Case No. 2:04-CV-401 TC.
April 7, 2005
REPORT AND RECOMMENDATION
Before the Court is a motion to dismiss filed by Defendant, Jenelle A. Ray, in this action. (File Entry #9.) Defendant Ray (hereafter "Defendant") argues that the alleged offending actions were conducted within her capacity as an officer of Liquidix, Inc., which later merged with Defendant Anscott. Therefore, Defendant claims protection from personal liability for any alleged tortious actions by the corporate form. As such, Defendant argues that Plaintiff has failed to state a claim upon which relief can be granted, with respect to Defendant, and therefore the action against Defendant should be dismissed pursuant to Fed.R.Civ.P. 12(b)(6).
The Court has carefully considered the parties' memoranda, oral arguments and the entire record before the Court and hereby makes this Report and Recommendation.
Defendant is a resident of Arizona and was the Chief Financial Officer, Vice President, Secretary, Treasurer, and a Director of Liquidix, Inc., formerly a Florida Corporation. (File Entry #1, at 3.) On or about April 15, 2003, Liquidix, Inc. transferred all assets and liabilities to AFS Seals, Inc. Pursuant to the same transaction, Anscott Chemical Industries became a wholly owned subsidiary and AFS Seals, Inc. filed amended articles of incorporation changing its name to Anscott Industries, Inc. (File Entry #1, at 2.)
On or about September 26, 2001, Plaintiff and Liquidix, Inc. (Defendant Anscott's predecessor in interest) entered into a consulting agreement (hereafter "Agreement"), wherein Plaintiff would provide investor relations and related services to Liquidix, Inc. and receive 250,000 shares of Liquidix, Inc. common stock as compensation. (File Entry #1, at 3-4.) On May 15, 2002, Defendant Standard Registrar Transfer Company, Inc. (hereafter "Standard") issued 250,000 shares of Liquidix, Inc. common stock via Stock Certificate No. 1320 (hereafter "Certificate") in Plaintiff's name as payment to Plaintiff for services provided to Liquidix, Inc. The Certificate contained the signatures of Defendant, as Secretary of Liquidix, Inc., and Perry E. Barker, as President of Liquidix, Inc. (File Entry #1, at 4.) On December 18, 2002, the Board of Directors for Liquidix, Inc. passed a resolution instructing Standard to cancel the Certificate. (File Entry #1, at 4.) This resolution was enacted through a letter sent by Defendant to Standard requesting the Certificate be cancelled. Standard then cancelled the Certificate issued to Plaintiff. (File Entry #1, at 4-5.) Subsequently, Plaintiff filed the instant action, alleging, inter alia, negligence, fraud and conversion against Defendant. (File Entry #1, at 7-13.) Defendant filed a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), claiming that because Defendant's actions were performed as Liquidix, Inc.'s Corporate Secretary, Plaintiff has not stated a claim against Defendant, personally, upon which relief may be granted. (File Entry #9.)
CHOICE OF LAW
A review of the record indicates the parties consented to the interpretation and governance of the Agreement "for all purposes by the laws of the State of Florida." (File Entry #25, Agreement.) The Tenth Circuit has established that when sitting in diversity, a district court should look to the forum state's choice of law provisions to determine the effect of a contractual designation of this type. See Lyon Dev. Co. v. Business Men's Assurance Co. of Am., 76 F.3d 1118, 1122 (10th Cir. 1996). The Utah Supreme Court has recognized that "parties may contract to apply the law of a foreign state to govern their contractual disputes." Trillium USA, Inc. v. Board of County Comm'rs of Broward County, Florida, 37 P.3d 1093, 1097 (Utah 2001). Plaintiff has provided no evidence as to why the choice of law provision in the original contract should not be honored, and this Court can identify no offense to Utah public policy by enforcing the parties' contract. See Jacobsen Constr. Co., Inc. v. Teton Builders, 106 P.3d 719, 723-724 (Utah 2005); M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972) ("A contractual choice-of-forum should be held unenforceable if enforcement would contravene a strong public policy of the forum in which the suit is brought."). As such, this Court will apply Florida substantive law.
