Court Opinion

ID: 4159790
Source: CourtListenerOpinion
Date Created: 2017-04-12 17:00:19.10862+00
Date Added: 2024-06-11T07:46:45.158158
License: Public Domain

NOT PRECEDENTIAL

                        UNITED STATES COURT OF APPEALS
                             FOR THE THIRD CIRCUIT
                                  _____________

                                       No. 15-3742
                                      _____________

                      NORTHEAST REVENUE SERVICES, LLC,
                                                   Appellant

                                             v.

            MAPS INDEED, INC; VICTOR DEANTHONY, JAMES FILLA,
                  JEFFERY DEANTHONY, INSEQUENCE, INC.
                               _____________

                 On Appeal from the United States District Court for the
                            Middle District of Pennsylvania
                              (D.C. No. 3-14-cv-00852)
                        District Judge: Hon. Edwin M. Kosik
                                   _____________

                       Submitted under Third Circuit L.A.R. 34.1(a)
                                      April 7, 2017

             Before: CHAGARES, SCIRICA, and FISHER Circuit Judges.

                                   (Filed: April 12, 2017)
                                      _____________

                                        OPINION
                                      _____________

       
        This disposition is not an opinion of the full court and, pursuant to I.O.P. 5.7,
does not constitute binding precedent.
CHAGARES, Circuit Judge.

       The plaintiff, Northeast Revenue Services LLC (“Northeast Revenue”), brought

this suit alleging violation of the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78a

et seq. (the “Securities Exchange Act”); the Racketeer Influenced and Corrupt

Organizations Act, 18 U.S.C. §§ 1961, et seq. (“RICO”); and various state laws. The

District Court granted the defendants’ motions to dismiss. For the reasons set forth

below, we will affirm the order of the District Court. 1

                                              I.

       Because we write exclusively for the parties, we set forth only those facts

necessary to our disposition. The facts, as alleged in the Amended Complaint, are as

follows. Northeast Revenue is a Pennsylvania limited liability company. Maps Indeed,

Inc. (“Maps Indeed”) is a registered Virginia corporation. Victor DeAnthony was the

president and CEO of Maps Indeed and was “an employee, agent, representative, or

principal” of Insequence, Inc. (“Insequence”). Appendix (“App.”) 38 ¶ 6. Jeffrey

DeAnthony was the chief marketing officer of Maps Indeed and was also “an employee,

agent, representative, or principal” of Insequence. App. 38 ¶ 7. 2 Insequence is a

Missouri corporation with the same registered office address as Maps Indeed.

Insequence “was/is the parent company, controlling shareholder in, and alter ego of

1
  The District Court granted James Filla’s motion to dismiss on April 30, 2015, and that
order is not at issue in this appeal.
2
  James Filla is/was the chief technology officer and a director and principal at Maps
Indeed. He is also the president and CEO of Insequence. Filla and the DeAnthonys are
referred to collectively in the Amended Complaint as the “Individual Defendants.”
                                              2
Defendant Maps Indeed, Inc.” App. 38 ¶ 8. Northeast Revenue argues that whereas

Maps Indeed was purported “to be a technology company using global satellite imagery

to provide a service allowing its clients to access and share geospatial and property data

(e.g., property assessment values and municipal tax liabilities) in real time and online,”

App. 43 ¶ 23, in reality, it was a “phony subsidiary and/or affiliate company,” App. 39 ¶

13, of Insequence that was “used partially as a corporate shell to collect money from

unsuspecting investors.” App. 43 ¶ 24.

       In 2012, the Individual Defendants approached Northeast Revenue about entering

into a contract. The terms of the contract were negotiated in Pennsylvania, and the

contract was executed there as well. According to Northeast Revenue, the Individual

Defendants made several misrepresentations to it, thereby fraudulently inducing

Northeast Revenue to enter into the contract. Northeast Revenue alleges that the

defendants “manufactured and furnished Plaintiff with purportedly accurate financial

statements and financial projections (‘pro formas’) that were designed to induce Plaintiff

to enter into the agreement, and to pay Defendants specified sums of money pursuant to

same.” App. 46 ¶ 36. Northeast Revenue also alleges that the DeAnthonys “personally

extended oral warranties to Plaintiff regarding the viability of the products, services, and

investment opportunity contemplated under the agreement.” App. 46 ¶ 40, 41. Northeast

