Gordon et al v. Dailey et al, No. 1:2014cv07495 - Document 143 (D.N.J. 2018)
Court Description: OPINION FILED. Signed by Judge Joseph H. Rodriguez on 3/27/18. (js)
Download PDF
<![CDATA[
Gordon et al v. Dailey et al Doc. 143 UNITED STATES DISTRICT COURT DISTRICT OF NEW J ERSEY BRANDON GORDON, et al., : : Plaintiffs, v. Hon. J oseph H. Rodriguez Civil Action No. 14-7495 : OPINION ZACHARY DAILEY and LAB RAT DATA PROCESSING, LLC., : Defendants. : This m atter is before the Court on Defendant’s Motion to Dism iss the Second Am ended Com plaint [Dkt. No. 126]. The Court has considered the written subm issions of the parties pursuant to Fed. R. Civ. P. 78 (b). For the reasons that follow, Defendant’s m otion is denied. I. Background Plaintiffs Brandon Gordon, Curtis Green, J akub Vondrak, J esse Lobb, Derek Piper, Christopher Galido, Mark Boehler, Merlin Fisher-Levine, Nathanael Flachsbart, and Russ Henderson bring this action against Defendant Zachary Dailey (“Defendant”) for claim s arising out of Defendant’s sale of alleged securities, in the form of bonds issued by adm inistratively term inated Defendant Lab Rat Data Processing, LLC.1 Investm ent in the bonds allowed Plaintiff Brandon Gordon (“Plaintiff”) to participate in a Bitcoin related initial public offering. The Bonds purchased by Plaintiff are attached to the Second Am ended Com plaint. 1 The only remaining Plaintiff in this action is Brandon Gordon. The others were dismissed from the case on May 29, 2017. Zachary Dailey is the only remaining Defendant to this action as Lab Rat Data Processing, LLC was administratively terminated after it filed a suggestion of bankruptcy on November 18, 2015 [Dkt. No. 81]. 1 Dockets.Justia.com The Second Am ended Com plaint, like its predecessors, alleges violations Section 12(a)(1) and 12(a)(2) of the Securities Act of 1933 (The 1933 Act), 15 U.S.C. § 77l and Section 10 (b) of the Securities Exchange Act of 1934 (The 1934 Act), and Rule 10 b-5 prom ulgated thereunder, codified at 15 U.S.C. § 78j(b) and 17 C.F.R. § 240 .10 b-5, for Defendant’s m isrepresentations in connection with the sale of the Bonds. These are the only federal claim s plead. The rem ainder of the claim s assert violations of New J ersey and Florida state laws, arising out of the sam e operative facts as the federal claim s set forth above, for violations of the New J ersey Uniform Securities Law, N.J . Stat. Ann. §§ 49:3-47, et. seq. and violations of the Florida Securities and Investor Protection Act, Fla. Stat. § 517.30 1, com m on law fraud, negligent m isrepresentations, fraudulent inducem ent, breach of contract, and unjust enrichm ent. In support of the m otion to dism iss, Defendant reargues som e of the points already addressed in the previous m otion to dism iss and in opposition of the m otion to am end. In short, Defendant claim s that the Second Am ended Com plaint should be dism issed for the following reasons: 1) Plaintiff has failed to plead a claim under Section 10 (b) of the Securities Act of 1934; 2) the Com plaint fails to plead facts that support any claim ; 3) the Com plaint fails to state a claim under state law; 4) the Com plaint fails to state a claim of com m on law fraud pursuant to Fed. R. Civ. P. 9 (b); 5) Plaintiff’s fraud, negligent representation and unjust enrichm ent claim s are barred by the econom ic loss doctrine; 6) the Com plaint fails to state a claim for unjust enrichm ent and/ or breach of contract; and 7) Counts XXI through XXIII should be dism issed based upon Plaintiff’s voluntary dism issal of these claim s.2 2 Plaintiff agrees that the claims related to the plaintiffs dismissed on May 29, 2017 who are no longer in the case is proper, but asks the Court to forgo dismissing them a second time. To the extent that these claims are no longer operative, Defendant’s motion is granted in this regard. 