Ensource Investments LLC v. Willis

          ORDER:(1) GRANTING IN PART AND DENYING IN PART WILLIS DEFENDANTS' MOTION FOR SUMMARY JUDGMENT; AND [DOC. NO. 136] (2) DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT OF PLAINTIFF'S SECURITIES EXCHANGE ACT CLAIM AGAINST DEFENDANT MARK A. WILLIS [DOC. NO. 138.]

          MARILYN L. HUFF, UNITED STATES DISTRICT COURT DISTRICT JUDGE

         On October 29, 2019, Defendants Beyond Review, LLC, Image Engine, LLC, Mark A. Willis, and Willis Group, LLC (collectively, “Willis Defendants”) filed a motion for summary judgment of all claims asserted by Plaintiff. (Doc. No. 136.) On November 1, 2019, Plaintiff EnSource Investments, LLC (“Plaintiff”) filed for summary judgment of Plaintiff's securities fraud claim against Defendant Mark A. Willis. (Doc. No. 138.) On November 25, 2019, the parties filed their respective oppositions to the motions for summary judgment. (Doc. Nos. 152, 154.) On December 2, 2019, the parties filed their respective replies. (Doc. Nos. 156, 157.)

         The Court held a hearing on the motions on December 6, 2019. Richard Nawracaj and Aaron Sadock appeared for Plaintiff. Shannon D. Sweeney and Michael Zarconi appeared for Willis Defendants. For the reasons below, the Court denies Plaintiff's motion for summary judgment and grants in part and denies in part Willis Defendants' motion for summary judgment.

         Background

         This case arises out of Plaintiff EnSource Investment, LLC's purchase of securities in a start-up company, the Hopewell - Pilot Project, LLC (“Hopewell”). Hopewell was formed on March 29, 2016 by Thomas Tatham and Defendant Mark A. Willis. (Doc. No. 136-2, Willis Decl. ¶ 4.) Through Hopewell, Willis and Tatham planned to use title searching technology to identify unleased lands in Texas containing oil and gas interests, purchase those leases, and use or flip those leases for a profit. (Doc. Nos. 136-2, Willis Decl. ¶¶ 2-4; 136-5, Ex. T.) Though Hopewell was the center of this enterprise, it contracted with several other entities to carry out its goals. For its technology, Hopewell contracted with Title Rover, LLC (“Title Rover”), a separate entity that Willis and Tatham formed in April 2016 to build Hopewell's title searching technology, a web-based portal to index title records and make them electronically searchable. (Doc. No. 136-2, Willis Decl. ¶ 4.) Hopewell also contracted with Beyond Review, LLC (“Beyond Review”), and Image Engine, LLC (“Image Engine”), two entities under the umbrella of the Willis Group, a company Willis founded in 2007 to provide staffing services. (Doc. No. 136-2, Willis Decl. ¶ 3.) Beyond Review provided contract and title attorneys to Hopewell, while Image Engine provided copying and imaging services. (Doc. Nos. 136-2, Willis Decl. ¶ 11; 136-7, Ex. MM.)

         Willis and Tatham were the sole managers and members of Hopewell's Board of Directors, with Willis serving as CEO and President of Hopewell. (Doc. Nos. 136-4, Ex. C at 61, Ex. D at 81-82, 94; 138-4; 154-8, Ex. AH at 417.) While Tatham handled the day-to-day management of Hopewell, Defendant Willis led their efforts to solicit potential investors. (Doc. No. 154-3, Willis Decl. ¶ 8.)

         From May to September 2016, Willis solicited prospective investors. (Doc. No. 136-2, Willis Decl. ¶ 6.) In May and June 2016, Willis asked one of his friends, Chad Martin, to invest in Hopewell. (Doc. No. 136-2, Willis Decl. ¶ 6; Doc. No. 138-4, Ex. D at 109- 113.) Martin expressed interest and referred Willis to other investors, including Justin Pannu. (Doc. No. 136-2, Willis Decl. ¶ 6.) In August 2016, Pannu, Martin, and several others formed Plaintiff EnSource Investments, LLC, for the purpose of investing in Hopewell securities. (Id.; Doc. No. 136-6, Ex. X at 417.)

