Fagan v. Fischer

TINA FAGAN and MICHAEL FAGAN, Plaintiffs, v. K. SCOTT FISCHER, VERONIKA M. FISCHER, BRIAN E. CARROLL,BRUCE W. BREITWEISER, FISCHER INVESTMENT CAPITAL, LLC, BYANA,LLC, PRIVATE CAPITAL, LLC, FUNDER, LLC, BOWDER, LLC,WEALTH CAPITAL GROUP, LLC, DUNBAR BREITWEISER & COMPANY,LLP, JOHN/JANE DOES 1-5, fictitious individuals to be named after discovery, andABC CORPS. 1-5, fictitious corporate entities to be named after discovery, Defendants.

Civ. Action No.: 14-7013 (FLW)(TJB)

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

October 30, 2019

*NOT FOR PUBLICATION*

OPINION

WOLFSON, U.S. Chief District Judge:

This case arises from a failed business relationship between Plaintiffs Tina Fagan and Michael Fagan (collectively, "Plaintiffs" or "the Fagans") and Defendant K. Scott Fischer ("Scott Fischer"). Plaintiffs allege that Scott Fischer controlled various corporate entities, many of which are defendants in this action, which he utilized as vehicles to operate a fraudulent real estate investment scheme and loan program. In that regard, Plaintiffs further allege that they were duped into making debt and equity investments, totaling over $2 million dollars, in the Derbyshire Project, a real estate development project in North Carolina, and entities associated with Scott Fischer. Defendants Scott Fischer; Bowder, LLC ("Bowder"); Byana, LLC ("Byana"); Brian E. Carroll; Veronika M. Fischer; Fischer Investment Capital, Inc.¹ ("FIC"); Funder, LLC ("Funder"); Private Capital, LLC ("Private Capital"); Wealth Capital Group, LLC ("Wealth Capital") (collectively, "Defendants") now move for partial summary judgment on Counts I (Federal RICO), II (conspiracy to violate RICO), III (New Jersey RICO), IV (Violation of Section 10(b) of the Securities' Exchange Act and Securities Rule 10b-5), V (the New Jersey Uniform Securities Act), VI (Common Law Fraud/Fraud in the Inducement), VII (Aiding and Abetting Common Law Fraud), VIII (Equitable Fraud), IX (Conversion), X (Unjust Enrichment), XI (Breach of Contract as to Defendant Scott Fischer only), and XIV (Breach of Fiduciary Duty) of the Second Amended Complaint pursuant to Federal Rule of Civil Procedure 56. For the reasons set forth below, Defendants' motion is GRANTED IN PART and DENIED IN PART. Summary Judgment is GRANTED in favor of defendants Veronika Fischer, Bowder, Funder, and Wealth Capital, on all of the claims against them, and those defendants are dismissed from the lawsuit. Summary Judgment is GRANTED in favor of Defendants Scott Fischer, Brian E. Carroll, Private Capital, FIC, and Byana on Counts I (Federal RICO), II (conspiracy to violate RICO), III (NJ RICO), IV (Violation of Section 10(b) of the Securities' Exchange Act and Securities Rule 10b-5), V (the New Jersey Uniform Securities Act), VIII (Equitable Fraud), IX (Conversion), X (Unjust Enrichment), and XIV (Breach of Fiduciary Duty). Defendants Scott Fischer, Brian E. Carroll, Private Capital, FIC, and Byana's Motion for Summary Judgment as to Counts VI (Common Law Fraud/Fraud in the Inducement), and VII (Aiding and Abetting Common Law Fraud) is DENIED. Scott Fischer's Motion for Summary Judgment on Count XI (Breach of Contract) is also DENIED, but this claim is limited as outlined in this Opinion.

I. Factual Background and Procedural History

A. The Creation of Byana and the Related Fischer Entities

The following facts are not disputed, unless otherwise noted. Byana, a Delaware LLC, was formed by Defendants Scott Fischer and Brian E. Carroll, and Dan Taylor, a non-party, on August 22, 2006. ECF No. 120-2, Defendants' Statement of Material Facts ("SOMF") ¶14. Byana was created for the purpose of "acquir[ing], develop[ing] and sell[ing] parcels of land located in Columbus, North Carolina" for the Derbyshire Project. SOMF ¶14. Byana is owned by its members, including Plaintiff Tina Fagan, Defendants Funder and Wealth Capital, and other non-party members. SOMF. ¶5. Approximately one month after creating Byana, Scott Fischer formed Private Capital, another Delaware LLC, to serve as the developer of the Derbyshire Project. SOMF. ¶15. Scott Fischer is the managing member of Defendant Private Capital, which is, in turn, the managing member of Byana. SOMF ¶6. Private Capital is owned by Defendants Funder and Weiss Capital. SOMF ¶7. Funder is owned jointly by Scott Fischer and his wife, Veronika Fischer. SOMF ¶3-4.

