Sec. & Exch. Comm'n v. Sky Grp. U.S.

• Decision Date: 02 February 2022
• Docket Number: 21-cv-23443-BLOOM/Otazo-Reyes
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. SKY GROUP USA LLC; EFRAIN BETANCOURT, JR.; Defendants, and ANGELICA BETANCOURT; AND EEB CAPITAL GROUP, LLC, Relief Defendants.
• Court: U.S. District Court — Southern District of Florida

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
SKY GROUP USA LLC; EFRAIN BETANCOURT, JR.; Defendants,

and ANGELICA BETANCOURT; AND EEB CAPITAL GROUP, LLC, Relief Defendants.

No. 21-cv-23443-BLOOM/Otazo-Reyes

United States District Court, S.D. Florida

February 2, 2022

ORDER ON MOTION TO DISMISS

BETH BLOOM, UNITED STATES DISTRICT JUDGE.

THIS CAUSE is before the Court upon Defendants Sky Group USA, LLC (“Sky Group”) and Efrain Betancourt, Jr.'s (“Betancourt”) (collectively, “Defendants”) Motion to Dismiss Complaint, ECF No. [23] (“Motion”). Plaintiff Securities and Exchange Commission (“Plaintiff” or “SEC”) filed a Response in Opposition, ECF No. [28] (“Response”), to which Defendants filed a Reply, ECF No. [33] (“Reply”). The Court has carefully reviewed the Motion, the record in this case, the applicable law, and is otherwise fully advised. For the reasons set forth below, the Motion is denied.

I. BACKGROUND

The SEC initiated this action on September 27, 2021 against Defendants for violations of the Securities Act and Exchange Act (“Securities Acts”). See ECF No. [1]. According to the SEC's Complaint, Betancourt is the Chief Executive Officer, managing member, and sole owner of Sky Group. See Id. ¶ 7. The SEC alleges that, from January 2016 to March 2020, Defendants

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fraudulently raised more than $66 million from at least 505 investors by promising to use the investments to finance Sky Group's business of offering short-term “payday” loans to consumer borrowers. Id. at ¶¶ 1-2. The investors signed an instrument called a “Loan Agreement and Promissory Note” (“Note”) in which the investors agreed to provide Sky Group funds in return for interest payments each month and the principal after one year. Id. ¶ 17. Defendants used significant portions of investor funds for purposes other than financing payday loans. Id. at ¶¶ 18-19. Specifically, Defendants used the funds for business operations, sales agent commissions, personal expenses for Betancourt, and Ponzi-like repayments to earlier investors. Id. at ¶¶ 19-20. Defendants only used approximately twenty (20) percent of the funds for payday loans. Id. ¶ 20.

On December 10, 2021, Defendants filed the instant Motion to Dismiss pursuant to Rule 12(b)(1). See ECF No. [23]. Defendants contend that the Court lacks subject matter jurisdiction because the Notes bear a “family resemblance” to instruments that the Supreme Court has exempted from the Securities Acts. See Id. at 4-5 (citing Reves v. Ernst & Young, 494 U.S. 56 (1990)). On December 23, 2021, the SEC filed its Response, arguing that the Court has subject matter jurisdiction because the Notes do not bear a “family resemblance” to the exempted instruments. See generally ECF No. [28]. SEC further argues that the Court has subject matter jurisdiction under the Howey test set forth in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). See Id. at 16-17. On January 7, 2022, Defendants' Reply followed. See generally ECF No. [33].

II. LEGAL STANDARD

A Rule 12(b)(1) motion challenges the district court's subject matter jurisdiction and takes one of two forms: a “facial attack” or a “factual attack.” McElmurray v. Consol. Gov't of Augusta-Richmond Cnty., 501 F.3d 1244, 1251 (11th Cir. 2007). “A ‘facial attack' on the complaint ‘require[s] the court merely to look and see if [the] plaintiff has sufficiently alleged a basis of

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subject matter jurisdiction, and the allegations in his complaint are taken as true for the purposes of the motion.'” McElmurray, 501 F.3d at 1251 (quoting Lawrence v. Dunbar, 919 F.2d 1525, 1529 (11th Cir. 1990)). “A ‘factual attack,' on the other hand, challenges the existence of subject matter jurisdiction based on matters outside the pleadings.” Kuhlman v. United States, 822 F.Supp.2d 1255, 1256-57 (M.D. Fla. 2011) (citing Lawrence, 919 F.2d at 1529); see Stalley ex rel. U.S. v. Orlando Reg'l Healthcare Sys., Inc., 524 F.3d 1229, 1233 (11th Cir. 2008) (“By contrast, a factual attack on a complaint challenges the existence of subject matter jurisdiction using material extrinsic from the pleadings, such as affidavits or testimony.”).

