Schaffer Family Investors, LLC v. Sonnier

• Decision Date: 13 August 2015
• Docket Number: CASE NO. 2:13-CV-5814-SVW (JEMx)
• Citation: 120 F.Supp.3d 1028
• Court: U.S. District Court — Central District of California
• Parties: Schaffer Family Investors, LLC, a Delaware limited liability company; and Robert Schaffer, an individual, Plaintiffs, v. Lee Sonnier, an individual; Kris Melancon, an individual; Pinacle Oil & Gas, LLC, a Louisiana limited liability company; Lemel Petroleum, LLC, a Louisiana limited liability company; and Does 1 through 10, inclusive, Defendants.

120 F.Supp.3d 1028

Schaffer Family Investors, LLC, a Delaware limited liability company; and Robert Schaffer, an individual, Plaintiffs,

v.Lee Sonnier, an individual; Kris Melancon, an individual; Pinacle Oil & Gas, LLC, a Louisiana limited liability company; Lemel Petroleum, LLC, a Louisiana limited liability company; and Does 1 through 10, inclusive, Defendants.

CASE NO. 2:13-CV-5814-SVW (JEMx)

United States District Court, C.D. California.

Signed August 13, 2015

Raymond O. Aghaian, Kilpatrick Townsend and Stockton LLP, Beverly Hills, CA, Jeffrey D. Wexler, Jennifer A. Seigle, Pillsbury Winthrop Shaw Pittman LLP, Los Angeles, CA, for Plaintiffs.

Scott L. Baker, Yuval Mordechai Rogson, Baker & Associates, Vasko Charles Alexander, VC Alexander Law, Los Angeles, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT LEE SONNIER'S MOTION TO DISMISS SECOND AMENDED COMPLAINT [67]

STEPHEN V. WILSON United States District Judge

I. INTRODUCTION

This case arises from Plaintiffs' investments in oil, gas, and mineral royalty and leasehold interests ("OGM Royalty Interests")—allegedly made with and through Defendants. Plaintiffs assert that Defendants' slick talking induced Plaintiffs to pump money into purportedly misrepresented investment opportunities.

On May 9, 2013, Plaintiffs filed suit in this Court. On November 26, 2014, the Court dismissed without prejudice Plaintiffs' federal securities claims because Plaintiffs failed to plead the existence of a security. (Dkt. 61: Order at 8-10.) The Court also stayed Plaintiffs' state law claims pending resolution of the viability of their federal claims, which were the sole basis for this Court's jurisdiction. (Id. at 10–11.)

On December 24, 2014, Plaintiffs filed their Second Amended Complaint ("SAC").¹ (Dkt. 62.) The SAC asserts claims against Sonnier for: (1) selling unregistered securities, 15 U.S.C. § 77e(a), 77l(a) ; (2) federal securities fraud, 15 U.S.C. § 78j and 17 C.F.R. § 240.10b-5 ("Rule 10b-5"); (3) selling unregistered securities in violation of Cal. Corp. Code §§ 25110, 25504.1 ; (4) California securities fraud, Cal. Corp. Code §§ 25401, 25504.1 ; (5) fraud; (6) breach of fiduciary duty—joint venturers; (7) breach of fiduciary duty—agent; (8) breach of written contract—purchases of OGM Royalty Interests; (9) breach of verbal contract—agency agreement; (10) violation of California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code §§ 17200 et seq. ; (11) "Accounting"; (12) selling unregistered securities in violation of Louisiana law, La. Rev. Stat §§ 51:714, 51:712(A)(1), 51:705 ; and (13) Louisiana securities fraud, La. Rev. Stat. §§ 51:714, 51:712(A)(2), 51:712(D).

Presently before the Court is Sonnier's motion to dismiss Plaintiffs' SAC (Dkt. 67.) For the reasons discussed below, the Court GRANTS IN PART and DENIES IN PART Sonnier's motion.

II. FACTUAL AND PROCEDURAL BACKGROUND

Because the facts underlying this case are complex, and Sonnier's motion turns on the sufficiency of the pleadings, the Court here recounts the complaint's allegations in detail.²

A. The Main Actors

Plaintiff Robert Schaffer ("Schaffer") was the first plaintiff to invest in the purportedly fraudulent scheme. Schaffer also brought his father, Herbert Schaffer ("Herbert"), into the alleged fraud. (SAC ¶ 25.) Herbert is plaintiff Schaffer Family Investors, LLC's ("SFI") representative. (Id. ) Herbert invested with the purported fraudsters on SFI's behalf.

Sonnier is the purported double-agent middleman at the center of the scheme. He allegedly induced Schaffer and SFI to make investments through him. (SAC ¶¶ 15–31.) He orchestrated deals between Sonnier and the other Defendants. Supposedly, in the course of facilitating these transactions, he defrauded both sides of the deals.

Defendant Kris Melancon ("Melancon") is allegedly a highly experienced Louisiana landman. (SAC ¶ 15.) Melancon was the purported brains behind the investments. See, e.g. , (SAC ¶ 14–15.) Defendants Pinnacle Oil & Gas, LLC ("Pinnacle") and Lemel Petroleum, LLC ("Lemel") (collectively with Melancon, the "Melancon defendants") are entities connected to Melancon.

