UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA : : : : : : : : :

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1 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 1 of 37 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA CORPORATE COMMISSION OF THE MILLE LACS BAND OF OJIBWE INDIANS, v. Plaintiff, MONEY CENTERS OF AMERICA, INC., MCA OF WISCONSIN, INC., CHRISTOPHER WOLFINGTON, MARK WOLFINGTON, SEAN WOLFINGTON, JONATHAN ZIEGLER, BAENA ADVISORS, LLC, and REAL ESTATE EMPOWERED, LLC, Defendants. : : : : : : : : : No. 0:12-cv RHK-LIB MEMORANDUM OF LAW IN SUPPORT OF MOTION BY DEFENDANTS CHRISTOPHER WOLFINGTON, MARK WOLFINGTON, AND REAL ESTATE EMPOWERED, LLC FOR PARTIAL DISMISSAL OF PLAINTIFF S SECOND AMENDED COMPLAINT DUANE MORRIS LLP James L. Beausoleil, Jr., Esq. Luke P. McLoughlin, Esq. 30 S. 17 th St. Philadelphia, PA PATTERSON LAW OFFICE, P.A. Robert B. Patterson, Jr., # Thimsen Avenue, Suite 200 Minnetonka, MN Counsel for Defendants Christopher Wolfington, Mark Wolfington, and Real Estate Empowered, LLC

2 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 2 of 37 TABLE OF CONTENTS Page I. PRELIMINARY STATEMENT... 1 II. FACTUAL BACKGROUND... 4 A. Real Estate Empowered... 5 B. The Employee Defendants... 5 C. The Initial Complaint, First Amended Complaint, and Second Amended Complaint... 6 III. ARGUMENT... 7 A. The Court Lacks Personal Jurisdiction Over Real Estate Empowered The Application of the Multi-Factor Test for Personal Jurisdiction Directs That There Is No Jurisdiction Over Real Estate Empowered... 9 B. The Commission Has Not Pled Facts Necessary to Pierce MCA s Corporate Veil A Veil Piercing Claim Shall Be Dismissed Where The Facts Alleged Are Implausible MCA was Not Established as a Sham Entity And Therefore The Commission Cannot Disregard MCA s Corporate Form to Sue the Employee Defendants MCA Implausibly Alleges That MCA Is a Corporate Fiction C. The Commission s Non-Veil Piercing Claims Fail Because They Do Not State A Claim Under Fed. R. Civ. P. 12(b)(6) or Fed. R. Civ. P. 9(b) Neither Christopher Wolfington, Mark Wolfington Nor Real Estate Empowered Obtained Vault Cash From the Commission, Therefore the Commission s Unjust Enrichment, Conversion, and Constructive Trust Claims Fail As A Matter of Law i

3 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 3 of The Commission Has Not Pled Facts that the Employee Defendants or Real Estate Empowered Committed a Fraudulent Transfer (Counts IX, X, XI, XII and XIII) a. The Commission Cannot Allege Fraudulent Transfers to Real Estate Empowered, As Any Alleged Transfer Was Prior to any Alleged Claim By the Commission b. The Commission s Claim for Fraudulent Transfer/Recovery Preference Should Be Dismissed as This Claim is Not Cognizable Under Pennsylvania Law c. The Commission s Fraudulent Transfer Claims Against Chris Wolfington and Mark Wolfington are Likewise Insufficient Under Fed. R. Civ. P. 8, 9(b), and 12(b)(6) The Commission Has Not Pled Facts that Christopher Wolfington or Mark Wolfington Committed Fraud The Commission s Breach of Fiduciary Duty Claim Against Chris Wolfington Must Be Dismissed Because the Commission Does Not Have Standing To Bring The Claim IV. CONCLUSION ii

4 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 4 of 37 Federal Cases TABLE OF AUTHORITIES Ashcroft v. Iqbal, 129 S. Ct (2009) Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)... 4, 20, 23, 29 In re BH S & B Holdings LLC, 420 B.R. 112, 52 Bankr. Ct. Dec. (CRR) 125 (Bankr. S.D. N.Y. 2009)... 3, Buchwald Capital Advisors LLC v. JPMorgan Chase Bank, N.A. (In re M. Fabrikant & Sons, Inc.), 480 B.R. 480 (S.D.N.Y. 2012) Edgar v. MITE Corp., 457 U.S. 624 (1982) In re: Foxmeyer Corporation, supra 290 B.R George Hyman Constr. Co. v. Gateman, 16 F.Supp.2d 129 (D. Mass. 1998)... 16, 18 Gryl ex rel. Shire Pharms. Group PLC v. Shire Pharms. Group PLC, 298 F.3d 136 (2d Cir. 2002) International Shoe Co. v. Washington, 326 U.S. 310 (1945)... 8 Johnson v. Welsh Equipment, Inc., 518 F. Supp. 2d 1080 (D. Minn. 2007) Kranz v. Koenig, 240 F.R.D. 453 (D. Minn. 2007) Lucachick v. NDS Americas, Inc., 169 F. Supp. 2d 1103 (D. Minn. 2001)... 8 Mobil Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260 (D. Del. 1989)... 11, Parnes v. Gateway 2000, Inc., 122 F.3d 539 (8th Cir. 1997) Pearson v. Component Tech. Corp., 247 F.3d 471 (3d Cir. 2001) Quantum Loyalty Sys., Inc. v. TPG Rewards, Inc., No SLR/MPT, 2009 WL (D. Del. Dec. 23, 2009), accepting Report and Recommendation, in part, 2010 WL (D. Del. Mar. 31, 2010)... 12, 14 Rupp v. Thompson, No. C , 2004 WL (D. Minn. Mar. 17, 2004) Schmelzle v. Alza Corp., 561 F. Supp. 2d 1046 (D. Minn. 2008) Stalley v. Catholic Health Initiatives, 509 F.3d 517 (8th Cir. 2007) iii

