Hershewe v. Givens et al, No. 1:2014cv00655 - Document 156 (M.D. Ala. 2015)
Court Description: OPINION AND ORDER DENYING 111 , 112 , 114 , 115 , 116 motions to dismiss, as further set out in order. Signed by Honorable Judge Myron H. Thompson on 9/29/15. (Attachments: # 1 civil appeals checklist)(djy, )
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Hershewe v. Givens et al Doc. 156 IN THE DISTRICT COURT OF THE UNITED STATES FOR THE MIDDLE DISTRICT OF ALABAMA, SOUTHERN DIVISION EDWARD HERSHEWE, ) ) ) ) ) ) ) ) ) Plaintiff, v. KEITH GIVENS, et al., Defendants. CIVIL ACTION NO. 1:14cv655-MHT (WO) OPINION AND ORDER Plaintiff against a Edward number of Hershewe brings defendants this asserting action state-law claims of fraud, breach of fiduciary duty, piercing the corporate veil, and corporate dissolution as well as a federal-law Influenced claim and of Corrupt U.S.C. § 1961 et seq. a violation of Organizations the Act Racketeer (RICO), 18 The defendants are Keith Givens (K. Givens), John Givens (J. Givens), Chase Givens (C. Givens), Eagle Investments, LLP, Eagle Investments Group, LLP, VLO Management, LLC, and Jacoby & Meyers, LLC. The court has federal-question jurisdiction over Dockets.Justia.com the federal claim pursuant to under 28 U.S.C. § 1331 and supplemental jurisdiction over the state-law claims pursuant to 28 U.S.C. § 1367. The case is now before this court on the defendants’ motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). The motions to dismiss will be denied. I. LEGAL STANDARD In considering a defendant’s Rule 12(b)(6) motion to dismiss, the court accepts the plaintiff’s allegations as true, Hishon v. King & Spalding, 467 U.S. 69, 73 (1984), and construes the complaint in the plaintiff’s favor, Duke v. Cleland, 5 F.3d 1399, 1402 (11th Cir. plaintiff 1993). will “The issue ultimately prevail is not but whether whether a the claimant is entitled to offer evidence to support the claims.” Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). To survive a motion to dismiss, a complaint need not 2 contain “detailed factual allegations,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545 (2007), “only enough facts to state a claim to relief that is plausible on its face.” Id. at 574. II. BACKGROUND This case arises out of a joint venture between Hershewe, a lawyer lawyer from Alabama. the court accepts from Missouri, and K. Givens, a As this is a motion to dismiss, any plausible pleading in the complaint as true. Several years ago, Hershewe and K. Givens began discussions for the joint venture. The idea was to establish a nationwide set of physical and virtual law offices across the country under the auspices of Jacoby & Meyers, a law firm where K. Givens worked and had an ownership interest. In order to roll out this business plan, K. Hershewe and Givens 3 sought a company that markets pre-made or do-it-yourself legal forms to join the venture. Hershewe and K. Givens finalized an agreement for a joint venture in 2012. K. Givens, along with his sons C. Givens and J. Givens, formed VLO Management LLC to manage the joint venture and agreed to transfer the intellectual property, licenses, websites, logos, copyrights, and brand name from Jacoby & Meyers to VLO. In exchange, Hershewe agreed to transfer $ 3.5 million to the company, $ 1.5 million of which would serve as a capital contribution. A large part of this $ 3.5 million was to be used as a down payment on USLegal, a company that could provide the pre-made legal forms central to the business plan. As part of the agreement to form VLO, Hershewe obtained a 46.25% interest in VLO; Keith Givens, 20%; C. Givens, 15%; J. Givens, 15%; and two other investors, 1.875% each. Every member of VLO except for Hershewe was a lawyer at the same law firm. K. Givens and Hershewe were co-managers of VLO, 4 while K. Givens, along with C. Givens, controlled the bank account. Soon after the formation, Hershewe transferred the first $ 1.5 million to VLO. On the same day, K. Givens transferred $ 1 million from VLO’s account to Eagle Investments,1 a company owned by K. Givens, J. Givens, and C. Givens. Eagle Investments shortly thereafter transferred $ Givens made over 930,000 several other as a loan questionable payment. K. transactions from the VLO account in the following months, including spending nearly $ 40,000 on registration and legal fees for Jacoby & Meyers and over $ 150,000 in furniture unrelated to VLO. VLO’s tax filings were changed to 1. Eagle Investments, LLP ceased to be a company in 2013-2014. Hershewe alleges that Eagle Investments Group, LLP, also registered by K. Givens, is its successor. The court will refer to them collectively as Eagle Investments. 5 cover up these transfers (doc. no. 101-10).2 Hershewe also claims that K. Givens, C. Givens, and J. Givens spent any money transferred from VLO to Eagle Investments and Jacoby & Meyers quickly so that these companies would be undercapitalized. In July 2012, Hershewe was scheduled to transfer the remaining $ 2 million of the $ 3.5 million investment to VLO in order to purchase the stake in USLegal. A month beforehand, K. Givens came to Hershewe, warning that USLegal was running out of money and needed more to support the business. He asked Hershewe co-sign a bank loan for $ 1 million so that VLO could help USLegal with its cash flow; Hershewe agreed. However, the $ 1 million was not actually for 2. “Attachments to the complaint are considered part of the pleadings for all purposes, including a 12(b)(6) motion.” Reeves v. DSI Sec. Servs., 2008 WL 808612, at *2 n.1 (M.D. Ala. 2008) (Thompson, J.) (internal quotation marks omitted) (quoting Solis-Ramirez v. U.S. Dept. of Justice, 758 F.2d 1426 (11th Cir. 1985)). 