Giunta v. Dingman

893 F.3d 73

Ryan GIUNTA, Erik H. Gordon, Plaintiffs-Appellants,

v.James T. DINGMAN, Bahamex Ltd., Out West Hospitality Ltd., Island Smoke House Ltd., The Traveller's Restaurant Ltd., 25 North Ltd., Defendants-Appellees.^*

Docket No. 17-1375-cv

August Term 2017

United States Court of Appeals, Second Circuit.

Argued: November 8, 2017

Decided: June 19, 2018

Franklin B. Velie (Harry H. Rimm, on the brief ), Sullivan & Worcester LLP, New York, New York, for Plaintiffs-Appellants.

Jeffrey A. Mitchell, Judith R. Cohen, Browne George Ross LLP, New York, New York, for Defendants-Appellees.

Before: Leval, Livingston, and Chin, Circuit Judges.

Chin, Circuit Judge:

This is an appeal by plaintiffs-appellants Ryan Giunta and Erik H. Gordon from a judgment of the district court dismissing this action against defendants-appellees James T. Dingman, BahaMex Ltd., Out West Hospitality Ltd., Island Smoke House Ltd., the Traveller's Restaurant Ltd., and 25 North Ltd., for lack of subject matter jurisdiction. The district court concluded that plaintiffs had not sufficiently alleged a "domestic transaction" under section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). As that was the only federal claim and diversity jurisdiction was lacking, the district court dismissed the case. For the reasons set forth below, we vacate the judgment of dismissal and remand for further proceedings.

BACKGROUND

A. The Facts

For purposes of this appeal, the facts alleged in plaintiffs' first complaint and proposed second amended complaint (the "SAC") are assumed to be true.¹

Gordon met defendant-appellee Dingman through Giunta, their mutual friend, in or around late 2011.² In April 2013, Dingman invited Gordon to visit him in the Bahamas where he showed him the Traveller's, a restaurant that was part of Dingman's hospitality venture and operated by his purported holding company, Out West Hospitality Ltd. ("OWH"). In November 2013, Dingman asked Gordon about investing in OWH.

From around November 1 to November 22, 2013, Gordon and Dingman met regularly for lunch in Manhattan and had several phone calls initiated by Dingman that Gordon took in Manhattan. They also met at least once at Dingman's family home in Manhattan. These New York meetings and the telephone conversations which Gordon took in New York are collectively referred to in the SAC and in this opinion as the "November 2013 Communications." Dingman made various material misrepresentations to Gordon during the November 2013 Communications to induce him to invest in OWH and/or its purported subsidiaries. It was also during the November 2013 Communications that Gordon accepted Dingman's offer of a 50% equity stake in the venture in return for Gordon's investment of capital (the "Agreement").³ The Agreement was not reduced to writing.

Dingman made the following misrepresentations during the November 2013 Communications: (i) OWH was the parent company and 100% owner of Traveller's and other purported subsidiaries; (ii) Dingman would issue shares of OWH to Gordon worth up to 50% of OWH's equity; (iii) Dingman had personally invested more than $600,000 in OWH; (iv) OWH and its purported subsidiaries were profitable; and (v) Gordon, Giunta, and Dingman were the only equity stakeholders in OWH.

Pursuant to the Agreement, on November 22, 2013, Gordon wired $100,000 from his personal bank account in New York to an account identified by Dingman. In an acknowledgment letter on OWH letterhead, Dingman stated: "This letter is to acknowledge the receipt of 3 wires in the total amount $100,000.00 USD made out to Traveller's Restaurant. [OWH] intends to use the funds to purchase material and general operations. The investment will represent a 10 percent stake in the holding company of Out west Hospitallity [sic]. We appreciate your support and investment in the holding company." App. 254.⁴

On December 17, 2013, Gordon wired another $150,000 from his personal bank account in New York to Dingman. Dingman sent Gordon a nearly identical acknowledgment letter on OWH letterhead that stated that the wire was "made out to Traveller's Restaurant," the funds were to be used for certain operations, and the "[t]he investment will represent a 10 percent stake in the holding company of Out west Hospitallity [sic]." App. 256. It further noted that on "January 15th the company [OWH] will issue shares that will represent a total investment of 250,000 USD." App. 256.⁵

From around January 2014 through April 2014, Dingman and Gordon continued to meet regularly for lunch in Manhattan where Dingman repeated the misrepresentations from the November 2013 Communications. Dingman also made similar misrepresentations in emails, e.g. , in a March 27, 2014 email from Dingman to Gordon where Dingman confirmed that "Erik and I have partnered up in The Bahamas in a fifty/fifty partnership." App. 258.

