. Count VIII of the
Amended Complaint will be dismissed.
In Pennsylvania, “a corporation . . . is normally regarded as a legal entity
separate and distinct from its shareholders.” Ashley v. Ashley, 393 A.2d 637, 641
(Pa. 1978); see also Advanced Tele. Sys., Inc. v. Com-Net Prof’l Mobile Radio, LLC,
846 A.2d 1264, 1278 (Pa. Super. Ct. 2004) (“the general rule is that a corporation
shall be regarded as an independent entity even if its stock is owned by one
person”); Coll. W atercolor Grp., Inc. v. H. Newbauer, Inc., 360 A.2d 200, 207 (Pa.
1976) (noting that a corporation with a single shareholder can be an independent
entity); Barium Steel Corp. v. W iley, 108 A.2d 336, 341 (Pa. 1954) (“The fact that
one person owns all of the stock does not make him and the corporation one and the
same person”). As such, “there is a strong presumption in Pennsylvania against
piercing the corporate veil.” Lumax Indus. v. Aultman, 669 A.2d 893, 895 (Pa. 1995)
(citing W edner v. Unemp’t Bd., 296 A.2d 792, 794 (Pa. 1972)).
16
Despite the strong presumption against looking beyond the corporate form,
the court will pierce the corporate veil and hold the owner of a corporation liable
“‘when the court must prevent fraud, illegality, or injustice, or when recognition of the
corporate entity would defeat public policy or shield someone from liability for a
crime.’” Pearson v. Component Tech. Corp., 247 F.3d 471, 484 (3d Cir. 2001)
(quoting Zubik v. Zubik, 384 F.2d 267, 272 (3d Cir. 1967)); see also Ashley, 393
A.2d at 641 (“whenever one in control of a corporation uses that control, or uses the
corporate assets, to further his or her own personal interest, the fiction of the
separate corporate identity may properly be disregarded.”). Courts apply the alter
ego doctrine to determine whether equity requires the court to pierce the corporate
veil. The alter ego doctrine is “not applied by a test, but by consideration of relevant
‘factors . . . to determine whether the debtor corporation is little more than a legal
fiction.’” Trs. of Nat. Elevator Idus. Pension, Health Benefit & Educ. Funds v. Lutyk,
332 F.3d 188, 197 (3d Cir. 2003) (quoting Pearson, 247 F.3d at 485). Third Circuit
alter ego doctrine precedent directs district courts to weigh the following factors:
“gross undercapitalization, failure to observe corporate formalities, nonpayment of
dividends, insolvency of debtor corporation, siphoning of funds from the debtor
corporation by the dominant stockholder, non-functioning of officers and directors,
absence of corporate records, and whether the corporation is merely a facade for the
operations of the dominant stockholder.” Pearson, 247 F.3d at 484-85 (citing Am.
Bell Inc.v. Fed’n of Tel. W orkers of Pa., 736 F.2d 879, 886 (3d Cir. 1984)).
17
The Amended Complaint alleges that Koos should be held personally liable
under the alter ego doctrine. The only factor plaintiff proffers in support of his alter
ego doctrine argument is that Koos dominates Bio-Matrix and Entest.1 (A.C. ¶ 9-11,
121). Even if the court accepts plaintiff’s assertion that Koos dominates as the only
Entest and Bio-Matrix agent/owner, the Amended Complaint nonetheless fails to
state a claim for piercing the corporate veil. Pennsylvania law is clear; the courts
are to regard corporations as independent entities, even if that corporation only has
one stockholder. See Advanced Tele. Sys., Inc., 846 A.2d at 1278; Lumax Indus.,
669 A.2d at 895; W atercolor, 360 A.2d at 207; W iley, 108 A.2d at 341. The
standard for piercing the corporate veil is a demanding one. The Third Circuit has
noted that meeting the burden necessary to establish that the corporate entity is little
more than a legal fiction is “notoriously difficult for plaintiffs.” Pearson, 247 F.3d at
485.