6 US Legal’s cash-flow difficulties; rather, K. Givens needed the money because he had depleted VLO’s bank account to the point where Hershewe’s earlier transfer of $ 2 million was not going to be enough to cover the purchase price for USLegal. Hershewe now brings this lawsuit alleging, among other claims, that K. Givens, C. Givens, and J. Givens defrauded him of his investment and violated their fiduciary duty to VLO. III. DISCUSSION The defendants move under Rule 12(b)(6) to dismiss all claims. The court will address each in turn. A. Civil RICO The court will first analyze Hershewe’s only federal claim: a civil claim under RICO against all defendants. should be The defendants dismissed because 7 argue that Hershewe this does not claim have standing to bring the claim and because he does not plead the substantive elements. The court finds that he meets these requirements. 1. Standing “Any person injured in business or property” by reason of a RICO claim has standing to sue, “except that no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities.” 18 U.S.C. § 1964. The defendants argue that Hershewe lacks standing because he relies on fraud regarding an investment contract that qualifies as a security exception.3 and thus falls within the standing The questions then are, How do federal 3. In some parts of their motions to dismiss, the defendants argue that Hershewe’s investment is a security under the definition provided by 15 U.S.C. § 77b, while in other parts they argue it is not a security. Compare, e.g., K. Givens Mot. to Dismiss (doc. no. 114) at 18 (is a security) with id. at 31 (continued...) 8 securities laws define the term ‘security’, and Does Hershewe’s investment fit within this category? Section 10b-5 of the federal securities laws prohibits the employment of manipulative or deceptive devices “in connection with the purchase or sale of a security.” See 17 C.F.R. § 240.10b-5. definitions, the term investment contract. investment in VLO was Among its many “security” can U.S.C. 77b. 15 an § “investment include an Hershewe’s contract” for purposes of federal securities law only if there was “(1) an investment of money, (2) a common enterprise, and (3) the expectation of profits to be derived solely from the efforts of others.” Sec. and Exch. Comm’n v. Unique Fin. Concepts, Inc., 196 F.3d 1195, 1199 (11th Cir. 1999). The court will analyze each prong in turn. n.10 (is not a security). The court assumes these are arguments in the alternative. 9 Under the first prong of this test, the required “investment of money refers to an arrangement whereby an investor commits assets to an enterprise or venture in such a manner as to subject himself to financial loss.” Gilmore v. MONY Life Ins. Co. of Am., 165 F. Supp. 2d 1276, 1284 (M.D. Ala. 2001) (Thompson, J.). This prong is easily met. The complaint describes Hershewe’s “equity investment” of $ 3.5 million for a “legal business venture.” It is clear that Hershewe committed assets in a way that subjected him to a loss. The second prong, or ‘common enterprise,’ is also easily met. fortunes of A common the enterprise investor are “exists where the interwoven with and dependent on the efforts and success of those seeking the investment Concepts, Inc., or of 196 third F.3d at parties.” 1199. Unique Here, Fin. Hershewe invested his money in VLO, and he would gain or lose money based on VLO’s performance. Their efforts were interwoven and thus formed a common enterprise. 10 The final prong, and the one most at issue in this case, requires that the expectation of profits derived solely from the efforts of others. not interpreted restrictively.” is “Solely is Sec. and Exch. Comm’n v. Merch. Capital, LLC, 483 F.3d 747, 755 (11th Cir. 2007). prong] Instead, “[t]he crucial inquiry [for the third is the amount of control that retain under their written agreements.” the investors Unique Fin. Concepts, Inc., 196 F.3d at 1201 (internal quotation marks omitted). This amount of control is measured from the “time the interest is sold, rather than at some later time after the expectations of control have developed or evolved.” Merch. Capital, LLC, 483 F.3d at 756. Economic reality of the arrangement governs over form. Id. at 755. In the complaint, Hershewe states that he was a co-manager and part-owner of VLO. 11 Although he does not provide role,4 governing the documents terms that co-manager Hershewe’s ability regarding VLO’s to make business. clearly and define part-owner significant Indeed, his imply decisions the term “co-manager” suggests that he is K. Givens’s equal when making decisions. Even if K. Givens later excluded him from all business decisions, the focus of this test is the relationship at the formation rather than how it evolved. of the business Id. at 756. Because Hershewe was originally a co-manager and had control over his investment, the investment was not an investment contract and therefore not a security. As such, he has standing to bring a civil RICO claim.5 4. The Second Amended Complaint states that it provides the by-laws in Exhibit 8. However, Exhibit 8 (doc. no. 101-17) appears to be a lease agreement and not the by-laws. 5. Hershewe initially alleged a 10b-5 claim in the alternative to the civil RICO claim. However, he admitted in open court that he did not state a claim (continued...) 