Heath v. Root9b

          RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE

          Kathleen M Tafoya United States Magistrate Judge

         This case comes before the court on Defendant Eric Hipkins' Motion to Dismiss the Third Amended Complaint [Doc. No. 29] (“Hipkins Mot.”) filed August 27, 2018, to which Plaintiff Mary Heath, acting pro se, filed a Response [Doc. No. 32] on August 28, 2018 and to which Defendant Hipkins filed a Reply on September 7, 2018 [Doc. No. 38].

         Also before the court is Defendant Root9b's “Motion to Dismiss Amended Complaint or, in the Alternative, for Summary Judgment” [Doc. No. 30] (“Root9b Mot.”) filed August 27, 2018), to which Plaintiff filed a Response on August 28, 2018 [Doc. No. 33] and Defendant Root9B filed a Reply [Doc. No. 40] on September 11, 2018.

         BACKGROUND AND FACTS

         Plaintiff filed her Third Amended Complaint [Doc. No. 23] (“TAC”) on August 13, 2018. Plaintiff cites her statutory authority to bring a federal action as “Federal question pursuant to 28 U.S.C. § 1331” and “18 U.S. Code 1348 - Securities and Commodities Fraud.” (TAC at 3.) Plaintiff brings two claims against Defendant Root9B^[1] and Defendant Eric Hipkins. Claim One alleges “Root9B & Eric Hipkins have committed Securities & Commodities Fraud.” Under the “Supporting Facts” section of the TAC Plaintiff states, “They swindled their investors out of millions of dollars.” (Id. at 4.) Claim Two alleges the defendants “falsely advertised they are the #1 Cybersecurity Company” and references the narrative beginning on page 6 of the TAC. (Id. at 5.)

         Plaintiff asserts she was interested in investing in technical stocks so she “googled the #1 Cybersecurity Company.” (Id. at 7.) She says she came upon articles in which Root9b^[2] was represented by Eric Hipkins as being the “#1 Cybersecurity 500 for the 4th consecutive quarter.” (Id.) Before she made any investment in Root9b, Plaintiff claims she called Root9b's “office on the NYSE” at 212-371-8660 and spoke to a male who answered the phone who told her, “Root9b was reorganizing to become a company that has all its resources going to cybersecurity.” (Id. at 8.) The same male allegedly also told her Root9b was “close, if not completing a contract with the Federal Government. This contract with the Federal Government would bring in millions of dollars.” (Id.)

         Plaintiff asserts that she “first invest[ed] in Root9b” on May 16, 2017 and “purchased over 64, 000 shares of Root9b” over “the next approximately 7 months[.]” (Id. at 7.) The TAC does not state what price per share Plaintiff paid for her stock. Plaintiff claims that on July 12, 2017, she called the Root9b office in Colorado Springs to express an interest in attending a stockholder's meeting for Root9b and spoke to an employee.^[3] She was discouraged from attending the meeting, but the employee told her “the company was growing.” (Id. at 9.) When Plaintiff expressed concern that the stock price was dropping, the employee allegedly told Plaintiff, “they have been speaking to investors, but this is good for stockholders. The investors will pay off the debt & stabilize the company.” (Id.)

         Plaintiff alleges that between May 19, 2017 and June 29, 2017, Quad Capital Management (“Quad”) began purchasing RTNB stock and eventually obtained 378, 697 shares of RTNB.^[4] Plaintiff provides no information in the TAC about the ownership or membership or officers of Quad. Plaintiff claims that the stock price of Root9b rose to $11.99 per share. (Id.) During or near the same time period, Plaintiff alleges “Root9b Holdings, Inc. . . . issued a series of secured convertible promissory notes to accredited investors.” (Id. at 10.) The TAC contains no identification of the investors. On or about August 11, 2017, those investors demanded “immediate repayment of all outstanding amounts due” associate with the notes, alleging improprieties under the loan provisions. (Id.) On August 22 and 23, 2017, Quad sold all its RTNB stock, and two days later when an unspecified “press release” was issued, the company's stock allegedly fell to “less than $2.00.” (Id.)

