Deluca et al v. GPB Automotive Portfolio, LP et al, No. 1:2019cv10498 - Document 96 (S.D.N.Y. 2020)
Court Description: MEMORANDUM AND OPINION re: 62 MOTION to Dismiss The Complaint. filed by Axiom Capital Management, Inc., 61 MOTION to Dismiss . filed by Jeffrey Schneider, Ascendant Capital, LLC, 58 MOTION to Dismiss . f iled by Ascendancy Alternative Strategies, LLC, Mark Martino, 60 MOTION to Dismiss . filed by GPB Automotive Portfolio, LP, GPB Capital Holdings, LLC, GPB Holdings II, LP, 70 MOTION to Dismiss . filed by David Gent ile. Defendants' motions [DI 58, 60, 61, 62, 70] are disposed of as follows: 1. Insofar as the motions seek dismissal of the complaint for failure to state a claim upon which relief may be granted, the motions are granted in all respects except that they are denied with respect to: a. So much of Counts I and II as are against GPB Capital, the GPB Investments, Gentile, and Lash and assert fraudulent misrepresentation with respect to the source of investor d istributions. b. So much of Count III as asserts breach of contract by GPB Capital for failure to provide audited financial statements and reports. 2. Insofar as the motions seek to stay proceedings and to dismiss on the basis of forum non conveniens, the motions are denied in all respects. So Ordered (Signed by Judge Lewis A. Kaplan on 12/13/2020) (js) Transmission to Orders and Judgments Clerk for processing.
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Deluca et al v. GPB Automotive Portfolio, LP et al Doc. 96 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 1 of 58 Dockets.Justia.com Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 2 of 58 2 Jessica Erin Levine Alexander Asher Truitt WINGET, SPADAFORA & SCHWARTZBERG, LLP Attorneys for Defendant Axiom Capital Management, Inc. Michael Howard Smith ROSENBERG FELDMAN SMITH, LLP Attorneys for Defendants Mark Martino and Ascendant Alternative Strategies, LLC William F. McGovern Leif Thorsten Simonson KOBRE & KIM LLP Attorneys for Defendant David Gentile LEWIS A. KAPLAN, District Judge. This putative class action relates to two private equity funds that invested in auto dealerships. Plaintiffs, who purport to represent a class of limited partners invested in the funds, claim that the funds and affiliates actually were parts of a Ponzi scheme by which defendants fraudulently "siphoned off' investments "under the guise" of management and sales fees. 1 Defendants include the funds, the general partner of the funds, the broker-dealers that sold and marketed the funds, and certain co-founders and officers. The complaint alleges six causes of action for common law fraud, aiding and abetting fraud, breach of contract, and unjust enrichment. Defendants move to dismiss under the doctrine of forum non conveniens and for failure to state a claim under Federal Rule of Civil Procedure l 2(b)( 6). They move also to stay the case due to pending state litigation. For the following reasons, defendants' motions to stay and to dismiss under forum non conveniens are denied. Their motions to dismiss for failure to state a claim are granted in part and denied in part. Compl. 1, 109. Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 3 of 58 3 Background The following facts are taken from the complaint, documents incorporated by reference in the complaint,2 and matters of which judicial notice appropriately may be taken. 3 All facts are assumed to be true and all reasonable inferences are drawn in favor of the plaintiffs. 4 I The Parties The plaintiffs are Barbara DeLuca and Drew R. Naylor, who are accredited investors with limited partnership interests in GPB Automotive Portfolio, LP ("Automotive") and GPB Holdings II, LP ("Holdings II") (together, the "GPB Investrnents"). 5 Deluca purchased two limited partnership units in Automotive for $100,000 in June 2015. 6 Naylor's one unit in Holdings II was 2 This includes the Private Placement Memorandums ("PPMs"), limited partnership agreements, and subscription agreements relating to the funds. See, e.g., Lakonia Mgmt. Ltd. v. Meriwether, 106 F. Supp. 2d 540 (S.D.N.Y. 2000) (looking to offering memorandum, subscription agreement, and partnership agreement on motion to dismiss). See Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d Cir. 2002). See In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007) (per curiam). Comp!. at l, ,r 17, 18. Limited partners in the GPB Investments invested by purchasing "limited partnership units" sold privately as unregistered securities under Securities and Exchange Commission ("SEC") Regulation D. Id. ,r,r 41-42. In connection with their purchases, plaintiffs certified that they were "sophisticated investor[s] with . . . knowledge and experience in financial and investment matters" who are "accredited" within the meaning of Rule 501(a) of the Securities Act of 1933. Truitt Deel., Exhibit 2 [DI 62-5] at ,r,r 10-11 [hereinafter Automotive Subscription Agreement]; Truitt Deel., Exhibit 3 [DI 62-6] at ,r,r 10-11 [hereinafter Holdings Il Subscription Agreement]. 6 CompI. ,r 17. Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 4 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 5 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 6 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 7 of 58 7 offerings. 