Throughout September and November 2006, in a series of transactions, Byana acquired a total of 181.74 acres of undeveloped land in North Carolina, 133.63 acres of which was subject to mortgage, to be used for the Derbyshire Project. SOMF ¶¶16-22. Purchasing the properties cost Byana approximately $2,517,900, which it financed primarily through debt and equity investments. SOMF ¶20. From its inception, Byana was leveraged; in order to fund the initial land purchase, Scott Fischer and several Fischer related entities made non-interest-bearing loans to Byana, totaling approximately $1.15 million, in or around October 2006. SOMF ¶81-83. The loans do not appear to have been formally documented in a loan agreement, and Plaintiff disputes the legitimacy of the loans. In November 2006, Byana utilized funds of approximately $915,144 which it obtained from investors to acquire two additional properties, totaling 48.11 acres. SOMF ¶84. After procuring those properties, Byana borrowed $4 million from Macon Bank to fund land development and operating costs. SOMF ¶126. The loan from Macon Bank was secured by the real estate which Byana owned. Id. Some of the funds, approximately $900,003.13, that Scott Fischer and the Fischer-related entities loaned to Byana to finance the initial 2006 land purchases were repaid by Byana in December 2006. SOMF ¶¶86-87, 94. The remaining funds due were reclassified from a loan to a capital contribution by Funder. SOMF ¶88.

B. The Fagans' Investments in Byana and the Related Fischer-Entities

In 2006, Scott Fischer contacted Plaintiffs about potentially investing in the Derbyshire Project, and subsequently, sent them a confidential investment offering (the "Investment Offering"), as well as a copy of the Byana Operating Agreement, and an accredited investor questionnaire via email on October 9, 2006. SOMF ¶¶23-24. 26. In the email, Scott Fischer indicated that "we have closed on the largest parcel [for the project] and have advanced over $1.1 million." SOMF ¶24. At the time, the Fagans were purportedly unaware what Scott Fischer meant by "advanced" and did not know that it referred to the approximately $1.15 million in funds which Byana had received from Scott Fischer and the Fischer-related entities. ECF No. 122-1, Plaintiffs' Responsive Statement of Facts ("Pl. Resp. SOMF") ¶25.

The overview portion of the Investment Offering stated, in pertinent part:

Private Capital's investment objective is to acquire the land and complete the infrastructure necessary to sell the improved lots. Private Capital is working to find equity investors to co-invest in the acquisition and provide additional equity as needed for the land infrastructure improvements. This can be achieved on a leveraged or un-leveraged basis. Total capital requirements for the transaction are approximately $6 million. Initial land costs are $2.5M with estimated infrastructure costs of $2.5M. Additional costs will include marketing, selling and carrying costs. Private Capital has designed both a debt and equity investment structure. Upon completion of the project, the debt investor will receive the return of their investment plus 12% simple interest. In addition, they will receive a 5% discount on their choice of lot for each $100,000 invested (ex. $200,000 investment earns 10% discount). The equity investor will receive the return of their investment capital plus 1% of the net profit for each $100,000 invested (ex. $400,000 investment earns 4% of net profit).

SOMF ¶29; see also ECF No.120-5, Certification of K. Scott Fischer Cert, Ex. L, Investment Offering. The Investment Offering also included a disclaimer which provided that the document was prepared "solely for informational purposes" and did not constitute "all or any part of an offer or contract" and that

Private Capital LLC strongly recommends first that each potential investor review the information contained in this Investment Offering with its accountants, attorneys and tax advisors. While the information contained herein is from sources deemed reliable, it has not been independently verified by Private Capital, LLC nor the owner makes any representations or warranties, express or implied, with respect to the information.

SOMF ¶33; see also Investment Offering.

After reviewing the Byana Operating Agreement and investment materials, Mr. Fagan and Scott Fischer had a follow up-conversation regarding the Derbyshire Project on October 12, 2006. SOMF ¶48. Plaintiffs assert, and Defendants dispute, that prior to investing in the project, Scott Fischer and Brian Carroll, a friend of Mr. Fischer's and a member of the Development Team for the Derbyshire Project, assured Mrs. Fagan that her investment would be fully protected from loss. Plaintiffs aver that they were told that the Derbyshire Project was a "no brainer" as an investment and that the investors would own the land "free and clear, debt free." See ECF No. 122-3, Certification of Michael A. Baldassare ("Baldassare Cert"), Ex. M, Deposition Testimony of Michael Fagan of October 18, 2017 ("M. Fagan Dep.") 93:6-8. Plaintiffs also claim that Scott Fischer represented that in the worst-case scenario "an asteroid lands on [the property], and nothing happens, and we have to sell the land, we'll always get our money back." Id. Thereafter, the Fagans made the decision to invest in the project, and on October 31, 2006, Mrs. Fagan executed the Byana Operating Agreement, and completed the accredited investor questionnaire. SOMF ¶¶50-51. The "Member Representations and Warranties" section of the Byana Operating Agreement included a provision...