Dunn v. Borta
| Decision Date | 19 May 2004 |
| Docket Number | No. 03-1362.,03-1362. |
| Citation | 369 F.3d 421 |
| Parties | Edward M. DUNN, Plaintiff-Appellant, v. Ronald T. BORTA; Peter C. Linzmeyer; Leslie A. Davis, Defendants-Appellees, and Ronbotics Corporation, Defendant. |
| Court | U.S. Court of Appeals — Fourth Circuit |
ARGUED: Raymond Charles Fay, Bell, Boyd & Lloyd, P.L.L.C., Washington, D.C., for Appellant. Sally Ann Hostetler, Odin, Feldman & Pittleman, P.C., Fairfax, Virginia, for Appellees. ON BRIEF: Andrew North Cook, Michael Jay Schrier, Bell, Boyd & Lloyd, P.L.L.C., Washington, D.C., for Appellant. Bruce Michael Blanchard, Odin, Feldman & Pittleman, P.C., Fairfax, Virginia; Christopher Ivan Kachouroff, Robert H. Klima & Associates, Manassas, Virginia, for Appellees.
Before NIEMEYER, KING, and DUNCAN, Circuit Judges.
Reversed and remanded by published opinion. Judge KING wrote the opinion, in which Judge DUNCAN joined. Judge NIEMEYER wrote a dissenting opinion.
Plaintiff Edward Dunn appeals the decision of the Eastern District of Virginia, rendered in February 2003, dismissing his securities fraud claims against defendants Borta, Linzmeyer, and Davis for failure to state a claim upon which relief can be granted, see Fed.R.Civ.P. 12(b)(6), and for failure to plead fraud with particularity, see id. 9(b). Dunn maintains that he was defrauded out of more than a half-million dollars on his investment in Ronbotics Corporation and that the court erred when it dismissed the claims he asserted under the Virginia Securities Act. As explained below, Dunn's Virginia state law claims pass muster under the applicable pleading requirements, and we reverse and remand.
Ronbotics Corporation is a privately held Virginia corporation founded to develop and manufacture electric motion platforms, used primarily in arcade games and training simulators. Ronbotics was operated, in part, by the individual defendants: Ronald Borta, its Chief Technology Officer and Chairman of the Board; Leslie Davis, its President and Chief Operating Officer; and Peter Linzmeyer, its Chief Executive Officer (collectively, the "Defendants").1
In January 2001, Ronbotics approached Edward Dunn about investing in its business, providing him with a Confidential Information Memorandum (the "Memorandum") describing Ronbotics's current and proposed product lines, business prospects, assets, and marketing strategy, and including financial reports and other information. The Memorandum asserted that "Ronbotics has developed proprietary motion control technology currently embodied in its patented electric motion platforms" and that "[t]he low cost of Ronbotics' patented platforms is attributable to its proprietary mechanical and systems designs, proprietary software and trade secret manufacturing processes."
In addition, the Memorandum made several representations concerning Ronbotics's business prospects. For example, it asserted that major manufacturers such as SEGA, Namco, and Gaelco were designing products using the Ronbotics platform, and it specified the stage of development for each of these companies' designs. The Memorandum further asserted that Ronbotics was involved in discussions with General Electric and other major distributors regarding Ronbotics's products and that it had sold 225 units of its principal product, the CoasteRider, prior to January 2001. Finally, the Memorandum made projections about Ronbotics's future growth and asserted that the company was negotiating with a manufacturing facility in Oklahoma to handle overflow production.
During the third week of January 2001, Dunn met with Borta and Linzmeyer to discuss his possible investment in Ronbotics. At the meeting, which lasted several hours, Dunn was asked to invest $500,000 in the company by purchasing its stock at $3.00 per share. When he expressed doubt that Ronbotics's stock was worth that price, Linzmeyer and Borta suggested that Dunn instead purchase a convertible subordinated note issued by the company. Dunn then voiced concern that Ronbotics did not possess sufficient assets to satisfy such a note if the company went bankrupt. Linzmeyer and Borta responded that Ronbotics owned two patents, one for a motion pinball machine and one for the electric motion platform used in the CoasteRider; that the patents were "worth millions"; that an outside investment firm had valued the patents at between $2 million and $4 million; and that the patents were the company's primary assets. When Dunn inquired as to the protections Ronbotics had in place to ensure that competitors did not misappropriate its technology, Linzmeyer and Borta represented that the company's patents protected against such misappropriation.