2 II. Standard of Review A m otion to dism iss pursuant to Federal Rule of Civil Procedure 12(b)(1) m ay involve either a facial challenge to subject m atter jurisdiction or a factual challenge to the jurisdictional allegations. Gould Elec., 220 F.3d at 176. If the defendant’s attack is facial—i.e., “asserting that the com plaint, on its face, does not allege sufficient grounds to establish subject m atter jurisdiction”—a court m ust accept all allegations in the com plaint as true. Taliaferro v. Darby Twp. Zoning Bd., 458 F.3d 181, 188 (3d Cir. 20 0 6). Alternatively, a defendant m ay “challenge a federal court’s jurisdiction by factually attacking the plaintiff's jurisdictional allegations as set forth in the com plaint.” Mortensen v. First Fed. Sav. & Loan Ass’n, 549 F.2d 884, 891 (3d Cir. 1977). A factual challenge attacks the existence of a court’s subject m atter jurisdiction apart from any of the pleadings and, when considering such a challenge, a presum ption of truthfulness does not attach to a plaintiff's allegations.” Id.; see also Martinez v. U.S. Post Office, 875 F. Supp. 10 67, 10 70 (D.N.J . 1995). Alternatively, Federal Rule of Civil Procedure 12(b)(6) allows a party to m ove for dism issal of a claim based on “failure to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). A com plaint should be dism issed pursuant to Rule 12(b)(6) if the alleged facts, taken as true, fail to state a claim . Fed. R. Civ. P. 12(b)(6). When deciding a m otion to dism iss pursuant to Rule 12(b)(6), ordinarily only the allegations in the com plaint, m atters of public record, orders, and exhibits attached to the com plaint, are taken into consideration.3 See Chester County Interm ediate Unit v. Pa. 3 “Although a district court may not consider matters extraneous to the pleadings, a document integral to or explicitly relied upon in the complaint may be considered without converting the motion to dismiss into one for summary judgment.” U.S. Express Lines, Ltd. v. Higgins, 281 F.3d 383, 388 (3d Cir. 2002) (internal quotation marks and citations omitted) (emphasis deleted). 3 Blue Shield, 896 F.2d 80 8, 812 (3d Cir. 1990 ). It is not necessary for the plaintiff to plead evidence. Bogosian v. Gulf Oil Corp., 561 F.2d 434, 446 (3d Cir. 1977). The question before the Court is not whether the plaintiff will ultim ately prevail. Watson v. Abington Twp., 478 F.3d 144, 150 (20 0 7). Instead, the Court sim ply asks whether the plaintiff has articulated “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twom bly, 550 U.S. 544, 570 (20 0 7). “A claim has facial plausibility4 when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the m isconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (20 0 9) (citing Twom bly, 550 U.S. at 556). “Where there are well-pleaded factual allegations, a court should assum e their veracity and then determ ine whether they plausibly give rise to an entitlem ent to relief.” Iqbal, 556 U.S. at 679. The Court need not accept “‘unsupported conclusions and unwarranted inferences,’” Baraka v. McGreevey, 481 F.3d 187, 195 (3d Cir. 20 0 7) (citation om itted), however, and “[l]egal conclusions m ade in the guise of factual allegations . . . are given no presum ption of truthfulness.” Wyeth v. Ranbaxy Labs., Ltd., 448 F. Supp. 2d 60 7, 60 9 (D.N.J . 20 0 6) (citing Papasan v. Allain, 478 U.S. 265, 286 (1986)); see also Kanter v. Barella, 489 F.3d 170 , 177 (3d Cir. 20 0 7) (quoting Evancho v. Fisher, 423 F.3d 347, 351 (3d Cir. 20 0 5) (“[A] court need not credit either ‘bald assertions’ or ‘legal conclusions’ in a com plaint when deciding a m otion to dism iss.”)). Accord Iqbal, 556 U.S. at 678-80 (finding that pleadings that are no m ore than conclusions are not 4 This plausibility standard requires more than a mere possibility that unlawful conduct has occurred. “When a complaint pleads facts that are ‘merely consistent with’ a defendant’s liability, it ‘stops short of the line between possibility and plausibility of ‘entitlement to relief.’’” Id. 4 entitled to the assum ption of truth). Further, although “detailed factual allegations” are not necessary, “a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitlem ent to relief’ requires m ore than labels and conclusions, and a form ulaic recitation of a cause of action’s elem ents will not do.” Twom bly, 550 U.S. at 555 (internal citations om itted). See also Iqbal, 556 U.S. at 678 (“Threadbare recitals of the elem ents of a cause of action, supported by m ere conclusory statem ents, do not suffice.”). Thus, a m otion to dism iss should be granted unless the plaintiff’s