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River North Equity LLC v. mPhase Technologies, Inc.

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

March 1, 2017

RIVER NORTH EQUITY LLC, Plaintiff,
v.
MPHASE TECHNOLOGIES, INC., Defendant.

          MEMORANDUM OPINION AND ORDER

          Hon. Marvin E. Aspe, United States District Judge

         Presently before us is Defendant mPhase Technologies, Inc.'s motion to dismiss, or in the alternative, to change venue. (Mot. (Dkt. No. 5).) Defendant removed this action pursuant to 28 U.S.C. §§ 1331, 1332, 1441, and 1446 from the Eighteenth Judicial Circuit, DuPage County, Illinois on November 30, 2016. Plaintiff has not entered an appearance in this removal action, nor has it responded to Defendant's motion. For the reasons that follow, Defendant's motion to dismiss is granted and Plaintiff's complaint is dismissed, without prejudice.

         BACKGROUND

         Plaintiff River North Equity LLC filed a complaint in DuPage County, Illinois on July 26, 2016. (Notice of Removal (Dkt. No. 1) ¶ 1.) Plaintiff asserts claims for violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (Count I); collection of $400, 000 debt allegedly owed on two delinquent promissory notes (Count II); breach of promissory note (Counts III and IV); breach of contract (Count V-1[1]); and common law fraud (Count V-2). (Compl. (Dkt. No. 1-4).)

         On or about December 15, 2009, Defendant made two promissory notes (the “Notes”) in favor of non-party JMJ Financial (“JMJ”) to secure repayment of certain loans made by JMJ to Defendant. (Compl. ¶ 5.) The first Note was in the principal amount of $1.5 million, as consideration for a $300, 000 loan. (Id.) The second Note was in the principal amount of $1.2 million, as consideration for a $100, 000 loan. (Id. ¶ 6.) Both Notes matured on December 15, 2012. (Id. ¶¶ 5-6.) Plaintiff alleges that Defendant “concealed material information concerning its true financial status from JMJ Financial in an effort to induce JMJ to purchase the First Note.” (Id. ¶ 7.) Defendant was in material default of its obligations, which Plaintiff alleges was only disclosed in later filings Defendant made with the Securities and Exchange Commission. (Id.) Plaintiff alleges Defendant sold both Notes to JMJ with the intent to never repay the obligations. (Id.) Thereafter, on December 22, 2014, JMJ entered into a Convertible Note Purchase Agreement with Plaintiff pursuant to which Plaintiff agreed to purchase the Notes. (Id. ¶ 8.) At that time, both Notes were in default for Defendant's failure to satisfy the balance at maturity. (Id.) At the time Plaintiff filed its complaint on July 26, 2016, it alleges Defendant continued to be in material default for “failure to pay sums due and owing under each Note when they became due.” (Id. ¶ 9.)

         Defendant was not served and did not waive service of process in the state court case, and no proceedings have transpired in the state court case to date. (Notice of Removal ¶¶ 2-3.) After removing the case, Defendant moved to dismiss Count I and V-2 for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Defendant also moves to dismiss Counts II through V-2 for lack of personal jurisdiction pursuant to Rule 12(b)(2), because Defendant does not have the requisite minimum contacts necessary for it to reasonably anticipate being haled into court in Illinois. In the alternative, Defendant moves for an order transferring this matter to the District of New Jersey pursuant to 28 U.S.C. § 1404(a). Defendant contends “the majority (if not all) of the evidence and proofs necessary for the disposition of the case are in New Jersey, ” and “both the private and public interests, the convenience of the parties, and the interests of justice favor transferring the matter to New Jersey.” (Mot. at 4.)

         Plaintiff was served with notice of the removal on December 1, 2016. (Dkt. No. 4.) Defendant provided notice of the motion to dismiss to Plaintiff on December 8, 2016. (Dkt. No. 6.) On December 14, 2016, we ordered Plaintiff to respond to the motion by January 5, 2017, and allowed Defendant to file a reply by January 17, 2017. (Dkt. No. 7.) On January 17, 2017, with no response having been filed, Defendant filed its reply brief. (Dkt. No. 8.)

