Am. Power, LLC v. Harris

• Decision Date: 02 August 2018
• Docket Number: Case No. 3:17-cv-00347
• Parties: AMERICAN POWER, LLC, Plaintiff, v. DOUGLAS O. HARRIS, et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

AMERICAN POWER, LLC, Plaintiff, v. DOUGLAS O. HARRIS, et al., Defendants.

Case No. 3:17-cv-00347

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF OHIO WESTERN DIVISION AT DAYTON

August 2, 2018

District Judge Walter H. Rice

Magistrate Judge Sharon L. Ovington

REPORT AND RECOMMENDATIONS¹

I. Introduction

Plaintiff American Power, LLC is a trucking-logistics company headquartered in Dayton, Ohio. According to the Complaint, Plaintiff invested in and loaned $450,000 to Defendant Dektrix LLC, a transportation-servicing company headquartered in Utah. The Complaint charges that the investment and loan were fraudulently obtained and ultimately worthless. "Plaintiff is left with nothing it invested." (Doc. #1, ¶ 72).

Plaintiff seeks to impose liability upon Dektrix and various other business entities and individuals for purported violations of federal securities laws and state common law. Two groups of Defendants—(1) the Dektrix Defendants, and (2) the Fontaine Defendants—seek to avoid liability by attacking Plaintiff's Complaint under Fed. R. Civ. P. 12(b)(6) for failing to state a claim upon which relief could be granted and, as to Plaintiff's fraud claims,for failing to meet the pleading requirements of Fed. R. Civ. P. 9(b) and the Private Litigation Securities Reform Act. (Doc. #s 16, 20). The Complaint must therefore be studied.

II. Factual Background

Accepting as true the well-pleaded factual content in Plaintiff's Complaint and construing it in the light most favorable to Plaintiff, see Ohio Pub. Employees Retirement Sys. v. Fed. Home Loan Mortgage Corp., 830 F.3d 376, 382 (6th Cir. 2016), reveals a narrative of deception, misplaced trust, and financial washout.

Dektrix LLC formed in January 2015. Its purpose was to commercialize a "'revolutionary intermodal flat-deck shipping solution...'"² Id. (Doc. #1, ¶11) (footnote added). This flat-deck shipping solution was manufactured by Defendant Fontaine Engineered Products, Inc. (d/b/a Fontaine Intermodal). It was known as Fontaine Evolution Intermodal Flat Decks. Photos of the Fontaine Flat Deck appear in a company document attached as an Exhibit to the Complaint, id. at 47-48, and in Fontaine's Flat Deck Owner's Guide (Doc. #39, Exh. B). Soon after Dektrix was formed, it began renting and using Fontaine Flat Decks.

In June 2016, Dektrix reached out to Plaintiff and others with an investment opportunity related to Dektrix's use of "new type of trailer design produced and manufactured by Defendant Fontaine[,]" referring to the Fontaine Flat Deck. (Doc. #1,¶25). The opportunity looked attractive in part because Dektrix held an exclusive opportunity to use the Fontaine Flat Decks. Similar communications from Dektrix followed: In July 2016, the Dektrix Defendants—there are seven of them³—told Plaintiff (through an email) that Dektrix "was a well-established company that had earned an exclusive opportunity to use Fontaine Evolution Intermodal Flat Decks to ship loads." Id. at ¶27. They also explained to Plaintiff that Dektrix had a successful (albeit brief) history and a promising future:

Operating History - Dektrix is not a start-up company. Dektrix was first organized in December of 2014. It has moved freight every month since April of 2015. It has two yards, 17 FTE employees [full-time employees] (both w-2 and 1099 contractors). It has moved over 814 loads of freight and it has billed more than $2.5M in sales. Dektrix has obtained all of its operating authorities as well as broker authorities. It is authorized to operate on all class 1 railways in North America.... It has a fleet of 73 decks and nine 2016 Freightliner tandem axel day cabs which it leases from Penske.... Dektrix has executed multiple carrier agreements and has current contracts and relationships with the logistics executives at various companies. Based on Dektrix['s] performance the executives at Marmon Highway Technologies and Fontaine Intermodal have granted Dektrix a 3 year exclusive opportunity. They will not produce or sell any decks or similar intermodal products to any other individual or entity for three years. These are the accomplishments of a company which has worked very hard and is now posed for rapid growth.

Id. (citation omitted).

In July and August 2016, the Dektrix Defendants met with Plaintiff and continued to solicit its investment. They informed Plaintiff about Dektrix's operating history, value, and client opportunities. They also showed Plaintiff a letter that Defendant Marmon's President Kelly Dier wrote making it clear, according to the Complaint, "that Fontaine, Marmon, and Dektrix were working together to secure investment money from Plaintiff." Id. at ¶29. TheComplaint quotes the letter at some length, including information about Dektrix's right to exclusive use of the Fontaine Flat Decks:

We [Marmon] agree to grant Dektrix two years of exclusivity from the date Dektrix purchases all of the 73 [Fontaine] Intermodal Flat Decks, which are currently being rented to Dektrix and we further agree to grant an additional third year of exclusivity to Dektrix in exchange for purchasing the 43 decks which Fontaine currently holds in inventory in the form of new components, ready to assemble....

