LeBrun v. Kuswa

• Court: U.S. District Court — Eastern District of Louisiana
• Writing for the Court: Porteous
• Citation: LeBrun v. Kuswa, 24 F.Supp.2d 641 (E.D. La. 1998)
• Decision Date: 26 October 1998
• Docket Number: No. CIV.A. 98-1428.,CIV.A. 98-1428.
• Parties: Denise LeBrun, wife of/and Dale J. LEBRUN, et al. v. Robert W. KUSWA, BK Enterprises, and Tomorrow, Inc.

24 F.Supp.2d 641

Denise LeBrun, wife of/and Dale J. LEBRUN, et al. v. Robert W. KUSWA, BK Enterprises, and Tomorrow, Inc.

No. CIV.A. 98-1428.

United States District Court, E.D. Louisiana.

October 26, 1998.

Stephen Kenneth Conroy, Christine W. Marks, Griffith & Conroy, LLC, Metairie, LA, for Plaintiffs.

Phillip Krch Wallace, Phillip K. Wallace, Attorney at Law, Slidell, LA, for Defendants.

ORDER AND REASONS

PORTEOUS, District Judge.

I. BACKGROUND

Plaintiffs, Denise LeBrun, wife of/and Dale J. LeBrun, Nancy Ancar, wife of/and Terry L. Ancar, Catherine Barr, wife of/and William L. Barr, David M. Keller, Catherine McMullen, wife of/and Joel T. McMullen, and Sandy Peyton, wife of/and Kevin Peyton (hereinafter collectively referred to as "plaintiffs"), have filed suit against defendants, Robert W. Kuswa (hereinafter "Kuswa"), BK Enterprises, and Tomorrow, Inc., alleging federal security fraud and breach of promissory notes. With regard to the federal securities fraud, the complaint of the plaintiff alleges that the defendants have violated the Federal Securities Exchange Act of 1934, § 10(b) as amended, 15 U.S.C.A. § 78j(b); and 17 C.F.R. § 240.10b-5.

Defendant Tomorrow, Inc. is in the business of manufacturing, distributing and selling commercial desiccant filters for coolers ("Moisture Controllers"), residential filters ("Food Savers") and mega freeze freshener central systems (hereinafter collectively referred to as "the Products"). Since 1990, plaintiff Dale LeBrun has been in the business of manufacturing metal parts and components. Commencing in 1995, Dale LeBrun was a vendor/supplier of Tomorrow, Inc., most notably performing certain work in manufacturing metal brackets which house the Products.

Dale LeBrun and defendant Kuswa had discussed on several occasions the Products of Tomorrow, Inc., and during 1995 Kuswa and LeBrun discussed the need for operating capital to continue the production, manufacture and sale of the Products. Pursuant to these discussions, LeBrun agreed to provide a loan to Tomorrow, Inc. for the capital funding of the business. Furthermore, LeBrun agreed to contact his friends and family to promote the Products of Tomorrow, Inc. and to seek to obtain additional funds for operating capital.

Thereafter, LeBrun obtained the commitment of friends and family to provide approximately $105,000.00 of loans to Tomorrow, Inc. for capital operations of the business. "Agreements to Borrow Monies" were executed by the following plaintiffs and the defendants as follows:

Dale and Denise LeBrun         12/19/95        $ 20,000.00
                David M. Keller                12/30/95        $ 20,000.00
                William and Catherine Barr     01/09/96        $ 20,000.00
                Joel and Catherine McMullen    01/23/96        $ 20,000.00
                Nancy and Terry Ancar          01/23/96        $ 20,000.00
                Kevin and Sandra Peyton        01/25/96        $  5,000.00
                                                               ___________
                                               TOTAL           $105,000.00
                

With regard to each separate loan transaction, there was an executed document entitled an "Agreement to Borrow Monies" (hereinafter "Loan Agreements"). These form documents were drafted by Tomorrow, Inc. through its officer and representative Kuswa. The Loan Agreements provided that the defendants would "repay the initial amount borrowed within twelve months from the date of execution of this agreement." The Loan Agreements also provided that the defendants were to pay interest quarterly based on certain sales, or "100% of the initial amount borrowed, which ever is greater."

