-GWF Federal Trade Commission v. Ivy Capital, Inc. et al, No. 2:2011cv00283 - Document 193 (D. Nev. 2011)
Court Description: ORDER Denying 37 and 38 Defendants Enrich Wealth Group, LLC's and Joshua Wickman's Motion to Dismiss; Denying 83 and 84 Defendants Benjamin Hoskins', and Oxford Financial, LLC's Motion to Dismiss and; Denying 86 Defendants' Ivy Capital's Motion to Dismiss. Signed by Judge James C. Mahan on 5/25/2011. (Copies have been distributed pursuant to the NEF - SLR)
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-GWF Federal Trade Commission v. Ivy Capital, Inc. et al Doc. 193 1 2 3 4 UNITED STATES DISTRICT COURT 5 DISTRICT OF NEVADA 6 7 FEDERAL TRADE COMMISSION, 8 9 10 2:11-CV-283 JCM (GWF) Plaintiff, v. IVY CAPITAL, INC., et al., 11 12 Defendants. 13 ORDER 14 Presently before the court is defendants Enrich Wealth Group, LLC’s and Joshua Wickman’s 15 motion to dismiss. (Docs. #37, 38). Plaintiff FTC has responded (doc. #150), but to date, the 16 defendants have not replied. 17 Also before the court is defendants Benjamin Hoskins’, Leanne Hoskins’, and Oxford 18 Financial, LLC’s motion to dismiss. (Docs. #83, 84). Plaintiff FTC has responded (doc. #154), and 19 the defendants have replied (doc. #164). 20 Finally before the court is defendants 3 Day MBA, LLC’s, Cherrytree Holdings, LLC’s, 21 Dream Financial’s, Fortune Learning System, LLC’s, Global Finance Group, LLC’s, John H. 22 Harrison’s, Melyna Harrison’s, ICI Development, Inc.’s, Ivy Capital, Inc.’s, Ivy Capital, LLC’s, 23 Kierston Kirschbaum’s, Kyle G. Kirschbaum’s, Logic Solutions, LLC’s, Steven E. Lyman’s, Tracy 24 Lyman’s, Mowab, Inc.’s, Oxford Debt Holdings, LLC’s, Revsynergy, LLC’s, S&T Time, LLC’s, 25 Sell It Vizions, LLC’s, Vianet, Inc.’s, Virtual Profit, LLC’s, and Virtucon, LLC’s (hereinafter “Ivy 26 Capital defendants”) motion to dismiss. (Doc. #86). Plaintiff FTC has responded (doc. #155), and 27 the defendants have replied (doc. #167). 28 James C. Mahan U.S. District Judge Dockets.Justia.com 1 The FTC filed the instant complaint on February 22, 2011, alleging that the defendants: (1) 2 engaged a common enterprise to commit violations of Section 5(a) of the Federal Trade Commission 3 Act (“FTCA’), which prohibits unfair or deceptive acts or practices in or affecting commerce; and 4 (2) committed violations of the telemarketing sales rule. (Doc. #1). The same day, the court imposed 5 a temporary restraining order (doc. #12) and subsequently granted plaintiff’s motion for preliminary 6 injunction. (Doc. #91). 7 The defendants now bring the instant motions to dismiss the complaint. The first (doc. #37) 8 alleges that the FTC has not satisfied either the heightened pleading standard of Rule 9(b) nor the 9 general pleading standard under Rule 8(a). The second (doc. #84) alleges that (1) the complaint does 10 not adequately plead claims against the relief defendants, (2) the complaint should be dismissed as 11 to the individual defendants because the FTC is unable to prove they had knowledge of the relevant 12 conduct, and (3) the complaint fails to meet Rule 9(b). The third (doc. #86) alleges that (1) the 13 complaint fails to satisfy Rule 9(b), (2) the FTC has failed to allege that the individual defendants 14 had knowledge of the activity, and (3) the FTC is not entitled to disgorgement from the relief 15 defendants. Whereas the arguments presented in each motion overlap, the court has chosen to 16 address the motions by grouping their arguments, rather than addressing each motion individually. 17 DISCUSSION 18 “To survive a motion to dismiss, a complaint must contain sufficient factual matter, 19 accepted as true, to ‘state a claim for relief that is plausible on its face.’” Ashcroft v. Iqbal, 129 S. 20 Ct. 1937, 1949 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). 