United States District Court, D. New Jersey
August 15, 2005.
WILLIAM KOZIN & KURT KOZIN, Plaintiffs,
RICHARD J. DUNN, KEVIN R. DUNN, & CROSSWALK HOLDINGS, INC., Defendants.
The opinion of the court was delivered by: DICKINSON DEBEVOISE, Senior District Judge
Presently before the court is the motion of Defendants Richard
J. Dunn, Kevin R. Dunn, and Crosswalk Holdings, Inc.
(collectively "Defendants") to dismiss the complaint for failure
to state a claim. For the reasons set forth below, the motion
will be denied with respect to Plaintiffs' common law fraud
claims and granted with respect to Plaintiffs' federal securities
On February 23, 2004, Plaintiffs William Kozin and his son Kurt
Kozin (collectively "Plaintiffs") filed the Complaint alleging
various violations of federal and state securities laws, common
law fraud, and breach of contract. Plaintiffs' claims are based
on an allegedly unpaid and overdue $150,000.00 loan made to
Crosswalk Holdings by William Kozin, Defendants' purported
promise to Kurt Kozin of a 5% equity stake in Crosswalk, and
Defendants' purported obligation to pay Kurt Kozin under an
Plaintiffs are residents of Pennsylvania. Defendant Crosswalk
is a corporation organized under Delaware law, with its principal
place of business at 9 Law Drive, Third Floor, Fairfield, New
Jersey. Defendant Richard Dunn is a resident of New York who was
the president of Crosswalk at all relevant times. Defendant Kevin
Dunn is a resident of New Jersey who was the secretary of
Crosswalk at all relevant times.
Crosswalk was a company that was set up to acquire
revenue-generating, profitable third-party administrators
("TPAs") that provide technology-based services, risk-taking
financial services, administrative services and products to managed care
organizations, health insurers, corporations, Taft-Hartley
welfare funds, health care providers and provider groups and
financial and insurance brokers and associations. In the fall of
2000, Crosswalk, by and through Richard J. Dunn and Kevin R. Dunn
(collectively, the "Individual Defendants"), approached Kurt
a. playing a major role in Crosswalk's senior
b. loaning $150,000 to Crosswalk and being paid 9%
with a balloon period at the end of 36 months;
c. granting the right to convert warrants to equity
equal to $150,000; and
d. buying a 5% equity ownership in Crosswalk.
(Compl. ¶ 16.) Kurt Kozin advised Defendants that his father,
William Kozin, would be the individual investing $150,000.
Defendants, by and through the Individual Defendants,
represented the following information to Plaintiffs:
a. Crosswalk intended to purchase or take a large
investment in a TPA located in Fairfield, New Jersey
that was currently generating $100,000 per month with
an EBITDA of over $20,000 a month;
b. This TPA could be purchased for $100,000 down and
an additional $150,000 staggered over 30 payments;
c. $75,000 was needed for additional working capital;
d. Crosswalk had lined up another firm to purchase,
and this firm was generating $900,000 in revenue and
over $100,000 in EBITDA and could be purchased for
very little cash or that the Company would be then
left with $2,100,000 in revenue with almost $350,000
e. Crosswalk would bring in several other accounts
which would generate another $500,000 in revenue by
mid-second quarter 2000; f. Crosswalk currently had commitments for $100,000
g. Crosswalk had the ability to do equipment
financing for an additional $150,000; and
h. Funding was available from Rockwell Capital of New
York City which currently had $2,500,000 in a public
shell that could be turned into $10 million in debt
financing for Crosswalk to complete these initial TPA
(Compl. ¶ 18.) These statements were communicated through
e-mails, including that of December 2, 2002 (Ex. A), by letters,
including that of December 10, 2002 (Ex. B), as well as numerous
other interstate telephone calls and communications. Plaintiffs
allege that these statements were untrue or omitted material
In reliance on these statements, Plaintiffs undertook the
a. Kurt Kozin entered into a Letter of Intent with
Crosswalk on December 23, 2002.
b. William Kozin lent Crosswalk $150,000 on January
1, 2003, as evidenced by a Promissory Note (Ex. D).
c. Kurt Kozin entered into an Employment Agreement
with Crosswalk which provided an annual base salary
of $150,000 for five years (Ex. E).
Crosswalk defaulted under the terms of the Promissory Note.
