OPINION
Defendants Dreambuilder Investments, LLC (“DBI”), Peter Andrews (“Andrews”), Greg Palmer (“Palmer”) and Elizabeth Eiss (“Eiss”) (collectively, the
Based upon the conclusions set forth below, Defendants’ motion to dismiss the securities claim is granted, Defendants’ motion to dismiss the state claims is denied, and Plaintiffs are granted leave to replead within twenty-one (21) days.
Prior Proceedings
On November 30, 2016, Plaintiffs filed their Complaint, (Dkt. 1), which was amended on December 14, 2016, (Dkt. 20), and alleges four causes of action: breach of contract on promissory notes, common law fraud, and securities fraud in violation of Sections 10(b) and 17(a) of the Securities Act and Rule 10(b)(5).
The Complaint sets forth the following allegations, which are assumed true for the purpose of this motion to dismiss. See Koch v. Christie’s Int’l PLC,
Wiedis is a Princeton, New Jersey resident. (Compl. ¶ 2.) Equity Trust is located in Westland, Ohio, and is an Individual Retirement Account (“IRA”) custodian that held retirement savings Wiedis withdrew to invest with DBI. (Compl. ¶¶ 3-4.) Andrews is a New York City resident and the Chief Executive Officer (“CEO”) of DBI. (Compl. ¶ 5.) Palmer is a Kingston, New Hampshire resident and a member of DBI. (Compl. ¶ 6.) Eiss is a New York . resident and was DBI’s Chief Operating Officer (“COO”) from 2007 to 2012. (Compl. ¶ 7.) .
In the second half of 2008, Wiedis made loans with DBI; $50,000 of which came from her Equity Trust IRA. (See Compl. ¶ 11-13.) In exchange for these-loans, DBI and Andrews provided Wiedis with debt security agreements entitled “Promissory Note and Security Agreement” (“PNSA”), one dated August 8, 2008, in the amount of $30,000 and another dated November 1, 2008, in. the amount of $20,000. (Compl., Exs. 1-2.) These PNSAs had interest rates of 14% and 18% respectively and each had -a term of twenty-four - months. (Compl. ¶¶ 15-16.) These PSNA loans were stated by DBI to be collateralized by DBI’s ownership interests in mortgage notes, some of which Wiedis could access from a DBI online portal. (See Compl., Exs. 1-2.)
On October 8, '2008, Wiedis made a loan of $8,000 with DBI, which came, from her ■savings. - (Compl. ¶¶ 26-27.) In exchange for this loan, Wiedis received .a similar PNSA (the “$8,000 PNSA”). (See Compl. ¶ 28.) The $8,000 PNSA has similar terms to the other PNSAs, such as 18% interest rate per annum for a term of twenty-four months, though it was nof allegedly viewable on the DBI online portal. (See Compl. ¶¶ 27-28; see, Compl. Exs. 4-5.)
In May 2009, prior to either the $30,000 or $20,000 PNSA reaching maturity, DBI “rolled-over” or combined the two loans into a single $50,000 PNSA (the “$50,000 PNSA”). (Compl. ¶20.) The $50,000 PNSA had a term of two years and an interest rate of 18% per annum.- (Compl. ¶20.)
According to the Complaint,; the purchased Notes had the following maturity dates: the August 1, 2008, Note matured
■ When Wiedis entered into these PNSAs with Defendants, Plaintiffs allege that the following representations by Defendants were made knowingly false: that Wiedis never had an actual enforceable legal right in the supposed collateral securing the PNSAs, (Compl. ¶¶ 18, 24); that Wiedis would earn and be paid 18%' interest on the PSNAs, (Compl. ¶¶20, 76); and that Defendants would ' pay costs associated with collection on the PNSAs, including reasonable attorney’s fees, (Compl. ¶¶23, 76).