factual allegations are “enough to raise a right to relief above the speculative level on the assum ption that all of the com plaint’s allegations are true (even if doubtful in fact).” Twom bly, 550 U.S. at 556. “[W]here the well-pleaded facts do not perm it the court to infer m ore than the m ere possibility of m isconduct, the com plaint has alleged-but it has not ‘shown’-‘that the pleader is entitled to relief.’” Iqbal, 556 U.S. at 679. Further, Rule 9(b) provides that “[i]n alleging fraud or m istake, a party m ust state with particularity the circum stances constituting fraud or m istake. Malice, intent, knowledge, and other conditions of a person's m ind m ay be alleged generally.” Fed. R. Civ. P. 9(b). Pursuant to Rule 9(b), a plaintiff m ust plead “with particularity ‘the circum stances of the alleged fraud in order to place the defendants on notice of the precise m isconduct with which they are charged, and to safeguard defendants against spurious charges of im m oral and fraudulent behavior.’ ” Lum v. Bank of Am ., 361 F.3d 217, 223– 24 (3d Cir. 20 0 4) (quoting Seville Indus. Mach. Corp. v. Southm ost Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984)). There are two ways to satisfy the particularity requirem ent. See Lum , 361 F.3d at 224. First, a plaintiff m ay plead the “date, place or tim e” of the fraudulent act. Id. (quoting Seville, 742 F.2d at 791) (internal quotations om itted) (em phasis added). 5 Second, a plaintiff m ay use “alternative m eans [to] inject [ ] som e m easure of substantiation into their allegations of fraud.” Id. (internal quotations om itted). Still, the plaintiff m ust plead enough to substantiate the allegations of fraud being m ade and m ay not rely on “conclusory statem ents.” NN & R, Inc. v. One Beacon Ins. Group, 362 F.Supp.2d 514, 518 (D.N.J . 20 0 5) (quoting Mordini v. Viking Freight, Inc., 92 F.Supp.2d 378, 385 (D.N.J . 1999)). At a m inim um , a plaintiff “m ust allege who m ade a m isrepresentation to whom and the general content of the m isrepresentation.” Lum , 361 F.3d at 224. Significantly, the heightened pleading standard required by Rule 9(b) applies to claim s of fraud brought under New J ersey law. Frederico v. Hom e Depot, 50 7 F.3d 188, 20 0 (3d Cir. 20 0 7). III. Analysis As a prelim inary m atter, the Court will not consider the large declaration Defendant appends to his m otion to dism iss. Given the posture of the Court under Fed. R. Civ. P. 12 (b) (6), only the allegations in the com plaint, m atters of public record, orders, and exhibits attached to the com plaint, are taken into consideration. See Chester County Interm ediate Unit v. Pa. Blue Shield, 896 F.2d 80 8, 812 (3d Cir. 1990 ); see also U.S. Express Lines, Ltd. v. Higgins, 281 F.3d 383, 388 (3d Cir. 20 0 2) (“Although a district court m ay not consider m atters extraneous to the pleadings, a docum ent integral to or explicitly relied upon in the com plaint m ay be considered without converting the m otion to dism iss into one for sum m ary judgm ent.” ) (internal quotation m arks and citations om itted) (em phasis deleted). The Court finds that Defendant’s m otion asks the Court to consider evidence not properly before the Court in this posture. In the Court’s Opinion granting Plaintiffs’ Motion to Am end, the Court found that the proposed Second Am ended Com plaint addressed concerns raised with respect to 6 jurisdiction and perm itted the am endm ent because the proposed, now operative, Second Am ended Com plaint was not futile. The Court will address Defendant’s argum ents as follows. 1. Plaintiffs have plead a claim under Section 10 (b) of the Securities Act of 1934 and the m otion to dism iss Counts V-VI is denied. Section 10 (b) of the Securities Exchange Act prohibits the use of “any m anipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Com m ission m ay prescribe ....” 15 U.S.C. § 78j(b). The SEC has in turn prom ulgated Rule 10 b– 5, which m akes it unlawful for any person to “m ake any untrue statem ent of a m aterial fact or to om it to state a m aterial fact necessary in order to m ake the statem ents m ade, in the light of the circum stances under which they were m ade, not m isleading ... in connection with the purchase or sale of any security.” 