28 In 2017, Ascendant Alternative, a broker-dealer and an affiliate of GPB Capital, also began selling limited partnership units.29 Ascendant Alternative's CEO was Mark Martino, who co-founded the firm with Schneider. 30 Ascendant Alternative passed 100 percent of the payments it received for the GPB Investments to Ascendant Capital, an affiliate of Ascendant Alternative and a "branch office" of Axiom that provided "marketing" services to GPB Capital.31 As mentioned, Ascendant Capital's CEO was Schneider.32 The GPB Investments paid fees to GPB Capital and the broker-dealers that sold the limited partnership units. GPB Capital was paid an annual management fee of about two percent of capital contributions. 33 The broker-dealers were paid sales fees "as high as 11 percent" of capital 28 Comp!. ,i,i 28, 47, 49. Axiom has denied that it was the underwriter for the GPB Investments' offerings. Axiom Mot. to Dismiss at 5-6. 29 Id. ,i,i 29, 50. An entity called DJ Partners, LLC., which is owned by Gentile and Schneider, owns 66.67 percent of Ascendant Alternative. Id. ,i 29. The remaining 33.33 percent of Ascendant Alternative is owned by an entity called MR Ranger LLC, which is owned solely by Mark Martino. Id. ,i 29. 30 Id. ,i,i 25, 29. Prior to co-founding Ascendant Alternative, Schneider and Martino worked together at Axiom. Id. 31 Id. ,i,i 29, 30. 32 Id. ,i 25. 33 Id. ,i 108. The "managerial assistance fee" paid to GPB Capital is provided for under paragraph 3.13 of the limited partnership agreements ("LPAs"). Bergenfeld Deel., Exhibit E [DI 60-6] ,i 3.13 [hereinafter Automotive LPA]; Bergenfeld Deel., Exhibit F [DI 60-7] ,i 3. 13 [hereinafter Holdings II LPA]. Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 8 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 9 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 10 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 11 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 12 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 13 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 14 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 15 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 16 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 17 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 18 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 19 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 20 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 21 of 58 21 V Current Securities Litigation In November 2019, plaintiffs brought this action on behalf of all limited partners in the GPB Investments under the Class Action Fairness Act of 2005. 108 The complaint consists of six claims for relief under state law, including: • Two fraud claims (Count I and Count II) against all defendants, which solely relate to alleged misstatements and omissions in the PPMs used to market the limited partnership units; • One aiding and abetting fraud claim (Count V) against the Selling Defendants, which also relates to misstatements and omissions in the PPMs; • Two breach of contract claims (Count III and Count IV) against GPB Capital, which relate to the limited partnership agreements ("LP As") that governed the GPB Investments' relationship with its partners; • One claim for unjust enrichment (Count VI) against all defendants. All of the defendants except Lash109 move to dismiss under the doctrine offorum non conveniens and for failure to state a claim under Rule 12(b)(6). Likewise, all of the defendants except Lash moved to stay the action due to pending state litigation. Plaintiffs' action is one of at least six putative class actions filed in the summer and fall of 2019 regarding the GPB Investments.110 The others include one brought in the Supreme Court of New York County by Adam Younker on behalf of all limited partners of the GPB 108 28 U.S.C. § 1332(d)(2)(B ). 109 110 Despite accepting service, see DI 26, Lash neither has filed a motion to dismiss nor has had counsel appear on his behalf in this matter. As the Court finds that the other defendants' claims equally apply to Lash, it considers their claims with respect to Lash sua sponte. See Thomas v. Scully, 943 F.2d 259,260 (2d Cir. 1991) ("[T]he district court has the power to dismiss a complaint sua sponte for failure to state a claim on which relief can be granted"). Automotive, Holdings II, and GPB Capital's Mot. to Dismiss [DI 60-9] at 2 & n. 4 [hereinafter GPB Defs.' Mot. to Dismiss]. Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 22 of 58 22 Investments and other funds, which has been consolidated with a related action under the caption In re GPB Capital Holdings, LLC., Litigation [hereinafter Younker]. 111 Younker, in which there are currently motions to dismiss pending, brings claims for, inter alia, negligence, breach of fiduciary duty, fraud, aiding and abetting fraud, and unjust enrichment. 112 The defendants in Younker include all of the defendants in this action except Martino, as well as other entities and individuals that are not defendants here. 113 Discussion I. Motion for a Stay Defendants request a stay of this action until the New York Supreme Court determines pending motions to dismiss in Younker. 114 As a stay of this action due to parallel state litigation is not warranted under Colorado River Water Conservation Dist. v. United States, 115 and defendants have not established that the balance of factors supports a discretionary stay, defendants' request is denied. 