LORETTA A. PRESKA, Chief Judge:
In this action, Gavin/Solmonese LLC (the "Trustee" or "Plaintiff"), acting on behalf of the bankrupt Waste2Energy Holdings Inc. ("W2E") and buyers of its debentures, brings securities fraud claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("the 1934 Act") against the management of W2E as well as the broker-dealer it hired to conduct a private offering, Charles Vista LLC ("Vista"). 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Plaintiff also brings related common law claims against the defendants, including negligent misrepresentation, breach of fiduciary duty, negligent hiring and retention, conversion, and unjust enrichment.
Three motions are presently before the court. Two motions to dismiss the First Amended Complaint ("FAC") for failure to state a claim have been filed by employees of W2E and by Vista employee Francis Lorenzo. In addition, Vista and its other employees have moved to compel arbitration, or, in the alternative, to dismiss. Taken together, these motions challenge all of Plaintiff's claims. For the reasons stated below, Plaintiff's securities fraud claims under Section 10(b) and 20(a) are dismissed against both the W2E and Vista defendants. Because Plaintiff's only federal claims have failed, the court declines to exercise supplemental jurisdiction over the remaining common law claims. However, Plaintiff is granted leave to supplement the complaint to plead the existence of diversity jurisdiction properly.
Waste2Energy Holdings Inc. is a cleantech technology company founded in 2007
Christopher D'Arnaud-Taylor ("Taylor") was involved in founding W2E and during the offering period served as Chairman of the Board of W2E Holdings and W2E Inc. and in fact as its sole director for at least part of this period. (FAC ¶ 38) He was also the managing director of the two subsidiaries W2E Technologies and PLC, which are part of the Liquidating Trust. (FAC ¶ 25.) John Joseph Murphy ("Murphy") was hired as managing director of Technologies and PLC in 2008 and after-wards was responsible for managing the Dargavel Project, W2E's only project in development. (FAC ¶ 27.) Peter Bohan ("Bohan") served as CEO of both W2E Inc. and W2E Holdings during the offering period but was replaced by Murphy in May 2011 after personal differences arose between them. (FAC ¶¶ 27, 29.) Together, these defendants collectively are referred to as "the W2E Defendants."
Gregg Lorenzo ("G. Lorenzo") is the owner of Charles Vista, LLC, a registered broker-dealer. Francis Lorenzo ("F. Lorenzo"), who is not related to him, was the head of investment banking at Vista. Together with Charles Vista itself, these defendants comprise the "Vista defendants."
W2E initially acquired a proprietary technology for waste "gasification" by purchasing the company Enerwaste Europe Ltd. ("EE") and hiring its owner, Friofinnur Einarsson ("Finni"), as W2E's Chief Technology Officer. In 2007, W2E was hired by Ascot Environmental Ltd. ("Ascot") to complete a waste to energy facility in Scotland called "the Dargavel Project" that EE was originally contracted to complete using its technology. (FAC ¶ 28.) The project was plagued by persistent problems, causing W2E to conclude that the intellectual property it had acquired was not operable, creating significant delays that put W2E in breach of its contract, and eventually leading the client to develop its own technological adaptations in order to complete the project.
The fraud and negligent misrepresentation claims in this case concern a private placement conducted by W2E between September 2009 and the middle of 2010 designed to raise up to $15 million which was imminently needed to finance the short-term operations of the company. W2E offered senior convertible debentures at a 12% interest rate, which matured a year from the date of issue. Investors also received additional warrants entitling them to buy common stock at a specified cost per share. (FAC ¶ 2.) W2E retained Vista to act as its exclusive placement agent for the offering. In addition to consulting and investment banking fees, Vista was to receive a commission of ten percent of the gross proceeds of the debentures sold as well as a non-accountable expense allowance of three percent of the proceeds. (FAC ¶¶ 36-37.) Vista's compensation would double if the debenture purchasers exercised their warrants to acquire company stock, and if $10 Million of debentures were sold, Vista would also have the right to name a minority of new directors. (Id. at 36, 38.)
Prospective investors were given a confidential private offering memorandum ("POM") which described the opportunity and identified the risk factors for the investment. Defendants also held live information sessions for investors. Plaintiff alleges that the POM and information sessions contained numerous fraudulent misrepresentations including the message
In August 2011, a group of investors filed a successful petition to force W2E Holdings, Inc. into involuntary bankruptcy pursuant to Section 303 of the Bankruptcy Code, 11 U.S.C. § 303. (FAC ¶ 6.) A Chapter 11 trustee was appointed, and in early 2012 he conducted an examination of the pre-petition business activities of W2E. Plaintiffs claim that this investigation brought to light key facts indicating that W2E had engaged in fraudulent misrepresentations throughout the offering period. (See FAC ¶ 9.) As part of the company's liquidation plan, debenture holders were given the option to assign their claims to the Liquidating Trust for prosecution, and 22 investors chose to do so. (FAC ¶ 18.)
In August of 2011, the SEC also launched an investigation of the Vista Defendants for the role they played as the placement agent for W2E's debentures. On February 15, 2013, the SEC issued a cease and desist order including allegations of misrepresentations made to three anonymous customers in order to induce them to purchase debentures. (FAC ¶ 79.)
Plaintiff also alleges that the officers and directors of W2E incompetently managed the company's affairs and, when it began to fail, seized corporate assets for themselves. However, this opinion need not go into depth about the facts underlying these claims because they are based in common law.
Claims brought under Section 10(b) must be brought by the earlier of "2 years after the discovery of the facts constituting the violation; or 5 years after such violation." 28 U.S.C.A, § 1658(b). Plaintiff's Section 10(b) claim against the W2E defendants is time-barred because W2E investors were or should have been aware of the key facts constituting the violation more than two years prior to the filing of this case on September 11, 2013. The Court need not determine whether Plaintiff's Section 10(b) claim against the W2E defendants is adequately pled because it was not timely filed. See e.g. Steginsky v. Xcelera Inc., 741 F.3d 365, 369 (2d Cir. 2014), (affirming dismissal of claim as untimely even though Plaintiff's case was previously dismissed by the district court for failure to plead scienter.)
The statute of limitations begins to run when a reasonably diligent plaintiff would have discovered the facts constituting the violation. Merck & Co. v. Reynolds, 559 U.S. 633, 653, 130 S.Ct. 1784, 176 L.Ed.2d 582 (2010). All elements of a Section 10(b) violation must be discovered, including facts establishing a defendant's scienter. Id. A fact is not deemed "discovered" until the Plaintiff can plead it with sufficient detail and particularity to survive a 12(b)(6) motion to dismiss. City of Pontiac Gen. Employees' Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 175 (2d Cir. 2011).
While mere inquiry notice no longer triggers the statute of limitations, the Supreme Court has noted that this does not put all plaintiffs in the same position no matter when they choose to begin investigating. Merck & Co., Inc., 559 U.S. at 652, 130 S.Ct. 1784. Courts must still consider when "storm warnings" would have prompted a reasonably diligent plaintiff to begin investigating in order to determine when a reasonable plaintiff would have discovered the necessary facts. Id. For instance, in a statute of limitations
Although the date at which discovery should have occurred can be a fact-intensive question, courts in this district often make this determination on a motion to dismiss. LC Capital Partners, LP v. Frontier Ins. Group, Inc., 318 F.3d 148, 156 (2d Cir.2003) (Where the relevant facts "can be gleaned from the complaint and papers ... integral to the complaint, resolution of the issue on a motion to dismiss is appropriate.") (Quoting Dodds v. Cigna Sec., Inc., 12 F.3d 346, 352 n. 3 (2d Cir. 1993)).