         ANALYSIS

         Plaintiff's failure to respond or file anything in this court for nearly three months may be grounds for dismissal for failure to prosecute under Rule 41(b). Regardless, for the reasons that follow, Defendant's motion to dismiss for failure to state a claim is well-supported. Taking Plaintiff's allegations as true and construing all facts in its favor, Plaintiff's Count I and V-2 fail to state a claim upon which relief may be granted, and the remainder of Plaintiff's complaint must be dismissed for lack of personal jurisdiction. Because we find dismissal of Plaintiff's claims is appropriate under Rule 12(b)(2) and Rule 12(b)(6), we decline to address Defendant's alternative argument that this matter should be transferred to the District of New Jersey.

         I. MOTION TO DISMISS FRAUD CLAIMS

         Defendant first argues Counts I and V-2, which assert fraud claims, do not plead fraudulent conduct with the requisite specificity under Federal Rule of Civil Procedure 9(b). In addition, Defendant contends that Count I, which alleges a violation of Section 10(b) of the Securities Exchange Act, fails for the additional reason that it does not meet the even higher pleading standards under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4(b).

         “The purpose of the motion to dismiss is to test the sufficiency of the complaint, not decide the merits.” Gibson v. City of Chi., 910 F.2d 1510, 1520 (7th Cir. 1990) (internal quotation marks omitted) (quoting Triad Assocs., Inc. v. Chi. Hous. Auth., 892 F.2d 583, 586 (7th Cir. 1989)). Dismissal pursuant to Rule 12(b)(6) is proper only if a complaint lacks enough facts “to state a claim [for] relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949-50 (2009) (internal quotations omitted) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974 (2007)); accord. Killingsworth v. HSBC Bank Nev., N.A., 507 F.3d 614, 618-19 (7th Cir. 2007). The plausibility standard “is not akin to a ‘probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. at 1964-65). That is, while the plaintiff need not plead “detailed factual allegations, ” the complaint must allege facts sufficient “to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555, 127 S.Ct. at 1964-65. We accept as true all well-pleaded factual allegations and draw all reasonable inferences in favor of the plaintiff. White v. Keely, 814 F.3d 883, 887-88 (7th Cir. 2016); Agnew v. Nat'l Collegiate Athletic Ass'n, 683 F.3d 328, 334 (7th Cir. 2012) (“In reviewing the sufficiency of a complaint, we must accept all well pled facts as true and draw all permissible inferences in favor of the plaintiff.”).

         A heightened pleading standard applies when a complaint alleges fraud, requiring a party to “state with particularity the circumstances constituting the fraud or mistake.” Fed.R.Civ.P. 9(b); see also Camasta v. Jos. A. Bank Clothiers, Inc., 761 F.3d 732, 737 (7th Cir. 2014). A complaint setting forth fraud claims “must describe the ‘who, what, when, where, and how' of the fraud-‘the first paragraph of any newspaper story.'” United States ex rel. Presser v. Acacia Mental Health Clinic, LLC, 836 F.3d 770, 776 (7th Cir. 2016) (quoting United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 853 (7th Cir. 2009)); accord. Camasta, 761 F.3d at 737 (a plaintiff must state “the identity of the person making the misrepresentation, the time, place and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff” (internal quotations omitted)). While a plaintiff need not provide “precise details” and we do not “take an overly rigid view” of the allegations, a plaintiff must nevertheless “use some . . . means of injecting precision and some measure of substantiation into their allegations of fraud.” Presser, 836 F.3d at 776 (alteration in original) (citation omitted).

         In addition to the burden imposed by Rule 9(b), where a Plaintiff alleges securities fraud under Section 10(b), such claims are subject to the pleading standards set forth in the PSLRA. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313-14, 127 S.Ct. 2499, 2504 (2007). To prevail on Count I, Plaintiff must prove: “(1) a material misrepresentation or omission by the defendant in connection with the purchase or sale of securities; (2) scienter; (3) reliance; (4) economic loss; and (5) loss causation.” AnchorBank, FSB v. Hofer, 649 F.3d 610, 617 (7th Cir. 2011). Under the PSLRA, where a plaintiff alleges that the defendant “(A) made an untrue statement of a material fact; or (B) omitted to state a material fact, ” the plaintiff must “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). Further, the plaintiff must “state with particularity facts giving rise to a strong inference ...


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