Id.

An eventful meeting occurred on August 5, 2016 during which two Dektrix Defendants, Douglas O. Harris and Murray J. Crane, gave a presentation to Plaintiff and other potential investors. Harris is the general manager of Dektrix; Crane is a Member-Manager of Dektrix (and the patent holder of technology used in the Fontaine Flat Decks). Harris told prospective investors, "Dektrix would register UCC statement on the Fontaine Intermodal flat decks that Dektrix would purchase from Fontaine with the investor money. The decks would be registered for the benefit of the investors 'so that they control the assets, they own the assets.'" Id. at ¶32.

Defendant Berkley Buchanan, then-President of Fontaine, also participated in the August 5, 2016 meeting, telling Plaintiff and the others, "We stand behind them,' meaning Fontaine stood behind Dektrix." Id. at 31. Defendant Buchanan also said, 'We [Fontaine] believe in this project strongly enough that we have provided them [Dektrix] an offer of exclusivity on the product.'" Id. (Plaintiff's brackets). He also "touted Fontaine's relationship with BNSF Railway through Berkshire Hathaway...," and "described the millions of dollars in development spent by Fontaine." Id.

Things began to coalesce the next day, August 6, 2016. Dektrix provided Plaintiffwith several documents, including (1) a Private Placement Memorandum "titled Confidential Offering Memorandum $6,000,000.00 Consisting of up to 400,000 Membership Units of Dektrix, LLC, Minimum Purchase $50,000...."; (2) a Subscription Agreement; and (3) Dektrix's Operating Agreement. Id. at ¶34 (citation omitted).

Plaintiff concluded, based on the Private Placement Memo, that Fontaine Flat Decks "were integral and necessary to Dektrix's business model." Id. at ¶35. The Private Placement Memo explained, "'The company's revenue is tied to securing shipping contracts which utilize the Dektrix Intermodal flat-deck solution....'" Id.

Plaintiff and its owners—Adil Baguirov and Islom Shakhbandarov—decided to review the information that was publicly available about Fontaine and its Flat Decks "particularly with respect to their compatibility with rail transportation." Id. at ¶37. Indeed, "[t]ransportation by railroad was the key to functionality of the Fontaine Evolution Flat Decks being used by Dektrix." Id. at ¶36. Baguirov and Shakhbandarov conducted "an easy search of the internet" and found Fontaine press releases in 2014, introducing its Flat Deck. Id. at ¶37. The press releases described the Fontaine Flat Deck as "'Certified by the Association of American Railroads, Fontaine's Evolution Intermodal Flat Deck includes multiple patented features related to the deck floor and load securement system.'" Id. (footnote and citation omitted). Several industry publications (copies are attached to the Complaint) quoted these assertions. "Plaintiff relied on Fontaine's statements that its Evolution Intermodal Flat Decks had been AAR certified when it decided to invest in Dektrix." Id. at ¶43.

The Association of American Railroads (AAR), according to the Complaint, is anindustry trade group primarily representing major freight railroads in North America. It is dedicated to maintaining railroad safety and operating standards. It publishes a Manual of Safety Standards and Recommended Practices "that includes all regularly adopted specifications, standards, and recommended practices ...." Id. at ¶39. AAR "maintains a rigorous certification program for equipment and components in conjunction with railroads, including rail cars and decks. The process for obtaining AAR approval is time consuming and expensive." Id. at ¶41. During 2013-2014, Defendant Crane was a member of AAR's Intermodal Operations Committee.

"In a video that was on its [Fontaine's] website in August 2016 and continuing through the date of [Plaintiff's] Complaint, Fontaine described the Evolution Intermodal Flat Deck to be 'stronger' and 'safer' than any other deck 'to withstand the punishing conditions associated with rail and highway transportation.' It's virtually indestructible yet simple and inexpensive to repair if it's ever damaged.'" Id. at ¶44.

"On numerous occasions, the Dektrix Defendants represented to prospective investors including Plaintiff that it had contractual shipping relationships and/or agreements with a number of carriers, including, among others, Atkore Steel, Allied Tube Conduit, Logan Aluminum, Inc., and Constellium." Id. at ¶47.

"[N]one of the Defendants ever disclosed before Plaintiff invested its money that the Fontaine Evolution Intermodal Flat Decks had never, in fact, been approved by the AAR. None of the Defendants had disclosed that the decks had significant engineering problems and were not safe to use on the highway or railroads." Id. ...