111 Index No.: 157679/2019 (Sup. Ct., N.Y. County). 112 Verified Consol. Compl.,ln re GPB Capital Holdings, LLC, Litig., Index No.: 157679/2019 (NYSCEF Doc. No. 82) [hereinafter Consol. Younker Comp!.]. 113 Id. 114 Index No.: 157679/2019. 115 424 U.S. 800 (1976). Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 23 of 58 23 A. Colorado River Stay Federal courts have a "virtually unflagging obligation ... to exercise the jurisdiction given them."' 16 Nevertheless, the Supreme Court held in Colorado River that certain "exceptional" circumstances require a federal court to abstain from exercising its jurisdiction - that is, when parallel state court litigation exists that could result in a "comprehensive disposition" of the litigation and it would conserve judicial resources.' 17 Though defendants have not requested explicitly that the Court abstain under Colorado River- they have requested generally that the Court use its discretion to stay this action in light of the state action' 18 - the Second Circuit has held that "[t]here is no difference between a stay and a dismissal for purposes of the Colorado River doctrine."' 19 Accordingly, the Court applies Colorado River. Under Colorado River and its progeny, courts consider six factors in determining whether to stay an action in favor of a parallel state proceeding: "(1) whether the controversy involves a res over which one of the courts has assumed jurisdiction; (2) whether the federal forum is less inconvenient than the other for the parties; (3) whether staying or dismissing the federal action will avoid piecemeal litigation; (4) the order in which the actions were filed, and whether proceedings have advanced more in one forum than in the other; (5) whether federal II Colorado River, 424 U.S. at 817. 117 Id. at 813, 817-18. 118 See, e.g., GPB Defs.' Mot. to Dismiss at 14-15. Plaintiffs, on the other hand, do argue that Colorado River applies. See Pis.' Omnibus Brief in Opp. to Defs.' Mot. to Dismiss [DI 77] at 54 [hereinafter Pis.' Omnibus Opp.]. 119 Burnett v. Physician's Online, Inc., 99 F.3d 72, 76-77 (2d Cir. 1996) (citations omitted). Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 24 of 58 24 law provides the rule of decision; and (6) whether the state procedures are adequate to protect the plaintiff's federal rights." 120 No one of these factors necessarily is determinative. Rather, "a carefully considered judgment taking into account both the obligation to exercise jurisdiction and the combination of factors counselling against that exercise is required." 121 The facial neutrality of a factor "is a basis for retaining jurisdiction, not for yielding it." 122 Before delving into the six-factor Colorado River analysis, a court must make the threshold determination "that the concurrent proceedings are 'parallel. "' 123 "Federal and state proceedings are parallel if substantially the same parties are contemporaneously litigating substantially the same issue in both forurns." 124 This action and Younker a re indeed parallel. The plaintiffs in both actions purportedly include all investors who purchased limited partnership units in the GPB Investments. 125 120 Niagara Mohawk Power Corp. v. Hudson River-Black River Regulating Dist., 673 F.3d 84, 100-01 (2d Cir. 2012) (quoting Woodford v. Cmty. Action Agency of Greene Cty., Inc., 239 F.3d 517,522 (2d Cir. 2001)). 121 Colorado River, 424 U.S. at 818-819. 122 Woodford, 239 F.3d at 522. 123 Dittmer v. Cty of Suffolk, 146 F.3d 113,118 (2d Cir. 1998). 124 Jacovacci v. Brevet Holdings, LLC, No. 18-cv-8048 (JFK), 2019 WL 2085989, at *4 (S.D.N.Y. May 13, 2019) (quotations omitted), reconsideration denied, No. 18-cv-8048, 2019 WL 2992165 (S.D.N.Y. July 9, 2019). 125 Consol. Younker Comp!. at 1-2; Compl. at 1. Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 25 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 26 of 58 26 court: this courthouse and New York Supreme Court are next door to each other. 131 Thus, the first two factors do not support a stay. Third, there is no significant need to avoid piecemeal litigation. As the state court has not resolved the pending motions to dismiss, Younker is still in its early stages. Accordingly, though certain issues are common between the two actions, a final judgment by the state court pertaining to those issues is not likely to come for some time. And even if the state court does arrive at a final judgment applicable to issues or claims in this case before this Court does, "this Court would give [that judgment] the appropriate preclusive effect." 132 At best, the third factor is neutral with respect to a stay.133 Fourth, as mentioned, there is no need to defer to Younker because it is still in its early stages. Though Younker was filed before this action, the Supreme Court has made clear that the fourth factor "does not turn exclusively on the sequence in which the cases were filed, 'but rather in terms of how much progress has been made in the two actions. "' 134 As both this action and Younker have progressed in an equal manner - indeed, this action now is farther ahead given this opinion - the fourth factor does not support a stay. 131 See Jacovacci, 2019 WL 2085989, at *6. 