5 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 5 of 37 Trevino v. Merscorp, Inc., 583 F. Supp. 2d 521 (D. Del. 2008)... Passim Wellman v. Dow Chem. Co., Civ. No SLR, 2007 WL (D. Del. Mar. 20, 2007) World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286 (1980)... 8 Youkelsone v. Washington Mut. (In re Washington Mut., Inc.), No , 2010 WL (Bankr. D. Del. Aug. 13, 2010) Zhorne v. Swan, 700 F. Supp (D. Minn. 1988)... 9 State Cases Aronson v. Lewis, 473 A.2d 805 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000) Crosse v. BCBSD, Inc., 836 A.2d 492 (Del. 2003) Lufkin & Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004) Mason v. Network of Wilmington, Inc., 2005 Del. Ch. LEXIS 99 (De. Ch. 2005)... 15, 19 Medi-Tec of Egypt Corp. v. Bausch & Lomb Surgical, 2004 Del. Ch. LEXIS 21, 2004 WL (Del. Ch. Mar. 4, 2004)... 11, 14 NACEPF v. Gheewalla, 930 A.2d 92 (Del. 2007) Outokumpu Eng'g Enters. v. Kvaerner Enviropower, 685 A.2d 724 (Del. Super. Ct. 1996) Rales v. Blasband, 634 A.2d 927 (Del. 1993) Wallace v. Wood, 752 A.2d 1175, 1999 Del. Ch. LEXIS 212 (Del. Ch. 1999) State Statutes 12 Pa.C.S Del. Code Ann., tit. 6, 1304(a) Del. Code Ann., tit. 6, 1305(a) Del. Code Ann. tit. 6, 1305(b)... 24, Del. Code Ann. tit. 6, 1309(3) iv

6 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 6 of 37 Rules Delaware Court of Chancery Rule Fed. R. Civ. P Fed. R. Civ. P. 8(a)(2)... 4 Fed. R. Civ. P. 9(b) , Fed. R. Civ. P Fed. R. Civ. P. 12(b)(2)... 7, 10 Fed. R. Civ. P. 12(b)(6)... Passim Fed. R. Civ. P Non-Periodical Publications America&match=&CIK=&filenum=&State=&Country=&SIC=&owner= exclude&find=find+companies&action=getcompany... 5 v

7 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 7 of 37 Defendants Christopher Wolfington, Mark Wolfington (together, the Employee Defendants ), and Real Estate Empowered, LLC ( Real Estate Empowered ) respectfully submit this memorandum of law in support of their motion for partial dismissal of the Second Amended Complaint ( SAC ) filed by Plaintiff Corporate Commission of the Mille Lacs Band of Ojibwe Indians (the Commission ). The Commission continues its pattern of overreaching in these proceedings by attempting to multiply a straightforward breach-of-contract case into a fishing expedition into new parties based on spurious new claims. The Commission s latest overreach should be rejected. Because the Commission (1) cannot show that this Court has jurisdiction over Real Estate Empowered, LLC, (2) cannot allege facts sufficient to pierce the corporate veil of MCA, and (3) cannot otherwise state plausible claims for relief, the Commission s claims should be dismissed with prejudice. I. PRELIMINARY STATEMENT The Commission is grasping at straws in an attempt to attach to these proceedings the assets of anyone associated with MCA. Notwithstanding the Court s explicit recognition that this suit for $5.6 million dollars is not a suit about fraud, Dkt. 112 (Jan. 8, 2013 Order Denying Commission Motion for Attachment/Injunction) at 8-9, the Commission attempts to transform the breach-of-contract case with MCA into a veilpiercing case based on events from 2010 and earlier. But the Commission admits it was fully reimbursed by MCA with Settlement Funds in 2009, in 2010, in 2011, and from January 1, 2012 until March 9, Dkt Only after March 10, 2012, according

8 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 8 of 37 to the Commission, did the Commission provide Vault Cash advances that were not settled with Settlement Funds. Id. The Commission has no conceivable basis, let alone a plausible one, to allege that MCA was formed in 1997 for the purpose of being a legal fiction and therefore defraud the Commission more than a half-dozen years later. Instead, the Commission again brays that its Vault Cash has been stolen, SAC 5, and that all of the defendants are realizing a significant benefit through their unlawful retention of the Vault Cash. SAC 111. The Commission is simply unwilling to acknowledge that all Vault Cash has been provided to its customers, and that this is a basic claim for breach-of-contract against MCA not anyone else. In the face of these basic facts, the Commission has responded to the Court s January 8, 2013 denial of its attachment/injunction motion by repackaging its unsuccessful motion as a Second Amended Complaint that now sues MCA s CEO and COO, Real Estate Empowered, as well as two other individuals (John Ziegler and Sean Wolfington) and a creditor of MCA (Baena Advisors, LLC). The principal focus of the Commission s latest pleading is to sue relatives of the Employee Defendants on claims regarding events from 2010 and prior events that, again, are conceded by Commission to precede by more than two years the damages it claims arose on and after March 10, See Dkt. 23, Declaration of Grand Casino Hinckley CFO Roxanne Hemming, 10 (outstanding receivable as of day of eviction consists of Vault Cash provided to MCA dating back to March 10, 2012, that has not been returned to the Grand Casino Hinckley 2

9 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 9 of 37 minus deductions for service fees due each day to MCA. ); Dkt. 24, Declaration of Mille Lacs Casino CFO Vernon Robertson, 10 (same). In other words, none of the money the Commission now seeks is for advances made prior to March 10, Though the Commission bizarrely claims that MCA was not only created in 1997 to act as a façade and defraud MCA in 2012 but to victimiz[e] Native American Tribes throughout the country, SAC 4, it is undisputed that all of the Vault Cash advances from 2009 to March 10, 2012 were reimbursed with appropriate Settlement Funds. Id. The Commission is again misrepresenting the basic nature of this dispute over a receivable created in March-April The Commission may be concerned that it may not be able to recover $5.6 million from MCA, but that is not a basis for seeking the extraordinary relief of veil piercing. Delaware courts have held that the possibility that a plaintiff may have difficulty enforcing a judgment is not an injustice warranting piercing the corporate veil. Trevino v. Merscorp, Inc., 583 F. Supp. 2d 521, 530 (D. Del. 2008); In re BH S & B Holdings LLC, 420 B.R. 112, 52 Bankr. Ct. Dec. (CRR) 125 (Bankr. S.D.N.Y. 2009) (applying Delaware law) (undercapitalization is rarely sufficient to pierce the corporate veil). If that weren t enough, the Commission s metastasizing allegations now seek to add to this case an entity called Real Estate Empowered, which the Commission alleges improperly received $70,000 from MCA in 2010 and Aside from the fact that there is no allegation that the Commission is owed money from 2010 or 2011, the Commission does not even attempt to contend the Court can exercise personal jurisdiction over Real Estate Empowered. See SAC 16 (identifying no basis for 3

10 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 10 of 37 personal jurisdictional over Real Estate Empowered). Real Estate Empowered has no connection to Minnesota and the Commission s attempt to add it as a new defendant should be dismissed. The Court should similarly dismiss the veil-piercing claims: the Commission nowhere plausibly alleges that MCA was formed to act as a corporate fiction. Trevino v. Merscorp, Inc., 583 F. Supp. 2d 528, 530 (D. Del. 2008). Instead, the Commission alleges implausibly that MCA was set up by the Wolfington Family back in 1997 to defraud the Commission and other nameless Native American tribes years later in This is a textbook case of implausible pleading was already rejected once when it was pressed as a basis to attach MCA s monies. Dkt The allegations should fare no better a second time. Because the Commission s latest attempt to transform this breach-of-contract case into something else fails to state conceivable, let alone plausible, claims for relief, it should be dismissed. Fed. R. Civ. P. 12(b)(6); Fed. R. Civ. P. 8(a)(2); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). II. FACTUAL BACKGROUND For the sake of brevity, the Employee Defendants and Real Estate Empowered incorporate by reference the facts set forth in the Memorandum of Law in Support of MCA s Motion to Dismiss the Second Amended Complaint, Dkt. 141, and add the following: 4

11 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 11 of 37 A. Real Estate Empowered Real Estate Empowered is a Pennsylvania limited liability real estate corporation. Real Estate Empowered owns in its own name properties in Philadelphia and Delaware counties in Pennsylvania. Christopher Wolfington is the sole member of Real Estate Empowered. Real Estate Empowered Decl Real Estate Empowered does not have any offices, employees, or agents in Minnesota, and the Commission does not allege otherwise. B. The Employee Defendants Christopher Wolfington is the Chief Executive Officer of MCA. He negotiated and signed the Agreement in 2009 with the Commission. Mark Wolfington is Chief Operating Officer of MCA. He joined MCA in MCA was incorporated in October 1997, and was a publicly traded business registered with the SEC from January 12, 2005 through November 24, See January 12, 2005 SB-2; Dec. 31, KSB. 1 MCA filed independently-audited financial statements when it registered with the SEC. At that time, MCA listed 47 full time employees, and over $800,000 in property and equipment owned by MCA less accumulated depreciation. Between 2009 and 2012, MCA employed approximately 20 individuals at the Commission s two casinos. The Commission was an eyewitness to the numerous 1 MCA s SEC filings are publicly available at ntry=&sic=&owner=exclude&find=find+companies&action=getcompany. 5

12 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 12 of 37 employees that MCA deployed at the Commission s casinos, and to the successful settlement of hundreds of millions of dollars of cash advances by those employees. C. The Initial Complaint, First Amended Complaint, and Second Amended Complaint After evicting MCA, the Commission filed a Complaint against MCA on April 4, Dkt. 1. Months later, the Commission demanded that the Court preliminarily attach MCA s out-of-state bank accounts and enjoin MCA from running its business. Dkt. 90. The Court denied the Commission s motion in its entirety, holding that the gravamen of the Commission s suit is a breach-of-contract claim for money damages. Dkt The Commission then amended its Complaint a second time, essentially restating the allegations from its unsuccessful attachment/injunction motion while bringing the following eight Counts against new defendants Christopher Wolfington and Mark Wolfington: Breach of Contract (Count I) Unjust Enrichment (Count II) Conversion / Intentional Interference With Personal Property (Count III) Declaratory Relief / Constructive Trust (Count V) Fraud/Deceit (Count VI) Fraudulent Transfer Actual Intent (Count IX) Fraudulent Transfer Constructive Intent (Count X) Fraudulent Transfer/Recovery Preference (Count XI). 2 Notably, the Commission demanded in its Breach of Contract claim that Mark and Christopher Wolfington be deemed liable for any breach of the contract between MCA 2 The Commission sued Chris Wolfington for Breach of Fiduciary Duty (Count XIV). 6