Plaintiff argues that many of the facts set forth in the FAC were only brought to light through the Chapter 11 Trustee's investigation in early 2012, particularly those pertaining to scienter. (Pl.'s Opp. To Summ. J. at 21; FAC ¶ 8, 62.) Plaintiff alleges scienter primarily based on statements by defendants Murphy and Taylor that at the time of the offering period, the Dargavel Plant was not in fact open, W2E did not have valuable IP, and lacked the "know-how" and resources successfully to create a gasification facility. (Pl.'s Opp. To Summ. J. at 17; FAC ¶ 60-61.) However, accepting all of Plaintiff's allegations as true, a substantial portion of this information was either known or freely available to investors much earlier, such that the facts necessary to state this claim should have been discovered before September 11, 2011.
For example, on October 1, 2009, in its delayed May 28, 2009 8-K SEC filing, W2E defined its IP platform as consisting of proprietary technology, know-how and pending patents inherited from EE (such as cBos technology which the POM claimed would be "the primary catalyst for growth in the ... industry due to its ... first-to-market advantages.") (Form 8-K of Oct. 1, 2009 at 16.) At the same time, W2E disclosed that the "initial plans, designs, and knowhow that were the foundation of the project plan" for the Dargavel plant, based on the IP acquired from EE, was unworkable and that W2E's IP platform would need to be rebuilt from scratch. (Id. at 24) As a result, the IP valued on its balance sheet was written down to zero. (Id. at F-24.) It also acknowledged that W2E had lost most of the personnel gained from EE credited with relevant expertise. (Id. at 24) Finally, W2E described significant difficulties with the Dargavel Project, including doubts about W2E's ability to complete the project, which had led to the retention of an outside consultant, and a dispute with the client, ASCOT, which was claiming liquidated damages against W2E for its failure to fulfill the contract on schedule. (Id. at 29, 36.)
These warning signs should have taken on greater significance in the context of W2E's consistent defaults on its debentures. The complaint does not indicate
Plaintiff argues that it was unaware until the 2012 investigation by the Trustee that W2E did not own valuable IP developed during the construction of the Dargavel site after the acquired IP was acknowledged worthless. (Transcript of Oral Argument July 29, 2014, 14:1-9; FAC ¶ 9) (citing Taylor's testimony that "the know-how was actually developed by the customer [ASCOT] and [W2E was] left hoping the customer would share it with them.") It is not clear that this statement was substantially different from the one made by Murphy in his September 8, 2011 declaration, which credited Ascot with developing "hundreds of changes to the Dargavel plant, which do not rely on the IP of W2E Tech but are uniquely necessary for compliance with ... regulatory requirements and productive operation." (Regan Decl., Ex. 18 at ¶ 32.) However, in the context of widespread defaults, even if investors believed that some valuable IP was being developed, notice that W2E was essentially starting from scratch in 2009 should have been sufficient to prompt investigation. Facts need not perfectly match the allegations that a plaintiff chooses to include in its complaint in order for the statute of limitations to run. In re Magnum Hunter Res. Corp. Sec. Litig., 26 F.Supp.3d 278 (S.D.N.Y.2014) (citing Freidus v. Barclays Bank PLC, 734 F.3d 132, 139 (2d Cir.2013); Staehr v. Hartford Fin. Servs. Grp., 547 F.3d 406, 427 (2d Cir. 2008) (An "investor does not have to have notice of the entire fraud being perpetrated to be on inquiry notice")).
Furthermore, the August 2011 declaration by Luppino, one of the largest debenture holders, makes clear that investors were in fact already aware by that time that misrepresentations had been made to them during the sale of the debentures. For example, while Luppino was "shown a video of what was represented to be a fully functional waste-to-energy plant built by W2E in Dargavel" in 2007, in actuality the plant "did not become mostly operational until [2011], and the plant still remain[ed] under construction four years after the presentation of the video." (Decl. of Carmelo Luppino in Supp. Of Mot. To Appoint Trustee for Debtor, August 9, 2011, Regan Decl., Ex 14 at ¶ 3.) Luppino had also already learned that by the time of the offering period, W2E was unable to get a performance bond to construct a plant and was not paying its subcontractors and therefore "could not possibly proceed with any construction projects." (Id. at ¶ 10.)
