Kresch v. Miller

          OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS FIRST AMENDED COMPLAINT

          LINDA V. PARKER U.S. DISTRICT JUDGE.

         Plaintiffs initiated this lawsuit against Defendants on January 3, 2018. In a First Amended Complaint filed on October 31, 2018, Plaintiffs assert the following claims against Defendants:

(I) breach of contract brought by Plaintiffs Ari Kresch (“Kresch”) and Merchant's Credit Recourse, LLC (“MCR”);

(II) breach of contract brought by Plaintiff John Moleski (“John”);

(III) breach of contract brought by Plaintiff Jesse Moleski (“Jesse”);

(IV) fraud brought by John;

(V) fraud brought by Jesse;

(VI) fraud brought by Kresch and MCR;

(VII) negligent misrepresentation brought by all Plaintiffs; and

(VIII) violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) brought by Kresch and MCR.

(ECF No. 20.) The matter is presently before the Court on Defendants' motion to dismiss, filed pursuant to Rules 12(b)(2) and (6) of the Federal Rules of Civil Procedure. (ECF No. 25.) The motion has been fully briefed. (ECF Nos. 27, 29.) Finding the facts and legal arguments sufficiently presented in the parties' briefs, the Court is dispensing with oral argument with respect to Defendants' motion pursuant to Eastern District of Michigan Local Rule 7.1(f). For the reasons that follow, the Court is granting in part and denying in part Defendants' motion to dismiss.

         I. Applicable Standards

         Federal Rule of Civil Procedure 12(b)(2) provides for dismissal when a court lacks personal jurisdiction over a defendant. The plaintiff has the burden of establishing the Court's jurisdiction over a defendant. See Theunissen v. Matthews, 935 F.2d 1454, 1458 (6th Cir. 1991) (citing McNutt v. Gen. Motors Acceptance Corp., 298 U.S. 178, 189 (1936)). To defeat a defendant's motion to dismiss for lack of personal jurisdiction, the plaintiff need only make a prima facie showing of jurisdiction. See id. A prima facie showing requires the plaintiff to “‘demonstrate facts which support a finding of jurisdiction. . ..'” Welsh v. Gibbs, 631 F.2d 436, 438 (6th Cir. 1980) (quoting Data Disc, Inc. v. Sys. Tech. Assoc., Inc., 557 F.2d 1280, 1285 (9th Cir. 1977)). Where the court does not hold an evidentiary hearing on the matter, “the court must consider the pleadings and affidavits in a light most favorable to the plaintiff.” Dean v. Motel 6 Operating L.P., 134 F.3d 1269, 1272 (6th Cir. 1998) (quoting CompuServe, Inc. v. Patterson, 89 F.3d 1257, 1262 (6th Cir. 1996)).

         A motion to dismiss pursuant to Rule 12(b)(6) tests the legal sufficiency of the complaint. RMI Titanium Co. v. Westinghouse Elec. Corp., 78 F.3d 1125, 1134 (6th Cir. 1996). Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” To survive a motion to dismiss, a complaint need not contain “detailed factual allegations, ” but it must contain more than “labels and conclusions” or “a formulaic recitation of the elements of a cause of action . . ..” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). A complaint does not “suffice if it tenders ‘naked assertions' devoid of ‘further factual enhancement.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 557).

         As the Supreme Court provided in Iqbal and Twombly, “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Id. (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). The plausibility standard “does not impose a probability requirement at the pleading stage; it simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of illegal [conduct].” Twombly, 550 U.S. at 556.

         In deciding whether the plaintiff has set forth a “plausible” claim, the court must accept the factual allegations in the complaint as true. Erickson v. Pardus, 551 U.S. 89, 94 (2007). This presumption is not applicable to legal conclusions, however. Iqbal, 556 U.S. at 668. Therefore, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. (citing Twombly, 550 U.S. at 555).

         Ordinarily, the court may not consider matters outside the pleadings when deciding a Rule 12(b)(6) motion to dismiss. Weiner v. Klais & Co., Inc., 108 F.3d 86, 88 (6th Cir. 1997) (citing Hammond v. Baldwin, 866 F.2d 172, 175 (6th Cir. 1989)). A court that considers such matters must first convert the motion to dismiss to one for summary judgment. See Fed. R. Civ. P 12(d). However, “[w]hen a court is presented with a Rule 12(b)(6) motion, it may consider the [c]omplaint and any exhibits attached thereto, public records, items appearing in the record of the case and exhibits attached to [the] defendant's motion to dismiss, so long as they are referred to in the [c]omplaint and are central to the claims contained therein.” Bassett v. Nat'l Collegiate Athletic Ass'n, 528 F.3d 426, 430 (6th Cir. 2008).

         II. Factual Background

         Kresch is currently a citizen of San Juan, Puerto Rico, but was a Michigan citizen during the events that give rise to this lawsuit. (Am. Compl. ¶ 1.) Kresch is the manager of MCR, which is in the business of collecting on Michigan debt portfolios. (Id. ¶¶ 1, 2.) John is a Florida resident who was employed by Defendant University Capital Solutions (“UCS”) to perform debt collection projections. (Id. ¶ 3.) Jesse, John's father, is a New York resident. (Id. ¶ 4.)

