Smith v. Tarter

• Decision Date: 22 January 2018
• Docket Number: Civil Action No. 5: 17–334–DCR
• Parties: Anna Lou Tarter SMITH et al., Plaintiffs, v. Joshua Donald TARTER, et al., Defendants.
• Court: U.S. District Court — Eastern District of Kentucky

305 F.Supp.3d 733

Anna Lou Tarter SMITH et al., Plaintiffs,

v.Joshua Donald TARTER, et al., Defendants.

Civil Action No. 5: 17–334–DCR

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

Signed January 22, 2018

Andrew Louis Sparks, Emma R. Wolfe, Kerry B. Harvey, Dickinson Wright PLLC, Lexington, KY, for Plaintiffs.

Benjamin Cadden Fultz, Leigh Vandiver Graves, Victor B. Maddox, Fultz Maddox Dickens, PLC, Steven Rush Romines, Romines, Weis & Young, PSC, Cory J. Skolnick, Theresa C. Canaday, Thomas C. Gleason, Frost Brown Todd LLC, Louisville, KY, for Defendants.

MEMORANDUM ORDER AND OPINION

Danny C. Reeves, United States District JudgeThis is a commercial action brought by Plaintiffs Anna Lou Tarter Smith ("Smith"), Lou Ann Coffey ("Coffey"), and Douglas Tarter, in their individual capacities and in their derivative capacities on behalf of the Tarter Companies.¹ [Record No. 1] The plaintiffs allege that Defendants Joshua Donald Tarter ("Joshua Tarter"), Thomas Gregory ("Gregory"), and QMC Industry Company, Ltd. ("QMC"), conspired to use sensitive company information to divert cost savings from the Tarter Companies to their own benefit in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c) and (d), the Defend Trade Secrets Act ("DTSA"), 18 U.S.C. § 1836, et seq. , the Kentucky Uniform Trade Secrets Act ("KUTSA"), KRS § 365.880 et seq. , and Kentucky common law. [Record No. 1, ¶¶ 136–239] Defendants Joshua Tarter and Gregory have moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), asserting that the plaintiffs lack standing to bring these claims in their individual or derivative capacities, and under Federal Rule of Civil Procedure 12(b)(6), on the basis that the plaintiffs have failed to state a claim under the RICO Act or the DTSA, and because the plaintiffs' remaining claims are either inadequately pled or should be dismissed for lack of jurisdiction.² [Record Nos. 8, 10] For the reasons that follow, the defendants' motions will be granted.

I.

The Tarter Companies are Kentucky companies with their principal place of business in Casey County, Kentucky. [Record No. 1, ¶ 4] They bill themselves as "the largest manufacturer of farm gates and animal management equipment in North America." [Id. ¶ 12] The Tarter Companies have been family-owned since 1945, and are now managed by the fourth generation. [Id. ¶¶ 12, 17] Plaintiff Smith and her children, Plaintiffs Coffey and Douglas Tarter, own 50% of the Tarter companies, while the remaining 50% belongs to Joshua Tarter and his two siblings, each of whom owns a one-sixth share. [Id. ¶ 17]

Joshua Tarter is a shareholder of the Tarter Corporations and a member and manager of the Tarter LLCs. [Id. ¶ 19] He has exercised executive authority on behalf of all of the Tarter Companies, and has variously held himself out as President, Vice–President, Officer, and Senior Executive of the Tarter Companies. [Id. ¶ 20] Gregory was a management employee of Tarter Gate Company, LLC, who oversaw engineering and quality, and held himself out as Vice–President or General Manager of the Tarter Companies. [Id. ¶¶ 26, 30] The plaintiffs claim that, because of their senior positions, Joshua Tarter and Gregory were in a position to control the vendors selected by the Tarter Companies, as well as the prices paid to those vendors, and that they had access to confidential and proprietary information, including marketing and business strategies, financial data, pricing, costs, profit margins, order information, and customer relationships. [Id. ¶¶ 21, 22, 28, 29, 33, 77]

The Tarter Companies began to source components for use in their finished products from Chinese suppliers in 2009. They engaged Xiaofeng Chen to act as their agent in China. [Id. ¶¶ 34–35] Utilizing Chinese suppliers should have enabled the Tarter Companies to save substantial costs. [Id. ¶ 36] However, the plaintiffs allege that, in 2010, Joshua Tarter, Gregory, and Chen devised a plan to funnel these potential savings to themselves. [Id. ¶¶ 37, 40, 52, 58, 73] To accomplish this scheme, they formed Defendant QMC, which the plaintiffs characterize as a pass-through entity which manufactures nothing. [Id. ¶¶ 38, 58]

