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ROER v. OXBRIDGE INC.

September 26, 2001

CRAIG ROER AND MARGARET ROER, PLAINTIFFS,
V.
OXBRIDGE INCORPORATED, WIN CAPITAL CORP., FREDERICK L. GORSETMAN, BARRY L. HAWK AND ZACHARY YOSEF LIEBMAN, DEFENDANTS.



The opinion of the court was delivered by: Seybert, District Judge.

      MEMORANDUM AND ORDER

Craig Roer and Margaret Roer ("plaintiffs") commenced this action on August 23, 1999, alleging multiple violations of federal securities laws under Sections 10(b) and 20 of the Securities Exchange Act of 1934 (the "'34 Act"), 15 U.S.C. § 78j(b) and 78t, and Sections 12(2) and 15 of the Securities Act of 1933 (the "'33 Act"), 15 U.S.C. § 771(2) and 770. Plaintiffs additionally assert state law claims pursuant to Section 349 of the New York General Business Law as well as common law claims sounding in breach of fiduciary duty, negligence, fraud and/or negligent misrepresentation, and breach of contract.

Pending before the Court are the defendants' respective motions to dismiss all claims against them in the Amended Complaint.*fn1 Specifically, defendants Oxbridge Incorporated ("Oxbridge"), Win Capital Corp. ("Win Capital"), Frederick L. Gorsetman ("Gorsetman"), Barry L. Hawk ("Hawk")*fn2 and Zachary Yosef Liebman ("Liebman") seek to dismiss all claims against them pursuant to Federal Rules of Civil Procedure 9(b), 12(b)(1) and 12(b)(6), and The Private Securities Litigation and Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b).

FACTUAL ALLEGATIONS

The following factual allegations are taken from plaintiffs' Amended Complaint and accepted as true for purposes of this motion to dismiss. See Zinermon v. Burch, 494 U.S. 113, 118, 110 S.Ct. 975, 108 L.Ed.2d 100 (1990); Charles W. v. Maul, 214 F.3d 350, 356 (2d Cir. 2000). In addition, the Court deems the Amended Complaint to include all documents incorporated by reference, to the extent submitted by the parties, public disclosure documents required by law to be, and have been, filed with the SEC, as well as documents the plaintiffs either possessed or knew about and upon which they relied in commencing suit. See Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (citing Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991); Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991); Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989)).

On or about May 11, 1998, Craig Roer met with defendants Hawk and Liebman in Melville, New York, at which time Hawk and Liebman recommended that Craig Roer invest in United Recycling, Inc. ("URI"), a Minnesota corporation engaged in the business of recovering fibers from used carpet for sale as feedstock to compounders and manufacturers for thermoplastic and nonwoven textile applications. Am. Compl. ¶ 19. During their meeting, Hawk stated to Craig Roer that he "was a registered representative and Director of [Oxbridge]" and further provided Craig Roer with an Oxbridge business card which had Hawk's name on it. Id. At all times relevant, defendant Gorsetman was the President, majority shareholder, and Chairman of the Board of Oxbridge. Am. Compl. ¶¶ 38-40. Gorsetman was also the President and Director of Oxbridge Funding, Inc. which, in turn, was the Manager of Oxbridge Investors, L.L.C. Am. Compl. ¶¶ 41-42. Gorsetman likewise was President and Chairman of the Board of Oxbridge Investors, L.L.C. Am. Compl. ¶¶ 44-45. Oxbridge Investors, LLC was the General Partner of Oxbridge URI, L.P. which, in turn controlled URI through its General Partner Oxbridge Investors, LLC. Am. Compl. ¶ 46. Gorsetman was the General Partner of Oxbridge URI, L.P. Id. Defendant Hawk maintained an office at Oxbridge's place of business. Am. Compl. ¶ 82.