13 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 13 of 37 and the Commission, based on the Commission s demand that MCA s corporate veil be pierced. Lastly, the Commission added as a new defendant Real Estate Empowered and sued it for unjust enrichment (Count II), Conversion / Intentional Interference With Personal Property (Count III); Declaratory Relief/ Constructive Trust (Count V), Fraudulent Transfer/Recovery Actual Intent (Count XII), and Fraudulent Transfer/Recovery Constructive Intent (Count XIII). III. ARGUMENT The Commission s attempt to multiply these proceedings by repackaging its unsuccessful attachment/injunction motion as a new Complaint is fatally flawed: there is no jurisdiction over Real Estate Empowered, the veil piercing claims fail to surmount Twombly s plausibility threshold, and the balance of the allegations are legally defective, generalized, and/or implausible. The Commission s attempt to attach new defendants and claims to this suit against MCA should be emphatically rejected. A. The Court Lacks Personal Jurisdiction Over Real Estate Empowered The Commission does not even attempt to plead jurisdiction over Real Estate Empowered. Real Estate Empowered should be dismissed from this case. A complaint against a defendant must be dismissed where the Court lacks jurisdiction over that defendant. Fed. R. Civ. P. 12(b)(2). 3 A two-step test determines 3 Courts may exercise either specific or general jurisdiction over a party. Where a court premises jurisdiction over a defendant upon the relationship between the plaintiff s claims and the defendant s forum-state activities, the court is exercising specific jurisdiction. See Johnson v. Welsh Equipment, Inc., 518 F. Supp. 2d 1080, 1088 (D. 7

14 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 14 of 37 whether a federal court has jurisdiction over a non-resident party: (1) whether the facts presented satisfy the forum state s long-arm statute, and (2) whether the nonresident has minimum contacts with the forum state, so that the court s exercise of jurisdiction would be fair and in accordance with due process. See Lucachick v. NDS Americas, Inc., 169 F. Supp. 2d 1103, 1106 (D. Minn. 2001). Because the Minnesota long-arm statute extends jurisdiction to the fullest extent permitted by the Due Process clause, the Court need only decide whether jurisdiction is consistent with the Due Process clause. See id. Courts in the Eighth Circuit examine five factors to determine whether the exercise of jurisdiction comports with the minimum contacts 4 requirement of the Due Process clause: (1) the nature and quality of the contacts with the forum state; (2) the quantity of contacts with the forum; (3) the relation of the cause of action to these contacts; (4) the interest of the forum state in providing a forum for its residents; and (5) the convenience of the parties. See id; International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). Courts do not apply these factors mechanically, and the last two factors Minn. 2007). When the plaintiff s claim is not related to the defendant s contacts with the forum, a court can exercise general jurisdiction based on the defendant s continuous and systematic contacts with the forum. See id. Because there are no allegations in the Second Amended Complaint consistent with a claim of general jurisdiction over Real Estate Empowered, only specific jurisdiction is discussed in this Memorandum. 4 The Due Process clause requires that there be minimum contacts between the defendant and the forum state. This requirement is satisfied if the defendant s conduct and connection with the forum state is such that the defendant should reasonably anticipate being haled into that state s court. Lucachick, 169 F. Supp. 2d at 1106 (citing World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 291 (1980). In addition, the maintenance of the suit in the forum state must not offend traditional notions of fair play and substantial justice. International Shoe Co. v. Washington, 326 U.S. 310 (1945). 8

15 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 15 of 37 are to be considered, but are not determinative. The application of these factors confirms that the Court lacks jurisdiction over Real Estate Empowered. 1. The Application of the Multi-Factor Test for Personal Jurisdiction Directs That There Is No Jurisdiction Over Real Estate Empowered Real Estate Empowered is a Pennsylvania LLC with a Pennsylvania address. As set forth in the attached affidavit, Real Estate Empowered does not have any offices, employees, or agents in Minnesota. Real Estate Empowered Decl It has not conducted any business in Minnesota, nor has it directed any marketing efforts toward Minnesota. Id. The Commission does not allege otherwise. To satisfy specific personal jurisdiction, there must be a connection between the cause of action and Defendant s contacts with the forum state. Here, the Second Amended Complaint fails to allege any connection between Real Estate Empowered and Minnesota. See SAC 16. There are no simply allegations that Real Estate Empowered had contacts with Minnesota that relate to the transactions at issue in this case only an allegation that Real Estate Empowered received $70,000 in 2010 and 2011 that the Commission believes was unwarranted. Real Estate Empowered is a Pennsylvania LLC with no ties to Minnesota and which would be inconvenienced by the need to travel to Minnesota to defend this lawsuit. Nor does Minnesota have a distinct interest in this suit by the Commission against Real Estate Empowered. This Court cannot assert jurisdiction over Real Estate Empowered without evidence of minimum contacts with the forum, even if the Commission contends that Real Estate Empowered improperly received $70,000. See Zhorne v. Swan, 700 F. Supp. 9

16 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 16 of , 1039 (D. Minn. 1988) (refusing to find personal jurisdiction over a corporation which had no contacts with the forum state but which was allegedly being used to shield fraudulently obtained assets). The application of the multifactor test described above makes clear that jurisdiction over Real Estate Empowered is utterly lacking. In light of the foregoing, the Second Amended Complaint should be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(2) because the multi-factor test for personal jurisdiction has plainly not been met. The Court should dismiss all of the claims against Real Estate Empowered based on a lack of jurisdiction over Real Estate Empowered. B. The Commission Has Not Pled Facts Necessary to Pierce MCA s Corporate Veil The veil-piercing claim (Count I, Breach of Contract) against the Employee Defendants should be dismissed per Fed. R. Civ. P. 12(b)(6). The Commission has not pled facts necessary to take the extraordinary step of piercing MCA s corporate veil. 5 The Commission, faced with proceeding against an insolvent entity for breach of contract, now improperly attempts to attach to these proceedings the assets of anyone associated with MCA with the last name Wolfington. Because the new claims against the 5 To avoid dismissal, a Complaint must include enough facts to state a claim to relief that is plausible on its face. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 547 (2007). A formulaic recitation of the elements of a cause of action will not suffice. Id. at 555; accord Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). Rather, the complaint must set forth sufficient facts to nudge[] the[] claim[] across the line from conceivable to plausible. Twombly, 550 U.S. at 570. Stated differently, the plaintiff must assert facts that affirmatively and plausibly suggest that [he] has the right he claims..., rather than facts that are merely consistent with such a right. Stalley v. Catholic Health Initiatives, 509 F.3d 517, 521 (8th Cir. 2007) (citing Twombly, 550 U.S. at ). 10