On January 31, 2001, Linzmeyer, on behalf of Ronbotics, executed a convertible subordinated note (the "Note"),2 by which Ronbotics promised to pay Dunn the principal sum of $500,000 on January 31, 2004, plus ten percent interest per annum, payable on the first day of each calendar quarter. Ronbotics made the Note's first required interest payment to Dunn on April 1, 2001, but it failed to make any subsequent interest payments through October 1, 2002. Exercising his rights under the Note, Dunn then demanded immediate payment of all principal and interest due thereon. The Note was not paid, and Ronbotics subsequently filed for bankruptcy in the Eastern District of Virginia bankruptcy court.
On June 28, 2002, Dunn filed a complaint in the Eastern District of Virginia against Ronbotics and the Defendants, alleging violations of federal and state securities laws, common law fraud, and breach of contract. Ronbotics did not enter an appearance in the action, but the Defendants filed motions to dismiss pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.3 On October 15, 2002, the court granted the motions to dismiss without prejudice, but authorized Dunn to amend his complaint.
On October 29, 2002, Dunn filed an amended complaint, naming the same defendants, which is the operative complaint in this appeal (the "Complaint"). The Complaint made numerous factual allegations against the Defendants. First, it alleged that the Defendants had authored and approved the Memorandum, which contained false and misleading statements in that it referred to Ronbotics's patented products, even though the patents were only pending when the Memorandum was provided to Dunn. Complaint ¶¶ 18, 30, 32. The Complaint further alleged that the Defendants orally made false statements concerning the existence and value of the patents and failed to disclose that Borta, the inventor, had retained certain reassignment rights in the patents. Complaint ¶¶ 31-32.
Next, the Complaint alleged that the Memorandum contained false and misleading statements regarding the status of Ronbotics's business. Complaint Part G. In particular, the Complaint alleged that, contrary to the Memorandum, SEGA, Namco, and Gaelco were not in the process of designing products using Ronbotics's motion platform. Complaint ¶¶ 36-39. The Complaint further alleged that Ronbotics had never engaged in substantive discussions with General Electric and had never been in serious negotiations with any other major distributors. Complaint ¶¶ 40-43. Also, according to the Complaint, the Memorandum falsely asserted that Ronbotics had sold 225 CoasteRiders, when in fact the company had not sold anywhere near that number prior to January 2001. Complaint ¶¶ 46-47. In addition, the Complaint alleged that the Memorandum provided misleading and unrealistic financial information. Complaint ¶¶ 50-53.
Based on its factual allegations, the Complaint alleged eight separate causes of action. Counts III and IV are the only counts relevant here, as Dunn has appealed only the two claims arising under the Virginia Securities Act (the "Act").4 Count III alleged violation of sections 13.1-502 and 13.1-522(A) of the Act.5 Complaint ¶¶ 88-92. Section 13.1-502 prohibits selling securities by means of an untrue statement or omission of a material fact.6 Section 13.1-522(A) creates civil liability for the sale of a security by means of such an untrue statement or omission.7 Count IV alleged violation of section 13.1-522(C) of the Act, which provides for control person liability for violations of section 13.1-522(A).8 Complaint ¶¶ 93-96.
On November 12, 2002, the Defendants again filed motions to dismiss pursuant to Rules 9(b) and 12(b)(6). In opposition to the motions, Dunn maintained that the Act does not require proof of scienter, reliance, or causation. The district court declined to address this contention, stating instead that, "even under Mr. Dunn's construction, the Virginia statute requires a material misrepresentation."9 Dunn v. Ronbotics Corp., No. 02-952, at 26 (E.D.Va. Feb. 20, 2003). The court went on to conclude that Dunn had failed to allege a material misrepresentation because the fact that Ronbotics's patents were still pending constituted publicly available information that a reasonable investor would have considered. Id. at 14-16, 26. In addition, the court concluded that the claims against Davis impermissibly relied on the concept known as "group pleading" rather than alleging specific actions on her part. Id. at 28-29. On these bases, the court dismissed the Complaint.10 Id. As noted, Dunn appeals only those claims arising under the Act, i.e., Counts III and IV.11 We possess jurisdiction pursuant to 28 U.S.C. § 1291.12
We review de novo a district court's dismissal of a complaint pursuant to Rule 12(b)(6). Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir.1993). We also review de novo a court's dismissal on the basis of Rule 9(b), because "lack of compliance with Rule 9(b)'s pleading requirements is treated as failure to state a claim under Rule 12(b)(6)." Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 783 n. 5 (4th Cir.1999).
In assessing whether the district...
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