United States District Court, E.D. Pennsylvania
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
For HANDONG WEN, Plaintiff: JARED DIMOCK BAYER, LEAD ATTORNEY, JAMES H. HELLER, COZEN O'CONNOR, PHILADELPHIA, PA.
For ROBERT E. WILLIS, FOXCODE, INC., Defendants: PHILIP M. SMITH, LEAD ATTORNEY, JACOB OSLICK, SEYFARTH SHAW LLP, NEW YORK, NY.
WENDY BEETLESTONE, J.
Plaintiff Handong Wen alleges that he was induced by Defendants Foxcode, Inc. (" Foxcode" ) and its principal Robert Willis (collectively, the " Defendants" ) to invest $4 million in a fraudulent scheme. Wen alleges that he invested money with Foxcode and Willis in a limited liability company created by the parties for Wen's benefit, but that Foxcode and Willis instead siphoned off most of his investment for their own personal use and profit. He brings seven claims under federal and state securities laws, as well as common law. Before the Court is the Defendants' motion to dismiss. They argue that several of Wen's claims are barred by the gist of the action doctrine and, in any event, he has failed to state claims for relief under Federal Rules of Civil Procedure 12(b)(6) and 9(b). For the reasons that follow, the motion shall be granted in part and denied in part.
Wen is a citizen of the People's Republic of China who is currently enrolled as an undergraduate student at Temple University. Compl. ¶ 2, 5. Willis is the principal of Foxcode, an investment and merchant banking firm. Id. ¶ 6.
According to the allegations in the Complaint, in or around the middle of 2013, Willis represented to Wen that, if Wen placed a $4 million investment with the Defendants, they would manage that investment
for his benefit, deliver a return on the investment, and guarantee the $4 million principal would be returned in full when the investment concluded. Id. ¶ 7. Wen agreed to make the investment, and the Defendants created two entities under the laws of Delaware as a vehicle to receive Wen's funds--Foxcode Far East, LLC (" FFE" ) and Foxcode Capital Markets, LLC (" Foxcode Capital" ). Id. ¶ ¶ 9-10. In reliance on the Defendants' representations, Wen signed the Foxcode Far East, LLC Agreement (" FFE Agreement" ). Id. ¶ 17. By the terms of the FFE Agreement, Wen would contribute $4 million in exchange for a 99.9% membership interest in FFE, and Foxcode Capital would contribute $4000 for a 0.1% membership interest while providing " all finance advis[ory] services necessary to generate earnings for Foxcode Far East LLC." Compl. Ex. A at 3-4. Foxcode Capital was to be paid 2% of the committed capital upon execution of the agreement and on each year thereafter as a management fee. Id. at 7. Foxcode Capital was also entitled to a " Performance Fee," equal to 30% of all distributions made to Wen over his committed capital plus an annual return of 15%. Id.
FFE was to be managed by its members, Wen and Foxcode Capital. Compl. Ex. A at 8 ¶ 22. As managers, Wen and Foxcode Capital had the ability to bind FFE in contract. Id. at 8 ¶ 23. Each could call a member meeting, given appropriate notice to the other was provided. Id. at 9 ¶ 27. Each could withdraw and dissolve the company after 24 months. Id. at 9 ¶ 30. Each had the power to demand FFE's books and records. Id. at 14 ¶ 40. Wen himself had the power to request an independent valuation of FFE if at any time he had reason to believe the net assets of the company fell below $2.5 million, and if that valuation determined that the net equity value of the company was lower than that amount, he had the sole authority to dissolve the company. Id. at 12 ¶ 37(d). And the following actions required the unanimous consent of Wen and Foxcode Capital:
(a) Incurring company liabilities over $3000;
(b) Incurring a single transaction over $3000;
(c) The sale of any Company asset with a fair market value over $3000;
(d) Hiring an employee with an annual compensation over $10,000;
(e) Termination of any employee;
(f) Assignment of ownership rights of Company property;
(g) Endangering the ownership or possession of Company property;
(h) Assignment of check signing authority;
(i) Releasing any Company claim except for payment in full; and
(j) Any actions described in item a, b, or c that result in any monthly accumulated amount of item a, b, or c higher than $10,000, respectively.