21 “Where a complaint pleads facts that are ‘merely consistent’ with a defendant’s liability, it ‘stops 22 short of the line between possibility and plausibility of entitlement to relief.’” Id. (citing Bell 23 Atlantic, 550 U.S. at 557). However, where there are well pled factual allegations, the court 24 should assume their veracity and determine if they give rise to relief. Id. at 1950. 25 I. 26 27 Pleading Standard Every complaint must set forth enough facts to state a claim that is plausible on its face. Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). The court evaluates the pleading according 28 James C. Mahan U.S. District Judge -2- 1 to Federal Rule of Civil Procedure 8, which requires a short and plain statement showing that the 2 pleader is entitled to the relief sought. To comply with Rule 8, a complaint must clearly and 3 concisely state which defendants are liable for which wrongs based on which facts. McHenry v. 4 Renne, 84 F.3d 1172, 1178 (9th Cir.1996). 5 6 7 (A) Applicability of the Heightened Pleading Standard for Fraud Under Federal Rule of Civil Procedure 9(b) A heightened pleading standard applies to claims of fraud. Under Federal Rule of Civil 8 Procedure 9(b), “[i]n alleging fraud or mistake, a party must state with particularity the 9 circumstances constituting fraud or mistake.” At issue here is whether the heightened pleading 10 standard for fraud claims applies to actions under Section 5(a) of the FTCA, which prohibits 11 unfair or deceptive acts or practices in or affecting commerce. The Ninth Circuit has not yet 12 decided this question. However, each of the three motions to dismiss urges the court to apply the 13 heightened pleading standard, and at least one lower court has concluded that Rule 9(b) does in 14 fact apply to claims for violations of the FTC, which “sound in fraud.” FTC v. Lights of Am., 15 Inc., 2010 WL 5564048, *3 (C.D. Cal. Dec. 17, 2010). 16 In Lights of America, the Cental District of California held that “Rule 9(b) applies when 17 (1) a complaint specifically alleges fraud as an essential element of a claim, (2) when the claim 18 ‘sounds in fraud’ by alleging that the defendant engaged in fraudulent conduct . . . and (3) to any 19 allegations of fraudulent conduct, even when none of the claims in the complaint ‘sound in 20 fraud.’” 2010 WL 5564048 at *3 (quoting Davis v. Chase Bank U.S.A., N.A., 650 F. Supp. 2d 21 1073, 1089–90 (C.D. Cal. 2009)). A claim will “sound in fraud” if plaintiff “alleges a unified 22 course of fraudulent conduct and relies entirely on that course of conduct as the basis of the 23 claim.” Id. Omission of the magic word, fraud, from the complaint does not necessarily detract 24 from the fraudulent nature of an allegation. Id. Applying these standards, the court in Lights of 25 America then held that the FTC’s Section 5 claim sounded in fraud and Rule 9(b) applied. 26 27 In reaching this conclusion, the Central District of California found the similarity between negligent misrepresentation and violations of the FTCA persuasive. Although the elements for 28 James C. Mahan U.S. District Judge -3- 1 the two claims are not identical, they are analogous, and “[i]t is well-established in the Ninth 2 Circuit that . . . claims for . . . negligent misrepresentation must meet Rule 9(b)’s particularity 3 requirement.” Id. at *4 (quoting Neilson v. Union Bank of Cal., 290 F. Supp. 2d 1101, 1141 4 (C.D. Cal. 2003)). Thus, the court concluded that “Rule 9(b) applies to claims for violation of the 5 FTC Act, just as 9(b) applies to claims for negligent misrepresentation.” Id. 6 As further support for its position, the court also noted that “a claim does not need to 7 include all of the elements of a claim for fraud or negligent misrepresentation in order for it to 8 trigger the heightened pleading standard of Rule 9(b).” Id. at *4. For example, the Ninth Circuit 9 has held that 9(b) applies to claims for violations of California’s Consumers Legal Remedies Act 10 and Unfair Competition