This matter is before the court on Defendants' Motion to Dismiss Plaintiff's Complaint Pursuant to F.R.Civ.P. 12(b)(6), which motion was filed on January 5, 2009.*fn1
For the following reasons, I grant defendants motion to dismiss with respect to Count XIV of plaintiff's Complaint, which alleged that defendants violated the Racketeer Influenced and Corrupt Organizations Act ("RICO").*fn2 Specifically, I conclude that plaintiff has failed to allege a pattern of racketeering activity and has not alleged an injury to her business or property, as required by RICO. Moreover, I conclude that an amendment to plaintiff's Complaint would be futile because plaintiff's proposed amendments would not establish that defendants proximately caused an injury to plaintiff's business or property.
Furthermore, I dismiss the remainder of plaintiff's Complaint, which alleges thirteen pendant state-law claims, for lack of subject matter jurisdiction. Plaintiff has not established diversity jurisdiction, and I conclude that plaintiff's state-law claims predominate over plaintiff's sole federal claim, which I have dismissed.
Accordingly, I dismiss the remaining portion of defendants' motion to dismiss plaintiff's state-law claims as moot without prejudice to raise the issues as preliminary objections in state court.
This case arises from the corporate governance and merger of defendant Spotts, Stevens and McCoy, Inc. ("SSM"), a Pennsylvania business corporation, which merged into a special purpose holding-company, Wyomissing Holdings, Inc., ("WHI"). Defendants J. Carlton Godlove, Brian Kelly, Patrick McCoy and Lewis McCoy (collectively "individual defendants") were directors of SSM and collectively owned 89% of SSM common stock.
Plaintiff Delia McCoy-McMahon was a minority shareholder of SSM before she was "squeezed out" in this merger. Plaintiff contends that the "Freeze-Out Merger" had an improper purpose, used an unfair process, and squeezed plaintiff out at an unfair price.
Plaintiff also alleges the individual defendants, in their capacity as directors of SSM, breached their fiduciary duty owed to shareholders and the corporation*fn3 and, in their capacity as controlling shareholders, breached their fiduciary duty owed to minority shareholders.
In total, plaintiff asserts fourteen causes of action for breach of fiduciary duties, fraud, breach of contract, violations of Pennsylvania securities laws, unjust enrichment, and violations of RICO.*fn4 The first thirteen claims are brought pursuant to Pennsylvania state law. Count XIV for violation of RICO is a federal law claim.
In Count I, plaintiff claims that the individual defendants breached a fiduciary duty by setting and securing excessive compensation for their roles as directors of Spotts, Stevens and McCoy, Inc. Count II alleges that the individual defendants engaged in corporate waste, and mismanaged corporate assets. Count III avers that the individual defendants misappropriated a corporate opportunity. Specifically, plaintiff alleges that the individual defendants capitalized on a profitable real estate venture for their own pecuniary benefit at the expense of SSM.
Count IV claims that the individual defendants, in their capacity as controlling shareholders, breached their fiduciary duties to the minority shareholders, including plaintiff, by withholding pertinent information about the corporation in order to exercise unfettered control of corporate decisions.
Count V, asserts that the individual defendants breached their fiduciary duty by implementing the Freeze-Out Merger, which plaintiff alleges had no business justification and was entered into in order to circumvent direct and derivative liability to plaintiff. Further, plaintiff alleges that the merger was not authorized by a majority of uninterested directors and that the consideration paid to minority shareholders for their stock did not represent its fair value.
Count VI states a claim that the individual defendants violated the Pennsylvania Securities Act of 1972.*fn5 Specifically, plaintiff contends that the materials provided by the individual defendants to minority shareholders regarding the merger contained untrue statements of material fact about the true value of SSM stock.
Count VII asserts a claim for fraud. Count VIII is a claim for intentional misrepresentation, and Count IX alleges negligent misrepresentation.
Count X alleges a cause of action for breach of fiduciary duty, based on the individual defendants failure to disclose material information about SSM and the potential or actual conflicts of interests of the individual defendants. Count XI alleges that the failure of the individual defendants to perform their duties as directors of SSM breached their employment contract with SSM.
