THE RHODE ISLAND INDUSTRIAL-RECREATIONAL BUILDING AUTHORITY, Plaintiff,
CAPCO STEEL, LLC; CAPCO ENDURANCE, LLC; MICHAEL J. CAPARCO, SR.;and MICHAEL J. HULLINGER, Defendants.
Providence County Superior Court
For Plaintiff: Michael T. Eskey, Esq.; Stephen A. Izzi, Esq.; Richard J. Welch, Esq.
For Defendant: Matthew T. Oliverio, Esq.; Christine M. Curley, Esq.; Thomas J. Enright, Esq.; Stephen Wald, Esq.
Before the Court for decision are two motions to dismiss all counts contained in Plaintiff The Rhode Island Industrial-Recreational Building Authority's (RIIRBA) Complaint. Defendants Capco Steel, LLC (Capco Steel), Capco Endurance, LLC (Capco Endurance), and Michael J. Caparco, Sr. (Caparco) seek to dismiss the Complaint pursuant to Super. R. Civ. P. 9(b), 12(b)(6), and 12(c); Defendant Michael J. Hullinger (Hullinger) seeks to dismiss the three counts alleged against him pursuant to Super. R. Civ. P. 12(b)(6). Count I of RIIRBA's Complaint-alleging breach of agreements-applies only to the Capco Defendants. The remaining counts (Counts II through IV) are asserted against all Defendants and set forth claims for fraudulent misrepresentation and concealment, civil conspiracy, and negligent misrepresentation and concealment, respectively.
I Facts and Travel
The Court recites the pertinent facts of this matter as they appear directly in the Complaint. RIIRBA-established by the General Assembly pursuant to G.L. 1956 §§ 42-34-1, et seq.-is a Rhode Island public corporation tasked with promoting industrial and recreational expansion in Rhode Island by insuring mortgage payments for a variety of facilities. Capco Steel is a Rhode Island limited liability company engaged in the fabrication and erection of steel and is a wholly-owned subsidiary of Capco Endurance. Capco Endurance serves as the holding company of Capco Steel. Both entities were formed in 2005 and are partly owned by Caparco and his family. Capco Endurance was additionally owned by two limited partnerships (LPs), Endurance Capital, LP and Endurance Capital Institutional Partners I, LP. At all times relevant hereto, Caparco was the Chief Executive Officer and member of the Capco Defendants. Hullinger was manager of the two LPs that held approximately three-fourths of the preferred membership interests in Capco Endurance.
The instant allegations against Defendants stem from RIIRBA's ongoing payment obligations to Webster Bank, N.A. (Webster) that were triggered as a result of the Capco Defendants' default on their payment obligations under a bond transaction in March 2012. Based on a need to restructure its financing and credit facilities as a result of declining profit margins, the Capco Defendants approached the Rhode Island Industrial Facilities Corporation (RIIFC) and Webster with a proposed bond transaction. Pursuant to the terms of the proposed transaction, RIIFC would issue bonds valued at $6, 000, 000 to be purchased by Webster as part of a financing transaction containing other financial accommodations by Webster not here significant. RIIRBA would insure the repayment of the bonds up to $5, 000, 000 to be made by the Capco Defendants. During the discussions surrounding the proposed transaction, RIIRBA received several documents, including the Capco Defendants' financial statements through October 2009. In addition, RIIRBA received an email from Hullinger that attached the Capco Defendants' line of credit renewal application with Bank of America (the lender providing the Capco Defendants' previous credit facilities) which projected an approximate net income of $1, 000, 000 before taxes. Importantly, in that same email, Hullinger expressly stated "based on actual financial results through August 2009 and monthly forecasts for September through December 2009[, ] * * * [a]ctual operating results through December 31, 2009 since preparation of the attached [Bank of America renewal application] forecast have confirmed the approximate $1 million net income before taxes originally forecast." (Compl. ¶ 25).