William Kozin, by letter dated December 15, 2003 and drafted on
his behalf by counsel (Ex. F), notified Crosswalk of its default
and exercised his acceleration rights pursuant to the Promissory
Kurt Kozin never received 5% equity ownership in Crosswalk or
any warrants. Kurt Kozin was not paid under the Employment
Agreement and left employment at Crosswalk in or about October
The Complaint includes the following seven counts as the bases
of Defendants' liability:
Count One Because the Promissory Note, Crosswalk
equity and warrants were securities that were not registered as required by §
5 of the Securities Act of 1933 (the "1933 Act"),
15 U.S.C. § 77a et seq., and were sold in violation
thereof, Defendants are responsible to Plaintiffs for
the loss caused by such sales pursuant to § 12 of the
Count Two Defendants are liable for securities
fraud under § 10(b) of the Securities Exchange Act of
1934, 15 U.S.C. § 78a, et seq. (the "1934 Act"),
and Rule 10b-5.
Count Three Defendants are liable for common law
Count Four Defendants are liable for negligent
Count Five Defendants breached the Promissory Note
by failing to pay William Kozin the amounts due
Count Six Defendants breached the Employment
Agreement by failing to pay Kurt Kozin $150,000 for
at least four years.
Count Seven Defendants violated the New Jersey
Securities Act, N.J. STAT. ANN. § 49:3-71.
Defendants have moved to dismiss for failure to state a claim
upon which relief can be granted. See FED. R. CIV. P. 12(b)(6).
Defendants' motion concerns only the common law fraud and federal
securities fraud claims i.e., Counts Two and Three because
Defendants request dismissal on the grounds that the Complaint
does not meet the heightened pleading standard under FED. R. CIV.
P. 9(b) and does not allege scienter adequately.
STANDARD OF REVIEW
A motion to dismiss should not be granted unless "it appears
beyond doubt that the plaintiff can prove no set of facts in
support of his claim which would entitle him to relief." Conley
v. Gibson, 355 U.S. 41, 45-46 (1957); Johnsrud v. Carter,
620 F.2d 29, 33 (3d Cir. 1980); Craftmatic Sec. Litig. v. Kraftsow,
890 F.2d 628, 634 (3d Cir. 1989). Allegations contained in the
Complaint will be accepted as true, Cruz v. Beto, 405 U.S. 319,
322 (1972), and Plaintiffs shall be "given the benefit of every favorable inference that can
be drawn from those allegations." Schrob v. Catterson,
948 F.2d 1402, 1405 (3d Cir. 1991). Although consideration of facts on a
motion to dismiss is typically limited to those contained in the
Complaint, courts may consider indisputably authentic documents
that are "integral to or explicitly relied upon in the
complaint." In re Burlington Coat Factory Sec. Litig.,
114 F.3d 1410, 1426 (3d Cir. 1997) (citations omitted). Accordingly, in
addition to the Complaint, the documents annexed to the Complaint
i.e., an e-mail dated December 2, 2002 from Kevin Dunn to
Kurt Kozin (Ex. A), a letter dated December 10, 2002 from Kevin
Dunn to Kurt Kozin (Ex. B), a Letter of Intent dated December 23,
2002 (Ex. C), the Promissory Note dated January 1, 2003 and check
#124 of William Kozin dated January 2, 2003 and paid to the order
of Crosswalk Holdings, Inc. in the amount of $150,000 (Ex. D), an
unexecuted Employment Agreement (Ex. E), a letter dated December
15, 2003 on William Kozin's behalf accelerating his rights under
the Promissory Note (Ex. F) will be considered because they are
integral to the Complaint and because Plaintiffs explicitly rely
upon these documents to support their allegations.
The targets of the pending motion to dismiss are the securities
fraud and common law fraud claims, which are subject to
heightened pleading requirements under both FED. R. CIV. P. 9(b)
and the federal securities laws. Both Rule 9(b) and the Private
Securities Litigation Reform Act (the "PSLRA"),
15 U.S.C. § 78u-4(b), require a plaintiff to plead "the who, what, when,
where, and how: the first paragraph of any newspaper story." In
re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999)
Rule 9(b) requires that "in all averments of fraud or mistake,
the circumstances constituting fraud or mistake shall be stated
with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally."
FED. R. CIV. P. 9(b). Although Rule 9(b) does not require every
material detail of the fraud such as date, location, and time to
be pleaded, a plaintiff must inject precision and some measure of
substantiation into its allegation of fraud. California Pub.