12 2. Substantive Elements The defendants next argue that Hershewe does not meet the substantive requirements for pleading a civil RICO claim under 18 U.S.C. § 1962(c). To establish a RICO claim, a plaintiff must plead “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Williams v. Mohawk Indus., Inc., 465 F.3d 1277, 1282 (11th Cir. 2006). As a “breed of fraud claims,” civil RICO allegations “must be pled with an increased level of specificity.” Ambrosia Coal & Const. Co. v. Pages Morales, 482 F.3d 1309, 1316 (11th Cir. 2007). must As with other fraud claims, the plaintiff identify the “(1) the precise statements, documents, or misrepresentations made; (2) the time, place, and person responsible for the statement; (3) for relief on this issue, and the dismissed the claim (doc. no. 144). 13 court has since the content and manner in which these statements misled the Plaintiffs; and (4) what the defendants gained by the alleged fraud.” 605 F.3d 1283, Am. Dental Ass'n v. Cigna Corp., 1291 (11th Cir. 2010). The particularity requirement serves to “alert[] defendants to the precise misconduct with which they are charged and protect[] defendants against spurious charges of immoral and fraudulent behavior.” Brooks v. Blue Cross and Blue Shield of Fla., Inc., 116 F.3d 1364, 1370-71 (11th Cir. 1997) (internal quotation marks omitted). The court first examines whether Hershewe pleads conduct of an enterprise. An enterprise “includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” 18 U.S.C. § 1961. It “is proved by evidence of an ongoing organization, formal or informal and by evidence unit.” that the various associates Williams, 465 F.3d at 1284. 14 function as a “[T]he complaint should inform each defendant of the alleged participation in the fraud.” nature of his Ambrosia Coal, 482 F.3d at 1317 (internal quotation marks omitted). Hershewe claims that the “Givens defendants”--K. Givens, C. Givens, and J. Givens--formed an enterprise to artificially and illegally depreciate the value of VLO corporate assets and defraud him of his interest in VLO. Hershewe in essence alleges two steps to show enterprise. First, he pleads that K. Givens fraudulently induced Hershewe to invest $ 3.5 million in VLO by promising to contribute Jacoby & Meyers assets, furthered his fraud by inducing Hershewe to guarantee another $ 1 million loan, and continues to defraud Hershewe of his interest by filing false tax returns regarding Hershewe’s contribution. This set of claims puts K. Givens on notice of Hereshewe’s simple charge: K. Givens, through VLO and Jacoby & Meyers, is stealing Hershewe’s contribution to VLO for his own benefit. 15 Second, Hershewe argues that K. Givens served as the agent of C. Givens and J. Givens and that his acts are attributable to them. A party can allege actual or apparent authority as a basis for holding a principal liable for the actions of an agent. Agency § 15. principal behalf--can 3 Am. Jur. 2d An actual agency relationship--where the intended for either be the agent express to act through a on his formal contractual agreement or implied based on the facts and circumstances of a particular case. Fisher v. Comer Plantation, Inc., 772 So. 2d 455, 465 (Ala. 2000). On the other hand, to allege liability based on apparent authority, a party need not prove that the principal intended the agent act on his behalf but rather that the principal “by his acts or conduct has clothed the agent with the appearance of authority.” Johnson v. Shenandoah Life Ins. Co., 281 So. 2d 636, 640 (Ala. 1973). “The question of agency is one for the trier of fact; and the existence and scope of a principal-agent 16 relationship is normally a determined by the jury.” question of fact to be Calvert v. Cas. Reciprocal Exch. Ins. Co., 523 So. 2d 361, 362 (Ala. 1988). The court finds that Hershewe has alleged adequately that K. Givens was an actual agent of C. Givens and J. Givens. While Hershewe did not plead that there was a formal contract between K. Givens and his sons, indicate the an facts implied and circumstances agency pled relationship. could Both C. Givens and J. Givens accepted their shares in VLO after K. Givens negotiated the contract with Hershewe, and both had Neither partial raised ownership any issue of Eagle when $ 1 Investments. million was transferred from VLO to Eagle Investments, when over $ 930,000 of that $ 1 million was used to pay off a loan, or when additional funds from VLO were spent for Eagle Investments or their personal businesses. Moreover, C. Givens had his name the Eagle Investments bank account into which VLO 