132 Frydman v. Verschleiser, 172 F. Supp. 3d 653, 665 (S.D.N.Y. 2016); see also Abe v. New York Univ., No. 14-cv-9323 (RJS),2016 WL 1275661,at *7(S.D.N.Y. Mar. 30,2016)("The mere existence of parallel federal and state suits does not, without more, warrant abstention, particularly where 'the nature of the parallel actions is such that principles of res judicata and collateral estoppel should be effective to prevent inconsistent outcomes."') (quoting CVR Energy, Inc . v. Wachtel!, Lipton, Rosen & Katz, No 14-cv-6566 (RJS), 2014 WL 7399040, at *4 (S.D.N.Y. Dec. 29, 2014)). 133 See id. 134 Vilt. o/Westfieldv. Welch's, 170 F.3d 116,122 (2d Cir. 1999)(quotingMoses H. ConeMem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 21 (1983)). Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 27 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 28 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 29 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 30 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 31 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 32 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 33 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 34 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 35 of 58 35 The omissions, which allegedly rendered statements in the PPMs false or misleading, are: • The Fund Defendants would employ the Convertible Loan Scheme to end-run manufacturer approval requirements. The Fund Defendants had not obtained manufacturer approval for dealerships that they claimed to have acquired. • The fees deducted from limited partners' capital investments were being paid to affiliates and/or related parties of the Fund Defendants with whom the Fund Defendants collaborated to defraud investors. 166 1. Common Law Fraud Under New York law, 167 fraudulent inducement and fraudulent misrepresentation have identical elements of proof and "can be treated together as common law fraud." 168 Fraud requires proof of five elements: "(l) a misrepresentation or omission of material fact; (2) which the defendant knew to be false; (3) which the defendant made with the intention of inducing reliance; (4) upon which the plaintiff reasonably relied; and (5) which caused injury to the plaintiff." 169 166 Id. iii! 166,174. 167 In line with the governing law provision in the Subscription Agreements, the parties have applied New York law to the fraud claims. GPB Defs.' Mot. to Dismiss at 17 & n.5; Schneider Defs.' Mot. to Dismiss at 10 & n.8; Axiom Mot. to Dismiss at 14, 20; Gentile Mot. to Dismiss n. 2; Pis.' Omnibus Opp. 5, 29. 168 Baril v. JPMorgan Chase Bank, NA., No. 14-cv-02364 JGK, 2014 WL 6684055, at *3 (S.D.N.Y. Nov. 26, 2014) (citing Fax Telecommunicaciones Inc. v. AT & T, 138 F.3d 479, 490 (2d Cir. 1998)); see also Choquette, 2017 WL 3309730, at *5 (listing elements of fraudulent inducement under New York law); Mandarin Trading Ltd.,16 N.Y.3d at 178 (listing the same elements for fraudulent misrepresentation under New York law). 169 Wynn v. AC Rochester, 273 F.3d 153, 156 (2d Cir. 2001). Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 36 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 37 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 38 of 58 38 obtained. 178 At the same time, the complaint is devoid of any non-conclusory factual allegations regarding how - and by whom - the PPMs were drafted. Though this scrapes by under Luce for the GPB Investments, GPB Capital, Gentile, and Lash , it is not sufficient for the Selling Defendants and Schneider. "Luce does not stand for the proposition that mere reliance on an offering memorandum or similar document satisfies a pleader's burden under Rule 9(b)."179 In other words, simply alleging that entities are "insiders or affiliates" of a general partner- as plaintiffs do here with the Selling Defendants and Schneider- is not enough to satisfy Rule 9(b), even under Luce. 180 Plaintiffs must allege "grounds for attributing the statements to the group," 181 i.e., non-conclusory facts from which the Court can infer plausibly that the Selling Defendants and Schneider participated in making the alleged misrepresentations and omissions or at least asserted some control over the partnership or the drafting of the PPMs. 17 E.g., Compl. ,r 78 ("the Fund Defendants and the Selling Defendants knew that the equity fund model was viewed in the industry as a far riskier model than traditional ownership by a member of the community.") (emphasis added); id. ,r 116 ("the Fund Defendants and the Selling Defendants knew that the GPB Investments could not meet the distributions expectations set forth in the PPMs") (emphasis added); see also id. ,r 56 ("the Fund Defendants and the Selling Defendants shared knowledge of the schemes that they were using to fraudulently induce investors into investing in the GPB Investments, i.e., the Ponzi Scheme and the Convertible Loan Scheme.") (emphasis added). 179 DiVittorio, 822 F.2d at 1248. 180 Id. at 1248-49 (Plaintiffs' "allegations [were] inadequate to charge [the] defendants with liability for misrepresentations in the Offering Memorandum" where the complaint merely stated that various entities were affiliates of the general partner of a limited partnership in which plaintiffs invested). Cf Luce, 802 F.2d at 52, 55 (finding no specific connection between defendants and misstatements was necessary where the complaint asserted that the general partners were "the 'alter egos of their affiliates, and the affiliates exercised complete direction and control over the partnership."'). 