Opinion
Case No. 2:03-CV-00223 PGC
April 14, 2004
ORDER GRANTING MOTION TO STRIKE AND GRANTING IN PART 12(b)(6) MOTION TO DISMISS AND DENYING RULE 11 MOTION TO DISMISS AND FOR SANCTIONS
This case is before the court on a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure (#18-1) and a Rule 11 motion to dismiss and for sanctions, (#21-1) both filed by defendants Kings Peak Capital, LLC ("Kings"), Peruvian Investments, LLC ("Peruvian"), and William C. Gibbs (collectively the "Gibbs defendants"). Plaintiffs Paul Anderson and Brad Crawford oppose both motions. Anderson and Crawford have also filed a motion to strike new argument and factual evidence presented in a reply memorandum filed by the Gibbs defendants (#45-1). Having reviewed the pleadings, the court finds that oral argument would not be helpful in resolving this matter and hereby GRANTS the motion to strike (#45-1). The court also GRANTS in part and DENIES in part the 12(b)(6) motion to dismiss (#18-1) and DENIES the Rule 11 motion to dismiss and for sanctions (#21-1), as explained below.
BACKGROUND
The First Amended Complaint (#2-1) was filed on July 1, 2003, alleging 27 claims for relief, including claims of federal and state securities fraud, fraudulent misrepresentation, negligent misrepresentation, breach of fiduciary duty, breach of contract, unjust enrichment, and constructive trust. The causes of action arise out of a series of business dealings between the plaintiffs and defendants William C. Gibbs and Mitchell L. Edwards (who were attorney consultants to plaintiffs) and other individuals and business entities affiliated with Gibbs and Edwards. In brief, defendants are alleged to have
engaged in a complex scheme deceptively designed to benefit and unjustly enrich the Defendants while defrauding the Plaintiffs of millions of dollars and ownership rights in various companies. Defendants used their relationship of trust and confidence with the Plaintiffs as attorneys, consultants and business advisors to lull the Plaintiffs into signing legal documents, accepting misrepresentations as true and proceeding with transactions designed to implement Defendants' scheme and artifice to defraud.
First Amended Complaint, at ¶ 22.
The essence of the scheme to defraud is various allegedly illegal dealings and materially false representations or omissions made in connection with a reverse-shell merger into an existing public shell. Under the merger, the public shell, Category 5 Technologies, Inc. f/k/a Network Investors, Inc. ("C5"), acquired ownership of plaintiffs' highly successful e-commerce business, ePenzio, Inc.
On October 17, 2003, the court, having not received proof of service as to any of the defendants, issued an order directing plaintiffs to show cause why the case should not be dismissed for failure to prosecute. On November 3, 2003, plaintiffs responded and also filed proof of service for several of the defendants. In light of plaintiffs' response to the order to show cause, the court extended the time to allow service of the remaining unserved defendants. Plaintiffs have now filed proof of service for all defendants except for Edward P. Mooney and Wendy H. Smart.
On December 19, 2003, the Gibbs defendants filed a motion to dismiss all claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing, inter alia, that the facts alleged do not give rise to any actionable claims. In addition, on December 8, 2003 (prior to the 12(b)(6) motion) the Gibbs defendants served plaintiffs with a notice of a motion to dismiss for Rule 11 violations based on plaintiffs' counsel's allegedly false joinder of Matthew A. Greene and Jade B. Millington as plaintiffs. Plaintiffs Greene and Millington, through counsel, voluntarily dismissed their claims on December 29, 2003. Nevertheless, on January 5, 2004, the Gibbs defendants moved to dismiss the action with prejudice and impose other sanctions for alleged violations of Rule 11 of the Federal Rules of Civil Procedure based primarily on the allegedly false joinder.
ANALYSIS
1. Motion to Strike Improper Evidence and Argument in the Reply Memorandum
Anderson and Crawford's motion to strike (#45-1) urges the court to disregard the extraneous factual evidence contained in the Gibbs defendants' reply memorandum to the 12(b)(6) motion as well as any new legal arguments raised in that brief that were not raised in the supporting memorandum. Under the court's local rules, the "reply memorandum must be limited to rebuttal of matters raised in the memorandum opposition the motion." Factual submissions are not appropriate in on a Rule 12(b)(6) motion, and the new legal arguments raised in the reply memorandum do not comply with the local rules; therefore, the court strikes all factual materials and new legal arguments contained in the Gibbs defendants' Rule 12(b)(6) reply memorandum, pursuant to Rule 12(f) of the Federal Rules of Civil Procedure.
DUCivR 7-1(b)(34).
2. Defendants' Motion to Dismiss Pursuant to Rule 12(b)(6)
In ruling on a motion to dismiss under Rule 12(b)(6), "all well-pleaded factual allegations in the amended complaint are accepted as true and viewed in the light most favorable to the nonmoving party." As mentioned in conjunction with the motion to strike, when reviewing "a motion to dismiss a court must restrict its inquiry to `the plaintiff's complaint alone.'"
Sutton v. Utah State School for Deaf and Blind, 173 F.3d 1226, 1236 (10th Cir. 1999).
Smith v. Plati, 258 F.3d 1167, 1176 (10th Cir. 2001), cert. denied, 537 U.S. 823 (2002).
In this case, the court finds no basis for dismissal of Anderson and Crawford's claims in the First Amended Complaint (the "complaint"). However, dismissal of ePenzio's claims (counts XI, XIII, XV) without prejudice is appropriate based on its former counsel's representations that 1) ePenzio has merged into another company which has since filed for bankruptcy; 2) plaintiffs' counsel has not been appointed as special counsel or bankruptcy counsel to ePenzio; and 3) plaintiffs do not assert any claims on behalf of ePenzio in this case.
The Gibbs defendants argue that dismissal of Anderson and Crawford's claims is appropriate because "Gibbs' pre-merger misrepresentations to plaintiffs and omissions, regarding the ownership of C5, is not actionable," since such misrepresentations and omissions were not made in connection with a sale of securities as required under state and federal securities law. This argument severely strains credibility, given the facts alleged in the complaint. Accepting the allegations as true, the Gibbs defendants' misrepresentations and omissions, given at a time when Gibbs was acting as a fiduciary to Anderson and Crawford, induced Anderson and Crawford to go forward with various transactions that culminated in the reverse-shell merger under which plaintiffs exchanged (sold) their ePenzio stock for shares of stock in C5.
See, e.g., Marsh v. Armada Corp., 533 F.2d 978, 981-982 (6th Cir. 1976) (citations omitted) (concluding allegations involving exchange of shares in a merger of two corporations qualifies as "purchase or sale" for purposes of Rule 10b-5).
The Gibbs defendants also argue that the particularity requirements of Rule 9(b) of the Federal Rules of Civil Procedure have not been met with respect to the state law claims of fraud and misrepresentation. The court disagrees. While Rule 9(b) certainly requires pleading fraud with particularity, this court has previously stated:
That particularity requirement must be read in conjunction with the general principles of notice pleading set forth in Rule 8, which requires `a short and plain statement of the claim' for relief. In striking a balance between those two rules, Wright and Miller note: "Perhaps the most basic consideration in making a judgment as to the sufficiency of a pleading is the determination of how much detail is necessary to give adequate notice to an adverse party and enable him to prepare a responsive pleading."
Bradford v. Moench, 670 F. Supp. 920, 924 (D. Utah 1987) (citing 5 C. Wright A. Miller, Federal Practice and Procedure § 1298 (1969)) (additional citations omitted).
In this case, as in the Bradford case plaintiffs' complaint when read as a whole, sufficiently states the alleged misrepresentations and omissions, including the general time frame of the alleged fraud, the persons making the misrepresentations, and the underlying facts. The court finds the complaint provides sufficient detail to give notice of the alleged fraud to the defendants to enable them to prepare an answer; therefore, dismissal under Rule 9(b) is not appropriate.
Finally, in both the pending motions to dismiss, the Gibbs defendants appear to assert that the release executed between ePenzio and Gibbs somehow insulates Gibbs from liability. While this argument may have merit when the facts are fully developed, it is not an appropriate basis for dismissal of plaintiffs' claims at this early stage of the litigation.
3. Motion to Dismiss as a Sanction for Rule 11 Violations
As mentioned above, even after plaintiffs' counsel filed notices of voluntary dismissal on behalf of plaintiffs Greene and Millington, the Gibbs defendants filed a motion to dismiss this action based on alleged Rule 11 violations. Such dismissal is not warranted in light of the efforts by plaintiffs' counsel to cure any arguable Rule 11 violations. Plaintiffs Greene and Millington, each represented by plaintiffs' counsel, had knowledge of the complaint in this matter as early as April, 2003 and subsequently dismissed their claims on December 29, 2003. The dismissals were within the safe harbor provisions of Rule 1 1(c)(1)(A) of the Federal Rules of Civil Procedure, which provides that a Rule 11 motion for sanctions "shall not be filed with or presented to the court unless, within 21 days after service of the motion (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected." In this case, the court finds that any potential Rule 11 defect — which is highly debatable to begin with — was appropriately corrected by plaintiffs' counsel when plaintiffs Greene and Millington dismissed their claims.
Finally, the Gibbs defendants' claim for Rule 11 dismissal based on plaintiffs' allegedly improper assertion of claims on behalf of ePenzio is denied in light of the dismissal of ePenzio from this case, as discussed above.
CONCLUSION
Based on the foregoing, Anderson and Crawford's motion to strike is GRANTED (#45-1). The Gibbs defendants' 12(b)(6) motion to dismiss (#18-1) is GRANTED with respect to the dismissal of claims by ePenzio and otherwise DENIED. Defendants' motion for Rule 11 dismissal and sanctions (#21-1) is DENIED.
The court will hold a status conference in this matter on April 15, 2004, at 1:30p.m. at which the court will address the issues of effectuation of service on the remaining unserved defendants and scheduling of this case.