Im Partners v. Debit Direct Ltd.

Citation394 F.Supp.2d 503
Decision Date29 September 2005
Docket NumberNo. Civ.A. 304CV1651JCH.,Civ.A. 304CV1651JCH.
CourtU.S. District Court — District of Connecticut
PartiesIM PARTNERS and Daniel E. Marino Plaintiffs, v. DEBIT DIRECT LIMITED, et al., Defendants.
394 F.Supp.2d 503
IM PARTNERS and Daniel E. Marino Plaintiffs,
DEBIT DIRECT LIMITED, et al., Defendants.
No. Civ.A. 304CV1651JCH.
United States District Court, D. Connecticut.
September 29, 2005.

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Thomas J. Williams, Cos Cob, CT, for Plaintiffs.

David J. Elliott, Day, Berry & Howard, Hartford, CT, Terence J. Gallagher, III, Day, Berry & Howard, Stamford, CT, for Defendants.


HALL, District Judge.

The plaintiffs, IM Partners and its general partner Daniel E. Marino, bring this action against defendants Debit Direct Limited ("Debit Direct"), Jack O'Halloran, David Butterworth, Michael Kelly, Skanco Business Systems Limited ("Skanco"), Barry Kennedy, Restart Limited ("Restart"), Ian Lloyd, Andrew Kermode, Domicilium (IOM) Limited, John Allen, and Patrick Walsh, alleging violations of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and various state law claims.1 15 U.S.C. § 78a et seq., 17 C.F.R. § 240.10b-5. Jurisdiction is predicated upon 15 U.S.C. § 78aa, and 28 U.S.C. §§ 1331 and 1367. Defendants Debit Direct, Butterworth, Kelly, Skanco, Kennedy, Restart, Lloyd, and Kermode move to dismiss the plaintiffs' suit pursuant to Fed.R.Civ.P. Rules 12(b)(2) for lack of jurisdiction, 12(b)(5) for insufficient service of process, and 12(b)(6) and 9(b) for insufficient pleading. Defendant O'Halloran moves separately to dismiss the plaintiffs' suit pursuant to Rules 12(b)(6) and 9(b). For the foregoing reasons, the defendants' motions are GRANTED in part and DENIED in part.


This suit arises from an investment made by the plaintiffs in Debit Direct, which the plaintiffs allege was induced by the fraudulent conduct of some of the defendants. IM Partners is a Connecticut partnership with its principal office in Stamford, Connecticut, and Marino, a Connecticut resident, serves as IM Partner's

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general partner. The moving defendants are all persons or corporations that reside in the Isle of Man and that have their principal places of business in the Isle of Man. Debit Direct was, at all relevant times, controlled and directed by O'Halloran, Butterworth, and Kelly, who also served as shareholders, agents, officers, directors, and employees of Debit Direct (hereinafter the "Debit Direct defendants"). Kennedy, with Butterworth, controlled and directed Skanco and Restart, and Lloyd and Kermode were officers or employees of Restart.

In October 2003, Marino was approached in the Isle of Man by O'Halloran. O'Halloran solicited Marino to invest in Debit Direct, and made "oral representations" about the potential for success of the proposed business of Debit Direct, the "integrity and qualification" of himself and Butterworth and Kelly, and the ability of the defendants to "assure the success" of Debit Direct. Compl., ¶ 44.

On October 27, 2003, O'Halloran visited Marino in Stamford and made further representations regarding the "potential for success" of Debit Direct. Id. at ¶ 45. Subsequently, O'Halloran, Butterworth, and Kelly contacted Marino and his partners on numerous occasions, as "officers and directors" of Debit Direct,3 making "further representations" about the prospects of Debit Direct.

On November 17, 2003, Marino, on behalf of IM Partners, executed a Memorandum of Understanding in Stamford that was also signed by O'Halloran, individually and on behalf of Debit Direct. The Memorandum of Understanding stated that "IM and O'Halloran desire to invest and participate in a joint venture with respect to Debit Direct" and that the parties "desire to move ahead with said joint venture while the formalities and documentation are finalized describing the transaction in detail." Id. at Ex. 1. The Memorandum provided that IM Partners would invest the sum of $2,000,000, specified as "US Dollars," in return for 45% of the outstanding shares of Debit Direct. O'Halloran agreed to "use his best efforts, in a reasonable and prudent manner, subject to the approval of Debit Direct Board of Directors and IM's approval, to preserve existing business relationships and obtain new business and business relationships for the sole benefit of Debit Direct in order to facilitate the growth of Debit Direct." Id. The Memorandum also stated that it "sets forth an agreement in principle only and is not binding on the parties hereto and may not be relied upon as the basis of a contract by estoppel." Id.