Thereafter, in early February 2010, Webster agreed to purchase the RIIFC bonds and provide the term loan and credit facility to the Capco Defendants, the other financial accommodations referred to above. On February 4, 2010, a Bond Insurance Application was sent to RIIRBA by the Capco Defendants which required, inter alia, the Capco Defendants to send to RIIRBA their "[m]ost current Certified Financial Statement" prior to the transaction's closing date of June 15, 2010. Id. ¶¶ 27-28. That Bond Insurance Application requested the $5, 000, 000 insurance from RIIRBA on the Capco Defendants' repayment of the bonds and was signed by Caparco. Along with the Application, the Capco Defendants also submitted additional materials for RIIRBA's review, including their audited financial statements for 2006 through 2008, unaudited 2009 financial statements, and a spreadsheet with a ten-year review and three-year forecast, including data for 2009. After a review of all of these materials, RIIRBA's staff recommended approval of the insurance commitment. On April 9, 2010, RIIRBA's board adopted a resolution that authorized the issuance of insurance for the bond transaction. As explained in the Complaint, the board's authorization was subject to a requirement that the Capco Defendants submit to RIIRBA a written certification that there has been no material adverse change in the Capco Defendants' financial position since RIIRBA's receipt of the last audited financial statements (i.e., the 2008 statements).
That same day-April 9, 2010-RIIRBA claims the Capco Defendants received their 2009 financial statements from their auditor (the 2009 Audit Report). RIIRBA claims the 2009 Audit Report indicated a material adverse change in the Capco Defendants' financial position had occurred since the delivery of the 2009 unaudited financial statements to RIIRBA. Specifically, while the 2009 unaudited financial statements reported to RIIRBA a net income of $1, 271, 385, the 2009 Audit Report demonstrated a net income of only $552, 621. As purportedly required pursuant to the Bond Insurance Application, RIIRBA claims the Capco Defendants, Caparco, and Hullinger should have submitted the 2009 Audit Report to RIIRBA for its review prior to the transaction's closing on June 15, 2010.
As part of the closing, Caparco executed several documents on behalf of the Capco Defendants: a Mortgage Insurance Agreement, a Regulatory Agreement, a Security Agreement, a Lease Agreement, a Bond Purchase Agreement, and a Certificate of Obligor. Pursuant to the terms of the Lease Agreement, the Capco Defendants specifically represented:
"The financial information concerning [the Capco Defendants] for the fiscal year ended December 31, 2009, [that] has been given to [RIIRBA] * * * presents fairly the financial position and results of operations of [the Capco Defendants] at the dates and for the periods indicated and there has been no material adverse change since such date with respect to the net worth of [the Capco Defendants] or of any other matters contained or referred to therein." Id. ¶ 48(d)(ii).
The various agreements also contained provisions that a breach under any specific agreement constituted a breach under the other related agreements.
As stated above, the Capco Defendants defaulted on their payment obligations under the bond transaction in March 2012. Pursuant to the structuring of the transaction, upon the Capco Defendants' default, RIIRBA became obligated to make such payments to Webster up to the $5, 000, 000 insurance it agreed to provide on the bonds. RIIRBA began making such payments at that time and continues to make such payments. RIIRBA filed a prior complaint against the Capco Defendants, Caparco, and Hullinger, as well as several other individuals and entities, on May 1, 2013, arising out of the bond transaction at issue here. On February 14, 2014, the Court dismissed without prejudice all of the counts against the presently-named Defendants. See R.I. Indus.-Recreational Bldg. Auth. v. Capco Endurance, LLC, No. PB 13-2069, 2014 WL 664406 (R.I. Super. Feb. 14, 2014) (Silverstein, J.). Only one count against the Capco Defendants' accounting firm, Feeley & Driscoll, P.C. (F&D), remains in that separate civil action. Following that dismissal, RIIRBA filed a second Complaint (the present matter) on December 9, 2014. Both of the motions to dismiss were filed on February 2, 2015. RIIRBA's Complaint, in essence, alleges that the Capco Defendants, Caparco, and Hullinger either intentionally concealed the 2009 Audit Report from RIIRBA or negligently failed to disclose it prior to the closing.