181 Loreley Fin. (Jersey) No. 3 Ltd., 797 F.3d at 173. Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 39 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 40 of 58 40 general partner. 1 84 Accordingly, with respect to these defendants, Counts I and II satisfy Rule 9(b)' s particularity requirement. With respect to the Selling Defendants and Schneider, however, Counts I and II are not pleaded sufficiently under Rule 9(b) and are dismissed. 3. Fraud Claims Against the GPB Investments, GPB Capital, Gentile, and Lash The bulk of plaintiffs' alleged misrepresentations and omissions also fail to support a claim for relief with regard to the remaining defendants: the GPB Investments, GPB Capital, Gentile, and Lash. A careful analysis of the complaint reveals that plaintiffs' overarching claim that the sale of units in the GPB Investments was a Ponzi scheme is no more than an allusion propped up by conclusory allegations and claims improperly taken from other lawsuits. a. Allegations from the Dibre and Rosenberg Actions As a threshold matter, plaintiffs cannot rely on allegations from other lawsuits to plead legally sufficient fraud claims. A fraud complaint that "merely recites others' allegations" is generally insufficient under Rule 9(b) where it does not allege also non-conclusory facts to support its claim for relief. 185 This is because "secondhand allegations" quoted in a complaint are "in the nature ofallegations 'upon information and belief,' which cannot ordinarily form the basis ofa fraud 184 Luce, 802 F.2d at 52, 55 (finding there is no need to plead specific facts linking insiders such as officers and directors to particular misstatements in an offering memorandum); Neubauer v. Eva-Health USA, Inc., 158 F.R.D. 281,283 (S.D.N.Y. 1994) (same); Cf DiVittorio, 822 F.2d at 1249 ("None of the individual ... defendants ... is tied to the Offering Memorandum in any specific way, or even alleged to have been an officer or director of any non-individual ... defendant when the Offering Memorandum was issued or the specified class of plaintiffs bought their limited partnership interests.") 185 Loreley Fin. (Jersey) No. 3 Ltd., 797 F.3d at 180. Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 41 of 58 41 claim 'except as to matters peculiarly within the opposing party's knowledge. "' 186 "Even as to the latter, a fraud plaintiff must generally state the facts upon which her belief is founded." 187 Almost thirty paragraphs of the complaint are attributed directly to the Dibre and Rosenberg actions. 188 These paragraphs largely parrot allegations that GPB Capital, Gentile, Lash, and Schneider engaged in fraudulent acts with respect to Dibre's and Rosenberg's dealerships. 189 If plaintiffs had made these allegations on their own knowledge, they may have led to a "strong inference" that defendants intentionally made the misrepresentations and omissions alleged in this action. But they have not done so. Indeed, the complaint alleges no non-conclusory facts that support the truth of these secondhand allegations. Allowing plaintiffs to rely on them is therefore impermissible under Rule 9(b). 190 186 Id. (quoting Luce, 80 2 F.2d at 54 n.l ). 187 Loreley Fin. (Jersey) No. 3 Ltd., 797 F.3d at 180. 188 See Comp!. 11 80-107. Outside of those paragraphs, other conclusory statements in the complaint appear to have been pulled also from those actions. E.g., id. 1169, 7 0 . 189 E.g., id. 182 (repeating Dibre's allegation that "GPB Capital ...overfunded itself from the dealerships by drawing out more than the net cash flows ...and then used that overfunded cash to distribute ... a 'special distribution "' to entice investors); id. 1 83 (repeating Dibre's allegation that "Defendants Gentile and Schneider recorded the purchase price of dealerships they purchases at several million dollars more than the actual purchase price"); id. 196-97 (repeating Rosenberg's allegation that he saw "two contracts titled 'Performance Guarantee,"' with Lash, which were a sham to boost profits); id. 199 (repeating Rosenberg's allegation that he "witnessed documents evidencing improper 'round tripping' by GPB Capital in an effort to inflate revenues"). 190 It is worth noting also that the complaint's recitation of inconclusive government investigations into matters related to the GPB Investments - some of which are not related to the funds at issue in this lawsuit - similarly does not suffice under Rule 9(b) to support a strong inference of fraud. See, e.g., City ofRockton Retirement Sys. v. Avon Products, Inc., l l-cv-4665 (PGG), 20 14 WL 483 2 3 21, at *24 (Apr. 24, 2015) ("[T]he existence of an investigation alone is not sufficient to give rise to a requisite cogent and compe lling inference of scienter."); Lipow v. Net] UEPS Techs., Inc., 131 F. Supp. 3d 144, 167 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 42 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 43 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 44 of 58 44 about any other fraudulent purpose. 