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Dhadphale v. Delaney

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

August 23, 2019




         Plaintiffs Aniket Dhadphale and FBO Christopher Westfall IRA are suing Defendants Joseph Delaney, Brett J. Runkel, and Scott Eshelman for their investment funds, which were allegedly provided in order to establish a pharmaceutical returns business, Encompass Pharmaceutical Services, LLC, but were not actually used for that purpose, were spent by Defendants, and never returned. Defendant Joseph Delaney has moved to dismiss Plaintiffs' fraud claim against him (ECF No. 14). Delaney asserts, first, that Plaintiffs' fraud claim was not pled with the particularly required by Rule 9(b) of the Federal Rules of Civil Procedure and, second, that the fraud claim should be dismissed under Rule 12(b)(6) for failure to state a claim upon which relief could be granted. The Court finds that Plaintiffs have sufficiently pled their claim for fraud against Delaney and accordingly will deny the motion to dismiss.


         Plaintiffs' Complaint avers that, on March 10, 2014, Joseph Delaney began targeting Aniket Dhadphale as part of a fraud scheme involving the formation, management, and operation of a pharmaceutical returns business, Encompass Pharmaceutical Services, LLC (“Encompass” or “the LLC”). ECF No. 11 PageID.505. Dhaphale was at that time operating a general pharmaceuticals and medical supplies distribution company; Delaney worked in sales at a pharmaceutical returns company named Rx Reverse. Id. According to Dhadpale, Delaney reached out to him by phone about opening a business that would specialize in managing pharmaceutical returns. Id. A few days later, on March 13, 2014, Delaney sent Dhadphale and Christopher Westfall, an acquaintance of Dhadphale's, business projections for the proposed business. ECF No. 11 PageID.506. To market this business idea to Plaintiffs, Delaney allegedly “highlighted his knowledge of the pharmaceutical returns industry” as well as his willingness to manage the business. Id.

         Over the next six weeks, Defendant Delaney and Plaintiffs Dhadphale and Westfall participated in a series of phone calls about purchasing an existing pharmaceutical returns business. Id. Next, during the winter of 2014, the three men met in person to discuss opening the proposed business. Id. Plaintiffs aver that at this meeting Delaney told them Brett J. Runkel-who Delaney described as a wealthy individual from Seattle, Washington-was interested in investing $500, 000 in the planned business. ECF No. 11 PageID. 506-07. Through late 2014 and early 2015, Defendants Delaney and Runkel, and Plaintiffs Dhadphale and Westfall, continued to discuss forming a pharmaceutical returns business. ECF No. 11 PageID.507. According to the Complaint, “[b]ased on Delaney's representations about his experience [and eagerness to manage the business] and Runkel's representation about his willingness and ability to contribute [ ] $500, 000 to the business venture, Dhadphale and Westfall agreed to go forward with forming an LLC.” Id.

         On January 15, 2015, Plaintiffs claim Delaney shared a draft operating agreement for Encompass with them. ECF No. 11 PageID.508. Under the proposed agreement, Delaney would serve as Encompass's chief executive officer and the LLC's members would include Delaney- as the managing member-and Runkel, Dhadphale, and FBO Christopher Westfall IRA as non-managing members. Id. Delaney would not be required to make any capital contribution yet would own 60% of the LLC's unit shares. Id. In his capacity as chief executive officer of Encompass, Delaney would also be paid a salary of $300, 000 for the first 120 days of operation and as much as $450, 000 for any subsequent period. ECF No. 11 PageID.509. Additionally, the operating agreement provided that Delaney would receive fully paid health insurance, two company cars, housing expenses for a home in Los Angeles, California, and reimbursement for business-related travel, lodging, and entertainment. ECF No. 11 PageID.509-10. As non-managing members of Encompass, Dhadphale and FBO Christopher Westfall IRA were each to make capital contributions of $250, 000 to the LLC. ECF No. 11 PageID.508. Dhadphale claims that, on Delaney's instructions, he wired his promised $250, 000 to the Law Offices of Doug Elston, Delaney's attorney, on February 2, 2015. ECF No. 11 PageID.509. Dhadphale further asserts that Delaney told him Attorney Elston “would hold the funds in escrow until the operating agreement was executed, the LLC was formed, and the LLC bank account was opened.” Id.

         The Complaint next avers that, on March 3, 2015, Runkel introduced Dhadphale and Westfall to D. Scott Eshelman, who Runkel described as “a close contact who would provide financial oversight for the LLC.” ECF No. 11 PageID.510. That same day, Eshelman apparently submitted Encompass's required business filings to the Secretary of State for the State of Washington, identifying himself as the contact person, registered agent, and executor of the LLC. ECF No. 11 PageID.510. Eshelman also opened a bank account for Encompass at a United States bank. Id. Finally, on March 16, 2015, six weeks after Dhadphale had wired his $250, 000 contribution to Elston, Encompass's operating agreement was finalized and executed by all parties. Id. Westfall wired his contribution of $250, 000 to the LLC's newly opened bank account shortly thereafter, on March 23, 2015. Id.

