Partners v. Boustead Sec., LLC (In re Onejet, Inc.)

643 B.R. 95

IN RE: ONEJET, INC., Debtor.

Woody Partners, et al., Plaintiffs,

v.Boustead Securities, LLC, Defendant.

Case No. 18-24070-GLT

Adv. Pro. No. 19-2134-GLT

United States Bankruptcy Court, W.D. Pennsylvania.

Signed September 2, 2022

James R. Cooney, The Cooney Law Offices LLC, Pittsburgh, PA, Attorney for Woody Partners, et al.

Christopher P. Parrington, Andrew R. Shedlock, Kutak Rock LLP, Minneapolis, MN, Jason L. Ott, Frost Brown Todd LLC., Pittsburgh, PA, Attorneys for Boustead Securities, LLC

MEMORANDUM OPINION

GREGORY L. TADDONIO, UNITED STATES BANKRUPTCY JUDGE

Boustead Securities, LLC seeks reconsideration of the Court's denial of partial summary judgment,¹ asserting that the Court's refusal to dismiss the aiding and abetting claims against it after the Plaintiffs’ settled with the direct tortfeasor ("Oral Ruling") conflicts with the legal standards applied in the Court's earlier Memorandum Opinion ("Opinion").² The Plaintiffs oppose the motion to reconsider ("Motion"), contending there is no valid reason to re-examine the analysis of either ruling.³ Frankly, Boustead's gripe is not that the Court is applying its rulings inconsistently, but that the Court does not accept Boustead's interpretation of the law or, more importantly, the Opinion . This is apparent from Boustead's inability to accurately describe the basis of the Oral Ruling . Thus, for the reasons below, the Court will deny the Motion .

I. BACKGROUND

OneJet was a Pittsburgh-based, California corporation formed by Matthew and Patrick Maguire in 2007 to provide affordable nonstop air service between mid-sized cities in regional markets.⁴ The Debtor began flight operations in April 2015.⁵ In February 2017, the Debtor retained Boustead to "assist [the Debtor] in securing investors and investment capital for [the Debtor's business]."⁶ Despite the Debtor's success in attracting investors, the venture was short-lived as it paid no federal taxes since 2015 and began defaulting on its obligations to vendors and the Allegheny County Airport Authority by June 2018.⁷ Within a month, the Debtor began selling planes in its fleet to "cover immediate operating expenses," and suspended all operations at Pittsburgh International Airport a few weeks later.⁸ Several creditors then filed an involuntary chapter 7 petition against the Debtor.⁹ The petition was uncontested and an order for relief entered on November 13, 2018.¹⁰

The Plaintiffs are a collection of disappointed investors who acquired OneJet securities before its demise.¹¹ Shortly after the order for relief, the Plaintiffs sued the Maguires and Boustead for various state and common law causes of action.¹² Essentially, they contend that the Maguires misrepresented the financial health of the Debtor to secure investors and that Boustead furthered the scheme by knowingly or recklessly distributing materially misleading financial information to the Plaintiffs. The current procedural posture largely concerns the claims under the Pennsylvania Securities Act ("PSA"), although common law analogs are also implicated.¹³ For context, both the Maguires and Boustead were alleged to be liable under section 501 of the PSA, which imposes liability on any person who "offers or sells a security in violation of sections 401, 403, 404 or otherwise by means of any untrue statement of material fact or any omission [and failure to correct a misleading statement.]"¹⁴ The Plaintiffs also allege the Maguires and Boustead are jointly and severally liable under section 503 of the PSA for "materially aid[ing] the act or transaction constituting" the other's alleged violation of section 501.¹⁵ In other words, a "section 501 claim" can be understood as targeting the perpetrator of securities fraud directly, while a "section 503 claim" imposes indirect liability on those who gave material aid to the primary tortfeasors.

The Maguires and Boustead moved to dismiss the Plaintiffs’ claims,¹⁶ which the Court denied in part and granted in part in the Opinion .¹⁷ Of relevance here, the Court focused on the legal question of "whether a party must first be held liable for a violation of the PSA before a section 503 action can arise."¹⁸ Relying on Daniel Boone Area Sch. Dist. v. Lehman Bros. , the Maguires and Boustead argued that the PSA "requires that someone other than the [section] 503 defendant be adjudicated liable under [section] 501 in order for the defendant to be liable under [section] 503."¹⁹ Put differently, they "contend[ed] that until someone is found liable under section 501, Plaintiffs do not have a cause of action against them under section 503."²⁰ Acknowledging that the "law is muddled as federal courts have failed to offer a uniform outcome in the absence of determinative case law from Pennsylvania appellate courts,"²¹ the Court observed that other district courts within the circuit have "held that it is unnecessary to ‘go through the motions of obtaining a judgment against a directly liable party’ before pursuing relief under section 503."²² Persuaded largely by Gilliland v. Hergert , the Court rejected Daniel Boone's rigid requirement and instead "conclude[d] that, as a matter of judicial efficiency, a section 503 claim can survive a motion to dismiss without an adjudicated PSA violation so long as a viable 501 claim remains pending in the same proceeding."²³ The Court noted that "[i]f the section 501 claim is later dismissed, then any derivative liability under section 503 would also evaporate."²⁴