Revenue entered into an agreement with Maps Indeed, executed by Victor DeAnthony on

its behalf in his capacity as president. Under the terms of the contract, Northeast

Revenue was required to pay a total of $150,000.00 to Maps Indeed and to “market Maps

Indeed, Inc.[’s] proprietary software to Counties and Municipalities in the

                                              3
Commonwealth of Pennsylvania” and to “assist Maps Indeed, Inc. with the setup and

maintenance of its geospatial information system.” App. 114. In exchange, Maps Indeed

would provide “products, services, and investment return.” App. 47 ¶ 45. Northeast

completed its payments and “Defendants failed to perform at all and provided none of the

agreed upon products, support, and/or services to Plaintiff.” App. 47 ¶ 47.

       Northeast Revenue alleges that it was not the defendants’ only victim. It alleges

that at least three other Pennsylvania citizens were also induced into entering contracts

with the defendants. Northeast Revenue alleges that among the misrepresentations

conveyed to the other victims were the following:

       (a) untrue statements about former Pennsylvania Governor Thomas Ridge’s
       involvement as a director of Defendant Maps Indeed, Inc., (b) founding
       shareholder of America Online, Inc. (“AOL”) also serving as a director of
       Maps Indeed, Inc., (c) the imminent acquisition of Defendant Maps Indeed,
       Inc. by LexisNexis Group, Inc. or Xerox Corporation Ltd., and (d)
       Individual Defendants’ issuance of several artificial and altered statements
       of financial projection(s).

App. 41 ¶ 18. The defendants also represented that Maps Indeed’s “core technology was

originally developed for the Department of Defense . . . [and] [t]he success within [t]he

Department of Defense prompted the continued development to allow full technology

integration within all levels of government.” App. 44 ¶ 28 (quoting App. 104). In total,

the other victims lost at least $380,000.00 in investments in Maps Indeed.

       Insequence filed a motion to dismiss the complaint for lack of personal jurisdiction

and for failure to state a claim. Maps Indeed and Victor DeAnthony filed a motion to

dismiss for failure to state a claim and for a more definite statement. Jeffrey DeAnthony

filed a motion to dismiss for failure to state a claim. The District Court concluded that

                                             4
although there was personal jurisdiction over Insequence, Northeast Revenue failed to

state a claim under federal law against any of the defendants and declined to exercise

supplemental jurisdiction over the state law claims. The District Court did not grant

Northeast Revenue leave to amend its complaint. Northeast Revenue timely appealed.

                                             II.3

       On appeal, Northeast Revenue argues that the District Court erred by concluding

that it had not adequately alleged securities fraud, a RICO violation, and a RICO

conspiracy. It also argues that the District Court abused its discretion by failing to

provide an opportunity sua sponte to amend the complaint. 4

                                             A.

       Count One alleges securities fraud under Section 10(b) of the Securities Exchange

Act and SEC Rule 10b-5. Section 10 of the Securities Exchange Act includes an implied

cause of action. See Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, 133 S. Ct.
1184, 1207 (2013). “The elements of an implied § 10(b) cause of action for securities

fraud are ‘(1) a material misrepresentation or omission by the defendant; (2) scienter; (3)

3
  The District Court had jurisdiction over federal law claims pursuant to 28 U.S.C. § 1331
and supplemental jurisdiction over state law claims pursuant to 28 U.S.C. § 1367. We
have jurisdiction pursuant to 28 U.S.C. § 1291.
4
  We exercise plenary review over an order granting a motion to dismiss pursuant to
Federal Rule of Civil Procedure 12(b)(6). Simon v. FIA Card Servs., N.A., 732 F.3d 259,
264 (3d Cir. 2013). “Under Rule 12(b)(6), a motion to dismiss may be granted only if,
accepting the well-pleaded allegations in the complaint as true and viewing them in the
light most favorable to the plaintiff, a court concludes that those allegations ‘could not
raise a claim of entitlement to relief.’” Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S.
544, 558 (2007)). “We review a district court decision refusing leave to amend under
Federal Rule of Civil Procedure 15(a) for abuse of discretion.” Great W. Mining &
Mineral Co. v. Fox Rothschild LLP, 615 F.3d 159, 163 (3d Cir. 2010).
                                              5
a connection between the misrepresentation or omission and the purchase or sale of a

security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6)

loss causation.’” Id. (quoting Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37–38

(2011)). The District Court concluded that Northeast Revenue failed to state a claim for

violation of the Securities Exchange Act because Northeast Revenue did not purchase a

“security,” as defined by the statute.

