UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
______________________________ ) MCWILLIAMS BALLARD, INC., ) Plaintiff, ) ) v. ) Civil Action No. 09-0690 (EGS) ) LEVEL 2 DEVELOPMENT, ) et al., ) ) Defendants. ) ______________________________)
MEMORANDUM OPINION
Plaintiff McWilliams Ballard, Inc. (“plaintiff” or
“McWilliams Ballard”) commenced this action alleging that the two
limited liability company defendants and two individual
defendants are alter egos of one another and failed to repay
funds loaned to them to assist in the purchase and development of
real property located in the District of Columbia. Defendants
L2CP LLC (“L2CP”), Jeffrey D. Blum (“Blum”), and David Franco
(“Franco”) have moved to dismiss all claims against them and to
vacate the Notice of Pendency of Action (“lis pendens”) filed by
plaintiff.1 Upon consideration of the motion, the response and
reply thereto, the applicable law, the entire record, and for the
reasons following, the Court DENIES defendants’ motion to dismiss
and to remove the notice of lis pendens.
1 The fourth defendant, Level 2 Development, LLC, (“Level 2") filed an answer to the complaint on May 21, 2009. I. BACKGROUND
Plaintiff, a corporation organized under the laws of
Virginia, Compl. ¶ 1, alleges the following facts. Defendant
Level 2 is a limited liability company organized under the laws
of the District of Columbia, with its principal place of business
in the District of Columbia. Compl. ¶ 2. Defendant L2CP is a
company organized under the laws of Delaware with its principal
place of business in the District of Columbia, at the same
address as Level 2. Compl. ¶ 3. Defendants Blum and Franco (the
“individual defendants”) are managers, members, directors, or
officers of Level 2 and L2CP. Compl. ¶¶ 4-5.
Plaintiff agreed to loan $100,000 to defendant Level 2 on
March 11, 2005 for the acquisition, development, and/or
improvement of real property located in the District of Columbia
(the “Property”). Compl. ¶ 11.2 The Property was intended to be
developed as a mixed-use, nine-story building containing
approximately 170 residential condominiums, street-level retail,
and underground parking, to be known as “View 14” [“View 14
Project”]. Compl. ¶ 13. Defendant L2CP then purchased the
Property on June 6, 2005, presumably with the proceeds of the
loan made by plaintiff to Level 2, and development began soon
after. Compl. ¶ 13. The loan became due on March 11, 2009;
2 A copy of the promissory note signed by defendant Blum on behalf of Level 2 on March 11, 2005 is attached to the complaint.
2 however, Level 2 did not make the payment required of it on that
date, nor has any payment been made since. Compl. ¶¶ 14-15.
Plaintiff provided Level 2 with a written notice of default on
March 11, 2009. Compl. ¶ 16; Notice of Default, Ex. C.
Plaintiff alleges that the defendants are collectively
“alter egos and/or agents of one another and, at all relevant
times, operated as a single business enterprise in the District
of Columbia.” Compl. ¶ 6. Plaintiff further alleges that the
individual defendants formed L2CP “to create a layer of a limited
liability company between them and Level 2 and between Level 2
and the [View 14] Project” and “exercised full control over Level
2 and [L2CP] for their own benefit and purposes . . . completely
dominated and controlled the assets, operations, activities,
policies, programs, procedures, strategies and tactics of Level 2
and [L2CP], [and] failed to observe important corporate
formalities.” Compl. ¶¶ 19, 24.
The complaint contains five counts alleging claims against
all defendants: breach of contract, unjust enrichment, breach of
the implied duty of good faith and fair dealing, fraudulent
inducement, and conversion. The complaint also alleges two
additional counts against the individual defendants: conspiracy
to commit fraud and aiding and abetting fraud. Finally, the
complaint seeks to impose a constructive trust against the
Property owned by L2CP. The individual defendants and L2CP filed
3 a motion to dismiss all claims against them under Federal Rule of
Civil Procedure 12(b)(6) and to vacate the lis pendens plaintiff
filed encumbering the Property.
