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American Power, LLC v. Harris

United States District Court, S.D. Ohio, Western Division, Dayton

August 2, 2018

DOUGLAS O. HARRIS, et al., Defendants.

          Walter H. Rice District Judge.


          Sharon L. Ovington United States Magistrate Judge.

         I. Introduction

         Plaintiff American Power, LLC is a trucking-logistics company headquartered in Dayton, Ohio. According to the Complaint, Plaintiff invested in and loaned $450, 000 to Defendant Dektrix LLC, a transportation-servicing company headquartered in Utah. The Complaint charges that the investment and loan were fraudulently obtained and ultimately worthless. “Plaintiff is left with nothing it invested.” (Doc. #1, ¶ 72).

         Plaintiff seeks to impose liability upon Dektrix and various other business entities and individuals for purported violations of federal securities laws and state common law. Two groups of Defendants-(1) the Dektrix Defendants, and (2) the Fontaine Defendants- seek to avoid liability by attacking Plaintiff's Complaint under Fed.R.Civ.P. 12(b)(6) for failing to state a claim upon which relief could be granted and, as to Plaintiff's fraud claims, for failing to meet the pleading requirements of Fed.R.Civ.P. 9(b) and the Private Litigation Securities Reform Act. (Doc. #s 16, 20). The Complaint must therefore be studied.

         II. Factual Background

         Accepting as true the well-pleaded factual content in Plaintiff's Complaint and construing it in the light most favorable to Plaintiff, see Ohio Pub. Employees Retirement Sys. v. Fed. Home Loan Mortgage Corp., 830 F.3d 376, 382 (6th Cir. 2016), reveals a narrative of deception, misplaced trust, and financial washout.

         Dektrix LLC formed in January 2015. Its purpose was to commercialize a “‘revolutionary intermodal flat-deck shipping solution…'”[2] Id. (Doc. #1, ¶11) (footnote added). This flat-deck shipping solution was manufactured by Defendant Fontaine Engineered Products, Inc. (d/b/a Fontaine Intermodal). It was known as Fontaine Evolution Intermodal Flat Decks. Photos of the Fontaine Flat Deck appear in a company document attached as an Exhibit to the Complaint, id. at 47-48, and in Fontaine's Flat Deck Owner's Guide (Doc. #39, Exh. B). Soon after Dektrix was formed, it began renting and using Fontaine Flat Decks.

         In June 2016, Dektrix reached out to Plaintiff and others with an investment opportunity related to Dektrix's use of “new type of trailer design produced and manufactured by Defendant Fontaine[, ]” referring to the Fontaine Flat Deck. (Doc. #1, ¶25). The opportunity looked attractive in part because Dektrix held an exclusive opportunity to use the Fontaine Flat Decks. Similar communications from Dektrix followed: In July 2016, the Dektrix Defendants-there are seven of them[3]-told Plaintiff (through an email) that Dektrix “was a well-established company that had earned an exclusive opportunity to use Fontaine Evolution Intermodal Flat Decks to ship loads.” Id. at ¶27. They also explained to Plaintiff that Dektrix had a successful (albeit brief) history and a promising future:

Operating History - Dektrix is not a start-up company. Dektrix was first organized in December of 2014. It has moved freight every month since April of 2015. It has two yards, 17 FTE employees [full-time employees] (both w-2 and 1099 contractors). It has moved over 814 loads of freight and it has billed more than $2.5M in sales. Dektrix has obtained all of its operating authorities as well as broker authorities. It is authorized to operate on all class 1 railways in North America…. It has a fleet of 73 decks and nine 2016 Freightliner tandem axel day cabs which it leases from Penske…. Dektrix has executed multiple carrier agreements and has current contracts and relationships with the logistics executives at various companies. Based on Dektrix['s] performance the executives at Marmon Highway Technologies and Fontaine Intermodal have granted Dektrix a 3 year exclusive opportunity. They will not produce or sell any decks or similar intermodal products to any other individual or entity for three years. These are the accomplishments of a company which has worked very hard and is now posed for rapid growth.

Id. (citation omitted).