There has been a series of communications between several of the plaintiffs and the defendants through the United States Mail. First, plaintiffs Dale and Denise LeBrun and David Keller received a letter in January, 1996 from BK Enterprises whereby defendant Kuswa requested to extend the plaintiffs' "investment contract" by thirty days, citing production delays as the reason for extension. (Exhibit G of Complaint). Furthermore, these plaintiffs have received periodic quarterly reports since July, 1996 referring to them as "investors." They have received only sporadic and minimal payments on these from the defendants.

Moreover, in August, 1996, when plaintiff Joel McMullen wrote the defendants demanding immediate repayment of his loan, plus all interest due, defendant Kuswa replied to plaintiff's letter stating that to "reimburse your investment," Kuswa would have to find "another investor" to replace him, a condition not part of the loan agreement. In addition, another set of communications occurred between plaintiff Terry Ancar and defendant Kuswa. In December, 1997, defendant Kuswa wrote a letter to plaintiff Terry Ancar requesting that he enter into a "new investor's contract for venture capital" as of January 1, 1998, which would have an investment rate of return of $0.05 per individual residential unit sold, $0.25 per individual commercial unit sold, or a "ten percent rate of return on investment per year until original capital investment is repaid." In January, 1997, plaintiff Ancar rejected a previously proposed new agreement in the form of a promissory note, and demanded repayment of the amount due him under the original Loan Agreement. The Loan was never repaid, and the defendants continued to communicate with Ancar, indicating that their cash flow was slow at the present time, but "our future is very promising," as well as proposing alternative methods of repayment that alluded to the original Loan debt as being "venture capital."

The plaintiffs, in their motion for summary judgment, move for this Court to find for the plaintiffs on the grounds that the Loan Agreements in question are promissory notes which have matured over a year ago, and said notes have not been repaid by the defendants. See Doc. # 8. Plaintiffs claim that the defendants have defaulted on these Loans, having failed to pay back the principal as well as the interest owed on the notes. Id. Because the defendants have breached the promissory notes, the plaintiffs claim that they are entitled to a judgment against the defendants as a matter of law. Id.

The defendants oppose the plaintiffs' motion for summary judgment, stating that the plaintiffs have asserted a flawed cause of action under Federal Securities Law, and as such, are attempting to establish jurisdiction before this Court when there is none. See Doc. # 11. Defendants claim that the promissory notes at issue are not securities within the definition of the Federal Securities Exchange Act, 15 U.S.C.A. § 78j(b) or 17 C.F.R. § 240.10b-5; therefore, there can be no securities violation under federal law and, accordingly, no federal jurisdiction. Id. Furthermore, defendants state that there are material facts as to whether the proper parties were named as defendants in this action,¹ and as to whether the plaintiffs are in fact the present holders of the Loan Agreements. Id.

Moreover, the defendants have filed a motion to dismiss pursuant to FRCP 12(b)(6). In this motion the defendants once again point to the fact that this Court lacks original jurisdiction because of the absence of a federal question and diversity. See Doc. # 5. Defendants claim that the Loan Agreements do not meet the definition of securities as either promissory notes or "investment contracts" under the applicable federal law. Id. Thus, the defendants assert that the transactions at issue are private transactions properly governed by Louisiana state law. Id. Accordingly, the defendants move this Court to decline to exercise pendent jurisdiction over the state law claims that would remain should the Court find that the Loan Agreements do not meet the tests and requirements of the Securities Exchange Act of 1934 § 10(b) as amended, 15 U.S.C.A. § 78j(b) (hereinafter "§ 75j(b)") or 17 C.F.R. § 240.10b-5.

Plaintiffs contend that they entered into the Loan Agreements with defendants thinking the documents to be promissory notes. See Doc. # 10. However, they claim that the defendants made it clear to them, through unilateral actions, that defendants were treating the transactions as securities. Id. That being the case, the plaintiffs allege that they are entitled to damages for fraud under § 78j(b) of the Securities Exchange Act or 17 C.F.R. § 240.10b-5. Id. Moreover, the plaintiffs claim in the alternative that should this Court find the Loan Agreements not to be securities, then the Court should exercise pendent jurisdiction and grant plaintiffs' motion for summary judgment as to their breach of contract claim under Louisiana state law. Id.

II. LEGAL ANALYSIS

A. Whether the Loan Agreements Are Securities Under 15 U.S.C.A. § 78c(a)(10)

The definition of a "security" is defined in the Securities Exchange Act as follows:

The term "security" means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise...