Lamers v. Kettle Cuisine

2000 DNH 043

• Court: District Court, D. New Hampshire
• Decided: February 18, 2000
• Docket: CV-98-039-JD
• Status: Published

Opinion

Lamers v. Kettle Cuisine CV-98-039-JD 02/18/00 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Andrew J. Lamers

v. Civil No. 98-039-JD Opinion No. 2000 DNH 043 Kettle Cuisine, Inc. and Jeremiah A. Shafir

O R D E R

Background

Andrew Lamers is a former employee of Kettle Cuisine, Inc.

Jeremiah Shafir is the President and Chief Executive Officer of

Kettle Cuisine. Lamers brought suit against Kettle Cuisine and

Shafir alleging that they reneged on a promise to give him a 3%

ownership of Kettle Cuisine after he worked there for three

years. Among other causes of action, Lamers brought claims

against Kettle Cuisine and Shafir for federal securities fraud.

The defendants move for judgment on the pleadings on the federal

securities claims (document no. 40), and Lamers objects.

Standard of Review

The defendants move for judgment pursuant to Federal Rule of

Civil Procedure 1 2 (c) which "allows a party, ' [a]fter the

pleadings are closed but within such time as not to delay the

trial, [to] move for judgment on the pleadings.'" Feliciano v. State of R .I ., 160 F.3d 780, 788 (1st Cir. 1998) . "[T]he

district court must accept all of the nonmoving party's well-

pleaded factual averments as true and draw all reasonable

inferences in her favor." Id. "[T]he court may not enter

judgment on the pleadings unless it appears 'beyond doubt that

the plaintiff can prove no set of facts in support of his or her

claim which would entitle him or her to relief.'" Prever v.

Dartmouth College, 968 F. Supp. 20, 23 (D.N.H. 1997) (quoting

Santiago de Castro v. Morales Medina, 943 F.2d 129, 130 (1st Cir.

1991)).

Facts1

Shafir began discussing possible employment at Kettle

Cuisine with Lamers in June of 1994 and he told Lamers that he

could expect to share financially in Kettle Cuisine's growth.

Shafir indicated that plans were to sell the company when its

sales reached $10 million per year. He wrote Lamers a letter

promising that he would receive a 3% ownership in Kettle Cuisine

after working there for three years, earning 1% ownership

interest each year. Relying on Shafir's promises, Lamers left

another job to work for Kettle Cuisine. Lamers began working for

1The court takes the following facts as alleged in the plaintiff's complaint for the purpose of deciding this motion only.

2 Kettle Cuisine on August 1 , 1994, and proceeded to work 65-hour

weeks and commute to work two hours each day.

Lamers was not given any documentation concerning his

promised ownership interest while he worked for Kettle Cuisine,

despite his repeated requests for such documentation. At some

point during Lamers's employment, Shafir told Lamers that he

would not be given any ownership interest until he had worked for

Kettle Cuisine for three full years. At no time during the

period that Lamers worked for Kettle Cuisine did anyone tell him

he would have to pay money to receive his 3% interest.

Upon his discharge from Kettle Cuisine on December 1, 1997,

Lamers was given a proposed separation agreement that said he

would receive his 3% ownership interest only if he paid Kettle

Cuisine $18,000 within thirty days. On December 19, 1997, Lamers

received papers from Kettle Cuisine's counsel demanding over

$24,000, due by December 31, 1997, or else he would forfeit his

right to any ownership interest. The defendants also demanded

that Lamers sign a non-competition agreement as a condition of

ownership. Prior to December 1, 1997, Lamers was unaware that

the transfer to him of a 3% ownership interest was conditioned on

anything other than a period of employment of at least three

years' duration.

3 Discussion

The defendants contend that they are entitled to judgment on

Lamers's claims under federal securities law because the alleged

misrepresentations or omissions, if made, were not made in

connection with the purchase or sale of a security.