         UCS is a Florida limited liability corporation that allegedly purchased private student loan debt generated by universities for debt collection. (Id. ¶ 8.) Defendant Donald Miller (“Miller”) is a Florida resident and the co-founder and manager of UCS. (Id. ¶ 5.) Defendant Kyle Arneson (“Arneson”) is a resident of Illinois and was the Vice President of Capital Formation for UCS. (Id. ¶ 6.) Defendant University Capital Investments, LLC (“UCI”) is a Florida corporation, apparently connected with UCS. (Id. ¶ 7.) Plaintiffs allege that there was a unity of interest between Defendants such that they are alter egos of one another. (Id. ¶¶ 10-12.)

         On February 16, 2012, Defendants approached Kresch and MCR offering them the opportunity to purchase student loan debt that Defendants claimed would fit the investing criterion of MCR's debt buying business. (Id. ¶ 21.) Defendants represented that UCS purchases private student loan debt generated by universities at a discount and then collects on that debt. (Id. ¶ 22.) In subsequent conversations with Kresch and MCR, Defendants further represented that UCS already owned a significant amount of “student gap debt, ” including Michigan schools for MCR to collect. (Id. ¶ 23.) Defendants supplied Kresch and MCR with materials describing UCS' business operations and financial projections and a link to a video presentation used for marketing to college presidents. (Id. ¶ 24.) On February 21, 2012, Defendants represented inter alia that UCS markets to over 2, 000 universities and 1, 200 colleges, and had over $400 million worth of portfolios booked and/or under contract for immediate purchase. (Id. ¶ 26.) Defendants provided a breakdown of the Michigan schools interested in selling UCS their delinquent accounts. (Id. ¶ 27.)

         Based on Defendants' representations, Kresch and MCR entered into a note purchase agreement with UCS on March 7, 2012. (Id. ¶ 28, citing Ex. A.) MCR wired $500, 000 to Defendants on March 14, 2012, in accordance with the agreement. (Id.) As part of the note purchase agreement, MCR was provided a Senior Corporate Debenture (“Debenture”). (Id. ¶ 29.) Pursuant to the Debenture, MCR was to be repaid its $500, 000 investment plus 12% interest on March 7, 2013. (Id.) Although UCS had the right to extend its repayment obligation by one year, it did not request such an extension. (Id.) UCS failed to pay the amount due.

         MCR also entered into a “Collection Servicing Agreement” with UCI on May 23, 2012. (Id. ¶ 30, Ex. B.) Pursuant to the Collection Servicing Agreement, UCI appointed MCR to be its exclusive servicer in Michigan in exchange for MCR's $500, 000 investment in UCS. (See id. Ex. B § 2.01.) The Collection Servicing Agreement required MCR to make additional investments in UCS upon receiving a specified amount of fees from accounts and other assets collected on behalf of UCS and/or UCI. (Id.)

         For a period of time, Kresch and MCR asked Defendants to identify the Michigan debt portfolios UCS acquired and that MCR would be receiving for collection. (Am. Compl. ¶ 31.) MCR in fact never received a single Michigan debt portfolio from Defendants and discovered in 2014 that USC never acquired any Michigan portfolios. (Id. ¶ 32.) In fact, MCR learned that UCS had no personal contacts with college and university presidents in Michigan and never intended to buy any debt portfolios from Michigan. (Id. ¶¶ 32, 33.) MCR also learned that the amount it paid Defendants had been deposited into Miller's and Arneson's personal bank accounts. (Id. ¶ 34.)

         John was introduced to Defendants in 2011, and agreed to work for Miller in April 2011. (Id. ¶¶ 36-37.) Based on Defendants' representations concerning UCS, John invested $85, 960.39 into the corporation. (Id. ¶ 39.) John witnessed Defendants raise at least $1.1 million in investments for UCS. (Id. ¶ 41.) According to John, UCS spent $40, 000, at most, to purchase debt portfolios; although, John came into contact with many colleges and universities while working with Defendants that were ready and willing to sell UCS student loan debt portfolios. (Id. ¶¶ 42, 43.)

         Jesse also invested in UCS after his son, John, shared the representations Miller made about the corporation with him. (Id. ¶ 48.) On May 5, 2011, Jesse signed a subscription agreement and wired $60, 5000 to UCS. (Id. ¶¶ 50, 51; Defs.' Mot. Ex. 1.)

         III. Defendants' Arguments & Analysis

         A. Claims by John and Jesse

         Defendants argue that this Court lacks personal jurisdiction over them with respect to John's and Jesse's claims because Defendants lack sufficient ties to Michigan to exercise general jurisdiction over them and the alleged conduct on which the claims are based has no connection with Michigan. Plaintiffs did not respond to Defendants' arguments in their response brief. As such, Plaintiffs have not satisfied their burden of showing that this Court has personal jurisdiction over John's and Jesse's claims.^[1]

         The Court therefore is dismissing without prejudice the claims asserted by John and Jesse in the First Amended Complaint (Counts II through IV in their entirety and Count VII in part).

         B. Breach of Contract Claim by MCR & ...