         From July to August 2016, Willis and Tatham negotiated Plaintiff's investment in Hopewell. (Doc. No. 154-3, Willis Decl. ¶¶ 9-13.) During these negotiations, Willis and Tatham provided Plaintiff with Hopewell's private placement memorandum and related documents, including an executive summary, project highlights, prospect area maps, a subscription booklet, and the Third Amended Restated Company Agreement of the Hopewell - Pilot Project, LLC (“Third Amended Agreement”). (Doc. Nos. 136-4, Exs. A-D; 136-5, Ex. W.) The private placement memorandum stated that Hopewell sought investment “for the purpose of acquiring new lease and mineral interest acquisitions in the four initial areas and for working capital to continue the Company's operations and evaluation of lease acquisition opportunities.” (Doc. No. 136-4, Ex. A at 3.) Similarly, the private placement memorandum's term sheet states that investment “proceeds . . . are to be used to fund all operating overhead of the Company through December 31, 2016, and for the acquisition of Mineral Interests, primarily new Oil and Gas leases, in an agreed Area of Mutual Interest (‘AMI') covering Madison County, TX and the Buda Rose play (‘Buda Rose' play).” (Id. at 4.) Throughout the course of negotiations between Plaintiff and Defendants, Hopewell had little to no money in its accounts, as well as ongoing monthly operating expenses due and accruing. (Doc. Nos. 136-2, Willis Decl. ¶ 8; 136-4, Ex. C at 64; 136-6, Ex. BB.)

         Willis and Tatham also provided Plaintiff with several webinars and presentations about the technology that Hopewell and Title Rover would employ, including three Title Rover technology slide decks prepared throughout July and August 2016. (Doc. Nos. 138-3, Ex. B Stanley Depo. at ¶ 29:3-30:25, RT31:1-7; 138-5, Ex. F; 138-6, Exs. G-H; 154-6, Ex. F Stanley Depo. at ¶ 53:17-54:25.) When describing Title Rover's technology, the private placement memorandum states that Hopewell was formed “for the purpose of demonstrating ‘Proof of Concept' involving the refinement, use, and application of a new proprietary software technology which can geographically sort and analyze land and mineral title records and related digital data for the purpose of acquiring Oil, Gas & Mineral interests . . . .” (Doc. No. 136-4, Ex. A at 3.) A later paragraph in the memorandum, titled “Technology, ” continues:

The Founders have arranged and provided a cost based contract to Hopewell for the exclusive use of new proprietary software technology owned by Title Rover, LLC, an affiltiate [sic] of the Founders. Hopewell will pay only for the direct costs of digital data purchase, direct operations and traning [sic] of Hopewell personnel related to use of Title Rover's proprietary software in an agreed AMI covering Madison County, TX. . . . The Company believes that the use of Title Rover technology in the evaluation of OG&M title will result in significant savings in both time and costs.

(Id. at 5.)

         The three technology slide decks Defendants gave to Plaintiff provide more detailed descriptions of Title Rover's title searching portal. The first slide deck, dated July 25, 2016, states that “Title Rover has developed the proprietary technology, workflow and interface to power the data processing function which is the key to automating and expediting much of the work associated with traditional prospect area opportunity analysis.” (Doc. No. 138-5, Ex. F.) In a subsequent slide, the presentation states that Title Rover “has developed its own proprietary technology and licensed sole rights to additional technology which delivers a 10X improvement to traditional methods of supporting data investigations and specialized analysis.” (Id. at 123.) The presentation also describes the technology's key features, such as custom indexing, filtering, and grouping. (Id. at 125.) Finally, the presentation contains a slide titled “Getting Started, ” which lists action plans, including: “Identify commercial opportunities, ” “Prepare resource plan and budget, ” “Prepare/execute project plan, ” “Build out database and UI, ” and “Perform analytics and deliver results.” (Id. at 131.)

         The second technology presentation slide deck, dated August 19, 2016, duplicates several slides or headings from the first presentation but offers screenshots further describing its technology's features. (Doc. No. 138-6, Ex. G at 133.) In its overview of key features, the presentation compares Title Rover's title searching web portal to other data services in the market. (Id. at 137-38.) Additionally, the August 19 presentation includes screenshots “which show the current version of the Title Rover Portal, ” and it states that Title Rover “also ha[s] a development plan which adds additional features in subsequent releases to enrich the functionality.” (Id. at 139.) The screenshots of the existing version of the web portal include screenshots of the login page, the main search page, its custom grouping function applied to deed types, its custom grouping function applied to family names, and a grid “Runsheet” to display data in an alternative format. (Id. at 139-143.) The slide deck also includes a slide representing the “logical architecture” of its technology, which identifies a “partial list of the software and programming used.” (Id. at 145.)