Alternatively, the defendants assert that Lamers has not pled his

claims of fraud with sufficient particularity as required by

Federal Rule of Civil Procedure 9 (b).

I. Connection with the Purchase or Sale of a Security

Counts I, II, and III of Lamers's complaint arise under

section 10(b) of the Securities Exchange Act of 1934, which

prohibits the use of manipulative or deceptive devices "in

connection with the purchase or sale" of a security. 15 U.S.C.A.

§ 78j (b) (1997). The Securities and Exchange Commission has

promulgated Rule 10b-5 that makes it

unlawful for any person, directly or indirectly, . . .

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or

4 deceit upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5 (1999). To prove a violation under section

1 0 (b) and Rule 10b-5, a plaintiff must show that the defendant,

in connection with the purchase or sale of a security and with

scienter, falsely represented or omitted to disclose material

information upon which the plaintiff justifiably relied. See

Bacon v. Smith Barney Shearson, Inc., 938 F. Supp. 98, 101

(D.N.H. 1996) (citing Estate of Soler v. Rodriguez, 63 F.3d 45,

53 (1st Cir. 1995) ) .

Anyone who purchases or sells a security has standing to

bring a private action for damages under federal securities laws.

See Blue Chip Stamps v. Manor Drug Stores. 421 U.S. 723, 749

(1975). Similarly, anyone who has a contractual right to

purchase a security, including the holder of an option, is a

purchaser for purposes of Rule 10b-5. See i d . at 751; see also

15 U.S.C.A. § 78c(10), (13). In this case, it is immaterial

whether the court considers the alleged promise to transfer stock

to Lamers as an outright sale of stock or a contract for stock

options. See Yoder v. Orthomolecular Nutrition Inst., 751 F.2d

555, 560 (2d Cir. 1985). Either type of agreement triggers the

protection of Rule 10b-5. The question here is whether the

5 alleged fraud is of the kind Rule 10b-5 was intended to remedy.

Lamers contends that he purchased a 3% ownership interest in

Kettle Cuisine by working for the company for over three years.

After he gave this consideration for the ownership interest in

reliance on Shafir's promises. Kettle Cuisine revealed that the

purchase price was not three years' employment, but rather three

years' employment, plus $24,000, plus signing a non-competition

contract.2 Therefore, Lamers argues, Shafir and Kettle Cuisine

misrepresented and omitted information about the purchase price

of the 3% ownership interest, and this fraudulent behavior was

directly connected to the price and value of the ownership

interest. Kettle Cuisine argues that this is merely a breach of

contract claim, any alleged fraud lies in the refusal to tender

the ownership interest, and no causal connection exists between

the alleged fraud and the purchase or sale of a security.

The allegations made in the complaint do not indicate that

any misrepresentations or omissions were made concerning the

value of the 3% ownership interest. Shafir made general

2The fact that Lamers gave consideration in the form of services as opposed to a monetary amount does not preclude the application of Rule 10b-5. See Yoder, 751 F.2d at 560; Rudinqer v. Insurance Data Processing, Inc., 778 F. Supp. 1334, 1338-39 (E.D. Pa. 1991) (citing Collins v. Rukin, 342 F. Supp. 1282, 1288 (D. M a s s . 1972)) .

6 predictions that Kettle Cuisine's sales would grow and the

company would be profitable, and Lamers has not alleged that

these predictions were false. The alleged fraud pertains to the

purchase price of the ownership interest, or the value of the

consideration provided by Lamers, not the value of the ownership

interest itself.

However, in order to violate Rule 10b-5, the

misrepresentation does not have to concern the value of the

security directly, as the defendants argue. See, e.g.,

Angelastro v. Prudential-Bache Sec., Inc., 764 F.2d 939, 942 (3d

Cir. 1985) ("Rule 10b-5 also encompasses misrepresentations

beyond those implicating the investment value of a particular

security."). For example, a material misrepresentation about

vesting rights or preconditions affecting the transferability of

stock can constitute fraud in connection with the sale of a

security. See Dubin v. E.F. Hutton Group Inc., 695 F. Supp. 138,

147 (S.D.N.Y. 1988). Misrepresentation of the value of

consideration offered to a seller in exchange for a security can

also constitute fraud in connection with the sale of a security.

