Armstrong v. AMERICAN PALLET LEASING INC.

678 F.Supp.2d 827

Timothy ARMSTRONG, et al., Plaintiffs, v. AMERICAN PALLET LEASING INC., et al., Defendants.

No. C07-4107-MWB.

United States District Court, N.D. Iowa, Western Division.

August 26, 2009.

Jeff W. Wright, Jill A. Finken, Heidman Redmond Fredregill Patterson Plaza Dykstra & Prahl, Sioux City, IA, Mark E. Haggerty, FFP Legal Services, LLC, Bloomington, MN, for Plaintiffs.

Kimberley K. Baer, Wandro & Baer, PC, David L. Phipps, John F. Fatino, Whitfield & Eddy, PLC, James L. Pray, Brown Winick Graves Gross Baskerville Schoenebaum, David Alan Morse, Rosenberg & Morse, Kimberley K. Baer, Steven P. Wandro, Wandro, Baer, Appel & Casper, PC, William W. Graham, Graham Law Firm, PC, Justin E. Lavan, Lamarca & Landry, Rebecca Boyd Dublinske, Dickinson Mackaman Tyler & Hagen PC, Des Moines, IA, Lawrence Fischman, Troy D. Phillips, Glast, Phillips & Murray, PC, Ellen Bush Sessions, Lindsy Nicole Alleman, Fulbright & Jaworski, LLP, Karen L. Cook, Cook Law Firm, David B. Dyer, Secore & Waller, LLP, Charles Rodney Acker, Ellen Bush Sessions, Fulbright & Jaworski, LLP, Dallas, TX, Daniel L. Hartnett, Marci L. Iseminger, Crary-Huff-Inkster-Hecht-Sheehan-Ringenberg-Hartnett-Storm, Rene Charles Lapierre, Klass Law Firm, L.L.P., Michael W. Ellwanger, Rawlings Neiland Probasco Killinger Ellwanger Jacobs, et al., Sioux City, IA, John C. Wagner, John

C. Wagner Law Office, PC, Amana, IA, Jeffery J. Kalinowski, R. Prescott Sifton, Jr., Husch Blackwell Sanders LLP, Rebecca A. Pinto, Sherri C. Strand, Thompson Coburn, LLP, St. Louis, MO, Victoria H. Buter, Husch, Blackwell, Sanders, LLP, Omaha, NE, Kenneth L. Butters, Brick Gentry, PC, West Des Moines, IA, Jeffrey B. Silverstein, Liam O'Brien, McCormick & O'Brien, LLP, New York, NY, Glenn Aaron Weiner, Michael Kenneth Coran, Rachel E. Bernstein, Klehr, Harrison, Harvey, Branzburg & Ellers, LLP, Philadelphia, PA, Landon R. Dufoe, Scheldrup Blades Schrock Sand Aranza P.C., Cedar Rapids, IA, Nicole M. Siemens, Terrence J. Fleming, Lindquist & Vennum PLLP, Minneapolis, MN, for Defendants.

Douglas H. Peterson, Moorhead, MN, pro se.

Chris Curnutt, Irving, TX, pro se.

MEMORANDUM OPINION AND ORDER REGARDING DEFENDANTS' MOTIONS TO DISMISS

MARK W. BENNETT, District Judge.

I. INTRODUCTION AND BACKGROUND ...................................... 834
      A. Procedural Background ......................................... 834
      B. Factual Background ............................................ 835
         1. Facts Drawn From First Amended Complaint ................... 835
         2. Facts Related Solely To Personal Jurisdiction .............. 843
 II. LEGAL ANALYSIS .................................................... 844
     A. U.S. Bank's Rule 12(b)(1) Challenge to Jurisdiction ............ 844
        1. General law regarding supplemental Jurisdiction ............. 844
        2. Analysis .................................................... 845
     B. Motions To Dismiss For Lack of Personal Jurisdiction ........... 848
        1. Rule 12(b)(2) standards ..................................... 848
        2. Nationwide service of process ............................... 849
     C. Motions To Dismiss For Failure to State A Claim ................ 851
        1. Rule 12(b)(6) standards ..................................... 851
        2. Pleading fraud under Rule 9(b) .............................. 852
        3. Analysis of civil RICO claims ............................... 853
        4. Analysis of securities claims ............................... 855
           a. Section 10(b) and Rule 10b-5 claims ...................... 855
                i. The Langley defendants .............................. 857
               ii. Defendant Morrison .................................. 859
              iii. Defendants Frost and the Nichols .................... 859
               iv. The Bumgarners ...................................... 860
                v. Defendant Gersten Savage ............................ 861
           b. Section 11 claims ........................................ 862
                i. The Langley defendants .............................. 863
               ii. Defendant Morrison .................................. 864
              iii. Defendants Frost and the Nichols .................... 864
               iv. The Bumgarners ...................................... 865
                v. Defendant Gersten Savage ............................ 865
           c. Section 12 Claims ........................................ 866
                 i. Sellers of APL stock ............................... 866
                ii. Statute of limitations ............................. 867
           d. Section 18 claims ........................................ 868
           e. Section 20 claims ........................................ 870
        5. State law claims ............................................ 872
           a. Conversion claims ........................................ 872
           b. Breach of fiduciary duty claims .......................... 873
                i. U.S. Bank ........................................... 874
 

