Ginsburg v. Icc Holdings, LLC, Civil Action No. 3:16-CV-2311-D

Decision Date13 November 2017
Docket NumberCivil Action No. 3:16-CV-2311-D
PartiesSCOTT GINSBURG, Plaintiff, v. ICC HOLDINGS, LLC, and TIM McGRAW, Defendants.
CourtUnited States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Northern District of Texas
MEMORANDUM OPINION AND ORDER

In this action arising from defendants' alleged misrepresentations and breach of contract in connection with plaintiff Scott Ginsburg's ("Ginsburg's") investment in defendants' medical marijuana1 business, defendants move to dismiss under Fed. R. Civ. P. 12(b)(6) and 9(b). For the reasons that follow, the court grants the motion in part and denies it in part and grants Ginsburg leave to replead.

I

In December 2015 defendant ICC Holdings, LLC ("ICC") and its Chief Executive Officer, defendant Tim McGraw ("McGraw"), contacted Ginsburg to solicit funding to support their medical marijuana business.2 In connection with defendants' solicitationefforts, McGraw sent Ginsburg a Private Placement Memorandum ("PPM") dated March 2015. The PPM "reasonab[ly] estimate[d] . . . the projected revenue for medical cannabis sales in Illinois" to be $1,115,910,000, and projected that ICC would have earnings before interest, taxes, depreciation, and amortization ("EBITDA") of $46,817,840 in 2016, and $53,065,367 in 2017. Ds. App. 14, 29. It also stated, on its financial projections page: "[t]he projections are 'forward looking statements' and were not prepared with a view to public disclosure or compliance with published guidelines of the commission or any state securities commission. The company advises all prospective investors to pursue their own independent investigation with respect to the projected financial information included." Id. at 29 (bold font and capitalization omitted).

Following Ginsburg's receipt of the PPM, he asked McGraw whether ICC would prepare and provide him a copy of audited financial statements. McGraw responded that ICC's bank required audited financial statements and that he would provide copies of them to Ginsburg as they were prepared.3 Allegedly in reliance on McGraw's representations andthe statements in the PPM, Ginsburg loaned ICC $7 million, as evidenced by a January 19, 2016 promissory note ("January Note") in that same amount, convertible into Class B Units in ICC.

In February 2016 McGraw and ICC sought additional funding from Ginsburg. In a February 4, 2016 email to Ginsburg, McGraw stated: "[t]he Holland deal is ours now. Revolution [an operating arm of ICC] will take operating control. . . Moral of the story is that we are in the driver[']s seat." Id. at ¶ 12(d) (alterations in original). McGraw also stated that the so-called "Holland deal" will "make Revolution the largest producer on the planet."4 Id. In a February 17, 2016 email, McGraw stated that ICC's projected financials should show Ginsburg "how lucrative being our lead investor on these deals is and how [McGraw] ha[d] structured them so [Ginsburg] [would] get [his] capital back quickly"; that "[w]e will overnight be bigger than GW"; that ICC's patient and facility ramp-up was slower than initially projected because of "decisions made by our Governor in Illinois," but that "even so the future is [expletive] bright"; and that ICC "stands alone at the top of cannabis." Id. ¶ 12(e) (some alterations in original). That same day, ICC's CFO, Jonathan Charak ("Charak"), emailed Ginsburg 3-year forecasted financials reflecting projected EBITDA of negative $1,452,781.00 for 2016, but projecting that in 2017, ICC's EBITDA would grow over $4.5 million to $3,052,688.00 and that ICC would have a positive net cash flow of $52,688.00. The 3-year forecast also projected EBITDA growth in 2018 of nearly 700% to$21,104,488.00, with positive cash flow of $19,104,488.00.

On February 22, 2016 McGraw stated in an email to Ginsburg that if Ginsburg provided $2,250,000 in exchange for another Class B convertible note, McGraw would also give Ginsburg 150,000 Founders' Units from McGraw's personal holdings. On March 3, 2016 McGraw emailed Ginsburg, stating that ICC needed cash to pay subcontractors that week or they would walk off the job. McGraw stated:

[t]here is HUGE demand for [marijuana extract] and we can make a [expletive] load as soon as we get the final inspection of the labs done. Which if we pay today or tomorrow can be next week. We want more revenue but we are sitting on a pile of money because the labs aren't online.

