United States District Court, W.D. Pennsylvania
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For PANTHERA RAIL CAR LLC, PANTHERA LEASING, INC., Plaintiffs: Deborah L. Thaxter, LEAD ATTORNEY, PRO HAC VICE, Nixon Peabody LLP, Boston, MA; Marcie Keenan Farano, LEAD ATTORNEY, Nixon Peabody LLP, San Francisco, CA; Matthew A. Richards, LEAD ATTORNEY, Nixon Peabody LLP, San Francisco, CA.
For KASGRO RAIL CORPORATION, a Pennsylvania corporation, KASGRO LEASING, LLC, KASGRO RAIL CAR MANAGEMENT, LLC, Defendants: Steven Benjamin Sacks, LEAD ATTORNEY, Sheppard Mullin Richter & Hampton LLP, San Francisco, CA; James Eric Goldschmidt, Steven Jay Berryman, PRO HAC VICE, Quarles and Brady LLP, Milwaukee, WI; John C. Schaak, Milwaukee, WI.
For KR LOGISTICS, LLC, Defendant: Douglas William Rose, PRO HAC VICE, Rose deJong, S.C., Milwaukee, WI; Gabriel Dash Zeldin, Steyer Lowenthal Boodrookas Alvarez Smith LLP, San Francisco, CA; Jeffrey H. Lowenthal, Steyer Lowenthal Boodrookas Alvarez & Smith LLP, San Francisco, CA; Lora Lynn LoCoco, PRO HAC VICE, Rose deJong S.C., Milwaukee, WI.
Judge Nora Barry Fischer.
This case involves multiple claims brought by Panthera Rail Car LLC (" Panthera" ) against Defendants KR Logistics, LLC (" KRL" ), Kasgro Leasing, LLC (" Kasgro Leasing" ), Kasgro Rail Car Management, LLC (" KRCM" ), and Kasgro Rail Corporation (" Kasgro Rail" ). (Docket No. 106). The Court ruled on KRL's previous motion to dismiss Panthera's First Amended Complaint (" FAC" ) in an Opinion dated August 21, 2013 (" August Opinion" ). (Docket No. 105 at 1-9). The factual background of this case was reviewed extensively in the August Opinion, and the Court need not fully restate all of the facts. ( Id. at 3-9).
In that ruling, the Court conducted choice-of-law analysis with respect to each of Panthera's claims against KRL, ( Id. at 10-24), and granted KRL's motion, without prejudice, under Federal Rule of Civil Procedure 12(b)(6). ( Id. at 31). Panthera added new allegations to its Second Amended Complaint (" SAC" ), (Docket No. 106), which are described in further detail below.
Presently before the Court are two Motions to Dismiss Panthera's SAC (Docket No. 106), filed by KRL (Docket No. 113) and the Kasgro Defendants (Docket No. 115). These matters having been fully briefed (Docket Nos. 114, 116, 126, 127, 129, 130) are now ripe for review.
II. KRL'S MOTION TO DISMISS
In the August Opinion, the Court found the following with respect to the choice of law governing Panthera's claims against KRL:
1. Alter Ego Liability is governed by Wisconsin law because KRL was incorporated in Wisconsin. (Docket No. 105 at 11-12).
2. The laws of the potentially governing states are the same as to Fraud, Aiding and Abetting Fraud, and Civil Conspiracy, and so the Court chose to apply California law " [f]or the sake of consistency." ( Id. at 24).
3. The Unfair Competition claim is governed by California law, based on Pennsylvania's choice of law analysis finding that the parties' most significant relationship was to California. ( Id. ).
Panthera added an additional claim for Civil Conspiracy against KRL in its SAC. (Docket No. 106 at 45-46). Although the Court did not address the choice of law for this claim in the August Opinion, the parties agree that there is no actual conflict as to the laws in the potentially applicable states. (Docket No. 114 at 4-5; Docket No. 126 at 5). Given that the laws of the potentially interested states could be applied interchangeably, the Court will apply California law for the sake of consistency. (Docket No. 105 at 24).