       The statutory definition of “security” includes “several catch-all categories which

were designed to cover other securities interests not specifically enumerated in the

statute.” Steinhardt Grp. Inc. v. Citicorp, 126 F.3d 144, 150 (3d Cir. 1997) (interpreting

15 U.S.C. § 77b(a)(1) with a substantially similar definition of “security”). Northeast

Revenue argues that its contract falls into one of these categories as an “investment

contract.” An investment contract is “a contract, transaction or scheme whereby a person

invests his money in a common enterprise and is led to expect profits solely from the

efforts of the promoter or a third party . . . .” S.E.C. v. W.J. Howey Co., 328 U.S. 293,

298–99 (1946). “Thus, the three requirements for establishing an investment contract

are: (1) ‘an investment of money,’ (2) ‘in a common enterprise,’ (3) ‘with profits to come

solely from the efforts of others.’” Steinhardt, 126 F.3d at 151 (quoting Howey, 328 U.S.

at 301). The parties do not dispute that the first two elements of the Howey test are

satisfied but contest whether the third element is satisfied. The question we must answer

is whether Northeast Revenue’s profits were to come solely from the effort of others.

       The third element of the Howey test “requires that the purchaser be attracted to the

investment by the prospect of a profit on the investment rather than a desire to use or

                                             6
consume the item purchased.” Steinhardt, 126 F.3d at 152. Courts look at “whether the

investor has meaningfully participated in the management of the partnership in which it

has invested such that it has more than minimal control over the investment’s

performance.” Id. We consider “the transaction as a whole, considering the

arrangements the parties made for the operation of the investment vehicle in order to

determine who exercised control in generating profits for the vehicle.” Id. at 153

(footnote omitted). Importantly, the definition of an investment contract “embodies a

flexible rather than a static principle, one that is capable of adaptation to meet the

countless and variable schemes devised by those who seek the use of the money of others

on the promise of profits.” S.E.C. v. Edwards, 540 U.S. 389, 393 (2004) (quoting

Howey, 328 U.S. at 299). Accordingly, we have held that “an investment contract can

exist where the investor is required to perform some duties, as long as they are nominal

or limited and would have ‘little direct effect upon receipt by the participant of the

benefits promised by the promoters.’” Lino v. City Investing Co., 487 F.2d 689, 692 (3d

Cir. 1973) (quoting Sec. & Exch. Comm’n Release Notice, Release No. 5211 (Nov. 30,

1971)). In Lino, for example, we concluded that the franchise license agreements at issue

were not investment contracts because they required the licensee to make “significant

efforts”; he was required to “open a sales center, staff it, and devote full time and best

efforts to his business,” as well as “recruit [and train] area distributors.” Id. at 693.

       The District Court here concluded that “[Northeast Revenue] was required to

make ‘significant efforts’ under the Agreement, as the benefits promised by the

Agreement, were based directly on [Northeast Revenue’s] duties.” App. 14. In

                                               7
particular, Northeast revenue was required to “market [Maps Indeed’s] proprietary

software to Counties and Municipalities in the Commonwealth of Pennsylvania” and

“assist [Maps Indeed] with the setup and maintenance of its geospatial information

system.” App. 14–15. Northeast Revenue argues that the “‘essential managerial efforts

which affect the failure or success of the enterprise’ all fall squarely on Maps Indeed.”

Northeast Revenue Br. 17 (quoting Lino, 487 F.2d at 692). In particular, Maps Indeed

was responsible for “providing, hosting and maintaining the geospatial information

system.” Id.

