ICD Capital, LLC. v. Codesmart Holdings, Inc.

Background

ICD Capital, LLC sued CodeSmart Holdings, Inc. and Sharon Franey. ICD brought claims individually, on behalf of other investors, and derivatively—that is, on behalf of CodeSmart—for losses arising from a 2013 private stock offering. The plaintiffs alleged that CodeSmart’s private placement memorandum, press releases, Securities and Exchange Commission filings, and statements by CodeSmart’s co-founder Ira Shapiro contained false or misleading information about the company’s business prospects and finances. They alleged that they and other investors purchased more than $2.1 million of CodeSmart securities at $1.50 per share, and that the investment later became worthless.

The plaintiffs also alleged that CodeSmart failed to file and make effective a registration statement that would have allowed them to resell their restricted shares. The amended complaint asserted four claims against Franey: negligent misrepresentation; aiding and abetting fraud; derivative breach of fiduciary duty; and derivative aiding and abetting of Shapiro’s breach of fiduciary duty. The plaintiffs had previously withdrawn their claims against Shapiro so the case could proceed against CodeSmart and Franey.

Legal standards

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim, and Rule 9(b), which requires fraud allegations to describe the alleged misconduct in detail. The court accepted factual allegations as true for purposes of the motion but did not accept bare conclusions or allegations unsupported by facts.

Court’s analysis

For negligent misrepresentation, the court held that the plaintiffs did not adequately allege a special or trust-based relationship between Franey and the investors. The complaint merely asserted that such a relationship existed. The court also found that the plaintiffs did not provide a factual basis for their allegations that most of the statements were false; instead, those allegations were made only on “information and belief.” The allegations about omitted financial information likewise did not explain why the omissions made the other statements misleading. Franey’s positions as chief operating officer, co-founder, and board member did not, by themselves, establish the required relationship or make her individually responsible for CodeSmart’s statements. The court dismissed Count I.

For aiding and abetting fraud, the court found that the plaintiffs did not adequately plead an underlying fraud because the allegations about the private placement memorandum, press releases, and Forbes article lacked a factual basis for claims of falsity. The court also held that the SEC filings and statements to potential investors were forward-looking predictions, which, standing alone, were not actionable misrepresentations of existing or past facts. In addition, the complaint did not provide specific facts supporting an inference that Franey knew about Shapiro’s fraud or substantially assisted it. The court dismissed Count II.

The court applied Florida law to the derivative claims because CodeSmart was incorporated in Florida. It dismissed the derivative breach-of-fiduciary-duty claim because the complaint lacked particular facts describing Franey’s wrongful conduct and did not adequately allege damages to CodeSmart. The only concrete injury alleged was the investors’ loss, and the alleged failure to register the shares was said to have injured ICD rather than CodeSmart. The court dismissed Count III. It also dismissed the derivative aiding-and-abetting claim because the complaint did not plausibly allege that Franey knew of Shapiro’s misconduct or affirmatively assisted or encouraged it, dismissing Count IV.

Disposition

The court granted the defendants’ motion to dismiss the amended complaint. Because all derivative claims were dismissed and the plaintiffs brought no direct claims against CodeSmart, the court dismissed the amended complaint as to CodeSmart as well. The court did not address the defendants’ arguments concerning conflicts of interest, demand futility, or certain fiduciary-duty defenses because the claims failed for the reasons discussed above.

The plaintiffs had not requested leave to amend. The court nevertheless stated that they could attempt to file a proposed second amended complaint, together with a redline and a memorandum explaining how the defects would be cured. The court did not grant leave to amend automatically; it directed that any such submission be made within 30 days of the opinion and order.