Paskenta Enters. Corp. v. Cottle

PASKENTA ENTERPRISES CORPORATION, Plaintiff, v. ALAN COTTLE and KNEE CENTERS MANAGEMENT, LLC, Defendants.

Case No. 1:17-cv-00033-JNP-BCW

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH

January 22, 2018

MEMORANDUM DECISION AND ORDER DENYING MOTION TO DISMISS

District Judge Jill N. Parrish

Before the court is Alan Cottle and Knee Centers Management, LLC's (collectively, defendants) motion to dismiss Paskenta Enterprises Corporation's (Paskenta) complaint. [Docket 14]. The court DENIES the motion.

BACKGROUND

Cottle was the sole member and manager of Knee Centers Management. Paskenta is a corporation owned by the Paskenta Band of Nomlaki Indians (Tribe). John and Ines Crosby occupied leadership roles in the Tribe. The Crosbys agreed that Paskenta would go into business with Knee Centers Management in order to open and operate a number of orthopedic clinics.

Paskenta and Knee Centers Management formed Emere Holding, LLC,¹ with Paskenta as a member with a 25% ownership stake and Knee Centers Management as the managing memberwith a 75% ownership stake. Emere opened a bank account to hold Paskenta's $5 million contribution to the enterprise. Emere also created a wholly-owned subsidiary, Knee Centers Operating Company, LLC, which operated the orthopedic clinics and controlled the parties' efforts to open new clinics nationwide. Money transfers from the Emere holding account to Knee Centers Operating Company required two signatures, one from Cottle and one from either John or Ines Crosby.

Knee Centers Operating Company spent the parties' initial investment. Cottle approached the Crosbys and proposed that Paskenta contribute additional funds in exchange for a greater ownership stake in Emere. The Crosbys caused Paskenta to contribute an additional $2 million to Emere's holding account. The Crosbys and Cottle subsequently transferred about $800,000 from the holding account to Knee Centers Operating Company.

In April 2014, the Tribe removed the Crosbys from their leadership positions. The Tribe alleges that it discovered evidence that the Crosbys had stolen tens of millions of dollars from Paskenta and the Tribe. The Tribe placed a freeze on all of Paskenta's bank accounts to prevent the Crosbys from diverting any more money. As a result, Knee Centers Management was unable to withdraw any of the remaining $1.2 million in the holding account.

Knee Centers Management "threatened" Paskenta in an attempt to convince it to release the funds in the holding account.² On May 23, 2014, Cottle sent a letter to Paskenta asserting a right to the funds and requesting that they be released. Cottle stated that the funds were desperately needed to keep the enterprise afloat and that without them Paskenta's investment inEmere could become worthless. Cottle also made four representations in the letter that Paskenta alleges were fraudulent:

• "All of our professional (medical and executive) talent has signed up to take this new company to 40-50 clinics over a 48 month period with an estimated $400MM-500MM valuation."

• A clinic was scheduled to open in Salt Lake City on July 7, 2014 and another clinic was scheduled to open in Boca Raton on July 14, 2014.

• "The list is long of planned expenses to move the entire company to the new [business] model during the spring and summer of this year. We are on track, we are on budget and we cannot have any stop or interference with the cash that was paid to us last year in exchange for more Paskenta ownership."

• "And to be clear not one dollar (or any amount of any type of remuneration) has ever been paid to Mr. Crosby or Ines Crosby or any of their entities (if they have any—who knows—I sure don't) by any entity I own or control (which is all of the entities we have discussed)."

On May 30, 2014 Knee Centers Management and Paskenta entered into an "Agreement for Release of Funds" (Funds Agreement), in which Paskenta agreed to release the money that remained in the holding account. The Funds Agreement contained the following statement: "No party is relying upon any statement or representation not specified in this Agreement as an inducement or basis for entering into this Agreement." On June 11, 2014, Knee Centers Management transferred all remaining funds in the Emere holding account to Knee Centers Operating Company.

The orthopedic clinic enterprise subsequently failed. Without consulting or notifying Paskenta, the defendants unilaterally dissolved Emere, Knee Centers Management, and Knee Centers Operating Company in July 2015.