17 transferred the money. With this pleading, Hershewe alerted C. Givens and J. Givens that their principal-agent relationship with K. Givens, and his actions taken on their behalf, is the basis of the fraud claim. Brooks, 116 F.3d at 1370-71 (internal quotation marks omitted). While the court makes no determination on the truth of this pleading, it is sufficient to survive a 12(b)(6) motion. The defendants next challenge whether there was a pattern of racketeering activity. In particular, they argue that Hershewe failed to plead two predicate acts to constitute a pattern and that the alleged activity is not continuous. For the purposes of RICO, a “pattern of racketeering activity” first requires at least two predicate acts. Mohawk, 465 F.3d at 1283. Here, Hershewe alleges several acts of mail fraud and/or wire fraud.6 He pleads that K. Givens’s promise to 6. Both mail fraud and wire fraud “require that a person (1) intentionally participates in a scheme or (continued...) 18 contribute Jacoby & Meyers’s intellectual property led him to make the initial agreement to invest in VLO; K. Givens’s assurances that the original $ 1.5 million would be a capital contribution that he would get back induced him Givens’s to make false the initial representation wire that transfer; USLegal K. needed additional cash led him to co-guarantee the $ 1 million loan later to purchase promise to stock in spend the USLegal; $ 2 and million K. Givens’s transfer on USLegal--rather than for his personal benefit--led him to transfer alleges continues that to this final VLO’s related to filing depreciate Hershewe is a member. the amount. the of value Moreover, false of tax VLO, Hershewe returns of which These predicate acts are all underlying purpose of defrauding artifice to defraud another of money or property, and (2) uses or causes the use of the mails or wires for the purpose of executing a scheme or artifice.” United States v. Ward, 486 F.3d 1212, 1221-22 (11th Cir. 2007). 19 Hershewe and draining VLO assets. They therefore meet the pleading requirement of two predicate acts towards a common purpose. In addition to pleading two predicate acts, Hershewe must also allege that the acts “amount to or pose a threat of continued criminal activity.” Jackson v. BellSouth Telecomm., 372 F.3d 1250, 1264 (11th Cir. 2004) (emphasis in original). A plaintiff can meet this requirement in one of two ways. First, he can allege that the pattern of conduct is “closed,” meaning that there was a past period of repeated conduct. Id. at 1265 (quoting H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 241-42 (1989)). Alternatively, he can allege that the pattern of conduct is “open,” meaning that there is a specific threat of ongoing conduct in the future or that “the predicate acts or offenses are part of an ongoing entity’s regular way of doing business.” Id. (quoting H.J. Inc., 492 U.S. at 242). The underlying concept is that a pattern must continue over 20 a substantial period of time--usually more than a year; two discrete acts within a short period of time are insufficient. A plaintiff can allege this period of time occurred in the past, in a ‘closed’ pattern, or will occur in the future, in an ‘open’ pattern. Hershewe racketeering pleads an activity continue indefinitely. open is pattern--i.e., ongoing and that threatens the to In particular, he notes that the defendants continue to falsify tax returns in order to cover up the dissipation of assets. Additionally, K. Givens, C. Givens, and J. Givens continue to have exclusive control over financial decisions at VLO, which makes possible their continuing fraud of using Hershewe’s investment in VLO for their own benefit. In other words, VLO’s regular way of doing business now entails those in control dissipating VLO’s assets for their own benefit. Such an allegation of a continuing scheme meets the continuity requirement. 21 As Hershewe meets both the standing and substantive requirements for a RICO claim, the court denies the 12(b)(6) motions on this claim. B. Fraud Hershewe next alleges that K. Givens, C. Givens, J. Givens, and investment Eagle in Investments VLO, and each defrauded defendant dismiss for failure to state a claim. him his moves now of to The court denies the motions to dismiss this claim. Under Alabama common law, fraud can be based on the misrepresentation or failure to disclose a present material fact or on a fraudulent promise to act or not to act in the future. See Penmont, LLC v. Blue Ridge Piedmont, LLC, 607 F. Supp. 2d 1266 (M.D. Ala. 2009) (Thompson, fraud). Givens, J.) (describing the different types of Here, Hershewe contends that K. Givens, C. and J. Givens promised to spend his $ 3.5 million investment for VLO’s operation and growth, but 22 instead used it for their own benefit. In other words, he alleges promissory fraud, claiming that they falsely promised to use the investment towards VLO’s business. To make out a claim for promissory fraud, a plaintiff must allege “(1) a false representation, (2) of material existing fact, (3) reasonably relied upon by the plaintiff, proximate (4) consequence of who suffered damage misrepresentation.” as Id. a at 1273 (quoting S.B. v. St. James Sch., 959 So. 2d 72, 101 (Ala. 2006)). The plaintiff must also show that at the time of the misrepresentation the defendant “had the intention not to perform the act as promised” and had the “intent to deceive.” Id. (quoting St. James, 959 So. 2d at 101). The intent to deceive “can be established relates to through events circumstantial that occurred misrepresentations were made.” 2d 334, 343 (Ala. 2002). a plaintiff can evidence after the that alleged Byrd v. Lamar, 846 So. As discussed above, although allege 23 intent generally, the circumstances constituting particularity. must be pled with Fed. R. Civ. P. 9(b). 