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Republic Property Trust v. Republic Properties Corp.

March 31, 2008

REPUBLIC PROPERTY TRUST, ET AL., PLAINTIFFS,
v.
REPUBLIC PROPERTIES CORPORATION, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Royce C. Lamberth, United States District Judge

MEMORANDUM OPINION

Defendants Richard L. Kramer ("Kramer") and Republic Properties Corporation ("RPC") and separately, defendant Stephen A. Grigg ("Grigg"), have moved to dismiss plaintiffs' amended complaint for failure to state a claim. The Court has considered plaintiffs' amended complaint [10]; Kramer and RPC's motion [14], plaintiffs' opposition thereto [23], and Kramer and RPC's reply [25]; Grigg's motion [15], plaintiffs' opposition thereto [22], and Grigg's reply [26]; and the applicable law. For the reasons set forth below, both motions are hereby GRANTED.

BACKGROUND

Defendants Grigg and Kramer are entrepreneurs who have established and controlled various business entities to develop and manage commercial properties. On July 19, 2005, along with non-party Mark Keller, they organized plaintiff Republic Property Trust ("the REIT") to acquire, develop, and ultimately operate office properties in the Washington, D.C. metropolitan area. (Am. Compl. ¶ 11.) Both Grigg and Kramer served on the REIT's Board of Trustees -- Grigg as Vice-Chairman, and Kramer as Chairman.*fn1 (Id. ¶¶ 4, 5, 11.) The REIT also employed Grigg as President and Chief Development Officer. (Id. ¶ 4.)

Prior to its initial public offering on December 20, 2005, the REIT established several subsidiary entities, among them plaintiff Republic Property Limited Partnership ("RPLP"). (Id. ¶ 13.) Through these subsidiaries, the REIT then acquired real property and contracts in exchange for its own shares and/or RPLP limited partnership units. (Id.)

On the other side of many such transactions were entities owned and/or controlled by Kramer and Grigg, including defendant RPC. (Id. ¶ 14.) At that time, Kramer owned 85% of RPC and served as Chairman of RPC's Board of Directors. (Id. ¶ 5.) Grigg owned the remaining 15% and also served on RPC's Board and as its President and Chief Executive Officer. (Id. ¶ 4.) In or around October 2004, RPC entered into a contract ("the Services Agreement") with an arm of the West Palm Beach, Florida city government, the Community Redevelopment Agency ("the Agency"). (Id. ¶ 15.) Under the Services Agreement, RPC would design, develop, and construct a $100 million urban mixed-use property development in West Palm Beach. (Id.) In doing so, RPC pledged it would conduct business reputably, that it would notify the Agency of any potential conflicts of interest, and that it had not paid anyone contingent on forming the contract. (Id. ¶ 90.)

On September 23, 2005, RPC assigned the Services Agreement to RPLP in exchange for limited partnership units that would be worth $1,202,808.00 when the initial public offering occurred in December.*fn2 (Id. ¶ 18.) The present litigation concerns this transaction.

To formalize the exchange, the parties formed a second contract ("the Contribution Agreement"). (Id.) Grigg, with Kramer's knowledge and approval, signed on RPC's behalf, and the REIT's CEO signed for RPLP. (Id. ¶ 19.) In the Contribution Agreement, RPC warranted that "no [] litigation or proceeding, either judicial or administrative, [was] pending or, to RPC's knowledge, threatened, affecting all or any portion of" the Services Agreement. (Am. Compl. Ex. A § 2.4.) It further promised that the Services Agreement was "in full force and effect" and that to its knowledge, neither it nor the Agency was in default. (Id. § 2.10.)

