Margaritis v. Vast Mountain Dev.

• Decision Date: 18 January 2022
• Docket Number: CV-20-00807-PHX-DLR
• Parties: William Margaritis, Plaintiff, v. Vast Mountain Development Incorporated, et al., Defendants.
• Court: U.S. District Court — District of Arizona

William Margaritis, Plaintiff,
v.
Vast Mountain Development Incorporated, et al., Defendants.

No. CV-20-00807-PHX-DLR

United States District Court, D. Arizona

January 18, 2022

ORDER

Douglas L. Rayes United States District Judge

Plaintiff William Margaritis alleges that he invested $850, 000 plus labor in Defendant Vast Mountain Development Incorporated's (“VMD”) Congress Mine Gold & Silica Recycling Project (“the Project”) in exchange for a fractional working interest in the Project. Margaritis claims he was led to be believe that gold extraction would be a significant component of the Project. He alleges that VMD-through two officers and directors, Defendants John Owen and Michael Galvis-knew at the time it solicited his investment that gold extraction was unlikely ever to occur because of environmental and regulatory obstacles to acquiring the necessary permits, continually misled him about the status of the gold extraction component of the Project, and misused the funds he invested. Margaritis' First Amended Complaint (“FAC”) brings claims against all three Defendants for federal and state law securities fraud, common law fraud, negligence, and negligent misrepresentation. The FAC also brings a breach of fiduciary duty claim against Owen

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and Galvis.^[1] (Doc. 16.) Defendants have moved to dismiss Margaritis' FAC in its entirety under Federal Rule of Civil Procedure 12(b)(6). (Doc. 22.) The motion is fully briefed (Docs. 23, 25) and the Court heard oral argument on April 6, 2021. For reasons explained below, the motion will be granted in part and denied in part.

I. Legal Standard

When analyzing a complaint for failure to state a claim to relief under Rule 12(b)(6), the Court accepts well-pled factual allegations as true and construes them most favorably to the nonmoving party. Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009). The Court does not accept conclusions couched as factual allegations, Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009), or “allegations that contradict matters properly subject to judicial notice[.]” Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). To avoid dismissal, the complaint must plead sufficient facts to state a claim to relief that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). In addition, Federal Rule of Civil Procedure 9(b) requires a plaintiff to allege fraud with particularity. “Averments of fraud must be accompanied by the who, what, when, where, and how of the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003). However, “[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” Fed.R.Civ.P. 9(b).

II. Discussion

A. Fraud Claims

Count I alleges federal securities fraud in violation of 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5. This claim requires Margaritis to plead (1) a material misrepresentation or omission of material fact; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.

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Kui Zhu v. Taronis Technologies, Inc., No. CV-19-04529-PHX-GMS, 2020 WL 1703680, at *3 (D. Ariz. Apr. 8, 2020). Count II alleges securities fraud under A.R.S. § 44-1991, which prohibits “employ[ing] any device, scheme or artifice to defraud . . . [or] [m]aking any untrue statement of material fact, or omit[ting] to state any material fact necessary in order to make the statements made . . . not misleading” in connection with the sale or purchase of securities. The elements of this claim are largely the same as a federal securities fraud claim, except Margaritis is not required to plead economic loss. See Aaron v. Fromkin, 994 P.2d 1039, 1043 (Ariz.Ct.App. 2000). Count III alleges a common law fraud claim. This claim requires Margaritis to plead the following nine elements: (1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted upon by and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) his reliance on the truth; (8) his right to rely thereon; and (9) his consequent and proximate injury. Peery v. Hansen, 585 P.2d 574, 577 (Ariz.Ct.App. 1978). The Court addresses these claims together because Defendants' arguments for dismissal overlap. (Doc. 22 at 5, 9.)

1. Puzzle Pleading

Defendants argue that the fraud claims must be dismissed because the FAC engages in impermissible “puzzle pleading, ” in that it requires Defendants “to comb through the complaint and determine which allegations correspond to the alleged claims.” Facciola v. Greenberg Traurig, LLP, 781 F.Supp.2d 913, 920 (D. Ariz. 2011). The Court disagrees. Although the FAC is not a model of clarity, it “is neither rambling nor confusing, ” nor is it “so unruly” that it would be difficult for Defendants “to determine which allegations support which claims[.]” Id. at 921. Indeed, Defendants appear to have had no difficulty identifying the particular representations upon which Margaritis' fraud claims are based.