A. Legal Standard
KRL moved to dismiss Panthera's SAC under Federal Rule of Civil Procedure 12(b)(6). (Docket No. 113). Rule 12(b)(6) empowers a district court to dismiss a complaint if it fails to state a claim upon which relief can be granted. To survive a motion to dismiss, " a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). A complaint is facially plausible if it alleges
sufficient " factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. However, the court is " not bound to accept as true a legal conclusion couched as a factual allegation." Iqbal, 556 U.S. at 678.
In addition to pleading adequate factual content, the complaint also must be legally sufficient. Iqbal, 556 U.S. at 678; Twombly, 550 U.S. at 555. To determine the complaint's legal sufficiency, the court must accept as true all of the facts, but not the legal conclusions, alleged, draw all reasonable inferences in the plaintiff's favor, and confirm that the accepted-as-true facts actually give rise to a claim that would entitle the plaintiff to relief. Id.; Inv. Syndicate of Am., Inc. v. City of Indian Rocks Beach, 434 F.2d 871, 876 (5th Cir. 1970) (standard posed under Rule 12(b)(6), like its common law antecessor, the demurrer, is " if every fact alleged by the opposite party be taken as established, the pleader is still entitled to no relief against me" ).
A court may not dismiss the complaint merely because it appears that the plaintiff cannot prove the facts alleged or will not ultimately prevail on the merits. Twombly, 550 U.S. at 556, 563 n.8. Instead, it must ask whether the facts alleged raise a reasonable expectation that discovery will reveal evidence of the necessary elements. Id. at 556. The motion to dismiss should not be granted if the plaintiff alleges facts which could, if established at trial, entitle him to relief. Id. at 563 n.8. In ruling on the motion, a court may consider only the complaint, attached exhibits, matters of public record, and undisputedly authentic documents not attached to the complaint if the complainant's claims are based on those documents. Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010). In considering external yet undisputedly relevant and authentic documents, the court need not convert the motion to dismiss into a motion for summary judgment. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997).
B. Sufficiency of Panthera's Second Amended Complaint
1. Alter Ego Liability
As detailed in the Court's August Opinion, Wisconsin uses a two-pronged test to establish alter-ego liability: formalities and fairness. (Docket No. 105 at 24-25). This is an equitable doctrine that is applied with the trial court's discretion. CB Distributors, Inc. v. Laurel Mountain Sales, Inc., 709 N.W.2d 112, 2006 WI App 20, 289 Wis.2d 219, 2005 WL 3543615, at *3 (Wis. Ct. App. Dec. 29, 2005) (citing Consumer's Co-op. of Walworth Cnty. v. Olsen, 142 Wis.2d 465, 472-73, 419 N.W.2d 211 (Wis. Ct. App. 1988)). The remedy can be used to reach the controlled entity's assets, as Panthera attempts here. Select Creations, Inc. v. Paliafito Am., Inc., 852 F.Supp. 740, 774 (E.D. Wis. 1994).
In the August Opinion, the Court found that Panthera's FAC sufficiently alleged facts supporting the fairness requirement, in that Panthera averred that " KRL was . . . established for the purpose of hiding transactions and profits from the lessors of the Kasgro Entities, as demonstrated by the fact that Panthera was neither alerted nor received profits from the assignment of the Westinghouse Lease and at least one other leasing deal." (Docket No. 105 at 27 n.19) (citations omitted). However, the Court granted KRL's motion to dismiss because, with respect to the formalities requirement, the Court concluded that Panthera had not shown that KRL lacked a separate and independent existence, and
was the mere instrumentality of the shareholders. ( Id. at 25).
