United States District Court, D. South Carolina, Greenville Division
Harold Brooks, Clara Louise Brooks, Benjamin Brooks, William F. Tomz, Frances W. Tomz, Sharon Finch, Individually and as Class Representatives, Plaintiffs,
Arthur M. Field, Frederick Scott Pfeiffer, Defendants.
REPORT AND RECOMMENDATION OF MAGISTRATE JUDGE
JACQUELYN D. AUSTIN, Magistrate Judge.
This matter is before the Court on a motion to dismiss filed by Defendant Arthur M. Field. [Doc. 24.] Pursuant to the provisions of 28 U.S.C. § 636(b) and Local Civil Rule 73.02(B)(2)(e), D.S.C., this magistrate judge is authorized to review all pre-trial matters in cases involving litigation by individuals proceeding pro se and to submit findings and recommendations to the District Court.
Plaintiffs filed this case on June 11, 2014, alleging violations of the civil Racketeer Influenced and Corrupt Organizations Act ("RICO"). [Doc. 1.] Defendant Arthur M. Field ("Field") filed a motion to dismiss on July 30, 2014. [Doc. 24.] Plaintiffs filed a response in opposition on September 2, 2014 [Doc. 42], and Field filed a reply on September 5, 2014 [Doc. 44] and a substitute reply on September 8, 2014 [Doc. 46]. Accordingly, the motion is ripe for review.
Plaintiffs bring this RICO action "as a class action for all 1, 142 Note holders." [Doc. 1 ¶ 2.] Plaintiffs allege that they relied upon prospectuses prepared by Defendants as material representations to invest in their securities and to continue to let Defendants, by and through various corporations they controlled and/or managed, retain Plaintiffs' investments. [ Id. ¶ 228.]
Field and Elliot Salzman arranged a meeting in New Jersey to pitch to a group of investors the idea of forming a business plan where money would be raised from South Carolina investors and then sent to a parent company in New Jersey for relending and real estate development. [ Id. ¶ 11.] The investors agreed and, therefore, Lancaster Resources, Inc. ("LRI"), a New Jersey corporation, was formed on November 19, 1998. [ Id. ¶ 12.] LRI held its organizational meeting of the first Board of Directors on February 24, 1999, and the minutes from that meeting reflect that LRI was to "acquire controlling interests of one or more other business to be used to further the business interests of the Corporation" and to "enter into a relationship with... a South Carolina limited liability company, and shall own 90% thereto, and shall borrow funds from such company and enter into repayment agreements." [ Id. ¶¶ 13, 15.] The South Carolina entity formed pursuant to this business plan was ultimately named Capital Investment Funding, LLC ("CIF"). [ Id. ¶ 16.] The initial incorporators meeting for CIF took place on February 25, 1999, and LRI owned more than 90% of the CIF membership interest. [ Id. ¶ 18.] On March 13, 2000, the members of CIF executed an Operating Agreement, providing that "the primary purpose of [CIF] shall be to raise funding to be loaned to [LRI] for the purposes set forth in its Articles of Incorporation, By-Laws, Operating Agreements[, ] etc., including the making of loans to purchase, develop, operate, lease, manage, and sell, alone or with others, commercial real property in the New York tri-state area, but this statement shall not confine or limit the Company's legitimate business activities." [ Id. ¶ 25 (some alterations in original).]
On February 26, 1999, Field signed Form U-1, Uniform Application to Register Securities, which was submitted to the South Carolina Securities Division in connection with its application to register securities of up to $4, 000, 000. [ Id. ¶ 20.] CIF issued a prospectus dated April 1, 1999, for distribution to South Carolina residents. [ Id. ¶ 21.] CIF then began selling promissory notes to investors in South Carolina. [ Id. ¶ 22.] During this time, Field primarily controlled the business activities of CIF. [ Id. ¶ 23.] At some point, Field befriended Defendant Frederick Scott Pfeiffer ("Pfeiffer"), and the two began to intertwine their business affairs. [ Id. ¶¶ 30-31.] The Complaint contains specific details about the alleged fraud by Defendants, including creating sham entities and making misrepresentations so that CIF's financial position appeared to be better than it was. On January 20, 2008, Field sent an unsigned letter to CIF's investors, indicating that CIF was no longer accepting monies and that it was winding up its business. [ Id. ¶ 295.]
Plaintiffs purchased numerous notes from CIF between 2000 and 2008, with interest rates between 6.25% and 9.75% per annum. [ Id. ¶¶ 229-93.] Interest is due on each note and has not been paid. [ Id. ¶ 294.]
On or about June 13, 2012, the State Grand Jury of the State of South Carolina issued a criminal indictment against Defendants. [ Id. ¶ 5.] Field was charged with two counts of criminal conspiracy under S.C. Code Ann. § 16-17-410, one count of forgery under S.C. Code Ann. § 16-13-10, and eleven counts of securities fraud under S.C. Code Ann. §§ 35-1-501 and 35-1-508. [Docs. 1 ¶ 299; 1-1 at 52-91.] On or about May 6, 2013, Field entered into a plea agreement, agreeing to plead guilty to all charges. [Docs. 1 ¶ 303; 1-4.]
