United States District Court, S.D. California
ENSOURCE INVESTMENTS LLC, a Delaware limited liability company, Plaintiff,
v.
MARK A. WILLIS, et al., Defendants.
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) ...