1. Hershewe fraud claims K. Givens that, during negotiations, K. Givens represented both that he would use Hershewe’s $ 3.5 million investment to advance VLO’s business and that he would transfer Jacoby & Meyers’s intellectual property to VLO. either promise. However, K. Givens did not fulfill He used the $ 3.5 million for his own businesses, including transferring $ 1 million of the initial investment into Eagle Investments, and he failed to transfer any intellectual property to VLO. As evidence that K. Givens intended to deceive at the moment of the promise, Hershewe notes that Jacoby & Meyers never transferred any intellectual property and that K. Givens transferred Hershewe’s initial $ 1 million to his personal account the same day Hershewe wired the money to VLO. 24 These detailed allegations put K. Givens on notice of the alleged fraud. His failure assets to transfer to VLO to Brooks, 116 F.3d at 1370-71. transfer and his the own any intellectual timing account of the provide $ property 1 million circumstantial evidence of K. Givens’s intent to deceive when VLO was formed. these Lamar, 846 So.2d at 343. pleadings state a The court finds that claim for fraud with particularity and thus denies the motion to dismiss on this claim. 2. Although the C. Givens and J. Givens complaint details a Givens’s actions that constitute fraud, number of K. it does not have the same level of detail for C. Givens or J. Givens. Indeed, the complaint never describes their individual actions separate from K. Givens. It only provides any specificity on three occasions: stating that C. Givens’s name was on the Eagle Investments’ 25 bank account along with K. Givens; describing C. Givens’s joint control of VLO’s bank account with K. Givens; and mentioning that K. Givens delegated management of VLO to C. Givens and J. Givens. None of these statements allege a specific action by C. Givens or J. Givens that they took alone. These statements do not qualify as pleading with particularity as to C. Givens or J. Givens. See Morrow v. Green Tree Servicing, LLC, 360 F. Supp. 2d 1246, 1250 (M.D. Ala. 2005) (Thompson, J.). Alternatively, Hershewe makes the claim that K. Givens at all times acted as the actual or apparent agent for C. Givens and J. Givens. As discussed above, this agency claim meets the pleading requirements. 3. Hershewe last Eagle Investments alleges that Eagle Investments is liable for fraud because K. Givens acted as its agent. According to the complaint, K. Givens was part-owner 26 and manager of Eagle Investments and transferred funds out of VLO’s account Investments. K. into Givens’s one owned position by Eagle within Eagle Investments gave him express power as an actual agent to act on its behalf. Moreover, Eagle Investments’s failure to protest the additional money flowing into its bank account suggests that K. Givens had the power to manage its finances and act on its behalf. Based on K. Givens’s formal position as well as the facts and circumstances of how he managed Eagle Investments, the court finds that Hershewe pleads an actual agency relationship between K. Givens and Eagle Investments and therefore denies the motion to dismiss on this claim. C. Hershewe Breach of Fiduciary Duty next brings direct and derivative breach-of-fiduciary-duty claims against K. Givens, C. 27 Givens, and J. Givens.7 Each moves to dismiss. The court denies the motions. 1. Direct Claim In order to have standing for a direct claim of breach of fiduciary duty, plaintiffs “suffered a harm unique to them.” Inc. v. Adams, However, “[i]f 76 the So. 3d wrong 228, must have Altrust Fin. Servs., 245 directly (Ala. 2011). damages the corporation and its assets from waste, conversion and intentional mismanagement, corporation’s.” the claim is the Mobile Attic, Inc. v. Cash, 2012 WL 7. It is unclear whether the plaintiffs actually plead this claim against J. Givens. The heading of Count II does not include J. Givens, but the paragraphs under it and the request for relief do apply to him. To avoid “elevat[ing] form over substance,” the court considers the claim against J. Givens. See Valentine v. Legendary Marine FWB, Inc., 2010 WL 1687738, at *2 (N.D. Fla. 2010) (Rodgers, J.). The court therefore denies J. Givens’s motion to strike paragraphs 121 and 122 (doc. no. 115) in relation to J. Givens. 