See Gurwara v. LyphoMed, Inc., 937 F.2d 380, 382 (7th Cir. 1991).

Here, the alleged misrepresentation concerns the purchase price

of the security, and the value of Lamers's employment as

consideration for the security. This kind of misrepresentation

7 is sufficiently related to the sale of the specific security in

question to satisfy the connection requirement of section 1 0 (b)

and Rule 10b-5.

Of particular concern is whether the alleged fraud induced

Lamers to purchase a security. See Collins, 342 F. Supp. at

1290. Lamers claims that Shafir made misrepresentations or

omissions concerning the purchase price of the stock and Lamers

relied on this misinformation, causing him to purchase a security

by accepting employment with Kettle Cuisine. The complaint

states facts sufficient to show that Lamers justifiably relied on

the representations made by Shafir, and that this reliance caused

Lamers to commence and continue his employment with Kettle

Cuisine. Under these facts, Lamers could show that the alleged

fraud occurred in connection with the purchase or sale of a

security. See id. at 1290-91.

The defendants rely on two cases which they claim are

similar to the instant case. See Gurwara, 937 F.2d at 381-83;

Hunt v. Robinson, 852 F.2d 786, 787 (4th Cir. 1988) . Gurwara

involved an employee who was told that his decision to go on

short-term disability leave would not affect his ability to

exercise his stock option, only to find after he took leave that

his option was lost. See Gurwara, 937 F.2d at 381. The Fourth

Circuit upheld dismissal of the plaintiff's 10(b) claim. See i d . at 383. In that case, the misrepresentation involved the

plaintiff's opportunity to exercise his stock option based on his

employment status, not the option price or the value of the

stock. See i d . at 382-83. Lamers's allegations differ because

he alleges that misrepresentations were made concerning the

actual price of the security he purchased. Furthermore, the

Seventh Circuit has clarified the Gurwara holding and indicated

that it relied primarily on the fact that no purchase or sale

occurred and did not reflect a narrow reading of the "in

connection with" requirement. See S.E.C. v. Jakubowski, 150 F.3d

675, 679 (7th Cir. 1998).

The Hunt plaintiff signed an employment contract promising

him a 22% ownership interest in the company, and sued when the

company refused to transfer the stock. See Hunt, 852 F.2d at

786-87. The Seventh Circuit affirmed the dismissal, stating that

the alleged fraud was based on the defendants' refusal to tender

shares, and finding a lack of causal connection between the fraud

and the purchase or sale of stock. See i d . at 787. Lamers has

alleged more than a simple refusal to transfer stock, however.

He alleges that before he was even hired, he was deceived as to

the purchase price of the ownership interest, and that this

deception caused him to accept employment with Kettle Cuisine.

These allegations distinguish the instant case from the bare

9 refusal to tender shares present in Hu n t . Furthermore, the

standard used in Hunt does not appear to comport with the broad,

flexible reading of section 10 (b) and Rule 10b-5 favored by the

United States Supreme Court. See Superintendent of Ins, of New

York v. Bankers Life and C a s . Co., 404 U.S. 6, 12 (1971) ("Since

there was a sale of a security and since fraud was used in

connection with it, there is redress under § 10 (b), whatever

might be available as a remedy under state law."); see also In re

Prudential Ins. Co. of Am. Sales Practices Litiq., 975 F. Supp.

584, 607 (D.N.J. 1996) (discussing Third Circuit's disagreement

with narrow reading in Hunt and Gurwara); Leisure Founders, Inc.

v. CUC Int'l, Inc.. 833 F. Supp. 1562, 1570 (S.D. Fla. 1993)

(distinguishing Hunt) .