II. STANDARD OF REVIEW
To survive a motion to dismiss, a complaint must satisfy
Federal Rule of Civil Procedure 8(a)(2)3 or, when pleading fraud,
Rule 9(b).4 To survive a motion to dismiss a complaint for
failure to state a claim upon which relief can be granted
pursuant to Federal Rule of Civil Procedure 12(b)(6), a plaintiff
must make sufficiently detailed factual allegations in the
complaint. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555
(2007). The allegations must “raise a right to relief above the
speculative level.” Id. (citation omitted). “In evaluating a
Rule 12(b)(6) motion, the Court must accept as true all of the
factual allegations contained in the complaint and grant the
plaintiff the benefit of all inferences that can be derived from
the facts alleged.” Eleson v. United States, 518 F. Supp. 2d
279, 282 (D.D.C. 2007) (internal citations and quotation marks
omitted). “However, ‘a plaintiff’s obligation to provide the
3 Rule 8(a)(2) requires “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). 4 Rule 9(b) requires a party “alleging fraud . . . [to] state with particularity the circumstances constituting fraud or mistake,” but allows “[m]alice, intent, knowledge and other conditions of a person’s mind to be alleged generally.” Fed. R. Civ. P. 9(b).
4 grounds of his entitlement to relief [in his complaint] requires
more than labels and conclusions, and a formulaic recitation of
the elements of a cause of action will not do.’” Id. (quoting
Twombly, 550 U.S. at 555). The Court is “not bound to accept as
true a legal conclusion couched as a factual allegation” when
considering a motion to dismiss. Trudeau v. Fed. Trade Comm’n,
456 F.3d 178, 193 (D.C. Cir. 2006) (quoting Papasan v. Allain,
478 U.S. 265, 286 (1986)).
III. DISCUSSION
A. Breach of Contract
Count I of the complaint alleges breach of contract against
all defendants. The moving defendants argue that they were not
parties to the alleged contract between Level 2 and McWilliams
Ballard and that the promissory note does not impose obligations
on them. Plaintiff responds that the moving defendants are
liable because they are the “alter egos” of, and therefore
indistinguishable from, Level 2, and that all defendants operated
as a single business enterprise. Pl.’s Mem. of P. & A. in Opp’n
to Defs.’ Mot. to Dismiss, and to Remove Notice of Pendency of
Action (“Pl.’s Mem.”); Compl. ¶ 6. The “alter ego” theory may be
invoked by parties seeking to pierce the corporate veil and
impose liability upon the corporation’s shareholders. Estate
5 ofv. Mitchell, 947 A.2d 464, 470 (D.C. 2008).5
The District of Columbia Court of Appeals has enunciated the
following test for piercing the corporate veil: “[g]enerally, the
corporate entity will be respected, but a party may be permitted
to pierce the corporate veil upon proof, ‘that there is (1) unity
of ownership and interest, and (2) use of the corporate form to
perpetrate fraud or wrong,’ or ‘other considerations of justice
and equity’ justify it.” Id. (citing Bingham v. Goldberg,
Marchesano, Kohlman, Inc., 637 A.2d 81, 92 (D.C. 1994)).6
Factors for determining when to pierce the corporate veil
include, inter alia, “(1) whether corporate formalities have been
disregarded, (2) whether corporate funds and assets have been
extensively intermingled with personal assets, (3) inadequate
initial capitalization, and (4) fraudulent use of the corporation
to protect personal business from the claims of creditors.” Id.
at 470-71 (citation omitted). 5 Resolution of claims arising under state law, whether brought in federal court or not, is controlled by the substantive law of the state that creates the cause of action. Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). The principle of Erie applies to federal courts in the District of Columbia. United States v. Pena, 731 F.2d 8, 11 (D.C. Cir. 1984). Therefore, District of Columbia law applies when analyzing plaintiff’s state law claims. 6 Defendants erroneously claim that District of Columbia law requires a finding of fraud in order to justify piercing the corporate veil. Defs.’ Mot. to Dismiss and to Remove Notice of Pendency of Action (“Defs.’ Mot.”) at 4. In fact, the District of Columbia Court of Appeals has held that fraud or “other considerations of justice and equity” may justify piercing the corporate veil; therefore, fraud is not required. Estate of Raleigh, 947 A.2d at 470 (citing Bingham, 637 A.2d at 92).