17 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 17 of 37 Employee Defendants are based on the erroneous premise that MCA is a legal fiction, they should be dismissed. 1. A Veil Piercing Claim Shall Be Dismissed Where The Facts Alleged Are Implausible Veil piercing claims are frequently dismissed on the pleadings because, under Delaware law, 6 the corporate entity is only disregarded in exceptional circumstances and [p]ersuading a Delaware court to disregard the corporate entity is a difficult task. Mobil Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 270 (D. Del. 1989); Wallace v. Wood, 752 A.2d 1175, 1999 Del. Ch. LEXIS 212 (Del. Ch. 1999). Delaware public policy is fundamentally against disregarding the corporate form, as the corporations and their limited liabilities have been acknowledged for decades as necessary to economic growth and to the development of new enterprises. See, e.g., Medi-Tec of Egypt Corp. v. Bausch & Lomb Surgical, 2004 Del. Ch. LEXIS 21, 2004 WL , at *8 (Del. Ch. Mar. 4, 2004). [C]ourts routinely consider, and grant, motions to dismiss for failure to allege facts sufficient to support the imputation of liability on an alleged alter ego. Youkelsone v. Washington Mut. (In re Washington Mut., Inc.), No , 2010 WL , at 6 Delaware law applies because Minnesota courts apply the internal affairs doctrine, that the law of the state of incorporation normally determines issues relating to the internal affairs of a corporation. Rupp v. Thompson, No. C , 2004 WL , at *3 (D. Minn. Mar. 17, 2004); see also Edgar v. MITE Corp., 457 U.S. 624, 645 (1982) ( [O]nly one State should have the authority to regulate a corporation s internal affairsmatters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders-because otherwise a corporation could be faced with conflicting demands. ). 11

18 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 18 of 37 *11 (Bankr. D. Del. Aug. 13, 2010) (whether sufficient facts are pled to pierce the corporate veil is a proper subject for resolution on a motion to dismiss ). See, e.g., Quantum Loyalty Sys., Inc. v. TPG Rewards, Inc., No SLR/MPT, 2009 WL , at *7 n.64 (D. Del. Dec. 23, 2009) (Report and Recommendation) (granting president and CEO s motion to dismiss based upon inability to pierce the corporate veil where the complaint lacked any facts evidencing fraud or inequity ), accepting Report and Recommendation, in part, 2010 WL (D. Del. Mar. 31, 2010); Trevino v. Merscorp, Inc., 583 F. Supp. 2d 521, 529 (D. Del. 2008) (granting motion to dismiss to the extent that corporate veil would not be pierced so as to hold shareholders of mortgagee liable for alleged overcharges, where plaintiffs failed to sufficiently allege injustice or unfairness); Wellman v. Dow Chem. Co., Civ. No SLR, 2007 WL , at *2 (D. Del. Mar. 20, 2007) (granting motion to dismiss where employee of subsidiary attempted to pierce the corporate veil). To state a veil-piercing claim in Delaware, the plaintiff must plead facts supporting an inference that the corporation, through its alter-ego, has created a sham entity designed to defraud investors and creditors. Crosse v. BCBSD, Inc., 836 A.2d 492 (Del. 2003) (emphasis added); Wallace ex. rel. Cencom Cable Income Partners II v. Wood, 752 A.2d 1175, (Del. Ch. 1999). In order to succeed on an alter ego theory of liability, plaintiffs must essentially demonstrate that, in all aspects of the business, the corporation and its shareholders actually functioned as a single entity and should be treated as such. Pearson v. Component Tech. Corp., 247 F.3d 471, 485 (3d Cir. 2001) (emphasis added). The degree of control required to pierce the veil is 12

19 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 19 of 37 exclusive domination and control to the extent that the company has no legal or independent significance of [its] own. Wallace, 752 A.2d at 1183 (emphasis added). None of the Commission s allegations plausibly alleges that MCA founded in 1997 and having transacted tens of millions of dollars for numerous customers is a corporate fiction. Therefore, the Commission s allegations against the Employee Defendants on the basis of veil piercing should be dismissed. 2. MCA was Not Established as a Sham Entity And Therefore The Commission Cannot Disregard MCA s Corporate Form to Sue the Employee Defendants The Commission brazenly alleges that MCA is the alter ego of Christopher, Mark, Sean Wolfington and Jonathan Ziegler ( Wolfington Family ), SAC 51, and that The Wolfington Family is jointly and severally liable for MCA s breach of contract. Id. at 107. But the Commission has not pled facts supporting the claim that Christopher Wolfington and Mark Wolfington created in 1997 a sham entity designed to defraud investors and creditors. Crosse v. BCBSD, Inc., 836 A.2d 492, 497 (Del. 2003). 7 According to the Commission, the Commission s Vault Cash was being used by Christopher and Mark Wolfington for personal expenses. Id. at 159(c). Yet the parties previously agreed, and Court previously held, that all Vault Cash has been provided to the casino patrons. Dkt. 112 at 9 ( The parties agree that the Commission willingly and knowingly advanced MCA the cash and that MCA used it to provide cash-access services as directed by the Agreement. The parties disagreement relates only to MCA s failure to 7 The Commission does not claim that Real Estate Empowered s veil should be pierced. 13