According to the plaintiffs, Joshua Tarter and Gregory used their authority to ensure that the Tarter Companies ordered the components from QMC rather than other suppliers. [Id. ¶¶ 22, 29, 77, 90] QMC would forward the orders to suppliers in mainland China, who would manufacture the components and ship them directly to the Tarter Companies. [Id. ¶¶ 38–39] The mainland suppliers would bill QMC for the true cost of the components, but QMC would substantially inflate the price and invoice the Tarter companies for the higher amount, thus absorbing the cost savings that the Tarter Companies would have received if they had purchased directly from the mainland suppliers. [Id. ¶¶ 40, 53–56, 62, 75–76] The plaintiffs allege that Joshua Tarter and Gregory used their knowledge of the prices the Tarter Companies paid for the components, the price quotations the Tarter Companies received from other potential suppliers, and the Tarter Companies' profit margins, to determine how much to inflate the price that QMC charged the Tarter Companies. [Id. ¶ 41] In total, the Tarter Companies paid QMC approximately $70,053,226.58, via wire transfer, over a seven year period for the component parts. [Id. ¶¶ 44, 63–72]

The plaintiffs assert that Joshua Tarter and Gregory used their positions within the Tarter Companies to further this scheme in a variety of ways. Most basically, they reduced the costs associated with QMC by misappropriating the Tarter Companies' resources, including by using the Tarter Companies' facilities and personnel for QMC business, and using the Tarter Companies' funds to pay for QMC expenses. [Id. ¶¶ 45, 83–84, 103, 135] They also allegedly used their positions within the Tarter Companies to ensure that QMC received more favorable treatment than other suppliers. [Id. ¶ 93] For example, the Tarter Companies typically paid QMC 50% of its price in advance, although other suppliers did not receive such a down payment. [Id. ¶¶ 42, 122] Additionally, the Tarter Companies would not seek bids from other potential suppliers when a component was sourced by QMC, corrupting the competitive bid process. [Id. ¶¶ 94, 96, 119, 123] Finally, the Tarter Companies would allegedly accept defective products supplied by QMC, in contravention of their standard practice, thus shifting a loss that should have fallen on QMC to the Tarter Companies. [Id. ¶¶ 95–96, 105, 135]

According to the plaintiffs, Joshua Tarter, Gregory, and Chen realized that secrecy was essential for their plan to succeed. [Id. ¶¶ 57, 109, 130] The plaintiffs allege that, as a result, neither Joshua Tarter nor Gregory disclosed their interest in QMC to the Tarter Companies, despite their fiduciary duties to do so. [Id. ¶¶ 49, 59–60, 101–07, 113] Further, Joshua Tarter allegedly misrepresented his ownership interest in QMC to the plaintiffs and the Tarter Companies on multiple occasions. [Id. ¶¶ 46–48, 77, 97–100] Nonetheless, after "considerable investigation," the plaintiffs discovered Joshua Tarter and Gregory's ownership interests in QMC in 2016, and confronted Joshua Tarter in meetings with him and his siblings. [Id. ¶¶ 109, 110–12] Joshua Tarter allegedly declined to attend further meetings, did not fully disclose his relationship with QMC, and refused to disgorge the profits he made from QMC and turn them over to the Tarter Companies. [Id. ¶¶ 115–17] Gregory resigned from his position on September 14, 2016, after being confronted for his allegedly improper behavior. [Id. ¶ 114]

The plaintiffs filed this action on August 11, 2017, alleging that Joshua Tarter, Gregory, and QMC conspired to and did violate RICO, DTSA, and KUTSA, and that they perpetrated a fraud by concealment and/or omission and unjustly enriched themselves.³ [Id. ¶¶ 136–46, 147–51, 152–66, 174–81, 182–95, 203–10, 228–31, 237–39] The plaintiffs also claim that Joshua Tarter and Gregory breached their fiduciary duties to the Tarter Companies and usurped a corporate opportunity [id. ¶¶ 211–16, 232–36],⁴ that Gregory and QMC aided and abetted Joshua Tarter's violations of DTSA and KUTSA and his breach of fiduciary duty [id. ¶¶ 167–173, 196–202, 217–23],⁵ and that Joshua Tarter made fraudulent misrepresentations.⁶ [Id. ¶¶ 224–27]

Defendants Joshua Tarter and Gregory have moved to dismiss for lack of standing and for failure to state a claim. [Record Nos. 8, 10] They argue, in relevant part, that the plaintiffs lack standing to bring these claims in their individual capacities because the only alleged injury was suffered by the Tarter Companies and not the plaintiffs personally, and that the plaintiffs lack standing to bring these claims in their derivative capacities because they failed to adequately plead that they made a demand on the Tarter Companies to bring this action, or that making such a demand would have been futile. [Record Nos. 8, 10]

II.

The defendants' argument that the plaintiffs lack of standing to bring this action contests this Court's subject matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure. Lyshe v. Levy , 854 F.3d 855, 857 (6th Cir. 2017) (citations omitted). A 12(b)(1) motion "can either attack the claim of jurisdiction on its face, in which case all allegations of the plaintiff must be considered as true, or it can attack the factual basis for jurisdiction, in which case the trial court must weigh the evidence and the plaintiff bears the burden of proving that jurisdiction exists." DLX, Inc. v. Kentucky , 381 F.3d 511, 516 (6th Cir. 2004). A facial challenge to the Court's subject matter jurisdiction, such as the defendants' challenge here, "merely questions the sufficiency of the pleading." Ohio Nat. Life Ins. Co. v. United States , 922 F.2d 320, 325 (6th Cir. 1990). "In...