B. The Alleged Fraudulent Scheme

In September 2007, Schaffer met Sonnier through a mutual friend. (SAC ¶ 12.) Shortly thereafter, at another meeting with Schaffer and the mutual friend, Sonnier allegedly stated that:

(a) he was a retired attorney who came from a family of extensive wealth; (b) he was interested and active in various investment and business activities; (c) years earlier he had been a participant in an investment group comprised of engineers, accountants, investors, and other attorneys; and (d) such group had successfully invested in various deals throughout the years.

(Id. ) After this meeting, Schaffer, Sonnier, and the mutual friend sporadically looked at potential investments. (SAC ¶ 13.)

Around July 2008, Sonnier contacted Schaffer about an investment opportunity with Melancon. (SAC ¶¶ 14–15.) Sonnier claimed that he had close ties with Melancon, who he described as a highly experienced Louisiana landman. (SAC ¶ 15.) Sonnier claimed that Melancon was in the business of investing in OGM Royalty Interests with his own funds and with money raised from others. (Id. ) Sonnier also said that Melancon had extensive connections in and "special knowledge" of the oil and gas business. (Id. )

1. Inception of the Purported Fraudulent Scheme

Sonnier offered Schaffer an opportunity to co-invest in "the same OGM Royalty Interests and in the same amount in which Sonnier, and/or his immediate family, would be investing[.]" (SAC ¶ 17.) He told Schaffer that "Melancon would be investing in the same OGM Royalty Interests in an amount equal to what both Schaffer and Sonnier were investing[.]" (Id. ) Thus, Sonnier and Schaffer would each acquire one fourth of the OGM Royalty Interests and Melancon would acquire the remaining one-half interest. (Id. ) Based on these representations, Schaffer "entered into a verbal agency agreement for Sonnier to serve as Schaffer's agent to evaluate, recommend, acquire, verify, and administer on Schaffer's behalf the same OGM Royalty Interests being purchased by Melancon and Sonnier as offered by the Melancon parties." (SAC ¶ 18.)

2. The Flow of Assets and the Kickback Scheme

Plaintiffs allege that the transactions "generally followed the same path." (SAC ¶ 45.) First, the Melancon defendants would identify a property where oil, gas, or mineral production had commenced or was believed to be imminent (because of nearby producing wells or other circumstances). (Id. ) The Melancon defendants would then offer to purchase a fractional interest in the OGM royalty interests from those interests' owners. (Id. ) At that point, the Melancon defendants would tell Sonnier that they had OGM Royalty Interests available for purchase by one or both Plaintiffs. (Id. ) Sonnier, allegedly representing that he was Plaintiffs' agent while actually acting as the Melancon defendants' agent, would then represent to Plaintiffs that he and the Melancon defendants were purchasing fractional undivided interests in the OGM Royalty Interests. (Id. ) He would then "offer Plaintiffs the opportunity to purchase from the Melancon Parties fractional undivided interests in the OGM Royalty Interests." (Id. )

Sonnier also allegedly represented that: (1) Plaintiffs' purchase price would be either the Melancon defendants' actual purchase cost (for Schaffer's purchases before SFI became involved) or the actual purchase cost plus a 3 percent markup (for purchases with SFI); (2) Sonnier and the Melancon defendants (or their related entities or family members) would each invest at least an equal amount and acquire at least an equal interest in the OGM Royalty Interests; and (3) other than the 3 percent mark-up, there would be "no other financial benefit to Schaffer, Melancon, or Sonnier, except for the benefit, shared jointly, of acquiring OGM Royalty Interests on more favorable terms as a result of making combined purchases." (SAC ¶¶ 20, 28, 45.) Plaintiffs assert that while they were free to decide whether to purchase the OGM Royalty Interests, they were entirely dependant on the Melancon defendants' and Sonnier's recommendations of which interests to acquire. (SAC ¶ 46.)

Each transaction was allegedly documented in "substantially the same way." (SAC ¶ 47.) First, one of the Melancon defendants purchased from the OGM Royalty Interest owner (often a landowner) a fractional undivided interest in the OGM Royalty Interest. (Id. ) This purchase was made by a royalty deed signed by the purchaser and the seller. (Id. ) The deed expressed the purchaser's interest as a fraction or percentage of "⁸/₈ths of the whole of any oil, gas or mineral, except sulphur, on and under to be produced from said lands [.]" (Id. )

The Melancon defendants then "typically sent e-mails to Sonnier identifying by location, royalty acres, price per royalty acre, and status of development the OGM Royalty Interests that they had available for sale." (SAC ¶ 48.) Sonnier allegedly sent to Plaintiffs what he represented to be forwarded emails from the Melancon defendants, "adding his own comments and recommendations[.]" (Id. ) However, Sonnier purportedly "often" altered the "forwarded" e-mails from the Melancon defendants by "for example, revising the e-mails to inflate the price per royalty acre or to make it appear that Sonnier would also be purchasing fractional undivided interests in the OGM Royalty Interests." (Id. ) If a Plaintiff agreed to purchase an Interest, Sonnier would send that Plaintiff an invoice, which Plaintiffs would then pay to one of the Melancon defendants. (Id. ) One the invoice was paid, the Melancon defendants would prepare an Assignment of Royalty Interests. (SAC ¶ 49.) Pursuant to these assignments, Plaintiffs received a fractional undivided interest in the underlying fractional undivided interest that the Melancon defendants had acquired from the OGM Royalty Interest...