The Eleventh Circuit has held that when reviewing a motion to dismiss based upon Rule 12(b)(6), "[t]he factual allegations of [Plaintiff's] complaint are accepted as true for the purposes of the motion to dismiss." South Florida Water Mgmt. Dist. v. Montalvo, 84 F.3d 402, 406 (11th Cir. 1996); see also Quality Foods de Centro America, S.A. v. Latin Am. Agribusiness Dev. Corp. S.A., 711 F.2d 989, 994-995 (When evaluating a complaint for sufficiency, the court "must accept the facts pleaded as true and construe them in a light favorable to [Plaintiff]."); accord Mitchell v. King, 537 F.2d 385, 386 (10th Cir. 1976) (explaining that a motion to dismiss admits all well pleaded facts in the complaint); Beck v. City of Muskogee Police Dept., 195 F.3d 553, 556 (10th Cir. 1999) (explaining that when reviewing a Rule 12 (b) (6) motion, a court must accept well pleaded allegations as true and construe them in the light most favorable to [Plaintiff]). A motion to dismiss "must be denied unless it is clear [Plaintiff] can prove no set of facts in support of the claims in the complaint." Montalvo, 84 F.3d at 406; accord Maez v. Mountain States Tel. and Tel., Inc., 54 F.3d 1488, 1496 (10th Cir. 1995) (Dismissal based upon Rule 12 (b) (6) is proper "only when it appears that [Plaintiff] can prove no set of facts in support of the claims that would entitle [Plaintiff] to relief."). However, Florida courts have held that "the threshold of sufficiency that a complaint must meet to survive a motion to dismiss for failure to state a claim is exceedingly low." Quality Foods, 711 F.2d at 995.
A. Agreement Claims
Plaintiff contracted with Liquidix, Inc. to provide investor relations and related services for a period from September 26, 2001, to March 26, 2002. Consideration for the contract was to be provided to Plaintiff in the form of 250,000 shares of Liquidix, Inc. common stock. (File Entry #1, at 3-4). The claims in this case center around the issuance of this stock to Plaintiff, and the subsequent rescission of the stock by Anscott/Liquidix, Inc.
In her motion to dismiss, Defendant's argument is partially founded upon the claim that no contract existed between Defendant and Plaintiff. (File Entry #9, at 2.) Defendant's argument regarding lack of privity between Plaintiff and Defendant misses the mark. Plaintiff has not brought an action for breach of contract against Defendant, but rather Plaintiff's allegations against Defendant are founded upon tort theory. As such, Defendant's argument for dismissal asserting that no fiduciary duty existed because there was no privity of contract between Plaintiff and Defendant fails.
Plaintiff has included Defendant in claims 4, 5, and 6 of its complaint, alleging Defendant engaged in negligence, fraud and conversion. (File Entry #1.) In support of these claims, Plaintiff generally indicates that the law establishes a fiduciary responsibility upon corporate officers and directors toward a corporation's shareholders and creditors. (File Entry #11, at 5.) The Court examines each of Plaintiff's claims below.
First, Plaintiff argues that Defendant "owed a duty of care to Plaintiff and to other shareholders of the publically trad[ed] company of which [Defendant] was CFO, Vice President, Secretary, Treasurer, and Director, to authorize the transfer of stock in said company, in conformity with law." (File Entry #1, at 8.) Plaintiff alleges Defendant owed Plaintiff this duty because Plaintiff was both a shareholder and a creditor of Liquidix, Inc. (File Entry #11, at 5-6; Official Transcript of Hearing In re: Internet Marketing Solutions v. Standard Register and Jenelle Ray, held December 20, 2004, (hereafter "Tr. ____"), at 8.) Plaintiff further argues that Defendant negligently breached this duty of care by cancelling the Certificate "without notice to Plaintiff, without valid court order, without the requirement of a bond, and without the proper legal authority or justification to do so." (File Entry #1, at 8.)
Under Florida law, the elements of negligence are:
(1) a legal duty on the part of the defendant towards the plaintiff under the circumstances;
(2) a breach of that duty by the defendant;
(3) the defendant's breach of duty was both the actual and proximate cause of the plaintiff's injuries; and
(4) the defendant suffered damages as a result of the breach.Humphreys v. General Motors Corp., 839 F. Supp. 822, 829 (N.D. Fla. 1993); see also Scruggs v. U.S., 959 F. Supp. 1537, 1544 (S.D. Fla. 1997).