         The TAC alleges that the investors foreclosed on the promissory notes issued to them.^[5](Id.) The investors took all Root9b's assets, including full ownership of Root9b, LLC, a private entity which was apparently a Root9b Holdings' subsidiary. (Id.) The secured investors therefore became the sole owners of Root9b, LLC, the private entity. (Id.at 10-11.) The investors then sold the remaining assets of Root9b Holding, Inc. at a foreclosure sale to Tracker Capital Management.^[6] (Id. at 11.) Plaintiff claims that the Asset Acquisition Agreement between the secured creditors and Tracker Capital Management contains confidentiality provisions that she has not been allowed to see. (Id. at 12.) Plaintiff asserts that Eric Hipkins still has ownership of “the company.” (Id. at 13.) Plaintiff claims she and other stockholders in the “worthless Root9b Holdings” were left holding worthless stock and concludes that “insiders” pocketed all the money received from sales of the stock at the Quad inflated price and retained unencumbered ownership of the cybersecurity business. (Id. at 11.)

         According to Plaintiff, Root9b evolved into two companies-Root9b, LLC and Root9b Holdings. (Id. at 12.) Plaintiff contends Root9b failed to protect the financial interests of its investors.

         While disagreeing with Plaintiff's conclusions, Root9b does not significantly disagree with the Plaintiff's factual version of events and transactions set forth in the TAC with respect to the business dealings of Root9b. (Root9b Mot. at 3-4.)

         The parties agree that Tracker Capital Management “has no connection or affiliation to [Root9b]” and “purchased the Foreclosed Assets from the Secured Creditors for fair value pursuant to an arms-length business transaction negotiated between sophisticated commercial entities.” (Id.) The sole variance between the Defendants and Plaintiff regarding these facts (as opposed to conclusions drawn therefrom) is whether Eric Hipkins retains any ownership of Root9b, LLC.^[7] (Root9B Mot. at 5; Bremer Decl. at ¶ 14.)

         LEGAL STANDARDS

         A. Pro se Plaintiff

         Plaintiff is proceeding pro se. The court, therefore, “review[s] h[er] pleadings and other papers liberally and hold[s] them to a less stringent standard than those drafted by attorneys.” Trackwell v. United States, 472 F.3d 1242, 1243 (10th Cir. 2007) (citations omitted). See also Haines v. Kerner, 404 U.S. 519, 520-21 (1972) (holding allegations of a pro se complaint “to less stringent standards than formal pleadings drafted by lawyers”). Pro se plaintiffs must “follow the same rules of procedure that govern other litigants” and “must still allege the necessary underlying facts to support a claim under a particular legal theory.” Thundathil v. Sessions, 709 Fed. App'x 880, 884 (10th Cir. 2017) (citations and internal quotation mark omitted). “[A] pro se plaintiff requires no special legal training to recount the facts surrounding his alleged injury, and he must provide such facts if the court is to determine whether he makes out a claim on which relief can be granted.” Hall, 935. F.2d at 1110. A pro se litigant's “conclusory allegations without supporting factual averments are insufficient to state a claim upon which relief can be based.” Id.

         Courts “cannot take on the responsibility of serving as the litigant's attorney in constructing arguments” or the “role of advocate” for a pro se plaintiff. Garrett v. Selby Connor Maddux & Janer, 425 F.3d 836, 840 (10th Cir. 2005). A court may not assume that a plaintiff can prove facts that have not been alleged, or that a defendant has violated laws in ways that a plaintiff has not alleged. Assoc. Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983). See also Whitney v. New Mexico, 113 F.3d 1170, 1173- 74 (10th Cir. 1997) (court may not “supply additional factual allegations to round out a plaintiff's complaint”); Drake v. City of Fort Collins, 927 F.2d 1156, 1159 (10th Cir.1991) (the court may not “construct arguments or theories for the plaintiff in the absence of any discussion of those issues”). The plaintiff's pro se status does not entitle her to application of different rules. See Montoya v. Chao, 296 F.3d 952, 957 (10th Cir. 2002).

