Hyer v. Malouf - No. 2:07-CV-249 TC, 2008 U.S. Dist. LEXIS 73789 (D. Utah Sep. 24, 2008)

Rule:

In considering a motion to dismiss under Rule 12(b)(6), "all well-pleaded factual allegations, as distinguished from conclusory allegations, must be taken as true" and viewed in the light most favorable to the nonmoving party. A plaintiff must provide "enough facts to state a claim to relief that is plausible on its face." In other words, "the complaint must give the court reason to believe that this plaintiff has a reasonable likelihood of mustering factual support for these claims."

Facts:

In their Amended Complaint, plaintiffs alleged that defendant Matt Malouf solicited funds from Plaintiffs for investment in three real estate development projects. Plaintiffs initially invested approximately $2.2 million in the development projects by purchasing ownership interests in the companies developing them; however, such ownership interests were allegedly never conveyed. In their Amended Complaint, plaintiffs outlined a number of untrue statements and omissions allegedly made by Malouf in the course of soliciting the investment funds from plaintiffs. These statements were the basis of Plaintiffs' claims under § 12(a)(2) and § 10(b).

In an attempt to resolve their differences, the parties entered into an Investment Workout Agreement in January 2007. As part of the Investment Workout Agreement, Defendants promised to convey a 22.1% interest in a company called Flatrock, which was represented to be a profitable real estate development in Texas.  Plaintiffs alleged that Defendants breached the Investment Workout Agreement by failing to convey the Flatrock interest. Defendants filed a Motion to Dismiss, seeking the dismissal of plaintiffs’ claims under § 12(a)(2) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, and the securities laws of Utah and Nevada. Defendants also asked the court to dismiss Plaintiffs' claims for breach of contract relating to an investment workout agreement.

Issue:

1. Should the court grant defendants’ motion to dismiss, seeking the dismissal of plaintiffs’ claims under § 12(a)(2) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, and the securities laws of Utah and Nevada?
2. Should the court grant defendants’ motion to dismiss plaintiffs’ claims for breach of contract relating to an investment workout agreement?

Answer:

1) No, with respect to § 12(a)(2) of the Securities Act of 1933. Yes, with respect to the Ilse de Mer and West Indies Village projects under the § 10(b) of the Securities Exchange Act of 1934 claim. 2) No.

Conclusion:

The court noted that section 12(a)(2) provided a cause of action to a purchaser of a security against one who was offering or selling a security "by means of a prospectus or oral communication" that included an untrue statement or omission of material fact. In this case, the court held that plaintiffs have stated a claim for relief under the aforesaid section since plaintiffs alleged that Malouf offered the alleged securities through the Project Offerings, which, according to Plaintiffs, constitute "written prospectuses."  The court further noted that in order to state a claim for relief under Rule 10b-5, a plaintiff must allege the following: "(1) the defendant made an untrue or misleading statement of material fact, or failed to state a material fact necessary to make statements not misleading; (2) the statement complained of was made in connection with the purchase or sale of securities; (3) the defendant acted with scienter, that is, either with intent to defraud or recklessness; (4) the plaintiff relied on the misleading statements; and (5) the plaintiff suffered damages as a result of his reliance." Applying these to the facts of the case, the court denied defendants’ motion to dismiss insofar as they related to the River Ridge project, but granted the motion insofar as they related to the Ilse de Mer and West Indies Village projects, with the understanding that evidence concerning these statements could be admissible on Plaintiffs' state securities fraud claims. Anent the claims for breach of contract, the court held that the plaintiffs’ claims were not barred by the election of remedies doctrine because plaintiffs were not considered to have elected their remedies merely by filing their initial complaint. Defendants have not pointed to any prejudice that they will suffer from Plaintiffs not including the breach of contract claim in their initial complaint. Accordingly, the court denied the motion.