Employees' Retirement Sys. v. Chubb Corp., 394 F.3d 126, 144 (3d
Cir. 2004) (citations omitted). The heightened pleading
requirement is designed to give defendants notice of the claims
against them, provide an increased measure of protection for
their reputations, and reduce the number of frivolous suits
brought solely to extract settlements. In re Burlington Coat
Factory Sec. Litig., 114 F.3d at 1418 (citations omitted).
In addition to the pleading requirements of Rule 9(b), a
plaintiff alleging securities fraud must also comply with the
heightened pleading requirements of the PSLRA. In a private
action alleging that defendants made a material misrepresentation
and/or omission, the PSLRA requires that "the complaint shall
specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if an
allegation regarding the statement or omission is made on
information and belief, the complaint shall state with
particularity all facts on which that belief is formed."
15 U.S.C. § 78u-4(b)(1). Additionally, "the complaint shall . . .
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)(2). The PSLRA has made the pleading standards
in securities fraud cases more rigorous than the Rule 9(b)
requirements. 2 MOORE'S FEDERAL PRACTICE § 9.10
Defendants argue that Counts Two and Three should be dismissed
"on the grounds that: (1) Plaintiffs' bald assertions of
liability are insufficient under Fed.R.Civ.P. 9(b); and (2) Plaintiff [sic] has [sic] failed to allege the requisite
scienter. . . ." (Defs.' Br. at 7.) Defendants argue that the
Complaint lacks specific facts to support its "blanket
allegations" of fraud. The motion to dismiss the common law fraud
claims will be denied, but the motion to dismiss the federal
securities fraud claims will be granted.
I. Common law fraud
To state a claim for common law fraud under New Jersey law, a
plaintiff must allege that the defendant (1) made a material
representation of a presently existing or past fact, (2) with
knowledge of its falsity and (3) with the intention that
plaintiff rely thereon, and (4) that plaintiff did so rely to his
detriment. Jewish Ctr. v. Whale, 432 A.2d 521, 524 (N.J. 1981).
The "circumstances constituting fraud" must be pleaded with
particularity. FED. R. CIV. P. 9(b). Knowledge, on the other
hand, may be averred generally. Id.
In this case, Plaintiffs' Complaint adequately alleges common
law fraud. The allegedly fraudulent misrepresentations are stated
in ¶ 18 of the Complaint and are further supported by the
exhibits annexed to the Complaint. The circumstances constituting
fraud are apparent from reading the allegations in the Complaint
Defendants approached Plaintiffs seeking investments in
exchange for repayment with interest, an equity stake, and
salary; and in order to induce Plaintiffs to make the investment,
Defendants made various fraudulent misrepresentations concerning
Crosswalk's sources of financing and specific targets for
imminent acquisition. The allegedly fraudulent misrepresentations
have been attributed to Defendants for example, the e-mail from
Kevin Dunn to Kurt Kozin (Ex. A) was cc'ed to Richard Dunn, and
the letter from Kevin Dunn (Ex. B) begins with "My father and I
would be very excited to have you as a partner and member of our
Executive Team in CrossWalk Holdings, Inc." Fraudulent misrepresentations, if any, contained in these documents may be
attributable to the Individual Defendants as well as Defendant
Crosswalk, which had only two shareholders, namely the Individual
Defendants. Plaintiffs have alleged knowledge (or scienter)
generally, which they are permitted to do under the Federal Rules
of Civil Procedure. Plaintiffs have also stated their detrimental
reliance on the alleged misrepresentations they allegedly have
not recouped investments or other payments as promised under the
Promissory Note, warrants, and Employment Agreement.
To summarize, the Complaint contains "the who, what, when,
where, and how" of the alleged fraud. Plaintiffs are entitled to
all reasonable inferences at the pleading stage, and the motion
to dismiss the common law fraud claims will be denied.
II. Securities fraud
The federal securities fraud claims, however, have an even
higher pleading hurdle to overcome. Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq. (the
"'34 Act") prohibits the use of any "manipulative or deceptive
device" in connection with the purchase or sale of a security.
15 U.S.C. § 78j(b). Rule 10b-5, promulgated thereunder, makes it
unlawful for any person, in connection with the purchase or sale
of a security, "to make any untrue statement of a material fact
or to omit to state a material fact necessary in order to make
the statements made, in light of the circumstances in which they
were made, not misleading. . . ." 17 C.F.R. § 240.10b-5. To state
a claim of securities fraud under § 10(b) and Rule 10b-5, a
private plaintiff must plead the following elements: (1) the
defendant made a misrepresentation or omission of (2) a material
(3) fact (4) with knowledge or recklessness, (5) upon which the
plaintiff reasonably relied and (6) consequently suffered damage.
