United States District Court, N.D. New York
NYSA SERIES TRUST; LEW RUMSMOKE; LEAH GABELMAN, Trustee; GABELMAN TRUST; GERALD E. FUESS; RICHARD MARTIN; RICHARD B. ABBOTT; TERI MARTIN; CHRISTOPHER MORRIS; JACOB HULLER; SUSAN SCHWEITZER, Trustee; SCHWEITZER LIVING TRUST; EDWIN L. OLMSTEAD; ALTON PROSSER; MICHAEL CUDDY; MICHAEL PFOHL; ELIZABETH PFOHL; ANDREW MERRITT; BRIAN LETCHER; WILLIAM PATTERSON, Trustee; PATTERSON WAREHOUSE EMPLOYEE; and PROFIT SHARING PLAN, Plaintiffs,
ESPSCO SYRACUSE, LLC; PATRICK DESSEIN; BRETT GREENKY, M.D.; SETH GREENKY, M.D.; GLENN AXELROD, M.D.; RICHARD ESPOSITO; and JOHN SACCO, M.D., Defendants.
JAY SHAPIRO, ESQ., BRIAN M. OUBRE, ESQ., ZAREEF J. AHMED, ESQ., WHITE AND WILLIAMS LLP, New York, NY, Attorneys for Plaintiffs.
PATRICIA C. FOSTER, ESQ., LAW OFFICES OF PATRICIA C. FOSTER, PLLC, Pittsford, NY, Attorneys for Plaintiffs.
PATRICK DESSEIN, pro se Syracuse, NY.
DANIEL B. BERMAN, ESQ., NINA I. BROWN, ESQ., HANCOCK ESTABROOK, LLP, Syracuse, NY, Attorneys for Defendants Greenky, Greenky, Axelrod, and Esposito.
J. MATTHEW VAN RYN, ESQ., MELVIN & MELVIN, PLLC, Syracuse, NY, Attorneys for Defendant Sacco.
MEMORANDUM-DECISION and ORDER
DAVID N. HURD, District Judge.
Each of the twenty-two named plaintiffs purchased debt securities offered for sale (the "Notes") by defendant ESPSCO Syracuse, LLC ("ESPSCO"), a limited liability company formed in Delaware and based in Syracuse, New York. On September 3, 2014, plaintiffs filed this action generally alleging that ESPSCO's owners and directors engaged in fraud and misconduct in connection with the sale and repayment of the Notes. They bring one federal claim for an alleged violation of section 10(b) of the Securities Exchange Act of 1934 ("First Cause of Action") as well as pendent state claims for fraud ("Second Cause of Action"), fraud in the inducement ("Third Cause of Action"), negligent misrepresentation ("Fourth Cause of Action"), breach of contract ("Fifth Cause of Action"), and unjust enrichment ("Sixth Cause of Action"). Plaintiffs seek restitution with pre-judgment interest.
On October 17, 2014, defendant Dr. John Sacco ("Sacco") filed a motion to dismiss the complaint for failure to state a claim, pursuant to Federal Rule of Civil Procedure 12(b)(6). Defendants Dr. Brett Greenky ("B. Greenky"), Dr. Seth Greenky ("S. Greenky"), Dr. Glenn Axelrod ("Axelrod"), and Richard Esposito ("Esposito") filed a similar motion on October 31, 2014. Shortly thereafter, defendant Patrick Dessein ("Dessein"), proceeding pro se, filed a letter motion seeking to join the co-defendants' motions. The motions have been fully briefed.
Oral argument was heard on January 9, 2015, in Utica, New York. Decision was reserved.
II. FACTUAL BACKGROUND
The following facts, taken from the Complaint and documents attached thereto, are assumed true for purposes of the motions to dismiss. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002).
1. ESPSCO and the Notes On November 24, 2009, Dessein, B. Greenky, S. Greenky, and Axelrod formed
ESPSCO to raise funds for an affiliated entity known as Syracuse Packaging International, LLC ("SPI"). Compl. ¶¶ 1, 49. Dessein served as ESPSCO's Chief Executive Officer; B. Greenky, S. Greenky, and Axelrod served as Managing Members. Id . ¶¶ 29-41. Sacco served on the Board of Managers of SPI. Id . ¶ 45.
ESPSCO sought to raise funds for SPI by offering $1, 700, 000 in Notes for sale to accredited investors in a private offering. Compl. ¶¶ 50-51. According to plaintiffs, defendants attempted to avoid the registration requirements of the Securities Act by structuring the offering as a private offering. ESPSCO's members provided interested parties, including plaintiffs, informational material about ESPSCO's ownership structure, the terms under which the Notes would be sold, and how ESPSCO would use the funds raised (the "Offering Materials"). See Compl. Ex. A.
Specifically, the Offering Materials indicated that Dessein, B. Greenky, S. Greenky, and Axelrod each owned twenty-five percent (25%) of ESPSCO. Id. at 3. These materials also indicated that purchasers would receive semi-annual interest payments valued at nine percent (9%) per year. Id . Moreover, the Offering Materials represented that SPI had "guarantied repayment of the Notes." Id. at 2. Finally, Appendix A of the Offering Materials, entitled "Risk Factors, " noted: "If [ESPSCO] fails to make any payment when due under the Notes, the sole remedy of the Note holders will be limited to proceeding against SPI to recover full payment thereon." Id., App. A, ¶ 2.
Ultimately, ESPSCO raised a total of $1, 150, 000 by issuing Notes to eighteen different purchasers, including the named plaintiffs. Compl. ¶ 56. In particular, plaintiff NYSA Series Trust ("NYSA Trust"), a mutual fund, purchased a Note valued at $100, 000. Id . ¶ 63.
On January 1, 2012, ESPSCO defaulted on its obligation to pay interest on the Notes, and SPI failed to honor its obligation as guarantor. Compl. ¶ 65. Two of the named plaintiffs-NYSA Trust and Michael Cuddy ("Cuddy")-sued ESPSCO and SPI in New York State Supreme Court, Onondaga County, to recover losses from these breached obligations. NYSA Trust and Cuddy won a $166, 836.23 judgment on April 17, 2012. See Compl. Ex. C.
On June 29, 2012, NYSA Trust and Cuddy agreed to enter into a "Judgment Forbearance Agreement" (the "Forbearance Agreement") with ESPSCO and SPI in lieu of enforcing this state court judgment. Compl. ¶ 75. Although the Forbearance Agreement contained a revised repayment schedule for the outstanding Notes, ESPSCO and SPI ...