Given this information, the debenture holders were aware or should have been aware of the key facts necessary to plead their securities fraud claims against the W2E defendants more than two years prior to the filing of this claim. However, the same cannot be said of the Vista defendants. The case against these defendants relies significantly on misconduct documented in the SEC's Cease and Desist Order dated February 15, 2013. (FAC ¶ 79.) As a consequence, Plaintiff's 10b-5
The Vista Defendants submit that Plaintiff should be compelled to arbitrate its claims against them pursuant to the "investment account application" signed by the majority of debenture holders who assigned their claims to the Trustee. This court agrees that arbitration is obligatory for the claims of investors who signed such an agreement, but only for those who did so.
The Federal Arbitration Act ("FAA") provides that written agreements to arbitrate disputes "shall be valid, irrevocable, and enforceable." 9 U.S.C. § 2. The Supreme Court and the Second Circuit have consistently recognized that the FAA embodies a "liberal federal policy favoring arbitration agreements." CompuCredit Corp. v. Greenwood, ___ U.S. ___, 132 S.Ct. 665, 669, 181 L.Ed.2d 586 (2012); Scott v. JPMorgan Chase & Co., No. 13-CV-646(KPF), 2014 WL 338753 at *6 (S.D.N.Y. Jan. 30, 2014) (collecting cases). In order to determine whether or not there is a valid arbitration clause, courts look to "(1) whether the parties have entered into a valid agreement to arbitrate, and, if so, (2) whether the dispute at issues comes within the scope of the agreement." In re Am. Exp. Fin. Advisors Sec. Litig., 672 F.3d 113, 128 (2d Cir.2011).
In this case, there was a valid arbitration agreement. Most of the investors signed an application which stated in pertinent part, "[b]y signing below, I acknowledge that I have received, read, understand and agree to be bound by the terms & conditions as set forth in the Customer Agreement." (Investment Account Applications, Cohen Decl., Ex. C.) Just above the signature line, the form stated in block text that signers acknowledge "that this agreement contains a predispute arbitration clause at section 28 of page 3." (Id.) The "Customer Agreement" that it referred to indeed contains a lengthy arbitration clause stating that "[a]ny controversy or claim arising out of or relating to this agreement shall be settled by arbitration before the Financial Regulatory Authority (FINRA)." (Customer Agreement, Cohen Decl., Ex. B, § 28.B.). Plaintiff's claims that Vista misrepresented W2E stock to investors and was unjustly enriched as a result falls within the scope of this agreement, which authorized Vista to act as an agent of the investors "with respect to the purchase or sale of securities." (Id. at § 2.) See Shearson/American Express v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (fraud claims under Securities Exchange Act of 1934 are arbitrable pursuant to a customer agreement with a brokerage firm.)
However, Defendants have provided evidence that only eighteen of the twenty-two investors that have assigned their claims to the Trustee signed investment account applications with Vista. The claims of the remaining four customers cannot be forced into arbitration. Defendants take the position that the remaining customers can be required to arbitrate under FINRA rules because "FINRA Rule 12200 requires arbitration if the `dispute is between a customer and member or associated person of a member; and the dispute arises in connection with the business activities of the member or the associated person.'" (Reply Supp. Mot. to Dismiss, at 2.) They omit the crucial first requirement that "[a]rbitration under the Code is either: (1) Required by a written agreement, or (2) Requested by the customer." (FINRA Rule 12200.) Neither is the case here.
To state a claim for securities fraud under Section 10(b) and Rule 10b-5, a plaintiff must adequately plead: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Ashland Inc. v. Morgan Stanley & Co., 652 F.3d 333, 337 (2d Cir.2011) (quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008)).
Plaintiffs must also meet the heightened pleading requirements of Fed. R.Civ.P. 9(b) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b), ("PSLRA"). "The complaint must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir.1993) (quoting Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989)). If a statement or omission is alleged based on information and belief, "the complaint [must] state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1).