In September 2009, DBI changed its loan security structures, specifically by converting loans in debt owned by DBI into equity in an investment fund overseen by DBI and others, a proposal which DBI promised was “secure” and offered “high-yield returns.” (Compl. ¶¶33, 38; see Compl. ¶¶ 33^0.) In an September 8, 2009, email signed by Andrews and Eiss, Defendants described some of the DBI changes:
[DBI] is making changes to its investment security structure and how our investors are secured. These changes are the result of launching out Distressed Mortgage Fund and the associated shift in ownership of the assets we manage. Until now, all assets were solely owned by DBI and could be directly pledged as security to individual investors. Going forward, all assets purchased and managed by DBI are owned jointly by DBI (the majority owner) and our partners in the fund. As a result, our investors can no longer be secured directly by individual loans and instead will be secured by the entity that owns the individual loans.
(Compl. ¶ 34; Compl., Ex. 5.), Plaintiffs allege that, around October 16, 2009, as part of these changes, Eiss spoke with Wiedis over the phone and informed Wied-is that she was required' to relinquish her secured interest in the $50,000 and $8,000 Notes securing her PNSAs in exchange for shares in a newly-made fund of unspecified assets. (Compl. ¶ 40.) The Complaint does not indicate whether Wiedis, accepted or contracted such an agreement. (See Compl. ¶ 40.)
Plaintiffs allege that Defendants omitted material facts about the new investment arrangement, including, but not limited to: details about how Wiedis’ money would actually be invested; when interest payments would be made; how the' payment amounts would be calpulated; the number of other investors who would have prior interests to collecting payments before Wiedis; and specific details concerning when and how Wiedis would receive repayment of her investment principal. (See .Compl. ¶ 39.) Plaintiffs further allege that DBI practices failed to keep true, complete, and accurate books and records showing assets and liabilities, including the amounts owned to various , investors. (Compl. ¶ 63.)
From 2010 through 2014, Plaintiffs point to the following statements made by Andrews, Palmer, and Eiss which they allege were false and misleading:
February 12, 2010 (Email from Andrews and Eiss): “We are. also designing a program by which our investors will becompensated for ... interest payment delays.” (Compl., Ex. 6);
April 1, 2010 (Email from Andrews and Eiss): “DBI has continued to maintain its strong performance into 2010.” (Compl., Ex. 7);
August 3, 2012 (Email from Andrews): “All DBI investors continue to earn interest on all outstanding principal until such time as all principal is repaid.” (Compl, Ex. 8);
September 30, 2013 (Email from Andrews): “[T]he Company [DBI] is growing rapidly under our new capital structure and in partnership with our new investor.... We are on pace to do more in revenue and new acquisitions in the-last half of 2013 than in any full year previously.” (Compl., Ex. 10);
April 1,- 2014 (Email from Andrews): Andrews told Wiedis that DBI “had the funds to repay her today,” but there were “different levels of investment.” Defendants did not have the funds' “to pay all of the investors at [her] level,” and “therefore we cannot pay you before we pay them.” (Compl, Ex. 12).
Following the September 2009 restructuring, Defendants continued to modify its investment structure, investment terms and conditions, and timing for when to make payments, at times without providing notice to investors. (See Compl. ¶ 41.)
Plaintiffs allege that Andrews and Palmer repeatedly acknowledged' to Wiedis DBI’s debt to her, but falsely assured her that “interest would continue to accrue in the meantime” of DBI paying Wiedis her investment principal (Compl. ¶ 51.) Defendants also created and distributed false account statements to investors like Wiedis to lead them to believe that interest was accruing in investors’ accounts, although Plaintiffs alleges DBI was not actually accruing or setting aside funds to make the interest payments. (Compl. ¶ 43.) Defendants continued to make small, sporadic payments to Wiedis in differing amounts, although none fully paid Wiedis what she was owed under the terms of the Notes, (Compl.. ¶ 53), which Plaintiffs claim lulled Wiedis into a false sense of security about the status of her loans, (see Compl. ¶ 54).