For these reasons, the court finds the defendants' arguments

unpersuasive. The allegations in Lamers's complaint are

sufficient to describe fraudulent conduct made in connection with

the purchase or sale of a security.

II. Particularity Reguirement

The defendants argue that they are entitled to judgment on

the federal securities claims because Lamers has failed to plead

his allegations of fraud with the particularity required by

Federal Rule of Civil Procedure 9(b). See Fed. R. Civ. P. 9(b).

10 Rule 9(b) provides that "[i]n all averments of fraud or mistake,

the circumstances constituting fraud or mistake shall be stated

with particularity. Malice, intent, knowledge, and other

condition of mind of a person may be averred generally." Id.

One purpose of the rule is to give the defendant notice of the

actions that form the basis of the fraud claim. See Suna v.

Bailey Corp., 107 F.3d 64, 68 (1st Cir. 1997) (citing Shields v.

Citvtrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994));

Havduk v. Lanna, 775 F.2d 441, 443 (1st Cir. 1985). The First

Circuit has rigorously applied the requirements of Rule 9 (b) to

securities fraud cases, noting the need to curtail suits brought

for the purpose of conducting discovery. See Maldonado v.

Dominquez, 137 F.3d 1, 9 (1st Cir. 1998) (citing Shaw v. Digital

Equip. Corp., 82 F.3d 1194, 1223 (1st Cir. 1996)). In securities

fraud cases, the complaint must specify the time, place and

content of the alleged misrepresentations, as well as the

speaker. See Suna, 107 F.3d at 68 (citing Shields, 25 F.3d at

1127-28); Romani v. Shearson Lehman Hutton, 929 F.2d 875, 878

(1st Cir. 1991). The complaint also must explain why the

statements complained of were fraudulent. See Suna, 107 F.3d at

68 (citing Shields, 25 F.3d at 1127-28) .3

3The complaint also must contain specific factual allegations that give rise to a strong inference of fraudulent

11 The defendants argue that Lamers's complaint does not meet

the Rule 9 (b) standard because it fails to specifically identify

fraudulent statements or explain why the statements were

fraudulent. Lamers's complaint states that during the hiring

process, Shafir told Lamers he would share the benefit of Kettle

Cuisine's growth as an owner.4 Shafir sent Lamers a letter

promising Lamers he would earn his 3% ownership interest after

three years' employment, 1% for each year worked. The defendants

omitted to inform Lamers that he would have to pay money in

addition to working three years to receive an ownership interest.

While Lamers was employed at Kettle Cuisine, Shafir told Lamers

on more than one occasion that he was working on getting

documentation for Lamers about the promised ownership interest.

The complaint identifies these statements as untrue statements

and omissions of material fact.

The complaint also states that Lamers relied on these

representations to leave another job to work at Kettle Cuisine,

and to remain working at Kettle Cuisine for over three years.

intent. See Greebel v. FTP Software, Inc., 194 F.3d 185, 197 (1st Cir. 1999); Maldonado, 137 F.3d at 9 (citing Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir. 1992)). The defendants do not argue that the complaint fails on this ground.

4The complaint identifies the "hiring process" period as June, July and August of 1994.

12 The complaint explains that the representations were fraudulent

because after Lamers had worked for Kettle Cuisine for over three

years, he was told that transfer of the 3% ownership interest was

conditioned on payment of a specific sum of money and the signing

of a non-competition agreement, in addition to the three years'

employment Lamers had already contributed. Lamers's complaint

both identifies specific statements and omissions that were

misleading and explains why these statements were fraudulent.

Therefore, the court finds the defendants' argument unpersuasive.

Conclusion

For the foregoing reasons, the defendants' motion for

judgment on the pleadings is denied (document no. 40).

SO ORDERED.

Joseph A. DiClerico, Jr. District Judge

February 18, 2000

cc: M. Elaine Beauchesne, Esquire Michael R. Callahan, Esquire