Kirzhner v. Silverstein

ILONA KIRZHNER, an individual, Plaintiff,

v. DAVID SILVERSTEIN, an individual, EVERGREEN INDUSTRIES, INC.,f/k/a Breakthrough Management Group International, Inc., f/k/a Breakthrough Management Group, Inc.,a Colorado Corporation, DAVID SILVERSTEIN INVESTMENTS, LLC,a Colorado limited liability company, DSI INVESTMENTS, LLC,a Colorado limited liability company, BMGI CORPORATION, a Delaware corporation,and BMGI HOLDINGS, LLC, a Delaware limited liability company, Defendants.

Civil Action No. 09-cv-02858-CMA-BNB

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

DATED: September 20 , 2011

Judge Christine M. Arguello

ORDER ON DEFENDANTS' MOTION TO DISMISS AMENDED COMPLAINT

AND PLAINTIFF'S MOTION TO DISMISS AMENDED COUNTERCLAIMS

This matter is before the Court on Defendants' Motion to Dismiss the Amended Complaint (Doc. ## 113, 114), and Plaintiff's Motion to Dismiss the Defendants' Amended Counterclaims (Doc. # 80). The motions are fully briefed and ripe for adjudication. For the following reasons, Defendants' Motion to Dismiss the Amended Complaint is DENIED, and Plaintiff's Motion to Dismiss the Defendants' Amended Counterclaims is GRANTED.

I. BACKGROUND

A. ALLEGED FACTS

Plaintiff Ilona Kirzhner's ("Kirzhner's") operative First Amended Verified Complaint ("FAC") (Doc. # 105) alleges as follows. On September 23, 2004, Kirzhner entered into a Stock Purchase and Sale Agreement (the "Agreement") with Defendant David Silverstein ("Silverstein") and Defendant Evergreen Industries, Inc., then known as Breakthrough Management Group, Inc. ("BMGI"). (Id., ¶ 14.) Under the Agreement, Kirzhner agreed to sell and Silverstein agreed to purchase 5,000,000 shares of BMGI common stock (the "Stock") for $1.00 per share. (Id.) Silverstein paid the purchase price for the Stock by executing and delivering to Kirzhner a Promissory Note Secured by Stock Pledge (the "Note") payable to Kirzhner in the amount of $5,000,000. (Id., ¶ 15.) Kirzhner alleges that, as of the date of the filing of the FAC, Silverstein was in default on the Note, had been in default for more than a year, and had refused repeated demands by Kirzhner for amounts owed on the Note. (Id., ¶¶ 18-19.)

The Agreement, however, contained a "sole remedy" provision stating that, "[i]n the event that [Silverstein] is in breach of this Agreement for failing to pay any installment of the [p]urchase [p]rice . . ., then [Kirzhner's] sole and exclusive remedy for the default or breach of the Agreement shall be for [Kirzhner] . . . to recover possession of all of the Stock not paid for at the time the default is declared . . . ." (Doc. # 59 at 3-4.) Kirzhner concedes in the FAC that Silverstein has attempted to return to Kirzhner 3,670,000 shares of BMGI stock, representing the unpaid amount still owing under theNote. (Doc. # 105, ¶ 36.) Kirzhner refused to accept the stock. (Id.) Silverstein and BMGI have filed counterclaims in this action alleging that Kirzhner fraudulently induced Silverstein to enter into the Agreement, despite never actually intending to abide by the "sole remedy" provision, and instead intending all along to file a lawsuit against Silverstein should Silverstein ever be in default on his payments under the Note. (See Doc. ## 74, 287.)

Although the FAC does not explain why Kirzhner refused to accept Silverstein's offer to return the stock, the FAC does detail an alleged scheme by Silverstein to devalue BMGI's stock in order to defraud Kirzhner, which resulted in BMGI's stock being worthless. (Id., ¶¶ 23-72.) The alleged scheme consisted of Silverstein transferring BMGI's assets through two investment companies created by him (Defendants David Silverstein Investments, LLC and DSI Investments, LLC ("DSI")) to two newly created entities (Defendants BMGI Corp. and BMGI Holdings, LLC). (See id.) As a result of the alleged scheme, BMGI's stock is worthless and BMGI Corp. now carries on BMGI's previous business, but free and clear of BMGI's obligation to Kirzhner. (Id., ¶ 70.)¹

B. PROCEDURAL HISTORY

Kirzhner originally filed this action in Boulder County District Court on November 18, 2009. (Doc. # 2.) On December 7, 2009, Defendants removed this action to federal court pursuant to 28 U.S.C. § 1446, based on diversity jurisdiction. (Doc. # 1.) On December 13, 2010, Kirzhner filed the operative FAC, bringing nine claims for relief against various combinations of defendants. (Doc. # 105.) The claims are: breach of contract, breach of the implied covenant of good faith and fair dealing, artifice or scheme of fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of the Colorado Uniform Fraudulent Transfer Act ("CUFTA"), conspiracy, joint and several liability for action in concert, and accounting. (Id. at 7-14.)