Applying that law to the facts, the Court found that because "most of the Plaintiffs assert a valid section 501 claim against Matthew Maguire, [they] have made a sufficient showing of a PSA violation to justify their pursuit of relief under section 503 against the other Defendants" like Boustead.²⁵ On the other hand, the Court concluded that "the essence of Plaintiffs’ [section 501] claims against the Boustead Defendants sound in negligence" and "is not the stuff of securities fraud."²⁶ With "no plausible basis in the pleadings" to show fraud by Boustead, the Court dismissed the section 501 claim against it.²⁷ As a result, the Court was then compelled to dismiss the section 503 claim against Matthew Maguire, reasoning that he "cannot be liable for aiding and abetting his own violation of the PSA" and "there is no pending section 501 claim (or a prior adjudication of liability) that can support a statutory aiding and abetting claim against [him]."²⁸

After the Opinion , the Plaintiffs, Matthew Maguire, and the Estate of Patrick Maguire²⁹ entered into settlement negotiations to resolve the outstanding claims. In June 2021, the Plaintiffs and the Maguires executed a "Settlement Agreement and Pro Rata Release" ("Release") under which the Plaintiffs agreed to a full and complete release of the Maguires from all claims asserted against them in this case or otherwise in exchange for a settlement payment of $1,200,000.³⁰ Under this so-called " Griffin -release,"³¹ the Maguires conceded joint tortfeasor liability without admitting "liability, fault, wrongdoing, or violation."³² Under the Uniform Contribution Among Tortfeasors Act,³³ the Release extinguished Boustead's right to seek contribution from the Maguires but, to the extent liability is ultimately allocated to them, also reduced Boustead's liability. Moreover, the Release barred the Plaintiffs from disparaging the Maguires.³⁴

Following the Maguires’ release, Boustead sought partial summary judgment as to both the common law aiding and abetting fraud claim and the section 503 claim.³⁵ Boustead argued that because the Maguires had been released from those wrongs supporting the aiding and abetting claims, it was no longer possible for the Plaintiffs to obtain the requisite findings of fraud to prevail against Boustead.³⁶ Specifically, Boustead emphasized one sentence from the Opinion : "If the section 501 claim is later dismissed, then any derivative liability under section 503 would also evaporate."³⁷ With no pending section 501 claim against the Maguires, Boustead contended that, under Daniel Boone , they cannot be adjudicated as liable for fraud.³⁸ This legal impossibility, under Boustead's reasoning, is only further exacerbated by the non-disparagement clause of the Release and precludes even the suggestion that the Maguires might be responsible for fraud.³⁹

On January 20, 2022, the Court held a hearing on Boustead's motion for partial summary judgment.⁴⁰ Following oral arguments, the Court issued the Oral Ruling denying Boustead's motion for partial summary judgment.⁴¹ The Court "agreed conceptually that the viability of a [s]ection 503 aiding and abetting claim under the PSA is dependent on the viability of the primary claim under [s]ection 501 or [s]ection 502," but noted that it "expressly rejected the Daniel Boone court's suggestion that a party must go through the motions of trial, first obtaining a judgment for direct liability before pursuing an aiding and abetting claim."⁴² As for the Opinion ’s statement on the "evaporat[ion]" of liability under section 503, the Court clarified that its "intent was to merely describe the interrelationship of the merits of the primary claims and any derivative liability under [s]ection 503, and was looking at it in the lens of several competing motions to dismiss at that time."⁴³ In this context, the Court stated that it was "apparent that [the language] was merely dicta."⁴⁴ The Court further acknowledged that describing section 503 liability as "derivative" was inapt.⁴⁵

Turning to the merits of the motion, the Court explained:

that a violation under [s]ection 501 or 502 is a precondition to a claim under [s]ection 503, and frankly, that's simple logic. One cannot aid and abet a violation of the PSA that did not occur. And the same holds true for the common law. There must be a primary tort if another is to be found liable for aiding and abetting it. And this rationale was the basis for the Court's Memorandum Opinion. But the Court

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