200 And though plaintiffs allege, on information and belief, that GPB Capital gave Dibre a convertible loan totaling $42 million to purchase six Nissan Volkswagen dealerships between 2013 and and 2015 - which was not disclosed in the PPMs - fraud pleadings cannot be made on information and belief alone under Rule 9(b). 201 Likewise, plaintiffs' allegations that GPB Capital "withdrew amounts in excess of the cash flow generated by the dealerships and paid it as a special distribution based on the alleged performance of the dealerships,"202 "falsified financial reports to make the dealerships look more profitable than they were," 203 and hid that the dealerships did not generate the necessary cash by transferring funds from GPB Holdings I to Automotive "on several occasions in 2016" 204 - all of which purportedly highlight the nefariousness of the "Convertible Loan Scheme" - clearly are lifted from the Dibre action. 205 They are thus similarly deficient under Rule 9(b). 200 See In re Apple RE/Ts Litig., No . ll-cv-2 919 KAM, 2013 WL 1386202, at *14 (E.D.N.Y . Apr.3, 2013) (finding prospectuses "not misleading given that the prospectuses 'state[ ] exactly the fact[s] that [plaintiffs] contend[ ] [have] been covered up."') (quoting I. Meyer Pincus & Assocs., P.C.v. Oppenheimer & Co, Inc., 93 6 F.2d 759, 7 62 ( 2d. Cir.1991), ajfd in part, vacated in part sub nom. Berger v. Apple REIT Ten, Inc., 563 F. App'x 81( 2d Cir. 2014). 201 See, e.g., Luce, 802 F.2d at 54 n.1. 202 Compl.169. 203 Id. 204 205 Id. ,r 70. Cf. id. ,r 82 (repeating Dibre's allegation that GPB Capital "manipulat[ ed] the financial statements of the dealerships" to make them look more profitable and "overfunded itself from the dealerships by drawing out more than the net cash flows ... and then used that overfunded cash to distribute ... a 'special distribution'" to entice investors); id. ,i 85 (repeating Dibre's allegation that "on several occasions" in 2016 "GPB Capital transferred funds from GPB Holdings I to Automotive and vice versa in order to bolster returns.") Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 45 of 58 45 c. Lack of Automobile Manufacturer Approval Next, plaintiffs have not alleged plausibly that the GPB Investments lacked "manufacturer approval for the dealerships they claimed to acquire" and that such a fact was concealed from the limited partners. 206 As a preliminary matter, plaintiffs appear to be asserting that the existence of convertible loans given to certain dealership owners should lead to an inference that the GPB Investments were hiding a lack of manufacturer approval for these dealerships. As these loans were disclosed to the limited partners, however, this is not a reasonable inference. Likewise, the mere fact that the manufacturer approval process was "rigorous" does not support an inference that the GPB Investments were not approved by manufacturers. Putting aside these allegations, the complaint makesjust one reference to a dealership transaction with Dibre that was not completed because an automobile manufacturer declined to approve GPB Capital, which it characterized as an "unknown equity fund. "207 The complaint makes another reference, however, to a transaction with Dibre that was not completed because the GPB Investments "lacked the funds" to complete it. 208 It is unclear from the complaint whether these allegations relate to the same transaction or different transactions. Regardless, these contradictory assertions, without more, do not support a plausible inference that the GPB Investments lacked manufacturer approval for dealerships they claimed to acquire. 206 Compl. 11 207 Id. 177. 208 Id. 169. 166, 174. Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 46 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 47 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 48 of 58 48 groups of the defendants received, the complaint makes no non-conclusory allegations to support an inference that such fees were "excessive" or that defendants profited from improper expenses and benefits. It merely makes the vague allegation that $103 million in "expenses" "appeared to filter down to Defendants." This is not sufficient to support a strong inference of fraudulent intent. f GAAP and FASB Financial Statements Nor does the complaint allege a "strong inference" of knowledge of falsity with respect to the PPMs' representation that the GPB Investments' financial statements complied with GAAP and FASB accounting standards. Merely alleging that Automotive's auditor resigned and that the GPB Investments' 2015 and 2016 financial statements were misstated does not suffice to support a strong inference of knowledge that the financial statements did not comply with accounting standards. 213 And the complaint's vague assertion that GPB Capital's chief financial officer (who is not a defendant in this action) resigned due to concerns about fraud does not remedy this. Plaintiffs need to "allege facts and circumstances that would support an inference that defendants knew of specific facts that [were] contrary to their public statements." 214 No such facts and circumstances are alleged in the complaint. 213 Rombach, 355 F.3d at 176 ("As this Court has observed, a 'pleading technique [that] couple[s] a factual statement with a conclusory allegation of fraudulent intent' is insufficient to 'support the inference that the defendants acted recklessly or with fraudulent intent."') (quoting Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 112930 (2d Cir.1994)). 