Wiedis v. Dreambuilder Invs., LLC

268 F.Supp.3d 457

Julie WIEDIS and Equity Trust Company, Custodian f/b/o Julie Wiedis Ira, Plaintiffs,

v.DREAMBUILDER INVESTMENTS, LLC, Peter Andrews, Greg Palmer and Elizabeth Eiss, Defendants.

16 Civ. 9254

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

Signed July 17, 2017

Filed July 18, 2017

Attorneys for Plaintiffs, DIAZ, REUS & TARG, LLP, 1050 Connecticut Avenue, N.W., Suite 500, Washington, D.C. 20036, By: Richard N. Wiedis, Esq.

Attorneys for Defendants, VERNER SIMON, 30 Wall Street, 8th Floor, New York, NY 10005, By: Paul W. Verner, Esq.

OPINION

Sweet, D.J.

Defendants Dreambuilder Investments, LLC ("DBI"), Peter Andrews ("Andrews"), Greg Palmer ("Palmer") and Elizabeth Eiss ("Eiss") (collectively, the "Defendants") have moved pursuant to Federal Rule of Civil Procedure 12(b)(6), Rule 9(b), and the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78 u – 4(b)(1)—(3)(A), to dismiss the complaint of Plaintiffs Julie Wiedis ("Wiedis") and Equity Trust Corporation, Custodian F/B/O Julie Wiedis ("Equity Trust") (collectively, the "Plaintiffs") seeking to recover sums alleged due under certain promissory notes (the "Complaint").

Based upon the conclusions set forth below, Defendants' motion to dismiss the securities claim is granted, Defendants' motion to dismiss the state claims is denied, and Plaintiffs are granted leave to replead within twenty-one (21) days.

Prior Proceedings

On November 30, 2016, Plaintiffs filed their Complaint, (Dkt. 1), which was amended on December 14, 2016, (Dkt. 20), and alleges four causes of action: breach of contract on promissory notes, common law fraud, and securities fraud in violation of Sections 10(b) and 17(a) of the Securities Act and Rule 10(b)(5).¹

The Complaint sets forth the following allegations, which are assumed true for the purpose of this motion to dismiss. See Koch v. Christie's Int'l PLC, 699 F.3d 141, 145 (2d Cir. 2012).

Wiedis is a Princeton, New Jersey resident. (Compl. ¶ 2.) Equity Trust is located in Westland, Ohio, and is an Individual Retirement Account ("IRA") custodian that held retirement savings Wiedis withdrew to invest with DBI. (Compl. ¶¶ 3–4.) Andrews is a New York City resident and the Chief Executive Officer ("CEO") of DBI. (Compl. ¶ 5.) Palmer is a Kingston, New Hampshire resident and a member of DBI. (Compl. ¶ 6.) Eiss is a New York resident and was DBI's Chief Operating Officer ("COO") from 2007 to 2012. (Compl. ¶ 7.)

In the second half of 2008, Wiedis made loans with DBI, $50,000 of which came from her Equity Trust IRA. (See Compl. ¶ 11–13.) In exchange for these loans, DBI and Andrews provided Wiedis with debt security agreements entitled "Promissory Note and Security Agreement" ("PNSA"), one dated August 8, 2008, in the amount of $30,000 and another dated November 1, 2008, in the amount of $20,000. (Compl., Exs. 1–2.) These PNSAs had interest rates of 14% and 18% respectively and each had a term of twenty-four months. (Compl. ¶¶ 15–16.) These PSNA loans were stated by DBI to be collateralized by DBI's ownership interests in mortgage notes, some of which Wiedis could access from a DBI online portal. (See Compl., Exs. 1–2.)

On October 8, 2008, Wiedis made a loan of $8,000 with DBI, which came from her savings. (Compl. ¶¶ 26–27.) In exchange for this loan, Wiedis received a similar PNSA (the "$8,000 PNSA"). (See Compl. ¶ 28.) The $8,000 PNSA has similar terms to the other PNSAs, such as 18% interest rate per annum for a term of twenty-four months, though it was not allegedly viewable on the DBI online portal. (See Compl. ¶¶ 27–28; see Compl. Exs. 4–5.)

In May 2009, prior to either the $30,000 or $20,000 PNSA reaching maturity, DBI "rolled-over" or combined the two loans into a single $50,000 PNSA (the "$50,000 PNSA"). (Compl. ¶ 20.) The $50,000 PNSA had a term of two years and an interest rate of 18% per annum. (Compl. ¶ 20.)

According to the Complaint, the purchased Notes had the following maturity dates: the August 1, 2008, Note matured on September 26, 2010; the October 1, 2008, Note matured on November 22, 2010; the November 1, 2008, Note matured on March 26, 2010² ; and the May 1, 2009, Note matured on June 15, 2011. (See Compl. ¶¶ 15, 16, 21, 28.)

