ECAP Holdings, LLC v. Quixotic Farming, LLC

          MEMORANDUM OPINION AND ORDER

          Sam A. Lindsay United States District Judge.

         Before the court is the Defendants’ Motion to Dismiss Pursuant to Federal Rules of Civil Procedure 12(b)(2) and 12(b)(5) (Doc. 18), filed February 22, 2019. After considering the motion, briefs, evidence submitted by the parties, record, and applicable law, the court denies without prejudice Defendants’ Motion to Dismiss Pursuant to Federal Rules of Civil Procedure 12(b)(2) and 12(b)(5) (Doc. 18) and grants Plaintiff’s request to conduct jurisdictional discovery.

         I. Factual and Procedural Background

         On June 14, 2018, Plaintiff ECAP Holdings, LLC (“Plaintiff” or “ECAP”) brought this action in state court against Defendants Quixotic Farming, LLC (“Quixotic Farming”); T. Lane Constant (“L. Constant”); Randy Constant (“R. Constant”); William O’Connor (“O’Connor”); Kent Dryer (“Dryer”); Quixotic Investments, LLC (“QI”); Pescado, LLC (“Pescado”); True Son Leasing (“TSL”); The Zou Leasing (“Zou”); and Innovative Aquaculture Alliance, LLC (“IAA”) (collectively, “Defendants”). The action was removed to federal court on August 20, 2018, based on diversity jurisdiction. In its Amended Complaint (“Complaint”), filed February 1, 2019, ECAP requests relief in the form of a declaratory judgment and asserts claims for breach of contract, quantum meruit, tortious interference with existing and prospective contract relations, common law fraud, fraud in a securities transaction, negligent misrepresentation, and fraudulent transfer.

         In support of these claims, ECAP alleges that:

14. ECAP is a merchant bank that specializes in accelerating high quality, development stage companies through their initial growth phase. ECAP assists early development stage companies with their business planning, financial modeling, and presentations for investors. After being hired by such companies, ECAP presents opportunities for accredited investors in a portfolio of companies that have the potential to be industry leaders of tomorrow. ECAP typically makes investments into its featured companies, which are 2-5 years in duration and limits their representation to 2-4 companies at a time, aligning their interests with both peer investors and the company’s management.

15. Such was the situation when ECAP was introduced to Quixotic Farming and its Management Team (R. Constant, L. Constant, Dryer and O’Connor) in early 2016. R. Constant and L. Constant were identified as two of the principals of Quixotic Farming, CEO and COO respectively. R. Constant is the father of L. Constant. O’Connor was represented to be the CFO of Quixotic and to be “heavily involved in the strategic growth of the company” and to provide “hands-on analytical and finance advisory services.” R. Constant, L. Constant, Dryer and O’Connor are collectively referred to herein as “Management Team”. Quixotic Farming and its Management Team wanted to use the services of ECAP to raise funds through investment from accredited investors to be located by ECAP for that purpose, with a goal of raising at least $7, 000, 000 in new capital to be injected into Quixotic Farming.

16. Quixotic Farming was located in Chillicothe, Missouri and was represented to ECAP in Texas by the Management Team in one or more telephone calls to be a company engaged in aquaculture-commercial for-profit fish farming, and also claiming to be the largest producer/seller of pure fresh water tilapia in the United States. It was further represented to ECAP by Quixotic Farming and its Management Team that since its founding in 2011, the Management Team had invested over $9, 000, 000 of their own capital into Quixotic Farming on research and development, facilities and operations in the pursuit of perfecting their process of growing and selling hormone-free, clean-diet tilapia.

17. During a conference call on May 4, 2016, which included each member of the Management Team (R. Constant, L. Constant, Dryer, and O’Connor), the Management Team specified the purported assets of Quixotic Farming and represented to ECAP’s members who were located in Texas at the time, that all of the assets used in the business of Quixotic Farming were owned by Quixotic Farming, free and clear of any liens, debts and/or liabilities. This included the former Wal-Mart store in Chillicothe, Missouri where Quixotic Farming conducted its operations; as well as all fish tanks, equipment, supplies and machinery located in that building. It also was represented to ECAP’s members who were located in Texas during that call that Quixotic Farming owned all facilities and equipment located in Colorado where Quixotic Farming had additional fish farming operations. The bottom line is Quixotic Farming was represented to ECAP’s representatives located in Texas during one or more telephone calls with Quixotic Farming and its Management Team (R. Constant, L. Constant, Dryer and O’Connor) that Quixotic Farming was a company that had at least $9, 000, 000 of assets in its name, which were free and clear of all liens, debts and/or liabilities. These representations later turned out to be false, but it was based on those false representations made to ECAP’s members located in Texas by Quixotic Farming and its Management Team, that ECAP detrimentally relied as it was induced into entering into a contract to perform services for Quixotic Farming.

Pl.’s Compl. ¶¶ 14-17. ECAP alleges that, based on the foregoing representations and financial information provided to it in Texas, ECAP, on April 28, 2016, agreed to enter into a Non-Disclosure and Non-Circumvent Agreement (“NDA”) with Quixotic Farming pursuant to which the parties agreed not to “engage in any negotiations or to execute any agreement, understanding or undertaking whatsoever with any person or entity that has a business relationship with the other party[.], ” and, on June 22, 2016, ECAP and Quixotic Farming entered into an Advisory Services Agreement (“ASA”) in which ECAP was hired by Quixotic Farming to secure investments for Quixotic Farming for both cash and equity in Quixotic Farming. That executed ASA was delivered to ECAP by Quixotic Farming and its Management Team in Texas. Id. ¶¶ 18-19. ECAP also made a cash investment of $25, 000 in Quixotic Farming and, under the ASA, it was to receive an initial 3.5% ownership interest in Quixotic Farming.

         ECAP alleges that it subsequently had found an investor who was considering making a substantial investment in Quixotic Farming in December 2016, but it discovered while gathering due diligence information requested by the investor that the assets previously represented to be owned by Quixotic Farming were not actually owned by Quixotic Farming but, instead, by members of the Management Team and various other related entities (Pescado, Zou, QI, TSL) that were owned by members of the Management Team. ECAP alleges that, when it confronted R. Constant and other Management Team members and advised that it would cease all work and correct unknowing misrepresentations made to potential investors if they did not immediately correct the ownership structure of all assets used by Quixotic Farming from that point forward to be owned 100% by Quixotic Farming, free and clear:

R. Constant and/or the members of the Management Team, QI, Pescado, Zou and TSL immediately promised and represented to ECAP that all assets used by Quixotic Farming but not then “owned” by Quixotic Farming or “titled” in the name of Quixotic Farming would be conveyed into and become part of Quixotic Farming and that Quixotic Farming would then own all such assets – free and clear of all liens, debts and/or liabilities. These representations were made either in person and/or via telephone to ECAP’s representatives who were located in Texas at the time of such representations.

Id. ¶ 26.

         ECAP alleges that, based this representation and assurance, it proceeded to negotiate with other potential investors. During this same time, ECAP alleges that it “was assured in Texas by Quixotic Farming and its Management Team (R. Constant, L. Constant, Dryer and/or O’Connor), Zou, Pescado, TSL and QI that the transfer/assignments of all assets to Quixotic Farming would occur prior to the closing of any investment by any outside accredited investor.” Id. ¶ 27. ECAP alleges that it, in the first quarter of 2017, it found and introduced a ...