Muncy v. Intercloud Sys., Inc., Civil Action No. 14–111–DLB.

• Decision Date: 10 March 2015
• Docket Number: Civil Action No. 14–111–DLB.
• Citation: 92 F.Supp.3d 621
• Parties: Robert B. MUNCY, Jr., Plaintiff v. INTERCLOUD SYSTEMS, INC., et al., Defendants.
• Court: U.S. District Court — Eastern District of Kentucky

92 F.Supp.3d 621

Robert B. MUNCY, Jr., Plaintiff

v.INTERCLOUD SYSTEMS, INC., et al., Defendants.

Civil Action No. 14–111–DLB.

United States District Court, E.D. Kentucky, Central Division at Lexington.

Signed March 10, 2015.

Eva Christine Trout, Trout Law Office, PLLC, Lexington, KY, J. Kent Wicker, Dressman Benzinger Lavelle PSC, Louisville, KY, for Plaintiff.

Culver V. Halliday, Stoll, Keenon & Ogden, PLLC, Louisville, KY, Eric D. Dowell, Scott C. Ross, Pryor Cashman LLP, New York, NY, for Defendants.

MEMORANDUM OPINION AND ORDER

DAVID L. BUNNING, District Judge.

Plaintiff Robert Muncy alleges that Defendant InterCloud Systems, Inc. violated federal and state securities laws when Defendant Billy Caudill and former-Defendant Russell Cornett¹ sold him InterCloud stock. InterCloud contends that it is not liable for Caudill's and Cornett's actions and has moved to dismiss under Fed.R.Civ.P. 12(b)(2) for lack of personal jurisdiction and Fed.R.Civ.P. 12(b)(6) for failure to state a claim. This matter is fully briefed and ripe for review. (Docs. 20, 23, 27). For the following reasons, the Court will deny InterCloud's Rule 12(b)(2) motion, and grant in part and deny in part its Rule 12(b)(6) motion.

I. Factual and Procedural Background

The following facts are taken either from the Plaintiff's Amended Complaint or from relevant public records and corporate filings. Bovee v. Coopers & Lybrand C.P.A., 272 F.3d 356, 360–61 (6th Cir.2001) (“[T]his Court may consider the full text of the SEC filings, prospectus, analysts' reports and statements ‘integral to the complaint,’ even if not attached, without converting the [Rule 12(b)(6) ] motion into one for summary judgment.”).

In October 2012, Plaintiff Robert Muncy, D.M.D., met with Defendant Billy Caudill and former-Defendant Russell Cornett at a restaurant in Lexington, KY. (Doc. # 11 at ¶ 12). Caudill is the former President of Genesis Group Holdings Company, which changed its name to InterCloud in January 2013.² (Doc. # 20 at Exs. A, D). InterCloud is a Delaware Corporation that engages in internet data storage and has its principal office in New Jersey. (Doc. # 11 at ¶ 3). Caudill joined Genesis in 2010 when it acquired Defendant Digital Comm., Inc. (Doc. # 20, Ex. B at 1). At all relevant times, Caudill has served as Digital's chief executive officer and Cornett as Digital's Vice President of Public Relations. (Doc. # 11 at ¶¶ 5, 6). In September 2012, approximately one month before the meeting in Lexington, Genesis terminated Caudill and sold a majority of its Digital shares. (Doc. # 20, Exs. A, B).

At the October 2012 meeting, Caudill and Cornett informed Muncy of their positions at Digital. (Doc. # 11 at ¶ 12). They provided Muncy with business cards that corroborated their titles and that stated Digital was a “Genesis Group Holdings Company.” (Id. ). According to Muncy, Caudill and Cornett represented that they were authorized to speak on Genesis' behalf. (Id. ) The pair told Muncy that they were giving him an opportunity to invest in Genesis before it undertook an initial public offering (IPO) and that Muncy would “realize a substantial profit.” (Id. at ¶ 13). Muncy contends that these statements were false and asserts that Caudill and Cornett failed to advise him of material facts necessary to make their statements not misleading. (Id. at ¶¶ 14, 16).

On October 24, 2012, Muncy signed a Subscription Agreement and Confidential Investor Questionnaire. (Id. ). The agreement was also signed by Caudill and stated it was accepted by Digital, “a division of Genesis.” (Id. at ¶ 18). Muncy purchased 500,000 shares of Genesis stock at $.10 per share (Id. at ¶ 17), but does not plead to whom he made the $50,000 payment. Genesis mailed a stock certificate to Muncy's home in Lexington, KY, which evidenced his ownership of 500,000 shares of Genesis stock. (Id. at ¶ 20). In October 2013, after Genesis changed its name to InterCloud, it underwent an Initial Public Offering (IPO) on the NASDAQ. (Doc. # 20 at Ex. E).

Muncy has attempted to have InterCloud rescind his stock purchase to no avail. (Doc. # 11 at ¶ 24). He now brings suit against Intercloud alleging violations of § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Kentucky's Blue Sky Laws, Ky.Rev.Stat. §§ 292.320, 292.330, 292.340, 292.480. Additionally, he asserts state law claims for fraud, negligent misrepresentation, unjust enrichment, and civil conspiracy.