Id. at 20-21 ¶ ¶ 63(a)--(j).
After signing the agreement, Wen delivered the $4 million to FFE via two wire
transfers made on July 22 and July 25, 2013. Compl. ¶ 20. Wen alleges that, rather than investing the money for his benefit, in accordance with the FFE Agreement, the Defendants drained the money out of FFE's bank account, transferring nearly all of it into their own accounts. Id. ¶ 23. By way of example, on December 23, 2013, Willis made a wire transfer of $1 million from FFE into his personal bank account. Id. ¶ 24. And by the end of March 2014, the Defendants had transferred all but approximately $26,000 of the original $4 million out of FFE's bank account and into the Defendants' accounts. Id. ¶ 25. Neither Wen nor any representative of his consented to these transfers of funds to personal accounts. Id. ¶ 26.
Wen began to suspect that his investment had been dissipated without adequate compensation and without providing any return to him. Id. ¶ 27. He inquired of Willis on several occasions as to the performance and status of the investment and/or to seek the return of the $4 million and the return thereon, but received no satisfactory response, despite the fact that the FFE Agreement provides that " Foxcode Capital Markets will submit a monthly written report of any of the above actions together with Cash Flow and Balance Sheet statements to Handong Wen or his authorized agent." Id. ; Compl. Ex. A at 21. Through counsel, Wen also requested that Willis produce all documents to show what happened to the money. Compl. ¶ 28. Wen made several requests and Willis promised to produce the records, but the records have not been produced in full. Id. ¶ 29. According to Willis, many of the records he should have kept were never created and do not exist. Id. The Defendants produced only a self-prepared general ledger, balance sheet, and profit and loss statements, as well as tax returns and a few emails. Id. ¶ 30. On the balance sheet provided by the Defendants, $3,885,457.39 of Wen's $4,000,000.00 investment is recorded as having been " loaned" to Willis, personally, and to Foxcode. Id. ¶ 31. Of the $114,542.61 not recorded as loaned to Willis, $80,000 was paid to Foxcode as a " consulting" expense. Id. ¶ 32.
Wen alleges that the Defendants secured a profit or return on the " loaned" funds of at least $5.6 million (over and above the $4 million in principal), which they have kept for their own benefit. Id. ¶ 33.
Wen filed a seven-count Complaint in this Court on March 16, 2015. In it, he asserts claims against the Defendants for: (1) fraud; (2) fraud in the inducement; (3) securities fraud under federal law; (4) securities fraud under Pennsylvania law; (5) conversion; (6) misappropriation; and (7) breach of fiduciary duty. The Defendants contend that Wen's common law claims for fraud, fraud in the inducement, conversion, misappropriation, and breach of fiduciary duty are all barred by the gist of the action doctrine. They also argue that Wen has failed to allege sufficient facts to state any of his claims under Federal Rule of Civil Procedure 12(b)(6) and the heightened pleading requirements of Rule 9(b).
II. LEGAL STANDARD
" 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 A. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). " In light of Twombly, 'it is no longer sufficient to allege mere elements of a cause of action; instead a complaint must allege facts suggestive of [the proscribed conduct].'" Great W. Mining &
Mineral Co. v. Fox Rothschild LLP, 615 F.3d 159, 177 (3d Cir. 2010) (quoting Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008)). Consistent with the Supreme Court's rulings in Twombly and Iqbal, the Third Circuit requires a two-step analysis when reviewing a Rule 12(b)(6) motion. Edwards v. A.H. Cornell & Son, Inc., 610 F.3d 217, 219 (3d Cir. 2010). First, a court should separate the factual and legal elements of a claim, accepting the facts and disregarding the legal conclusions. Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009). Second, a court should determine whether the remaining well-pled facts sufficiently show that the plaintiff " has a 'plausible claim for relief" Id. at 211 (quoting Iqbal, 556 U.S. at 679). The Court must construe the facts and draw inferences in the light most favorable to the plaintiff. Santomenno ex rel. John Hancock Trust v. John Hancock Life Ins. Co. (U.S.A.), 768 F.3d 284, 290 (3d Cir. 2014). However, " [w]here 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" Great Western Mining, 615 F.3d at 177 (quoting Twombly, 550 U.S. at 556-57 ...