         In July and August 2016, the Dektrix Defendants met with Plaintiff and continued to solicit its investment. They informed Plaintiff about Dektrix's operating history, value, and client opportunities. They also showed Plaintiff a letter that Defendant Marmon's President Kelly Dier wrote making it clear, according to the Complaint, “that Fontaine, Marmon, and Dektrix were working together to secure investment money from Plaintiff.” Id. at ¶29. The Complaint quotes the letter at some length, including information about Dektrix's right to exclusive use of the Fontaine Flat Decks:

We [Marmon] agree to grant Dektrix two years of exclusivity from the date Dektrix purchases all of the 73 [Fontaine] Intermodal Flat Decks, which are currently being rented to Dektrix and we further agree to grant an additional third year of exclusivity to Dektrix in exchange for purchasing the 43 decks which Fontaine currently holds in inventory in the form of new components, ready to assemble….


         An eventful meeting occurred on August 5, 2016 during which two Dektrix Defendants, Douglas O. Harris and Murray J. Crane, gave a presentation to Plaintiff and other potential investors. Harris is the general manager of Dektrix; Crane is a Member-Manager of Dektrix (and the patent holder of technology used in the Fontaine Flat Decks). Harris told prospective investors, “Dektrix would register UCC statement on the Fontaine Intermodal flat decks that Dektrix would purchase from Fontaine with the investor money. The decks would be registered for the benefit of the investors ‘so that they control the assets, they own the assets.'” Id. at ¶32.

         Defendant Berkley Buchanan, then-President of Fontaine, also participated in the August 5, 2016 meeting, telling Plaintiff and the others, “We stand behind them,' meaning Fontaine stood behind Dektrix.” Id. at 31. Defendant Buchanan also said, ‘We [Fontaine] believe in this project strongly enough that we have provided them [Dektrix] an offer of exclusivity on the product.'” Id. (Plaintiff's brackets). He also “touted Fontaine's relationship with BNSF Railway through Berkshire Hathaway…, ” and “described the millions of dollars in development spent by Fontaine.” Id.

         Things began to coalesce the next day, August 6, 2016. Dektrix provided Plaintiff with several documents, including (1) a Private Placement Memorandum “titled Confidential Offering Memorandum $6, 000, 000.00 Consisting of up to 400, 000 Membership Units of Dektrix, LLC, Minimum Purchase $50, 000….”; (2) a Subscription Agreement; and (3) Dektrix's Operating Agreement. Id. at ¶34 (citation omitted).

         Plaintiff concluded, based on the Private Placement Memo, that Fontaine Flat Decks “were integral and necessary to Dektrix's business model.” Id. at ¶35. The Private Placement Memo explained, “‘The company's revenue is tied to securing shipping contracts which utilize the Dektrix Intermodal flat-deck solution….'” Id.

         Plaintiff and its owners-Adil Baguirov and Islom Shakhbandarov-decided to review the information that was publicly available about Fontaine and its Flat Decks “particularly with respect to their compatibility with rail transportation.” Id. at ¶37. Indeed, “[t]ransportation by railroad was the key to functionality of the Fontaine Evolution Flat Decks being used by Dektrix.” Id. at ¶36. Baguirov and Shakhbandarov conducted “an easy search of the internet” and found Fontaine press releases in 2014, introducing its Flat Deck. Id. at ¶37. The press releases described the Fontaine Flat Deck as “‘Certified by the Association of American Railroads, Fontaine's Evolution Intermodal Flat Deck includes multiple patented features related to the deck floor and load securement system.'” Id. (footnote and citation omitted). Several industry publications (copies are attached to the Complaint) quoted these assertions. “Plaintiff relied on Fontaine's statements that its Evolution Intermodal Flat Decks had been AAR certified when it decided to invest in Dektrix.” Id. at ¶43.

         The Association of American Railroads (AAR), according to the Complaint, is an industry trade group primarily representing major freight railroads in North America. It is dedicated to maintaining railroad safety and operating standards. It publishes a Manual of Safety Standards and Recommended Practices “that includes all regularly adopted specifications, standards, and recommended practices ….” Id. at ¶39. AAR “maintains a rigorous certification program for equipment and components in conjunction with railroads, including rail cars and decks. The process for obtaining AAR approval is time consuming and expensive.” Id. at ¶41. During 2013-2014, Defendant Crane was a member of AAR's Intermodal Operations Committee.

         “In a video that was on its [Fontaine's] website in August 2016 and continuing through the date of [Plaintiff's] Complaint, Fontaine described the Evolution Intermodal Flat Deck to be ‘stronger' and ‘safer' than any other deck ‘to withstand the punishing conditions associated with rail and highway transportation.' It's virtually indestructible yet simple and inexpensive to repair if it's ever damaged.'” Id. at ¶44.

