SS Richmond LLC v. Harrison

640 F.Supp.3d 453

SS RICHMOND LLC, MK Richmond LLC, Plaintiffs, v. Christopher A. HARRISON, the C.A. Harrison Companies, LLC,CAH Model Tobacco, LLC, McKenzie Blake Development Company, LLC, Defendants.

Civil No. 3:22cv405 (DJN)

United States District Court, E.D. Virginia, Richmond Division

Signed November 9, 2022

Patrick James Stafford, Keith Harris Forst, Pro Hac Vice, Nicholas Inns, Pro Hac Vice, Quinn Emanuel Urquhart & Sullivan LLP, Washington, DC, for Plaintiffs.

Todd Michael Fiorella, Christopher Carl Schreyer, Fraim & Fiorella PC, Norfolk, VA, Katherine Marguerite Lennon, Woods Rogers Vandeventer Black PLC, Norfolk, VA, George Doumar, Doumar Martin PLLC, Fairfax, VA, for Defendants.

MEMORANDUM OPINION

David J. Novak, United States District Judge

Plaintiffs SS Richmond LLC ("SSR") and MK Richmond LLC ("MKR") (together, "Plaintiffs"), bring this action against Defendants Christopher A. Harrison ("Harrison"), The C.A. Harrison Companies, LLC ("CAHC"), CAH Model Tobacco, LLC ("CAH"), and McKenzie Blake Development Company, LLC ("MBDC") (collectively, "Defendants") alleging violations of the Racketeer Influenced and Corrupt Organization ("RICO") Act, 18 U.S.C. §§ 1962(a), 1964(c), securities fraud, 15 U.S.C. § 78j(b); 17 C.F.R. § 240.1 Ob-5, and dissociation claims, Va. Code § 13.1-1040.1(5), as well as common law breach of contract, fraud and fraud by concealment claims. Defendants bring counterclaims against Plaintiffs in the same action, seeking dissociation of Plaintiffs from Model Tobacco Developer, LLC ("Developer") and Model Tobacco Development Group, LLC ("MT Development") under Va. Code § 13.1-1040.1, a request for a declaration of rights as to the validity of the Amended and Restated Operating Agreement of Model Tobacco Development Group, LLC ("Amended Operating Agreement"), and common law breach of contract. This matter now comes before the Court on Defendants' Motion to Dismiss the Amended Complaint (ECF No. 44) and Plaintiffs' Motion to Dismiss Defendants' Amended Counterclaim (ECF No. 41).

For the reasons set forth below, the Court will DENY Defendants' Motion to Dismiss. Additionally, the Court will GRANT Plaintiffs' Motion to Dismiss Defendants' Counterclaim. This case shall proceed on Counts One through Eight of the Amended Complaint against Defendants and Counterclaims One and Three against Plaintiffs.

I. BACKGROUND

This breach of contract, fraud, securities fraud and RICO action arises out of Defendants' alleged series of fraudulent transactions relating to the development of the Model Tobacco Project. Defendants' alleged fraud and embezzlement induced Plaintiffs to invest millions of dollars into the Project which Plaintiffs seek to recover.

A. Factual Background

At this stage, the Court must accept as true the facts set forth in the Amended Complaint (ECF No. 35). Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Against this backdrop, the Court accepts the following facts as alleged for purposes of resolving the instant motion.

The Amended Complaint alleges that Harrison, individually and by and through CAH, CAHC and MBDC, entities of which he is the owner, manager and sole member, systematically conducted "a pattern of bank fraud, wire fraud, mail fraud and money laundering in an effort to seize control of and increase his interest in a project to purchase and refurbish a closed tobacco manufacturing facility" (the "Model Tobacco Project," the "Project" or "Model Tobacco") with SSR and MKR, his partners. (Am. Compl. ¶ 1.) Model Tobacco Project is a fifteen-acre collection of seven buildings in Richmond, Virginia, centered around the Model Tobacco Building that previously served as a factory for the United States Tobacco Company. (Am. Compl. ¶ 29.) In 2017, Defendants Harrison and CAHC became interested in acquiring the property and converting the buildings into an apartment complex. (Am. Compl. ¶ 30.) In mid-2017, Harrison approached non-party Mr. Steven Sushner to invest in Model Tobacco, offering him a four percent stake in "Model Tobacco Lofts LLC" in exchange for a $100,000 investment. (Am. Compl. ¶ 32-33.) Sushner sent $50,000 via wire transfer, but never received the "paperwork" regarding Model Tobacco Lofts LLC or Model Tobacco Lofts Development LLC, as neither company was registered with the Commonwealth of Virginia at the time. (Am. Compl. ¶ 36-38.) The "loan" has never been returned to Mr. Sushner. (Am. Compl. ¶ 44.)