17 C.F.R. § 240 .10 b– 5. OFI Asset Mgm t., 834 F.3d at 493. The Second Am ended Com plaint in subsection C, sets forth with sufficient particularity as to Plaintiff Gordon, a claim under Section 10 (b) of the Securities Exchange Act. See Sec. Am en. Com pl. ¶¶ 37-61. To state a claim for securities fraud under Section 10 of the Exchange Act and Rule 10 b– 5, a plaintiff m ust plead the following: “(1) a m aterial m isrepresentation or om ission by the defendant; (2) scienter; (3) a connection between the m isrepresentation or om ission and the purchase or sale of a security; (4) reliance upon the m isrepresentation or om ission; (5) econom ic loss; and (6) loss causation.” Am gen, Inc. v. Conn. Retirem ent Plans & Trust Funds, 568 U.S. 455, 133 S.Ct. 1184, 1192, 185 L.Ed.2d 30 8 (20 13) (internal citation om itted). 7 Scienter is a “m ental state em bracing intent to deceive, m anipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 218 n.12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). In evaluating scienter's “strong inference” requirem ent, courts m ust weigh “plausible nonculpable explanations for the defendant's conduct” against the “inferences favoring the plaintiff.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 30 8, 324, 127 S.Ct. 2499, 168 L.Ed.2d 179 (20 0 7). A “strong inference” of scienter is one that is “cogent and at least as com pelling as any opposing inference of nonfraudulent intent.” Id. at 314, 127 S.Ct. 2499; see also id. at 324, 127 S.Ct. 2499 (“The inference that the defendant acted with scienter need not be irrefutable, i.e., of the ‘sm oking gun’ genre, or even the m ost plausible of com peting inferences.” (Internal quotation m arks om itted.)). The pertinent question is “whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, m eets that standard.” Id. at 323, 127 S.Ct. 2499; see also id. at 326, 127 S.Ct. 2499 (“[T]he court's job is not to scrutinize each allegation in isolation but to assess all of the allegations holistically.”). “[I]n cases alleging securities fraud, plaintiffs m ust ‘satisfy the heightened pleading rules codified in’ the [Private Securities Litigation Reform Act, or] PSLRA.” OFI Asset Mgm t. v. Cooper Tire & Rubber, 834 F.3d 481, 493 (3d Cir. 20 16) (quoting Institutional Investors Grp. v. Avaya, Inc., 564 F.3d 242, 252 (3d Cir. 20 0 9)). To satisfy this heightened pleading standard, a plaintiff m ust state the circum stances of his alleged cause of action with “sufficient particularity to place the defendant on notice of the ‘precise m isconduct with which [it is] charged.’ ” Frederico v. Hom e Depot, 50 7 F.3d 188, 20 0 (3d Cir. 20 0 7) (quoting Lum v. Bank of Am erica, 361 F.3d 217, 223– 24 (3d Cir. 20 0 4)). Specifically, the plaintiff m ust plead or allege the “date, tim e and place of the 8 alleged fraud or otherwise inject precision or som e m easure of substantiation into a fraud allegation.” Frederico, 50 7 F.3d at 20 0 (citing Lum , 361 F.3d at 224). The Third Circuit has advised that, at a m inim um , a plaintiff m ust allege the “essential factual background that would accom pany ‘the first paragraph of any newspaper story’—that is, the ‘who, what, when, where and how’ of the events at issue.” In re Suprem a Specialties, Inc. Sec. Litig., 438 F.3d 256, 276– 77 (3d Cir. 20 0 6) (quoting In re Rockefeller Ctr. Prop., Inc. Sec. Litig., 311 F.3d 198, 216 (3d Cir. 20 0 2)). The PSLRA provides two distinct pleading requirem ents, both of which m ust be m et in order for a com plaint to survive a m otion to dism iss. Avaya, 564 F.3d at 252. First, under 15 U.S.C. § 78u– 4(b)(1), the com plaint m ust “specify each allegedly m isleading statem ent, why the statem ent was m isleading, and, if an allegation is m ade on inform ation and belief, all facts supporting that belief with particularity.” Winer Fam ily Trust v. Queen, 50 3 F.3d 319, 326 (3d Cir. 20 0 7) (construing 15 U.S.C. § 78u– 4(b)(1)). Second, the com plaint m ust, “with respect to each act or om ission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of m ind.” 15 U.S.C. § 78u– 4(b)(2). Under the PSLRA's second pleading requirem ent for Exchange Act claim s, a plaintiff m ust “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of m ind.” 15 U.S.C. § 78u– 4(b)(2). An Exchange Act plaintiff m ust also plead a connection between the m isrepresentation or om ission and the purchase or sale of a security and reliance. Am gen, 133 S.Ct. at 1192; Blue Chip Stam ps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Rule 10 b– 5, prom ulgated by the Securities and Exchange Com m ission, m akes it unlawful: 9 (a) To em ploy any device, schem e, or artifice to defraud, (b) To m ake any untrue statem ent of a m aterial fact or to om it to state a m aterial fact necessary in order to m ake the statem ents m ade, in the light of the circum stances under which they were m ade, not m isleading, or (c) 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 .10 b– 5 (em phasis added); In re Westinghouse Secs. Litig., 90 F.3d 696, 710 (3d Cir. 1996). As a result, before a plaintiff can invoke the protections of the antifraud provisions of the federal securities laws, a plaintiff m ust show that the alleged m isconduct involves a purchase or sale of securities. See Steinhardt Grp. Inc. v. Citicorp, 126 F.3d 144, 150 (3d Cir. 1997); Scattergood v. Perelm an, 945 F.2d 618, 622 (3d Cir. 1991) (fraud under the Exchange Act and Rule 10 b– 5 m ust concern the purchase or sale of a “security”). Here, Defendant sold Bonds in his com pany under the guise that the bonds were not securities but com plied with all regulations. Under The Exchange Act, a “security” is defined as: any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit sharing agreem ent or in any oil, gas, or other m ineral royalty or lease, any collateraltrust certificate, preorganization certificate or subscription, transferable share, investm ent contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrum ent com m only known as a “security”; or any certificate of interest or participation in, tem porary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker acceptance which has a m aturity at the tim e of issuance of not exceeding nine m onths, exclusive of days of grace, or any renewal thereof the m aturity of which is likewise lim ited. 10 15 U.S.C. § 78c (a)(10 ) (em phasis added). “[T]he term ‘security’ was m eant to include ‘the m any types of instrum ents that in our com m ercial world fall within the ordinary concept of a security,’ ... the scope of federal securities laws is not without lim itation, and Congress did not intend to create a federal cause of action for com m on fraud.” Goodwin v. Elkins & Co., 730 F.2d 99, 10 2 (3d Cir. 1984) (citation om itted). The Bonds at issue here are described as investm ent con tracts, a term that has not been defined by Congress. In SEC v. W.J . Howey Co., the Suprem e Court identified three elem ents which indicate whether an investm ent qualifies as a security: (1) “an investm ent of m oney,” (2) “in a com m on enterprise,” and (3) “with profits to com e solely from the efforts of others.” SEC v. W.J . Howey Co., 328 U.S. 293, 298– 99, 66 S.Ct. 110 0 , 90 L.Ed. 1244 (1946). At this stage, Plaintiff’s com plaint sufficiently sets forth a claim under the Exchange Act. Plaintiff alleges that Dailey intentionally and falsely represented that the Bonds com plied with all legal and regulatory requirem ents and knew that the issuance of the Bonds violated federal and state securities laws. Sec. Am . Com pl. at ¶¶ 34, 37-52, 56-65, 10 4-110 , 126-130 . In addition, the Com plaint sets forth facts that strongly infer that Dailey had incentive and m otive to m islead and, therefore, acted with the required state of m ind. See 15 U.S.C. § 78u– 4(b)(2). See, e.g., Gargiulo v. Isolagen, Inc., 527 F. Supp. 2d 384, 390 (E.D. Pa. 20 0 7) (holding that “Plaintiffs, by establishing m otive and opportunity, have m et their burden and pled facts with sufficient particularity to give rise to a strong inference of scienter”). The Court finds that Plaintiffs' factual allegations sufficiently plead that certain statem ents Defendant m ade were false and m isleading. The Second Am ended Com plaint specifies what Dailey said, what the contract prom ised, and that his actions 11 constitute a violation of the securities laws. For the sam e reasons, Plaintiff has sufficiently plead claim s under New J ersey Un iform Securities Law, N.J . Stat. Ann. §§ 49:3-47, et. seq. and violations of the Florida Securities and Investor Protection Act, Fla. Stat. § 517.30 1.5 Dailey’s m otion to dism iss Counts V-VI will be denied. 