Park Miller, LLC v. Durham Group, Ltd.

Background

Park Miller, LLC, a wealth advisory firm, advised clients to invest in Durham Group, Ltd. (DGL). The clients signed promissory notes with DGL to fund Durham Commercial Capital Corp.’s factoring business. DGL defaulted on the notes, and the contracting plaintiffs sued for breach of contract.

The plaintiffs also alleged that DGL, Durham Commercial Capital Corp. (DCC), Craig McGrain, First Austin Funding Corp., and Maasai Holdings LLC misrepresented or concealed DGL and DCC’s financial condition. The allegations focused in part on receivables connected to 1-800 Solar that plaintiffs said were reported as valuable assets even though the work underlying them had not been completed and the receivables were not recoverable. Park Miller alleged that it lost clients, revenue, and reputation because of the defendants’ conduct.

This was the plaintiffs’ second amended complaint. The defendants again moved to dismiss for lack of personal jurisdiction and failure to state a claim, and also moved for sanctions under Federal Rule of Civil Procedure 11.

Judicial Notice

The court granted plaintiffs’ request for judicial notice only as to the existence of documents from a related bankruptcy proceeding and the existence of the statements in those documents. The court did not accept the documents’ contents as true. The court also did not consider an opposing declaration to introduce outside factual material on the failure-to-state-a-claim portion of the motion.

Claims Against DGL and DCC

The court held that the Second Amended Complaint described the alleged fraud with enough detail to satisfy Federal Rule of Civil Procedure 9(b), which requires fraud allegations to identify the basic circumstances of the alleged misconduct, including who did what, when, where, and how. The court therefore denied dismissal of the fraud-based claims against DGL and DCC on the ground that they were not pleaded with enough specificity.

For the promissory-fraud claims, the court distinguished between plaintiffs based on when they invested. The court denied dismissal of the promissory-fraud claims brought by the LCCM plaintiffs because they alleged that the defendants entered the relevant promissory notes without intending to perform, or while knowing they could not perform. The court granted dismissal of those claims as brought by the other plaintiffs because the complaint did not adequately allege that the defendants made promises without intending to perform when those notes were entered.

The court denied dismissal of the negligence and negligent-misrepresentation claims against DGL and DCC. It also denied dismissal of Park Miller’s intentional-interference-with-contractual-relations and negligent-interference-with-prospective-economic-relations claims. The court found that Park Miller plausibly alleged contracts or economic relationships with its clients, the defendants’ knowledge of those relationships, interference, disruption, and resulting harm. For the intentional-interference claim, the court followed cases requiring an actual breach or disruption of the contractual relationship and found that Park Miller had plausibly alleged that requirement.

Personal Jurisdiction

The court granted the motion to dismiss Craig McGrain, First Austin Funding Corp., and Maasai Holdings LLC for lack of personal jurisdiction. Personal jurisdiction is the court’s authority over a particular defendant.

As to McGrain, the court found that the allegations did not sufficiently connect his California contacts to the fraud and misrepresentation claims. The court also found that the plaintiffs had not adequately shown that an exception to the fiduciary-shield doctrine applied. That doctrine generally prevents a person’s connection to a corporation, by itself, from establishing personal jurisdiction over the person. The court further found that the plaintiffs had not adequately pleaded that McGrain was the alter ego of DGL or DCC. An alter-ego theory asks whether the company and the person or another company were so closely connected that treating them as separate would produce fraud or injustice.

As to First Austin and Maasai Holdings, the court found that allegations of shared ownership, management, office space, websites, or phone numbers were insufficient to establish alter-ego status. The plaintiffs also did not adequately allege that respecting the companies’ separate legal identities would produce an inequitable result.

Because the court dismissed McGrain, First Austin, and Maasai Holdings for lack of personal jurisdiction, the defendants’ request to dismiss the breach-of-contract claims against those three defendants was moot. “Moot” here means that the court did not need to decide that request after ruling that it lacked authority over those defendants.

Sanctions

The court denied the defendants’ motion for sanctions. It concluded that the plaintiffs’ amended claims had at least some plausible basis, so the defendants had not shown that the complaint was objectively baseless or sanctionable under Rule 11.

Disposition

The court granted the motion to dismiss McGrain, First Austin, and Maasai Holdings for lack of personal jurisdiction. The motion to dismiss the promissory-fraud claims against DGL and DCC was denied as to the LCCM plaintiffs and granted as to the other plaintiffs. The court denied dismissal of the negligence, negligent-misrepresentation, and interference claims against DGL and DCC. The breach-of-contract dismissal request concerning McGrain, First Austin, and Maasai Holdings was moot, and the related sanctions motion was denied.