ii. The Lagley defendants .............................. 875 c. Fraudulent misrepresentation and omission claims ......... 876 i. U.S. Bank ........................................... 877 ii. The Langley defendants .............................. 877 iii. Morrison ............................................ 877 iv. The Nichols ......................................... 878 d. Negligent misrepresentation/Nondisclosure claims .......... 878 i. The Langley defendants .............................. 879 ii. Morrison ............................................ 879 iii. The Nichols ......................................... 880 e. Professional Negligence ................................... 881 i. Morrison and Gersten Savage .......................... 881 ii. The Langley defendants ............................... 882 f. Punitive damages .......................................... 882 D. Leave to Amend ................................................. 882 III. CONCLUSION ........................................................ 882

The court is confronted in this case with a myriad of claims brought under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), both the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as several state law claims all arising from an alleged Ponzi scheme orchestrated around the selling of securities in the publically traded company, American Pallet Leasing, Inc.¹

I. INTRODUCTION AND BACKGROUND

A. Procedural Background

On November 30, 2007, plaintiffs, all investors in the corporation American Pallet Leasing, Inc. ("APL") filed their complaint in this case.² On October 10, 2008, plaintiffs filed their First Amended Complaint against defendants, including defendants U.S. Bancorp, Inc. and U.S. Bancorp Investment Services, Inc. (collectively "U.S. Bank" unless otherwise indicated), Langley, Williams & Company, L.L.C. and Daphne B. Clark (collectively the "the Langley defendants" unless otherwise indicated), Jason Nichols, Jennifer Nichols, Gregory Frost, Margaret Bumgarner, Kevin Bumgarner, and Gersten Savage, L.L.P. ("Gersten Savage").³ In their First Amended Complaint, plaintiffs set out the following fourteen causes of action against the named defendants: (1) violation of Racketeer Influenced and Corrupt Organizations Act ? 1962(c), 18 U.S.C. ? 1962(c) (Count 1); (2) violation of RICO ? 1962(a), 18 U.S.C. ? 1962(a) (Count 2); violation of RICO ? 1962(d), 18 U.S.C. ? 1962(d) (Count 3); (4) breach of fiduciary duty (Count 4); (5) conversion (Count 5); (6) negligent misrepresentations/nondisclosures (Count 6); (7) fraudulent misrepresentations and omissions (Count 7); (8) violation of ? 10(b) and Rule 10(b-5) of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. ? 78j(b) (Count 8); (9) violation of ? 11 of the Securities Act of 1933 ("the 1933 Act"), 15 U.S.C. ? 77k (Count 9); (10) violation of ? 12 of the Securities Act of 1933, 15 U.S.C. ? 77l (Count 10); (11) violation of ? 18 of the Securities Exchange Act of 1934, 15 U.S.C. ? 78r (Count 11); (12) controlling persons under ? 20 of the Securities Exchange Act of 1934, 15 U.S.C. ? 78t (Count 12); (13) professional negligence (Count 13); and, (14) punitive damages (Count 14).

Defendants U.S. Bank, the Langley defendants, Jason Nichols, Jennifer Nichols, Gregory Frost, Margaret Bumgarner and Kevin Bumgarner (referred to jointly as the "Bumgarners"), and Gersten Savage have filed motions to dismiss which are presently before the court.⁴ In their respective motions to dismiss, Frost, the Langley defendants, and the Nichols assert that they have insufficient minimum contacts within the state of Iowa to establish personal jurisdiction and, therefore, the First Amended Complaint should be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(2). Frost, the Langley defendants and the Nichols, alternatively, move to dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). The Langley defendants, Gersten Savage and the Bumgarners each move to dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). U.S. Bank moves to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(1), on the ground that the court lacks subject matter jurisdiction over plaintiffs' claims against U.S. Bank because all federal claims against U.S. Bank have been dismissed and the court lacks supplemental jurisdiction over plaintiffs' remaining state law claims against it because those claims allegedly do not share a common nucleus of operative facts with the RICO and securities claims against the other defendants. U.S. Bank, alternatively, moves to dismiss the claims asserted against it for failure to state a claim, pursuant to Federal Rule of Civil Procedure 12(b)...