Park Yield, LLC v. Brown

Background

Park Yield LLC sued Eric Brown, BESC Realty Company LLC, Sterling Management, LLC, 4 Square Management, LLC, Park Pro Systems, LLC, and John Does 1 and 2. The complaint alleged securities fraud based on the sale of unregistered securities and Eric Brown’s alleged failure to disclose his 2014 felony mail-fraud conviction before the sales. The opinion notes that the amended complaint’s caption named John Doe 2, while its body referred to Ian Brown; the court presumed that Ian Brown referred to John Doe 2.

Park Yield purchased a 40-percent equity interest in Sterling for $150,000 under a July 28, 2017 agreement and a 40-percent equity interest in 4 Square for $130,000 under an August 3, 2017 agreement. The agreements stated that the interests were securities being offered under private-offering exemptions, that there would be no public market for them, and that their transfer would be restricted. They also identified Park Pro as the manager and reserved day-to-day, mid-range, and long-term operational strategies for Sterling and 4 Square.

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. Park Yield cross-moved for partial summary judgment under Rule 56 on its claim that the defendants violated Section 5 of the Securities Act of 1933 by selling unregistered securities.

Section 5 Claim

The court concluded that the interests Park Yield purchased were “securities” because they were investment contracts. Applying the test from SEC v. W. J. Howey Co., the court found that Park Yield invested money in a common enterprise with an expectation of profits derived from the efforts of others. Although the defendants pointed to Park Yield’s rights to audit records and approve certain transactions, the agreements reserved operational management to Sterling and 4 Square and did not give Park Yield a meaningful role in managing the businesses.

The court nevertheless dismissed the Section 5 claim because the interests were exempt from registration under Section 4(a)(2) of the Securities Act. The agreements expressly stated that the interests were being offered under a private-offering exemption. The court also relied on the limited number of offerees, the investors’ contractual representations about their financial knowledge and ability to evaluate the investments, their stated opportunity to conduct due diligence and consult advisers, and the restrictions on resale. The court found that these facts showed the offering was private and that registration was not required.

Other Federal and State Claims

Park Yield also alleged that Eric Brown violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 by stating that the interests did not need registration and by failing to disclose his conviction. The court dismissed these claims under Rule 12(b)(6). Because the interests were exempt from registration, the court found no misrepresentation in the statement that registration was unnecessary. It also ruled that the conviction was publicly available and therefore that Brown had no duty to disclose it; the court separately stated that the complaint did not adequately allege loss causation.

The remaining claims were for common-law fraud and negligent misrepresentation. After dismissing the federal claims over which it had original jurisdiction, the court declined to exercise supplemental jurisdiction over those state-law claims. The court therefore dismissed the complaint in its entirety.

Disposition

Judge George B. Daniels granted the defendants’ motion to dismiss. He denied Park Yield’s cross-motion for partial summary judgment. The clerk was directed to close the motions.