28 2120794, at *2 (M.D. Ala. 2012) (Thompson, J.) (quoting id. at 241). self-dealing For example, claims of mismanagement and are “quintessential derivative injury, merely incidental to status as a stockholder.” Mobile Attic, 2012 WL 2120794, at *2 (internal quotation marks omitted). Investors direct can allege claim--where the a unique nature of harm--and thus the was harm a an inducement to provide funding to enter a joint venture or guarantee a loan. 218, 222 purchased limited (Ala. an In DGB, LLC v. Hinds, 55 So. 3d 2010), interest liability the in a plaintiffs originally real-estate-development company. After this initial investment, at the request of the managers of the LLC, the plaintiffs agreed to fund an additional $ 2.5 million investment and to guarantee an additional $ 7.5 million loan in order to purchase a specific piece of property that the LLC told them was worth $ 10 million. Id. at 222-23. Unbeknownst 29 to the plaintiffs, the property had been purchased days earlier for half that price by a company partially defendants who owned the LLC. owned Id. by the same The court held that the plaintiffs had standing to sue on direct claims because “the concealed defendants information made directly representations from [the to and plaintiffs] regarding the circumstances” of the joint venture. Id. at 229; see also ECR Properties, LLC v. Camden Cnty. Dev., LLC, 998 F. Supp. 2d 1295, 1310-11 (M.D. Ala. 2014) (Fuller, J.) (finding standing for direct claim where plaintiffs were induced by a false representation to make a capital contribution to a joint venture). The defendants make three arguments against Hershewe’s claim of direct breach of fiduciary duty: Hershewe lacks standing to bring the claim, he fails to allege a fiduciary duty, and that, even if there was a fiduciary duty, there was no breach of it. rejects all three arguments. 30 The court The first issue is whether Hershewe has standing to bring this direct claim. Hinds, Hershewe was Similar to the plaintiffs in induced to provide a capital contribution and later to guarantee personally a loan based on a false premise: that the investment would be used for the benefit of VLO. The alleged wrong for this claim was based on the inducement to invest money and not on K. Givens’s misappropriation of VLO funds.8 Because K. Givens “made representations directly to and concealed information directly from” Hershewe when inducing him to invest, Hershewe has standing to bring a direct claim for breach of fiduciary duty. Hinds, 55 So. 3d 218 at 229. 8. Indeed, this holding on standing for a direct claim is limited to the inducement alone. To the extent Hershewe alleges direct, versus derivative, injury to VLO from K. Givens’s self-dealing use of VLO funds, which affects all members of the LLC, the claim is rejected. See Mobile Attic, 2012 WL 2120794, at *2. 31 The defendants next contend that Hershewe fails to allege the existence of a fiduciary duty between the parties. Breach of fiduciary duty sounds in tort law. Hensley v. Poole, 910 So.2d 96, 106 (Ala. 2005). As such, Hershewe has to plead duty, causation, breach, and damages. Under Alabama law, members of an LLC owe each other a duty of loyalty and a duty of care. Ala. Code § 10A-5-3.03. These duties 1975 include accounting for property, profit, or benefits derived from the self-dealing business and as well grossly intentional misconduct. Id. as refraining negligent, reckless, from or Each member must also act in a manner consistent “with the obligation of good faith and fair dealing.” Id. The complaint sufficiently pleads that K. Givens had a fiduciary duty to Hershewe, that he violated that duty, and that the breach caused Hershewe damages. The complaint makes clear that they were both members of the LLC and accordingly owed each other a duty of care, 32 duty of loyalty, and duty to act in good faith. See id.; Compl. ¶ 107. Givens first induced Hershewe to invest $ 1.5 million in VLO and then used it for his personal benefit; and K. Givens misrepresented the reason for the $ 1 million loan in order to induce Hershewe into guaranteeing it. This self-dealing on both issues violates the duty of loyalty as well as the duty to deal in good faith. In sum, Hershewe has standing and properly pled a direct claim for breach of fiduciary duty against K. Givens. Based on the agency theory discussed above, he also pled a claim against C. Givens and J. Givens. court therefore denies the motions to dismiss The this claim. 2. Derivative Claim To plead a derivative claim, a plaintiff must meet both the derivate procedural claim and requirements the substantive 33 for pleading requirements a for breach of fiduciary duty. The court will first turn to whether Hershewe met the procedures outlined in the federal rules and then move to the substantive claim against each defendant. i. The pleads first a derivative Procedural Requirements question derivative claim is whether claim. under federal In Hershewe order to procedural properly make a rules, a plaintiff must allege that the shareholder was a member of the corporation at the time of the transaction and that the action is not a collusive attempt to confer jurisdiction. Fed. R. Civ. Proc. 23.1. He must also plead with particularity any demand he made to those in charge to change their actions or the reasons for not making such an effort, i.e., why such an effort would have been futile. Id.; 1975 Ala. Code § 10A-5-4.04. 