6 Construing plaintiff’s allegations as true, as the Court
must at this stage, plaintiff has sufficiently alleged facts
allowing a plausible inference that there is unity of ownership
and interest between Level 2, L2CP, and the individual
defendants. In particular, plaintiff alleges that “[t]he
acquisition of the Property and development of the [View 14]
Project were the personal investments and business ventures” of
the individual defendants and that the individual defendants
formed L2CP to “create a layer of a limited liability company”
between them and defendant Level 2 and between defendant Level 2
and the View 14 Project without establishing any separate
business structure, following business formalities, or
maintaining separate business records. Compl. ¶¶ 18, 19.
Plaintiff also alleges that neither Level 2 nor L2CP was a
separate business with its own separate decision-making process
and personnel allowing them to deviate from the wishes of the
individual defendants. Compl. ¶ 21. At this stage, these claims
are sufficient to plead the unity of ownership and interest
element of this cause of action. See Estate of Raleigh, 947 A.2d
at 470. (D.C. 2008).
Second, the complaint sufficiently demonstrates that
considerations of equity and justice justify maintaining the
claim against the moving defendants at this stage. For instance,
plaintiff alleges that the defendants represented that the loan
7 was “absolutely necessary” to effectuate the purchase,
development, and improvement of the View 14 Property. Compl. ¶
65. Thus, as plaintiff argues, the project could not have moved
forward without the loan and should Level 2 be found liable for
the money allegedly owed plaintiff, considerations of justice and
equity may require piercing the corporate veil in order to ensure
that the loan is repaid. See Pl.’s Mem. at 10. Therefore,
plaintiff has alleged sufficient facts in support of its breach
of contract claim to survive a motion to dismiss at this stage.
B. Unjust Enrichment
Count II of the complaint alleges that defendants were
unjustly enriched by using the funds provided by plaintiff to
develop the Property and then refusing to repay the loan. Unjust
enrichment occurs when 1) the plaintiff conferred a benefit on
the defendant; 2) the defendant retained the benefit; and 3)
under the circumstances, the defendant’s retention of the benefit
is unjust. News World Commc’ns, Inc. v. Thompsen, 878 A.2d 1218,
1222 (D.C. 2005) (citing 4934, Inc. v. District of Columbia Dep’t
of Employment Servs., 605 A.2d 50, 55 (D.C. 1992)). Plaintiff
has pled facts sufficient to satisfy each of these elements. In
addition to the general facts cited above, plaintiff alleges that
it conferred a benefit on defendants when it made the loan to
Level 2. Compl. ¶¶ 11-12, 31.7 Plaintiff also alleges that 7 Plaintiff alleges that the funds were diverted to L2CP and the individual defendants; therefore, for all practical purposes,
8 defendants retained the benefit because the loan has not been
repaid. Compl. ¶¶ 15, 31. Finally, plaintiff alleges that
allowing defendants to retain the benefits of the loan, the View
14 Project, without repayment would be “unjust, unfair, and
inequitable.” Compl. ¶ 32. While defendants argue that no
specific allegations are provided, Defs.’ Mot. at 8, “[s]pecific
facts are not necessary” at the pleading stage. Aktieselskabet
AF 21 Nov. 2001 v. Fame Jeans Inc., 525 F.3d 8, 16 (D.C. Cir.
2008)(citing Erickson v. Pardus, 551 U.S. 89, 93 (2007)).
C. Breach of the Implied Duty of Good Faith and Fair Dealing
In the District of Columbia, all contracts contain “an
implied duty of good faith and fair dealing, which means that
‘neither party shall do anything which will have the effect of
destroying or injuring the right of the other party to receive
the fruits of the contract.’” Paul v. Howard Univ., 754 A.2d
297, 310 (D.C. 2000) (quoting Hais v. Smith, 547 A.2d 986, 987
(D.C. 1988)). A party breaches this implied duty of good faith
and fair dealing when it “evades the spirit of the contract,
willfully renders imperfect performance, or interferes with
performance by the other party.” Id.
the benefit was conferred on the moving defendants as well as Level 2, to which the loan was directly made. See Compl. ¶¶ 24, 31, 40, 64.
9 Defendants hinge their argument that plaintiffs have not
sufficiently alleged such a breach on their argument that there
was not a contract between plaintiff and the moving defendants.
