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Fernau v. Enchante Beauty Products, Inc.

United States District Court, S.D. Florida

September 17, 2019


          The Honorable Robert N. Scola, Jr. Counsel of record.



         Pending before the Court is Defendants' Consolidated Motion to Dismiss (ECF No. 115). The motion has been fully-briefed, (ECF Nos. 122, 125), and the Honorable Robert N. Scola, Jr. has referred it to me for a report and recommendation, (ECF No. 66).

         After careful review of the parties' legal memoranda and the applicable law, for the reasons that follow I recommend that the Court grant Defendants' Motion.

         I. BACKGROUND

         Plaintiffs initiated this lawsuit on March 7, 2018. (ECF No. 1). Prior to the filing of the operative Verified Second Amended Complaint (“SAC”), (ECF No. 106), Defendants filed two motions to dismiss earlier complaints. (ECF No. 17, 57). In both of those motions, the Defendants argued that Plaintiff had failed to sufficiently allege continuity in their Florida RICO claim. (ECF No. 17 at 6-7; ECF No. 57 at 4-8).[1] Defendant Rey was not served until June 7, 2019. (ECF No. 98). As a result, the arguments asserted in the pending Motion regarding the sufficiency of the allegations against Rey are raised for the first time.

         The SAC was filed on June 21, 2019 and asserts claims for violation of state and federal securities statutes, common law fraud, and Florida's Civil Remedies for Criminal Practices Act, Fla. Stat. 772.101 et seq. (the “Florida RICO Act”). (ECF No. 106) Defendants seek dismissal of the Florida RICO claim and all claims against Maria Fernanda Rey. (ECF No. 115). The facts set forth herein are taken from the allegations of the SAC, which the Court assumes are true at this stage of the proceedings. See Quality Foods de Centro America S.A. v. Latin American Agribusiness Dev. Corp. S.A., 711 F.2d 989, 944-95 (11th Cir. 1983) (when considering whether to grant a motion to dismiss a complaint, the court must assume the facts alleged are true and cast them in the light most favorable to the non-moving party).

         In August 2015, Defendants Lamus and Rey[2] sold Enchante[3] securities to Plaintiff Mateu and his wife Plaintiff Maria Dolores de Lucas[4] (together, the “Mateu Plaintiffs”) for $100, 000.00. (ECF No. 106 at ¶ 11; ECF No. 20-1). The sale was solicited using material misstatements and omissions. (ECF No. 106 at ¶ 11). The first misrepresentations and omissions occurred on or about August 5, 2015, when Rey “presented the success of Enchante and its cosmetics business to [the Mateu Plaintiffs].” (Id. at ¶ 12). Lamus then organized two in-person meetings with the Mateu Plaintiffs at which the investment was further discussed. (Id.). Lamus and Rey provided information regarding the company's financial status, valuation, cash flows, and business plans that was false and misleading and omitted to disclose all material information. (Id. at ¶¶ 14, 15). Lamus and Rey also relied upon documents, including an Investment Memo, Executive Summary (the “Investment Memo”) which contained materially false and misleading disclosures and/or contained forecasts and assumptions which lacked any reasonable basis in fact. (Id. at ¶¶ 16, 18).

         In December 2015, Lamus and Rey sold the Mateu Plaintiffs additional securities in Enchante for $6, 000.00. (Id. at ¶ 21; ECF No. 20-2). This sale was again accomplished with material misstatements and omissions, specifically the omission of the substantial losses Enchante had incurred up to that time and Lamus and Rey's failure to correct the misrepresentations and omissions made in connection with the August 2015 sale of securities. (ECF No. 106 at ¶¶ 22, 23).

         In March 2017, Lamus sold Fernau securities in Enchante for $62, 500.00. (Id. at ¶ 24; ECF No. 20-3). Rey was not involved in the sale of securities to Fernau. Lamus provided Fernau with communications and documents which contained materially false and misleading disclosures and/or contained forecasts and assumptions which lacked any reasonable basis in fact. (ECF No. 106 at ¶¶ 28, 30). A copy of the Investment Memo which was the same or similar to the copy of that document that had been shared with the Mateu Plaintiffs, was shared with Fernau in the course of the sales solicitation. (Id. at ¶¶ 30, 244).

         At the time of each sale, Lamus and/or Rey were aware of the poor financial performance of Enchante, or were severely reckless in not knowing this information, and failed to disclose the risks and negative events that had already materialized. (Id. at ¶¶ 20, 22, 32-33). This scheme to defraud investors and a criminal enterprise, composed of Enchante, Lamus, and Rey, was ongoing between approximately 2012 and 2017. (Id. at ¶ 34).

