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Keystone Associates LLC v. Fulton

United States District Court, D. Delaware

August 8, 2019

KEYSTONE ASSOCIATES LLC, a Utah limited liability company; CABLE MOUNTAIN PARTNERS LLC, a Utah limited liability company, Plaintiffs,
BENJAMIN FULTON, an individual; ELKHORN CAPITAL GROUP, LLC, a Delaware limited liability company, Defendants.

          Timothy R. Dudderar, Jonathan A. Choa, Potter Anderson & Corroon LLP, Wilmington, Delaware. David J. Jordan, Michael R. Menssen, Stoel Rivers LLP, Salt Lake City, Utah. Counsel for Plaintiffs.

          Robert J. Katzenstein, Smith, Katzenstein & Jenkins LLP, Wilmington, Delaware. Steven S. Scholes, Peter B. Allport, McDermott Will & Emery LLP, Chicago, Illinois. John R. Gerstein, Clyde & Co. U.S. LLP, Washington, DC. Counsel for Defendants.



         Plaintiffs Keystone Associates LLC (“Keystone”) and Cable Mountain Partners LLC (“Cable Mountain, ” and collectively, “Plaintiffs”) have sued defendants Benjamin Fulton (“Fulton”) and Elkhorn Capital Group, LLC (“Elkhorn, ” and collectively, “Defendants”) for securities fraud, common law fraud, and negligent misrepresentation. Fulton is the founder, manager, and chief executive officer of Elkhorn.

         Pending before the Court is Defendants' motion to dismiss the amended complaint for failure to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. (D.I. 16). The Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1331 and 28 U.S.C. § 1367. For the following reasons, Defendants' motion to dismiss is GRANTED.

         I. BACKGROUND

         Three transactions between Plaintiffs and Defendants are at issue in this action. On February 18, 2016, Keystone and Elkhorn entered into a subscription agreement (“the Subscription Agreement”) whereby Elkhorn issued 1, 110 Class A Units to Keystone in exchange for a capital contribution of $1, 000, 000. (D.I. 17-1, Ex. 1(B) ¶ A). The amended complaint alleges that this equity interest was later assigned and transferred to Cable Mountain. (D.I. 15 ¶ 22).

         On June 29, 2016, Cable Mountain entered into an agreement with Elkhorn to provide Elkhorn a loan of $1, 000, 000 in exchange for a promissory note. (Id. ¶ 24). Cable Mountain had the option to convert this promissory note into equity of Elkhorn. (Id.).

         On January 30, 2017, Keystone provided Elkhorn with a loan of $500, 000 in exchange for a convertible promissory note. (Id. ¶ 26). Under this promissory note, Keystone had the option to convert all or any portion of the principal amount and accrued interest of the loan into equity of Elkhorn. (Id.).

         According to the amended complaint, Plaintiffs engaged in all three transactions based on the same misrepresentation. Specifically, Larry and John Lunt (managers of both Keystone and Cable Mountain) exchanged emails with Fulton and Phil Ziesemer (the CEO and CFO of Elkhorn, respectively) on February 6, 2016. (D.I. 15 ¶¶ 37, 43, 48). In that email exchange, Fulton and Ziesemer purportedly represented that Barclays committed to making an unconditional $500, 000 marketing payment to Elkhorn each year for next three years. (Id. ¶ 35). Contrary to that representation, the annual $500, 000 marketing payment was contingent upon Elkhorn selling $100, 000, 000 of Barclays' products annually. (Id. ¶ 29). Elkhorn is now insolvent, and Plaintiffs' investments are “essentially worthless.” (Id. ¶ 34).


         “To survive a motion to dismiss, a civil plaintiff must allege facts that ‘raise a right to relief above the speculative level on the assumption that the allegations in the complaint are true (even if doubtful in fact).'” Victaulic Co. v. Tieman, 499 F.3d 227, 234 (3d Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Dismissal under Rule 12(b)(6) is appropriate if a complaint does not 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) (quoting Twombly, 550 U.S. at 570); see also Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009). A claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. The factual allegations do not have to be detailed, but they must provide more than labels, conclusions, or a “formulaic recitation” of the claim elements. Twombly, 550 U.S. at 555-56. The Court is not obligated to accept as true “bald assertions” or “unsupported conclusions and unwarranted inferences.” Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997); Schuylkill Energy Res., Inc. v. Pa. Power & Light Co., 113 F.3d 405, 417 (3d Cir. 1997). Instead, “[t]he complaint must state enough facts to raise a reasonable expectation that discovery will reveal evidence of [each] necessary element” of a plaintiffs claim. Wilkerson v. New Media Tech. Charter Sch. Inc., 522 F.3d 315, 321 (3d Cir. 2008) (internal quotation marks omitted). The court must accept all well-pleaded factual allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. In re Rockefeller Ctr. Prop., Inc. Sec. Litig., 311 F.3d 198, 215 (3d Cir. 2002).


         Plaintiffs' amended complaint asserts three claims: securities fraud (Count 1), common law fraud (Count 2), and negligent misrepresentation (Count 3). (D.I. 15 ¶¶ 36-52). Defendants raise a multitude of arguments as to why the claims should be dismissed, including that: Cable Mountain does not have standing to assert a claim based on Keystone's purchase of Elkhorn Units or Keystone's loan to Elkhorn; Keystone does not have standing to assert a claim based on its purchase of Elkhorn Units or Cable Mountain's loan to Elkhorn; Defendants did not make a false statement or omit a material fact to Keystone; Defendants did not direct the statements at issue to Cable Mountain; all of the claims are defective for failure to allege justifiable reliance, loss causation, and scienter; the Rule 10b-5 claims are time barred; and, finally, there was no fiduciary relationship between the parties as required to state a claim for negligent omission. (D.I. 17). The Court is unable to resolve some of these issues at this time, such as the statute of limitations, because Defendants addressed ...

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