34 As neither party disputes whether Hershewe was a member of VLO and no evidence suggests collusion,9 the court turns to whether he pleads demand or futility with particularity. When analyzing a demand or futility federal courts look to state substantive law. argument, Playford v. Lowder, 635 F. Supp. 2d 1303, 1307 (M.D. Ala. 2009) (Thompson, J.) (quoting Kamen v. Kemper Fin. Serv., Inc, 500 U.S. 90, 95-6, 101-103 (1991)). undisputed that Hershewe Here, it is did not make a pre-lawsuit demand, so the question is whether he can demonstrate futility. Although courts have not elaborated on the futility requirement for limited-liability companies, they have evaluated a similar law for corporations. To 9. Even though Hershewe does not allege collusion, “[f]ailure to plead lack of collusion is not fatal to a derivative action where the facts alleged in the complaint do not establish the existence of collusion.” Plunkett v. Poyner, 2009 WL 5176542, at *5 (S.D. Fla. 2009) (Cohn, J.). K. Givens has not argued collusion, and the facts do not suggest it. 35 demonstrate futility under Alabama corporations law, a plaintiff must show “such a degree of antagonism between the directors and the corporate interest that the directors would be incapable of performing their duty.” Davis v. Dorsey, 495 F. Supp. 2d 1162, 1174 (M.D. Ala. 2007) (Thompson, J.) (quoting Elgin v. Alfa Corp., 598 So. 2d 807, 815 (Ala. 1992)). A court can consider whether a majority of the directors are accused of breaches of fiduciary duty by the plaintiff, and the futility requirement is generally “deemed satisfied if the directors or a majority thereof are shown to have been under the control of the alleged wrongdoers.” Id. (internal citations and quotation marks omitted). The same concepts limited-liability company can be in this applied to the case. Hershewe alleges that he did not hold a majority interest in VLO and that he would not have been able to convince other members to take action, as they were all part of the 36 same law firm. Moreover, three defendants in this case--K. Givens, C. Givens, and J. Givens--own 50% of VLO, rendering any attempt to secure a majority VLO’s members to bring this lawsuit futile. therefore finds that Hershewe met the of The court procedural requirements for a derivative claim and turns to the substantive merits. ii. Substantive Requirements The defendants allege that Hershewe does not plausibly claim the underlying elements for breach of fiduciary duty for a derivative claim. As stated above, Hershewe must allege a harm on behalf of VLO in order to state a derivative claim. According to the complaint, K. Givens used his position as co-manager of VLO to funnel money into his personal enterprises, including a $ 1 million transfer and over $ 100,000 worth of purchases for another business he owned. In addition, K. Givens 37 and C. Givens had control of the Eagle Investments bank account to which the money was transferred and from which they spent money for their personal benefit. company for personal self-dealing. gain Taking money from a is the epitome of As such, Hershewe plausibly alleges a derivative claim for breach of the fiduciary duty of loyalty against K. Givens as well as his sons on the agency theory. Because Hershewe meets the substantive and procedural requirements for pleading a derivative claim for breach of fiduciary duty, the court denies the motions to dismiss on this issue. D. Piercing the Corporate Veil Hershewe next claims that the court should pierce the veil corporate veil of VLO, Eagle Investments, and Jacoby & Meyers because K. Givens, C. Givens, and J. Givens used these personal liability. companies as alter egos to avoid Each defendant moves to dismiss. 38 Under Alabama law, a plaintiff can move to pierce the corporate veil of an directly” on the members. LLC and “impose liability Filo America, Inc. v. Olhoos Trading Co., LLC, 321 F. Supp. 2d 1266, 1268 (M.D. Ala. 2004) (Thompson, J.) (quoting Culp v. Econ. Mobile Homes, Inc., 895 So. 2d 857, 859 (Ala. 2004)) (internal quotation marks omitted). corporate veil is to The purpose of piercing the “furnish[] a means for a complainant to reach ... [an] individual upon a cause of action that otherwise would have existed only against the ... corporation.” Gilbert v. James Russell Motors, 2001) Inc., 812 (internal differently, if So.2d 1269, quotation a 1273 marks plaintiff (Ala. Civ. App. omitted). sues a Put defendant corporation and the corporation lacks assets, piercing the corporate collect any corporation] veil provides ... award from another 39 a “means against source, by [the which to defendant namely [the corporation’s] shareholders.” Stephens v. Fines Recycling, Inc., 84 So. 3d 867, 877 (Ala. 2011). The defendants argue that piercing the corporate veil is inapplicable in this case because every claim asserted against Eagle Investments and Jacoby & Meyers can be, and has been, asserted against K. Givens, C. Givens, and J. Givens. In other words, they argue that this case is not the normal context for piercing the corporate veil where an individual is attempting to avoid liability through a sham corporation. The court rejects the defendants’ prejudge the outcome of this case. invitation to For example, the defendants