II Standard of Review
In recent years, despite the United States Supreme Court's adoption and utilization of a new standard of review for motions to dismiss brought under Rule 12(b) of the Federal Rules of Civil Procedure, the Rhode Island Supreme Court has consistently maintained that "a Rule 12(b)(6) motion to dismiss should be granted only 'when it is clear beyond a reasonable doubt that the plaintiff would not be entitled to relief from the defendant under any set of facts that could be proven in support of the plaintiff's claim.'" Chhun v. Mortg. Elec. Registration Sys., Inc., 84 A.3d 419, 421-22 (R.I. 2014) (quoting Palazzo v. Alves, 944 A.2d 144, 149–50 (R.I. 2008)). The "new Federal guide of plausibility"-as set forth in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009)-requires "'[f]actual allegations must be enough to raise a right to relief above the speculative level, ' and a plaintiff must 'nudge their claims across the line from conceivable to plausible.'" Chhun, 84 A.3d at 422 (quoting Twombly, 550 U.S. at 555, 570). On the other hand, the traditional Rhode Island standard-the so-called "notice pleading standard"-requires "the complaint give the opposing party fair and adequate notice of the type of claim being asserted." Haley v. Town of Lincoln, 611 A.2d 845, 848 (R.I. 1992). As explained in Haley, "[t]he plaintiff is not required to plead the ultimate facts that must be proven in order to succeed on the complaint . . . [or] set out the precise legal theory upon which his or her claim is based." Thus, our approach-one which originated in Conley v. Gibson, 355 U.S. 41 (1957) but, according to Twombly, 550 U.S. at 563, has since "earned its retirement"-instructs a court to grant a motion to dismiss unless it is clearly apparent that the plaintiff can prove "no set of facts" to support its complaint. See, e.g., Chhun, 84 A.3d at 422 n.5; Collins v. Fairways Condos. Ass'n, 592 A.2d 147, 148 (R.I. 1991); Bragg v. Warwick Shoppers World, Inc., 102 R.I. 8, 12, 227 A.2d 582, 584 (1967).
In ruling on a motion to dismiss, a trial justice "must look no further than the complaint, assume that all allegations in the complaint are true, and resolve any doubts in a plaintiff's favor." R.I. Affiliate, Am. Civil Liberties Union, Inc. v. Bernasconi, 557 A.2d 1232, 1232 (R.I. 1989). Indeed, "the sole function of a motion filed pursuant to [Rule] 12(b)(6) is to test the sufficiency of the complaint." Ryan v. State, Dep't of Transp., 420 A.2d 841, 842 (R.I. 1980); see also McKenna v. Williams, 874 A.2d 217, 225 (R.I. 2005) ("[I]t is [the court's] function to examine the complaint to determine if plaintiffs are entitled to relief under any conceivable set of facts."). Similarly, Super. R. Civ. P. 12(c) "provides a trial court with the means of disposing of a case early in the litigation process when the material facts are not in dispute after the pleadings have been closed and only questions of law remain to be decided." Chariho Reg'l Sch. Dist. v. Gist, 91 A.3d 783, 787 (R.I. 2014) (quoting Haley, 611 A.2d at 847). A motion brought under Super. R. Civ. P. 12(c) is tantamount to a motion to dismiss under Super. R. Civ. P. 12(b)(6) and invokes the same standards as presented herein. See id. Plainly, regardless of which standard the Court invokes, "[t]he standard for granting a motion to dismiss is a difficult one for the movant to meet." Pellegrino v. R.I. Ethics Comm'n, 788 A.2d 1119, 1123 (R.I. 2002).
All named Defendants request the Court dismiss Counts II through IV (fraudulent misrepresentation and concealment, civil conspiracy, and negligent misrepresentation and concealment, respectively) of RIIRBA's Complaint. Additionally, the Capco Defendants seek the dismissal of Count I (breach of agreements) which is brought only against them. The Court will address each Count in turn.
Breach of Agreements (Count I)