In its SAC, Panthera adds substantial new allegations indicating that KRL is an alter ego of the Kasgro Entities:
o KRL's eight founding members " all are key players with the Kasgro Entities," as each of these members is " either: an owner, director, officer, and/or shareholder of Kasgro Rail; a member of Kasgro Leasing; and/or an officer or member of Kasgro Rail's parent, Antietam, LLC ('Antietam')." (Docket No. 106 at 3-4, ¶ 9). As such, KRL's founding members had knowledge of the conditions imposed on the Kasgro Entities by the 2005 Revised Lease, as well as the Kasgro Entities' responsibilities under the Revised Lease. ( Id at 4-5, ¶ ¶ 12-13).
o KRL's registered address in Pennsylvania is the same business address used by the Kasgro Entities. ( Id at 4, ¶ 10). Similarly, KRL's business address in Wisconsin is the same address as used by Kasgro Rail's parent, Antietam. ( Id. at 4, ¶ 11).
o KRL's only transactions or business activities have been with Kasgro Entities or its former insiders. ( Id. at 5, ¶ 14).
o KRL observed no corporate formalities when it was assigned the Westinghouse Lease from the Kasgro Entities, with no consideration paid. ( Id. at ¶ 16).
o The timeline of events--beginning with KRCM entering into a Purchase Order Lease Agreement with Westinghouse on March 30, 2011 for rail cars to be delivered on January 2, 2012 and in violation of the 2005 Lease Agreement, through controlling members of the Kasgro Entities founding KRL on November 17, 2011, and KRL receiving $1.4 million in proceeds in relation to the Westinghouse lease on December 13, 2011--indicates that KRL was formed " for the purpose of, and participation in, the Kasgro Entities' fraudulent schemes." ( Id. at 25-27, ¶ ¶ 110-11).
In light of these additions to the SAC, Panthera contends that its pleadings survive under Rule 12(b)(6). (Docket No. 126 at 9-11).
KRL argues that the SAC fails to rectify the deficiencies the Court found in the FAC with respect to the formalities requirement. (Docket No. 129 at 3-9). KRL describes the SAC as containing more " conclusory statements without factual support." (Docket No. 114 at 7). KRL further characterizes the SAC as bolstering the fairness prong of the alter ego test, which it argues cannot affect the outcome of this theory because the formalities prong remains inadequate. ( Id. at 8). Regarding the assignment of the Westinghouse Lease, KRL suggests that these facts actually evidence the distinct nature of these KRL and the Kasgro Entities: " the fact that a formal assignment took place and is documented only further supports the fact that KR Logistics and the Kasgro Entities obeyed and respected corporate formalities." (Docket No. 129 at 5).
Despite KRL's arguments, the Court finds that Panthera has alleged sufficient facts to state a plausible claim under the alter ego doctrine in this case. Specifically, Panthera's reference to the common parties controlling KRL and the Kasgro Entities, combined with the timeline of events, is compelling. The SAC's version of events supports Panthera's theory that KRL was formed simply to assist the Kasgro Entities in avoiding their lease obligations.
(Docket No. 106 at 25, ¶ 111). Under Wisconsin law, the alter ego doctrine is " particularly appropriate" in such cases, where an entity is used " to hide assets or secretly to conduct business to avoid the pre-existing liability of the controlling party." Select Creations, 852 F.Supp. at 774.
Panthera's averments related to common ownership, taken as true, are also persuasive indications that the entities shared such a unity of interest and ownership that the Kasgro Entities exercised complete control over KRL. Discovery Technologies, Inc. v. AvidCare Corp., 2005 WI App 59, 280 Wis.2d 557, 694 N.W.2d 509, 2005 WL 350438, at *4 (Wis. Ct. App. 2005). Panthera paints a picture wherein the Kasgro Entities, attempting to avoid their obligations to Panthera, decided to form a new company that would not be expressly bound to the Panthera lease. (Docket No. 106 at 5, ¶ 13). Furthermore, Panthera alleges that KRL conducted no business other than transactions related to the Kasgro Entities, such as the Westinghouse lease. ( Id. at 5-6 ¶ ¶ 13-15). These allegations evidence a lack of formalities; essentially, KRL was a separate entity only in the most technical of senses. 1 Fletcher Cyc. Corp. § 43 (2013) ( " The control necessary to invoke the " instrumentality rule" is not mere majority or complete stock control, but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is but a business conduit for its principal." ). Its founding members were " non-functioning" in the sense that they wore their " Kasgro" hats even while managing KRL. See Discovery Technologies, Inc., 2005 WI App 59, 280 Wis.2d 557, 694 N.W.2d 509, 2005 WL 350438, at *4 (determining whether the formalities requirement is met by looking to the extent of control and dominance exercised over the subsidiary). In this light, KRL can be seen as a sham corporation.