2. The Com plaint satisfies Rule 9 (b) as to the claim s of com m on law fraud and Defendant’s m otion to dism iss Count XI is denied. The Court finds that the Second Am ended Com plaint pleads claim s of fraud with sufficient particularity to withstand scrutiny under Rule 9 (b). See Sec. Am . Com pl. ¶¶ 34, 37-52, 56-65, 10 4-110 , 126-130 . To establish a claim for com m on law fraud, there m ust be “(1) a m aterial m isrepresentation of a presently existing or past fact; (2) 5 The elements of a claim under the Florida and New Jersey State securities laws are substantially similar to Rule 10b–5 of the Exchange Act. Under Florida law, a violation of Section 517.301 requires a showing that: (2) Any person purchasing or selling a security in violation of s. 517.301, and every director, officer, partner, or agent of or for the purchaser or seller, if the director, officer, partner or agent has personally participated or aided in making the sale or purchase, is jointly and severally liable to the person selling the security to or purchasing the security from such person in an action for rescission, if the plaintiff still owns the security, or for damages, if the plaintiff has sold the security. A cognizable claim under Section 517.301 must allege that (1) a misrepresentation or omission of a material fact; (2) justifiably relied on; (3) that the misrepresentation or omission was made in connection with a purchase or sale of securities; (4) with scienter or reckless disregard as to the truth of the communication; and (5) that the untruth was the direct proximate cause of the loss. Profilet v. Cambridge Fin. Corp., 231 B.R. 373, 380 (S.D.Fla.1999) (citing First Union Brokerage v. Milos, 717 F.Supp. 1519, 1523 (S.D.Fla. 1989), aff'd, 997 F.2d 835 (11th Cir.1993)). Under New Jersey Law, a claim pursuant to N.J. Stat. Ann. § 49:3–47, et seq. must allege “an[] untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstance under which they are made, not misleading.” The statute provides for a civil cause of action against persons who, in connection with the sale or purchase of a security, make “any untrue statement of material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading.” N.J. Stat. Ann. § 49:3–71(c); § 49:3–52. As a result, Defendants motion to dismiss Counts VII-X is denied. 12 knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting dam ages.” Gennari v. Weichert Co. Realtors, 148 N.J . 582, 610 , 691 A.2d 350 (1997) (citing J ewish Ctr. of Sussex County v. Whale, 86 N.J . 619, 624– 25, 432 A.2d 521 (1981)). As previously stated, there is also a heightened pleading standard when alleging fraud: “a party m ust state with particularity the circum stances constituting fraud or m istake. Malice, intent, knowledge, and other conditions of a person's m ind m ay be alleged generally.” Fed.R.Civ.P. 9(b) (em phasis added). Taking the allegations in the Com plaint as true, as this Court m ust under a Rule 12(b)(6) m otion, the elem ents of com m on law fraud are satisfied. The Com plaint provides that Defendant’s J uly 6, 20 13 "Official Announcem ent" stated that the bonds being offered were not regulated, that the bonds constituted an ownership interest, and a payout schem e was set forth in the offering and the business plan. In addition Plaintiff alleges that Dailey om itted the fact that he lacked the financial resources, knowledge, experience, equipm ent and ability to distribute weekly dividends resulting from the BTC m ining operations m anaged by LRM or repay the BTC Plaintiffs provided to purchase the LRM Bonds. Plaintiff further alleges that Dailey m ischaracterized the m anner in which funds he collected from the plaintniffs would be used and that the funds were actually diverted to a num ber of im proper purposes. See Sec. Am . Com pl., ¶¶ 34, 37-52, 56-65, 10 4-110 , 126-130 . Defendant’s m otion to dism iss Count XI is denied. 3. Plaintiff’s fraud, negligent representation and unjust enrichm ent claim s are not barred by the econom ic loss doctrine. 