Law, even though fraud is not necessarily an element of those claims. Id. 11 Accordingly, the heightened standard should also apply to claims under Section 5 of the FTCA. 12 The FTC disputes the holding in Lights of America, noting it is not binding precedent, 13 and also both the elements and purpose of an FTC enforcement action distinguish it from a fraud 14 claim: “[U]nlike the elements of common law fraud, the FTC need not prove scienter, reliance, 15 or injury. . . .” FTC v. Freecom Communs. Inc., 401 F.3d 1192, 1204 n. 7 (10th Cir. 2005). Thus, 16 a violation of Section 5 of the FTCA “is not a claim of fraud as that term is commonly 17 understood or as contemplated by Rule 9(b).” Id. Such FTC actions are “not . . . designed to 18 remedy a singular harm, but [are] a government action brought to deter deceptive acts and 19 practices aimed at the public and to obtain redress on behalf of a large class of third-party 20 consumers who purchased defendants’ products and services over an extended period of time.” 21 Id. The FTC also cites holding from other courts, which have chosen to apply the Tenth Circuit’s 22 reasoning. See e.g., FTC v. Innovative Marketing, Inc., 654 F. Supp. 2d 378, 388 (D. Md. 2009) 23 (holding that a heightened pleading standard does not apply to claims under Section 5(a) of the 24 FTCA); Fed. Trade Comm’n v. Skybiz.com, Inc., 2001 WL 1673649, *4 (N.D. Okla. 2001) 25 (same); FTC v. Communidyne, Inc., 1993 WL 558754, *2 (N.D. Ill. 1993) (same). 26 27 Although the FTC is correct in stating that Lights of America is not binding precedent on this court, neither party has cited any binding precedent on this issue. Accordingly, evaluating the 28 James C. Mahan U.S. District Judge -4- 1 arguments on both sides, the court finds the Lights of America holding persuasive. The instant 2 action “sounds in fraud,” in that the FTC has alleged that the defendants collectively engaged in a 3 unified course of fraudulent conduct, which forms the entire basis of the claims alleged. The 4 FTC’s arguments to the contrary are unpersuasive: “As Rule 9(b) particularity is not focused on 5 intent, it would be anomalous to suggest that a section 5 claim is free from Rule 9(b)’s 6 heightened pleading requirement because the FTC need not prove scienter. . . .” FTC v. Wellness 7 Support Network, Inc., 2011 WL 1303419, *9 (N.D. Cal. 2011) (quoting FTC v. Swish 8 Marketing, 2010 WL 653486 (N.D. Cal. Feb. 22, 2010)). Accordingly, the court applies the 9 heightened pleading standard of Rule 9(b) in evaluating the instant motions to dismiss. 10 (B) Application of Rule 9(b) 11 A heightened pleading standard applies to claims of fraud. Under Federal Rule of Civil 12 Procedure 9(b), “[i]n alleging fraud or mistake, a party must state with particularity the 13 circumstances constituting fraud or mistake.” This rule requires that claims of fraud be 14 accompanied by the “who, what, when, where, and how” of the conduct charged, Vess v. Ciba- 15 Geigy Corp., USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (quoting Cooper v. Pickett, 137 F.3d 16 616, 627 (9th Cir. 1997)), so that the complaint may not simply “lump multiple defendants 17 together[,]” Destfino v. Reiswig, 630 F.3d 952, 958 (9th Cir. 2011). This requirement ensures that 18 the defendants are on “notice of the particular misconduct . . . so that they can defend against the 19 charge and not just deny that they have done anything wrong.” Vess, 317 F.3d at 1106. 