         Throughout April 2015, Delaney communicated with Dhadphale and Westfall about Encompass's business operations, according to Plaintiffs, “intentionally leading both [of them] to believe that Delaney was fulfilling his duties as chief executive officer and managing member of the LLC and [that] the business was operational.” ECF No. 11 PageID.511. Unbeknownst to Dhadphale and Westfall, however, Eshelman resigned as Encompass's registered agent in June 2015. Id. Because Encompass did not register any new agent within the mandated 65-day period, the Secretary of State dissolved the LLC. Id. Plaintiffs contend none of the Defendants notified them of Eshelman's resignation or Encompass's dissolution. See id.

         In late 2015, Defendants became increasingly unresponsive to Plaintiffs' requests for updates about Encompass's business operations. See ECF No. 11 PageID.512. Plaintiffs assert that, by the end of 2016, Delaney had entirely stopped responding to their efforts at communication. Id. A that point, Plaintiffs “concluded the best business strategy at that point would be to liquidate the LLC.” Id. Dhaphale demanded that Delaney and Runkel return his capital contribution. Id. According to the Complaint, Runkel repeatedly assured Dhadphale during the summer of 2017 that the contribution would be returned but then dragged his feet and refused to provide any specific deadline by which the money would be wired. Id. Runkel later told Dhadphale that “the money could not be returned because Delaney had drained the LLC account.” ECF No. 11 PageID.514. Plaintiffs aver Dhadphale's capital contribution had not been returned as of the date they filed their Second Amended Complaint. ECF No. 11 PageID.513.

         Plaintiffs further allege that Runkel never contributed any capital to the LLC, that Elston, at Runkel's direction, deposited only $50, 000 of Dhadphale's $250, 000 capital contribution into Encompass's bank account, and that the remainder of Dhadphale's money was sent to accounts controlled by Delaney and Runkel directly, as well as to Elston, and to an account controlled by an entity named Busch Development. ECF No. 11 PageID.514. Additionally, Plaintiffs assert that Delaney continued to draw a salary and reimburse himself for claimed expenses from Dhadphale and Westfall's capital contributions, and that Eshelman made withdrawals from Encompass's bank account. ECF No. 11 PageID.514-16.


         Rule 9(b) of the Federal Rules of Civil Procedure provides that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” Fed.R.Civ.P. 9(b). Courts have interpreted this language to mean that a claim for fraud typically meets Rule 9(b)'s requirements if it alleges: “(1) the time, place, and content of the alleged misrepresentation, (2) the fraudulent scheme, (3) the defendant's fraudulent intent, and (4) the resulting injury.” In re FCA U.S. LLC Monostable Elec. Gearshift Litig., 280 F.Supp.3d 975, 1003 (E.D. Mich. 2017) (internal quotations omitted) (quoting Wall v. Mich. Rental. 952 F.3d 492, 496 (6th Cir. 2017)). At a minimum, to meet Rule 9(b)'s particularity pleading requirements the Sixth Circuit requires that a plaintiff “must allege the time, place and contents of the misrepresentations upon which they relied.” Frank v. Dana Corp., 547 F.3d 564, 570 (6th Cir. 2008) (citing Bender v. Southland Corp., 749 F.2d 1205, 1216 (6th Cir. 1984)). Another court in this district, for example, dismissed a claim for fraud where the plaintiff identified the time and place of the alleged misrepresentations, but not their “specific content.” S.E.C. v. Conaway, No. 2:05-CV-40263, 2009 WL 1606655, *2 (E.D. Mich. June 8, 2009).

         Even where a plaintiff alleges fraud in violation of state law only, Rule 9(b)'s particularity requirement applies if the claims are asserted in federal court. Bowlers' Alley, Inc. v. Cincinnati Ins. Co., No. 13-13804, 2015 WL 3541905, at *3 (E.D. Mich. Apr. 30, 2015). Here, Plaintiffs assert their claim for fraud under Michigan law, the elements of which are: (1) the defendant made a material misrepresentation; (2) that was false; (3) defendant made the misrepresentation knowing it was false, or made it recklessly, without any knowledge of its truth, and as a positive statement; (4) she made it with the intention that it should be acted upon by plaintiff; (5) plaintiff indeed relied upon it; and (6) plaintiff thereby suffered injury. Harbor Thirteen Mile-20600 LLC v. Emp. Ret. Plan of Consol. Elec. Distrib., Inc., No. 15-14066, 2016 WL 1665158, *2 (E.D. Mich. Apr. 27, 2016) (citing Hi-Way Motor Co. v. Int'l Harvester Co., 247 N.W.2d 813, 816 (Mich. 1976)).

         Plaintiffs' Second Amended Complaint provides detailed allegations of Delaney's fraud. ECF No. 11. They establish a clear timeline of when the alleged fraud took place, beginning with Delaney's March 10, 2014 phone call to Dhaphale. ECF No. 11 PageID.505. The pleading also contains the dates of various conversations between Plaintiffs and the Defendants-both citing to specific dates and to approximate ones, such as “the winter of 2014”-during which the alleged misrepresentations took place. See generally ECF No. 11. Likewise, Plaintiffs explain how the claimed misrepresentations took place over phone and email, as well ...

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