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Equity Trust Co. v. Kopacka

United States District Court, E.D. Michigan, Southern Division

August 3, 2018

EQUITY TRUST COMPANY, et al., Plaintiff,
TIMOTHY JAMES KOPACKA, et al., Defendant.



         Plaintiffs Danny Wrubel; Teresa Wrubel; the Marion Family Living Trust, by its Trustee, Josephine A. Marion; the Marion Irrevocable Trust, by its Trustee, Teresa Wrubel; Josephine A. Marion, by her Next Friend, Teresa Wrubel; Equity Trust Company, Custodian FBO Marilynn Peterson IRA; Marilynn Peterson; Travis Peterson; the Ferrario Family Revocable Trust, by its Trustee, Julie Ferrario; Julie Ferrario; Julie Vipond; Karen Fell; the Marilynn L. Peterson Revocable Trust, by its Trustee, Marilynn L. Peterson; and Equity Trust Company, Custodian FBO Danny J. Wrubel IRA bring this securities fraud action against defendants Timothy James Kopacka, United Mortgage Trust (UMT), United Development Funding II, LP (UDF II), and United Development Funding III, LP (UDF III).

         Plaintiffs filed suit in Macomb County Circuit Court on June 28, 2017. On July 12, 2017, defendants removed the case to federal court on the basis of jurisdiction under 28 U.S.C. § 1331. Plaintiffs filed their First Amended Complaint (FAC) on August 2, 2017. (Doc. 9). Plaintiffs bring six claims; fraud (Count I), breach of fiduciary duties, (Count II), negligent misrepresentation/omission, (Count III), securities fraud under section 10(b) of the Securities and Exchange Act and SEC Rule 10b-5, (Count IV), civil RICO, (Count VI), and civil RICO conspiracy, (Count VII). Plaintiffs pleaded additional theories of liability including aiding and abetting fraud and breach of fiduciary duty, (Count V), and agency, (Count VIII).

         Defendants filed the instant motion to dismiss on September 18, 2017. (Doc. 13). Plaintiffs filed a response on October 30, 2017. (Doc. 16). Defendants filed a reply on November 30, 2017. (Doc. 19). The Court held oral argument on July 16, 2018. For the reasons stated below, defendants' motion to dismiss is GRANTED IN PART. Counts VI and VII are dismissed with prejudice. Count IV is dismissed without prejudice. The Court declines to exercise supplemental jurisdiction over plaintiffs' remaining state law claims. The Court will allow plaintiffs an opportunity to amend their complaint regarding Count IV. Plaintiffs' failure to amend by the deadline will result in remand of the remaining state law claims.

         I. Background

         Plaintiffs worked with Kopacka to purchase interests in UMT, UDF II, and UDF III between 2000 and 2009. (Doc. 9 at PageID 65). In 2016, the FBI investigated UDF II and UDF III following allegations that they were operating a Ponzi scheme. (Doc. 9 at PageID 68). This investigation appears to have prompted plaintiffs' complaint. The FAC generally alleges that Kopacka made three types of misrepresentations; (1) misrepresenting the risk, liquidity, and other features of the investments; (2) concealing Kopacka's status as a direct or indirect owner, manager, and/or advisor of UMT, UDF II, or UDF III; and (3) failing to disclose that Kopacka was barred from the stock brokerage industry. (Doc. 9 at PageID 65-66).

         II. Legal Standard

         A court confronted with a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) must construe the complaint in favor of the plaintiff, accept the allegations of the complaint as true, and determine whether the plaintiff's factual allegations present plausible claims. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 554-56 (2007). “[N]aked assertions devoid of further factual enhancement” and “unadorned, the- defendant-unlawfully-harmed-me accusation[s]” are insufficient to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The complaint need not contain “detailed” factual allegations, but its “factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all of the allegations in the complaint are true.” Ass'n of Cleveland Fire Fighters v. City of Cleveland, 502 F.3d 545, 548 (6th Cir. 2007).

         III. Analysis

         A. Counts VI and VII

         Count VI alleges a civil RICO claim pursuant to 18 U.S.C. § 1962(c), which prohibits “any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.” Plaintiffs allege that defendants “worked together to fraudulently cause Plaintiffs and other investors to purchase securities issued by companies” with which Kopacka was associated and held pecuniary interests. (Doc. 9 at PageID 89). Plaintiffs allege that Kopacka “operated an unregistered investment advisor firm, was legally prohibited from providing investment advice, was barred by the NASD, and used his wife, Ms. Kopacka, and other registered representatives of D.H. Hill Securities and IMS Securities as conduits through which to unlawfully sell shares of UMT and partnership interests in UDF II and UDF III to his clients.” (Doc. 9 at PageID 88). Plaintiffs frame these allegations as predicate acts of mail fraud and wire fraud. (Doc. 9 at PageID 89).

         Section 107 of the Private Securities Litigation Reform Act (PSLRA) amended 18 U.S.C. § 1964(c) to prohibit plaintiffs from relying “upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of [18 U.S.C.] section 1962.” As such, “[a]ny fraudulent conduct actionable under the securities laws is no longer actionable under RICO.” Aries Aluminum Corp. v. King, 194 F.3d 1311, at *2 (6th Cir. 1999) (table) (citing Bald Eagle Area School District v. Keystone Financial, Inc., 189 F.3d 321, 329-30 (3rd Cir.1999)). Moreover, “a plaintiff cannot avoid the RICO Amendment's bar by pleading mail fraud, wire fraud and bank fraud as predicate offenses in a civil RICO action if the conduct giving rise to those predicate offenses amounts to securities fraud. Allowing such surgical presentation of the cause of action here would undermine the congressional intent behind the RICO Amendment.” Javitch v. First Montauk Fin. Corp., 279 F.Supp.2d 931, 943-44 (N.D. Ohio 2003) (citing Bald Eagle Area School Dist., 189 F.3d at 330).

         Count VI implicates “conduct that would have been actionable as [securities] fraud.” 18 U.S.C. 1964(c). In fact, plaintiffs' securities fraud claim is based on the same conduct. As such, 18 U.S.C. § 1964(c) bars the use of this alleged conduct as predicate offenses. Plaintiffs do not plead any other ...

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