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

Background

ICD Capital, LLC brought direct and derivative claims against CodeSmart Holdings, Inc. and Sharon Franey. ICD claimed that investors purchased approximately $2.1 million of CodeSmart securities in reliance on allegedly false or misleading statements in a private placement memorandum, press releases, Securities and Exchange Commission filings, and statements by Ira Shapiro, CodeSmart’s former chief executive officer and board chairman. The proposed second amended complaint asserted two direct claims against Franey—negligent misrepresentation and aiding and abetting fraud—and two derivative claims brought on behalf of CodeSmart—breach of fiduciary duty and aiding and abetting Shapiro’s breach of fiduciary duty.

The court had previously dismissed ICD’s first amended complaint without prejudice and allowed ICD an opportunity to show that a second amended complaint could survive a motion to dismiss. ICD then moved for leave to file the proposed second amended complaint. ICD argued that amendment was justified partly because Shapiro was likely unable to repay investors fully through the criminal restitution process and Franey was likely covered by directors-and-officers insurance.

Legal standards

The court explained that leave to amend is generally granted when justice requires, but may be denied when amendment would be futile. An amendment is futile if the proposed claims could not survive a motion to dismiss for failure to state a legally sufficient claim under Federal Rule of Civil Procedure 12(b)(6). Because the claims involving alleged fraud had to meet Federal Rule of Civil Procedure 9(b), ICD also had to plead the circumstances of the alleged fraud with particularity and provide facts supporting a strong inference of fraudulent intent or actual knowledge.

Direct claims against Franey

For negligent misrepresentation, the court held that ICD had not adequately alleged the required special or close relationship between ICD and Franey, incorrect information, and reasonable reliance. The court noted that ICD alleged no communications between ICD and Franey and did not cite authority showing that Franey’s position as a company officer and director, combined with her prior business experience, created the required relationship. Leave to amend Count I was denied as futile.

For aiding and abetting fraud, the court held that the proposed complaint did not adequately plead Franey’s actual knowledge of the alleged fraud or her substantial assistance in it. The proposed complaint added an allegation that Franey received and responded to an email questioning the accuracy of a press release about Ramapo College, but the court found that ICD had not provided a factual basis for its separate assertion that CodeSmart never finalized a contract with Ramapo College. The court also found that Franey’s response could suggest that she did not intend for a false release to be issued, and that the allegations did not show how her failure to correct the release or failure to file a registration statement substantially assisted the alleged fraud. Leave to amend Count II was denied as futile.

Derivative claims

The parties agreed that Florida law governed the derivative claims because Florida was CodeSmart’s state of incorporation. For the breach-of-fiduciary-duty claim, the court held that the proposed complaint did not plausibly allege damages to CodeSmart. Instead, it alleged harm primarily to ICD and other investors. The court also found that the allegations did not plausibly show that Franey’s failure to correct the Ramapo press release harmed CodeSmart, and that the failure to file a registration statement was alleged to have harmed the investors rather than the company. Leave to amend Count III was denied as futile.

For aiding and abetting Shapiro’s breach of fiduciary duty, the court held that ICD again had not plausibly alleged Franey’s actual knowledge of Shapiro’s misconduct or that she affirmatively assisted or encouraged it. Leave to amend Count IV was denied as futile.

Claims against CodeSmart and disposition

Because ICD brought no direct claims against CodeSmart and no derivative claims survived, the court also denied leave to amend the claims against CodeSmart.

The court DENIED ICD’s motion for leave to file a second amended complaint. It further ordered that ICD’s claims against Franey and CodeSmart were dismissed with prejudice because ICD had received a full opportunity to amend. The Clerk was directed to terminate the motion and close the case.