         The third technology presentation slide deck, dated August 23, 2016, provides a “Technology and Intellectual Property Overview.” (Doc. No. 138-6, Ex. H.) It describes the “team of experts” that Title Rover “commissioned . . . to build a web portal where users can explore the data using tools and features, ” and explains the technical background of each member, including Brent Stanley, whom the presentation identifies as Title Rover's “CTO, ” or Chief Technology Officer. (Id. at 152.) The presentation's overview also states that its technology team is “responsible for the [sic] defining the feature set used by the portal and developing, testing and deploying the portal.” (Id.)

         Regarding the technology itself, the August 23, 2016 presentation's overview first describes the Title Rover “technology effort” as having two main goals: “[t]o build a portal where attorneys and other users can perform faceted searches . . .” and “[t]o build a deep index from records more quickly and cost effectively than is available in the industry.” (Id.) Following this outline of goals, the presentation states, “[w]hat we have done over the last few months for Title Rover is to create v1.0 of the portal . . . .” (Id.) According to the presentation, the “new customized portal accomplishes the primary tasks” necessary for the project, including “[c]reating an automated chain of title from the data, ” “[c]reating a run sheet from the chain as an automated output, ” and “[s]upporting custom groups of instrument types, family genealogy, and geographies to enhance the searching of the data for specific interests.” (Id.) Like the August 19 slide deck, the August 23 slide deck includes screenshots “which show the current version of the Title Rover Portal, ” and states that Title Rover “also ha[s] a development plan which adds additional features in subsequent releases to enrich the functionality.” (Id. at 154.) Unlike the August 19, 2016 slide deck, the August 23, 2016 slide deck adds a description of the Title Rover's web portal's technical architecture, stating, “[t]he Title Rover portal was built by Joe Haynes in collaboration with the team and resides on servers in a secure data center. All software code in use for the portal is owned by Title Rover.” (Id. at 159.)

         In addition to Title Rover's web portal, the August 23 presentation explains that Title Rover has contracted with Beyond Recognition, LLC (“Beyond Recognition”)^[1] to index land records into data usable by the Title Rover web portal. The slide deck states that Title Rover “has commissioned [Beyond Recognition] to execute a statement of work demonstrating its ability to derive a high quality, deep index from a collection of land records from scratch . . . .” (Id. at 152.) The August 23 slide deck also specifies that data mining would be performed by Beyond Recognition, “which has developed a unique method for executing data mining on records.” (Id. at 159.) Further, the slide deck states that Beyond Recognition “has developed proprietary source code and the application to leverage visual similarity for its purpose.” (Id. at 160.) The August 23 presentation continues, “Title Rover has licensed technology from [Beyond Recognition] to automate data mining for this data type . . . .” and Title Rover has “both a license for use of the technology and an exclusivity option.” (Id.)

         These technology presentations were part of Plaintiff's due diligence review conducted in the months of July to September 2016. The review process also included communications between Plaintiff and Tatham and “online data rooms” that Defendants created to provide additional documents for Plaintiff's review. (Doc. No. 136-2, Willis Decl. ¶ 9; 136-4, Exs. H-J; 136-5, Ex. U; 136-6, Ex. GG at 511-13, Ex. HH.) On August 30, 2016, Justin Pannu sent an email to Thomas Tatham, writing, “it appears that whatever these individuals are developing currently is critically important to the success of the Madison County and Buda Rosa plays - but that such items are not yet developed.” (Doc. No. 154-9, Ex. Z at 351.) Pannu then asked, “[i]s the seemingly vital technology still a work-in-process?” (Id.) In a reply email sent the same day, Tatham states, “[i]ndexing of pre 1922 digital data remains to be completed” and “[t]he technology is currently working, the Madison County digital data base [sic] needs to be fully indexed, appropriate filters need to be developed for the Top Lease Play based upon legal analysis to be completed[.]” (Id.)

         On September 29, 2016, Plaintiff and Hopewell closed their deal and executed a subscription agreement. (Doc. No. 154-8, Ex. AC.) Plaintiff agreed to invest $530, 000 in Hopewell in exchange for shares in the company. (Id.)