         “On numerous occasions, the Dektrix Defendants represented to prospective investors including Plaintiff that it had contractual shipping relationships and/or agreements with a number of carriers, including, among others, Atkore Steel, Allied Tube Conduit, Logan Aluminum, Inc., and Constellium.” Id. at ¶47.

         “[N]one of the Defendants ever disclosed before Plaintiff invested its money that the Fontaine Evolution Intermodal Flat Decks had never, in fact, been approved by the AAR. None of the Defendants had disclosed that the decks had significant engineering problems and were not safe to use on the highway or railroads.” Id. at ¶50.

         In December 2016, Plaintiff (through Baguirov and Shakhbandarov) invested in Dektrix by purchasing “preferred membership units.” Id. at ¶52. A Membership Purchase Agreement stated that Plaintiff (including Baguirov and Shakhbandarov) “shall pay $350, 000 U.S. to Dektrix LLC…, for which [the Dektrix Defendants] will immediately convey 70, 000 preferred membership units to [Plaintiff and the two other investors]….” Id. (quoting MPA, attached to the Complaint as Exh. E). The Membership Purchase Agreement also granted Plaintiff a second lien on the first 73 Fontaine Flat Decks and, according to Plaintiff, “demonstrates the parties' intent that the $350, 000 was to be used toward the purchase of the first 73 intermodal flat decks from Fontaine.” Id. at ¶54 (quoting Exh. E). Shortly after the Membership Purchase Agreement was executed, Plaintiff wired $350, 000 to the Dektrix Defendants. Id. at ¶52.

         Things soon began to disintegrate. A month later, on January 25, 2017, the Dektrix Defendants advised Marmon and Fontaine (the Fontaine Defendants-there are five of them[4]), “after inspection of the decks, ‘about 50% of the fleet have sheared bolts on both the front and rear hub [brake] assemblies.'” Id. at ¶55.

         Five days later, “the … Fontaine Defendants wrote to the Dektrix Defendants and terminated the existing lease.” Id. at ¶57. The letter was sent to Dektrix's General Manager Harris. It provided two reasons for the decision to terminate the existing lease: Dektrix's continued failure (1) to pay rent as required by the lease agreement between Dektrix and Fontaine, and (2) “‘maintain the decks in good and efficient operating order, in accordance with the manufacturers recommendations, all laws and DOT Regulations and in the same condition or appearance when accepted by [Dektrix]'….” (Doc. #1, Exh. F, PageID #174) (quoting § 10 of their Dektrix-Fontaine lease agreement).

         Yet, all was apparently not lost. A week later, on February 7, 2017, the Dektrix Defendants represented to Plaintiff that the lease termination would be short-term, that any issue with sheared bolts was repairable and could be resolved. The Dektrix Defendants did not at any time indicate to Plaintiff that the Marmon and Fontaine Defendants “were seeking not only to call back and seek return of all decks, but were actively seeking to physically destroy such decks on the basis that they were unfit, defective, and otherwise unsafe….” Id. at ¶58.

         The Dektrix Defendants attempted to improve the situation-or so it looked-by offering to buy (from the Marmon and Fontaine Defendants) 73 Fontaine Flat Decks for $1 million ($13, 699 apiece). But the Dektrix Defendants needed help with these pricey purchases. They therefore turned to Plaintiff and obtained a $100, 000 bridge loan to be used by Dektrix for the purchase of the Fontaine Flat Decks. Dektrix General Manager Harris reported to Plaintiff that Defendants Fontaine and Defendant Henry Prochazka[5] “had agreed to accept Plaintiff's money as a ‘refundable deposit should things not culminate as we had hoped for.'” Id. at ¶60. “Dektrix wired $50, 000 of Plaintiff's money to Fontaine on March 1, 2017.” Id.

         On April 6, 2017, the Dektrix Defendants clued in Plaintiff-for the first time- about the fact that the AAR had never certified Fontaine Flat Decks. The import of this becomes clear in light of the Complaint's allegation that Murray J. Crane (remember, he is a Member-Manager of Dektrix) had learned two years earlier-on May 20, 2015-about the lack of AAR certification. Crane learned this from an email sent to him on May 20, 2015 by Michael Lesniak with the AAR. Id. at ¶62.

         Plaintiff alleges, “the Dektrix Defendants later admitted that they reported defects in the [Fontaine Flat] decks in 2015 to Buck Buchanan of Fontaine. Defendants Buchanan and Fontaine had the decks crudely repaired at that time. Neither the 2015 defects nor the repairs were ever reported to Plaintiff before its investment in and loan to Dektrix.” Id. at ¶63.