Therefore, “[i]n assessing the propriety of a motion for dismissal under Fed.R.Civ.P. 12(b)(1), a district court is not limited to an inquiry into undisputed facts; it may hear conflicting evidence and decide for itself the factual issues that determine jurisdiction.” Colonial Pipeline Co. v. Collins, 921 F.2d 1237, 1243 (11th Cir. 1991). Further, “[w]hen a defendant properly challenges subject matter jurisdiction under Rule 12(b)(1), the district court is free to independently weigh facts, and ‘may proceed as it never could under Rule 12(b)(6) or Fed.R.Civ.P. 56.'” Turcios v. Delicias Hispanas Corp., 275 Fed.Appx. 879, 880 (11th Cir. 2008) (quoting Morrison v. Amway Corp., 323 F.3d 920, 925 (11th Cir. 2003)). “In short, no presumptive truthfulness attaches to plaintiff's allegations, and the existence of disputed material facts will not preclude the trial court from evaluating for itself the merits of the jurisdictional issue.” Morrison, 323 F.3d at 925 (quoting Lawrence, 919 F.2d at 1529).

However, a court may independently weigh facts and find that it lacks subject matter jurisdiction only “if the facts necessary to sustain jurisdiction do not implicate the merits of plaintiff's cause of action.” Morrison, 323 F.3d at 925 (citation omitted) (emphasis in original). When a jurisdictional challenge implicates the merits of plaintiff's claim, the court must “find that

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jurisdiction exists and deal with the objection as a direct attack on the merits of the plaintiff's case.” Id. (citations omitted). According to the Eleventh Circuit, this ensures “a greater level of protection for the plaintiff who in truth is facing a challenge to the validity of his claim: the defendant is forced to proceed under Rule 12(b)(6) . . . or Rule 56 . . . both of which place great restrictions on the district court's discretion.” Id. (citations omitted) (alterations in original); see also SEC v. LeCroy, No. 2:09-CV-2238-AKK, 2010 WL 11565305, at *2 (N.D. Ala. Aug. 4, 2010).

III. DISCUSSION

a. Standard for Evaluating Subject Matter Jurisdiction

The Court must first determine the standard of review for the instant Motion. See ECF No. [23] at 2. Defendants argue that the Court should consider matters outside the pleadings and that no presumptive “truthfulness” attaches to the SEC's factual allegations. Id. at 2-3 (quoting Lawrence, 919 F.2d at 1529). The SEC claims that Defendants are making a factual, rather than a facial, challenge to the Court's subject matter jurisdiction, and the SEC may therefore introduce additional facts. See ECF No. [28] at 2. The SEC further argues that factual disputes should be resolved in favor of the SEC as they would be under a summary judgment motion. See Id. Defendants reply that the SEC's argument is mistaken because although Defendants make a factual challenge - thus allowing the Court to consider extrinsic evidence - the Court should not resolve factual disputes in the SEC's favor. See ECF No. [33] at 2-3. According to the Reply, “Defendants have not challenged the merits of the Commission's claims in their Motion, but have challenged ‘the trial court's jurisdiction-its very power to hear the case.'” ECF No. [33] at 3 (quoting Morrison, 323 F.3d at 925). Because Defendants do not challenge the merits of the SEC's claims, Defendants contend that the Court should not resolve factual disputes in the SEC's favor. See id.

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As an initial matter, the Court agrees with both Parties that Defendants raise a factual challenge to subject matter jurisdiction. As a result, the Court can consider extrinsic evidence in addressing the Motion. See Kuhlman, 822 F.Supp.2d at 1256-57 (citing Lawrence, 919 F.2d at 1529); Stalley, 524 F.3d 1229, 1233 (11th Cir. 2008). The Court must next address whether factual disputes should be resolved in the SEC's favor as the SEC argues or if the SEC's factual allegations should be not entitled to a presumption of truthfulness, as Defendants argue.

As stated above, a court may independently weigh facts and find that it lacks subject matter jurisdiction only “if the facts necessary to sustain jurisdiction do not implicate the merits of plaintiff's cause of action.” Morrison, 323 F.3d at 925 (citation omitted) (emphasis in original). When a jurisdictional challenge implicates the merits of the plaintiff's claim, the court must “find that jurisdiction exists and deal with the objection as a direct attack on the merits of the plaintiff's case.” Id. (citations omitted). According to the Eleventh Circuit, “jurisdiction becomes intertwined with the merits of a cause of action when a statute provides the basis for both the subject matter jurisdiction of the federal court and the plaintiff's substantive claim for relief.” Morrison, 323 F.3d 920, 926 (11th Cir. 2003) (internal quotation marks and citation omitted). In regard to a jurisdictional challenge based on the word “security” under the Securities Acts, the Fifth Circuit in a pre-Bonner decision “specifically held that the definition of the term ‘security' in the context of a suit based on the federal securities laws may reach the merits of the case.” LeCroy, 2010 WL 11565305, at *4 (citing Williamson v. Tucker, 645 F.2d 404, 416 (5th Cir. May 20, 1981)).^[1] In Williamson the Fifth Circuit held that “it is clear that the jurisdictional issue reaches the merits of the plaintiffs' case; if the [notes at issue] are not securities, there is not only no federal jurisdiction to hear the case but also no federal cause of action on the stated facts.” 645 F.2d at 416.

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In this case, Defendants' argument rests on their contention that the SEC lacks the authority to prosecute them under the Securities Acts because the Notes are not securities. See ECF No. [23] at 4. This argument reaches the merits of the SEC's case...