Hershewe v. Givens, CIVIL ACTION NO. 1:14cv655-MHT (WO)
| Decision Date | 29 September 2015 |
| Docket Number | CIVIL ACTION NO. 1:14cv655-MHT (WO) |
| Court | U.S. District Court — Middle District of Alabama |
| Parties | EDWARD HERSHEWE, Plaintiff, v. KEITH GIVENS, et al., Defendants. |
Plaintiff Edward Hershewe brings this action against a number of defendants asserting state-law claims of fraud, breach of fiduciary duty, piercing the corporate veil, and corporate dissolution as well as a federal-law claim of a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq. The defendants are Keith Givens (K. Givens), John Givens (J. Givens), Chase Givens (C. Givens), Eagle Investments, LLP, Eagle Investments Group, LLP, VLO Management, LLC, and Jacoby & Meyers, LLC. The court has federal-question jurisdiction overthe federal claim pursuant to under 28 U.S.C. § 1331 and supplemental jurisdiction over the state-law claims pursuant to 28 U.S.C. § 1367.
The case is now before this court on the defendants' motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). The motions to dismiss will be denied.
In considering a defendant's Rule 12(b)(6) motion to dismiss, the court accepts the plaintiff's allegations as true, Hishon v. King & Spalding, 467 U.S. 69, 73 (1984), and construes the complaint in the plaintiff's favor, Duke v. Cleland, 5 F.3d 1399, 1402 (11th Cir. 1993). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). To survive a motion to dismiss, a complaint need notcontain "detailed factual allegations," Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545 (2007), "only enough facts to state a claim to relief that is plausible on its face." Id. at 574.
This case arises out of a joint venture between Hershewe, a lawyer from Missouri, and K. Givens, a lawyer from Alabama. As this is a motion to dismiss, the court accepts any plausible pleading in the complaint as true.
Several years ago, Hershewe and K. Givens began discussions for the joint venture. The idea was to establish a nationwide set of physical and virtual law offices across the country under the auspices of Jacoby & Meyers, a law firm where K. Givens worked and had an ownership interest. In order to roll out this business plan, Hershewe and K. Givens sought a company thatmarkets pre-made or do-it-yourself legal forms to join the venture.
Hershewe and K. Givens finalized an agreement for a joint venture in 2012. K. Givens, along with his sons C. Givens and J. Givens, formed VLO Management LLC to manage the joint venture and agreed to transfer the intellectual property, licenses, websites, logos, copyrights, and brand name from Jacoby & Meyers to VLO. In exchange, Hershewe agreed to transfer $ 3.5 million to the company, $ 1.5 million of which would serve as a capital contribution. A large part of this $ 3.5 million was to be used as a down payment on USLegal, a company that could provide the pre-made legal forms central to the business plan. As part of the agreement to form VLO, Hershewe obtained a 46.25% interest in VLO; Keith Givens, 20%; C. Givens, 15%; J. Givens, 15%; and two other investors, 1.875% each. Every member of VLO except for Hershewe was a lawyer at the same law firm. K. Givens and Hershewe were co-managers of VLO,while K. Givens, along with C. Givens, controlled the bank account.
Soon after the formation, Hershewe transferred the first $ 1.5 million to VLO. On the same day, K. Givens transferred $ 1 million from VLO's account to Eagle Investments,1 a company owned by K. Givens, J. Givens, and C. Givens. Eagle Investments shortly thereafter transferred over $ 930,000 as a loan payment. K. Givens made several other questionable transactions from the VLO account in the following months, including spending nearly $ 40,000 on registration and legal fees for Jacoby & Meyers and over $ 150,000 in furniture unrelated to VLO. VLO's tax filings were changed tocover up these transfers (doc. no. 101-10).2 Hershewe also claims that K. Givens, C. Givens, and J. Givens spent any money transferred from VLO to Eagle Investments and Jacoby & Meyers quickly so that these companies would be undercapitalized.
In July 2012, Hershewe was scheduled to transfer the remaining $ 2 million of the $ 3.5 million investment to VLO in order to purchase the stake in USLegal. A month beforehand, K. Givens came to Hershewe, warning that USLegal was running out of money and needed more to support the business. He asked Hershewe co-sign a bank loan for $ 1 million so that VLO could help USLegal with its cash flow; Hershewe agreed. However, the $ 1 million was not actually forUS Legal's cash-flow difficulties; rather, K. Givens needed the money because he had depleted VLO's bank account to the point where Hershewe's earlier transfer of $ 2 million was not going to be enough to cover the purchase price for USLegal.
