United States District Court, D. Delaware
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
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
NOREIKA, U.S. DISTRICT JUDGE
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.
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.
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
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.).
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.).
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).
STANDARD OF REVIEW
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).
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