According to the plaintiffs, who did not specify when this particular representation occurred, O'Halloran, Butterworth, and Kelly represented to the plaintiffs that the total investment of USD $2,000,000 would be sufficient to "assure the success of the proposed business of Debit Direct." Id. at ¶ 49. In accordance with the Memorandum of Understanding, and based upon the representations that had been made by the Debit Direct defendants, the plaintiffs wired a total of USD $2,000,000 to Debit Direct in November 2003 and March 2004.

The plaintiffs argue that the transfer of funds from IM Partners to Debit Direct caused a fiduciary relationship to be formed between IM Partners and the Debit Direct defendants, and that the defendants breached their fiduciary duties by failing to disclose to the plaintiffs several material facts, and by entering into self-serving

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transactions with the other defendants, that adversely affected Debit Direct and, consequently, IM Partners. The plaintiffs claim that O'Halloran did not disclose that he had previously been banned from serving as a director of any Irish company by the government of Ireland, and that this was a material fact that the defendants concealed from the plaintiffs with the intent to defraud the plaintiffs. In addition, the plaintiffs claim that the defendants knew and with fraudulent intent did not disclose to the plaintiffs, at the time that IM Partners executed the November Memorandum of Understanding and at the time that IM Partners transferred funds to Debit Direct, that USD $2,000,000 would not in fact be sufficient to complete the development of Debit Direct. The Debit Direct defendants also did not disclose to the plaintiffs that the defendants had caused Debit Direct to enter into non-arms-length transactions with Skanco and Restart, both of which were controlled in part by Butterworth, from which the Debit Direct defendants personally profited.

On April 20, 2004, the Direct Debit defendants, with Walsh, visited Stamford again and requested an additional investment of USD $2,500,000 from IM Partners, explaining that the November 17, 2003 Memorandum "mistakenly" stated the investment amount in American dollars instead of British pounds, and that the original investment of USD $2,000,000 was insufficient for the development of Debit Direct. According to the plaintiffs, at the April meeting, O'Halloran also made reference to his relationship with a "world renowned mafia boss" and reminded Marino that IM Partners "had better consider who they were dealing with in considering whether to make the additional investment." Compl., ¶ 67.

In June 2004, IM Partners decided not to provide further funding to Debit Direct and attempted to rescind the previous transactions by requesting that Debit Direct return the original $2,000,000 investment. In response, Butterworth informed IM Partners that, if it did not provide the additional $2,500,000, Skanco, under terms of a contract that had not been disclosed to the plaintiffs, would seize all of the assets of Debit Direct, and IM Partners would receive no interest or benefit from their original investment.

On the basis of the foregoing, the plaintiffs allege that O'Halloran, Butterworth, Kelly, Kennedy, and Skanco conspired to create Debit Direct for the purpose of diverting funds intended for investment in Debit Direct for their own benefit and gain through the use of "dummy" corporations, and fraudulently induced IM Partners to invest in Debit Direct. The plaintiffs allege causes of action for the violation of section 10(b) of the 1934 Securities Exchange Act, 15 U.S.C. violation of the Connecticut Unfair Trade Practices Act ("CUTPA"), violation of the Connecticut Uniform Securities Act ("CUSA"), rescission and restitution, unjust enrichment, fraud and conspiracy to defraud related to stock transactions, negligent misrepresentation, breach of fiduciary duty relating to stock transactions, breach of the implied covenant of good faith and fair dealing, and seek, in addition to monetary damages, the imposition of a constructive trust and declaratory relief.


A. Service of Process

Defendants Debit Direct, Kelly, Skanco, Restart, Lloyd, and Kermode challenge the service of process they received under Fed.R.Civ.P. Rules 4 and 12(b)(5), arguing that the service was insufficient under the conditions set forth in the November 15,

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1965 Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil Or Commercial Matters, 20 U.S.T. 361, 658 U.N.T.S. 163 ("Hague Convention").

Parties are bound to effect service pursuant to the Hague Convention in countries that are parties to the treaty. Rule 4(f) provides, "[u]nless otherwise provided by federal law, service upon an individual ... may be effected in a place not within any judicial district of the United States: (1) by any internationally agreed means reasonably calculated to give notice, such as those means authorized by the Hague Convention." Fed.R.Civ.P. Rule 4(f). The Supreme Court has held that the methods of service prescribed by the Hague Convention are mandatory where service abroad to a person in a signatory country is required. See Volkswagenwerk Aktiengesellschaft v. Schlunk, 486 U.S. 694, 699, 108 S.Ct. 2104, 100 L.Ed.2d 722 (1988)("By virtue of the Supremacy...

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