2. False Representations

Defendants raise several arguments as to why the FAC fails to allege actionable false statements.

First, Defendants argue that the FAC mischaracterizes the representations about

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gold production. (Doc. 22 at 6.) This is a fair critique. The nature of the Project and Margaritis' investment are described in two documents: the Working Interest Purchase and Sale Agreement (“the Agreement”) and the Sales Memorandum (“the Memo”), which functioned much like a business plan.^[2] (Doc. 16 ¶ 19.) The Agreement states that VMD's “Plan of Operations” is “to recover and profitably sell gold, silica and other valuable metals and minerals[.]” (Doc. 22 at 22.) The Memo states that “[t]he Congress Tailings have two potential values, as a silica sand and the contained gold values.” (Id. at 47.) It estimates that the Project could yield 100, 350 ounces of recoverable gold, 295, 290 ounces of recoverable silver, and 1.57 million tons of silica, which could be sold for $1, 000 per ounce, $14 per ounce, and $50 per ton, respectively. (Doc. 22 at 39, 50.) The FAC takes liberties in describing the content of these documents. For example, the FAC alleges that the Agreement and Memo state “gold extraction was the primary purpose, central component and main operation of the Project, ” that the Memo “state[s] that gold extraction from the Congress Mine Tailings would be the primary revenue driver for the Project, ” and that the Memo “expressly describe[s] the returns that [Margaritis] . . . could expect to receive based almost solely on the value of the gold to be extracted.” (Doc. 16 ¶¶ 20, 24, 25.) Although the Agreement and Memo fairly describe gold as one component of the Project and a significant portion of projected revenue, the FAC's allegations are hyperbolic.

In his response in opposition to Defendants' motion to dismiss, Margaritis wisely tempers his descriptions and clarifies that his “claim is not that defendants promised gold production would be the ‘sole' or ‘primary' aspect of the Project, but it turned out to be something less than that. . . . Instead, [Margaritis'] claim is that, at the time Defendants represented that gold production was a central purpose of the project . . . they knew that gold production was likely to never occur[.]” (Doc. 23 at 8-9.) The Court will not get bogged down in an argument over semantics, nor will it dismiss a complaint on account of hyperbole. The FAC, as clarified by the response brief, can be fairly read as claiming that,

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collectively, the statements and projections in the Agreement and Memo conveyed to Margaritis that gold excavation would be one of the Project's main purposes and would account for a significant portion of the projected revenue. (Doc. 16 ¶¶ 20, 24, 25, 37; Doc. 23 at 11.)

Second, Defendants argue these statements regarding gold extraction are not actionable because they are forward-looking statements. (Doc. 22 at 7.) But forward-looking statements are actionable if the speaker knows at the time that they are false or misleading, or if the speaker is aware of undisclosed facts that seriously undermine the accuracy of the statement. See, e.g., Hanon v. Dataproducts Corp., 976 F.2d 497, 501 (9th Cir. 1992); Allstate Life Ins. Co. v. Robert W. Baird & Co., 756 F.Supp.2d 1113, 1165 (D. Ariz. 2010); 15 U.S.C.A. § 78u-5(c)(1)(A). Here, Margaritis alleges that Defendants knew at the time they solicited his investment that gold extraction was unlikely to ever occur because of environmental and regulatory obstacles to securing the necessary permits. (Doc. 16 ¶¶ 34-35, 79-84.) At this stage, the Court must accept Margaritis' allegations as true.

Third, Defendants argue that post-investment representations demonstrate that Defendants made a business decision to focus on silica, rather than gold, because of increased market demand. (Doc. 22 at 7.) Although this might prove to be a meritorious defense at a later stage of this litigation, it does not require dismissal of Margaritis' fraud claims. Margaritis alleges that Defendants fabricated their silica sales to divert attention from the lack of progress on the gold excavation aspects of the Project. (Doc. 16 ¶¶ 60-61, 74-76.) These allegations might later prove false, but at this stage the Court must accept them as true.

Fourth, Defendants argue that Margaritis' allegations concerning permit approval are not actionable because these statements were true when made. (Doc. 22 at 7-8.) Again, this might prove to be a...