Auctus Fund, LLC v. Sauer Energy, Inc.

• Decision Date: 16 March 2020
• Docket Number: CIVIL ACTION NO. 19-11027-WGY
• Citation: 444 F.Supp.3d 279
• Parties: AUCTUS FUND, LLC, Plaintiff, v. SAUER ENERGY, INC., Defendant.
• Court: U.S. District Court — District of Massachusetts

444 F.Supp.3d 279

AUCTUS FUND, LLC, Plaintiff,

v.SAUER ENERGY, INC., Defendant.

CIVIL ACTION NO. 19-11027-WGY

United States District Court, D. Massachusetts.

Filed March 16, 2020

Philip M. Giordano, Reed & Giordano, P.A. Giordano & Company, P.C., Boston, MA, for Plaintiff.

MEMORANDUM AND ORDER

YOUNG, D.J.

I. INTRODUCTION

Do the words "nine months" mean nine months? That is the odd question the Court confronts in deciding whether this plaintiff has stated a claim for relief under the Securities Exchange Act of 1934. See First Am. Compl. Demand Jury ¶¶ 1(a), 31 ("Am. Compl."), ECF No. 12 (citing 15 U.S.C. § 78j(B) ; 17 C.F.R. § 240.10b-5 ). The text of the Securities Exchange Act, 15 U.S.C. §§ 78a - 78qq, seems straightforward: it exempts notes that mature in nine months or less from regulation as a "security." See 15 U.S.C. § 78c(a)(10) (providing that, although "[t]he term ‘security’ means any note," it does not encapsulate "any note ... which has a maturity at the time of issuance of not exceeding nine months") (the "Nine Month Exclusion"). Yet even a seemingly clear statute sometimes reveals hidden meanings after a closer look. See, e.g., Yates v. United States, 574 U.S. 528, 135 S. Ct. 1074, 1079, 191 L.Ed.2d 64 (2015) (ruling, under the Sarbanes-Oxley Act, that a fish is not a "tangible object," although a fish certainly can be touched). This is such a statute. The Supreme Court instructs courts that "the phrase ‘any note’ should not be interpreted to mean literally ‘any note,’ but must be understood against the backdrop of what Congress was attempting to accomplish" with the Securities Exchange Act and its earlier counterpart, the Securities Act of 1933, 15 U.S.C. §§ 77a - 77aa. Reves v. Ernst & Young, 494 U.S. 56, 63, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990). Further, while no court in the First Circuit has considered the issue, several courts and the United States Securities and Exchange Commission ("SEC") construe the Nine-Month Exclusion to exempt only certain high-quality debt issued to banks (so-called "commercial paper"). See, e.g., SEC v. R.G. Reynolds Enters., Inc., 952 F.2d 1125, 1132 (9th Cir. 1991) (citing Securities Act Release No. 33-4412, 26 Fed. Reg. 9158 (1961) ); see generally Wendy Gerwick Couture, The Securities Acts' Treatment of Notes Maturing in Less than Nine Months: A Solution to the Enigma, 31 Sec. Reg. L.J. 496 (2003).

Yet this approach clashes with the statutory text's plain meaning. See In re Hill, 562 F.3d 29, 32 (1st Cir. 2009). Although the Court agrees that the Nine Month Exclusion exempts commercial paper, nothing in the Securities Exchange Act's text, purpose, or legislative history cabins the Nine Month Exclusion to commercial paper alone. Instead, a better reading of the Nine Month Exclusion flips the presumption that "any note" is a security under the Securities Exchange Act. That is, though in the usual course courts are to presume that "any note" is a security, notes that mature in nine months or less (such as the one before the Court, which matures in nine months on the dot) are presumptively not securities. In the Court's eyes, this reading of the statute is more correct.

Yet there is more to law and justice than correct statutory interpretation. The Court sees little benefit in unsettling nearly fifty years of consistent case law narrowly interpreting the Nine Month Exclusion, even though that reading is faulty. See Reves, 494 U.S. at 74-75, 110 S.Ct. 945 (Stevens, J., concurring) (citing cases and persuasively arguing that "such a settled construction of an important federal statute should not be disturbed unless and until Congress so decides"). This may be one of those matters where, as Justice Brandeis taught, "it is more important that the applicable rule of law be settled than that it be settled right." Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 406, 52 S.Ct. 443, 76 L.Ed. 815 (1932) (Brandeis, J., dissenting); see Kimble v. Marvel Entertainment, LLC, 576 U.S. 446, 135 S. Ct. 2401, 2409, 192 L.Ed.2d 463 (2015).

In any event, the Court need not decide whether the loan in this case is a security because, even assuming that it is, the plaintiff has failed adequately to plead fraud. The Court thus DISMISSES the plaintiff's Securities Exchange Act claim for failure to state a claim. It then declines to exercise supplemental jurisdiction over the remaining state law claims. Accordingly, the Court DENIES the motion for a default judgment, ECF No. 25, and DISMISSES the case for want of jurisdiction.