As a preliminary matter, Vista defendants may not be held liable for alleged misrepresentations made in the POM through the group pleading doctrine. In Janus Capital Grp., Inc. v. First Derivative Traders, the Supreme Court held that only the "maker" of a statement may be held liable for securities fraud. ___ U.S. ___, 131 S.Ct. 2296, 2298, 180 L.Ed.2d 166 (2011) (separate entity "significantly involved in preparing" an investment prospectus not liable for the statements within it.) The Vista defendants are not corporate officials of W2E, and they did not sign either of the POMs. See In re Smith Barney Transfer Agent Litig., 884 F.Supp.2d 152, 164 (S.D.N.Y.2012) (Corporate officials who sign documents are in ultimate control over their content and may be held liable as a group.). Plaintiff has plead no facts to support an inference that Vista was the "entity with ultimate authority over the statement, including its content and whether and how to communicate it." Janus, 131 S.Ct. at 2302. Any role Vista played in the drafting process or in distributing the offering materials is insufficient to impose primary liability under Janus. See In re Fannie Mae 2008 Sec. Litig., 891 F.Supp.2d 458, 483 (S.D.N.Y.2012) aff'd, 525 Fed.Appx. 16 (2d Cir.2013); SEC v. Tambone, 597 F.3d 436 (1st Cir.2010) ("using" a statement not equivalent to "making" a statement for purposes of a Rule 10(b)-5 claim).
Plaintiff does allege additional misstatements by the Vista defendants made to investors during the offering period both on an individual basis and at informational meetings. However, plaintiff fails sufficiently to allege reliance on these statements that could give rise to liability.
To plead reliance, Plaintiff must allege that specific investors were aware of the company's misrepresentation and engaged in the relevant transaction based on that misrepresentation. In re Smith Barney Transfer Agent Litig., 884 F.Supp.2d 152, 161 (S.D.N.Y.2012). Furthermore, this reliance must have been reasonable.
Plaintiffs are entitled to a presumption of reliance (1) where there is an omission of material fact that a defendant had a duty to disclose, or (2) where there is "fraud-on-the-market." See Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972); Basic v. Levinson, 485 U.S. 224, 248, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (reliance presumed where there is "fraud-on-the-market" meaning that a defendant (1) "made public" (2) "material misrepresentations" (3) about stock traded on an "impersonal, efficient market.") (quotations omitted). Neither condition applies here. The debentures were privately offered to a limited number of qualified investors and did not trade on an efficient impersonal market.
Plaintiff argues that a presumption of reliance should still be applied based on Vista's "duty to disclose", citing the Supreme Court's opinion in Affiliated Ute Citizens of Utah v. U.S., which held that a bank that solicited individual holders of a specialized security distributed to members of the Ute Tribe had a duty to disclose that they were offering to purchase shares at less than the prevailing market rate. 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972) (Pl.'s Opp. to Summ. J. at 7). However, the court derived this affirmative duty from the fact that the defendants were "market makers" who were both the purchasers and sellers of the relevant securities and thereby able to manipulate the price of the shares. Id. at 153, 92 S.Ct. 1456. ("This being so, they possessed the affirmative duty ... to disclose.") In the present case, Vista was not a market maker, and the commissions that it would receive for the debenture offering were clearly outlined in the POM. It had no affirmative duty to disclose information regarding the investment. See Pa. Ave. Funds v. Inyx Inc., No. 08-CV-6857(PKC), 2011 WL 2732544, at *8 (S.D.N.Y. July 5, 2011) (Under Affiliated Ute, plaintiffs must "show[] that the defendant had an obligation to disclose the information"). Furthermore, the allegations against Vista are better characterized as affirmative misstatements rather than omissions. (See FAC ¶¶ 79-105.)
