Rocky Aspen Mgmt. 204 LLC v. Hanford Holdings LLC

230 F.Supp.3d 159

ROCKY ASPEN MANAGEMENT 204 LLC, Plaintiff,

v.HANFORD HOLDINGS LLC, Defendant.

Hanford Holdings LLC, Counter- and Third–Party Plaintiff,

v.Rocky Aspen Management 204 LLC, Counter–Defendant,andJeffrey Citron, Stephen Goglia, Mark Hamwi, Watershed Ventures LLC, Patrick McGrath, AH DB Kitchen Aspen Investors LLC, Castlegrace Equity Investors LLC, and Aristone Hospitality LLC, Third–Party Defendants.

16 Civ. 4270 (VM)

United States District Court, S.D. New York.

Signed February 1, 2017

Michael E. Norton, Norton & Associates LLC, New York, NY, for Plaintiff.

Scott A. Meyers, Levenfeld Pearlstein, LLC, Chicago, IL, Alyx Siobhan Pattison, Akerman LLP, Chicago, IL, Benjamin Reid Joelson, Michael Darren Traub, Akerman LLP, New York, NY, Jason Stiehl, Pro Hac Vice, Seyfarth Shaw LLP, Chicago, IL, for Defendant.

DECISION AND ORDER

VICTOR MARRERO, United States District Judge.

Plaintiff Rocky Aspen Management 204 LLC ("RAM 204") commenced this action against Hanford Holdings, LLC ("Hanford") seeking a declaratory judgment that RAM 204 is the owner of the majority of membership interests in Rocky Aspen LLC ("Rocky Aspen"), a Colorado limited liability company ("LLC") ("Complaint," Dkt. No. 1; "First Amended Complaint," Dkt. No. 15).

Hanford filed an answer to the First Amended Complaint that included counterclaims against RAM 204, as well as claims against third-party defendants Jeffrey Citron, Stephen Goglia ("Goglia"), Mark Hamwi, and Watershed Ventures LLC (collectively and together with RAM 204 the "Watershed Defendants"), and against Patrick McGrath ("McGrath"), AH DB Kitchen Aspen Investors LLC ("AH DB"), Castlegrace Equity Investors LLC, and Aristone Hospitality LLC (collectively, the "Aristone Defendants") ("Answer and Third Party Complaint," Dkt. No. 23).

Since Hanford filed its Answer and Third Party Complaint, the parties have exchanged numerous pre-motion letters, pursuant to the Court's Individual Practices. The Court now construes the Watershed Defendants' November 17, 2016 pre-motion letter as a motion by the Watershed Defendants to dismiss Hanford's Answer and Third Party Complaint for failure to state a claim upon which relief may be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Rule 12(b)(6)") ("Motion," Dkt. No. 42).

For the reasons set forth below, the Watershed Defendants' Motion is DENIED.

I. BACKGROUND¹

On June 8, 2016, Plaintiff RAM 204 commenced this action and, on June 29, 2016, filed the First Amended Complaint against Hanford seeking a declaratory judgment that Rocky Aspen, not Hanford, is the owner of the majority of membership interests in Rocky Aspen. (See Dkt. No. 1; Dkt. No. 15.) On July 27, 2016, Hanford filed an Answer and Third Party Complaint alleging counterclaims against RAM 204, as well as claims against third-party defendants, the Watershed Defendants and the Aristone Defendants. (See Dkt. No. 23.)

Hanford's Answer and Third Party Complaint raises four counterclaims arising under federal law: (1) securities fraud in violation of Section 10(b) ( "Section 10(b)") of the Securities and Exchange Act of 1934 ("Exchange Act") and Securities and Exchange Commission Rule 10b–5 ("Rule 10b–5"); (2) control person liability for securities fraud in violation of Section 20(a) of the Exchange Act ("Section 20(a)"); (3) offer and sale of unregistered securities in violation of Section 12(a)(1) of the Securities Act of 1933 ("Securities Act")² ("Section 12(a)(1)"); and (4) control person liability for offer and sale of unregistered securities in violation of Section 15 of the Securities Act ("Section 15") (See Dkt. No. 23). The remaining counterclaims are state law claims alleged pursuant to 28 U.S.C. Section 1367. (See id. )

By letter dated September 14, 2016, the Watershed Defendants requested that Hanford voluntarily withdraw its counterclaims and third-party claims. (See Dkt. No. 44.) After Hanford declined the request (see Dkt. No. 45), the Watershed Defendants notified the Court of their intention to move to dismiss Hanford's counterclaims and third-party claims and requested a pre-motion conference pursuant to this Court's Individual Practices. (See Dkt. No. 47.)

The Court held a telephone conference on November 3, 2016, during which the Court directed the parties to submit correspondence addressing the merits of a motion to dismiss Hanford's counterclaims and third-party claims. (See Dkt. Minute Entry for Nov. 3, 2016.) The Court construes the correspondence as a motion to dismiss by the Watershed Defendants and an opposition by Hanford. ("Opposition," Dkt. No. 41.)

