The opinion of the court was delivered by: Hon. Jerome B. Simandle
This matter involving a loan transaction is before the Court on the motion of Defendants Dream Trust and Louis V. Greco, Jr. to dismiss Count VI of the Complaint for failure to state a claim under the Securities Exchange Act and to dismiss the remaining state law claims for lack of personal jurisdiction and improper venue [Docket Item 5]. In the alternative to dismissal, Defendants ask the Court to transfer the case to the United States District Court for the Eastern District of New York. As explained in today's Opinion, the Court will dismiss the securities claim for failure to state a claim under Rule 12(b)(6), Fed. R. Civ. P., and retain jurisdiction over the state law claims which will not be transferred.
The claims in this suit arise out of a one million dollar loan that Plaintiff, Sandra W. Fox, provided to Defendant Dream Trust on September 22, 2008. (Compl. ¶ 6.) Plaintiff alleges that the loan was not repaid and that various representations made in soliciting the loan violate New Jersey common law and the federal securities statutes. The Court has federal question jurisdiction over Plaintiff's federal securities claim, see 28 U.S.C. § 1331, as well as diversity jurisdiction over all claims pursuant to 28 U.S.C. § 1332(a)(1) since the parties are diverse in citizenship and the amount in controversy is greater than $75,000.
The one million dollars Plaintiff loaned to Dream Trust was to be added to funds raised by Dream Trust and then given to SDS 2008, LLC, to finance a real estate deal. The Complaint and Plaintiff's briefing do not present the full scope of the real estate deal as Plaintiff now understands it, nor do they relate if and how the entire deal was represented to Plaintiff or her agent at the time of the loan. Instead, the Complaint refers to only one part of the deal even though the alleged misrepresentations made with respect to the loan, which are quoted in the Complaint, all occurred in the context of the entire deal.
Based on the documents relied upon in the Complaint and presented by Defendants, as well as the public records submitted by Defendants, it appears that the deal involved SDS 2008's $10,000,000 purchase of two properties in Brooklyn at Columbia Street and Congress Street. (Greco Decl. Ex. C. at 1.) Dream Trust would play some role in financing the acquisition, and in return would obtain a mortgage on the properties. (Greco Decl. Ex. C. at 1; Ex. F at 1.)
The loan in question in this case was to be made to Dream Trust, but ultimately given to SDS 2008 to finance its activities, and was pitched to Plaintiff's agent as a short-term solution to a cash-flow problem that SDS 2008 was having with respect to the real estate deal. (Greco Decl. Ex. C. at 1.) The apparent reason for the selection of the Fox family as likely financiers is that they were interest holders in SDS 2008, having invested $1.5 million in the company on July 25, 2008, more than $500,000 of which belonged to Plaintiff. (Compl. ¶¶ 19-20.)
Tacie Fox, Plaintiff's daughter, is her agent and investment manager. (Id. ¶ 1.) Defendant Louis Greco is the manager of SDS 2008 as well as the sole trustee of Dream Trust. (Id. ¶¶ 3, 15.)
The securities claim at issue in this motion focuses on representations regarding Plaintiff's loan made in the days before the loan agreement was made, including a phone call and two e-mails between Tacie Fox and Defendant Greco, as well as a phone call from Mr. Greco's lawyer to Tacie Fox.
According to the Complaint, on September 21, 2008, Mr. Greco telephoned Tacie Fox to tell her that the Fox family would lose its $1.5 million equity investment in SDS 2008 unless they provided $1 million to the Dream Trust by September 22, 2008. (Id. ¶¶ 21, 39.) No further allegations about that phone call are made in the Complaint.