In December 2015, Wiedis retained counsel and sent another demand letter to DBI for repayment on her loan principal. (Compl. ¶ 56.) Around this time, although Wiedis was not aware, Defendants were settling similar litigations,with situated investments with DBI. (Compl. ¶ 57.)
In June 2016, Defendants made additional allegedly false representations about' their investmént position in DBI’s investor update, including describing assets available to DBI to repay investors and the statement that: “[I]t is also certain that, based on the remaining value of the portfolio, DBI now has the means to fully repay its investors and continues to be committed to doing so.” (Compl. ¶¶ 58-59.)
In August 2016, Defendants represented to- Wiedis that while ‘they owed her at least $91,893, they were unable to immediately satisfy its obligations to Wiedis, despite having allegedly made-lump sum payments to the other, similarly situated -investors pursuant - to litigation settlement agreements. (Compl. ¶ 61.) In November 2016, Andrews wrote Wiedis promising to pay some-of her investments over an extended period of time, but not Wiedis’ costs, expenses, or reasonable attorneys’ fees, but never sent Wiedis a written settlement agreement. (Compl. ¶ 62.) At present, Defendants have not returned Wiedis’ $58,000 investment principal or any costs and expenses associated with enforcement of the Notes though have paid interest payments totaling approximately $33,800. (Compl. ¶¶ 53, 55.)
On a Rule 12(b)(6) motion to dismiss, all factual allegations in the complaint áre accepted as true and all inferences are drawn in favor of the pleader. Mills v. Polar Molecular Corp.,
While “a plaintiff may plead facts alleged upon information and belief ‘where the belief is based on factual information that makes the inference of culpability plausible,’- such allegations. must be ‘accompanied by a statement of the facts upon which the-belief is founded.’” Munoz-Nagel v. Guess, Inc., No. 12 Civ. 1312 (ER),
Section 10(b) imposes civil liability on any person who uses “any manipulative or deceptive device or contrivance” “in connection with the purchase or sale” of any security. 15 U.S.C. § 78j(b). Rule 10b-5 makes it unlawful for “any person ... to engage in any act, practice, or course of business which operates or would operate as a. fraud or deceit upon any person, in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5.1
To state a claim under .Section 10(b) and Rule- 10b-5, a plaintiff must plead that defendants “(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which' plaintiffs relied; and (5) that plaintiffs’ reliance was the proximate cause of their injury.” Lentell v. Merrill Lynch & Co., Inc., 396. F.3d 161, 172 (2d Cir. 2005) (quoting In re IBM Sec. Litig.,
Rule 9(b) requires that the plaintiff “state with particularity the circumstances constituting the fraud.” Fed. R. Civ. P. 9(b). To satisfy this requirement, the complaint must: “(1) specify the statements that the plaintiff contends were fraudulent,- (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Rombach v. Chang,
Defendants* Motion to Dismiss the Securities Claim is Granted
Plaintiffs have alleged securities fraud violations under Sections 10(b) of the Securities Act and Rule 10(b)(6). Defendants have moved to dismiss these claims as time-barred under the applicable statutes of limitations and repose. A district court may consider timeliness on a motion to dismiss when the circumstances are “sufficiently clear on the face of the complaint and related documents as to make the time-bar ruling appropriate on a motion to dismiss.” Arco Capital Corps. Ltd. v. Deutsche Bank AG,
Securities fraud claims brought under Section 10(b) of the Securities Exchange Act are subject to the earlier of a two-year statute of limitations and a five-year statute of repose. See 28 U.S.C. § 1658(b). The statute of limitations begins running when “a reasonably diligent plaintiff would have discovered the facts constituting the violation.” Sissel v. Rehwaldt,
Thus, the question of timeliness generally turns on when the violation occurred, and when Plaintiffs can be said to have discovered the facts constituting the violation.
