Matthews v. Stolier

Citations: 207 F. Supp. 3d 678; 2016 U.S. Dist. LEXIS 123878; 2016 WL 4761557Docket: CIVIL ACTION NO: 13-6638

Court: District Court, E.D. Louisiana; September 13, 2016; Federal District Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Defendants Stephen Sullivan and others filed a Motion for Partial Summary Judgment, which was granted by Judge Jane Triche Milazzo. The background involves Lazarus Healthcare, LLC, owned by Charles Matthews, acquiring Camillus Specialty Hospital. A dispute arose between Camillus and its landlord, prompting Matthews to seek new management, leading to his retention of Red River Healthcare Management, owned by Jimmy and Connie Morgan. Matthews sought to relocate Camillus to the closing Louisiana Specialty Hospital (LSH) and engaged Sullivan to negotiate its purchase. Plaintiffs allege that Sullivan conspired with other defendants to prevent Matthews from buying LSH, resulting in the formation of WJLT Hospital, LLC, where Matthews held a 91.1% stake. Following the purchase, Plaintiffs claim Sullivan and Schulze engaged in fraudulent activities to mislead Matthews about LSH’s financial status, coercing him into signing a Power of Attorney that allowed Morgan to sell LSH. Ownership transferred to JLTAC, LLC, associated with Sullivan, and a $1.2 million promissory note was issued to WJLT. Plaintiffs argue that Defendants concealed an imminent $800,000 payment from Matthews, who would not have signed the Power of Attorney had he known LSH was financially stable. Additionally, during Matthews' brief ownership, Camillus extended loans to LSH.

After JLTAC acquired LSH, Matthews, representing Camillus, demanded loan repayments. Plaintiffs allege that Defendants conspired to fraudulently strip Matthews of his ownership interest in Camillus, preventing him from receiving loan proceeds. They seek to reverse transactions to restore Matthews’ full ownership of Camillus and LSH and request damages for alleged wrongful acts by Defendants. The Court identified several claims that survived motions to dismiss: a fraud claim against Sullivan and the Morgans; a request to nullify a Power of Attorney based on fraud; breach of fiduciary duty claims against the Morgans, Red River, Sullivan, and the Law Firm Entities; breach of contract claims related to the sale of LSH to JLTAC and two promissory notes executed by JLTAC; a legal malpractice claim against Sullivan, Schulze, and the Law Firm Entities; negligence claims against the Morgans and Red River; and claims for violations of securities laws. In response to a motion for summary judgment by the Moving Defendants, who seek dismissal of the securities law claims, the Court highlights that summary judgment is appropriate when there is no genuine issue of material fact. The Moving Defendants argue that the securities law allegations pertain solely to fraud linked to the transfer of LSH ownership from WJLT to JLTAC, which involved two $1.2 million promissory notes.

Moving Defendants contend that additional alleged violations of securities laws fall outside the pleadings and are not properly before the Court. Plaintiffs assert they have identified four distinct violations. The Court clarifies that its previous inquiry regarding securities claims was limited to determining if federal law claims were alleged on the petition's face, distinct from the current inquiry into claim sufficiency challenged by Defendants in a summary judgment motion.

The Court will first address the claims concerning the LHS Transaction. Plaintiffs claim Defendants unlawfully sold a security (the promissory note) to the detriment of the note's owner, violating 15 U.S.C. 78j(b) and Rule 10b-5. To succeed in a 10(b) private action, a plaintiff must establish six elements, including material misrepresentation, scienter, and loss causation.

Defendants argue that federal securities law does not apply to the LHS Transaction because the relevant notes are not securities. They assert Congress did not intend for securities laws to cover all fraud and aimed to regulate investments specifically. The determination of whether a note qualifies as a security involves the "family resemblance" test, which presumes a note is a security unless it closely resembles instruments deemed non-securities, such as various types of consumer or short-term loans.

If the note does not fit these categories, the Supreme Court's four-factor test from *Reves v. Ernst & Young* is applied, examining the seller's purpose, distribution plan, public expectations, and any mitigating regulatory factors. The Eastern District of Louisiana employs a balancing approach to these factors, though the weight of each remains uncertain. The Court will analyze the JLTAC-WJLT Note and the WJLT-Matthews Note separately.