During their May 11, 1998 meeting, Craig Roer informed Hawk and Liebman that "he was presently unemployed and that he could not afford to lose any money." Am. Compl. 20. In response, Hawk and Liebman told Craig Roer that an investment in URI would return between one hundred percent and four hundred percent of his original investment. Am. Compl. ¶ 22. At the May 11, 1998 meeting, both Hawk and Liebman individually stated to Craig Roer that "they had a company waiting in the wings to buy [URI]" and that "he would receive a return on his investment between one hundred percent to four hundred percent. . . ." Id. According to Hawk and Liebman, the buyout of URI would occur by October or November of 1998. Id. Hawk and Liebman also told Craig Roer that URI would be profitable within sixty days. Id. In reliance on Hawk and Liebman's statements, on May 11, 1998, plaintiffs purchased 396,963 common stock purchase warrants of URI ("warrants") and a $100,000 Senior Secured Note of URI with a maturity date of June 30, 1998 ("URI Note"). Am. Compl. ¶ 23. The URI Note provided for payment on June 30, 1998 of $100,000 plus interest on the outstanding principal amount at a rate of 12% per annum. Affidavit of Frederick L. Gorsetman dated October 21, 1999 ("Gorsetman Aff."), Ex. C (URI Note). The warrants included in the deal entitled plaintiffs to purchase URI common stock at $.25 per share between May 11, 1998 and May 11, 2008. Gorsetman Aff., Ex. B (warrants). Plaintiffs paid a total of $100,000 for both the warrants and the URI Note. Am. Compl. ¶ 23.

Following the May 11, 1998 meeting, Craig Roer spoke individually to both Hawk and Liebman who each again represented to him that they "had a company waiting in the wings ready to buy out [URI]" and that he would receive a return of one hundred percent to four hundred percent on his "$100,000 investment" and that the buyout of URI would occur by October or November of 1998. Am. Compl. ¶ 24.

Thereafter, in or about June 1998, Hawk telephoned Craig Roer and recommended that the plaintiffs "invest in a Secured Promissory Note and Additional Understandings" of Firestorm Pictures, LLC ("Firestorm"), a California company involved in the production of motion pictures. Am. Compl. ¶ 25. In the course of their conversation, Hawk informed Craig Roer that "he would receive a 50% return on his money within a two month period." Id. Additionally, Hawk further stated to Craig Roer that Firestorm was going to produce movies with Miramax and that Firestorm had an insurance policy with "Oppenheimer" on any movies made such that plaintiffs' investment with Firestorm would be protected from any losses. Id. Hawk also told Craig Roer that he would be investing his own money into Firestorm, that he was an attorney and, as such, plaintiffs should trust his advice and invest in Firestorm. Id. Lastly, Hawk told Craig Roer that there was a motion picture deal pending with respect to Firestorm. Id.

On July 10, 1998, plaintiffs "agreed to invest in, and did invest in," a Secured Promissory Note dated July 9, 1998 in the amount of $50,000 ("July 9, 1998 Firestorm Note") and a letter of "Certain Additional Understandings" dated July 9, 1998 ("July 9, 1998 Letter Agreement"), by mailing a check for $50,000 to the main office of Oxbridge and made payable to Firestorm. Am. Compl. ¶ 26. The July 9, 1998 Firestorm Note provided for payment of the principal amount plus interest at an annual rate of 12% no later than October 30, 1998. Gorsetman Aff., Ex. F (July 9, 1998 Firestorm Note). Pursuant to the terms of the July 9, 1998 Firestorm Note, plaintiffs were to receive a "production fee" and an interest in the "producer's net profit", as those terms were defined by the July 9, 1998 Letter Agreement, as "Additional Consideration" for their investment. Id. Plaintiffs agreed to the investment in reliance upon the statements and representations made by Hawk. Id.

During their conversation, Hawk advised Craig Roer that he should invest an additional $25,000.00 in Firestorm and "assured Craig Roer that Firestorm . . . would pay him a seventy [-]five percent return on his total investment in Firestorm . . . in two months." Id. Thereafter, on or about October 15, 1998, plaintiffs "agreed to invest and believed at the time that they did invest an additional $12,500.00 . . . in Firestorm." Am. Compl. ¶ 28. Specifically, in exchange for the July 9, 1998 Firestorm Note, Firestorm Pictures, LLC issued plaintiff a new Secured Promissory Note dated October 29, 1998 ("October 29, 1998 Firestorm Note"), which promised to pay plaintiffs principal and interest in the total sum of $87,500 and a new letter of Certain Additional Understandings dated October 29, 1998 ("October 29, 1998 Letter Agreement") which superseded the previously issued July 9, 1998 Letter Agreement.*fn3 Gorsetman Aff., Ex. H (October 29, 1998 Letter Agreement). Plaintiffs allege that the additional $12,500.00 they intended to invest in Firestorm was diverted to an entity called Stourbridge Investments, Ltd. ("Stourbridge"). Id. Plaintiffs base their belief on a "Paying Agent and Security Agreement" between Firestorm and other parties listing the address of Stourbridge and a personal check, dated October 15, 1998, made payable to Stourbridge in the amount of $12,500.00 and signed by Craig Roer. Id; see also Affidavit of Craig Roer dated February 21, 2000 ("Roer Aff.") at Ex. E.