Ieradi v. Mylan Lab., Inc., 230 F.3d 594, 598 (3d Cir. 2000). "A misrepresentation or omitted
fact `is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding
how to act.'" EP Medsystems, Inc. v. Echocath, Inc.,
235 F.3d 865, 872 (3d Cir. 2000) (quoting TSC Indus., Inc. v. Northway,
Inc., 426 U.S. 438, 449 (1976)).
In particular, the PSLRA requires that, in order for scienter
to be pleaded properly, "the complaint shall . . . 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)(2) (emphasis added). For purposes of Rule 10b-5 claims,
"scienter" means a "mental state embracing intent to deceive,
manipulate, or defraud." Ernst & Ernst v. Hochfelder,
425 U.S. 185, 194 (1976). The Court of Appeals has held that a strong
inference of scienter may be shown if the complaint states with
particularity (1) facts establishing a motive and opportunity to
commit fraud, or (2) facts that constitute circumstantial
evidence of reckless or conscious behavior. E.g., In re
Advanta, 180 F.3d 525, 534-35 (3d Cir. 1999). Recklessness is
conduct involving "not merely simple, or even inexcusable
negligence, but an extreme departure from the standard of
ordinary care, and which presents a danger of misleading buyers
or sellers that is either known to the defendant or is so obvious
that the actor must have been aware of it." McLean v.
Alexander, 599 F.2d 1190, 1197 (3d Cir. 1979).
Defendants focus on Plaintiffs' purported failure to plead the
scienter requirement, arguing that the Complaint does not show
motive and opportunity or conscious misbehavior or recklessness.
Plaintiffs, on the other hand, argue that the Individual
Defendants, as the sole equity owners of Defendant Crosswalk, had
both motive and opportunity to make material misrepresentations,
and that they also showed recklessness and conscious misbehavior. Plaintiffs have not shown scienter by pleading motive and
opportunity. The motive and opportunity ascribed to Defendants
i.e., the Individual Defendants are the sole shareholders of
Crosswalk and as such had motive to commit fraud are generally
possessed by the sole shareholders of any closely held company
and does not raise an inference of wrongdoing, let alone a strong
Plaintiffs have also not raised a strong inference of
Defendants' conscious misbehavior or recklessness. Reckless
behavior "involv[es] not merely simple, or even inexcusable
negligence, but an extreme departure from the standards of
ordinary care, and which presents a danger of misleading buyers
or sellers that is either known to the defendant or is so obvious
that the actor must have been aware of it." Id. at 535
(citations omitted). The Complaint does not state with
particularity any facts giving rise to a strong inference that
Defendants knew or had reason to know that they were making
material misrepresentations to Plaintiffs, or that their
representations to Plaintiffs amounted to an extreme departure
from the standards of ordinary care and presented a danger of
misleading Plaintiffs. Unlike pleading common law fraud which
permits general averments of state of mind 10b-5 securities
fraud claims must plead specific facts to give rise to a strong
inference of the requisite state of mind. In this case, the
scienter requirement has not been met.
In addition to not pleading scienter properly, the Complaint
also does not plead falsity adequately. The PSLRA requires the
Complaint to specify the reason(s) why each statement is
misleading and, if an allegation regarding a statement or
omission is made on information and belief, to state with
particularity all facts on which that belief is formed.
15 U.S.C. § 78u-4(b)(1). In California Pub. Employees' Ret. Sys. v. Chubb
Corp., 394 F.3d 126 (3d Cir. 2004), the Court of Appeals adopted the standard espoused by the Second Circuit in
Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) for assessing the
sufficiency of allegations made on information and belief.
Allegations made on information and belief can meet the pleading
requirement by providing "sufficient documentary evidence and/or
a sufficient description of the personal sources of the
plaintiff's beliefs." Chubb, 394 F.3d at 147. In this case,
Plaintiffs have provided documentary evidence of the alleged
misrepresentations. This documentary evidence does not, however,
show why the statements contained therein are misrepresentations.
The Complaint does not indicate why Plaintiffs believe the
statements are misrepresentations, but merely states that they
are. This is insufficient under the PSLRA.
Accordingly, the motion to dismiss will be granted with respect
to Plaintiffs' federal securities fraud claims.
For the reasons set forth above, Defendants' motion to dismiss
will be denied with respect to the common law fraud claims and
granted with respect to the securities fraud claims. Plaintiffs
may file an amended complaint within thirty days of the date of
this opinion. An appropriate order will be issued.