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Iron Range Capital Partners, LLC v. Osprey Capital, LLC

United States District Court, N.D. Illinois, Eastern Division

October 7, 2014

IRON RANGE CAPITAL PARTNERS, LLC, Plaintiff,
v.
OSPREY CAPITAL, LLC; DAVID H. HOFFMAN; and GREGORY D. HOFFMAN, Defendants.

MEMORANDUM OPINION AND ORDER

JOHN W. DARRAH, District Judge.

Plaintiff Iron Range Capital Partners, LLC ("Iron Range") has brought this action, alleging Defendants, Osprey Capital, LLC ("Osprey"), Gregory Hoffman ("Gregory"), and David Hoffman ("David"), (collectively "Defendants"), defrauded Iron Range of its rights to acquire the capital stock of a third company, Orange Line Holdings, Inc. ("Orange Line"). Iron Range's seven-count Complaint asserts the following: violations of the Securities Exchange Act of 1934 (Count I); violations of the Illinois Securities Law of 1953 (Count II); fraud (Count III); breach of contract (Counts IV and V); unjust enrichment (Count VI); and tortious interference with prospective economic advantage (Count VII). Defendants have moved to dismiss the Complaint, pursuant to Federal Rule of Civil Procedure 12(b)(6), for failure to state a claim.

BACKGROUND

The following is taken from the Complaint, which is assumed to be true for purposes of deciding this Motion. See Reger Dev., LLC v. Nat'l City Bank, 592 F.3d 759, 763 (7th Cir. 2010). Iron Range is an Illinois private equity firm engaged in the business of investing in companies for its own account. Osprey is an Illinois private equity firm with over $250 million of committed capital across a number of industries, with the primary goal of building businesses. Defendant David Hoffman is a principal, founder, and managing partner of Osprey. His son, Defendant Gregory Hoffman, is also a principal of Osprey. (Compl. ¶¶ 6-9.)

In January 2013, an investment banking brokerage firm contacted Iron Range regarding the potential acquisition by Iron Range of Orange Line, a lubricant oil distribution company. ( Id. ¶¶ 10-13.) Iron Range conducted due diligence; and, in April 2013, Iron Range and Orange Line executed a Letter of Intent (the "Iron Range LOI"), by which Iron Range obtained the exclusive rights to acquire 100 percent of Orange Line's outstanding capital stock. ( Id. ¶ 14.)[1]

In June 2013, Iron Range and Osprey began discussing the potential Orange Line acquisition by Osprey and executed a Non-Circumvention Agreement ("NCA"). ( Id. ¶ 16.) The NCA provided that Osprey would not pursue a transaction with Orange Line without authorization from Iron Range. ( Id. Exh. A.) On June 28, 2013, Iron Range and Osprey further entered into a Joint Ownership Agreement ("JOA"), pursuant to which (1) Iron Range would, inter alia, receive 5 percent of Orange Line stock, and (2) Osprey would receive 95 percent of Orange Line stock in exchange for providing subordinated debt and capital for the acquisition of Orange Line. ( Id. ¶¶ 19-21.)

David subsequently informed Iron Range that Osprey required a letter of intent between Osprey and Orange Line. ( Id. ¶ 27.) Relying on David's representations that Osprey would honor the payment terms in the JOA, Iron Range obtained a new Letter of Intent (the "Osprey LOI") from Orange Line, giving exclusive rights to Osprey and voiding the previous arrangement between Orange Line and Iron Range. ( Id. ¶¶ 28-30.) However, after obtaining the Osprey LOI on July 22, 2013, Defendants reversed course, excluded Iron Range from participating in the Orange Line transaction. Defendants eventually closed on the transaction in October 2013, in secret, without Iron Range's knowledge or consent. ( Id. ¶¶ 33-48.) Defendants also refused to issue Orange Line securities, or provide other consideration, to Iron Range, as required by the JOA. ( Id. ¶ 49.)

LEGAL STANDARD

Rule 12(b)(6) permits a defendant to move to dismiss a complaint for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). To survive a motion to dismiss, a complaint must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). Facial plausibility exists when the court can "draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "Threadbare 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). Rather, the complaint must provide a defendant "with fair notice' of the claim and its basis." Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008) (quoting Fed.R.Civ.P. 8(a)(2) and Twombly, 550 U.S. at 555). When ruling on a motion to dismiss, the court accepts all well-pleaded factual allegations as true and construes all reasonable inferences in favor of the plaintiff. Tamayo, 536 F.3d at 1081.

ANALYSIS

Count I - Plaintiff's Federal Securities Claim

In Count I, Iron Range alleges that Defendants violated Section 10(b) and Rule 10b-5 of the federal securities laws because Defendants misrepresented their intentions to issue to Iron Range a 5-percent interest in Orange Line. Defendants argue that Iron Range has failed to state a claim in Count I because Iron Range did not purchase or sell any securities. Furthermore, Defendants argue that Iron Range has not alleged that Defendants made any misrepresentations related to the value of the 5-percent interest in Orange Line.

Section 10(b) prohibits the use "in connection with the purchase or sale of any security... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 78j. Pursuant to Section 10(b), the SEC adopted Rule 10b-5, which similarly prohibits "fraud or deceit upon any person, in connection with the purchase or sale of any security." SEC Rule, 17 C.F.R. § 240.10b-5. "The purpose of 10(b) is to create a remedy for a plaintiff induced by misrepresentations or omissions to buy or sell stock." Rabin v. JPMorgan Chase Bank, N.A., No. 06 C 5452, 2007 WL 2295795, at *4 (N.D. Ill. Aug. 3, 2007) (citing Isquith v. Caremark Int'l, Inc., 136 F.3d 531, 534 (7th Cir. 1998) (federal securities laws provide a remedy for plaintiffs induced by "a misrepresentation or a misleading omissions to buy or sell a stock.").

Not every alleged fraud that touches upon a security gives rise to a private remedy under Section 10(b) and Rule 10b-5. See Gavin v. AT&T Corp., 464 F.3d 634, 639 (7th Cir. 2006) ("[A] mere but for' cause linking a securities transaction... to a subsequent injury... does not make the injury one suffered in connection with the purchase or sale of securities."). Rather, plaintiffs "injured by fraud may recover under federal securities laws only if the deceit caused them to purchase or sell securities." Anderson v. Aon Corp., 614 F.33d 361, 363 (7th Cir. 2010) (citing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)). However, neither the SEC nor the Supreme Court "has ever held that there must be a misrepresentation about the value of a particular security in order to run afoul of ...


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