Opinion
Civil Action No: 99-3765, Section: "J"(5)
June 2, 2000
Before the Court is a Motion to Dismiss (Rec. Doc. 3) filed by defendants Metairie Medical Equipment Leasing Corporation, Modern Medical Modalities Corporation, Roger Findlay, Jan Goldberg, Toby Soprano, and Gary Maccia. Plaintiff opposes the motion. The motion, set for hearing on April 12, 2000, is before the Court on briefs without oral argument.
For the following reasons, the Court GRANTS defendants' motion.
The facts necessary to the resolution of these issues are as follows. In 1998, KFC Ventures, L.L.C., ("KFC") paid $250,000 in cash for a fifteen percent membership interest in Open MRI Imaging Center of Metairie, L.L.C. ("Open MIRI"). As an inducement, defendants Metairie Medical Equipment Leasing Corporation ("Metairie Medical"), Roger Findlay, Jan Goldberg, and Toby Soprano represented to KFC that Metairie Medical would purchase an eighty-five percent interest in Open MRI by contributing $1,265,000 worth of physical assets and leasehold interests free of liens, claims, and encumbrances. This arrangement was memorialized in an exhibit to the "Operating Agreement."
This brief recitation of facts is largely adopted from the Complaint and will be considered as true for purposes of this motion. See Spivey v. Robertson, 197 F.3d 772, 774 (5th Cir. 1999).
The Operating Agreement, a document explaining the terms, policies, and nature of Open MRI, names Metairie Medical as the initial manager of Open MRI with the "full, exclusive, and complete discretion, power, and authority" to acquire property, own property, sell assets in the ordinary course of business, and contractually bind Open MRI. Operating Agreement, §§ 5.1.1-5.1.2.4.
On December 16, 1999, KFC filed suit in this Court, claiming that Metairie Medical failed to make the capital contribution as well as other acts of mismanagement and asserting causes of action for securities fraud, fraud, breach of fiduciary duty and gross negligence, breach of contract, unfair competition and unfair trade practices, detrimental reliance, breach of the covenant of good faith and fair dealing, and alter ego liability.
In response to various allegations in the Complaint, defendants have filed the present Motion to Dismiss.
In the motion, defendants move the Court for three separate grounds of relief. First, defendants argue, two of KFC's claims should be dismissed because they fail to state a claim upon which relief can be granted under the federal securities laws. Second, defendants maintain that KFC's allegations of fraud should be dismissed since those claims were not pleaded with particularity or, alternatively, that the Court should dismiss the portion of the fraud claim which alleges fraudulent misrepresentation of future events. Lastly, defendants assert that KFC's claims under the Louisiana Unfair Trade Practices Act ("LUTPA"), La. Rev. Stat. § 51.1401 et seq., should be dismissed because the claims are perempted, KFC does not have standing to bring a LUTPA claim, and LUTPA does not apply to securities transactions.
I. KFC's Securities Claims
In the motion, defendants argue that KFC's allegations of securities violations under the Securities Exchange Commission Act of 1934 should be dismissed for failure to state a claim because KFC's membership interest in the limited liability company ("LLC") of Open MRI is not a security.
In its motion, the defendants Metairie Medical do not address whether the membership interest is a security under the Louisiana Securities Act, La. Rev. Stat. 51:701 et seq.
"LLC membership interests are not `securities' unless they meet the . . . criteria of an `investment contract' set forth in SEC v. Howey, 328 U.S. 293 (1946)." Keith v. Black Diamond Advisors, Inc., 48 F. Supp.2d 326 (S.D.N.Y. 1999). For an interest to be a security,Howey "requires three distinct elements: (1) an investment of money; (2) in a common enterprise; and (3) on an expectation of profits to be derived solely from the efforts of individuals other than the investor."Williamson v. Tucker, 645 F.2d 404, 417 (5th Cir. 1981).
The parties do not dispute the first two elements but, instead, focus their arguments on the final element — whether there was an expectation of profits to be derived solely from the efforts of others. Defendants contend that KFC could not rely solely on the efforts of others because Open MRI, as a LLC, allowed KFC more than adequate opportunity to engage in Open MRI's business affairs. KFC, on the other hand, submits that, since Open MRI is managed by Metairie Medical, a member with an eighty-five percent interest in Open MRI, KFC has no authority to oversee or manage the daily affairs of Open MRI and must rely upon the efforts of Metairie Medical.
In an analogous context, the Fifth Circuit has made clear that an interest in a limited liability partnership and, even under limited situations, a general partnership may be considered a security. L B Hospital Ventures, Inc. v. Healthcare Int'l, Inc., 894 F.2d 150, 152-53 (5th Cir. 1990); Williamson v. Tucker, 645 F.2d 414, 425 (5th Cir. 1981). "[A] [general] partnership can be an investment contract only when the partners are so dependant on a particular manager that they cannot replace him or otherwise exercise ultimate control." Williamson, 645 F.2d at 424. "In this area of the law, the key is managerial efforts." L B Hospitals, 894 F.2d at 152.