       Although Northeast Revenue accurately states Maps Indeed’s obligations under

the contract, it minimizes its own obligations. The beginning of the contract is

particularly illustrative in demonstrating the cooperative relationship between Northeast

Revenue and Maps Indeed. It provides, in pertinent part,

               WHEREAS, Maps Indeed, Inc. is a technology company which
       provides services to County and State Governments to share and sell data
       online;
               WHEREAS, Northeast Revenue Services, LLC provides services to
       County and Municipal Governments;
               WHEREAS, Maps Indeed, Inc. has developed a geospatial
       information system which provides online access to geo-reference and non-
       geo-reference information in an online interface;
               WHEREAS, Northeast Revenue Service, LLC has developed unique
       expertise and experience with marketing its products to Counties within the
       Commonwealth of Pennsylvania;
               WHEREAS, Maps Indeed, Inc. desires assistance with marketing its
       geospatial information system to customers of the Commonwealth of
       Pennsylvania from Northeast Revenue, LLC;
               WHEREAS, the parties have reached an agreement whereby
       Northeast Revenue Service, LLC shall be granted exclusive licensing for
       Maps Indeed, Inc. within the Commonwealth of Pennsylvania . . . .

App. 113. The contract then describes the aforementioned obligations of each party.

                                             8
       This is not a contract in which the plaintiff’s duties are “nominal or limited and

would have ‘little direct effect upon receipt by the participant of the benefits promised by

the promoters.’” Lino, 487 F.2d at 692 (quoting Sec. & Exch. Comm’n Release Notice,

Release No. 5211 (Nov. 30, 1971)). Rather, the success of Maps Indeed and the profits

to be derived by Northeast Revenue are, in part, dependent on Northeast Revenue’s

networking, expertise and marketing efforts, as well as its efforts to “setup and

maint[ain]” the Maps Indeed system in the Commonwealth of Pennsylvania. App. 114.

Therefore, we conclude that the contract between Northeast Revenue and the defendants

is not an investment contract and that Northeast Revenue failed to state a claim for

securities fraud.

                                              B.

       Count Two alleges violation of RICO, and Count Three alleges conspiracy to

violate RICO. “To plead a RICO claim under § 1962(c), ‘the plaintiff must allege (1)

conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.’” In re Ins.

Brokerage Antitrust Litig., 618 F.3d 300, 362 (3d Cir. 2010) (quoting Lum v. Bank of

Am., 361 F.3d 217, 223 (3d Cir. 2004), abrogated in part on other grounds by Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 557 (2007)). To plead a pattern of racketeering

activity, a plaintiff must allege “at least two acts of racketeering activity within a ten-year

period.” Id. at 363 (citing 18 U.S.C. § 1961(5)). Northeast Revenue alleges predicate

acts of “bank fraud, mail fraud, and wire fraud.” App. 51 ¶ 70. Although bank fraud,

mail fraud, and wire fraud may serve as predicate acts to support a RICO claim, see 18

U.S.C. § 1961(1) and Lum, 361 F.3d at 223, the District Court concluded that Northeast

                                               9
Revenue failed to meet the appropriate pleading standard.

       Where, as here, the plaintiff relies on bank fraud, 5 mail fraud, and wire fraud 6 as

the basis for a RICO violation, it must pled with specificity as required by Federal Rule

of Civil Procedure 9(b). See Fed. R. Civ. P. 9(b); Lum, 361 F.3d at 223. Rule 9(b)

requires that a plaintiff “state with particularity the circumstances constituting fraud or

mistake.” Fed. R. Civ. P. 9(b). We have held that “[p]laintiffs may satisfy this

requirement by pleading the ‘date, place or time’ of the fraud, or through ‘alternative

means of injecting precision and some measure of substantiation into their allegations of

fraud.’” Lum, 361 F.3d at 224 (quoting Seville Indus. Mach. Corp. v. Southmost Mach.

Corp., 742 F.2d 786, 791 (3d Cir. 1984)). A plaintiff “also must allege who made a

misrepresentation to whom and the general content of the misrepresentation.” Id.

       Northeast Revenue alleges that the defendants used “a means and instrumentality

of interstate commerce and the mails and phone lines . . . in connection with the sale of

securities in Defendant Maps Indeed, Inc. . . . to defraud Plaintiff . . . .” App. 50 ¶ 58. It

also alleges that “[t]he course of conduct displayed by Defendants necessarily consisted

of instances of bank fraud, mail fraud, and wire fraud . . . in efforts to further the schemes

of the enterprise.” App. 51 ¶ 70. These allegations lack the specificity required to satisfy