could argue, and a jury could find, that K. Givens, C. Givens, and J. Givens are protected from individual liability for Eagle Investments and Jacoby & Meyers’s actions because of the corporate structure. In that case, Hershewe’s claim that these companies are undercapitalized defendants would and meet alter the 40 egos of purpose the of individual piercing the corporate veil because piercing the veil might be the only alternative Recycling, 84 means So. 3d to at collect 877. an The award. court Fines therefore denies the motion to dismiss this claim. E. Corporate Dissolution Hershewe next brings a corporate-dissolution count against VLO and its subsidiaries. VLO contends that this count should be dismissed because the court lacks subject-matter jurisdiction and because Hershewe failed to state a claim for which relief can be granted.10 Alabama law provides for judicial dissolution of a limited-liability company: 10. VLO listed general affirmative defenses at the end of its answer, including these two objections. Although not clear, the court assumes the affirmative defenses apply to each claim against VLO. Additionally, several other defendants allege the same defenses to corporate dissolution; however, they cannot assert these defenses on VLO’s behalf. 41 “On application by or for a member, the circuit court for the county in which the certificate of formation is filed may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the governing documents.” Ala. Code 1975 § 10A-5-7.02. The court subject-matter argues that must first examine jurisdiction there is no over whether this claim. subject-matter it has VLO jurisdiction because the statute only allows the Alabama circuit court, and not a federal court, to dissolve a company. In essence, they argue that the state legislature, by limiting jurisdiction to only circuit courts, barred federal-court review. jurisdiction to Federal courts, however, have hear state-law claims under supplemental or diversity-of-citizenship jurisdiction, and corporate law is not one of the limited spheres where federal courts cannot exercise this jurisdiction, such as the granting of divorce or a decree of alimony. Cf. Ankenbrandt v. Richards, 504 U.S. 689, 704 (1992) 42 (upholding domestic-relations federal-court jurisdiction, exception but narrowing to it to encompass only issuance of divorce, alimony, or a child custody decree). Indeed, a state legislature cannot avoid federal-court jurisdiction simply by enacting a statute that requires the case be brought in state court. Cf. Jolly v. Pittore, 1993 WL 277284, at *2 (S.D.N.Y. 1993) (Martin, J.) (exercising jurisdiction for corporate specified that dissolution the Court issue is where of Delaware Chancery statute could decree dissolution). The next whether Hershewe plausibly alleges why it is not reasonably practicable to carry on VLO’s documents. business in Although accordance Alabama with law the does governing not define ‘reasonably practicable,’ and Alabama courts have not ruled on the issue, other state courts have addressed it. For example, Delaware courts, interpreting an almost identical statute, have labeled dissolution as 43 an “extreme remedy” and identified only two situations where it is not reasonably practicable to operate the business: “(i) where there is deadlock that prevents a corporation from operating and (ii) where the defined purpose of the entity is fulfilled or impossible to carry out.” Wiggs v. Summit Midstream Partners, LLC, 2013 WL 1286180, at *12 (Del. Ch. 2013); see also In re Arrow Inv. Advisors, LLC, 2009 WL 1101682, at *4 (Del. Ch. 2009). Other state courts have stressed that deadlock or breaches of fiduciary duty alone cannot be grounds for dissolution but must instead be tied to the inability of the business to conform with the governing documents. 590, 596 In re 1545 Ocean Ave., LLC, 893 N.Y.S.2d (N.Y. App. 2010) (interpreting almost identical statute to the one at issue here) The court agrees with the interpretation of the Delaware and New York courts. Under the plain language of member the Alabama managerial statute, deadlock or a a fundamental 44 must plead change in how the company, the market, or the legal landscape makes it impossible to achieve the business’s purpose. Hershewe describes a meets company this pleading where one standard. member is He suing his co-manager and two other members for embezzling money from the company for their own purposes and failing to carry Unlike out the a case core purpose where one of the joint executive at venture. a large corporation is embezzling, the alleged fraud and breach of fiduciary duty here implicates four out of the six members of the LLC, a large portion of the capital being used for the business, property central to the business. and the intellectual The court finds that it not reasonably practicable to carry on the business given this deadlock. It therefore denies the motion to dismiss on this claim. *** 45 Accordingly, it is ORDERED that the motions to dismiss (doc. nos. 111, 112, 114, 115, 116) are denied. DONE, this the 29th day of September, 2015. /s/ Myron H. Thompson___ UNITED STATES DISTRICT JUDGE 46
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