         B. Subject Matter Jurisdiction

         Federal Rule of Civil Procedure Rule 12(b)(1) empowers a court to dismiss a complaint for lack of subject matter jurisdiction. Fed.R.Civ.P. 12(b)(1). Dismissal under Rule 12(b)(1) is not a judgment on the merits of a plaintiff s case. Rather, it calls for a determination that the court lacks authority to adjudicate the matter, attacking the existence of jurisdiction rather than the allegations of the complaint. See Castaneda v. INS, 23 F.3d 1576, 1580 (10th Cir. 1994) (recognizing federal courts are courts of limited jurisdiction and may only exercise jurisdiction when specifically authorized to do so). The burden of establishing subject matter jurisdiction is on the party asserting jurisdiction. Basso v. Utah Power & Light Co., 495 F.2d 906, 909 (10th Cir. 1974). A court lacking jurisdiction “must dismiss the cause at any stage of the proceedings in which it becomes apparent that jurisdiction is lacking.” See Basso, 495 F.2d at 909. The dismissal is without prejudice. Brereton v. Bountiful City Corp., 434 F.3d 1213, 1218 (10th Cir. 2006); see also Frederiksen v. City of Lockport, 384 F.3d 437, 438 (7th Cir. 2004) (noting that dismissals for lack of jurisdiction should be without prejudice because a dismissal with prejudice is a disposition on the merits which a court lacking jurisdiction may not render).

         A Rule 12(b)(1) motion to dismiss “must be determined from the allegations of fact in the complaint, without regard to mere conclusionary allegations of jurisdiction.” Groundhog v. Keeler, 442 F.2d 674, 677 (10th Cir. 1971). When considering a Rule 12(b)(1) motion, however, the court may consider matters outside the pleadings without transforming the motion into one for summary judgment. Holt v. United States, 46 F.3d 1000, 1003 (10th Cir. 1995). Where a party challenges the facts upon which subject matter jurisdiction depends, a district court may not presume the truthfulness of the complaint's “factual allegations . . . [and] has wide discretion to allow affidavits, other documents, and [may even hold] a limited evidentiary hearing to resolve disputed jurisdictional facts under Rule 12(b)(1).” Id.

         The party invoking federal jurisdiction has the burden of establishing standing. Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992). In addition to asserting an injury, this requires the party to show “her injury is ‘fairly traceable to the challenged action of the defendant, and not the result of the independent action of some third party not before the court,' ” and that such injury is likely to be redressed by the relief sought. Nova Health Sys. v. Gandy, 416 F.3d 1149, 1156 (10th Cir. 2005) (quoting Lujan, 504 U.S. at 560). The law in this circuit is clear that a plaintiff lacks standing if she “fail[s] to demonstrate the necessary causal connection between [her] injury and these defendants, ” including by failing to present evidence that the defendants “have done or have threatened to do anything that presents a substantial likelihood of causing [plaintiff] harm.” Id. at 1156-57.

         C. Failure to State a Claim

         Federal Rule of Civil Procedure 12(b)(6) provides that a defendant may move to dismiss a claim for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). “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) (quotation marks omitted).

         “A court reviewing the sufficiency of a complaint presumes all of plaintiff's factual allegations are true and construes them in the light most favorable to the plaintiff.” Hall, 935 F.2d at 1109. “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 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Plausibility, in the context of a motion to dismiss, means that the plaintiff pleaded facts which allow “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. The Iqbal evaluation requires two prongs of analysis. First, the court identifies “the allegations in the complaint that are not entitled to the assumption of truth, ” that is, those allegations which are legal conclusion, bare assertions, or merely conclusory. Id. at 679-81. Second, the Court considers the factual allegations “to determine if they plausibly suggest an entitlement to relief.” Id. at 681. If the allegations state a plausible claim for relief, such claim survives the motion to dismiss. Id. at 679.