A. THE WATERSHED DEFENDANTS' MOTION TO DISMISS ³

In their Motion, the Watershed Defendants argue that Hanford's Answer and Third Party Complaint should be dismissed because Hanford has failed to plead factual allegations sufficient to establish (1) the purchase or sale of securities, and (2) that the pledge of membership interests was an offering of securities requiring registration under Section 12. (See Dkt. No. 42.)

The Watershed Defendants argue that "the fatal flaw in Hanford's case is that the Rocky [Aspen] LLC membership interests are not ‘securities' under the federal securities statutes." Id. , at 2. Rather, the Watershed Defendants argue, "Hanford's allegations, taken as true, show only that [Hanford] made a secured business loan to Rocky [Aspen] which has not been repaid." Id. Specifically, the Motion contends that the personal guaranty of McGrath; the Leasehold Mortgage and Security Agreement covering certain of Rocky Aspen's assets; and the pledge and security agreement covering Rocky Aspen's outstanding LLC interests were offered as collateral for the loan, and that none constitutes the purchase or sale of securities. (See id. at 2.)

In support of their argument, the Watershed Defendants cite to both the Exchange Act and the Securities Act, noting that LLC interests are not specifically enumerated in the definitions of a "security" under either statute. Id. (citing to 15 U.S.C. Section 77b(a)(1) and 15 U.S.C. Section 78c(a) (10) ).) The Watershed Defendants further note that "Courts in this district and elsewhere have not hesitated to dismiss under Rule 12(b)(6) federal securities law claims premised on [LLC] membership interests being ‘securities.’ " Id. (citing Archer Well Company, Inc. v. GW Holdings I, LLC , No. 2013 WL 2314271 (S.D.N.Y. 2013) ; Endico v. Fonte , 485 F.Supp.2d 411 (S.D.N.Y. 2007) ; Nelson v. Stahl , 173 F.Supp.2d 153 (S.D.N.Y. 2001) ; Keith v. Black Diamond Advisors, Inc. , 48 F.Supp.2d 326 (S.D.N.Y. 1999) ; see also Robinson v. Glynn , 349 F.3d 166 (4th Cir. 2003) ; Wen v. Willis , 117 F.Supp.3d 673 (E.D. Pa. 2015) ; Avenue Capital Management II, L.P. v. Schaden , 131 F.Supp.3d 1118 (D. Colo. 2015) ).

The Watershed Defendants argue that this Court must follow suit and dismiss Hanford's Answer and Third Party Complaint, because Hanford has failed to "allege sufficient facts establishing that ... the secured loan transaction, including the pledge of the LLC membership interests, constituted an ‘investment contract,’ " as defined by SEC v. W.J. Howey Co. , 328 U.S. 293, 301, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). Motion, at 3. The three-prong Howey test for determining whether a particular scheme is an investment contract is whether the scheme involves "(1) an investment of money; (2) in a ‘common enterprise’; and (3) with the expectation of profits to be derived from the efforts of a third-party." Id. (citing to Revak v. SEC Realty Corp ., 18 F.3d 81, 87 (2d Cir. 1994) ); see also Howey , 328 U.S. at 301, 66 S.Ct. 1100.

Finally, the Watershed Defendants argue that "Section 12(a) of the Securities Act applies only to public offerings of securities, not to private transactions such as the loan and pledge agreement between Hanford and Rocky," and that, as a result, Hanford's claim that the non-public pledge of membership interests were improperly unregistered must be dismissed. Motion, at 5.

B. HANFORD'S OPPOSITION ⁴

Hanford's Opposition argues that (1) Hanford's allegations are adequately pled; (2) whether the membership interests at issue are "securities" is a factual question that should not be decided on a motion to dismiss; (3) taken as true, Hanford's allegations establish that the pledged membership interests constitute securities; and (4) Hanford's allegations have established that the membership interests are subject to Section 12's registration requirements. (See Opposition, at 2–3.)

As an initial matter, Hanford argues that dispensing of its counterclaims and third party claims at the Motion to Dismiss stage would be premature because whether the interests in question are "securities" is a fact-intensive inquiry not to be decided on a motion to dismiss. (See id. ) (citing Automated Teller Mach. Advantage LC v. Moore , 2009 WL 2431513, at *5 (S.D.N.Y. Aug. 6, 2009) (holding whether "membership interests are ultimately determined to be investment contracts is ‘more appropriately addressed in a summary judgment motion.’ ") (citations omitted)); Stechler v. Sidley, Austin Brown & Wood, L.L.P. , 382 F.Supp.2d 580, 597 (S.D.N.Y. 2005) (determining "[w]hether the Digital Options are securities ultimately turns on these issues of fact" not appropriately resolved on a motion to dismiss).

Nonetheless, Hanford argues that its Answer and Third Party Complaint contains well-pleaded allegations sufficient to show that the pledged membership interests constitute "securities" entitled to the protection of the federal securities laws. (See Motion, at 2) (citing In re Tower Auto. Sec. Litig. , 483 F.Supp.2d 327, 334 (S.D.N.Y. 2007) ).

Specifically, Hanford argues that its well-pleaded Answer and Third Party Complaint contains allegations establishing that "[u]nder the [Watershed] Defendants' LLC agreement, the Aristone Defendants were to provide real estate development expertise, and raise capital for the venture and Watershed was to manage the operations finances and Rocky Aspen...