Count XII is a claim for unjust enrichment against the individual defendants for profits they realized in violation of their fiduciary duties. Count XIII alleges that the individual defendants collectively conspired to engage in the unlawful acts described in Counts I through XII.
Finally, Count XIV asserts that the individual defendants violated RICO. 18 U.S.C. § 1962(c). Specifically, plaintiff contends that defendants' conduct, described in Counts I through XIII, violated 18 U.S.C. §§ 1341, 1343, 1344 and 157, which establish liability based on mail fraud, wire fraud, bank fraud, and bankruptcy fraud, respectively.
Jurisdiction in this case is based on federal question jurisdiction pursuant to 28 U.S.C. § 1331. This court has supplemental jurisdiction over plaintiff's pendent state-law claims. See 28 U.S.C. § 1367.
Venue is proper pursuant to 28 U.S.C. § 1391(b) because the events giving rise to plaintiff's claims allegedly occurred within Berks County, Pennsylvania, which is located within this judicial district.
A claim may be dismissed under Federal Rule of Civil Procedure 12(b)(6) for "failure to state a claim upon which relief can be granted."*fn6 Fed.R.Civ.P. 12(b)(6). A Rule 12(b)(6) motion requires the court to examine the sufficiency of the complaint. Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 102, 2 L.Ed.2d 80, 84 (1957) (abrogated in other respects by Bell Atlantic Corporation v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
Generally, in ruling on a motion to dismiss, the court relies on the complaint, attached exhibits, and matters of public record, including other judicial proceedings. Sands v. McCormick, 502 F.3d 263, 268 (3d Cir. 2008).
Except as provided in Federal Rule of Civil Procedure 9, a complaint is sufficient if it complies with Rule 8(a)(2), which requires "a short and plain statement of the claim showing that the pleader is entitled to relief."
Fed.R.Civ.P. 8(a)(2). Rule 8(a)(2) "[does] not require heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570, 127 S.Ct. at 1974, 167 L.Ed.2d at 949.*fn7
In determining whether a plaintiff's complaint is sufficient, the court must "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading, the plaintiff may be entitled to relief." Fowler, 578 F.3d at 210 (quoting Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008)).
Although "conclusory or 'bare-bones' allegations will [not] survive a motion to dismiss," Fowler, 578 F.3d at 210, "a complaint may not be dismissed merely because it appears unlikely that the plaintiff can prove those facts or will ultimately prevail on the merits." Phillips, 515 F.3d at 231. Nonetheless, to survive a 12(b)(6) motion, the complaint must provide "enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element[s]." Id. (quoting Twombly, 550 U.S. at 556, 127 S.Ct. at 1965, 167 L.Ed.2d at 940) (internal quotation omitted).
The court is required to conduct a two-part analysis when considering a Rule 12(b)(6) motion. First, the factual matters averred in the complaint, and any attached exhibits, should be separated from legal conclusions asserted therein. Fowler, 578 F.3d at 210. Any facts pled must be taken as true, and any legal conclusions asserted may be disregarded.
Second, the court must determine whether those factual matters averred are sufficient to show that the plaintiff has a "plausible claim for relief." Id. at 211 (quoting Iqbal, __ U.S. at __, 129 S.Ct. at 1950, 178 L.Ed.2d at 884).
Ultimately, this two-part analysis is "context-specific" and requires the court to draw on "its judicial experience and common sense" to determine if the facts pled in the complaint have "nudged [plaintiff's] claims" over the line from "[merely] conceivable [or possible] to plausible." Iqbal, __ U.S. at __, 129 S.Ct. at 1950-1951, 178 L.Ed.2d at 884-885 (internal quotations omitted).
A well-pleaded complaint may not be dismissed simply because "it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely." Twombly, 550 U.S. at 556, 127 S.Ct. at 1965, 167 L.Ed.2d at 940-941.
FACTS Based upon the allegations in plaintiff's Complaint, which under the foregoing standard of review I must accept as true for purposes of defendants' motion to dismiss, the pertinent facts are as follows.
