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Dinnen v. Kneen

United States District Court, D. Colorado

September 19, 2017

MICHAEL W. DINNEN, an individual, Plaintiff,
v.
TIMOTHY KNEEN, an individual, MICHAEL ROBERTS, an individual, TIMOTHY FLAHERTY, an individual, CARL VERTUCA, an individual, and PdC, LLC, a Colorado LLC, Defendants.

          ORDER

          PHILIP A. BRIMMER, UNITED STATES DISTRICT JUDGE

         This matter is before the Court on Defendant's [sic] Motion to Dismiss Claims in Amended Complaint [Docket No. 59].[1] The Court has jurisdiction pursuant to 28 U.S.C. § 1331.

         I. BACKGROUND[2]

         The claims in this action arise from allegedly false and misleading statements made by defendants PdC, LLC, Timothy Kneen, Michael Roberts, Timothy Flaherty, and Carl Vertuca (“defendants”) to induce plaintiff to invest in a luxury real estate project in Mexico.[3] Docket No. 55 at 1, ¶ 1.

         Plaintiff is an investor in defendant PdC, LLC (“PdC”).[4] Id. at 1, ¶ 1. Plaintiff met defendants Flaherty and Kneen in 2007. Id. at 6, ¶ 22. In 2008, plaintiff attended a pitch for the development of a beachfront resort on Xpu-Ha Beach near Playa del Carmen to be called the Sereno Beach Resort (the “Sereno project”). Id. at 4, ¶ 12; 6-7, ¶ 22. Defendants told plaintiff at the pitch that by investing in the Sereno project he could double his money. Id. at 6-7, ¶ 22. In the summer of 2008, plaintiff attended a meeting in Denver where defendants made “representations concerning the use and scope of the Sereno Project as well as the safety of the investment.” Id., ¶ 26. At a sales presentation in 2010, plaintiff was told “that their investment was ‘safe' and would result in a doubling of their money.” Id., ¶ 23. Defendants Flaherty, Kneen, and Roberts participated in the 2010 sales presentation. Id.

         At some point before February 2009, defendants began offering “B Units” in PdC. Id. at 8, ¶ 27. On or about February 2, 2009, defendant PdC provided plaintiff with a Private Placement Memorandum (“PPM”) describing the B Units offering. Id., ¶ 28. The PPM described an offering of B Units that were eligible for a return of up to “one times” the capital contribution, subject to the repayment of “bank loans and other administrative payments and reserves.” See Docket No. 55-1 at 8. The PPM included a table of financial projections that provided a list of certain anticipated expenses. See Id. at 12-14. The amended complaint states that these financial projections were “knowingly misleading, inaccurate or prepared with reckless disregard for accuracy.” Docket No. 55 at 10, ¶ 41. The investment proceeds from the offering of B Units were to be used for a number of purposes, including the development of the Sereno project. Id. at 8, ¶ 31.

         In promoting the B Units, defendants Kneen and Flaherty represented that “[w]ithin 18-24 months, the investment would double in value” and that “[c]onstruction was to begin immediately and everything was ready to go.” Id. at 12, ¶ 46. According to the amended complaint, defendants did not disclose that the planned development exceeded permitting requirements, that investment proceeds would be used for projects unrelated to the Sereno project, and that PdC lacked government permission for the project. Id. at 13, ¶ 48. Plaintiff invested in the B Units in 2009.[5] Docket No. 55 at 1-2, ¶ 1; 8, ¶ 28.

         After plaintiff invested in the B Units, defendants provided numerous updates related to the status of the project. Id. at 14-15, ¶ 53. In April 2010, defendants stated that they had received a final environmental permit. Id. On October 13, 2010, defendants stated that the Sereno project had been granted “the last permit by the City for the . . . Villas.” Id. The October 13, 2010 email included as an attachment a remodel permit, not a permit for new construction. Id.

         Some time before December 2010, defendants informed plaintiff that PdC had partnered with SV Capital, a firm with experience developing projects like the Sereno project. Id. at 16, ¶ 55. However, at some point before 2014, SV Capital informed defendants that the Sereno project could not be completed as planned. Id.

         In 2011, plaintiff gave PdC $120, 106 towards the purchase of a villa. Id. at 17, ¶ 58. Plaintiff has received a partial refund of this deposit.