5
  The federal bank fraud statute prohibits the knowing execution or attempted execution
of a scheme or artifice “(1) to defraud a financial institution; or (2) to obtain any of the
moneys, funds, credits, assets, securities, or other property owned by, or under the
custody or control of, a financial institution, by means of false or fraudulent pretenses,
representations, or promises.” 18 U.S.C. § 1344.
6
  “The federal mail and wire fraud statutes prohibit the use of the mail or interstate wires
for purposes of carrying out any scheme or artifice to defraud.” Lum, 361 F.3d at 223
(citing 18 U.S.C. §§ 1341 (mail fraud) and 1343 (wire fraud)).
                                              10
Rule 9(b) because they lack precision and some measure of substantiation. Northeast

Revenue attempts to provide substantiation by arguing that its reference to “pro formas”

and its inclusion of a “false investment presentation” attached as an exhibit to the

Amended Complaint further support its claim. However, there is no indication that the

mail or wires were involved in producing or transmitting these documents. Likewise,

there is no indication that these documents could support a claim of bank fraud.

       Because Northeast Revenue’s substantive RICO claim fails as a matter of law, it

follows that its conspiracy claim also fails. Lightning Lube, Inc. v. Witco Corp., 4 F.3d
1153, 1191 (3d Cir. 1993) (“Any claim under section 1962(d) based on a conspiracy to

violate the other subsections of section 1962 necessarily must fail if the substantive

claims are themselves deficient.”). Accordingly, the District Court did not err in granting

the motion to dismiss the complaint. 7

                                                C.

       Finally, Northeast Revenue argues that the District Court erred by failing to grant

leave to amend the complaint. In Fletcher-Harlee Corp. v. Pote Concrete Contractors,

Inc., we held that “in ordinary civil litigation it is hardly error for a district court to enter

final judgment after granting a Rule 12(b)(6) motion to dismiss when the plaintiff has not

properly requested leave to amend its complaint.” 482 F.3d 247, 253 (3d Cir. 2007).

Northeast Revenue did not request leave to amend in the District Court, so the District

7
  Northeast Revenue does not challenge the District Court’s decision to decline to
exercise supplemental jurisdiction over its state law claims. In any event, we note that
because the District Court properly dismissed Northeast Revenue’s federal claims, the
District Court acted within its discretion when it declined to exercise jurisdiction over its
state law claims. See 28 U.S.C. § 1367(c)(3).
                                                11
Court did not abuse its discretion by failing to grant leave sua sponte. Northeast Revenue

argues that our holding in Phillips v. County of Allegheny, 515 F.3d 224 (3d Cir. 2008) is

contrary to that in Fletcher-Harlee. In Phillips, we stated that “if a complaint is subject to

a Rule 12(b)(6) dismissal, a district court must permit a curative amendment unless such

an amendment would be inequitable or futile.” 515 F.3d at 245. However, Phillips was a

civil rights case, and we have consistently held that “in civil rights cases district courts

must offer amendment—irrespective of whether it is requested—when dismissing a case

for failure to state a claim unless doing so would be inequitable or futile.” Fletcher-

Harlee, 482 F.3d at 251. Because this is not a civil rights case, the District Court was not

required to sua sponte offer amendment. 8

                                              IV.

       For the reasons set forth above, we will affirm the order of the District Court.

8
  Northeast Revenue points to two non-precedential opinions in which we acknowledged
“an apparent conflict” between Fletcher-Harlee and Phillips. Northeast Revenue Br. 24
n. 3 (quoting Snyder v. Baxter Healthcare, Inc., 393 F. App’x 905, 910 (3d Cir. 2010));
see also Snyder, 393 F. App’x at 909–10 (“In Phillips, a Section 1983 case, we
announced that ‘[i]f a complaint is vulnerable to 12(b)(6), a district court must permit a
curative amendment, unless an amendment would be inequitable or futile.’ The reach of
this rule outside of the Section 1983 context, and extent to which a district court must sua
sponte offer leave to amend remains unresolved.” (citation omitted) (quoting Phillips,
515 F.3d at 236)); Guirguis v. Movers Specialty Servs., Inc., 346 F. App’x 774, 777 (3d
Cir. 2009) (“The interaction between Phillips and Fletcher-Harlee Corp. presents an
interesting question but one that we need not resolve on this appeal.”). Although our
statement was broad in Phillips, it nonetheless was a civil rights case and the holding of
Fletcher-Harlee remains intact, as does our distinction between ordinary civil cases and
civil rights case.

                                              12