When Wiedis entered into these PNSAs with Defendants, Plaintiffs allege that the following representations by Defendants were made knowingly false: that Wiedis never had an actual enforceable legal right in the supposed collateral securing the PNSAs, (Compl. ¶¶ 18, 24); that Wiedis would earn and be paid 18% interest on the PSNAs, (Compl. ¶¶ 20, 76); and that Defendants would pay costs associated with collection on the PNSAs, including reasonable attorney's fees, (Compl. ¶¶ 23, 76).

In September 2009, DBI changed its loan security structures, specifically by converting loans in debt owned by DBI into equity in an investment fund overseen by DBI and others, a proposal which DBI promised was "secure" and offered "high-yield returns." (Compl. ¶¶ 33, 38; see Compl. ¶¶ 33–40.) In an September 8, 2009, email signed by Andrews and Eiss, Defendants described some of the DBI changes:

[DBI] is making changes to its investment security structure and how our investors are secured. These changes are the result of launching out Distressed Mortgage Fund and the associated shift in ownership of the assets we manage. Until now, all assets were solely owned by DBI and could be directly pledged as security to individual investors. Going forward, all assets purchased and managed by DBI are owned jointly by DBI (the majority owner) and our partners in the fund. As a result, our investors can no longer be secured directly by individual loans and instead will be secured by the entity that owns the individual loans.

(Compl. ¶ 34; Compl., Ex. 5.) Plaintiffs allege that, around October 16, 2009, as part of these changes, Eiss spoke with Wiedis over the phone and informed Wiedis that she was required to relinquish her secured interest in the $50,000 and $8,000 Notes securing her PNSAs in exchange for shares in a newly-made fund of unspecified assets. (Compl. ¶ 40.) The Complaint does not indicate whether Wiedis accepted or contracted such an agreement. (See Compl. ¶ 40.)

Plaintiffs allege that Defendants omitted material facts about the new investment arrangement, including, but not limited to: details about how Wiedis' money would actually be invested; when interest payments would be made; how the payment amounts would be calculated; the number of other investors who would have prior interests to collecting payments before Wiedis; and specific details concerning when and how Wiedis would receive repayment of her investment principal. (See Compl. ¶ 39.) Plaintiffs further allege that DBI practices failed to keep true, complete, and accurate books and records showing assets and liabilities, including the amounts owned to various investors. (Compl. ¶ 63.)

From 2010 through 2014, Plaintiffs point to the following statements made by Andrews, Palmer, and Eiss which they allege were false and misleading:

February 12, 2010 (Email from Andrews and Eiss): "We are also designing a program by which our investors will be compensated for ... interest payment delays." (Compl., Ex. 6);

April 1, 2010 (Email from Andrews and Eiss): "DBI has continued to maintain its strong performance into 2010." (Compl., Ex. 7);

August 3, 2012 (Email from Andrews): "All DBI investors continue to earn interest on all outstanding principal until such time as all principal is repaid." (Compl., Ex. 8);

September 30, 2013 (Email from Andrews): "[T]he Company [DBI] is growing rapidly under our new capital structure and in partnership with our new investor.... We are on pace to do more in revenue and new acquisitions in the last half of 2013 than in any full year previously." (Compl., Ex. 10);

April 1, 2014 (Email from Andrews): Andrews told Wiedis that DBI "had the funds to repay her today," but there were "different levels of investment." Defendants did not have the funds "to pay all of the investors at [her] level," and "therefore we cannot pay you before we pay them." (Compl., Ex. 12).

Following the September 2009 restructuring, Defendants continued to modify its investment structure, investment terms and conditions, and timing for when to make payments, at times without providing notice to investors. (See Compl. ¶ 41.)

Plaintiffs allege that Andrews and Palmer repeatedly acknowledged to Wiedis DBI's debt to her, but falsely assured her that "interest would continue to accrue in the meantime" of DBI paying Wiedis her investment principal (Compl. ¶ 51.) Defendants also created and distributed false account statements to investors like Wiedis to lead them to believe that interest was accruing in investors' accounts, although Plaintiffs alleges DBI was not actually accruing or setting aside funds to make the interest payments. (Compl. ¶ 43.) Defendants continued to make small, sporadic payments to Wiedis in differing amounts, although none fully paid Wiedis what she was owed under the terms of the Notes, (Compl. ¶ 53), which Plaintiffs claim lulled Wiedis into a false sense of security about the status of her loans, (see Compl. ¶ 54).

In December 2015, Wiedis retained counsel and sent another demand letter to DBI for repayment on her loan principal. (Compl. ¶ 56.) Around this time, although Wiedis was not aware, Defendants were settling similar litigations with situated investments with DBI. (Compl. ¶ 57.)

In June 2016, Defendants made additional allegedly false representations about their investment position in DBI's investor update, including describing assets available to DBI to repay investors and the statement that: "[I]t is also certain that, based on the remaining value of the portfolio, DBI now has the means to fully repay its investors and continues to be committed to doing so." (Compl. ¶¶ 58–59.)

In August 2016, Defendants represented to Wiedis that while they owed her at least $91,893, they were unable to immediately satisfy its obligations to Wiedis, despite...