Ajjarapu v. AE Biofuels, Inc.

• Decision Date: 23 July 2010
• Docket Number: Civil Action No. 09-cv-01013-CMA-KLM
• Parties: Surendra Kumar AJJARAPU, and Sandhya Ajjarapu, Plaintiffs, v. AE BIOFUELS, INC., Corporate Stock Transfer, Inc., and Crone Rozynko, LLP, Defendants.
• Court: U.S. District Court — District of Colorado

728 F.Supp.2d 1154

Surendra Kumar AJJARAPU, and Sandhya Ajjarapu, Plaintiffs,

v.AE BIOFUELS, INC., Corporate Stock Transfer, Inc., and Crone Rozynko, LLP, Defendants.

Civil Action No. 09-cv-01013-CMA-KLM.

United States District Court,

D. Colorado.

July 23, 2010.

Gregory Bartko, Law Office of Gregory Bartko, LLC, Atlanta, GA, for Plaintiffs.

Dana L. Eismeier, Hilary A. Anderson, Burns, Figa & Will, P.C., Greenwood Village, CO, Alisande M. Rozynko, AE Biofuels, Inc., Cupertino, CA, Michael J. Coffino, The Crone Law Group, San Francisco, CA, Benjamin Elwood Tracy, Bernard Roland Woessner, Mark H. Dumm, Nathan,Bremer, Dumm & Myers, PC, Patrick John Russell, Allen & Vellone, P.C., Denver, CO, Mark A. Harmon, Hodgson Russ, LLP, New York, NY, for Defendants.

ORDER REGARDING MOTIONS TO DISMISS

CHRISTINE M. ARGUELLO, District Judge.

This is a tort and securities fraud case brought by Plaintiffs Surendra Kumar and Sandhya Ajjarapu against A.E. Biofuels, Inc. ("AE"), Corporate Stock Transfer ("CST"), and Crone Rozynko, LLP ("Crone").¹ These matters are before the Court on Defendant AE's Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(6) (Doc. # 59) and Defendant Crone's Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(2) and (6) (Doc. # 84). Subject-matter jurisdiction is proper pursuant to 28 U.S.C. § 1332.² These matters are fully briefed and ripe for review.

I. FACTUAL AND PROCEDURAL BACKGROUND

In 2007, American Ethanol, Inc. merged with Marwich II, Ltd. through what is known as a reverse-merger and became AE. (Doc. # 35, ¶¶ 11; 16.) According to 17 C.F.R. § 230.144 ("Rule 144") ³ and the Schedule 14C AE filed with the SEC, new shares of AE were required to contain a restrictive legend preventing transfer of the shares until after the expiration of a one-year holding period. ( Id., ¶ 14.) As a result, AE's new shares would contain a restrictive legend preventing sale until removal of the restriction after the one-year holding period expired. ( Id.) The parties' varying interpretations of Rule 144 form the basis of this lawsuit.

Upon conclusion of the merger in late 2007, AE employed Plaintiff Surendra Kumar Ajjarapu as its president. ( Id., ¶ 17.) At this time, Mr. Ajjarapu owned 9.6% of AE's stock. ( Id., ¶ 19.) On October 16, 2008, Mr. Ajjarapu resigned as president, and it appears that he wanted to sell the shares he and his wife, Plaintiff Sandhya Ajjarapu, owned.⁴ ( Id., ¶¶ 20; 28.) He instructed his brokerage firm to ask CST, AE's stock transfer agent, whether Plaintiffs' AE shares could be reissued without a restrictive legend under Rule 144. ( Id., ¶¶ 31; 29.) CST responded to the brokerage firm and indicated that the shares would not be available without a restrictive legend preventing sale for another five months because of the one-year holding period required by Rule 144. ( Id.)

Mr. Ajjarapu asserts that CST nonetheless issued shares without a restrictive legend to other shareholders based on legal opinions AE's counsel, Crone, issued in December 2008 and March 2009 opining that other shareholders could receive their shares without restrictive legend pursuant to Rule 144. ( Id., ¶¶ 30; 47; 49-50.) Mr. Ajjarapu further contends that in order to thwart Plaintiffs' attempts to sell their shares, on March 30, 2009, AE instructedCrone to send an e-mail directing CST not to remove any more restrictive legends on allegedly "bogus grounds" that AE was not going to be current in their SEC filings. ( Id., ¶ 52; Doc. # 85-1 at 2.) Mr. Ajjarapu contacted his private securities' attorney, who informed him in an opinion dated March 31, 2009 that some of his shares should be able to be issued without a restrictive legend pursuant to Rule 144. ( Id., ¶ 30.) Mr. Ajjarapu then provided this opinion to CST, which nevertheless continued to refuse to reissue Plaintiffs' shares without a restrictive legend. ( Id., ¶ 31.)

On May 5, 2009, CST commenced this case by filing an interpleader complaint asking for the Court's assistance in resolving the dispute between Plaintiffs and AE. (Doc. # 1.) On July 1, Plaintiffs filed their Answer, counterclaimed against CST, and crossclaimed against AE. (Doc. # 10.) Plaintiffs sought a declaratory judgment against CST declaring that CST violated its duty under Rule 144. ( Id. at 18.) They also brought claims against AE for breach of fiduciary duty, conversion, and securities fraud, seeking damages and injunctive relief. ( Id.)