On March 7, 2014, at a lunch in California, Dingman asked Gordon to wire $18,000 to him as a personal loan. Gordon did so from his New York bank account. Dingman never repaid the loan, and told Gordon that the money would count toward Gordon's equity. On or around March 12, 2014, Gordon wired an additional $75,000 as an investment in OWH to Dingman, again from his bank account in New York.

Gordon repeatedly requested financial records for OWH throughout early 2014, but never received them. On September 9, 2014, Dingman sent a joint letter to all OWH investors informing them that all businesses had been closed. The letter also stated that Dingman was doing a capital call to raise additional funds that would dilute existing shares if the shareholders failed to invest more. The existence of other equity holders came as a surprise to Gordon given Dingman's previous representations that Dingman and Gordon shared in 50/50 equity of OWH. In the following weeks, Dingman ignored Gordon's phone calls and emails requesting operating and financial information and refused to return Gordon's investment.

B. The Proceedings Below

This action was originally commenced by fourteen American and Bahamian plaintiffs. Shortly after defendants filed a motion to dismiss for forum non conveniens , eleven plaintiffs voluntarily dismissed their claims, leaving only the two current American plaintiffs, Gordon and Giunta, and a company allegedly owned by Giunta.

After the other plaintiffs dismissed their claims, the court directed Gordon and Giunta to file an opposition to the motion to dismiss along with a proposed amended pleading. Gordon and Giunta submitted the SAC, which asserted subject matter jurisdiction on the basis of diversity of citizenship and federal question jurisdiction arising from Gordon's section 10(b) claim—the only remaining claim asserted under federal law.

At a February 16, 2017 hearing on the motion to dismiss, the district court directed the parties to file submissions addressing whether Gordon's section 10(b) claim was a cognizable "domestic" securities claim under Morrison v. National Australia Bank Ltd ., 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010).

After considering the parties' submissions and the allegations set forth in the SAC, on March 29, 2017, the district court dismissed the case for lack of subject matter jurisdiction. The court concluded that diversity jurisdiction was lacking, and that Gordon had not sufficiently alleged a "domestic transaction," as required for a cognizable federal securities claim. Applying Rule 12(b)(6) standards to the sufficiency of the federal securities claim, the district court determined that the transaction was not domestic because Bahamian approval was required for shares to be issued to Gordon.⁶ It reasoned that this "approval" was a condition precedent that had to be satisfied before Dingman and Gordon became "irrevocably bound" to effect the purchase and sale of the securities. The district court therefore concluded that a sufficient domestic transaction had not been entered into at the time of the Agreement.⁷ Judgment was entered March 31, 2017.⁸ This appeal followed.

DISCUSSION

I. Domestic Transaction

A. Applicable Law

We review de novo a district court's dismissal of a complaint under Rule 12(b)(6), accepting all of the complaint's factual allegations as true and drawing all reasonable inferences in the plaintiffs' favor. Forest Park Pictures v. Universal Television Network, Inc. , 683 F.3d 424, 429 (2d Cir. 2012). The complaint must state a claim that is plausible on its face. Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

Section 10(b) of the Exchange Act makes it unlawful "[t]o use or employ, in connection with the purchase or sale of any security ..., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b).

In Morrison , the Supreme Court held that section 10(b) does not apply extraterritorially but only to "transactions in securities listed on domestic exchanges[ ] and domestic transactions in other securities ." 561 U.S. at 267, 130 S.Ct. 2869 (emphasis added). Morrison did not provide guidance as to what constitutes "domestic transactions in other securities." Id . In Absolute Activist Value Master Fund Ltd. v. Ficeto , however, we explained that "domestic transactions," are those involving securities in which (1) irrevocable liability is incurred in the United States, or (2) title passes within the United States. 677 F.3d 60, 62 (2d Cir. 2012).

With respect to the first category—whether irrevocable liability is incurred in the United States—we explained that "it is sufficient for a plaintiff to allege...