In the present case, whether the 'claims would survive under the two-year statute of limitations is unnecessary because, under the statute of repose, the claims must be dismissed. The statute of repose" “begins to run without interruption once the necessary triggering" event has occurred, even if equitable considerations would warrant tolling or even if' the plaintiff 'has not yet, or could not yet have, discovered that she has a cause of action.” P. Stolz Family P’ship L.P. v. Daum,
Fatal to Plaintiffs, however, the Second Circuit has already answered this precise question: “[t]he ... statute of repose in federal securities law claims, [under Sec
Plaintiffs argue Arnold, as a summary order, has no precedential effect, and that the Second Circuit later undermined Arnold in City of Pontiac Gen. Employees’ Ret. Sys. v. MBIA, Inc.,
Summary orders “can be instructive to district courts in resolving particular disputes, and aiso may be seen as highly persuasive and predictive of how the Second Circuit Court of Appeals would decide an issue in the future.” Liana Carrier Ltd. v. Pure Biofuels Corp., No. 14 Civ. 3406 (VM),
Wiedis purchased notes from Defendants in 2009 and 2010. The Complaint in this action was filed on November 30, 2016, more than five years after each of the securities purchases were made. The claims must therefore be dismissed as time-barred. As the claims are untimely, the Court need not determine whether the claims were also adequately pled. See Gavin/Solmonese LLC v. D’Arnaud-Taylor,
Defendants’ Motion to Dismiss the State Claims is Granted in Part and Denied in Part
Plaintiffs have also alleged state law claims for fraud and breach of contract.
To plead fraud under New York law, a plaintiff must allege: (1) the defendant made a material misrepresentation; (2) with intent to defraud the plaintiff; (3) the plaintiff reasonably relied upon the representation; and (4) suffered damage as a result. Eternity Global Master Fund, Ltd. v. Morgan Guar. Trust Co. of N.Y.,
Under New York law, the statute .of limitations for common law fraud is six years from accrual or two years from actual or imputed discovery. N.Y. C.P.L.R. § 213(8). The six-year period runs from “the commission of the fraud”. Piedra v. Vanover,
“The test as to when fraud should with reasonable diligence have been discovered is an objective one.” Gutkin v. Siegal,
Viewed in the light most favorable to Plaintiffs’, the allegations in the Complaint permit tolling at this stage. Although the fact that DBI made “minimal and sporadic interest payments” over the course of six years, (Compl. ¶ 53), and, after repeated demands- for repayment, continued to fail to.pay Wiedis her loan principal — actions which might have suggested to some signs of trouble — it is not clear under these circumstances that, even with reasonable diligence, a plaintiff could have unearthed the actual financial conditions of their investments sufficient to bring a cause of action. Taking Plaintiffs’ allegations as true, DBI was consistently providing inaccurate and reassuring investment information while being a source from which it was difficult to get clear answers, plausibly indicating that Wiedis would have been unable to determine whether her investments were ever' collateralized or her investments financially sound. Put another way, while a sophisticated investor might have done otherwise, Wiedis, like the average plaintiff, was not a sophisticated investor, and should be judged as such. See Valentini,
Furthermore, unlike other Situations where courts have found inquiry notice met, there was not “a wealth of public information that should have put [Wiedis] on inquiry, notice of the alleged fraud” present here, Aozora Bank,
Defendants next contend that the claim of fraud is not extraneous to Plaintiffs’ breach of contract claim and therefore must be dismissed. As some of Plaintiffs’ fraud claims fall under an exception to this general rule, however, this argument also fails.