As discussed above, plaintiff has adequately pled facts to
support a claim for breach of contract against the moving
defendants. Therefore, plaintiff has likewise adequately pled
that the moving defendants evaded the spirit of the contract and
willfully rendered imperfect performance.
D. Fraud Claims8
Counts IV, V, and VI contain various fraud-based allegations
against the defendants. Under District of Columbia law, there
are five elements to the tort of common law fraud: “(1) a false
8 Under District of Columbia law, the individual defendants are liable for torts in which they participate. “[C]orporate officers ‘are personally liable for torts which they commit, participate in, or inspire, even though the acts are performed in the name of the corporation.’” Perry ex rel. Perry v. Frederick Inv. Corp., 509 F. Supp. 2d 11, 18 (D.D.C. 2007)(quoting Lawlor v. District of Columbia, 758 A.2d 964, 974 (D.C. 2000)). “Liability must be premised upon a corporate officer's meaningful participation in the wrongful acts ... [which] can exist when there is an act or omission by the officer which logically leads to the inference that he had a share in the wrongful acts of the corporation which constitute the offense.” Id. (quoting Lawlor, 758 A.2d at 977)(emphasis in original). Here, plaintiff has alleged that the individual defendants are directors or officers of Level 2 and L2CP and that they participated in the fraudulent conduct by misrepresenting their intentions. Compl. ¶¶ 4-5, 38. As the Court noted in a similar case, it “is not an uncommon result” that the same allegations that support veil-piercing also support the inference that the individual defendants were meaningful participants in the alleged fraud. McWilliams Ballard, Inc. v. Broadway Mgmt. Co., Inc., 636 F. Supp. 2d 1, 10 (D.D.C. 2009).
10 representation (2) in reference to material fact, (3) made with
knowledge of its falsity, (4) with the intent to deceive, and (5)
action . . . taken in reliance upon the representation.” Bamba
v. Res. Bank, 568 F. Supp. 2d 32, 34 (D.D.C. 2008) (quoting
Bennett v. Kiggins, 377 A.2d 57, 59-60 (D.C. 1977)). To satisfy
the particularity requirement of Rule 9(b), “the pleader [must]
state the time, place and content of the false
misrepresentations, the fact misrepresented and what was retained
or given up as a consequence of the fraud[,] . . . and identify
individuals allegedly involved in the fraud.” United States ex
rel. Williams v. Martin-Baker Aircraft Co., Ltd., 389 F.3d 1251,
1256 (D.C. Cir. 2004) (citing Kowal v. MCI Commc'ns, Corp., 16
F.3d 1271, 1278 (D.C. Cir. 1994)); Quality Air Servs., L.L.C. v.
Milwaukee Valve Co., Inc., 567 F. Supp. 2d 96, 103 (D.D.C. 2008).
Rule 9(b) must, however, be read in conjunction with Rule 8(a),
which requires only a short and plain statement of the claims.
See U.S. ex rel. Williams, 389 F.3d at 1256. Motions to dismiss
for failure to plead fraud with particularity are evaluated in
light of the overall purpose of Rule 9(b) to “ensure that
defendants have adequate notice of the charges against them to
prepare a defense.” United States ex rel McCreedy v.
Columbia/HCA Healthcare Corp., 251 F. Supp. 2d 114, 116 (D.D.C.
2003).
11 In this case, plaintiff alleges that the defendants made
false representations which led plaintiffs to sign the promissory
note. Plaintiff clearly points to negotiations that took place
between itself and the individual defendants on behalf of Level 2
and L2CP concerning the loan that was “absolutely necessary” in
order for defendants to move forward with the View 14 Project.
Compl. ¶ 65. These negotiations ultimately led to plaintiff
signing a promissory note for the $100,000 loan on March 11,
2005. Compl. ¶ 11. Plaintiff alleges that, at the time this
loan was made, defendants had no intention of repaying the loan.
Compl. ¶¶ 38, 46, 53. These allegations contain sufficiently
particular details regarding the content of the
misrepresentations, who made the false statements, and when they
were made to provide defendants the opportunity to prepare a
defense, and thus meet the pleading requirements of Rule 9(b).
As discussed in more detail below, the Court therefore finds that
defendants’ attempts to dismiss plaintiffs fraud-based claims
must fail at this time.
