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Industrial Technology Ventures, L.P v. Pleasant T. Rowland Revocable Trust

February 17, 2012


The opinion of the court was delivered by: Marian W. Payson United States Magistrate Judge



Plaintiff Industrial Technology Ventures, L.P. ("ITV") has sued two trusts -- the Pleasant T. Rowland Revocable Trust and the W. Jerome Frautschi Living Trust -- and two individuals -- W. Jerome Frautschi and Diane Creel -- asserting, inter alia, claims for breach of fiduciary duty, securities fraud and tortious interference with business relationships. (Docket # 4). Currently pending before this Court are ITV's motion to amend its complaint and a subsequent motion to substitute the proposed amended complaint it seeks to file. (Docket ## 62, 84). For the reasons discussed below, ITV's motions are granted.


I. Procedural History

This action was filed on May 27, 2008. (Docket # 1). ITV filed an amended complaint on September 5, 2008 (the "First Amended Complaint"), which defendants unsuccessfully sought to dismiss. (Docket ## 4, 5, 35). The initial scheduling order set July 1, 2010 as the deadline for amending the pleadings. (Docket # 46). Although various deadlines in the original scheduling order were thereafter extended, that deadline was not. (Docket # 61).

On February 18, 2011, ITV forwarded to defendants a red-lined proposed amended complaint and requested that defendants agree to the amendments. (Docket # 62-1 at 2). The proposed amendments included only new and revised factual allegations; it did not include any proposed new claims or defendants. Defendants did not respond to ITV's request, but deposed ITV's representatives after the draft was circulated and during those depositions apparently inquired about allegations in the proposed draft. (Docket # 76 at 9). On May 13, 2011, ITV again requested defendants' agreement to their proposed amended complaint. (Docket # 62-1 at 2). Only defendant Creel responded, and she opposed the request. (Id.).

ITV filed the instant motion on June 2, 2011. (Docket # 62). The proposed amended complaint attached to that motion was not the same draft that had been circulated in February 2011. Instead, it included additional factual allegations based on discovery conducted between February and May. (Docket # 62-1 at 2 n.2). Defendants objected to ITV's motion because it differed from the February proposal and argued that ITV had not demonstrated good cause to amend the complaint following the expiration of the deadline in the scheduling order. Defendants also opposed the motion on the ground of futility, arguing that the fraud allegations were not pled with sufficient particularity under Fed. R. Civ. P. 9(b) and that some of the proposed amendments lacked evidentiary support. (Docket # 68).

On August 9, 2011, this Court held a status conference with the parties. (Docket # 82). At the conference, this Court addressed the fact that ITV's motion to amend sought permission to file a proposed amended complaint that differed from the copy that it had circulated to defendants in February 2011. The Court also urged ITV to review its claims of securities fraud to ensure that they were pled with adequate particularity.

On August 22, 2011, ITV filed the instant motion to substitute its proposed amended complaint. (Docket # 84). The August version of the complaint abandons many of the allegations that were new in the June version and amends only that portion of the February version pertaining to ITV's fraud claims in order to address the Court's comments about the particularity of those allegations. (Id.). Again, no new claims or defendants have been included. Defendants continue to oppose the motion to amend on the grounds that ITV has not demonstrated good cause for the amendments and that ITV's allegations lack evidentiary support.*fn1 (Docket # 88).

II. The Proposed Amendments

According to the First Amended Complaint, ITV was an investor in Ecovation, an environmental technology company that built and operated wastewater treatment plants. (Docket # 4 at ¶ 2). Defendant Diane Creel ("Creel") became Ecovation's CEO in 2003. (Id. at ¶ 21). The Pleasant T. Rowland Revocable Trust and the W. Jerome Frautschi Living Trust (together, the "Trusts") were also substantial investors in Ecovation and had provided the company with an approximately $30 million dollar line of credit. (Id. at ¶¶ 20, 25). Defendant W. Jerome Frautschi ("Frautschi") was a representative of the Trusts and also a member of Ecovation's Board of Directors. (Id. at ¶ 23).

A. The Securities Fraud Allegations

According to ITV, defendants unlawfully schemed "to take advantage and control of [Ecovation] when [it] was in need of capital." (Id. at ¶ 3). ITV asserts that as part of the scheme, defendants deceptively induced ITV into selling two-thirds of its shares in Ecovation to the Trusts at an unreasonably low price by concealing their knowledge of certain material facts and by making material misrepresentations -- conduct that constitutes a violation of Section 10(b) of the Securities Exchange Act of 1934. (Id. at ¶¶ 3, 85-102).

In the First Amended Complaint, ITV alleged that an Ecovation representative, Dan Hagen ("Hagen"), attended an industry conference in January 2007, at which he had discussions with a representative of another company, Ecolab, who "expressed vigorous interest" in purchasing Ecovation. (Docket # 4 at ¶ 79). The complaint further alleged that Hagen immediately relayed this information to Creel, who, in turn, advised the Trusts. (Id. at ¶¶ 80-83). Creel and the Trusts then began secret negotiations to sell Ecovation to Ecolab without disclosing those negotiations to ITV. (Id. at ¶¶ 83-84).

According to the First Amended Complaint, ITV alleged that almost immediately after the industry conference, the Trusts began to solicit the purchase of ITV's shares in Ecovation. (Id. at ¶ 86). At that time, the Trusts knew that ITV planned to hold its investment in Ecovation for approximately two to three years (id. at ¶¶ 87, 93); to induce ITV to sell, Frautschi advised it that the Trusts planned to hold their investments for a longer period of time (id. at ¶¶ 93, 94; Ex. 5). According to ITV, Frautschi deliberately concealed Ecovation's "imminent" sale to Ecolab, a fact that would have led ITV to reject the Trusts' offer to buy its shares. (Id. at ¶¶ 94-98). In fact, ITV sold a "substantial" number of its Ecovation shares to the Trusts. (Id. at ¶¶ 3, 91). Approximately six months later, Ecolab bought Ecovation for $210 million, generating a profit of ...

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