Liberty Ridge LLC v. Realtech Systems Corp., 01 Civ. 5974(MP).

• Court: United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
• Citation: 173 F.Supp.2d 129
• Docket Number: No. 01 Civ. 5974(MP).,01 Civ. 5974(MP).
• Parties: LIBERTY RIDGE LLC v. REALTECH SYSTEMS CORP.
• Decision Date: 13 November 2001

173 F.Supp.2d 129

LIBERTY RIDGE LLC v. REALTECH SYSTEMS CORP.

No. 01 Civ. 5974(MP).

United States District Court, S.D. New York.

November 13, 2001.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Lowenstein Sandler PC, (Michael S. Etkin, Steven M. Hecht and Sheila Sadighi, of counsel), New York City, for Plaintiffs.

Jenkins & Gilchrist Parker Chapin LLP (Stephen G. Rinehart, of counsel), New York City, for Defendants.

OPINION

MILTON POLLACK, Senior District Judge.

Plaintiffs are Liberty Ridge, LLC ("Liberty Ridge") and individual investors in Defendant RealTech Systems Corporation ("RealTech"). Plaintiffs claim that Defendants are liable under Sections 12, 15, and 20(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. Plaintiffs also allege that defendants committed common law fraud, fraudulent misrepresentation, fraudulent concealment, negligent misrepresentation, breach of contract, and breach of the implied covenant of good faith and fair dealing.

Plaintiffs seek to recover the consideration paid by them to Defendant RealTech in the amount of $3,080,022.00, with interest, and damages in the amount of $3,080,022.00.

Defendants have filed a Motion to Dismiss the Complaint pursuant to: (1) Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Fed. R. Civ.P."), for failure to state a claim upon which relief can be granted; (2) Rule 9(b), Fed.R.Civ.P., for failure to plead fraud with particularity; (3) Rule 12(b)(1), Fed.R.Civ.P., dismissing the pendant state claims for lack of subject matter jurisdiction; and (4) granting such other and further relief as the court may deem just and proper.

I. BACKGROUND

Plaintiffs' claims arise out of (1) the sale of 560,000 shares of Series C Preferred Stock by RealTech to Liberty Ridge for an aggregate purchase price of $1,885,352, and (2) the sale of 360,000 shares of common stock by RealTech to the individual plaintiffs for an aggregate purchase price of $1,194,670, in transactions that occurred between December, 1999 and March, 2000.

According to Plaintiffs, in selling these securities Defendants misrepresented and omitted material facts relating to RealTech's financial and business positions. They further allege that, due to the relationships among the individual Plaintiffs and between the individual Plaintiffs and Liberty Ridge, the Defendants could and did make representations to Liberty Ridge and one or more of the individual Plaintiffs with the intent and knowledge that the representations would be shared with other Plaintiffs.

First, Plaintiffs claim that Defendants made misrepresentations and omitted material facts relating to RealTech's financial position for the year 1999. According to their allegations, prior to the investments by Liberty Ridge and the individual investors, Defendants disclosed information relating to RealTech's financial position up to September 30, 1999 which materially understated the losses sustained by RealTech in the first three quarters of that year. Plaintiffs further allege that, although Defendants characterized RealTech's fourth quarter as "going well," the company in fact sustained a fourth quarter loss that was more than one and a half times the recorded losses for the first three quarters of the year combined and exceeded the projected fourth quarter losses in the Business Plan given to one of the individual investors by more than $2 million. Thus, Plaintiffs assert that Defendants' optimistic statements regarding the outlook for RealTech's fourth quarter 1999 performance were intentionally false and misleading.

Second, Plaintiffs allege that Defendants made misrepresentations and omitted material facts relating to RealTech's business position. Plaintiffs allege that defendants falsely represented that RealTech was shifting the focus of its business by phasing out its value added reseller ("VAR") business in favor of services business, and that the cash generated by the Plaintiffs' investments would be used to expand RealTech's business presence in the service provider market by financing, inter alia, strategic office expansion nationwide and the hiring of top industry engineers. They argue that these representations were false and misleading, because within approximately two weeks of closing the majority of the Plaintiffs' investments, Defendants sent out nearly $3 million in satisfaction of an apparently past-due account in connection with RealTech's old VAR business, leaving RealTech with inadequate operating capital despite the infusion of the Plaintiff's funds. Plaintiffs allege that their investments were used to satisfy this account instead of for the expansion of RealTech's business presence in the service provider market.