To support its claim to pierce Entest and Bio-Matrix’s corporate veil, plaintiff
contends its position is analogous to other cases in this District as well as the
Eastern District of Pennsylvania in which the corporate veil was pierced. (See Tr. at
23-33). However, the plaintiffs in these cases pled the quantum of facts necessary
1
When asked which veil-piercing factors he relied on, plaintiff’s counsel stated, “[i]n
this case Koos is everything. He is the only person we spoke to, the only person we dealt
with. He is the C.E.O., C.F.O. He is everything to the company. He signed both
agreements, and that’s what we are saying is it’s just Koos. There is nobody else.” (Tr. at
31). Plaintiff’s counsel later confirmed that its “allegations on piercing the corporate veil
are all domination and control.” (Id. at 34).
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to give rise to the reasonable inference that the alter ego test could be satisfied.2
Here, if taken as true, plaintiff’s pleadings fail to contain the quantum of facts
necessary to give rise to the reasonable presumption that piercing the corporate veil
is appropriate. W ith the exception of domination allegations, plaintiff pleads no other
equitable factor in favor of piercing Entest or Bio-Matrix’s corporate veil. Plaintiff
does not plead that Koos uses these corporations for some impermissible personal
use, such as to perpetuate a fraud. Nor does plaintiff plead that Entest or Bio-Matrix
are insolvent, undercapitalized corporations. Rather, to the contrary of prevailing
veil-piercing jurisprudence, plaintiff pleads that Entest and Bio-Matrix are active
corporate entities by listing the scientific and research oriented activities these
corporations purport to engage in. (A.C. ¶¶ 4, 6). Plaintiff does not plead that it
provided Koos with any personal services, rather plaintiff avers that it performed
valuable services, such as assisting with investor relations and SEC compliance, for
the corporate defendants. (Bio-Matrix Agreement at 1; Entest Agreement at 1).
Plaintiff also alleges it is entitled to Entest and Bio-Matrix corporate stock, which is
2
See Melikian v. Corradetti, 791 F.2d 274, 281 (3d Cir. 1986) (noting the
eleven fraud and insolvency related allegations plaintiff made in support of the claim
to pierce the corporate veil); Morelia Consultants, LLC v. RCMP Enter., LLC, No.
3:10cv432, 2011 W L 4021070, at *8-9 (M.D. Pa. Sept. 9, 2011) (holding it would be
premature to dismiss a claim for piercing the corporate veil after noting allegations
that the corporate defendants were under capitalized, that the stockholder
intertwined personal and corporate finances and that the corporate entity was used
to commit fraud); Ginley v. E.B. Mahoney Builders, Inc., No. 04-1986, 2004 W L
2137820 (E.D. Pa. Sept. 23, 2004) (finding the veil should be pierced after noting
allegations that the stockholder-defendant converted corporate funds and failed to
account for other corporate funds).
19
an equity interest in the same corporations plaintiff wants this court to disregard as
corporate entities. (A.C. ¶¶ 24, 56). Therefore, the court will dismiss Count VIII of
the Amended Complaint.
E.
Motion to Strike Requests for Punitive Damages
Defendants move under Federal Rule of Civil Procedure 12(f) to strike
plaintiff’s request for punitive damages. Defendants contend that, as a business
dispute and contract action, punitive damages are applicable. Plaintiff alleges that
its request for punitive damages are inappropriate because defendants have acted
outrageously. Defendants’ alleged “outrageous” behavior stems from plaintiff’s belief
that defendant acted with “blatant bad faith” and “reckless indifference to plaintiff’s
[contract] rights.” (Doc. 13, Pl.’s Opp’n Br. to Mot. to Dismiss at 20). The court
agrees with defendant that the requests for punitive damages should be removed
from the complaint.
Punitive damages are not available under Pennsylvania law for cases in which
the theory of liability rests soundly in breach of contract. See Johnson v. State Farm
Life Ins. Co., 695 F. Supp. 2d 201, 213 (W .D. Pa. 2010). Plaintiff’s claims rest in
breach of contract; therefore, punitive damages are not available. Despite plaintiff’s
assertions that the breach was “willful” and “blatant,” the court can identify no facts
that would lead any reasonable person to conclude defendants behaved
outrageously. Therefore, the court will strike plaintiff’s request for punitive damages.
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F.
Motion to Strike Requests for Attorneys’ Fees
Defendants also move pursuant to Federal Rule of Civil Procedure 12(f) to
strike plaintiff’s request for attorneys’ fees. The general rule in Pennsylvania is that
each party is responsible for his or her own attorneys’ fees. Lucchino v.
Commonwealth, 809 A.2d 264, 267 (Pa. 2002). This general rule “holds true ‘unless
there is express statutory authorization, a clear agreement of the parties or some
other established exceptions.’” McMullen v. Kutz, 985 A.2d 769, 775 (Pa. 2009)
(quoting Mosaica Acad. Charter Sch. v. Commonwealth, 813 A.2d 813, 822 (Pa.
2002)).
The parties agree that, in the instant case, an award for attorneys’ fees is not
provided by law. However, the parties dispute whether Section 6(b) of the Bio-Matrix
and Entest Agreements contractually provides for the shifting of attorneys’ fees.
Section 6(b) is identical in each agreement, and it provides in relevant part:
Except as may be otherwise provided in this Agreement, such breach
by either party will result in the other party being responsible to
reimburse the non-defaulting party for all costs incurred directly as a
result of the breach of this Agreement, and shall be subject to such
damages as may be allowed by law including all attorneys’ fees and
costs of enforcing this Agreement.
Plaintiff contends that both agreements are clear as they both “specifically
authorize an award of ‘all attorneys’ fees and costs of enforc[ement].” (Doc. 13, Pl.’s
Br. in Opp’n to Mot. to Dismiss at 17). Defendants on the other hand assert that the
plain language of these agreements signify that plaintiff cannot obtain attorneys’
21
fees, as such an award is not specifically authorized by law. To support this
argument, defendants cite an unpublished Fifth Circuit opinion wherein the court
interpreted a similar contract provision.
The court is uncertain whether either interpretation of this provision is obvious.
Fischer and Koos included Section 6(b) in the agreements and without further
discovery the court does not know whether Section 6(b) is meaningless as
defendants assert or meant to assign the cost of enforcement as plaintiff avers.
Therefore, the court will deny defendants’ motion to strike plaintiff’s request for
attorneys’ fees as it is too early in the proceedings to determine whose interpretation
of this provision is correct.
Conclusion
For the reasons stated above, Defendants’ motion to dismiss and strike
portions of the Amended Complaint will be granted in part and denied in part. An
appropriate order follows.
22
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
18 KT.TV, LLC,
:
No. 3:11cv244
Plaintiff
:
:
(Judge Munley)
:
:
v.
:
:
ENTEST BIOMEDICAL, INC.;
:
BIO-MATRIX SCIENTIFIC GROUP;
:
and DAVID R. KOOS;,
:
Defendants
:
::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::
AND NOW, to wit, this 7th day of November 2011, defendants’ Rule 12 Motion (Doc.
10) is hereby GRANTED IN PART and DENIED IN PART as follows:
1.
Defendants’ motion to dismiss Count VII of the Amended Complaint
(Participation Theory) is GRANTED;
2.
Defendants’ motion to dismiss Count VIII of the Amended Complaint (Piercing
the Corporate Veil) is GRANTED;
3.
Defendants’ motion to strike plaintiff’s request for punitive damages is
GRANTED;
4.
The motion is DENIED in all other respects (i.e. defendants’ motion to dismiss
Counts II, III, V and VI of the Amended Complaint and defendants’ motion to
strike plaintiff’s request for attorneys’ fees).
BY THE COURT:
s/ James M. Munley
JUDGE JAMES M. MUNLEY
United Stated District Court
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