Harrison and CAHC then approached Mr. Snider and Mr. Keuhn, the owners of SSR and MKR, respectively, to invest in Model Tobacco, given their partnership with Harrison on another real estate deal. (Am. Compl. ¶¶ 47-48.) During phone calls in September 2017, Harrison told SSR and MKR that the "shovel-ready" Project had debt-financing in place for purchase of the site and construction and that the acquisition would close in "early 2018." (Am. Compl. ¶ 47.) On September 14, 2017, Harrison emailed to Plaintiffs the Project's Offering Memorandum, which represented project completion by "late 2019." (Am. Compl. ¶ 53.) On October 7, 2017, Harrison emailed Plaintiffs a "Bank Package" with a project description and financing projections, which forecasted the site purchase in the second quarter of 2018, a March 1, 2018 construction start date, a completion date of September 1, 2019, and post-development rental income beginning in 2019. (Am. Compl. ¶¶ 53, 55.) On December 19, 2017, Harrison revised the "Bank Package," moving up the closing date to the first quarter of 2018 while the rest of the timeline remained the same. (Am. Compl. ¶ 56.) As a result of these representations, Plaintiffs allege that they believed their investments would yield returns by late 2019. (Am. Compl. ¶ 57.) Further, Plaintiffs allege that Harrison knew the falsity of the timeline and the Project's shovel-readiness, but misrepresented these facts to Plaintiffs to procure a $ 1.6 million investment. (Am. Compl. ¶¶ 58-59, 78.)

On December 29, 2017, the parties formed Model Tobacco Development Group LLC ("MT Development") and executed the Development Group Operating Agreement ("Operating Agreement" or the "Agreement"). (Am. Compl. ¶ 59.) The Agreement capped mandatory capital contributions from members at $1,637,136.00, and Harrison promised to provide guarantees himself to complete the residential portion of the project. (Am. Compl. ¶ 63.) The Agreement also mandated that Harrison provide Plaintiffs with MT Development's financial statements and other necessary reports to monitor progress. (Am. Compl. ¶ 64.) On February 16, 2018, Plaintiffs, Harrison and CAHC opened a bank account for MT Development at TD Bank. (Am. Compl. ¶ 65.) Plaintiffs contributed their mandatory capital contributions, while Harrison claimed that prior expenses on personal credit cards or other companies' bank accounts satisfied his contribution. (Am. Compl. ¶¶ 67-68.) Plaintiffs allege that Harrison behaved similarly or falsely claimed to contribute capital more than a dozen times between 2018 and 2021 to avoid the Operating Agreement's financial controls. (Am. Compl. ¶¶ 73-75.)

Additionally, the Project failed to proceed pursuant to the projected timeline. On March 25, 2019, Harrison mailed a letter to Plaintiffs that represented that MT Development would acquire the Model Tobacco site by June 15, 2019, with construction beginning at the end of the month. (Am. Compl. ¶¶ 79-80.) Plaintiffs allege that Harrison knew the timeline's impossibility, because he had secured no financing at the time. (Am. Compl. ¶ 81.) Instead, MT Development did not close on the purchase until June 2020, which Plaintiffs allege cost the parties an additional $1.25 million in extension fees, although Harrison labeled the fees as recoverable deposits. (Am. Compl. ¶¶ 86-87.)

On April 19, 2019, Harrison and CAHC, unbeknownst to Plaintiffs, executed a document styled as the "First Amendment" to Model Tobacco Development Lofts LLC's operating agreement,¹ which promised to pay non-parties Kamran and Ana Raika a fee of $250,000 to serve as guarantors for the Model Tobacco Project. (Am. Compl. ¶ 94.) Harrison paid the first installment using MT Development money, without Plaintiffs' approval and despite Model Tobacco Development Lofts LLC not being a member of MT Development, nor a party to the contract. (Am. Compl. ¶¶ 95, 104.)

On September 13, 2019, the parties created Model Tobacco Developer, LLC ("Developer") and signed an operating agreement ("Developer Agreement"), which required all members' authorization for transactions and obligations exceeding $50,000, mandated that Plaintiffs receive financial statements and prohibited commingling Developer funds with other companies. (Am. Compl. ¶ 108.)

On October 27, 2020, MT Development closed on the construction financing for the Project. (Am. Compl. ¶ 112.) As part of closing, Plaintiffs received a packet containing the first page and signature pages of each document requiring signature and an email link to download over 2, 200 pages of documents related to the closing. (Am. Compl. ¶ 115.) Included among the documents received was an "Amended and Restated Operating Agreement," with no further explanation of the amendments. (Am. Compl. ¶ 115.) Notwithstanding the amendments, the Plaintiffs' signature pages to the Amended Operating Agreement contained the title for the original, unamended agreement, while Harrison's remained correctly labeled. (Am. Compl. ¶¶ 116, 121.) Plaintiffs thus executed the signature pages while unaware of a significant new obligation: the Amended Operating Agreement required that Plaintiffs, as well as Developer, fund any "excess development costs" of the Project. (Am. Compl. ¶¶ 124-25.)

Plaintiffs further allege that between 2018 and 2022, Defendants engaged in a series of fraudulent transactions resulting in millions of dollars of "embezzlement, unauthorized expenses and self-dealing," including the theft of $431,300 that Harrison failed to credit to Plaintif...