         On May 22, 2017, further twists in the parties' relationship developed: The Dektrix Defendants informed Plaintiff of their intent to file for bankruptcy relief. They also informed Plaintiff about their position that their use of Plaintiff's investment money, including the bridge loan, was not limited to “asset, ” meaning Fontaine-Flat-Deck, purchases. Id. at ¶64. Indeed, Dektrix “misused, misallocated, and never used Plaintiff's investment money in a reasonable, sound, prudent and/or agreed upon manner, rather, such money, including but not limited to the bridge loan, was never used to purchase assets by way of Fontaine [Flat Decks]. Rather, such investment money was used to repay the bridge loan (approximately $7, 000) and otherwise enrich themselves in the form of salaries ($42, 000 going directly to Defendants Crane and Larson[6]).” Id. at ¶65 (footnote added).

         Two days later, Dektrix told Plaintiff for the first time that Fontaine (through Defendant Prochazka) had written a letter to a Dektrix creditor warning, in part, that the Fontaine Flat Decks “are not fit for use and are not safe for use….” Id. at ¶66 (quoting Exh. G).

         By June 2016, Dektrix “had fallen into financial difficulties, and the Fontaine [Flat Decks] that it was leasing had been seized by a creditor ….” Id. at ¶69.

         In July 2017, Dektrix's General Manager Harris told Plaintiff that Fontaine had not returned its $50, 000, as Prochazka had personally assured. Id. at ¶70. Plaintiff alleges, “Fontaine would not make Dektrix whole for the harm caused by the defective Intermodal decks. Instead, Fontaine and Dektrix used Plaintiff's money to further their own interests….” Id.

         In August 21, 2017, Dektrix's General Manager Harris wrote an email, blaming the “fraud” on various Fontaine Defendants. The Complaint quotes the email at length, and given its eye-popping allegations, it is worth repeating:

“Here is the fraud-Kelly Dier, John Craig, Hank Prochazka, Buck Buchanan, Jess Drommond and others made loud and published claims to reputable reporters and trade journals that the Evolution deck was in fact AAR certified. This certification is not something handed out easily but requires heavy investment in time, money and extensive testing. The benefit of AAR certification is that the user of the deck would be assured its operation would be safe. Shortly after putting the decks in service we had pins shearing in the upright support arms. Those pins were critical to supporting the 60, 000 lbs. of another container stacked on top of our deck. When we verbally drew this problem to Fontaine's attention, they asked us to keep it quiet and assured us they would immediately fix the problem. They also told us that they had not experienced this problem with any of their other Evolution decks in use with Boyd Brothers or Prime (not true). The repairs were made in a shoddy way and did not reflect a design improvement. In fact, the solution they proposed was to weld the pins in place, which only exacerbated the problem. Now we had more of the pins shearing. We limped along for several months with Fontaine trying different weights of pins, washers and welds. The problem was never adequately resolved.[7] It wasn't until we were gearing up to service the new Constellium contract[8] in January that we went to Chicago and to California to inspect our fleet. To our surprise many of the main bolts holding the upright arms in place appeared to be missing. In fact, more than 40% of the hub assemblies seemed to have missing bolts. Fontaine provided us a power point presentation demonstrating how we should replace the bolts, apply a lock-tight solution and the problem would be solved. As we tried to implement their plan we discovered the bolts were not missing. They hadn't merely shaken their way out of the socket or been sheared clean. They were in fact exploded within the assembly. The amount of pressure on those bolts must have been inordinate. Not knowing when a pin might explode we realized the entire fleet was unfit to service the Constellium contract.”
“We put all of our findings in an email to Buck Buchanan, expecting a robust partnering type response assuring us they would fix this and get it done right away. To our surprise there was no such support, only a phone [sic] from Hank Prochazka, (Buck's boss) who said he wanted to give me a heads up that Fontaine would be calling back all of the decks because we had now made the safety issue a discoverable issue (this statement is also verifiable).”

Id. at ¶71 (footnotes added).

         Since August 2017, and despite Plaintiff's significant investment in Dektrix, “the Dektrix Defendants have not conducted any substantive shipping and/or transportation activities, including generating any revenue for the company and/or its Members….” Id. at ¶72.