214 Rombach, 355 F.3d at 176. Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 49 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 50 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 51 of 58 51 scheme. There are many potential reasons for why distributions would be made from investor capital and hidden from investors - for instance, a knowledge that the dealerships were being mismanaged and/or were not as profitable as expected- that fall short of the existence of a Ponzi scheme. Without more specific factual allegations, the Court cannot plausibly make such an inferential leap. Accordingly, one fraud claim survives solely on the basis of the alleged misrepresentation that investor distributions would be made from cash. As this alleged misrepresentation is pleaded redundantly in Counts I and II, it survives dismissal as one claim for common law fraud against the GPB Investments, GPB Capital, Gentile, and Lash only. C. Aiding and Abetting Fraud (Count 1iJ Plaintiffs' claim of aiding and abetting fraud (Count V) is against the Selling Defendants only and is premised on a smaller subset of the misrepresentations and omissions alleged in Counts I and II. As Rule 9(b)' s particularity requirement equally applies to an aiding and abetting fraud claim, Count V must be dismissed as against the Selling Defendants for same the reasons as Counts I and II must be dismissed against them. Moreover, the aiding and abetting claim fails because plaintiffs have not sufficiently alleged that the Selling Defendants had actual knowledge of the alleged fraudulent conduct. To state a claim for aiding and abetting fraud in New York plaintiffs must allege: (1) the existence of a fraudulent scheme, (2) that the defendant had actual knowledge of the fraud, and (3) that the defendant provided substantial assistance to advance the fraudulent scheme.220 "A failure to allege 220 Lerner v. Fleet Bank, NA., 459 F.3d 273, 292 (2d Cir. 2006). Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 52 of 58 52 sufficient facts to support the inference that the alleged aider and abettor had actual knowledge of the fraudulent scheme warrants dismissal of the aiding and abetting claim at the pleading stage."221 "[C]onstructive knowledge" is insufficient to constitute the knowledge element of an aiding and abetting claim. 222 Plaintiffs' assertion in Count V that "[t]he Selling Defendants acted with willful blindness or recklessness in offering the [limited partnership units] to investors" and therefore are "charged with constructive knowledge" of the alleged misrepresentations and omissions is patently insufficient under New York law. 223 And the complaint's factual allegations do not remedy this deficiency: apart from conclusory statements that the Selling Defendants "knew" certain misrepresentations and omissions were made and "collaborated" in selling the limited partnership units, 224 the complaint asserts no facts whatsoever regarding the Selling Defendants' actual knowledge of alleged misrepresentations and omissions. D. Breach of Contract Claims (Counts 111 & IV) Plaintiffs bring two breach of contract claims against GPB Capital with respect to three contractual provisions. In Count III, Plaintiffs allege that GPB Capital breached provisions of the LPAs regarding (i) the production of audited financial statements and (ii) the submission of "Related Party Transactions" to an Advisory Committee. In Count IV, Plaintiffs allege that GPB 221 Krys v. Pigott, 749 F.3d 117, 127 (2d Cir. 2014). 222 Id. (quoting Oster v. Kirschner, 77 A.D.3d 51,905 N.Y.S. 2d 69, 72 (1st Dep't 2010)). 223 Comp!. ,i 191. 224 See, e.g., id. ,i 4 7. Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 53 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 54 of 58 54 , [partnership]. , ,22s Section 3 .15(c) ofthe LPAs states that: "The Partnership may not enter into a Related Party Transaction without the approval of all of the members of the Advisory Committee. In approving any Related Party Transaction, the General Partner must provide the Advisory Committee with an independent valuation of the proposed acquisition, and the Advisory Committee must determine that the Related Party Transaction is in the best interests of the Partnership." (emphasis added). According to the Delaware Supreme Court, language m an LPA stating that conflicted party transactions must be "in the best interests of the Partnership"- as the LPAs state here- is indicative of harm to the partnership, not to the plaintiff. 229 This is because claiming that a transaction with a related party was not "in the best interests of the Partnership" is really a claim of"corporate overpayment."230 As the benefit ofrecovery for such a claim "must flow solely to the Partnership," it is derivative. 231 Accordingly, plaintiffs' claim for breach under this provision is must be dismissed. 232 228 See El Paso Pipeline, 152 A.3d at 1260. 229 Id. at 1258-59. 230 Id. at 1261. 231 Id. at 1261, 1264. 232 As an aside, the Court notes that, even if plaintiffs had alleged derivative standing, plaintiffs' theory for relief does not allege that this provision regarding related party transactions was breached. Plaintiffs' theory is not that defendants acquired or sold assets to a related party. Plaintiffs allege that "the vast majority of the fees, expenses, compensation and benefits on sales, acquisitions, management, and operations were being paid to related parties." Comp!. 1 112. A related party's receipt of such fees and benefits plausibly cannot violate this provision of the LPA, which relates to "proposed acquisitions" with related parties. Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 55 of 58 55 2. Alleged Breach Regarding DRULPA Distributions Likewise, Plaintiffs' claim that GPB Capital breached its duty to make investor distributions only to the extent of available cash in the partnership, in compliance with DRULPA, must be dismissed for failure to state a claim. Section 17-607 ofDRULPA states: "A limited partnership shall not make a distribution to a partner to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specified property of the limited partnership, exceed the fair value ofthe assets of the limited partnership, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds that liability." "In simplified terms," this section of DRULPA prevents a limited partnership from "mak[ing] a distribution when it is balance sheet insolvent or if the distribution would render the limited partnership insolvent."233 Plaintiffs' conclusory allegations that GPB Capital's "improper distributions" caused the GPB Investments to "essentially cease[] its operations" do not plausibly state a claim for breach under this provision ofDRULPA, which requires allegations of insolvency. 234 According to the complaint, the GPB Investments still are operating, and Holdings II still is paying distributions. Plaintiffs have not alleged any facts that lead to the inference that the GPB Investments were "balance sheet insolvent" when it made distributions or were rendered insolvent by such 33 ESG Capital Partners II, LP v. Passport Special Opportunities Master Fund, LP, No. CV 11053-VCL, 2015 WL 9060982, at *8 (Del. Ch. Dec. 16, 2015). 234 See Comp!. ,r 188. Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 56 of 58 56 distributions. Without more, the Court cannot make the inferential jump from paying certain distributions from capital contributions to insolvency. Accordingly, this claim for relief fails. 3. Alleged Breach Regarding Audited Financial Statements On the other hand, plaintiffs' claim that GPB Capital breached a provision in the LPAs requiring it to provide the limited partners with yearly audited financial statements survives dismissal. It is a direct claim under Delaware law, and the complaint plausibly states a claim for relief for breach. A claim for breach of contract based on a duty to provide limited partners with financial statements is a direct claim because it regards a duty owed directly to the limited partners. 235 Delaware courts have interpreted such claims as direct because they essentially allege that "[p ]laintiffs were injured because they were stripped of 'their right to withdraw from the [partnership] or to seek rescission of their investment. "' 236 Under Delaware law, "[o]n a claim of breach of contract, the plaintiff must prove a) the existence of a contract; b) the breach of an obligation imposed by that contract; and c) resulting damages to the plaintiff."237 Here, plaintiffs have alleged plausibly that GPB Capital breached its obligation under the LPAs to provide them with yearly audited financial statements because it failed to provide the GPB Investments' audited financials for 2017 and 2018. Moreover, 35 See MKE Holdings Ltd. v. Schwartz, No. CV 2018-0729-SG, 2019 WL 4 723 816, at *8 n. 150 (Del. Ch. Sept. 26,20l9);Sehoy EnergyLP v. Haven Real Estate Grp., LLC,No. CV 12387-VCG, 2017 WL 1380619, at *9 (Del. Ch. Apr. 17, 2017). 236 Sehoy Energy LP, 2017 WL 1380619, at *9; Albert v. Alex. Brown Mgmt. Servs., Inc., No. CIV.A. 762-N, 2005 WL 2130607, at *6 (Del. Ch. Aug. 26, 2005). 237 Lorenzetti v. Hodges, 62 A.3d 1224 (Del. 20 I 3). Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 57 of 58 Case 1:19-cv-10498-LAK Document 96 Filed 12/14/20 Page 58 of 58 58 Moreover, with respect to GPB Capital in particular, the unjust enrichment claim fails for another reason: the "unearned compensation and fees" paid to GPB Capital - i.e., its management fees - were paid pursuant to the LPAs. Under New York law, a claim for unjust enrichment is precluded where "a valid and enforceable written contract govem[s] [the] particular subject matter."241 Conclusion Defendants' motions [DI 58, 60, 61, 62, 70] are disposed of as follows: 1. 2. Insofar as the motions seek dismissal of the complaint for failure to state a claim upon which relief may be granted, the motions are granted in all respects except that they are denied with respect to: a. So much of Counts I and II as are against GPB Capital, the GPB Investments, Gentile, and Lash and assert fraudulent misrepresentation with respect to the source of investor distributions. b. So much of Count III as asserts breach of contract by GPB Capital for failure to provide audited financial statements and reports. Insofar as the motions seek to stay proceedings and to dismiss on the basis offorum non conveniens, the motions are denied in all respects. SO ORDERED. December 13, 2020 Dated: Lewis A. Kapla United States Distri 241 Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y.2d 382,388 (N.Y. 1987).
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