Under New York law, “parallel fraud and contract claims may be brought if the plaintiff (1) demonstrates a legal duty separate from the duty to perform under the contract; (2) points to a fraudulent misrepresentation that is collateral or
At this stage, Plaintiffs have pled alleged misrepresentations of present fact by DBI sufficient to establish a fraud claim independent of their breach of contract claim. To be sure, certain of the statements Plaintiffs present are statements of future actions and, therefore, are unactionable, such as the alleged promises of future high-yield returns by DBI on the 2009 conversion or DBI’s assertions about its future fund’s liquidity, security, and payment of interest. (See Compl. ¶¶ 38, 40, 42); Coolite Corp. v. Am. Cyanamid Co.,
It should be.noted, however, that the breach of contract claim can survive only as against DBI who, as signatory to the Employment Agreement, can be liable. See Navana Logistics Ltd. v. TW Logistics, LLC, No. 15 Civ. 856 (PKC),
Lastly, Defendants argue that the Court should reject supplemental jurisdiction over both the fraud claims and the breach
Before discussing supplemental jurisdiction, it is worth preliminarily noting that Plaintiffs’ breach of contract claim survives as well. To sustain a breach of contract claim, a plaintiff must prove (1) there was an agreement; (2) adequate performance of the contract by the plaintiff; (3) breach of the contract by the defendant; and (4) damages. 24/7 Records, Inc. v. Sony Music Entm’t, Inc.,
Here, the alleged breaches of the contracts occurred monthly during the lifetime of the Notes whenever DBI did not pay required interest payments, (see Compl. ¶ 68), and upon their maturity, at which point shortly thereafter Wiedis should have received' the principal’ and interest owed under the Notes, (see Compl. ¶ 70). The maturity dates of the contracts ranged from 2010 to 2011, as described above. Insofar as Plaintiffs allege material breach when, upon maturity, DBI failed to pay the accrued amounts and interest, marking the latest contract breach, the May 2009 Note had a maturity date of June 2011, Plaintiffs have sufficiently pled that the owed monies have not been paid in breach of the contract. The filing of the Complaint in November 2016 was therefore properly within the statute of limitation’s permissible window.
As to Defendants’ request that the Court decline supplemental jurisdiction over the. remaining state law claims, the request is declined. The ability to retain supplemental jurisdiction over the claims is discretionary. See 28 U.S.C. § 1367(c)(3). There is no novel issue of state law present. And, most importantly, diversity jurisdiction exists as to the. remaining claims: there is complete diversity of parties and the amount-in-controversy exceeds $75,000. See 28 U.S.C. § 1332. Therefore, exercising jurisdiction is proper. See Scarpinato v. E. Hampton Point Mgmt. Corp., No. 12 Civ. 3681 (JFB) (GRB),
Leave to Replead is Granted
In this circuit, “[i]t-is the usual practice upon granting a motion to dismiss to allow leave to replead.” Cortec Indus., Inc. v. Sum Holding L.P.,
Conclusion
For the foregoing reasons, Defendants’ motion to dismiss is granted in part and denied in part. Plaintiffs are granted leave to replead within twenty-one (21) days.
It is so ordered.
Notes
. Plaintiffs have voluntarily dismissed their claim for securities fraud in violation of Sec-tión .J.7(a)' of tlie Securities' Act. (See Dkt. 35.)
. It is curious that the Complaint expressly states this Note’s maturity date as earlier than twenty-four months after the effective date of the Note. Based on the language of this Note, the maturity date is more likely to have been in December 2010. Regardless, choosing between these two dates would result in the same resolution of the instant motion.
. Throughout the Complaint, Plaintiffs repeatedly allege that Defendants made both material misrepresentations and omissions. (See, e.g., Compl. ¶ 74.) However, “a fraud cause of action may be predicated on acts of concealment where the defendant had a duty to disclose material information.” Kaufman v. Cohen,
. Defendants note that the damages sought by Plaintiff under their fraud claim are identical to the amount sought for their breach of contract claim, (See Defs,’ Mem. in Supp. at 23.) However, no authority has been presented or located which render this fact dispositive at this stage as to whether to dismiss Plaintiffs’ fraud claim as insufficiently plead,
. Defendants’ motion papers and accompanying chart all but concede as such, despite their attempt to construe Plaintiffs’ allegations, and consequently, dates of breach, otherwise. (See Defs.’ Reply Mem. in Supp. at 2 & n.3.)