An email of September 21, 2008 from Mr. Greco to Tacie Fox states that the Columbia-Congress real estate deal was going to fall through unless temporary financing could be arranged before the closing on September 23, 2008.*fn1 (Greco Decl. Ex. C at 1.) It is apparent from the email and the September 22 email that Tacie Fox was familiar with at least the broad outline of the Columbia-Congress deal, though neither email lays out the details of the transaction.*fn2 The September 21 e-mail indicates that "we have already paid $3,250,000 of the $10,000,000 purchase price to the seller," and that an additional $6,750,000 will be due at closing. (Id.)
The email indicates that Mr. Greco would be unable to come up with the amount needed at closing in time. He states that he has "subsequently renegotiated the deal so that we will take title only to the Columbia Street Property," and that therefore only $2.9 million will need to be raised before the previously scheduled closing date to keep the deal on track, and that the closing will be adjourned. (Id.) Mr. Greco writes in the email that he has "arranged for $900,000 of additional capital from our internal sources," and proposes that "the remaining $2,000,000 be funded by $1MM by you and $1MM by the Dream Trust in the form of a loan that will be secured by the first mortgage on Columbia Street which has been appraised in excess of $3.3MM." (Id.) It is unclear whether the $900,000 was in the possession of SDS 2008, to which Dream Trust would add a loan of $2 million, or whether the loan to SDS 2008 would be in the amount of $2.9 million because Dream Trust would be adding an additional $1 million to the $900,000 it had. It is also unclear how exactly the mortgage would secure the loan.
On September 22, 2008, Plaintiff loaned $1 million to Defendant Dream Trust. (Compl. ¶¶ 7, 21.) The next day, Dream Trust was assigned a $5,343,000 mortgage note on the Columbia Street and Congress Street properties from Citibank Mortgage, (Compl. ¶ 23), and SDS 2008 acquired the title to the Columbia Street Property through its subsidiary, SDS Columbia LLC. (Greco Decl. Ex. G at 1.)
Defendants have allegedly defaulted on the loan and failed to pay back Plaintiff's principal and any interest owed to her. Plaintiff claims that the loan was induced by fraud, because Defendants misrepresented (1) the amount of the loan given to SDS 2008 to which her contribution would be added ($2 million v. $2.9 million); (2) how Plaintiff's money would be used (purchase of title v. assignment of mortgage); (3) when Defendants would record the mortgage securing the loan; and (4) their ability to repay the loan. (Compl. ¶ 70.) Plaintiff brings a federal securities fraud claim against Defendants under Section 10(b) of the Securities Exchange Act ("Exchange Act"), 15 U.S.C. § 78(j), and Rule 10b-5 of the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5, along with numerous state law claims, including money lent (Count I), conversion (Count II), money had and received (Count III), fraud (Count IV), negligent misrepresentation (Count V), and violation of Section 49:3-71(a) of the New Jersey Uniform Securities Law (Count VII). Plaintiff seeks both compensatory and punitive damages.
Defendants move under Rule 12(b)(6) of the Federal Rules of Civil Procedure for the Court to dismiss Plaintiff's federal securities fraud claim for failure to state a claim upon which relief can be granted. In support of their motion, Defendants contend that the instrument in question was not a "security" as defined under the Exchange Act, and even if it was, that Plaintiff has failed to meet the stringent pleading requirements for such a claim. Defendants further move for the Court to dismiss the case in its entirety under Rules 12(b)(2) and 12(b)(3) of the Federal Rules of Civil Procedure for lack of personal jurisdiction and improper venue.
A. Personal Jurisdiction and Venue
Plaintiff asserts personal jurisdiction over Defendants based on the nationwide service of process provision provided in 15 U.S.C. § 78aa, which has been interpreted to provide personal jurisdiction in any district court for a securities claim against any defendant with minimum contacts with the United States. See, e.g., Equidyne Corp. v. Does, 279 F. Supp. 2d 481 (D. Del. 2003) (citing Max Daetwyler Corp. v. R. Meyer, 762 F.2d 290, 295 (3d Cir. 1985)). Plaintiff asserts pendent personal jurisdiction over the state law claims based on the jurisdiction granted under § 78aa. See IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1056-57 (2d Cir. 1993) ("[U]nder the doctrine of pendent personal jurisdiction, where a federal statute authorizes nationwide service of process, and the federal and state claims 'derive from a common nucleus of operative fact,' the district court may assert personal jurisdiction over the parties to the related state law claims even if personal jurisdiction is not otherwise available."); Robinson v. Penn Central Co., 484 F.2d 553, 555 (3d Cir. 1973).