1. Fraudulent Inducement
Count IV of the complaint alleges that defendants
fraudulently induced plaintiff to loan them money that they never
intended to repay. Fraudulent inducement requires proof of: 1) a
false misrepresentation; 2) made in reference to a material fact;
3) with knowledge of its falsity; 4) with the intent to deceive;
12 and 5) action taken in reliance upon the misrepresentation. In
re McKenny, 953 A.2d 336, 342 (D.C. 2008). The parties’
arguments on this claim center on whether plaintiff has
adequately alleged that an actionable misrepresentation was made.
Defendants argue that the alleged “misrepresentation” that
the loan would be repaid does not qualify as a fraudulent
misrepresentation because if it did, “anyone who borrows money
and fails to repay it would be liable for punitive damages and
attorney’s fees under a theory of fraud.” Defs.’ Mot. at 9.
Contrary to defendants’ position, the breach of a contractual
promise can be the subject of a fraudulent misrepresentation “if
at the time of its making, the promisor had no present intention
of carrying it out.” Virginia Acad. of Clinical Psychologists v.
Group Hospitalization & Med. Servs., 878 A.2d 1226, 1234 (D.C.
2005). This is precisely what plaintiff alleges here: that
defendants induced it into making the loan and that “they never
intended to repay the loan.” Compl. ¶ 38. Thus, plaintiff’s
allegations satisfy the first element of the fraudulent
inducement claim.
The alleged misrepresentation was material because
McWilliams Ballard would not have made the loan but for the
promise to repay; therefore the second element is met. Compl. ¶
40. Plaintiff’s allegations that defendants made the promise to
repay the loan in order to induce plaintiff to sign the
13 promissory note, and that they knew at the time that they had no
intention repaying the loan, satisfy the third and fourth
elements of this claim. Compl. ¶ 38. Finally, plaintiff’s
action of actually making the loan satisfies the final element of
a fraudulent inducement claim.9
9 Defendants argue that L2CP did not “exist” at the time the promissory note was signed and, therefore, that it could not possibly have made such a misrepresentation. Defs.’ Mot. at 10. In support of this argument, defendants attached L2CP’s Delaware Certificate of Incorporation to their motion, indicating that the company was formed on May 4, 2005. Plaintiff responds that defendant L2CP did in fact exist at the time the promissory note was signed, despite the date of incorporation. Pl.’s Mem. at 16 n.8. Plaintiff’s assertions must be taken as true at this time. The Court notes, however, that in the District of Columbia, corporate existence begins “upon the issuance of the certificate of incorporation.” Owen v. Bd. of Dirs. of Washington City Orphan Asylum, 888 A.2d 255, 267 (D.C. 2005) (quoting D.C. Code § 29-301.32); see also Robertson v. Levy, 197 A.2d 443, 446 (D.C. 1964) (“The corporation comes into existence only when the certificate has been issued. Before the certificate issues, there is no corporation de jure, de facto, or by estoppel.”); Rest. Equip. Serv. v. Cohen, No. 90A-JN-3, 1991 WL 113386, at *2 (Del. Super. Ct. April 3, 1991) (citing Del. Code. Ann. Tit. 8, § 106 (1998) (“[C]orporate existence could not commence until the certificates of corporation were filed with the Secretary of State.”).
While defendants attach the certificate of incorporation to their motion, the Court will exclude it from consideration because the case is at the motion to dismiss stage and plaintiff disputes the date on which L2CP came into existence. “[W]hen ‘matters outside the pleadings are presented to and not excluded by the court’ on a motion to dismiss under Rule 12(b)(6), ‘the motion must be treated as one for summary judgment [.]’” Highland Renovation Corp. v. Hanover Ins. Group, 620 F. Supp. 2d 79, 82 (D.D.C. 2009) (quoting Fed. R. Civ. P. 12(d)). Neither party has argued that the Court should convert the motion to dismiss to a motion for summary judgment under Rule 12(d), and the Court declines to convert the motion sua sponte.