20 The court finds that the FTC has met the heightened pleading requirement in this case. 21 The thirty-page complaint (doc. #1) goes to great lengths to categorize defendants based on their 22 function in the alleged scheme (id. at 6:8–13:22), and the FTC also describes the nature of the 23 scheme in detail (id. at 14:22–27:9). Finally, the court agrees with the FTC that the court may 24 relax Rule 9(b)’s particularity requirements in circumstances where it may be difficult for the 25 plaintiff to identify the specific actions that a corporate officer took in causing the harm to the 26 plaintiff. Cf. Moore v. Kayport Package Express, 885 F.2d 531, 540 (9th Cir. 1989) (holding that 27 a complaint need only include the roles of individual defendants in corporate fraud cases where 28 James C. Mahan U.S. District Judge -5- 1 possible because such situations make it difficult to attribute particular conduct to each 2 defendant). Accordingly, the motions to dismiss are denied on this basis.1 3 II. 4 Relief Defendants The FTC has stated that only one claim applies to the parties categorized as “relief 5 defendants” (doc. #155 at 12:9): Count X alleges that “Relief Defendants Cherrytree, Oxford 6 Financial, S&T Time, Virtucon, Curva, Mowab, Kierston Kirschbaum, Melyna Harrison, Tracy 7 Lyman, and Leanne Hoskins have received, directly or indirectly, funds, or other assets, or both, 8 from Defendants that are traceable to funds obtained from Defendants’ customers through the 9 unlawful acts or practices described herein.” (Doc. #1 at ¶ 109). Because these defendants were 10 not bona fide purchasers of the funds, the complaint alleges that the relief defendants will be 11 unjustly enriched unless the court orders disgorgement. (Id. at ¶ 110). Accordingly, the FTC 12 requests that the court hold the relief defendants’ assets and funds in constructive trust for the 13 benefit of the defendants’ consumer. (Id. at ¶ 111). 14 The FTC has stated: “A relief defendant’s liability does not depend on the relief 15 defendant having engaged in wrongdoing or controlled the company engaged in wrongdoing.” 16 (Doc. #154 at 4:19–20). Accordingly, the relief defendants are essentially nominal defendants, 17 against whom the FTC has alleged no wrongful conduct but from whom the FTC seeks to 18 recover ill-gotten gains. See S.E.C. v. Cross Fin. Serv., Inc., 908 F. Supp. 718, 730 (C.D. Cal. 19 1995) (describing nominal defendants as those against whom there is no claim but from whom 20 the plaintiff seeks disgorgement). 21 The relief defendants argue that the complaint is insufficiently pled because it does not 22 allege that they participated in or controlled any of the wrongdoing, or that they had knowledge 23 of any of the allegedly fraudulent conduct. (Docs. #84, 86). This is inapposite. Disgorgement 24 from a nominal defendant is available if (1) the defendant has received ill-gotten gains, and (2) 25 the defendant does not have a legitimate claim to those assets. S.E.C. v. Colello, 139 F.3d 674, 26 27 28 James C. Mahan U.S. District Judge 1 Whereas the court has found that the claims meet the heightened pleading standard under Rule 9(b), they necessarily meet the general pleading standard under Rule 8(a). -6- 1 677 (9th Cir. 1998). The complaint alleges that all named relief defendants have received funds 2 that can be directly traced to the Ivy Capital enterprise’s unlawful acts and that no relief 3 defendant has a claim to those funds. (Doc. #1 at ¶¶36–45). 4 Accordingly, the FTC has adequately plead the tenth claim for relief against the relief 5 defendants, and the court denies the motions to dismiss on this ground. The court also notes that 6 the instant motions are motions to dismiss based on pleading standards rather than the sufficiency 7 of the evidence, and have accordingly been treated as such. Defendants’ arguments as to the 8 sufficiency of the evidence on this point are inappropriate at this juncture. 9 III. 10 Individual Defendants To determine whether an individual defendant is liable for a corporation’s violations of 11 the FTCA, there are two distinct standards. First, to obtain permanent injunctive relief, the FTC 12 must allege that the individual participated directly in the acts or practices or had the authority to 13 control the company involved in the unlawful practices. FTC v. Publ’g Clearing House, Inc., 104 14 F.3d 1168, 1170 (9th Cir. 1997). Second, to obtain monetary damages, the FTC must allege that 15 the individual also had knowledge of the acts or practices. Id. at 1171. Each of the motions to 16 dismiss argues that the FTC has failed to allege that the individual defendants participated in, 17 controlled, or had any knowledge of any of the wrongdoing. 