20 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 20 of 37 repay the Commission s advances on time (or at all). ). The Commission s claim that the Employee Defendants retain Vault Cash, see SAC 52, is incorrect, as the Commission knows. Dkt MCA received Customer Funds from its customers at the casinos, and used those and other monies to settle Settlement Funds back to the Commission. The Commission s primary argument is based on a fundamentally incorrect description of who possesses Vault Cash. Moreover, the Commission only points to alleged wrongs by MCA, not MCA s corporate structure itself, as being the basis for piercing the veil. This is insufficient under Delaware law to seek employee liability based on veil piercing. Medi-Tec of Egypt Corp. v. Bausch & Lomb Surgical, No NC, 2004 Del. Ch. LEXIS 21, 2004 WL , at *4 (Del. Ch. Mar. 4, 2004) (holding that plaintiff's alter ego argument fails because plaintiff has not alleged that the corporate form in and of itself operates to serve some fraud or injustice, distinct from the alleged wrongs of the underlying corporation); see also Quantum Loyalty Sys., Inc WL , at *7 n.64 (granting motion to dismiss where the complaint lacked any facts evidencing fraud or inequity ); Trevino, 583 F. Supp. 2d at Under Delaware law, the fraud or similar injustice that must be demonstrated in order to pierce a corporate veil under Delaware law must, in particular, be found in the defendants use of the corporate form. In re: Foxmeyer Corporation, supra 290 B.R. at 236 citing Mobil Oil, 718 F. Supp. at 269; see also Wallace, 752 A.2d at 1184 ( Piercing the corporate veil... requires that the corporate structure cause fraud or similar injustice ) (citation omitted; emphasis added). 14

21 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 21 of 37 [T]he underlying cause of action[, at least by itself,] does not supply the necessary fraud or injustice. To hold otherwise would render the fraud or injustice element meaningless, and would sanction bootstrapping. Mobil Oil, 718 F. Supp. at 268; see also Outokumpu Eng'g Enters. v. Kvaerner Enviropower, 685 A.2d 724, 729 (Del. Super. Ct. 1996) ( The injustice must be more than the breach of contract alleged in the complaint ). Here, the structural problem that the Commission posits is MCA s insolvency (discussed below) and an initial loan one that has not been paid since 2010 from Baena. SAC 74. Those are not the type of allegations that would permit veil piercing. In re BH S & B Holdings LLC, 420 B.R. 112, 52 Bankr. Ct. Dec. (CRR) 125 (Bankr. S.D. N.Y. 2009). 3. MCA Implausibly Alleges That MCA Is a Corporate Fiction The sum total of the Commission s other veil piercing allegations is a claim that (1) MCA is insolvent, (2) MCA does not pay dividends, (3) MCA does not retain board minutes, and (4) MCA was created to fund... lifestyles. SAC 53. All of these contentions evaporate upon inspection, and provide no plausible basis to sue Mark or Chris Wolfington for any alleged contractual breach by MCA in First, under Delaware law, mere insolvency or undercapitalization is not enough to allege piercing of the corporate veil. Mason, 2005 Del. Ch. LEXIS 99; In re BH S & B Holdings LLC, 420 B.R. 112, 52 Bankr. Ct. Dec. (CRR) 125 (Bankr. S.D.N.Y. 2009) (applying Delaware law) (undercapitalization is rarely sufficient to pierce the corporate veil). And rightly so otherwise the veil of every insolvent corporation could be pierced. 15

22 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 22 of 37 Id. Instead, the inquiry is most relevant for the inference it provides into whether the corporation was established to defraud its creditors or other improper purpose such as avoiding the risks known to be attendant to a type of business. Trevino, 583 F. Supp. 2d at 530 (dismissing on the pleadings alter ego claim where plaintiff conceded subsidiary established for legitimate business purpose). When determining whether a subsidiary was adequately capitalized, courts focus on the initial capitalization: whether a corporate entity was or was not set up for financial failure. George Hyman Constr. Co. v. Gateman, 16 F. Supp. 2d 129, (D. Mass. 1998). Not only did MCA have a legitimate business purpose when it was founded in 1997, but it continued to have such a purpose and has been a functioning business for almost 15 years. As the Commission well knows, MCA was publicly traded, was registered with the SEC, and has had numerous employees, assets, and customers. As noted above, MCA was incorporated in October 1997, and was a publicly traded business registered with the SEC from January 12, 2004 through November 24, See January 12, 2004 SB-2; Dec. 31, KSB. MCA filed independently-audited financial statements when it registered with the SEC. At that time, MCA listed 47 full time employees, and over $800,000 in property and equipment owned by MCA less accumulated depreciation. Between 2009 and 2012, MCA employed approximately 20 individuals at the Commission s two casinos. The Commission witnessed to the numerous employees that MCA deployed at the Commission s casinos, and to the successful settlement of hundreds of millions of dollars of cash advances by those 16

23 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 23 of 37 employees. The Commission, with this direct knowledge of MCA s legitimate corporate operations, cannot now say that MCA had no business purpose and was a sham entity. All of this information is publicly available or was provided to the Commission in discovery yet the Commission unrestrainedly seeks to sue the Employee Defendants regardless. 8 The Commission s motivation may be its concern that the Commission may not be able to recover $5.6 million from MCA, but that is not a basis for veil piercing. Delaware courts have held that the possibility that a plaintiff may have difficulty enforcing a judgment is not an injustice warranting piercing the corporate veil. Trevino, 583 F. Supp. 2d at 530. Second, and contrary to what the Commission claims, MCA s election not to pay dividends does not mean its veil can be pierced. After nearly 10 years in the business, independent auditors noted that MCA had a working capital deficit, and substantial doubt about the Company s ability to continue as a going concern. Dec. 31, KSB. Accordingly, MCA made the prudent financial decision not to issue dividends, but instead to put the funds into financing the business. Dec. 31, KSB ( The future payment of dividends... will depend on our future earnings, financial requirements and other similarly unpredictable factors. For the foreseeable future, we anticipate that any 8 The Court can consider on this motion the financial statements and publicly available documents that the Commission relied on and referenced in its Second Amended Complaint. Parnes v. Gateway 2000, Inc., 122 F.3d 539, 546 n.9 (8th Cir. 1997); see also Gryl ex rel. Shire Pharms. Group PLC v. Shire Pharms. Group PLC, 298 F.3d 136, 140 (2d Cir. 2002) (court is free to consider documents that are incorporated into the complaint by reference or attached to the complaint as exhibits, or whose terms and effect are relied upon by the plaintiff in drafting the complaint ). 17