14 2. Conspiracy to Commit Fraud
Count V of the complaint alleges that the two individual
defendants, Blum and Franco, engaged in a conspiracy to commit
fraud. The elements of conspiracy to commit fraud are: 1) an
agreement between two or more persons; 2) to participate in an
unlawful act; and 3) an injury caused by an unlawful overt act
performed by one of the parties to the agreement, and in
furtherance of the common scheme. Hill v. Medlantic Care Group,
933 A.2d 314, 334 (D.C. 2007). The complaint meets the first two
elements because it alleges an agreement between the individual
defendants to make false promises to repay the loan on behalf of
Level 2 and L2CP. Compl. ¶¶ 19, 24, 44, 45. Furthermore,
plaintiff has sufficiently alleged injury by claiming that it has
not been paid money owed to it pursuant to the promissory note.
Compl. ¶¶ 15, 17.10
3. Aiding and Abetting Fraud
Count VI alleges that the individual defendants aided and
abetted fraud in their capacity as representatives of Level 2 and
L2CP. The elements of aiding and abetting fraud are: 1) the
party that the defendant aided performed a fraudulent act that 10 The Court further notes that plaintiff’s claims for conspiracy to commit fraud and aiding and abetting fraud, addressed infra, are “a means for establishing vicarious liability for [an] underlying tort” and plaintiff has stated a valid fraud claim that forms the basis for these derivative claims. See Broadway Mgmt. Co., Inc., 636 F. Supp. 2d at 7 n.7. (quoting Cadet v. Draper & Goldberg, PLLC, No. 05-2105, 2007 WL 2893418, at *14 (D.D.C. Sept. 28, 2008)).
15 caused injury; 2) the defendants were aware of their role in
contributing to the fraud when they acted; and 3) defendants
knowingly assisted the wrongdoer in the fraud. Silverman v.
Weil, 662 F. Supp. 1195, 1200 (D.D.C. 1987). Again, plaintiff’s
claims regarding the agreement entered into by the individual
defendants on behalf of Level 2 and L2CP and their awareness at
the time that they did not intend to follow through with their
promise to repay the loan satisfy the elements of this claim.
E. Conversion
Count VII of the complaint alleges conversion against all
defendants. In the District of Columbia, “conversion has
generally been defined as any unlawful exercise of ownership,
dominion or control over the personal property of another in
denial or repudiation of his rights thereto.” Flocco v. State
Farm Mut. Auto Ins., 752 A.2d 147, 158 (D.C. 2000) (quotations
omitted). Plaintiff alleges that defendants induced plaintiff to
make a loan that they never intended to repay and that those
funds have been controlled by defendants contrary to plaintiff’s
rights, despite demands by plaintiff to be repaid. See Compl. ¶¶
15-17, 38. These allegations are sufficient to survive a motion
to dismiss.
F. Constructive Trust
In Count VIII of the complaint, McWilliams Ballard seeks to
impose a constructive trust against L2CP as owner of the View 14
16 Property. “A constructive trust arises where a person who holds
title to property is subject to an equitable duty to convey it to
another on the ground that he would be unjustly enriched if
permitted to retain it.” Heck v. Adamson, 941 A.2d 1028, 1029
(D.C. 2008) (quotation omitted).11 McWilliams Ballard has
alleged that L2CP received the proceeds of the $100,000 loan and
that it used such funds for the acquisition and development of
the View 14 Property. Compl. ¶¶ 11, 13. Additionally, according
to plaintiff’s allegations, L2CP would not own and could not be
developing the View 14 Property without the loan made by
plaintiff. Compl. ¶ 65 (alleging that “[d]efendants represented
to McWilliams Ballard that the Loan was absolutely necessary for
the purpose of acquiring, developing and/or improving the
property.”). In Heck the District of Columbia Court of Appeals
acknowledged the trial court’s decision to uphold a claim for
constructive trust where plaintiff sought to “follow the money”
11 In their motion to dismiss, defendants misstate the court’s holding in Heck by arguing that a constructive trust will not be granted absent a showing by the complaining party that a recovery of legal damages would be inadequate. Defs.’ Mot. at 13 (citing Heck, 941 A.2d at 1031). Rather, the Heck court only noted that this argument was made and considered by the trial court, but declined to take a position on whether this argument was correct. Heck, 941 A.2d at 1031. Defendants also cited McAteer v. Lauterbach, for this proposition; however, in that case the court similarly noted without deciding the argument. See 908 A.2d 1168, 1169 (D.C. 2006) (per curium). In any event, the Court is not making a determination at this stage of litigation whether a constructive trust should be granted, rather the Court is only making a determination whether plaintiff’s claim for a constructive trust survives a motion to dismiss.