On acquiring the Services Agreement, RPLP promptly assigned it to an indirectly wholly owned subsidiary ("the Subsidiary"). (Am. Compl. ¶ 20.) The Agency approved both assignments on December 19, 2005. (Id. ¶ 53.) For the next few months, the Subsidiary provided development services to the Agency in accordance with the Services Agreement. (Id. ¶ 22.) It and the Agency amended the agreement twice: in March 2006, they added a provision authorizing the Subsidiary to demolish and properly prepare the site for a $36,366.96 fee, and in April 2006, they agreed the Subsidiary would complete the project for an aggregate fee in excess of $4 million. (Id. ¶¶ 60, 63.) Although this latter amendment was never executed, the Subsidiary performed services pursuant to it until May 5, 2006. (Id. ¶ 64.)

That day, plaintiffs received an unwelcome surprise. The United States Attorney for the Southern District of Florida charged Raymond Liberti ("Liberti"), a West Palm Beach city commissioner and voting member of the Agency, with accepting bribes and otherwise abusing his elected position. (Id. ¶ 71.) No party to this lawsuit was directly implicated. (Id. ¶ 72.)

Since approximately October 2004, however, RPC had been making payments to Liberti under a series of "Consulting Agreements." (Id. ¶¶ 29, 30.) Liberti engaged in various business development activities on RPC's behalf, including government relations and lobbying, but he avowedly abstained from involvement in any matter touching West Palm Beach. (Id. ¶ 57; Am. Compl. Exs. B, D, E.) Plaintiffs describe this arrangement as a scheme whereby Grigg authorized payments from RPC to Liberti while Liberti cast favorable votes and engaged in other related activities as a member of the City Commission and the Community Redevelopment Association [sic] on matters benefitting RPC, [the REIT], and other businesses in which Grigg, Kramer, and others held an interest.

(Am. Compl. ¶ 30.) RPC paid Liberti $5,000 per month from November 2004 through April 2005, during which time Liberti voted to approve an amendment to the Services Agreement that secured more city funds for RPC. (Id. ¶¶ 37, 40, 41, 42, 44, 45.) Two days after this vote, Kramer emailed Grigg to praise Liberti and proposed hiring him as an exclusive RPC employee. (Id. ¶ 47.) In April 2005, Liberti's monthly fee rose to $8000, at which rate RPC paid him for the next year. (Id. ¶¶ 49, 52, 56, 59.) During this period, Liberti participated in several Agency votes on the Services Agreement and on other Grigg/Kramer ventures, always voting in a manner favorable to Grigg, Kramer, and/or RPC. (Id. ¶¶ 53, 60, 63, 67.)

Though Grigg apparently served as Liberti's primary point of contact, Kramer was aware of, authorized, and/or ratified Grigg's conduct in hiring and paying Liberti. (Id. ¶¶ 31, 70.) Grigg regularly reported to Kramer, RPC's other owner, on the corporation's business activities in and around West Palm Beach and on its arrangement with Liberti. (Id. ¶ 69.) Prior to Liberti's exposure, neither Grigg nor Kramer disclosed this arrangement's existence to the REIT (on whose Board of Trustees they both served), RPLP, or the Subsidiary. (Id. ¶ 4, 5, 81.)

On May 5, 2006, Grigg informed the REIT's officers in an email that RPC had "retained Liberti under an agreement dated November 2004 on retainer, that was extended by [RPC] in January 2006," and had paid him by check. (Id. ¶ 73.) Over the next few days, both the REIT and West Palm Beach city officials learned more about the Liberti-RPC relationship, and the local press speculated that additional criminal charges might soon follow. (Id. ¶ 72, 76.) Within the month, the Agency notified the Subsidiary that it intended to terminate the Services Agreement. (Id. ¶ 77.)

On June 20, the REIT's Audit Committee voted to hire independent counsel to investigate the entire affair and to supplement an earlier internal investigation. (Id. ¶¶ 82, 83.) Only at this inquiry's conclusion did the REIT discover the depth, duration, and details of the Liberti-RPC relationship, elucidated above. (Id. ¶ 87.) Meanwhile, the Subsidiary and the Agency signed mutual releases terminating the Services Agreement. (Id. ¶¶ 79, 80.) Neither the Subsidiary nor its parents were fully paid for the work they had performed under that contract. (Id. ¶¶ 22, 64.)