Hershewe now brings this lawsuit alleging, among other claims, that K. Givens, C. Givens, and J. Givens defrauded him of his investment and violated their fiduciary duty to VLO.
The defendants move under Rule 12(b)(6) to dismiss all claims. The court will address each in turn.
The court will first analyze Hershewe's only federal claim: a civil claim under RICO against all defendants. The defendants argue that this claim should be dismissed because Hershewe does not havestanding to bring the claim and because he does not plead the substantive elements. The court finds that he meets these requirements.
"Any person injured in business or property" by reason of a RICO claim has standing to sue, "except that no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities." 18 U.S.C. § 1964. The defendants argue that Hershewe lacks standing because he relies on fraud regarding an investment contract that qualifies as a security and thus falls within the standing exception.3 The questions then are, How do federalsecurities laws define the term 'security' , and Does Hershewe's investment fit within this category?
Section 10b-5 of the federal securities laws prohibits the employment of manipulative or deceptive devices "in connection with the purchase or sale of a security." See 17 C.F.R. § 240.10b-5. Among its many definitions, the term "security" can include an investment contract. 15 U.S.C. § 77b. Hershewe's investment in VLO was an "investment contract" for purposes of federal securities law only if there was "(1) an investment of money, (2) a common enterprise, and (3) the expectation of profits to be derived solely from the efforts of others." Sec. and Exch. Comm'n v. Unique Fin. Concepts, Inc., 196 F.3d 1195, 1199 (11th Cir. 1999). The court will analyze each prong in turn.
Under the first prong of this test, the required "investment of money refers to an arrangement whereby an investor commits assets to an enterprise or venture in such a manner as to subject himself to financial loss." Gilmore v. MONY Life Ins. Co. of Am., 165 F. Supp. 2d 1276, 1284 (M.D. Ala. 2001) (Thompson, J.). This prong is easily met. The complaint describes Hershewe's "equity investment" of $ 3.5 million for a "legal business venture." It is clear that Hershewe committed assets in a way that subjected him to a loss.
The second prong, or 'common enterprise,' is also easily met. A common enterprise "exists where the fortunes of the investor are interwoven with and dependent on the efforts and success of those seeking the investment or of third parties." Unique Fin. Concepts, Inc., 196 F.3d at 1199. Here, Hershewe invested his money in VLO, and he would gain or lose money based on VLO's performance. Their efforts were interwoven and thus formed a common enterprise.
The final prong, and the one most at issue in this case, requires that the expectation of profits is derived solely from the efforts of others. "Solely is not interpreted restrictively." Sec. and Exch. Comm'n v. Merch. Capital, LLC, 483 F.3d 747, 755 (11th Cir. 2007). Instead, "[t]he crucial inquiry [for the third prong] is the amount of control that the investors retain under their written agreements." Unique Fin. Concepts, Inc., 196 F.3d at 1201 (internal quotation marks omitted). This amount of control is measured from the "time the interest is sold, rather than at some later time after the expectations of control have developed or evolved." Merch. Capital, LLC, 483 F.3d at 756. Economic reality of the arrangement governs over form. Id. at 755.
In the complaint, Hershewe states that he was a co-manager and part-owner of VLO. Although he does notprovide governing documents that clearly define his role,4 the terms co-manager and part-owner imply Hershewe's ability to make significant decisions regarding VLO's business. Indeed, the term "co-manager" suggests that he is K. Givens's equal when making decisions. Even if K. Givens later excluded him from all business decisions, the focus of this test is the relationship at the formation of the business rather than how it evolved. Id. at 756. Because Hershewe was originally a co-manager and had control over his investment, the investment was not an investment contract and therefore not a security. As such, he has standing to bring a civil RICO claim.5
The defendants next argue that Hershewe does not meet the substantive requirements for pleading a civil RICO claim under 18 U.S.C. § 1962(c). To establish a RICO claim, a plaintiff must plead "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Williams v. Mohawk Indus., Inc., 465 F.3d 1277, 1282 (11th Cir. 2006). As a "breed of fraud claims," civil RICO allegations "must be pled with an increased level of specificity." Ambrosia Coal & Const. Co. v. Pages Morales, 482 F.3d 1309, 1316 (11th Cir. 2007). As with other fraud claims, the plaintiff...
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