         In February 2012, plaintiff and other potential investors met with defendants Flaherty, Kneen, and Vertuca. Id. at 18, ¶ 61. Defendants offered plaintiff the opportunity to participate in a second round of financing referred to as the mezzanine loan or “the Mezz.” Id. at 8-14, ¶¶ 27-48; 17-23 at ¶¶ 60-73. Defendants represented that the Mezz “would permit the acquisition of 11 acres of beachfront property.” Id. The second property (“Sereno II”) was adjacent to the beachfront property already owned by PdC (“Sereno I”). Id.

         In offering the Mezz, defendants did not disclose, among other things, that the Sereno II property was subject to a lien filed by Hoteles Turisticos Unidos, S.A. (“Hotusa”), that defendants had other financial difficulties, that defendants still had not obtained permits to develop Sereno I, or that investor money was being used to pay for defendants “marketing, travel, living.” Id. at 19-20, ¶ 64. On May 9, 2012, defendants emailed a letter agreement and letter of intent to plaintiff regarding investment in the Mezz, to be made to PdC through a “vehicle described as ‘the RM Funding Group, LLC.'” Id. at 21, ¶ 66. Plaintiff wired $250, 000 to PdC after receiving the letter agreement. Id. at 22, ¶ 68.

         Shortly after plaintiff wired his funds to PdC, defendants provided plaintiff with seven contracts “that laid out a transaction structure [of the Mezz] where Mr. Dinnen would have an equity interest in a single purpose LLC, RM Funding LLC.” Id. at 22, ¶ 69.

         After the Mezz offering, defendants continued to offer upbeat assessments of the Sereno project. Id. at 23-24, ¶ 74. In August 2014, defendants held a conference call wherein they disclosed that PdC had been involved in unsuccessful litigation with Hotusa regarding the Sereno II property, resulting in a $6, 000, 000 lien on the Sereno II property with priority over the Mezz funding. Id. at 24-25, ¶ 78. Defendants have yet to obtain permits to develop the Sereno project, and plaintiff states that he has not “received a single penny” from his investments. Id. at 1-2, ¶ 1.

         On April 19, 2016, plaintiff filed suit. Docket No. 1. Plaintiff's amended complaint, filed on October 4, 2016, contains eight claims for relief: fraud; negligent misrepresentation; negligence; misrepresentations and omissions in violation of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78a, et seq.; control person liability under the Exchange Act; unjust enrichment; civil conspiracy; and a request for an accounting. Docket No. 55.

         II. LEGAL STANDARD

         “The court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff's complaint alone is legally sufficient to state a claim for which relief may be granted.” Dubbs v. Head Start, Inc., 336 F.3d 1194, 1201 (10th Cir. 2003) (citations omitted). In doing so, the Court “must accept all the well-pleaded allegations of the complaint as true and must construe them in the light most favorable to the plaintiff.” Alvarado v. KOB-TV, L.L.C., 493 F.3d 1210, 1215 (10th Cir. 2007) (quotation marks and citation omitted). At the same time, however, a court need not accept conclusory allegations. Moffett v. Halliburton Energy Servs., Inc., 291 F.3d 1227, 1232 (10th Cir. 2002).

         Generally, “[s]pecific facts are not necessary; the statement need only ‘give the defendant fair notice of what the claim is and the grounds upon which it rests.'” Erickson v. Pardus, 551 U.S. 89, 93 (2007) (per curiam) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)) (omission marks, internal quotation marks, and citation omitted). The “plausibility” standard requires that relief must plausibly follow from the facts alleged, not that the facts themselves be plausible. Bryson v. Gonzales, 534 F.3d 1282, 1286 (10th Cir. 2008).

         However, “where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged - but it has not shown - that the pleader is entitled to relief.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009) (internal quotation marks and alteration marks omitted). Thus, even though modern rules of pleading are somewhat forgiving, “a complaint still must contain either direct or inferential allegations respecting all the material elements necessary to sustain a recovery under some viable legal theory.” Bryson, 534 F.3d at 1286 (quotation marks and citation omitted).

         III. ANALYSIS

         A. Plaintiff's Section 10(b) Claim (Fourth Claim for Relief)

         Under Section 10(b) of the Exchange Act, it is unlawful for any person “[t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.” 15 U.S.C. § 78j(b). SEC Rule 10b-5 provides that it is unlawful for any person

(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under ...

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