18 The motions to dismiss are denied on this ground, as the complaint alleges that each of 19 the individual defendants formulated, directed, controlled, had the authority to control, or 20 participated in the acts and practices set forth in the complaint. (See doc. #1 at ¶¶ 28–35). The 21 complaint also outlines each individual defendant’s involvement in either Ivy Capital, Inc., or its 22 associated entities (id.), and the court finds that these allegations are sufficient to state a claim for 23 both injunctive and monetary relief. The court again notes that the instant motions are motions to 24 dismiss based on pleading standards rather than the sufficiency of the evidence, and have 25 accordingly been treated as such. Thus, defendants’ arguments as to the sufficiency of the 26 evidence on this point are inappropriate at this juncture. 27 28 James C. Mahan U.S. District Judge -7- 1 2 IV. Do Not Call Rule Violations Defendants Harrison, Kirschbaum, and Lyman (doc. #86) and defendant Wickman (doc. 3 #38) argue that the FTC has not properly pled counts XIII and IX, which allege that defendants 4 violated the telemarketing sales rule (“TSR”) by calling numbers on the do not call registry 5 (“DNC”) and failing to pay the fee for the DNC, because the complaint alleges that only the 6 “primary” and “upsell” defendants made these calls. 7 Both motions to dismiss are denied on this ground. To establish individual liability for 8 injunctive relief, the FTC must allege that the individual participated in the acts or practices or 9 had the authority to control the company involved in the unlawful practices. Publ’g Clearing 10 House, Inc., 104 F.3d at 1170. The FTC has met this burden. 11 First, the complaint alleges that defendant Wickman is the owner and registered agent of 12 defendant Enrich Wealth Group (“EWG”) (doc. #1 at ¶ 35), one of the “primary defendants” (id. 13 at ¶ 10). The FTC alleges that Wickman had “formulated, directed, controlled, had the authority 14 to control, or participated in the acts and practices set forth in the complaint.” (Id.). Second, the 15 complaint alleges that defendants Harrison (id. at ¶ 29), Kirschbaum (id. at ¶ 28), and Lyman (id. 16 at ¶ 30) are each officers and/or directors of Ivy Capital, Inc., a “primary defendant” (id. at ¶ 6) 17 and that each formulated, directed, controlled, had the authority to control, or participated in the 18 acts and practices set forth in the complaint. 19 Applying the standard for individual liability to the facts alleged in the complaint, the 20 court finds that the FTC has adequately stated a claim for violations of the TSR against 21 defendants Harrison, Kirschbaum, Lyman, and Wickman by alleging that each either participated 22 in or had the authority to control a company involved in the unlawful practices. The motions to 23 dismiss are denied on this ground. 24 Accordingly, 25 IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that defendants Enrich 26 Wealth Group, LLC’s and Joshua Wickman’s motion to dismiss (docs. #37, 38) is DENIED; 27 28 James C. Mahan U.S. District Judge -8- 1 2 3 4 5 IT IS FURTHER ORDERED that defendants Benjamin Hoskins’, Leanne Hoskins’, and Oxford Financial, LLC’s motion to dismiss (docs. #83, 84) is DENIED; IT IS FURTHER ORDERED that the Ivy Capital defendants’ motion to dismiss (doc. #86) is DENIED. DATED May 25, 2011. 6 7 UNITED STATES DISTRICT JUDGE 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 James C. Mahan U.S. District Judge -9-
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