Schwartz v. Sensi, LLC

Background

Jonathan Schwartz alleged that he entered into a Finder’s Fee Agreement with Sensei, LLC, doing business as Kaviva. Under that agreement, Schwartz claimed he was entitled to a fee equal to 7% of an investment made by a third party he identified, or by someone introduced through his efforts. Schwartz introduced Sensei to Odeon Capital Group, LLC, and Odeon later connected Sensei with KLS Diversified Master Fund, L.P., which invested $2 million in Sensei. Sensei paid Odeon $140,000, but Schwartz alleged that Sensei did not pay him the corresponding finder’s fee.

Schwartz also alleged that Sean McDevitt and Alexander Eric Furer made misleading statements about Sensei’s existing and expected clients, revenue, and business prospects. The Second Amended Complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and related federal rules, along with contract and common-law claims.

Motions and Jurisdiction

Odeon moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Rule 12(b)(1) concerns the court’s authority to hear a case, while Rule 12(b)(6) concerns whether a complaint states a legally sufficient claim. McDevitt and Furer moved to dismiss under Rule 12(b)(6). Sensei had consented to entry of default, so its motion to dismiss had previously been denied as moot.

The court held that it lacked diversity jurisdiction over the claims against Odeon because both Schwartz and Odeon were New York citizens. It also held that there was no original federal-question jurisdiction over Odeon because Schwartz asserted only state-law claims against that defendant. The court further held that the state-law claims against Odeon did not share a sufficient factual connection with Schwartz’s federal claims to support supplemental jurisdiction. Odeon’s motion under Rule 12(b)(1) was therefore granted.

The court found that it had diversity jurisdiction over the claims against McDevitt and Furer because they were domiciled in states different from Schwartz and the amount in controversy was at least $440,000.

Federal Securities Claims

The court dismissed Count I, which alleged a violation of Section 10(b) of the Exchange Act and Rule 10b-5. The court assumed for purposes of its analysis that Schwartz could satisfy the requirement that the alleged fraud be connected to the purchase or sale of a security. Even with that assumption, the court found that the complaint did not plausibly allege materiality, reliance, or loss causation.

The court found that the allegations about Sensei’s clients and prospects were largely conclusory and concerned forward-looking projections. It also noted that the Finder’s Agreement was allegedly entered in November 2015, before the misleading statements were allegedly made in September through November 2016, so those statements could not have induced Schwartz to enter the agreement. The court further found that Schwartz’s own emails showed he discounted the information and did not rely on it. Finally, the court held that Schwartz’s alleged loss—the unpaid finder’s fee—was not plausibly caused by the alleged securities fraud because he sought payment under the Finder’s Agreement itself.

The court dismissed Count II, which asserted control-person liability under Section 20(a) of the Exchange Act. Because Schwartz had not stated a viable primary securities-fraud claim, the court held that he could not state a derivative control-person claim against McDevitt or Furer.

Contract and Veil-Piercing Claims

The court concluded that Schwartz had plausibly alleged that Sensei breached the Finder’s Agreement and its non-circumvention provision. The alleged facts included the existence of the agreement, Schwartz’s introduction of Sensei to Odeon, Sensei’s receipt of the investment, Sensei’s failure to pay the finder’s fee, and resulting damages. The court expressly did not rule on Sensei’s liability in this order.

Schwartz also sought to hold McDevitt and Furer personally responsible by piercing Sensei’s corporate veil. Veil piercing is an exception to the usual rule that a corporation’s obligations are separate from those of its owners and officers. The court found that Schwartz had not alleged facts showing that Furer completely dominated Sensei. As to McDevitt, the court found that Schwartz had adequately alleged domination but had not adequately alleged that McDevitt used that domination to commit a fraud or other wrongful act that harmed Schwartz. The allegations that McDevitt undercapitalized Sensei and made it unable to pay its obligations were too conclusory and lacked details about when or how that occurred.

Because the court declined to pierce Sensei’s corporate veil, it dismissed Counts IV and V against the individual defendants for breach of the Finder’s Agreement and the non-circumvention provision. The court also explained that Furer did not sign the agreement and that signing it for Sensei did not, without clear evidence of a personal commitment, make McDevitt personally liable.

Remaining Claims and Disposition

The court dismissed the remaining claims against McDevitt and Furer—fraud in the inducement, quantum meruit, unjust enrichment, estoppel, civil conspiracy, constructive fraud, and fraudulent conveyance—because they related to or mirrored the alleged corporate breach and the court declined to pierce the corporate veil.

The court granted Odeon’s motion to dismiss under Rule 12(b)(1) and granted McDevitt and Furer’s motion to dismiss under Rule 12(b)(6). The court stated that the allegations against Odeon and the individual defendants were dismissed in their entirety. It directed the Clerk of Court to terminate those motions and stated that the claims against Sensei would be addressed by separate order.