Finally, Plaintiffs claim that Defendants LaChance, Yanneck and Mesich, because of the positions they occupied at RealTech and the responsibilities and duties associated with those positions, knew or recklessly failed to know RealTech's true financial and business positions and thus knew or recklessly failed to know of the falsity of RealTech's representations to Plaintiffs. Amended Complaint (hereinafter "Am. Compl.") ¶¶ 74-76. Plaintiffs further allege that Defendants LaChance and Yanneck affirmatively misrepresented RealTech's business plan and financial situation to both Liberty Ridge and to a number of the individual investors. Am. Compl. ¶ 78, 84.

II. DISCUSSION

1. Motion to Dismiss Pursuant to Rule 12(b)(1)

Normally, motions to dismiss for lack of jurisdiction pursuant to Rule 12(b)(1) must be decided before motions pursuant to other Federal Rules of Civil Procedure are considered, Integrated Utilities Inc. v. United States, 1997 WL 529007 at *2 (S.D.N.Y.1997) (Scheindlin, J.), "[s]ince dismissal of an action for lack of subject matter jurisdiction will render all other accompanying defenses and motions moot." United States v. Space Hunters, Inc., 2001 WL 968993 at *3 (S.D.N.Y.2001) (Casey, J); see United States ex rel Kreindler & Kreindler v. United Techs. Corp., 985 F.2d 1148, 1155-56 (2d Cir.1993), cert. denied sub nom Kreindler & Kreindler v. United Techs. Corp., 508 U.S. 973, 113 S.Ct. 2962, 125 L.Ed.2d 663 (1993). In this case, however, Defendants' 12(b)(1) motion relates solely to Plaintiffs' state law claims, requesting their dismissal for lack of supplemental jurisdiction should the Plaintiffs' federal claims be dismissed. It is therefore necessary to consider the substance of Defendants' claims, and render a decision on 12(b)(6) grounds, before returning to the 12(b)(1) motion.

2. Motion to Dismiss Pursuant to Rule 12(b)(6)

On a motion to dismiss pursuant to Rule 12(b)(6), "a court must accept as true all well-pleaded factual allegations of the complaint and must draw all inferences in favor of the pleader." Dafofin Holdings S.A. v. Hotelworks.com, Inc., 2001 WL 940632 at *2 (S.D.N.Y.2001) (Preska, J). Mere "[c]onclusory allegations or legal conclusions masquerading as factual conclusions" will not suffice to avoid dismissal. Gebhardt v. Allspect, Inc., 96 F.Supp.2d 331, 333 (S.D.N.Y.2000) (Conner, J) (quoting 2 James Wm. Moore et al., Moore's Federal Practice § 12.34[a][b] (3d ed.1997)). A motion for dismissal should be granted only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); accord Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir.1994).

3. Section 12(a)(2) Claims Under the 1933 Act.

Section 12(a)(2) of the Securities Act of 1933 imposes liability on any person who "offers or sells a security ... by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements ... not misleading."

Defendants argue that plaintiffs lack standing to sue under Section 12(a)(2) of the Securities Act of 1933, since that section applies only to the initial public offering of stock, not to secondary private offerings. See Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 576, 115 S.Ct. 1061, 1070, 131 L.Ed.2d 1 (1995).¹ In Gustafson, the Court held that the term "prospectus," as it is used in Section 12(a)(2), "is confined to documents related to public offerings by an issuer or its controlling shareholders." Gustafson at 569, 115 S.Ct. 1061. Plaintiffs counter that they have alleged misrepresentations made by oral communications, not by a prospectus, and that this case is therefore distinguishable from Gustafson. They point out that, while the Gustafson Court noted agreement amongst the Courts of Appeals that "the phrase `oral communications' is restricted to oral communications that relate to a prospectus," Gustafson at 567-568, 115 S.Ct. 1061, the Court did not analyze the issue and thus ruled only on the meaning of the term "prospectus."

In this District, courts have consistently interpreted Gustafson to hold that the term "oral communication" in Section 12(a)(2) is a "communication that relates to a public written communication, such as a prospectus." Dietrich v. Bauer, 76 F.Supp.2d 312, 330 (S.D.N.Y.1999) (Sweet, J); accord Waltree Ltd. v. ING Furman Selz LLC, 97 F.Supp.2d 464, 469-70 (S.D.N.Y.2000) (Scheindlin, J); Double Alpha, Inc. v. Mako Partners, L.P., 2000 WL 1036034, at *3 (S.D.N.Y.2000) (Chin, J). Furthermore, in Laser Mortgage Mgmt. Inc. v. Asset Securitization Corp., 2001 WL 1029407 (S.D.N.Y.2001) (Buchwald, J), the court noted that "Gustafson suggests that the purpose of Section 12 is to protect public purchasers of securities ... [t]hat purpose would not be served by extending liability to those who purchase securities in private placements." Laser Mortgage at *7.

Here, the oral communications alleged by Plaintiffs to have contained misrepresentations did not pertain to a prospectus. Furthermore, the securities...