A. Plaintiff as a Creditor
Plaintiff asserts that the law requires an officer of a corporation "to observe fiduciary duties to the corporation, and to its shareholders and creditors." (File Entry #11, at 5.) However, Florida courts have held "[d]irectors of a corporation are generally not personally liable to creditors for breach of fiduciary relationship." Braun v. Buyers Choice Mortgage Corp. ex rel. McAloon, 851 So. 2d 199, 202 (Fla.Dist.Ct.App. 2003); see also In re Int'l. Resorts, 46 B.R. 405, 416 (D.C. 1984) ("[C]orporate directors, officers and agents owe a fiduciary duty to the corporation but not to the creditors." (Emphasis added.)); Skinner v. Hulsey, 138 So. 769, 773 (Fla. 1931) (Holding that "directors have limited duties to creditors as for breach of trust in case of willful misappropriation or misapplication of the corporate assets by gross negligence, whereby the corporate assets were wasted, resulting in insolvency and in the inability of the corporation to pay its debts."). In reversing a lower court's decision, the Braun court held that a corporate director did not owe a creditor a fiduciary duty at a time when the debtor business was solvent.
Accordingly, Plaintiff, in its role as a creditor of Liquidix, Inc., cannot sustain a claim of negligence against Defendant. Based on Florida law, the Court concludes that Defendant had no duty of care toward Plaintiff, as a creditor, at the time Defendant instructed Standard to rescind the Certificate.
B. Plaintiff as a Shareholder
Additionally, Plaintiff claims that Defendant owed Plaintiff a fiduciary duty of care based upon Plaintiff's status as a shareholder of Liquidix, Inc. (File Entry #1, at 8; #11, at 5.) Plaintiff alleges Defendant's actions, instructing Standard to rescind the Certificate representing 250,000 shares of Liquidix, Inc., breached this duty, and constituted a "willful and wanton disregard for the economic rights of Plaintiff." (File Entry #1, at 9.)
Florida statutes establish a mandatory duty on corporate officers and directors to act:
a) In good faith;
b) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
c) In a manner he or she reasonably believes to be in the best interest of the corporation.
FLA. STAT. ch. 607.0830 (1) (1997). The statute provides discretion to the director to consider other factors "as the director deems relevant," which may include "the long-term prospects . . . of the corporation and its shareholders." Id. ch. 607.0830(3). The statute also provides immunity from personal liability for corporate officers and directors so long as the duties of office are performed "in compliance with this section." Id. ch. 607.0830(5). Nevertheless, Florida courts have established an officer or director of a corporation will not be protected from liability by the statutory shield of the corporate form for a tort in which he himself is involved. See In re Gitelman, 74 B.R. 492, 496 (S.D. Fla. 1987) (emphasis added); see also DeLong Equip. Co. v. Washington Mills Abrasive, 840 F.2d 843, 851 (11th Cir. 1988) (holding that personal participation by a corporate officer or director in wrongful activities of the corporation is sufficient to make the individual and the corporation substantively liable for a tort); U.S. v. Schlei, 122 F.3d 944, 971 (11th Cir. 1997) ("[T]he evidence must show that each officer, the person, willfully participated in the scheme." (Internal quotations omitted.)).
In support of her motion to dismiss, Defendant has argued that her actions were performed as part of her duties as Liquidix, Inc.'s Corporate Secretary. (Tr. 5.) As previously noted, to survive a motion to dismiss based upon Rule 12(b)(6), Plaintiff must merely show the existence of a set of facts which supports the claims in Plaintiff's complaint. See Montalvo, 84 F.3d at 406. Plaintiff alleges that, as Defendant held the positions of Chief Financial Officer, Vice President, Secretary, Treasurer, and acting Director of Liquidix, Inc., Defendant personally and willfully participated in the decision to rescind the Certificate. Therefore, Plaintiff alleges Defendant's actions violated Defendant's fiduciary responsibility to Plaintiff, as a shareholder of Liquidix, Inc., to ensure that the transfer of Liquidix, Inc. stock was performed "in conformity with law." (File Entry #1, at 8.) The Court finds this set of facts provides sufficient support for Plaintiff's negligence claim. See Quality Foods, 711 F.2d at 995. Accordingly, the Court recommends Defendant's motion to dismiss Plaintiff's negligence claim, based upon Plaintiff's position as a shareholder of Liquidix, Inc., be denied.
Second, Plaintiff alleges that Defendant engaged in fraud through the issuance of the Certificate. Specifically, Plaintiff alleges that Defendant issued the Certificate to Plaintiff as payment for debt incurred through services rendered by Plaintiff to Liquidix, Inc. Plaintiff claims "[Defendant] intended that the Certificate would not remain registered to Plaintiff and that Plaintiff would thereby lose the value of the Certificate as payment for services rendered." (File Entry #1, at 10 (emphasis in original).) Plaintiff alleges Defendant intended that Plaintiff would rely upon the Certificate for payment of Liquidix, Inc.'s debt, while also intending "surreptitiously to take action to revoke the [Certificate], and intended that all this would be accomplished in secret to give [Plaintiff] the false impression it had been paid for services" provided to Liquidix, Inc. (File Entry #1, at 10-11.) Moreover, Plaintiff alleges Defendant deliberately failed to notify Plaintiff of the revocation of the Certificate, "a fact. . . . of significance to Plaintiff," in an attempt to further the alleged fraud. (File Entry #1, at 11.) Plaintiff claims it relied upon Defendant's representations regarding issuance of the Certificate, and did so to its financial detriment. (File Entry #11.)
Florida law has established the essential elements of fraudulent misrepresentation as:
1) a false statement concerning a specific material fact;
2) a showing that the representor knew, or should have known, that the representation was false;
3) an intention that the representation induce another to act on it; and
4) consequent injury to the party acting in justifiable reliance on the representation.Kingston Square Tenants v. Tuskegee Gardens, 792 F. Supp. 1566, 1576 (S.D. Fla. 1992).
At oral argument, Defendant asserted Plaintiff's claim of fraud was deficient, arguing that Defendant had made no misrepresentation to Plaintiff. (Tr. 6.) As previously noted, a motion to dismiss based upon Rule 12(b)(6) must be denied if it is clear that Plaintiff can prove a set of facts in support of its claims. See Montalvo, 84 F.3d at 406. Plaintiff has alleged that Defendant made a false statement of fact regarding the Certificate at the time the Certificate was issued, that Defendant knew the issuance of the Certificate was not permanent, that Defendant intended Plaintiff to rely upon the Certificate, and that Plaintiff has been injured from reliance upon the Certificate. The Court finds these allegations sufficiently set forth violations of the elements of a claim of fraud outlined above. Therefore, the Court recommends Defendant's motion for dismissal regarding fraud be denied.
Finally, Plaintiff alleges that Defendant engaged in conversion. Plaintiff claims that by instructing Standard to cancel the Certificate issued to Plaintiff as payment for services rendered under the Agreement, Defendant converted Plaintiff's property for the use and benefit of Anscott. (File Entry #1, at 13.)
Florida courts have divided the description of conversion into three elements:
1) an act of dominion wrongfully asserted;
2) over another's property; and
3) inconsistent with his ownership therein.
Del Monte Fresh Produce Co. v. Dole Food Co., 136 F. Supp. 2d 1271, 1294 (S.D. Fla. 2001); see also Carl v. Republic Sec. Bank, 282 F. Supp. 2d 1358, 1371 (S.D. Fla. 2003) (The essence of "conversion is the exercise of wrongful dominion or control over property to the detriment of the rights of the actual owner." (Internal quotations omitted.)); Misabec Mercantile, Inc. de Panama v. Donaldson, Lufkin Jenrette Acli Futures, Inc., 853 F.2d 834, 837-838 (11th Cir. 1988) ("`Conversion is an unauthorized act which deprives another of his property permanently or for an indefinite time.'" (Quoting Shelby Mutual Ins. Co. v. Crain Press, 481 So. 2d 501, 503 (Fla.Dist.Ct. App. 1985.))).
At oral argument, Defendant argued Plaintiff's complaint was deficient because there was no evidence to support the theory that Defendant conspired with Standard to convert Plaintiff's property for the benefit of Anscott or Liquidix, Inc. (Tr. 6.) Defendant's argument misses the mark regarding conversion under Florida law. It is not necessary for Plaintiff to demonstrate that Defendant conspired to accomplish, nor must Defendant benefit from, an act of conversion. As set forth above, Plaintiff need only establish that Defendant exercised unauthorized control over Plaintiff's property, which interfered with Plaintiff's ownership rights. See Del Monte, 136 F. Supp. 2d at 1294. Plaintiff has alleged Defendant provided instructions and authorization to Standard to rescind the Certificate, which had been previously issued to, and held as property by, Plaintiff. Therefore, Plaintiff has sufficiently alleged facts relating to all the elements of conversion in its complaint. Accordingly, the Court recommends that Defendant's motion to dismiss regarding Plaintiff's conversion claim be denied.
Based on the above analysis, IT IS HEREBY RECOMMENDED that the Court DENY Defendant's motion to dismiss.
Copies of the foregoing Report and Recommendation are being mailed to the parties who are hereby notified of their right to object to the same. The parties are further notified that they must file any objections to the Report and Recommendation, with the clerk of the district court, pursuant to 28 U.S.C. § 636(b)(1), within ten (10) days after receiving it. Failure to file objections may constitute a waiver of those objections on subsequent appellate review.