Four previous actions have been filed against one or both Defendants relating to their dealings with CIF. [Doc. 1 ¶ 312.] On or about May 16, 2008, noteholders, including Plaintiffs in this action, instituted an action in South Carolina state court related to their purchase of securities from CIF. [ Id. ¶ 313.] That suit was combined and consolidated with another action. [ Id. ] At the time, CIF remained under the control and direction of Field, and on or about August 24, 2009, the parties in that action reached a Global Settlement Agreement ("GSA"). [ Id. ¶¶ 314-15.] Under the GSA, control of CIF was given to a courtappointed receiver and the plaintiffs dismissed their actions against Defendants, but specifically agreed that "the rights of the class under any state or federal securities law shall not be affected by this settlement...." [ Id. ¶ 315.] Following the appointment of the receiver, CIF filed a legal malpractice claim against Pfeiffer and others. [ Id. ¶ 316.] That case settled and was dismissed on February 15, 2013. [ Id. ¶ 318.] On November 28, 2012, CIF filed an action in this Court alleging RICO violations and numerous state law claims. [ Id. ¶ 319.] On August 26, 2013, CIF filed another action in this Court alleging the same violations against defendants named in the original RICO suit for the purpose of perfecting service on those defendants. [ Id. at 46 n.1.] Both of these RICO cases were dismissed on January 20, 2015 as barred by the Private Securities Litigation Reform Act ("PSLRA"). Capital Investment Funding, LLC v. Field, Civil Action Nos. 6:12-3401-BHH, 6:13-2326-BHH, 2015 WL 247720 (D.S.C. Jan. 20, 2015). In this case, Plaintiffs allege two causes of action-a violation of 18 U.S.C. § 1962(c) and a violation of 18 U.S.C. § 1962(d)-and seek certification of a class as well as actual damages, trebled, plus attorneys' fees and costs. [Doc. 1 at 46-49.]
Motion to Dismiss Standard
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a motion to dismiss for failure to state a claim should not be granted unless it appears certain that the plaintiff can prove no set of facts which would support her claim and entitle her to relief. When considering a motion to dismiss, the court should "accept as true all well-pleaded allegations and should view the complaint in a light most favorable to the plaintiff." Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993). However, the court "need not accept the legal conclusions drawn from the facts" nor "accept as true unwarranted inferences, unreasonable conclusions, or arguments." Eastern Shore Mkts., Inc. v. J.D. Assocs. Ltd. P'ship, 213 F.3d 175, 180 (4th Cir. 2000). Further, for purposes of a Rule 12(b)(6) motion, a court may rely on only the complaint's allegations and those documents attached as exhibits or incorporated by reference. See Simons v. Montgomery Cnty. Police Officers, 762 F.2d 30, 31 (4th Cir. 1985). If matters outside the pleadings are presented to and not excluded by the court, the motion is treated as one for summary judgment under Rule 56 of the Federal Rules of Civil Procedure. Fed.R.Civ.P. 12(d).
With respect to well-pleaded allegations, the United States Supreme Court explained the interplay between Rule 8(a) and Rule 12(b)(6) in Bell Atlantic Corp. v. Twombly:
Federal Rule of Civil Procedure 8(a)(2) requires only "a short and plain statement of the claim showing that the pleader is entitled to relief, " in order to "give the defendant fair notice of what the... claim is and the grounds upon which it rests." While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the "grounds" of his "entitle[ment] to relief" requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact).
550 U.S. 544, 555 (2007) (footnote and citations omitted); see also 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1216, at 235-36 (3d ed. 2004) ("[T]he pleading must contain something more... than a bare averment that the pleader wants compensation and is entitled to it or a statement of facts that merely creates a suspicion that the pleader might have a legally cognizable right of action.").
"A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). "The plausibility standard is not akin to a probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (citing Twombly, 550 U.S. at 556). The plausibility standard reflects the threshold requirement of Rule 8(a)(2)-the pleader must plead sufficient facts to show he is entitled to relief, not merely facts consistent with the defendant's liability. Twombly, 550 U.S. at 557 (quoting Fed.R.Civ.P. 8(a)(2)); see also Iqbal, 556 U.S. at 678 ("Where a complaint pleads facts that are merely consistent with' a defendant's liability, it stops short of the line between possibility and plausibility of "entitlement to relief."'" (quoting Twombly, 550 U.S. at 557)). Accordingly, the plausibility standard requires a plaintiff to articulate facts that, when accepted as true, demonstrate that the plaintiff has stated a claim that makes it plausible the plaintiff is entitled to relief. Francis v. Giacomelli, 588 F.3d 186, 193 (4th Cir. 2009) (quoting Iqbal, 556 U.S. at 678).
Field filed his motion to dismiss pursuant to Federal Rules of Civil Procedure 8, 9, 12, 19, and/or 23 in two parts, arguing:
1. RICO is disfavored and does not apply herein;
2. The PSLRA bars Plaintiffs' Complaint;
3. The "criminal exception" to the PSLRA does not apply to Field or encompass these Plaintiffs;
4. The action is barred under the Supreme Court holding of Janus Capital Group, Inc. v. ...