As a LLC, Open MRI is a hybrid business entity, possessing the limited liability characteristic of a limited partnership and the managerial control of a general partnership. Its Operating Agreement, besides designating Metairie Medical as its manager, states that Open MRI "shall be managed by a Manager, who may, but need not, be a Member." Operating Agreement, 5.1.1. Therefore, Open MRI is a manager-managed LLC. Under the Operating Agreement, the manager is granted "full, exclusive, and complete discretion, power, and authority . . . to manage, control, administer, and operate the business and affairs of the Company. . . ."Operating Agreement, § 5.1.2. The manager is also empowered to acquire property, own property, sell assets in the ordinary course of business, and contractually bind Open MRI. Id. at §§ 5.1.2.1-5.1.2.4.
Conversely, a member of Open MRI is not allowed to act as its agent by mere virtue of being a member, and, if a member does purport to so act, then he must reimburse and hold harmless any loss Open MRI may incur.Operating Agreement, §§ 5.1.4.1-5.1.4.2. Rather, a member's authority is largely limited to voting on extra-ordinary matters such as dissolution, where written unanimity of its members is required, admission of additional members, and entering a jurisdiction which does not recognize LLCs. Id. at §§ 5.1.3-5.1.3.3. Importantly, except in seeking a dissolution, a successful voting result depends on which member can muster the majority. In this case, where Metairie Medical not only acts as manager but retains an eighty-five interest in Open MRI, KEC's ability to exercise any managerial control is effectively nonexistent.
According to the unambiguous terms of the Operating Agreement, "there is evidence that plaintiff never exerted nor had capacity to exert essential managerial efforts." L B Hospital, 894 F.2d at 153. Consequently, it is possible that KFC's membership interest in Open MRI may be a security.
II. KFC's Claims of Fraud
Defendants next argue that KFC's federal and state claims of securities fraud and state claim of fraud should be dismissed because the claims were not plead with particularity and, as to one claim, because it alleged future misrepresentations.
Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." FED. R. CIV. PROC. 9(b). "This requirement applies to federal securities fraud claims." Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994). "[A]rticulating the elements of fraud with particularity requires a plaintiff to specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent." Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir. 1997). Alternatively stated, "Rule 9(b) requires the plaintiff to allege `the particulars of time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what [that person] obtained thereby.'" Tuchman, 14 F.3d at 1068 (quoting Tel-Phonic Services, Inc. v. TBS Int'l, Inc., 975 F.2d 1134, 1139 (5th Cir. 1992)).
KFC's Complaint does not meet the requirements of Rule 9(b). KFC's allegations of fraud center around representations made by Metairie Medical, Findlay, Goldberg, and Soprano: (1) that a CAT Scan machine would be installed at Open MRI's place of business, Complaint, ¶ 18; and (2) that Metairie Medical's capital contribution of $1,265,000 and physical assets would be free of liens, claims, and encumbrances,Complaint, ¶ 20. Defendant Maccia, as the director of Metairie Medical, is alleged to also be responsible for the fraudulent statements. Complaint, ¶ 36.
Although the Complaint does indicate the general content of the statements and what the defendants would gain from the alleged fraudulent representation, i.e., an influx of cash and assets into Open MRI, it fails to provide any particulars as to when or where the statements were made. Furthermore, naming almost all the defendants in a boilerplate fashion makes it impossible to identify the person making each representation. The lack of particularities in the Complaint would make it unreasonably burdensome for the defendants to conduct meaningful discovery.
Therefore, defendants' motion as to this ground is GRANTED. However, plaintiff is given fifteen (15) days from the entry of this order to amend its Complaint in accordance with Rule 9(b).
III. KFC's Claim Under the Louisiana Unfair Trade Practices Act
Defendants move the Court to dismiss KFC's claims under the Louisiana Unfair Trade Practices and Consumer Protection Act, La. Rev. Stat. 51:1401 et seq. ("LUTPA"), because (1) the claims are perempted; (2) KFC has no standing since it is not a consumer or competitor; and (3) LUTPA does not apply to security transactions,
Finding that KFC is not a consumer or competitor, the Court pretermits defendants' alternative arguments. LUTPA is "limited to consumers and business competitors." Thibaut v. Thibaut, 607 So.2d 587, 607 (La.App. 1st Cir. 1992); see also Orthopedic Sports Injury Clinic v. Wang Laboratories, Inc., 922 F.2d 220 (5th Cir. 1991); Gil v. Metal Service Corp., 412 So.2d 706 (La.App. 4th Cir. 1982). The Complaint is devoid of any allegations which suggest that KFC is either a consumer or a competitor to Open MRI. Therefore, the LUTPA claims should be dismissed.
Conclusion
In sum, the Court grants defendants' motion to dismiss plaintiff's claims of LUTPA violations and federal and state securities fraud claims, although allowing plaintiff 15 days leave to amend its Complaint. Accordingly,
IT IS ORDERED that defendants' Motion to Dismiss is GRANTED. Plaintiffs federal and state law claims of securities fraud and state law claim of fraud as well as the claim of LUTPA violations should be and are herebyDISMISSED. Plaintiff is GRANTED fifteen (15) days leave from the entry of this order to amend its Complaint in accordance with Rule 9(b).