         Notwithstanding, the court need not accept conclusory allegations without supporting factual averments. S. Disposal, Inc., v. Texas Waste, 161 F.3d 1259, 1262 (10th Cir. 1998). “[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S at 678. Moreover, “[a] pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.' Nor does the complaint suffice if it tenders ‘naked assertion[s]' devoid of ‘further factual enhancement.' ” Id. (citation omitted). “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.' ” Id. (citation omitted).

         In evaluating a Rule 12(b)(6) motion to dismiss, courts may consider not only the complaint itself, but also attached exhibits and documents incorporated into the complaint by reference. Smith v. United States, 561 F.3d 1090, 1098 (10th Cir. 2009) (citations omitted). “[T]he district court may consider documents referred to in the complaint if the documents are central to the plaintiff's claim and the parties do not dispute the documents' authenticity.” Id. (quotations omitted).

         ANALYSIS

         A. Standing/Subject Matter Jurisdiction.

         As an irreducible constitutional minimum, a plaintiff must satisfy three criteria in order for there to be a “case or controversy” that may be resolved by the federal courts. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). First, the plaintiff must have suffered an “injury in fact”-an invasion of a legally protected interest that is both (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical. Id. Second, there must be a causal connection between that injury and the challenged action of the defendant-the injury must be “fairly traceable” to the defendant, and not the result of the independent action of some third party. Id. Finally, it must be likely, not merely speculative, that a favorable judgment will redress the plaintiff's injury. Id. at 561. See also Nova Health Sys. v. Gandy, 416 F.3d 1149, 1154 (10th Cir. 2005). The causal connection requires that the defendant's actions caused the harm to Plaintiff. Id. at 1156-57. Root9b, LLC argues that it is the defendant in this action and that Root9b, LLC did not cause any harm to Plaintiff. Therefore, the Plaintiff lacks standing to bring claims against it.

         At the outset, the court notes that the law firm of Ireland Stapleton Pryor & Pascoe, PC, has taken it upon itself without authorization to amend the caption of the instant case to show Root9b, a Colorado limited liability company, as one of the defendants in this action. Ireland Stapleton Pryor & Pascoe, PC purports to represent Root9b, LLC. (See Root9b Mot.) Plaintiff filed the case against the entity Root9B. She did not include the term “a Colorado limited liability company” in her caption on her originally filed Complaint nor on any of her Amended Complaints. [Doc. Nos. 1, 13 (which added the phrase “including directors of the company”), 21 or 23, the operative complaint.] Nor did the Plaintiff describe the Defendant in her lawsuit in terms of its organizational structure in the body of the documents. The official caption of this case is Mary Heath, Plaintiff v. Root9B and Eric Hipkins, Defendants.

         For reasons not entirely clear to the court, Ireland Stapleton Pryor & Pascoe, PC insist that Plaintiff served Root9b, LLC and that Root9b, LLC is the Defendant entity. This, too, is factually incorrect. The Process Receipt and Return from the U.S. Marshals Service [Doc. No. 8] shows the entity “Root9B” was served on July 12, 2018 at 102 N. Cascade Avenue, Suite 220, Colorado Springs, CO. The Chief Operating Officer for Root9b, listed as John Harbaugh, was the individual who accepted service on behalf of the Defendant. As a limited liability company, it is unlikely that Root9B, LLC has either a Chief Operating Officer (or any officers at all) or Directors, although as such companies are by definition not public entities, the members can structure an LLC in whatever way they see fit.

         According to Annual Report, Form 10-K filed by ROOT9B HOLDINGS, INC., root9b Holdings, Inc. is located at 102 N. Cascade Avenue, Suite 220, Colorado Springs, CO 80919, the location where service was made by the Plaintiff. (Root9b Mot., Ex. 1-A [Doc. No. 30-2] at 2; Process Receipt [Doc. No. 8].) ROOT9B, LLC, by contrast, according to documents submitted by Root9b, LLC, is a Limited Liability Company with its principal office mailing address at 90 S. Cascade, Ave. #830, Colorado Springs, CO ...