Moreover, KRL mischaracterizes Wisconsin law when it argues that the SAC's alter ego claims should be dismissed because they merely add more allegations going to fairness rather than to formalities. (Docket No. 114 at 8). The test for this equitable doctrine is less rigid than KRL would have. See Consumer's Co-op., 142 Wis.2d 465 at 485, 419 N.W.2d 211 ( " [B]ecause of the equitable nature of this remedy, flexibility must be maintained." ). Given that Panthera's SAC--taken as true--satisfies the formalities prong, fairness again becomes relevant in that the Court must decide whether, in its discretion, the alter ego theory should be applied. CB Distributors, 709 N.W.2d 112, 2006 WI App 20, 289 Wis.2d 219, 2005 WL 3543615, at *3. In this case, the Court finds the fairness prong particularly compelling, and therefore concludes that Panthera has stated plausible grounds for applying the alter ego doctrine.
2. Common Law Fraud
California law allows a cause of action for common law fraudulent concealment by showing: " (1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed
fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage." Lovejoy v. AT& T Corp., 92 Cal.App.4th 85, 111 Cal.Rptr.2d 711, 719 (Cal. Ct. App. 2001) (quoting Marketing West, Inc. v. Sanyo Fisher (USA) Corp., 6 Cal.App.4th 603, 7 Cal.Rptr.2d 859, 864 (Cal. Ct. App. 1992)).
The Court dismissed Panthera's common law fraud claim in its FAC, explaining that this decision was compelled by the Court's ruling on the alter ego claim. (Docket No. 105 at 28-29). KRL's arguments with respect to the SAC similarly center on the viability of the alter ego theory, and provide no arguments as to why this claim should be dismissed if the Court finds that Panthera may proceed on the alter ego theory. (Docket No. 114 at 8-9; Docket No. 129 at 8). Having found that the SAC sufficiently pleads the alter ego theory, KRL's arguments cannot stand.
Additionally, the Court finds that the SAC meets the special pleading requirements under Federal Rule of Civil Procedure 9(b). When pleading fraud, the plaintiff must " state with particularity the circumstances constituting fraud, including the 'who, what, when, where, and how' of the charged misconduct." Walsh v. Kindred Healthcare, 798 F.Supp.2d 1073, 1081 (N.D. Cal. 2011). To this end, the SAC asserts that KRL knew that by taking over the Westinghouse Lease, it would enable the Kasgro Entities to divert $1.4 million that the Kasgro Entities would have otherwise received, shielding this sum from being included in the 2011 Excess Profit Certification. (Docket No. 106 at 4-5, ¶ 12). This pleading requirement is also satisfied because Panthera has put KRL on notice of the nature and circumstances of the fraud alleged, such that KRL will be able to answer and defend against this claim. Walsh, 798 F.Supp.2d at 1081 (citing Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 540 (9th Cir.1989)); Neilson v. Union Bank of Cal., N.A., 290 F.Supp.2d 1101, 1141-42 (C.D. Cal. 2003). Therefore, the SAC sufficiently pleads a plausible claim for fraud.
3. Aiding and Abetting Fraud
California follows the Second Restatement of Torts with respect to civil claims for aiding and abetting fraud. Casey v. U.S. Bank Nat. Assn., 127 Cal.App.4th 1138, 26 Cal.Rptr.3d 401, 405 (Cal. Ct. App. 2005). A defendant is subject to ...