In 1993, after a series of corporate reorganizations and mergers not relevant to this action, Spotts, Stevens and McCoy ("SSM") was formed.*fn8 Plaintiff acquired 13,693 shares of SSM stock.*fn9
On September 12, 1996, the entire Board of Directors for SSM resigned, and the then-president's employment was terminated, and the individual defendants, J. Carlton Godlove, II, Brian R. Kelly, Patrick M. McCory and Lewis J. McCoy, Jr. were elected to replace the Board.*fn10
Also on September 12, 1996, plaintiff entered into a shareholder agreement with the individual defendants, which granted the individual defendants the right to vote all of their respective shares.*fn11 The shares subject to the shareholder agreement composed 95.81% of the total outstanding shares of SSM common stock.*fn12 By March 27, 1998, the four individual defendants, J. Carlton Godlove, II, Brian R. Kelly, Patrick M. McCoy and Lewis J. McCoy, Jr., each owned, directly or indirectly, 22.27% of the outstanding shares of common stock, or an aggregate of 89.06% of the outstanding stock.*fn13
Upon being elected directors of SSM, each defendant entered into an employment agreement with SSM.*fn14 The employment agreements established base salaries and benefits for the individual defendants, which were subject to increase, but not decrease, and further provided that the directors were eligible to receive an annual bonus if the directors established an incentive plan to govern bonus disbursements.*fn15 No incentive plan was ever established.*fn16
Between 1996 and 2008 the individual defendants were paid salaries and bonus packages deemed excessive by plaintiff.*fn17
Moreover, in establishing their compensation, the individual defendants ignored formalities of SSM's bylaws and, in the absence of a formal resolution by the board, established a compensation committee to allocate a "bonus pool."*fn18 The bonus pool was repeatedly allocated exclusively to the individual defendants.*fn19
Moreover, contrary to provisions in SSM's bylaws, plaintiff repeatedly did not receive notification of annual shareholder meetings and the individual defendants did not furnish SSM's financial statements and balance sheets to shareholders.*fn20
On June 9, 2000, the individual defendants mailed a letter to SSM shareholders setting forth a tender offer, which expired after 5 days. The tender was an offer to purchase all of the outstanding shares of SSM.*fn21 This "Buyback Letter" offered $5.16 per share based on a calculation of share value as set forth in the shareholder agreement.*fn22
According to the Buyback Letter, SSM did not have any plans that would materially affect the value of SSM stock. Additionally, the Buyback Letter indicated that SSM planned to continue to reinvest into the business for corporate purposes such as updating technology, hiring and compensating talented employees, expanding SSM's office, and paying down debt.*fn23
However, contrary to the plans identified by the Buyback Letter, corporate profits were used to fund bonus pools for the individual defendants.*fn24 Additionally, the individual defendants possessed insider information about the value of SSM, and the offer of $5.16 per share was undervalued.*fn25
On June 10, 2000, plaintiff called defendant Kelly with questions about the Buyback Letter.*fn26 Mr. Kelly told plaintiff that the individual defendants had plans to sell the corporation and that he would not let the corporation be sold for anything less than $40-$50 per share. He also said the individual defendants were were hopeful of obtaining an offer for $90-$100 per share because they "were thinking big."*fn27
Twenty-four shareholders, totaling more than 20,000 shares of SSM stock, sold their shares pursuant to the terms of the Buyback Letter.*fn28 The price of SSM stock six weeks after the Buyback Letter was sent rose to $5.90 per share, costing the shareholders who sold their stock more than $14,600.*fn29
Plaintiff, however, did not sell her shares.
On June 6, 2003, the individual defendants formed a partnership called Uniquad Management Group, L.P. ("Uniquad"). The only limited partners of Uniquad were the individual defendants.*fn30
On June 24, 2003, Uniquad purchased property at 1047 North Park Road, in Wyomissing, Berks County, Pennsylvania to serve as SSM's new headquarters for more than $2.5 million. The North Park Road property was 100% financed.*fn31
SSM, as directed by the individual defendants, agreed to guarantee the $2.5 million debt without obtaining any consideration or collateral from Uniquad.*fn32 SSM's guarantee of the Uniquad debt was not noted in minutes recorded at SSM board meetings and the individual defendants did not obtain approval from the shareholders to guarantee the debt.*fn33
Currently, SSM pays a monthly rent of $35,833 per month to Uniquad for the property.*fn34
Despite Uniquad making the purchase, and SSM merely guaranteeing the debt and providing rental payments, on June 24, 2003, the individual defendants published a press release, revealing that ...