         On December 7, 2016, Tatham delivered a report to Plaintiff on Hopewell's activities as of November 30, 2016. (Doc. No. 136-5, Ex. P.) Tatham reported that, though Hopewell's “initial goal was to lease 1, 000 net acres collectively, ” “progress has been slow” and Hopewell had closed purchases of about 125.01 acres. (Doc. No. 136-5, Exs. P, Q.) Tatham also reported that Hopewell had pending offers for leases covering about 657.54 acres, and that Hopewell would need to complete “at least 50%” of those purchases for Hopewell “to be considered successful from an economic standpoint.” (Doc. No. 136-5, Ex. Q.)

         On January 13, 2017, Plaintiff filed a complaint in this Court alleging that Defendants defrauded Plaintiff. (Doc. No. 1.) On December 27, 2018, Plaintiff filed an amended complaint, claiming that Defendants defrauded Plaintiff in violation of the Securities Exchange Act, 15 U.S.C. § 78j, and California's unfair competition law, California Business & Professions Code § 17200. (Doc. No. 93.) Plaintiff also alleges that Defendants committed common law conversion and intentional misrepresentation. (Id.) Specifically, Plaintiff alleges that Defendants failed to disclose Hopewell's financial insolvency, used Plaintiff's investment proceeds to cover antecedent debts instead of “go-forward” purchases of leases with oil and gas interests, and made misrepresentations about the title searching technology Plaintiff claimed to possess. (Id.)

         Discussion

         I. Legal Standards

         Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil Procedure if the moving party demonstrates that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A fact is material when, under the governing substantive law, it could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Fortune Dynamic, Inc. v. Victoria's Secret Stores Brand Mgmt., Inc., 618 F.3d 1025, 1031 (9th Cir. 2010). “A genuine issue of material fact exists when the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Fortune Dynamic, 618 F.3d at 1031 (internal quotation marks and citations omitted); accord Anderson, 477 U.S. at 248. “Disputes over irrelevant or unnecessary facts will not preclude a grant of summary judgment.” T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987).

         A party seeking summary judgment always bears the initial burden of establishing the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. The moving party can satisfy this burden in two ways: (1) by presenting evidence that negates an essential element of the nonmoving party's case; or (2) by demonstrating that the nonmoving party failed to establish an essential element of the nonmoving party's case that the nonmoving party bears the burden of proving at trial. Id. at 322-23; Jones v. Williams, 791 F.3d 1023, 1030 (9th Cir. 2015). Once the moving party establishes the absence of a genuine issue of material fact, the burden shifts to the nonmoving party to “set forth, by affidavit or as otherwise provided in Rule 56, ‘specific facts showing that there is a genuine issue for trial.'” T.W. Elec. Serv., 809 F.2d at 630 (quoting former Fed.R.Civ.P. 56(e)); accord Horphag Research Ltd. v. Garcia, 475 F.3d 1029, 1035 (9th Cir. 2007). To carry this burden, the non-moving party “may not rest upon mere allegation or denials of his pleadings.” Anderson, 477 U.S. at 256; see also Behrens v. Pelletier, 516 U.S. 299, 309 (1996) (“On summary judgment, . . . the plaintiff can no longer rest on the pleadings.”). Rather, the nonmoving party “must present affirmative evidence . . . from which a jury might return a verdict in his favor.” Anderson, 477 U.S. at 256.

         When ruling on a summary judgment motion, the court must view the facts and draw all reasonable inferences in the light most favorable to the non-moving party. Scott v. Harris, 550 U.S. 372, 378 (2007). The court should not weigh the evidence or make credibility determinations. See Anderson, 477 U.S. at 255. “The evidence of the non-movant is to be believed.” Id. Further, the Court may consider other materials in the record not cited to by the parties, but it is not required to do so. See Fed.R.Civ.P. 56(c)(3); Simmons v. Navajo Cnty., 609 F.3d 1011, 1017 (9th Cir. 2010).

         II. Analysis

         A. Securities Fraud

         Willis Defendants seek summary judgment of Plaintiff's claim that the Willis Defendants committed securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. (Doc. No. 136.) Plaintiff, meanwhile, seeks summary judgment of their securities fraud claim against Defendant Mark A. Willis. (Doc. No. 138.)

         Section 10(b) of the Securities Exchange Act prohibits fraud in the sale of securities, including “any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities Exchange] Commission may prescribe.” 15 U.S.C. § 78j. Rule 10b-5, promulgated by the Securities Exchange Commission under Section 10(b), makes it unlawful, in connection with the purchase or sale of a security, to “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5. To assert a private claim for relief under Rule 10b-5, a plaintiff must prove six elements: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) ...