24 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 24 of 37 earnings that may be generated from our operations will be retained by us to finance and develop our business and that dividends will not be paid to stockholders. ). Third, the Commission points to the fact that MCA may not retain board minutes as grounds for veil piercing, while omitting any mention of MCA s SEC filings or the comprehensive financial statements, independent audit, and general ledgers that MCA uses to run its business (and that the Commission has in its possession). The Commission s single blinkered reference to the absence of Board minutes shows that the Commission s implausible claims depend on a fundamentally skewed view of MCA and its structure. Despite all of the public information about MCA and volumes of information the Commission has received in discovery, the Commission brazenly takes the absence of board minutes and tries to inflate that into an absence of corporate formalities altogether. SAC 107(a) (Claiming that the Wolfington Family failed to observe corporate formalities or keep corporate records, including failing to keep minutes to board meetings ). The Commission s allegation about this 15-year old company that transacted tens of millions of dollars is skewed and implausible. Fourth, the Commission s portrait of a Wolfington Family standing behind the façade of MCA, using Vault Cash for personal expenses, is colorful nonsense built (again) on the claim of stolen Vault Cash. The Commission alleges that shortly after the Commission gave MCA access to its Vault Cash, Individual Defendants had drained MCA of the funds. SAC 133. See also id. at 159(c) (Averring that Commission s Vault Cash was being used by 18

25 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 25 of 37 Christopher and Mark Wolfington for personal expenses. ). The Commission knows this statement is not right MCA received access to the Vault Cash in 2009, and Vault Cash undisputedly went to the casino patrons until the day MCA was evicted in The Commission received all Settlement Funds up to and including the advances made on March 9, Thus, there was no drain[ing] MCA of the Vault Cash, in 2009 or at any time. Nor has the Baena loan that the Commission so heavily criticizes been repaid since SAC at 89 ( MCA issued payments to Baena of approximately $50,000 per month from 2006 through at least ). Had it been, the Commission surely would have attacked that too, as another form of draining Vault Cash. The Commission s fraud arguments have that flexibility because they are divorced from the facts. Respectfully, the Commission s new allegations of drainage like those in the attachment/injunction motion flaunt the facts in search of a fraud theme. Dkt. 112 at 9-10 ( Although the Commission seeks to imbue this contract dispute with fraudulent overtones by implying that the funds MCA received from casino customers belonged to the Commission and MCA stole them, this contention is not supported by the Agreement. ). The Court should not permit this. Finally, and most notably, the Commission makes no effort to explain how any of its allegations about 2010 and prior render a March-April, 2012 receivable something other than a traditional corporate receivable. As in its unsuccessful attachment/injunction motion, the Commission claimed that MCA was set up to defraud the Commission and nameless other Native American tribes. Compare Dkt. 92 (Mem. in Support of 19

26 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 26 of 37 Prejudgment Attachment) at 4, 12, with Dkt. 128 (SAC 1, 4, 107(b)). This claim was utterly baseless but the Commission again persists with this line of attack nonetheless. The Court should take the Commission s repackaged allegations and dismiss them. 9 In sum, the publicly available documents the Commission cites and the documents the Commission received in discovery belie the Commission s own allegations. MCA is not a sham entity or shell corporation created only to perpetrate a fraud; it is merely a corporation like any other, and one that successfully transacted with the Commission for three years. The Commission is again overreaching out of its desire to secure a judgment prior to trial. See Mason v. Network of Wilmington, Inc., 2005 Del. Ch. LEXIS 99 (De. Ch. 2005) ( If creditors could enter judgments against shareholders every time that a corporation becomes unable to pay its debts as they become due, the limited liability characteristic of the corporate form would be meaningless. ). MCA s Employee Defendants are not liable for any breaches by MCA itself. C. The Commission s Non-Veil Piercing Claims Fail Because They Do Not State A Claim Under Fed. R. Civ. P. 12(b)(6) or Fed. R. Civ. P. 9(b) Not only is there (1) no jurisdiction over Real Estate Empowered, and (2) no plausible claim for veil piercing, but (3) the Commission s allegations including their 9 The Court may recall that the Commission submitted an affidavit in support of its unsuccessful attachment/injunction motion from a certified fraud examiner. That fraud examiner found no fraud, and simply made observations that [b]ased on [her] experience, this pattern of bank activity is unusual. Where is this examiner now, and where are any of her opinions that might support the extraordinary allegation of veil piercing? Reference to the Commission s own expert who was provided MCA s audit, general ledgers, creditor agreements, bank account statements, cash-flow statements, deposition testimony, and correspondence is conspicuously omitted from Plaintiff s new pleading. 20