13 According to Dailey, Plaintiff’s com m on law fraud claims are barred by the econom ic loss doctrine. In general term s, the econom ic loss doctrine “prohibits plaintiffs from recovering in tort econom ic losses to which their entitlem ent flows only from a contract.” Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 60 4, 618 (3d Cir. 1995). The econom ic loss doctrine bars claim s for negligence between parties to a contract. SRC Const. Corp. of Monroe v. Atl. City Hous. Auth., 935 F. Supp. 2d 796, 80 0 (D.N.J . 20 13). “Under New J ersey law, a tort rem edy does not arise from a contractual relationship unless the breaching party owes an independent duty im posed by law. ... But m ere failure to fulfill obligations encom passed by the parties' contract, including the im plied duty of good faith and fair dealing, is not actionable in tort.” Skypala v. Mortgage Elec. Registration Sys., Inc., 655 F. Supp. 2d 451, 460 (D.N.J . 20 0 9); Rost v. Avelo Mortg., LLC, No. CV 15-3254, 20 15 WL 67370 26, at *5 (D.N.J . Nov. 3, 20 15) Here, Plaintiff alleges that Dailey falsely represented that the Bonds were not securities and that the Bonds com plied with all legal and regulatory requirem ents. In addition, the Second Am ended Com plaint alleges that Dailey concealed that Dailey’s corporation and form er defendant Lab Rat Data Processing’s issuance, sale and delivery of the unregistered Bonds constituted a violation of the federal securities laws. Finally, when coupled with the m any other alleged m isrepresentations and om issions, especially those set forth in Lab Rat Data Processing’s Official Announcem ent, Prospectus and Business Plan, the alleged conduct goes beyond and is outside of the confines of the contract between the parties. In other words, this fraud is independent from , and not contained within, the four corners of the parties’ contracts. The Court finds that as alleged, this m isconduct is distinct from the breach of contract and renders the econom ic loss rule inapplicable under both New J ersey and 14 Florida Law. See UBI Telecom Inc. v. KDDI Am ., Inc., 20 14 WL 296570 5, at *15 (finding that plaintiff’s fraudulent inducem ent claim was not barred by and could co-exist with a breach of contract claim ): G & F Graphic Servs., Inc. v. Graphic Innovators, Inc., No. CIV 13-6482 J EI/ AMD, 20 14 WL 1818235 (D.N.J . May 8, 20 14) (denying a m otion to dism iss where "the fraud alleged is not 'contained within the four corners of the contract'"); Lithuanian Com m erce Corp. v. Sara Lee Hosiery, 219 F. Supp. 2d 60 0 , 60 8 (D.N.J . 20 0 2) (holding the plaintiff's fraudulent inducem ent claim was prem ised upon fraud that was extrinsic to the contract and that plaintiff was not barred from pursuing sim ultaneous tort and contract claim s); Florian Greenhouse, Inc. v. Cardinal IG Corp., 11 F. Supp. 2d 521, 526 (D.N.J . 1998) (denying a m otion to dism iss based on the econom ic loss doctrine based on the court's finding that the fraud was extraneous to the contract as it did not involve nonfulfillm ent of a warranty or guarantee contained within the contract itself); Hilliard v. Black, 125 F.Supp.2d 10 71 (N.D.Fla. 20 0 0 )(econom ic loss rule does not bar claim of breach of fiduciary duty where breach of fiduciary duty claim was independent of breach of contract claim ); see also Russell v. Sherwin– William s Co., 767 So.2d 592 (Fla. 4th DCA 20 0 0 ) (citing Bay Garden Manor Condom inium Ass'n v. Marks Associates, 576 So.2d 744 (1991); First State Savings Bank v. Albright & Assoc., of Ocala, 561 So.2d 1326 (Fla. 5th DCA), review denied, 576 So.2d 284 (Fla. 1990 )). Dailey’s m otion to dism iss on this basis is denied. 6. The Com plaint states a claim for unjust enrichm ent and/ or breach of contract and Defendant’s m otion to dism iss Counts XIV-XXII and XXIV is denied. 15 In order to properly plead a claim for a breach of contract, a plaintiff m ust allege “(1) a contract; (2) a breach of that contract; (3) dam ages flowing therefrom ; and (4) that the party perform ed its own contractual duties.” Video Pipeline, Inc. v. Buena Vista Hom e Entm 't, Inc., 210 F.Supp.2d 552, 561 (D.N.J .20 0 2). A claim for a breach of contract is subject to the liberal notice pleading requirem ents found in Rule 8(a) of the Federal Rules of Civil Procedure. See, e.g., St.