Several months later, in March 2007, Kramer filed suit against the REIT in a Maryland federal court. (Id. ¶ 97.) He sought a declaration that he was entitled to indemnification for legal fees he incurred in responding to the REIT's independent investigation, and he later requested advancement of legal fees to defend the present lawsuit. (Id. ¶¶ 97, 99.) Kramer voluntarily dismissed this complaint on May 3, 2007 and re-filed in state court. (Kramer and RPC Mem. Supp. Mot. to Dismiss 19 n.14.)

Plaintiffs filed their original complaint in this Court on March 28, 2007, amending it on April 27. In their amended complaint, they plead nine causes of action.

Plaintiffs seek recovery from RPC, Kramer, and Grigg for securities fraud, under both 15 U.S.C. section 78j(b) ("Section 10(b)") and D.C. Code section 31-5606.05(a)(3)(b)(ii), and for common law fraud, and they also seek punitive damages. (Am. Compl. ¶¶ 102-110, 117-126, 139-147, 157-158.)

Against Kramer and Grigg, individually, they assert claims for control person liability, under 15 U.S.C. section 78t(a) ("Section 20(a)") and D.C. Code section 31-5606.05(c), and for unjust enrichment, and they further seek a declaratory judgment absolving the REIT of any duty to reimburse or advance legal fees to Kramer. (Id. ¶¶ 111-116, 127-131, 148-156.)

Finally, plaintiffs claim RPC breached the Contribution Agreement and demand damages and indemnification. (Id. ¶¶ 132-138.)

DISCUSSION

I. Applicable Pleading Standards

Plaintiffs' various claims implicate three different pleading standards. Federal Rule of Civil Procedure 8(a) supplies the default standard, while Rule 9(b) applies to certain "special matters," including fraud. Fed. R. Civ. Pro. 8(a), 9(b). The Private Securities Litigation Reform Act of 1995 ("PSLRA") prescribes additional, strict pleading requirements for private federal securities fraud claims. 15 U.S.C. § 78u-4 et seq. (2008).

A. The Default Standard: Rule 8(a)

In resolving a Rule 12(b)(6) motion to dismiss, the Court must ascertain whether the challenged complaint adequately states a claim on which relief may be granted. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Harlow v. Fitzgerald, 457 U.S. 800 (1982). Generally, the Federal Rules require only "'a short and plain statement of the claim' that will give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Conley v. Gibson, 355 U.S. 41, 47 (1957) (quoting Fed. R. Civ. Pro. 8(a)(2)). In measuring a complaint against this standard, the court must construe all allegations therein and draw all reasonable inferences in the plaintiff's favor. Scheuer, 416 U.S. at 236; United States ex rel. Harris v. Bernad, 275 F. Supp. 2d 1, 5 (D.D.C. 2003). Indeed, "once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint." Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1969 (2007). While a complaint need not plead "detailed factual allegations," the factual allegations it does include "must be enough to raise a right to relief above the speculative level" and to "nudge[] [] claims across the line from conceivable to plausible." Id. at 1964-65, 1974. As the Court observed, Rule 8(a)(2) requires a "showing" that the pleader is entitled to relief. Id. at 1965 n.3. Though conclusory assertions may afford a defendant "fair notice" of the nature of a plaintiff's claim, only factual allegations can clarify the "grounds" on which that claim rests. Id.

Thus, in evaluating a motion to dismiss, the court need not accept plaintiffs' unsupported inferences, nor "legal conclusions cast in the form of factual allegations." Kowal v. MCI Commc'ns Corp., 16 F.3d 1271, 1276 (D.C. Cir. 1994). The court may consider "documents attached as exhibits or incorporated by reference in the complaint" in addition to the ...


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