II. BACKGROUND

A. Procedural History

This case arises out of a loan transaction between Auctus Fund, LLC ("Auctus") and Sauer Energy, Inc. ("Sauer"). Alleging that the transaction had soured, Auctus sued Sauer on May 1, 2019. Compl. Demand Jury Trial ("Compl."), ECF No. 1. Since Auctus based federal jurisdiction on diversity of citizenship and Auctus is a limited liability company, the Court ordered Auctus to submit the citizenship information of its members within two weeks of July 1, 2019. Electronic Clerk's Notes, ECF No. 11; see Wolf v. Altitude Costa LLC, 347 F. Supp. 3d 106, 109 (D.P.R. 2018) (observing that, for diversity jurisdiction purposes, "[a]n LLC shares the citizenship of all its members") (citing D.B. Zwirn Special Opportunities Fund, L.P. v. Mehrotra, 661 F.3d 124, 125 (1st Cir. 2011) (per curiam)).

Auctus responded to the Court's order on July 15, 2019 with an amended complaint that claimed that Sauer violated the federal securities laws, which it mistakenly thought mooted the Court's order. See Am. Compl. ¶ 6; Pl. Auctus Fund, LLC's Initial Resp. July 22nd Order Show Cause ("Initial Resp. Show Cause") 3-4, ECF No. 14. In its amended complaint, Auctus alleged that Sauer violated section 12(a)(2) of the Securities Act and section 10(b) of the Securities Exchange Act. Am. Compl. ¶ 31. The amended complaint did not allege that diversity of citizenship vested this Court with subject matter jurisdiction. See generally Am. Compl.

Consequently, on July 22, 2019, the Court ordered Auctus to show cause why (1) it had not complied with the Court's order and (2) the Court ought not dismiss Auctus's federal securities law claims for failure to state a claim. Order Show Cause 2, 7, ECF No. 13; Auctus Fund, LLC v. Sauer Energy, Inc., 393 F. Supp. 3d 139, 139-42 (D. Mass. 2019). As for the second part of its Order, the Court raised two concerns. First, the Court noted that it had previously questioned similar claims that Auctus raised in a previous suit and that Auctus defended only its Securities Exchange Act -- not its Securities Act -- claim. Id. at 140-41. Second, the Court acknowledged that it had ruled that the similar Auctus Securities Exchange Act claim was colorable -- that is, whether it was sufficiently serious to require a decision on its merits -- in light of cases that Auctus had cited but that the Court continued to harbor serious doubt about its plausibility -- that is, whether as matter of law, Auctus's complaint, taken as true, merited relief. Id. at 141-42. In particular, the Court notified Auctus that it seriously doubted whether Auctus's loan qualified as a security under the Securities Exchange Act because Sauer's debt matured in nine months. Id.

Auctus first responded to the Order to Show Cause on July 29, 2019 with a list of the unique residences of its members. Initial Resp. Show Cause, Ex. A, Aff. Louis Posner Ex. 1 ("Membership List"), ECF No. 14-2. With the Court's permission to file a supplemental response, Auctus submitted a memorandum on August 26, 2019 that explained its position as to the merits of its federal securities law claims.¹ Pl. Auctus Fund, LLC's Further Resp. July 22nd Order Show Cause ("Resp."), ECF No. 23.

Since Sauer had not yet appeared or answered either complaint, Auctus moved for an entry of default on August 9, 2019, ECF No. 16, which the Court granted on August 13, 2019, ECF Nos. 19, 20. On August 29, Auctus moved for a default judgment. See Pl. Auctus Fund, LLC's Mot. Entry Default Judgment Damages, Equitable Relief & Permanent Inj. Compelling Conversion Debt Public SENY Shares Against Def. Sauer Energy, Inc., ECF No. 25; Pl. Auctus Fund, LLC's Mem. Supp. Mot. Entry Default Judgment Damages, Equitable Relief & Permanent Inj. Compelling Conversion Debt Public SENY Shares Against Def. Sauer Energy, Inc., ECF No. 26.

At a hearing on September 5, 2019 that Sauer again failed to attend, the Court accepted Auctus's factual allegations in its amended complaint as uncontested and true. Electronic Clerk's Notes, ECF No. 28. It proceeded to dismiss Auctus's claim that Sauer violated the Securities Act but took under advisement whether to enter judgment on the Securities Exchange Act and state law claims. Id.

For the reasons that follow, the Court dismisses Auctus's Securities Exchange Act claim. Given that the case no longer involves a federal claim, the Court declines to exercise supplemental jurisdiction to rule on Auctus's state law claims. See Rossi v. Gemma, 489 F.3d 26, 39 (1st Cir. 2007) ("As a general principle, the unfavorable disposition of a plaintiff's federal claims at the early stages of a suit ... will trigger the dismissal without prejudice of any supplemental state-law claims." (quoting Rodriguez v. Doral Mortg. Corp., 57 F.3d 1168, 1177 (1st Cir. 1995) and citing 28 U.S.C. § 1367(c)(3) )).

B. Facts Alleged

Auctus is a Boston-based limited liability company, apparently in the business of loaning money on a short-term basis to other businesses. Am. Compl. ¶¶ 4, 22; see, e.g., Compl. & Demand Jury Trial, Ex. B, Convertible Promissory Note, Auctus Fund, LLC v. GenesysID, Inc., Civ. A. No. 17-12205-WGY (Nov. 8, 2017), ECF No. 1-2 (convertible promissory note that matured in nine months attached to complaint alleging corporate defendant breached that note); Compl. & Demand Jury Trial, Ex. B, Convertible Promissory Note, Auctus Fund, LLC v. RedHawk Holdings Corp., Civ. A. No. 18-12020-WGY (Sept. 26, 2018), ECF No. 1-2 (s...