To establish reliance, a plaintiff must specify what false statements they relied on and how reliance on those specific misrepresentations led them to engage in the relevant transaction. Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, ___ U.S. ___, 133 S.Ct. 1184, 1192, 185 L.Ed.2d 308 (2013). Without sufficient detail identifying who made a statement and when it was made, in addition to who heard the statement and if and when they subsequently invested, it is impossible for the court to determine if Plaintiff could have relied on any of the purported misstatements. See Prime Mover Capital Partners, L.P. v. Elixir Gaming Technologies, Inc., 793 F.Supp.2d 651, 663 (S.D.N.Y.2011) (Motion to dismiss granted where plaintiffs failed to plead when they purchased or sold the relevant stock). Plaintiff's claim against the Vista defendants fails because it cannot plead reliance with sufficient particularity.
Plaintiff alleges reliance on oral misstatements made by the Vista defendants during investor meetings concerning the value of the company's IP and the riskiness of the venture. Specifically, Plaintiff alleges that:
The first allegation does not state which defendants were responsible for showing the video or which investors viewed it. The second fails to identify which prospective investors Gregg Lorenzo spoke to. The third allegation similarly fails to identify which defendant communicated with which investor. See Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993) ("[plaintiffs] still have not linked the alleged fraudulent statements to particular Directors.") The fourth and fifth allegations suffer from a problem common to all of these statements; they fail to provide a timeline of when the statements were made in relation to when the particular investor purchased securities. Prime Mover, 793 F.Supp.2d at 663 (Plaintiff "failed to state a claim for securities fraud because ... the complaint fail[ed] to allege that Prime Mover purchased or sold any EGT stock during the period in which EGT's stock price allegedly was inflated by defendants' misstatements and omissions.")
Plaintiff also points to findings from the SEC's investigation as further evidence that investors detrimentally relied on fraudulent statements by Vista. The SEC's Cease and Desist Order does provide detailed allegations about specific statements made by each of the defendants to investors A, B, and C and specifies the date on which each invested and the amount that they invested. (FAC ¶ 81-105.) While Plaintiff's recitation of the misstatements made to investors A, B, and C may be supportive of a finding of scienter for the Vista defendants, it does not establish reliance by the investors whose claims are to be adjudicated in this action. Plaintiff does not allege that investors A, B, or C are among the twenty-two investors whose claims were assigned to the Trustee. Rather, Plaintiff attempts to piggy-back on the SEC's detailed allegations of specific misrepresentations made to these unnamed investors by stating that "these same misrepresentations and/or material omissions were previously made [sic] other prospective investors and purchaser of the Debentures (including Luppino and Savage) by G. Lorenzo either together with Taylor and/or Bohan or in the presence of Taylor and Bohan and with their assent." (FAC ¶ 106.) As discussed
Even if individual misstatements had been pled with greater particularity, Plaintiff would also be required to show that such reliance was reasonable. See Harsco Corp. v. Segui, 91 F.3d 337 (2d Cir.1996). An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth. Brown v. E.F. Hutton Grp., Inc., 991 F.2d 1020, 1032 (2d Cir.1993) (citing Royal American Managers, Inc. v. IRC Holding Corp., 885 F.2d 1011, 1015-16 (2d Cir.1989)). Courts look to several factors in determining whether or not an investor justifiably relied on misstatements, including:
In addition, courts will look to whether the offering agreement "bespoke caution" regarding the area in which Plaintiff claims there was a misrepresentation. Harsco Corp., 91 F.3d at 345.
Here, though some investors may have been prior customers of Charles Vista, all investors were qualified investors, and Vista had no fiduciary duty to them based on this transaction.
Courts have generally found it unreasonable to rely on oral statements when, as here, there is a written offering memorandum that each investor was required to read in full before investing. See, e.g. Brown v. Hutton, 991 F.2d at 1032 (Investors were unreasonable as a matter of law for relying on oral statements by broker that investment was low risk rather than the written prospectus which included the risk factors and details of the venture.) Furthermore, the POM explicitly stated that investors should not rely on information
Because there is no underlying violation by the Vista defendants, there can be no control person liability for the W2E defendants. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir.2007) ("ATSI fails to allege any primary violation; thus, it cannot establish control person liability.")