As a result of this interpleader complaint, AE's new counsel Burns, Figa & Will, P.C. communicated to Plaintiffs its interpretation of Rule 144, with which Plaintiffs disagree. (Doc. # 35, ¶¶ 34-38.) Finally, on July 9, 2009, CST offered to have Plaintiffs' shares reissued without the restrictive legend, so long as Plaintiffs sent CST a representation that they had a bona fide intention to sell. ( Id., ¶ 39.) On July 27, AE agreed to this arrangement. ( Id., ¶ 40.) Plaintiffs consented, despite not believing that they needed an intention to sell to receive their shares without a restrictive legend. ( Id. ¶ 40 n. 10.)

On September 5, Plaintiffs filed an Amended and Restated Complaint, which realigned the parties to make themselves Plaintiffs and make CST and AE Defendants; added Crone as a Defendant; and asserted: (1) a securities fraud claim under 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10B-5 ("Rule 10b-5") against all three Defendants; (2) a claim under section 104.8401 of the Nevada Revised Statutes ⁵ against AE and CST; (3) a claim for breach of fiduciary duty against AE; and (4) a claim for conversion against AE. (Doc. # 35, ¶ 54-75.) Plaintiffs seek injunctive relief against AE and damages against all Defendants. ( Id., ¶ 76-77; Id. at 25-26.)

On October 27, 2009, AE filed a Motion to Dismiss Plaintiffs' Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(6). (Doc. # 59.) AE argues that: (1) Plaintiffs' common law tort claims, i.e., their breach of fiduciary duty and conversion claims, are preempted by the Uniform Commercial Code ("UCC"); (2) Plaintiffs fail to state a claim for securities fraud; (3) Plaintiffs fail to state a claim under the UCC; and (4) Plaintiffs fail to plead the elements required for injunctive relief. (Doc. # 59 at 4-9.) On November 9, Plaintiffs responded (Doc. # 73), and on November 24, AE replied (Doc. # 78).

Likewise, on December 30, 2009, Crone filed a Motion to Dismiss Plaintiffs' Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(2) and (6). (Doc. # 84.) Crone argues that: (1) this Court lacks personal jurisdiction over it, and (2) Plaintiffs fail to state a securities fraud claim against it. (Doc. # 84 at 3-6.) On January 11, 2010, Plaintiffs responded (Doc. # 85), and on January 29, Crone replied (Doc. # 90). Discovery between Croneand any party is stayed pending this Court's ruling on Crone's Motion to Dismiss. (Doc. # 99.)

II. DISCUSSION

A. CRONE'S MOTION TO DISMISS

Defendant Crone moved to dismiss on Rule 12(b)(2) and (6) grounds. (Doc. # 84.) Because the Court must have jurisdiction in order to render a valid judgment, the Court must consider Crone's personal jurisdiction argument before reaching the merits of the case against Crone. OMI Holdings, Inc. v. Royal Ins. Co. of Can., 149 F.3d 1086, 1090 (10th Cir.1998). Thus, the Court will address Crone's Rule 12(b)(2) argument first. Because the Court concludes it does not have personal jurisdiction over Crone, it need not address Crone's 12(b)(6) argument.

1. Standard of Review-Rule 12(b)(2) Motion

Plaintiffs have the burden to establish the Court's personal jurisdiction over Crone. Dudnikov v. Chalk & Vermilion Fine Arts, 514 F.3d 1063, 1069 (10th Cir.2008).

Where a district court considers a pre-trial motion to dismiss for lack of personal jurisdiction without conducting an evidentiary hearing, the plaintiff need only make a prima facie showing of personal jurisdiction to defeat the motion. The plaintiff may make this prima facie showing by demonstrating, via affidavit or other written materials, facts that if true would support jurisdiction over the defendant.

AST Sports Sci., Inc. v. CLF Distrib. Ltd., 514 F.3d 1054, 1056-57 (10th Cir.2008) (citations and internal quotation marks omitted).⁶

In resolving a Rule 12(b)(2) motion, the Court accepts as true all well-pleaded, i.e., non-conclusory and non-speculative, facts alleged in Plaintiffs' Complaint. Dudnikov, 514 F.3d at 1070 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Any factual conflicts must be resolved in Plaintiffs' favor, and Plaintiffs' prima facie showing is sufficient notwithstanding the contrary presentation by the moving party. Wenz v. Memery Crystal, 55 F.3d 1503, 1505 (10th Cir.1995). If Plaintiffs satisfy their prima facie burden, Crone "must present a compelling case demonstrating 'that the presence of some other considerations would render jurisdiction unreasonable.' " OMI Holdings, 149 F.3d at 1091 (quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 477, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985)).

2. Analysis

To obtain personal jurisdiction over a nonresident defendant, a plaintiff must demonstrate that (1) jurisdiction is legitimate under the laws of forum state, and (2) the exercise of jurisdiction comports with the Due Process Clause. Dudnikov, 514 F.3d at 1070 (quoting Trujillo v. Williams, 465 F.3d 1210, 1217 (10th Cir.2006)). "Colorado's long arm statute ... confers the maximum jurisdiction permissible consistent with the Due Process Clause." Id. (quoting Archangel Diamond Corp. v. Lukoil, 123 P.3d 1187, 1193 (Colo.2005)). Therefore, the two-pronged inquiry collapses into one in Colorado. Id. The Court asks only whether the exercise of personal jurisdiction over Defendant Crone comports with due process.

This is a two-step inquiry. At step one, the Court examines "whether the nonresidentdefendant has 'minimum contacts' with the forum state such that he should reasonably anticipate being haled into court there." Melea, Ltd. v. Jawer SA, 511 F.3d 1060, 1065 (10th...