On December 23, 2010, Defendants David Silverstein, DSI Investments, LLC, and David Silverstein Investments LLC (collectively, "the Silverstein Defendants") filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), seeking to dismiss four of the nine claims asserted in the FAC: the claims for artifice or scheme of fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and breach of CUFTA. (Doc. # 113.) Defendants BMGI, BMGI Corp., and BMGI Holdings, LLC (collectively, "the BMGI Defendants") joined in the Silverstein Defendants' motion to dismiss. (Doc. # 114.) Kirzhner filed a Response to Defendants' motion to dismiss (Doc. # 116), and the Silverstein Defendants filed a Reply (Doc. # 119), to which the BMGI Defendants joined (Doc. # 120).

On August 5, 2010, Silverstein and BMGI both filed counterclaims against Kirzhner. (Doc. ## 62, 63.) These two counter-claimants have now both filed First Amended Counterclaims, each bringing a single claim of fraud in the inducement against Kirzhner. (Doc. ## 74, 287.) On November 4, 2010, Kirzhner filed a motion to dismiss the First Amended Counterclaims under Federal Rule of Civil Procedure 12(b)(6). (Doc. # 80.) Each counter-claimant filed a Response to Kirzhner's motion to dismiss (Doc. # 92, 93), and Kirzhner filed a Reply (Doc. # 112).

II. STANDARD OF REVIEW

Federal Rule of Civil Procedure 12(b)(6) provides that a party may move to dismiss a claim for relief in any pleading for "failure to state a claim upon which relief can be granted." A complaint or counterclaim will survive a Rule 12(b)(6) motion to dismiss only if it "contains 'enough facts to state a claim to relief that is plausible on its face.'" Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant [or counter-defendant] has acted unlawfully." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citation and internal quotation marks omitted); see also Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) ("The allegations must be enough that, if assumed to be true, the plaintiff [or counter-claimant] plausibly (not just speculatively) has a claim for relief.").

In reviewing a Rule 12(b)(6) motion to dismiss, a court "must accept all the well-pleaded allegations of the complaint [or counterclaim] as true and must construe them in the light most favorable to the [non-moving party]." Young v. Davis, 554 F.3d 1254, 1256 (10th Cir. 2009) (citation and internal quotation marks omitted). However, the court is "not bound to accept as true a legal conclusion couched as a factual allegation." Twombly, 550 U.S. at 555 (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)). Also, "a complaint [or counterclaim] does not suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Iqbal, 129 S. Ct. at 1949 (quoting Twombly, 550 U.S. at 557). Further, "[t]he court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the [complaint or counterclaim] alone is legally sufficient to state a claim for which relief may be granted." Sutton v. Utah State Sch. for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 1999) (citation and internal quotation marks omitted).

III. ANALYSIS

A. DEFENDANTS' MOTION TO DISMISS THE AMENDED COMPLAINT

Defendants move to dismiss four claims from the FAC: the artifice or scheme of fraud claim, the breach of fiduciary duty and aiding and abetting breach of fiduciary duty claims, and the CUFTA claim. (Doc. # 113 at 8-12.)

1. Artifice or Scheme of Fraud Claim

Kirzhner's artifice or scheme of fraud claim against all Defendants alleges, inter alia, that Defendants "have been or are engaged in a scheme and artifice to defraudKirzhner out of the value of the Stock by causing the encumbrance of the Assets by DSI and the subsequent transfers of the Assets from BMGI to DSI, and from DSI to BMGI Corp. and BMGI Holdings" and that the scheme or artifice to defraud "causes [Kirzhner] damage by causing devaluation of the Stock thereby creating a situation in which the likelihood of payment to [Kirzhner] under the Note is diminished as a result of the Stock becoming worthless." (Doc. # 105, ¶¶ 90-91.)

In their motion to dismiss, Defendants argue that the Court should dismiss Kirzhner's artifice or scheme of fraud claim for failure to state a claim because Kirzhner has failed to allege that any Defendants made any misrepresentation to her or that she detrimentally relied on any such misrepresentation, which are necessary elements of a common law fraud claim. (Doc. # 113 at 8-9.)² In response, Kirzhner argues that her scheme or artifice of fraud claim is actionable even though the alleged wrong "does not fall within the cookie cutter common law fraud rubric nor constitute a [statutory] fraudulent transfer [claim]." (Doc. # 116 at 3-5.)

Although Kirzhner has failed to frame the nature of her claim effectively in response to the motion to dismiss, the Court concludes that the FAC has...