17 and assert a constructive trust over property that was purchased
with proceeds from the sale of a separate property, to which
plaintiff alleged he was entitled. 941 A.2d at 1029 (holding
that constructive trust was an interest in property sufficient to
support the filing of a notice of lis pendens). Here, plaintiff
is similarly attempting to “follow the money” and has adequately
pled that allowing L2CP to continue its use and enjoyment of the
property constitutes unjust enrichment.
In their reply, defendants argue that because L2CP did not
exist at the time the promissory note was signed, it is improper
to impose a constructive trust against it.12 Because, however,
plaintiff has adequately pled facts sufficient to support
piercing the corporate veil, were the veil to be pierced, L2CP
could be liable for the funds owed to plaintiff. Therefore,
defendants’ argument that the Court would have to conclude that a
claim can be maintained against a limited liability company for
actions taken before it came into existence is incorrect. See
Defs.’ Reply at 2. If plaintiff ultimately succeeds in piercing
L2CP’s corporate veil, L2CP could be liable to plaintiff and thus
a constructive trust could be appropriate.
12 As discussed in note 9, supra, the Court assumes at this stage of litigation that L2CP did exist at the time the note was signed.
18 IV. Removal of Lis Pendens
In addition to the motion to dismiss filed on behalf of the
individual defendants and L2CP, defendant L2CP also asks the
Court to remove the lis pendens plaintiff filed against the View
14 Property. In the District of Columbia, a lis pendens notice
should be filed if an action in “state or federal court in the
District of Columbia” either “affect[s] the title to” or
otherwise “assert[s] a mortgage, lien, security interest, or
other interest in real property situated in the District of
Columbia.” D.C. CODE § 42-1207(a) (2010). The District of
Columbia Court of Appeals has stated that the “raison d’etre of
the lis pendens statute is” is to avoid “the risk that property
will be transferred before litigation affecting an interest in
[the property] is concluded . . . .” McAteer, 908 A.2d at 1170.
The validity of a lis pendens notice does not depend on the
merits or likely outcome of the case. Id. at 1170. An action,
such as this one, asserting a constructive trust is “an ‘interest
in real property’ which is all the statute requires.” Heck, 941
A.2d at 1030 (emphasis in original).
Removal of a lis pendens is only available in narrow
circumstances. The statute provides for cancellation and release
of the notice if “judgment is rendered in the action or
proceeding against the party who filed the notice of pendency.”
19 D.C. CODE § 42-1207(d) (2010).13 In Heck, the District of
Columbia Court of Appeals rejected a request to remove a lis
pendens in a case where, as here, plaintiffs had asserted a
constructive trust. 941 A.2d 1028. The Heck court reasoned that
the statute “envisions that the notice will remain in effect
until judgment on the underlying action is rendered.” Id. at
1030. In refusing to cancel the lis pendens, the Heck court
reiterated that “‘upon a motion to cancel or discharge a lis
pendens, the court may not consider anything other than whether
the complaint sufficiently states a cause of action to impress a
[constructive] trust.” Id. at 1030-31 (quoting Polk v. Schwartz,
399 A.2d 1001, 1004 (1979)) (alteration in original). The court
stated in dicta that it “might well be justified in concluding
that, before judgment is rendered in the action or proceeding,
the trial court enjoys no authority to order cancellation of a
lis pendens notice” and stated that “at a minimum, any
‘equitable’ power the court has to act before judgment must be
exercised parsimoniously.” Id. at 1030. Thus, if this Court
enjoys any authority to cancel a lis pendens, it could exercise
such authority only in rare circumstances not present in the
instant case.
13 The District of Columbia Court of Appeals has noted that the appropriate remedy for a frivolous lis pendens notice is the imposition of sanctions. Heck, 941 A.2d at 1030 (citing D.C. CODE § 42-1207).
20 V. CONCLUSION
For the reasons set forth above, the Court DENIES
defendants’ motion to dismiss and to remove the notice of lis
pendens. An appropriate Order accompanies this Memorandum
Opinion.
Signed: Emmet G. Sullivan United States District Judge March 24, 2010