-Val v. Dom ino's Pizza, LLC, Civil No. 0 6– 4273, 20 0 7 U.S. Dist. LEXIS 50 518, at *4– 5, 20 0 7 WL 20 49120 (D.N.J . J uly 12, 20 0 7) (applying Rule 8(a) to a plaintiff's breach of contract claim ). Defendant seeks the dism issal of Plaintiffs’ breach of contract claim s in Counts XIV and XXI because the Second Am ended Com plaint fails to identify the existence or breach of the parties’ contracts. The Court disagrees. The Second Am ended Com plaint sufficiently alleges that the parties entered into a Lab Rat Data Processing “Official Contract” and the term s of the Plaintiff’s investm ent in the Bond were set forth in the body of the com plaint and attached thereto. See Sec. Am . Com pl., ¶¶ 231-241 and 315325. In large m easure, Plaintiff points to the fact that his actions solidified acceptance of the offer. An enforceable contract m ay occur where once party com m unicates an offer and another party dem onstrates acceptance. Im portantly, acceptance m ay be shown by words or conduct. See, e.g., Weichert Co. Realtors v. Ryan, 128 N.J . 427, 435 (1992)(“An offeree m ay m anifest assent to the term s of an offer through words, creating an express contract, or by conduct, creating a contract im plied-in-fact”); West Caldwell v. Caldwell, 26 N.J . 9, 24 (1958); J ohnson & J ohnson v. Charm ley Drug Co., 11 N.J . 526, 538, 95 16 A.2d 391 (1953); N.J . Model Civil Instr. 4.10 C6 . Defendant’s m otion to dism iss the breach of contract claim is denied. To establish unjust enrichm ent, “a plaintiff m ust show both that defendant received a benefit and that retention of that benefit without paym ent would be unjust.” VRG Corp. v. GKN Realty Corp., 135 N.J . 539, 641 A.2d 519, 554 (N.J . 1994). However, a defendant will be liable only if the plaintiff shows that it “expected rem uneration from the defendant at the tim e it ... conferred a benefit on defendant and that the failure of rem uneration enriched defendant beyond its contractual rights.” Id. It has been observed that quasicontract claim s involve either som e direct relationship between the parties or a m istake on the part of the person conferring the benefit. See Callano v. Oakwood Park Hom es Corp., 91 N.J . Super. 10 5, 219 A.2d 332, 335 (N.J . Super. Ct. App. Div. 1966). Count XXIV of the Com plaint states all of the elem ents of an unjust enrichm ent claim . The claim s are plead with Rule 9(b)’s required particularly as shown above with respect to the securities claim s, as Defendant has m ore than adequate notice of the unjust and inequitable m isconduct in fraudulently inducing Plaintiffs to invest in 6 The New Jersey Model Jury Instructions provide: An offer occurs when one party communicates to another a willingness to enter into a contract and does so under circumstances [that] justify the other party's understanding that if the offer is accepted, an agreement would result. An offer must be reasonably clear, definite and certain in all its essential terms. An acceptance occurs when a party shows intent to agree to an offer. The acceptance may be made by words or conduct. It must be made before the offer is withdrawn or lapses, and it must match the terms of the offer exactly. A proposal to accept an offer on any different terms is not an acceptance of the original offer. If any new or different terms are proposed in response to the offer, the response is not an acceptance but rather a counteroffer. A counter-offer is a new offer by the party making that proposal. The new offer must in turn be agreed to by the party who made the original offer for there to be an acceptance. 17 unregistered securities that serves as the basis for Plaintiffs’ claim . Defendant’s m otion to dism iss the unjust enrichm ent claim is denied. IV. Conclusion For the reasons set forth above, Defendant’s m otion to dism iss is denied. An appropriate Order shall issue. Dated: March 27, 20 18 s/ J oseph H. Rodriguez Hon. J oseph H. Rodriguez, UNITED STATES DISTRICT J UDGE 18
]]>
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You
should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