Given that Plaintiff's federal claims have been dismissed, I decline to retain supplemental jurisdiction over the remaining common law claims. See Silverman v. Teamsters Local 210 Affiliated Health & Ins. Fund, 761 F.3d 277 (2d Cir.2014) ("Federal courts will normally decline to retain jurisdiction in such circumstances."); 28 U.S.C. § 1367(c).
In the complaint, Plaintiff asserts that the court has both supplemental jurisdiction over its non-federal claims pursuant to 28 U.S.C. § 1367(a) and diversity jurisdiction pursuant to 28 U.S.C. § 1332(a). To establish diversity jurisdiction, there must be complete diversity of citizenship between the Plaintiff and each of the Defendants and the amount in controversy must exceed $75,000. 28 U.S.C. § 1332(a); Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 68 (2d Cir. 1990). However, Plaintiff fails to plead the facts necessary to establish complete diversity between the parties. Federal courts are obligated to consider whether subject matter jurisdiction has been established, even sua sponte. Joseph v. Leavitt, 465 F.3d 87, 89 (2d Cir.2006).
Plaintiff alleges that the defendants are citizens of New York, New Jersey, Florida, and South Carolina. (FAC ¶¶ 25, 27, 29-32.) The complaint also includes the place of incorporation of several of the corporations that are part of the Liquidating Trust (FAC ¶ 21, 24.) However, it does not allege their primary places of business. See 28 U.S.C. § 1332(c)(1) ("a corporation shall be deemed to be a citizen of every State ... by which it has been incorporated and of the State ... where it has its principal place of business.") In addition, Plaintiff does not allege the citizenship of the Trustee itself, Gavin/Solmonese LLC, which consists of the citizenships of all of its members. Handelsman v. Bedford Vill. Assocs. Ltd. P'ship, 213 F.3d 48, 51-52 (2d Cir.2000).
Generally, when claims are assigned to a trust, the relevant citizenship for the purposes of 28 U.S.C. § 1332(a) is that of the trustee rather than the beneficiaries. Grede v. Bank of New York Mellon,
In this case, however, the Trustee is representing not just the claims of the bankrupt corporations but also the debenture holders who have assigned their claims to the Trust for prosecution. (FAC ¶¶ 18.) In that capacity, it is not clear that the special reasoning relating to a bankruptcy relationship is applicable at all. See, e.g. Grede v. Bank of New York Mellon, 598 F.3d 899, 900 (7th Cir.2010) (utilizing citizenship of trustee in case where investors had assigned their claims to liquidation trust for collection pursuant to a Chapter 11 reorganization plan.) Thus, Plaintiff must plead the citizenship of the Trustee in order to establish diversity jurisdiction.
Leave to amend the complaint may be granted at the discretion of the court. American Stock Exch., LLC v. Mopex, Inc., 230 F.Supp.2d 333, 335 (S.D.N.Y. 2002). While the opportunity to amend the complaint should be "freely given when justice so requires," Fed.R.Civ.P. 15(a), it may be denied where it "is unlikely to be productive." Lucente v. IBM Corp., 310 F.3d 243, 258 (2d Cir.2002). Given that Plaintiff has already amended the complaint in response to a motion to dismiss that challenged the element of reliance and acknowledged at oral argument that it did not possess additional facts ready to supplement this area, Plaintiff will not be permitted to replead its federal claims. (See Transcript of Oral Argument July 29, 2014, 23:18-20; Mem. Supp. Mot. to Compel Arbitration or Dismiss at 20-22.) However, Plaintiff has leave to supplement the complaint exclusively for the purpose of establishing diversity jurisdiction over the non-federal claims.
For the reasons discussed above, the motion by the Vista defendants to compel arbitration [dkt. no. 60] is granted with respect to the claims of those investors who both assigned their claims to the Liquidating Trustee and signed written agreements including an arbitration clause.
SO ORDERED.