The JLTAC-WJLT note is a $1.2 million promissory note issued as part of the sale of LSH to JLTAC, featuring a repayment structure based on LSH's cash receipts and earnings. Payments consist of 1.5% of cash receipts for the first year, increasing to 2.25% thereafter, with a guaranteed minimum payment of $10,000 per month. Additionally, 25% of LSH's EBITDAM exceeding $1,500,000 is payable annually. The note is secured by a lien on LHS’s hospital license and related assets. 

Defendants argue that the note should not be classified as a security, likening it to short-term notes secured by business assets. However, plaintiffs counter that its maximum term of 10 years disqualifies it from this category. The Court evaluates the transaction's economic realities, concluding that it is not a security. It identifies that JLTAC's intent was not to raise general funds but to facilitate the acquisition of LSH, indicating a commercial rather than investment motivation. The absence of interest further supports this finding, as the lack of profit expectation aligns with non-security transactions. WJLT's motivation was simply to receive payments for its asset sale, reinforcing that the note does not meet the criteria for classification as a security.

The Court evaluates the JLTAC-WJLT note's status as a security through several factors. 

1. **Plan of Distribution**: The Court assesses whether the note involved common trading for investment. Common trading requires broad public sale; however, limited distribution does not automatically negate its status as a security. Here, the JLTAC-WJLT note was exclusively offered to WJLT to acquire an asset, lacking broad public distribution, which suggests it is not a security.

2. **Reasonable Expectations of the Investing Public**: This factor focuses on public perception. A note is typically deemed a security if the public reasonably expects it to be an investment. Unlike prior cases where notes were marketed as investments, there is no evidence that the JLTAC-WJLT note was offered or advertised as such. The claim that it was an investment for Mr. Matthews is undermined by a lack of interest charged on the note, further indicating it is not a security.

3. **Risk of the Instrument**: The Court analyzes risk factors affecting investor protection. In contrast to uncollateralized notes in previous rulings, the JLTAC-WJLT note is secured by a lien on significant assets, reducing its risk and making federal securities law unnecessary for investor protection. 

Collectively, these factors suggest that the JLTAC-WJLT note is not a security. The Court finds that summary judgment is appropriate, as ongoing discovery does not present any evidence that contradicts the conclusion that the note was issued for asset payment rather than as an investment. Consequently, the claims under federal securities law are dismissed, and this dismissal also applies under Louisiana state law, which follows the same analysis.

The Court determines that the WJLT-Matthews Note cannot support any securities law claims, as it is an obligation between two Plaintiffs—WJLT and Charles Matthews—rather than an investment opportunity, leading to the dismissal of any related securities claims. The Court also addresses whether three other transactions, identified by Plaintiffs as potential securities law violations, are properly before it. After reviewing the extensive 286-paragraph complaint, the Court notes that Plaintiffs did not adequately plead these transactions as securities law violations; instead, they were framed as state law fraud claims, which have been dismissed for lack of justifiable reliance or misrepresentation. Additionally, a claim regarding JLTAC's sale of its interest in LSH is dismissed as it was not properly included in the original complaint and occurred after litigation commenced. Consequently, all securities law claims against the Defendants—Stephen Sullivan and associated parties—are dismissed based on the allegations and facts presented.

Securities law claims have been made against James Morgan, Connie Morgan, and Red River, collectively referred to as the "Morgan Defendants," related to the WJLT-JLTAC Note. The Court intends to dismiss these claims based on previous findings but notes a procedural issue since the Morgan Defendants have not filed for summary judgment. Under Rule 56(f), the Court can grant summary judgment to a nonmovant with proper notice and time for response. Consequently, Plaintiffs are permitted to file a brief within 20 days to clarify how their claims against the Morgan Defendants differ from those already dismissed. If Plaintiffs submit this brief, the Morgan Defendants can reply within 10 days. Failure to file the brief will result in partial summary judgment for the Morgan Defendants on all remaining securities law claims. Additionally, the Court has granted the motion for partial summary judgment by Defendants Stephen Sullivan and others, dismissing the state and federal securities law claims against them. The document also refers to various names used for Camillus and LSH in the Complaint and identifies the "Law Firm Entities" involved.