27 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 27 of 37 non-veil piercing claims otherwise fail to meet the pleading standards of Fed. R. Civ. P. 12(b)(6) and Fed. R. Civ. P. 9(b). For that independent reason, the newly added Counts against Real Estate Empowered and the Employee Defendants should be dismissed. First, the Commission makes numerous claims that Real Estate Empowered and the Employee Defendants are in possession of the Commission s Vault Cash. E.g., SAC , 119, 121. It has been definitively established that all Vault Cash was provided to the casino patrons or retrieved from the booth when the Commission evicted MCA. Dkt There can be no plausible claim that Vault Cash is in the possession of the Employee Defendants or Real Estate Empowered. Second, the claims of fraudulent transfer should be dismissed because Plaintiff nowhere contends how any of the allegedly fraudulent acts were themselves out of the ordinary course of business. Nor does Plaintiff face the fact that the monies it demands relate to cash advances from March 10, 2012 to April 2, 2012, not before. The Plaintiff instead makes generalized attacks on MCA s and its employees actions from Fraud must be plead with particularity, Fed. R. Civ. P. 9(b), and Plaintiff has not done so. As such, its non-veil piercing claims should be dismissed. 1. Neither Christopher Wolfington, Mark Wolfington Nor Real Estate Empowered Obtained Vault Cash From the Commission, Therefore the Commission s Unjust Enrichment, Conversion, and Constructive Trust Claims Fail As A Matter of Law The Commission makes a claim against the Employee Defendants and Real Estate Empowered for Unjust Enrichment (Count II), Intentional Interference with Personal Property/Conversion (Count III), and Constructive Trust (Count V) based entirely based 21

28 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 28 of 37 upon the alleged retention of Vault Cash by MCA. SAC , However, it has already been definitively established that all Vault Cash was either provided to casino patrons or obtained by the Commission during its eviction of MCA in April Dkt In the face of this, the Second Amended Complaint does not plead a single fact alleging that the Employee Defendants or Real Estate Empowered received any Vault Cash from the Commission. Because the Commission has not pled even the most basic allegations that the Employee Defendants and/or Real Estate Empowered obtained any Vault Cash from the Commission, these claims must be dismissed with prejudice. 2. The Commission Has Not Pled Facts that the Employee Defendants or Real Estate Empowered Committed a Fraudulent Transfer (Counts IX, X, XI, XII and XIII) a. The Commission Cannot Allege Fraudulent Transfers to Real Estate Empowered, As Any Alleged Transfer Was Prior to any Alleged Claim By the Commission The Commission s allegations of fraudulent transfer bear no relationship to its allegations of being owed $5.6 million in Settlement Funds for Vault Cash advances made between March 10, 2012 and April 2, With respect to Count XIII, SAC , any claim that transfers of $70,000 to Real Estate Empowered were made to defraud the Commission as a creditor pursuant to Del. Code Ann., tit. 6, 1305(a) must fail. On the face of the Complaint, these transfers occurred in 2010 and SAC 174. The Commission s alleged claim arose in March of Thus, the Commission s claim did not arise before the allegedly fraudulent transfers occurred. See Del. Code Ann. tit. 6, 1305(a) (requiring that the 22

29 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 29 of 37 claim be fraudulent as to a creditor whose claim arose before the transfer at issue was made). For that reason, the claim can be swiftly rejected. Likewise, the Commission has not alleged that the transfers to Real Estate Empowered were without receiving reasonably equivalent value 10 as would be required pursuant to Del. Code Ann. tit. 6, 1305(a). Nor has the Commission alleged that the Real Estate Empowered Transfers were made with an actual intent to hinder, delay defraud MCA s creditors, as would be required pursuant to Del. Code Ann., tit. 6, 1304(a). SAC 179 (referencing only Wolfington Transfers ). Moreover, the Commission has not alleged any badges of fraud relevant to Real Estate Empowered. The Commission has not alleged that Real Estate Empowered itself was an insider, just that Chris Wolfington has an interest in it. The Commission s allegations are that tens of thousands of dollars had been transferred to Real Estate Empowered two years prior to the Commission s alleged claim. These allegations do not state a legally viable claim for fraudulent transfer, and therefore Counts XII and XIII should be dismissed. 10 The Commission only alleges that there was no transfer of title of property from Real Estate Empowered to MCA. SAC 184. However, there are no facts pled to determine that value outside of the transfer of a title was not received by MCA. The Supreme Court has held that, to survive a Rule 12(b)(6) motion to dismiss, a complaint must provide for more than just a formulaic recitation of the elements of a cause of action. See Twombly, 550 U.S. at 555. The Commission s allegations fail to meet that test. 23

30 CASE 0:12-cv RHK-LIB Document 160 Filed 03/04/13 Page 30 of 37 b. The Commission s Claim for Fraudulent Transfer/Recovery Preference Should Be Dismissed as This Claim is Not Cognizable Under Pennsylvania Law While the Commission cites to Delaware law, Pennsylvania law should apply to the Commission s Preference Claim (Count XI). 11 Minnesota Courts follow a five-factor test as to which state s law applies: (1) predictability of results; (2) maintenance of interstate order; (3) simplification of the judicial task; (4) advancement of the forum state s interests; and (5) application of the better rule of law. See Schmelzle v. Alza Corp., 561 F. Supp. 2d 1046, 1048 (D. Minn. 2008). Minnesota, the forum state, has little interest here as the Commission is a corporate body politic of the Mille Lacs Band of the Ojibwe Indians. SAC 6. The two other states with an interest, Pennsylvania and Delaware, have both adopted the Uniform Fraudulent Transfers Act; however, Pennsylvania s enactment of the Uniform Fraudulent Transfers Act does not contain the provision which is relied upon by the Commission in Count XI. Compare Del. Code Ann. tit. 6, 1305(b) with 12 Pa.C.S Most of the factors that the Court would consider in its choice-of-law analysis would appear to have little application to the facts of the present case i.e., predictability of results, simplification of the judicial task, and application of the better rule of law. Finally, with respect to maintenance of interstate order, although MCA may be a Delaware corporation (SAC 7), its principal office is alleged to be in Pennsylvania and 11 For Counts IX and X, XII, and XIII, Pennsylvania and Delaware law are nearly identical. 24