II. Analysis

A. Standard of Review

Different standards of review and burdens of proof apply to the individual claims and grounds for dismissal, differences that are dispositive.

When a defendant brings a Rule 12(b)(2) motion, the burden is on the plaintiff to establish personal jurisdiction. Theunissen v. Matthews, 935 F.2d 1454, 1458 (6th Cir.1991). The plaintiff cannot meet his burden by simply pointing to the pleadings, “but must, by affidavit or otherwise, set forth specific facts showing that the court has jurisdiction.” Id. A court views the pleadings and affidavits in the light most favorable to the plaintiff and “does not weight the controverting assertions of the party seeking dismissal.” Id. at 1459. When the court has not conducted an evidentiary hearing,³ a plaintiff need only make a prima facie showing of personal jurisdiction, Neogen Corp. v. Neo Gen Screening, Inc., 282 F.3d 883, 887 (6th Cir.2002), making his burden “relatively slight,” Estate of Thomson v. Toyota Motor Corp. Worldwide, 545 F.3d 357, 360 (6th Cir.2008). Surviving a Rule 12(b)(2) motion does not relieve a plaintiff of his burden to prove jurisdiction by a preponderance of the evidence, should the defendant later raise the issue. Serras v. First Tennesse Bank Nat. Ass'n, 875 F.2d 1212, 1214 (6th Cir.1989).

On a Rule 12(b)(6) motion to dismiss, a court construes the complaint in the light most favorable to the plaintiff, accepts the factual allegations as true, and determines whether the plaintiff can prove any set of facts that would entitle him to relief. Bovee, 272 F.3d at 360. To survive a motion to dismiss, a complaint must contain more than “a formulaic recitation of a cause of action's elements”; rather, there must be “enough facts to state a claim to relief that is plausible,” i.e. “above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

The fraud based claims are subject to Fed.R.Civ.P. 9(b). This rule requires a plaintiff to: “(1) specify the allegedly fraudulent statements; (2) identify the speaker; (3) plead when and where the statements were made; and (4) explain what made the statements fraudulent.” Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239, 247 (6th Cir.2012). Under Rule 9(b), “conditions of a person's mind may be alleged generally,” but a plaintiff must plead facts that “make the state-of-mind allegation ‘plausible on its face.’ ” Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) ). Rule 9(b)'s standard applies to Muncy's § 10(b), Ky.Rev.Stat. § 292.320, common-law fraud, and negligent misrepresentation claims. Id. at 248.

Muncy's § 10(b) and Ky.Rev.Stat. § 292.320 claims are also subject to the Private Securities Litigation Reform Act (PSLRA), which requires that he (1) “specify each statement alleged to have been misleading” along with “the reason or reasons why the statement is misleading,” and (2) “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u–4(b)(1)–(2).

B. Muncy has made a plausible showing of apparent authority

A threshold issue touches upon all others: whether it is plausible that Caudill and Cornett acted with InterCloud's apparent authority. InterCloud moves to dismiss all claims under the theory that it is not responsible for any of the acts alleged in the complaint. (Doc. # 20 at 9, 11). InterCloud argues that Caudill and Cornett were not its agents at the October 2012 meeting because, a month prior, it terminated Caudill and sold a majority of its Digital shares. (Id. at 11, 12). In the alternative, InterCloud argues that Caudill's and Cornett's actions cannot be imputed to it because the stock sale involved a purely private transaction. (Id. at 13). Muncy's response is that Caudill and Cornett acted under InterCloud's apparent authority.

Because the events took place in Kentucky, the Court applies Kentucky agency law. See Belmont v. MB Inv. Partners, Inc., 708 F.3d 470, 494 (3d Cir.2013) (stating that “[a]lthough the Investors' underlying securities fraud claims are governed by federal law, the issue of imputation is determined by state law” (citing O'Melveny & Myers v. Fed. Deposit Ins. Corp., 512 U.S. 79, 84–85, 114 S.Ct. 2048, 129 L.Ed.2d 67 (1994) )). An apparent agent “is one whom the principal, either intentionally or by want of ordinary care, induces third persons to believe to be his agent, although he has not, either expressly or by implication, conferred authority upon him.” Middleton v. Frances, 257 Ky. 42, 77 S.W.2d 425, 426 (1934). Importantly, there does not need to be “direct contact between the principal and the third party asserting apparent authority.” Dierig v. Lees Leisure Industries, Ltd., No. 11–125–DLB–JGW, 2012 WL 669968, at *6 (E.D.Ky. Feb. 28, 2012) (citing Papa John's Int'l, Inc. v. McCoy, 244 S.W.3d 44, 58 (Ky.2008) (Lambert, C.J., dissenting)).

The Kentucky Supreme Court recently gave the following definition of apparent authority:

Apparent authority ... is created by a person's manifestation that another has authority to act with legal consequences for the person who makes the manifestation, when a third party reasonably believes the actor to be authorized and the belief is traceable to the manifestation.

Mark D. Dean, P.S.C. v. Commonwealth Bank & Trust Co., 434 S.W.3d 489, 499 (Ky.2014) (citing Restatement (Third) of Agency § 3.03 (2006) ). Accordingly, the Court must determine whether it is...