         It is interesting to note that the name Dektrix, a portmanteau blending decks with tricks, winks toward flat-deck innovation and cleverness as well as flat-deck tricks. Regardless of whether this was intended, Plaintiff advances federal-securities violations against the Dektrix Defendants and the Fontaine Defendants, including:

• Count I-The Dektrix and Fontaine Defendants violated Section 10(b) of the Securities Exchange Act and the Securities and Exchanges Commission's Rule 10b-5.
• Count II-The individual Defendants violated Section 20(a) of the Exchange Act.
• Count III-The Dektrix Defendants violated Section 12(a)(2) of the Securities Act.
• Count IV-The Dektrix Defendants violated Section 15 of the Securities Act.

         The Complaint further advances state-law claims of fraud, breach of contract, breach of fiduciary duty, and unjust enrichment.

         III. Pleading Requirements

         Notice pleading is alive in the United States Courts; the “hypertechnical code pleading regime of a prior era..., ” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), is not. See CNH America LLC v. Int'l Union, 645 F.3d 785, 794 (6th Cir. 2011) (concluding the Complaint's allegations “suffice to meet the modest notice-pleading requirements of Civil Rule 8(a).” (citations omitted)). The foundational principal of notice pleading is that a complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief, in order to ‘give the defendant fair notice of what the claim is and the grounds upon which it rests....” Bell Atlantic v. Twombly, 550 U.S. 544, 555 (2007) (quoting, in part, Fed.R.Civ.P. 8(a)(2); other citation omitted).

         To endure an attack under Fed.R.Civ.P. 12(b)(6), a complaint must plead a plausible claim for relief. Iqbal, 556 U.S. at 678. A plausible claim exists if the complaint contains “‘sufficient factual matter' to render the legal claim plausible, i.e., more than merely possible.” Iqbal, 556 U.S. at 678. Sufficient factual matter is present “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 (citing Twombly, 550 U.S. at 556). “Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief.” Id. (citation and internal quotations omitted). Labels and conclusions are not enough; “a formulaic recitation of the elements of a cause…,' id., is not enough; and “‘naked assertions' devoid of ‘further factual enhancement…, '” are not enough, id. (citations and brackets omitted).

         A complaint charging federal or state fraud triggers additional pleading mandates set by Fed.R.Civ.P. 9(b). Frank v. Dana Corp., 547 F.3d 564, 570 (6th Cir. 2008); see Glimcher Co., LLC v. Deavers, 2:09cv797, 2010 WL 1610709, at *4 (S.D. Ohio 2010) (Frost, D.J.). “[The] complaint must ‘(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.' At a minimum, [the complaint] must allege the time, place and contents of the misrepresentations upon which they relied. Frank, 547 F.3d at 570 (quoting, in part, Gupta v. Terra Nitrogen Corp., 10 F.Supp.2d 879, 883 (N.D. Ohio 1998)). And a securities-fraud complaint must work even harder. “As a check against abusive litigation by private parties…, ” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007), the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4, imposes stringent pleading requirements:

To satisfy this heavier, statutorily created burden, plaintiffs must identify each misleading or false statement and explain how it is misleading. 15 U.S.C. § 78u-4(b)(1)(B). In addition, plaintiffs must “state with particularity facts giving rise to a strong inference that the defendant[s] acted with the required state of mind.” § 78u-4(b)(2)(A). These requirements are not easily satisfied.

In re Omnicare, Inc. Securities Litigation, 769 F.3d 455, 461 (6th Cir. 2014). Although the PSLRA, in general, places an “elephant-sized boulder…, ” id., in the path of pleading securities fraud, “‘[w]hen considering a motion to dismiss, [courts] must tread lightly … engaging carefully with the facts of a given case and considering them in their full context.'” Ohio Pub. Employees Retirement Sys., 830 F.3d at 388 (quoting Omnicare, 769 F.3d at 473).

         IV. Discussion: Count I

         A. Plaintiff's Count I and § 10(b)

         Plaintiff claims in Count I that the Dektrix Defendants and the Fontaine Defendants, and each of them, violated § 10(b)[9] by deceiving and misleading Plaintiff into investing in Dektrix (in December 2016) and providing a bridge loan to Dektrix (in 2017). Plaintiff alleges, in part, “The purpose of the scheme was to enrich Defendants' companies and themselves through the use of material false statements or omissions intended to secure investment from Plaintiff….” (Doc. #1, PageID #24).

         Section 10(b) bans the “use or employ, in connection with the purchase or sale of any security ... [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of ...

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