Langhamer v. Johnson

Background

Randy and Debra Langhamer, their children acting through Uniform Gifts to Minors Act accounts, and Terri Weller invested in units issued by American Growth Funding II, LLC. The company promised investors a monthly return of one percent and allowed them to redeem or roll over their investments after a two-year lock-up period.

Plaintiffs alleged that Ralph C. Johnson and related companies made materially false or misleading statements about the investments. Among other allegations, plaintiffs claimed that defendants failed to disclose a Securities and Exchange Commission enforcement action; misrepresented how investor money was used; made inaccurate statements about audits, financial statements, loan performance, and the collectability of receivables; and made misleading promises about honoring redemption requests.

In 2020, defendants offered investors the opportunity to exchange their interests in American Growth Funding II for shares in Propellus, Inc. The offer also included a broad release of claims. Plaintiffs alleged that defendants misrepresented the reasons for the company’s financial problems, the value and prospects of Propellus, and the terms and consequences of the exchange. Terri signed the offer in December 2020, while Randy and Debra signed it in January 2021. Randy and Debra did not sign the offer for the children’s accounts because, plaintiffs alleged, Johnson promised to prioritize payments to those accounts.

The amended complaint asserted federal securities claims under Sections 10(b) and 20(a) of the Securities Exchange Act and related state-law claims, including fraudulent inducement, aiding and abetting fraud, breach of fiduciary duty, breach of contract, and requests for declaratory relief. Defendants answered the amended complaint before filing their motion to dismiss. Because a motion to dismiss normally must be filed before the answer, the court treated the motion as one for judgment on the pleadings under Rule 12(c). That motion uses the same pleading standard as a motion to dismiss for failure to state a claim.

The Release

Defendants argued that the exchange offer was a settlement that released all of plaintiffs’ claims. Plaintiffs argued that the release was unenforceable because it lacked consideration, was too broad, and was obtained through fraud.

The court assumed, without deciding, that the release was supported by consideration and was not overly broad. It held that plaintiffs had adequately alleged a separate fraud that could invalidate the release. Specifically, plaintiffs alleged that defendants made additional misrepresentations to persuade them to sign the exchange offer and release, including statements in the exchange materials, a monthly update, and later communications from Johnson.

The court concluded that whether plaintiffs reasonably relied on those statements was a fact-intensive question not suitable for resolution on the pleadings. The court also rejected defendants’ arguments that plaintiffs’ sophistication, the release’s written language, or plaintiffs’ decision not to sign for the children’s accounts defeated the claims as a matter of law. The release therefore did not bar the action at this stage.

Statute of Limitations

Defendants argued that plaintiffs’ claims concerning their earlier American Growth Funding II investments were untimely. The court concluded that each rollover could qualify as a new purchase under the federal securities laws because the rollover significantly changed the investment risk. As a result, each plaintiff made at least one purchase within five years before the original complaint was filed.

The court deemed the breach-of-implied-contract claim timely because defendants conceded that the alleged failures to honor redemption requests occurred within New York’s six-year limitations period. It also held that the breach-of-fiduciary-duty claim was timely because the rollover investments constituted new acts in an ongoing series of alleged breaches, and the limitations period ran from the later end of the fiduciary relationship.

The court further held that plaintiffs adequately alleged that they did not discover, and could not reasonably have discovered, the alleged fraud until within two years before filing the original complaint. The court therefore declined to dismiss the federal securities or state fraud claims as untimely at this stage.

Pleading Requirements

Defendants argued that the amended complaint failed to meet the heightened requirements for fraud claims under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. The court disagreed. It found that the complaint generally identified the statements alleged to be fraudulent, the speakers, when and how the statements were made, and why the statements were allegedly false or misleading. The court also noted that defendants had not identified specific allegations that failed to meet those requirements.

Disposition

The court denied defendants’ motion to dismiss the amended complaint. The ruling did not decide whether plaintiffs’ allegations are ultimately true or whether they will prevail on their claims. The court ordered the parties to proceed toward an initial pretrial conference and case-management filings.