Defendants assume that if Plaintiff's securities law claim is dismissed under Rule 12(b)(6), then the Court will lack personal jurisdiction with respect to the state law claims. However, the doctrine of pendent personal jurisdiction is unclear about what happens when the claim upon which pendent personal jurisdiction hangs is dismissed. In the analogous context of supplemental subject matter jurisdiction, a court has the discretion to maintain jurisdiction in such a case. See 28 U.S.C. § 1367. And, as in the case of supplemental subject matter jurisdiction, although a party cannot take advantage of the jurisdictional provision by offering a frivolous or entirely baseless securities claim, the mere dismissal of the claim does not strip the Court of jurisdiction. Republic of Panama v. BCCI Holdings (Luxembourg) S.A., 119 F.3d 935, 942 (11th Cir. 1997) ("[I]nsofar as an asserted federal claim is not wholly immaterial or insubstantial, a plaintiff is entitled to take advantage of the federal statute's nationwide service of process provision.").
The Court need not reach the question of what happens to pendent personal jurisdiction when the main claim is dismissed, however, because even absent pendent personal jurisdiction this Court still has personal jurisdiction over Defendants because the Complaint alleges facts to show that Defendants' purpose was for their allegedly injurious communications to reach Plaintiff in New Jersey. Federal Rule of Civil Procedure 4(e) makes this Court's jurisdiction co-extensive with that of New Jersey state courts, which extend it to the maximum range permitted by the Constitution. Miller Yacht Sales, Inc. v. Smith, 384 F.3d 93, 97 (3d Cir. 2004). The Due Process clause requires that Plaintiff establish that the Defendants have "certain minimum contacts with [the forum] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice." Int'l Shoe v. Washington, 326 U.S. 310, 316 (1945); Pinker v. Roche Holdings Ltd., 292 F.3d 361, 368 (3d Cir. 2002). A plaintiff attempting to establish jurisdiction based on sporadic contacts related to the cause of action must show "that the cause of action arose from the defendant's forum-related activities." Mellon Bank (EAST) v. DiVeronica Bros., 983 F.2d 551, 554 (3d Cir. 1993).*fn3
According to the Complaint, Defendants directed their communications to Tacie Fox with the purpose of soliciting Plaintiff (among others), and they knew that their representations were being communicated to Plaintiff in New Jersey before the loan deal was consummated because Tacie Fox told them so. (Compl. ¶¶ 41-46.) These allegations are reasonable inferences from the facts pled in the Complaint. (Id.) Defendants knew they were making a deal with a resident of New Jersey, and so the Court has personal jurisdiction over Defendants with respect to Plaintiff's state law claims concerning that deal. This is sufficient "purposeful availment" of the forum to ensure that Defendants are not being "haled into a jurisdiction solely as a result of random, fortuitous, or attenuated contacts," and to satisfy the requirements of fair play and substantial justice. See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985) (describing test for specific jurisdiction) (internal citations and quotations omitted).
Venue is proper for similar reasons. There is venue in a securities case "where a defendant causes false or misleading information to be transmitted into a judicial district, even if the defendant never has been physically present in that district." Oxford First Corp. v. PNC Liquidating Corp., 372 F. Supp. 191, 197 (E.D. Pa. 1974).*fn4 Even if the Court does not apply pendent venue to the state claims based on the venue-granting provision of the securities law,*fn5 the ordinary venue statute would place venue in New Jersey. 28 U.S.C. § 1391. Plaintiff's claims involve the disposition of the ...