In or about November 1998, Hawk informed Craig Roer that Firestorm's deal with Miramax fell through, but that another company would eventually be found to produce the motion picture. Am. Compl. ¶ 29. At that time, Hawk reiterated to Craig Roer that his investments in Firestorm were protected because the motion picture Firestorm intended to produce was insured with Oppenheimer. Id. Also in November 1998, Hawk further informed Craig Roer that the company waiting in the wings to purchase URI "never materialized." Am. Compl. ¶ 30.

Subsequently, in January 1999, Hawk told Craig Roer that a group of investors from Florida was planning to invest money in Firestorm and that Craig Roer's investment would be returned to him with the previously promised seventy-five percent return. Am. Compl. ¶ 31. In March 1999, Hawk advised Craig Roer that the anticipated investors from Florida, with respect to the Firestorm investment, "never materialized," but that he should not be concerned because "they were working on deals in California and his investment in Firestorm . . . would be returned with the previously promised 75% return." Am. Compl. ¶ 32.

In or about February 1999, Hawk informed Craig Roer that URI would be sending him an interest payment due on the $100,000 Senior Secured note "shortly." Am. Compl. ¶ 33. The interest payment was never made. Id.

Following this turn of events, in March 1999, Craig Roer met with Gorsetman and informed him that he wanted all of the money he and his wife invested in URI and Firestorm returned. Am. Compl. ¶ 34. In response, Gorsetman allegedly assured Craig Roer that he "would find someone to take [plaintiffs] out of their positions and return their money." Id. Gorsetman also told Craig Roer during their meeting that URI "was going to be doing a big deal with Allied Signal Corp." Id. During the months of March and April of that same year, Gorsetman advised Craig Roer to "push defendant Hawk to find someone to buy out his positions and that defendant Hawk should take on some of the responsibility of returning the moneys invested by [plaintiffs]." Am. Compl. ¶ 35. Thereafter, in May 1999, Gorsetman allegedly "insisted" that Allied Signal Corp. would be providing URI with a substantial contract that would "put [URI] in the black." Am. Compl. ¶ 36.

At present, plaintiffs claim the common stock purchase warrants of URI are worthless and that URI has defaulted on the URI Note. Am. Compl. 147. Additionally, plaintiffs claim that Firestorm also has defaulted on the October 29, 1998 Firestorm Note. Am. Compl. 48. Based on these allegations, plaintiffs claim defendants have violated §§ 10(b) and 20 of the '34 Act, and §§ 12(2) and 15 of the '33 Act as well as several state laws.

Specifically, with respect to plaintiffs' purchase of the URI Note and URI common stock purchase warrants, plaintiffs allege that defendants Hawk and Liebman knowingly and/or recklessly made material misrepresentations of fact in connection with that transaction because oral statements made by Hawk and Liebman during and after the May 11, 1998 meeting "were untrue when made" and "material to the [p]laintiffs' investment decision and relied upon by the [p]laintiffs." Am. Compl. ¶ 51 and ¶ 51(a)-(g), 1 61 and ¶ 61(a)-(d), (g). Plaintiffs additionally allege that, in connection with the purchase of the URI Note and URI common stock purchase warrants, defendants Hawk and Liebman made several omissions of fact that would have been material to plaintiffs' investment decisions. In particular, plaintiffs allege that Hawk and Liebman failed to disclose (1) that the URI transaction was "highly speculative and involved a high degree of risk and involved a high degree of risk of loss of the entire investment" and (2) that previously issued notes of URI were in default at the time of plaintiffs' purchase. Am. Compl. ¶ 53, 62. Plaintiffs also contend that defendants Oxbridge, Gorsetman, and Win Capital likewise are primarily liable to plaintiffs under § 10(b) and/or liable as controlling persons under § 20(a) based on their involvement in the URI transaction.

With respect to plaintiffs' purchase of the July 9, 1998 Firestorm Note and October 29, 1998 Firestorm Note, plaintiffs' allege that defendant Hawk knowingly and/or recklessly made several material misrepresentations of fact because the oral statements made by Hawk and relied upon by defendants in connection with that transaction "were untrue when made". Am. Compl. ¶ 52 and ¶ 52(a)-(m). In addition, plaintiffs allege that, in connection with the Firestorm deal, Hawk knowingly and/or recklessly omitted to state material facts necessary to make his affirmative statements not misleading, including, (1) that the purchase of the Firestorm Senior Secured Note was "highly speculative and involved a high degree of risk and involved a high degree of risk of loss of the entire investment"; (2) that Firestorm was a small Limited Liability Company incorporated in July of 1998; and (3) that the $12,500 plaintiffs intended to invest with Firestorm would be diverted to Stourbridge. Am. Compl. 154 and ¶ 52(a)-(c). Finally, plaintiffs further contend that defendants Oxbridge and Gorsetman also are primarily liable to plaintiffs under § 10(b) and/or liable as controlling persons under § 20(a) based on their involvement in the Firestorm transaction.

In response, defendants move to dismiss the Amended Complaint on the following grounds: (1) plaintiffs have failed to set forth a prima facie case against defendants Oxbridge, Gorsetman and Win Capital as "controlling persons" or as "primary wrongdoers"; (2) plaintiffs have failed to state a claim for a primary violation of § 12(2) of the '33 Act and § 10(b) of the '34 Act; (3) neither the URI Note, July 9, 1998 Firestorm Note, nor October 29, 1998 Firestorm Note are a "security" for purposes of § 10(b) of the '34 Act; (4) plaintiffs fail to allege any actionable misrepresentation or omission with respect to the common stock purchase warrants; (5) plaintiffs' claims are time barred under the applicable statute of limitations; and (6) the pendent state law claims should be dismissed.

LEGAL STANDARD

A district court should grant a motion to dismiss under Fed.R.Civ.P. 12(b)(6) for failure to state a claim only if "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249-50, 109 S.Ct. 2893, 2906, 106 L.Ed.2d 195 (1989) (quoting Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984)); Annis v. County of Westchester, 36 F.3d 251, 253 (2d Cir. 1994).

In applying this standard, a district court must "read the facts alleged in the complaint in the light most favorable" to the plaintiff and accept these factual allegations as true. H.J. Inc., 492 U.S. at 249, 109 S.Ct. at 2906; Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Christ Gatzonis Elec. Contractor, Inc. v. New York City Sch. Constr. Auth., 23 F.3d 636, 639 (2d Cir. 1994); see also Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 507 U.S. 163, 165, 113 S.Ct. 1160, 1163, 122 L.Ed.2d 517 (1993) (citing Fed.R.Civ.P. 8(a)(2) to demonstrate liberal system of `notice pleading' employed by the Federal Rules of Civil Procedure).

The court's duty "is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980). Accord Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). The appropriate inquiry, therefore, is not "whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer, 416 U.S. at 236, 94 S.Ct. at 1686; Ricciuti v. New York City Transit Auth., 941 F.2d 119, 123-24 (2d Cir. 1991) (plaintiff is not compelled to prove his or her case at the pleading stage).

Additionally, a claimant is not required to set out in detail the facts upon which he or she bases a claim. Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 103, 2 L.Ed.2d 80 (1957). A claimant need only give a statement of his or her claim that will give defendant "fair notice of what the . . . claim is and the grounds upon which it rests." Id. Therefore, where a complaint is filed that charges each element necessary to recover, dismissal of the case for failure to set out evidential facts can seldom be warranted. United States v. Employing Plasterers Ass'n of Chicago, 347 U.S. 186, 189, 74 S.Ct. 452, 454, 98 L.Ed. 618 (1954). Individual allegations, however, that are so baldly conclusory that they fail to give notice of the basic events and circumstances of which the plaintiff complains are meaningless as a practical matter and, as a matter of law, insufficient to state a claim. Barr v. Abrams, 810 F.2d 358, 363 (2d Cir. 1987). Additionally, as previously noted, on a motion to dismiss a complaint shall be deemed "to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference . . . as well as public disclosure documents required by law to be, and that have been, filed with the SEC, and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit. . . ." Rothman, 220 F.3d at 88-89 (citations omitted).

It is within this framework that the Court addresses the present motion.

DISCUSSION


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