Paskenta sued Cottle and Knee Centers Management, asserting four causes of action. Paskenta alleges that the representations made in the May 23, 2014 letter constituted either fraudulent inducement or negligent misrepresentations that caused it to enter into the Funds Agreement. Paskenta further asserts that Knee Centers Management breached its fiduciary duties as the managing member of Emere by making false statements in the May 23 letter and by failing to provide any notice, distribution, or accounting when it dissolved Emere. Finally, Paskenta alleges that Cottle aided and abetted Knee Centers Management's breaches of fiduciary duty.

CHOICE OF LAW AND LEGAL STANDARDS

A federal court exercising diversity or supplemental jurisdiction "applies the substantive law, including choice of law rules, of the forum state." BancOklahoma Mortg. Corp. v. Capital Title Co., 194 F.3d 1089, 1103 (10th Cir. 1999) (citation omitted). Utah applies "the 'most significant relationship' approach as described in the Restatement (Second) of Conflict of Laws in determining which state's laws should apply to a given circumstance." Waddoups v. Amalgamated Sugar Co., 54 P.3d 1054, 1059 (Utah 2002).

Paskenta, a corporation with its principal place of business in California, asserts state-law claims against Cottle, an individual domiciled in Utah, and Knee Centers Management, a Utah LLC. Neither party, however, conducted a choice of law analysis to determine whether the law of California, Utah, or another state should be applied to Paskenta's claims. Moreover, it is difficultfor the court to conduct a choice of law analysis on its own because the complaint does not reveal the location where the representations in May 23 letter were made or received or where actions in reliance upon these representations occurred. See RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 148 (1971). Because the parties consistently cite Utah law in their briefing on the motion to dismiss, they appear to concede that Utah law controls. The court, therefore, applies Utah's substantive law for the purposes of this motion.

But this court applies federal law when determining whether dismissal of a cause of action is appropriate under Rule 12(b)(6) of the Federal Rules of Civil Procedure. See Stickley v. State Farm Mut. Auto. Ins. Co., 505 F.3d 1070, 1076 (10th Cir. 2007). Under Rule 12(b)(6), a court may dismiss a complaint if it fails "to state a claim upon which relief can be granted." When considering a motion to dismiss for failure to state a claim, a court "accept[s] as true all well-pleaded factual allegations in the complaint and view[s] them in the light most favorable to the plaintiff." Burnett v. Mortg. Elec. Registration Sys., Inc., 706 F.3d 1231, 1235 (10th Cir. 2013). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted).

ANALYSIS

I. FRAUDULENT INDUCEMENT AND NEGLIGENT MISREPRESENTATION

A fraudulent inducement claim requires a plaintiff to establish:

(1) that a representation was made (2) concerning a presently existing material fact (3) which was false and (4) which the representor either (a) knew to be false or (b) made recklessly, knowing that there was insufficient knowledge upon which to base such a representation, (5) for the purpose of inducing the other party to act upon it and (6) that the other party, acting reasonablyand in ignorance of its falsity, (7) did in fact rely upon it (8) and was thereby induced to act (9) to that party's injury and damage.

Keith v. Mountain Resorts Dev., LLC, 337 P.3d 213, 225-26 (Utah 2014). Additionally, Utah law on the tort of negligent misrepresentation provides that

a party injured by reasonable reliance upon a second party's careless or negligent misrepresentation of a material fact may recover damages resulting from that injury when the second party had a pecuniary interest in the transaction, was in a superior position to know the material facts, and should have reasonably foreseen that the injured party was likely to rely upon the fact.

Price-Orem Inv. Co. v. Rollins, Brown & Gunnell, Inc., 713 P.2d 55, 59 (Utah 1986). Thus both fraudulent inducement and negligent representation claims require (1) reasonable reliance upon (2) a representation of existing material fact.

The defendants argue that Paskenta cannot state a claim for either fraudulent inducement or negligent misrepresentation because these two essential elements of both claims cannot be proven. They also argue that the complaint does not state a claim because it does not allege that the four representations made in the May 23 letter were false.

A. Reasonable Reliance

1) The non-reliance provision

The defendants assert that Paskenta could not reasonably rely upon any fraudulent or negligent representations of fact made before the funding agreement was signed. They point to the integration clause in the agreement, which also provides: "No party is relying upon any statement or representation not specified in this Agreement as an inducement or basis for entering into this Agreement." The defendants cite a federal district court case applying Colorado and Indiana law and argue that this contractual provision renders any reliance upon pre-contractrepresentations unreasonable as a matter of law. See Steak n Shake Enterprises, Inc. v. Globex Co., LLC, 110...