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B. Riley FBR, Inc. v. Clarke

United States District Court, D. Minnesota

September 6, 2019

B. RILEY FBR, INC. f/k/a B. RILEY & CO., LLC, Plaintiff,
v.
THOMAS M. CLARKE, Defendant.

          ORDER ON MOTION TO DISMISS AMENDED COMPLAINT

          Nancy E. Brasel United States District Judge.

         This case presents a dispute over a contract between B. Riley, Thomas Clarke, and various entities, where B. Riley agreed to provide financial advisory services, allegedly provided those services, and was never paid. B. Riley has sued the other entities in a separate lawsuit. In this suit, B. Riley alleges that Clarke negotiated on behalf of the entities, fraudulently induced B. Riley into the contract, and knew all along that B. Riley would not be paid. B. Riley has thus brought several fraud claims and a negligent misrepresentation claim against Clarke, and Clarke has moved to dismiss. The Court concludes that B. Riley failed to plead a duty to disclose and thus dismisses the negligent misrepresentation claim. The Court also concludes that B. Riley successfully pleaded fraud with particularity and denies Clarke's motions on the fraud claims.

         BACKGROUND

         The Court accepts the following factual allegations of the Amended Complaint as true, as it must on a motion to dismiss. Aten v. Scottsdale Ins. Co., 511 F.3d 818, 820-21 (8th Cir. 2008). The Plaintiff B. Riley provides investment services to its clients. [ECF No. 13 ¶ 3.] In February 2017, B. Riley began negotiations to provide financial advisory services to ERP Iron Ore, LLC ("ERPI"). [ECF No. 60 ("Complaint" or "Am. Compl.") ¶ 9.] These and additional negotiations ultimately led to three contracts (the "Agreements") for B. Riley to provide financial services to ERPI, Chippewa Capital Partners, LLC, and Mesabi Metallics Company, LLC.

         The first agreement is the February 2017 Engagement Agreement between B. Riley and ERPI. (Am. Compl. Ex. A.) The Defendant Thomas Clarke was the sole negotiator on behalf of ERPI, and ultimately signed the document as CEO of ERPI. (Am. Comp. ¶¶ 11, 16.) During the negotiations, "Mr. Clarke represented and affirmed to B. Riley that he had authority to act on behalf of [ERPI] when he negotiated the terms of the Engagement Agreement and signed it on behalf of the company." (Zd.¶ 17.)

         The second agreement, called the First Amendment, came a month later. It called for B. Riley to provide enhanced services and receive additional fees. (Id. ¶¶ 20, 22.) The First Amendment was also between B. Riley and ERPI, and again negotiated and signed solely by Clarke for ERPI. (Id. ¶¶ 20, 23.) Clarke "represented and affirmed" that he had authority to act on behalf of ERPI in these negotiations too. (Id. ¶ 25.)

         The third agreement, called the Second Amendment, came at the end of 2017. It added Mesabi, a wholly-owned subsidiary of Chippewa. (Id. ¶¶ 26-27.) Clarke negotiated and signed the Second Amendment on behalf of ERPI[1] and Chippewa as CEO of both companies. (Id. ¶¶ 28-28, 32)[2] Clarke "never made any representation to B. Riley that he was not an authorized signatory on behalf of ERPI and Chippewa." (Id. ¶ 32.) And, during those negotiations, Clarke "knowingly and intentionally made material representations that he and Mesabi would honor the Second Amendment and that he and Mesabi intended to compensate B. Riley under the Agreements." (Id. ¶ 28.)

         Throughout the negotiations, Clarke affirmatively told B. Riley that he had authority to act on behalf of the entities, and that the entities intended to pay B. Riley for services provided under the Agreements. (Am. Compl. ¶¶ 17, 25, 28, 34, 36, 42, 46, 49, 50.) Conversely, the Complaint alleges, Clarke omitted the opposite information: he did not inform B. Riley that he was not an authorized signatory for the entities or that they were unwilling to pay. (Id. ¶¶ 32, 34, 35, 43, 47, 48, 49.)

         B. Riley held up its end of the bargain, performing financial services under the Agreements through the spring of 2018. Indeed, in June of that year, Mesabi closed on debt and equity funding for $900 million of new capital, including $650 million of debt financing. (Am. Compl. ¶ 47.) B. Riley calculates that for its role in helping to obtain the financing, Mesabi owes it $16, 875, 000. (Id. ¶¶ 57-60.) But when B. Riley requested payment, Mesabi refused, stating that Clarke did not have authority to bind it to the Agreements. (Id. ¶ 61.)

         B. Riley sued, claiming that Clarke fraudulently induced B. Riley to enter into these three contracts. According to B. Riley, Clarke made two misrepresentations: (1) he misrepresented his authority to act on behalf of the entities and (2) he misrepresented their intention to pay B. Riley for its work.

         B. Riley's original claims included fraudulent inducement, fraudulent misrepresentation, and negligent misrepresentation. [ECF No. 1.] About a month after filing suit, B. Riley sought a temporary restraining order and preliminary injunction [ECF No. 11.] and this Court denied the motion [ECF No. 46.] B. Riley later amended its complaint to include a claim for fraudulent omission. (Am. Compl.¶¶ 95-105.) Clarke then moved to dismiss.[3] [ECF No. 63.]

         ANALYSIS

         I. Standard of Review

         Clarke has moved for dismissal under both Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim and Federal Rule of Civil Procedure 9(b) for failure to plead fraud with particularity. When reviewing a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), a court must accept as true all factual allegations in the complaint and draw all reasonable inferences in the plaintiff's favor. Aten v. Scottsdale Ins. Co.,511 F.3d 818, 820-21 (8th Cir. 2008). The factual allegations in the complaint "must be enough to raise a right to relief above the speculative level" and the complaint must "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007). Generally, a complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief . . . ." Fed.R.Civ.P. 8(a)(2). When the complaint alleges fraud, however, "a ...


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