         II. ANALYSIS

         A. Standard of Review

         Rule 8 of the Federal Rules requires that a pleading contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). Although a complaint “does not need detailed factual allegations, ” it must provide “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. . . .” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citation omitted). “Factual allegations must be enough to raise a right to relief above the speculative level.” Id. And, they must present “more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citations omitted). When reviewing a motion under Rule 12(b)(6), a court, as a general rule, must accept the plaintiff's factual allegations as true and evaluate all plausible inferences derived from those facts in favor of the plaintiff. Am. Dental Ass'n v. Cigna Corp., 605 F.3d 1283, 1289 (11th Cir. 2010). However, courts “are not bound to accept as true a legal conclusion couched as a factual allegation.” Twombly, 550 U.S. at 555 (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)).

         Fraud claims filed in federal court are additionally subject to Fed.R.Civ.P. 9(b)'s heightened pleading requirements. Rule 9(b) provides that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake” but “[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” The Eleventh Circuit has stated that Rule 9(b)'s fraud particularity requirement is met if the complaint sets forth “(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.” Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1202 (11th Cir. 2001) (quotation marks and citation omitted).

         B. RICO Claim

         In Count 6, Plaintiffs sue all three Defendants under the Civil Remedies for Criminal Practices Act. Fla. Stat. § 772.101. et. seq. “The Florida RICO Act, patterned after the federal RICO Act, establishes civil liability when an enterprise engages in a pattern of criminal activity.” Arthur v. JP Morgan Chase Bank, NA, 569 Fed.Appx. 669, 679-80 (11th Cir. 2014) (citing Fla. Stat. § 772.103)). Courts that analyze Florida RICO claims rely on cases that analyze federal RICO. Ferrell v. Durbin, 311 Fed.Appx. 253, 256 n.5 (11th Cir. 2009) (citing Jackson v. BellSouth Telecomm., 372 F.3d 1250, 1263-64 (11th Cir. 2004)).[5]To state a claim, a civil plaintiff must plead that a defendant “(1) operated or managed (2) an enterprise (3) through a pattern (4) of racketeering activity that included at least two racketeering acts.” Ray v. Spirit Airlines, Inc., 836 F.3d 1340, 1348 (11th Cir. 2016) (citation omitted). “A civil plaintiff must also show (1) the requisite injury to business or property, and (2) that such injury was by reason of' the substantive RICO violation.” Id. (citation and quotation marks omitted).[6]

         Defendants contend the SAC to does not plead a Florida RICO claim because it does not allege (1) the existence of a RICO enterprise that is distinct from the RICO defendants; and (2) a pattern of racketeering activity. (ECF No. 115 at 5-13).

         1. Plaintiffs Have Failed to Allege a RICO Enterprise Distinct from the RICO Defendants

         “Persons” are liable under RICO (“It is unlawful for any person. . .”). Fla. Stat. § 772.103. To plead liability under the Act, a plaintiff must allege the existence of two distinct entities: (1) a “person”; and (2) an enterprise (that engaged in the pattern of criminal activity), that is not the same “person” referred to by a different name. Cedric Kushner Productions, Ltd. v. King, 533 U.S. 158, 161 (2001). The Supreme Court has explained that “liability ‘depends on showing that the defendants conducted or participated in the conduct of the enterprise's affairs, not just their own affairs.'” Id. quoting Reves v. Ernst & Young, 507 U.S. 170, 185 (1993). See also Palmas Y Bambu, S.A. v. E.I. Dupont De Nemours & Co., Inc., 881 So.2d 565, 574 (Fla. 3d DCA 2004) (“The words ‘employed by or associated with,' as used in this provision anticipates an enterprise separate and distinct from the person charged with a civil RICO violation. . . .”). Defendants argue that Plaintiffs have failed to allege the existence of a RICO enterprise that is distinct from the RICO defendants. (ECF No. 115 at 5-7). They are correct.

         Here, the “persons” are defendants Lamus, Rey and Enchante. Plaintiffs then allege that those same persons are, collectively, the criminal enterprise:

211. Defendants Lamus, Rey, and Enchante formed an “enterprise” within the meaning of Fla. Stat. 772.102(3) because Lamus and Rey are individuals and Enchante a corporation; which together associated in ...

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