Id. at ¶ 12(h) (alterations in original). Allegedly in reliance on McGraw's and ICC's statements and projections, Ginsburg executed a second promissory note ("March Note") in the amount of $3.6 million, convertible into Class B Units in the company. Under the terms of a Funding Disbursement and Interest Reserve Agreement ("Reserve Agreement"), Ginsburg was to "hold back" $1,260,000 from the $3.6 million stated value of the March Note, which was to be used to service 12 months of ICC's interest obligations on the $10.6 million combined total of both notes. Although Ginsburg only wired $2,340,000 to ICC in March 2016 (not the full $3.6 million), he contends that he never executed the Reserve Agreement and never consented to its terms.

Ginsburg alleges that he later learned that the statements and projections on which he had relied had no basis in fact "and were, stated mildly, wildly optimistic forecasts." Id. at ¶ 12(j). Although ICC had projected 2016 EBITDA of $46,817,840 on January 6, 2016, ICCemailed Ginsburg on February 17, 2016 (approximately one month after it received $7 million in funding from Ginsburg) forecasting 2016 EBITDA of negative $1,452,781.00. These same forecasts (sent halfway through Q1) showed Q1 EBITDA to be estimated at negative $410,850. Then, on May 16, 2016, after Ginsburg executed the March Note, McGraw emailed Ginsburg providing 5-year projected financials showing the actual Q1 EBITDA to be negative $1,932,113—a loss more than $1.5 million greater than the projections provided to Ginsburg halfway through that quarter, when defendants were seeking additional funding from Ginsburg. The May 16, 2016 projected financials also showed revised 2016 EBITDA to be projected at a $4,885,755.00 loss, which was three times greater than the projections provided to Ginsburg on February 17, and more than $50 million less than the EBITDA projected in defendants' emailed estimates on January 6, 2016.

Ginsburg alleges that defendants also materially misrepresented having specialized knowledge about the status of marijuana legalization efforts nationally and internationally, in general, and the status of the Illinois legislature's position and timetable for getting laws changed, which would expand the potential Illinois customer base for medical marijuana usage. Although the PPM stated that "[a]s cannabis gains support for full legalization/recreational use, it is another indication that the industry is set to rapidly expand, providing both investors and operators with unprecedented opportunities," such "full legalization" never materialized in Illinois or in the remainder of the United States. Id. ¶ 13(a). In addition, on March 10, 2016, allegedly "amidst discussions between ICC and [Ginsburg] regarding [a] potential second round of funding," McGraw stated in an email toGinsburg that, through ICC's efforts, a law was about to be enacted that would considerably expand the permissible uses for medical marijuana, thus significantly increasing the market and demand for ICC's products.5 Id. at ¶ 13(b). But neither chronic pain nor Post-Traumatic Stress Disorder was added to the list of permissible uses for treatment by medical marijuana, as McGraw had indicated, nor were the other indicated changes enacted into law.

Ginsburg alleges that he justifiably relied on the material misrepresentations made by ICC and McGraw when he provided funding to ICC by making loans that could be converted into Class B Units of ICC. He asserts that McGraw and ICC continue to materially mislead potential investors; that, on May 6, 2016, McGraw emailed him an "Investor Presentation" in preparation for the round of Class C Unit-convertible notes and failed to disclose ICC's known risks (e.g., that favorable legislation might not be passed), the probability that such risks would materialize, or the anticipated magnitude of such materialization; and that defendants "continue to display an ongoing pattern of deceit, over-inflation of projected earnings, and under-estimation of known risks." Id. ¶ 15.

By letter dated July 6, 2016, Ginsburg made demand upon ICC to bring the debts on the January Note and March Note (collectively, the "Notes") current by paying the accrued interest, which was due three months after the effective date of each note. Ginsburg allegesthat ICC was to have made the interest payments on or before August 4, 2016, but they were not paid. In April 2017 Ginsburg notified ICC that the interest then owing under the Notes exceeded $1,260,000 and demanded that ICC bring the Notes current within 20 business days, which ICC failed to do.

Ginsburg sues McGraw and ICC alleging claims for breach of contract based on ICC's alleged default on the Notes; common law fraud, violation of Tex. Bus. & Com. Code Ann. § 27.01; violation of § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Securities and Exchange Commission ("SEC") Rule 10b-5; violation of § 20 of the Exchange Act, 15 U.S.C. § 78t (as to McGraw only); violation of Tex. Rev. Civ. Stat. Ann. Art. 581-33(A)(2); violation of Tex. Rev. Civ. Stat. Ann. Art. 581-33(F) (as to McGraw only); violation of the Illinois Securities Law of 1953, 815 ILCS 5/12(F), and violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c).

McGraw and ICC move to dismiss Ginsburg's fourth amended complaint under Rules 12(b)(6) and 9(b). They contend that because the purpose of the Notes is to fund the cultivation, possession, and sale of marijuana, in violation of federal law, the Notes are void and...

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