United States District Court, D. Utah
MEMORANDUM DECISION AND ORDER DENYING MOTION TO
N. Parrish, United States District Court Judge
the court is Alan Cottle and Knee Centers Management,
LLC's (collectively, defendants) motion to dismiss
Paskenta Enterprises Corporation's (Paskenta) complaint.
[Docket 14]. The court DENIES the motion.
was the sole member and manager of Knee Centers Management.
Paskenta is a corporation owned by the Paskenta Band of
Nomlaki Indians (Tribe). John and Ines Crosby occupied
leadership roles in the Tribe. The Crosbys agreed that
Paskenta would go into business with Knee Centers Management
in order to open and operate a number of orthopedic clinics.
and Knee Centers Management formed Emere Holding, LLC,
with Paskenta as a member with a 25% ownership stake and Knee
Centers Management as the managing member with a 75%
ownership stake. Emere opened a bank account to hold
Paskenta's $5 million contribution to the enterprise.
Emere also created a wholly-owned subsidiary, Knee Centers
Operating Company, LLC, which operated the orthopedic clinics
and controlled the parties' efforts to open new clinics
nationwide. Money transfers from the Emere holding account to
Knee Centers Operating Company required two signatures, one
from Cottle and one from either John or Ines Crosby.
Centers Operating Company spent the parties' initial
investment. Cottle approached the Crosbys and proposed that
Paskenta contribute additional funds in exchange for a
greater ownership stake in Emere. The Crosbys caused Paskenta
to contribute an additional $2 million to Emere's holding
account. The Crosbys and Cottle subsequently transferred
about $800, 000 from the holding account to Knee Centers
April 2014, the Tribe removed the Crosbys from their
leadership positions. The Tribe alleges that it discovered
evidence that the Crosbys had stolen tens of millions of
dollars from Paskenta and the Tribe. The Tribe placed a
freeze on all of Paskenta's bank accounts to prevent the
Crosbys from diverting any more money. As a result, Knee
Centers Management was unable to withdraw any of the
remaining $1.2 million in the holding account.
Centers Management “threatened” Paskenta in an
attempt to convince it to release the funds in the holding
account. On May 23, 2014, Cottle sent a letter to
Paskenta asserting a right to the funds and requesting that
they be released. Cottle stated that the funds were
desperately needed to keep the enterprise afloat and that
without them Paskenta's investment in Emere could become
worthless. Cottle also made four representations in the
letter that Paskenta alleges were fraudulent:
• “All of our professional (medical and executive)
talent has signed up to take this new company to 40-50
clinics over a 48 month period with an estimated $400MM-500MM
• A clinic was scheduled to open in Salt Lake City on
July 7, 2014 and another clinic was scheduled to open in Boca
Raton on July 14, 2014.
• “The list is long of planned expenses to move
the entire company to the new [business] model during the
spring and summer of this year. We are on track, we are on
budget and we cannot have any stop or interference with the
cash that was paid to us last year in exchange for more
• “And to be clear not one dollar (or any amount
of any type of remuneration) has ever been paid to Mr. Crosby
or Ines Crosby or any of their entities (if they have any-
who knows-I sure don't) by any entity I own or control
(which is all of the entities we have discussed).”
30, 2014 Knee Centers Management and Paskenta entered into an
“Agreement for Release of Funds” (Funds
Agreement), in which Paskenta agreed to release the money
that remained in the holding account. The Funds Agreement
contained the following statement: “No party is relying
upon any statement or representation not specified in this
Agreement as an inducement or basis for entering into this
Agreement.” On June 11, 2014, Knee Centers Management
transferred all remaining funds in the Emere holding account
to Knee Centers Operating Company.
orthopedic clinic enterprise subsequently failed. Without
consulting or notifying Paskenta, the defendants unilaterally
dissolved Emere, Knee Centers Management, and Knee Centers
Operating Company in July 2015.
sued Cottle and Knee Centers Management, asserting four
causes of action. Paskenta alleges that the representations
made in the May 23, 2014 letter constituted either fraudulent
inducement or negligent misrepresentations that caused it to
enter into the Funds Agreement. Paskenta further asserts that
Knee Centers Management breached its fiduciary duties as the
managing member of Emere by making false statements in the
May 23 letter and by failing to provide any notice,
distribution, or accounting when it dissolved Emere. Finally,
Paskenta alleges that Cottle aided and abetted Knee Centers
Management's breaches of fiduciary duty.
OF LAW AND LEGAL STANDARDS
federal court exercising diversity or supplemental
jurisdiction “applies the substantive law, including
choice of law rules, of the forum state.”
BancOklahoma Mortg. Corp. v. Capital Title Co., 194
F.3d 1089, 1103 (10th Cir. 1999) (citation omitted). Utah
applies “the ‘most significant relationship'
approach as described in the Restatement (Second) of Conflict
of Laws in determining which state's laws should apply to
a given circumstance.” Waddoups v. Amalgamated
Sugar Co., 54 P.3d 1054, 1059 (Utah 2002).
a corporation with its principal place of business in
California, asserts state-law claims against Cottle, an
individual domiciled in Utah, and Knee Centers Management, a
Utah LLC. Neither party, however, conducted a choice of law
analysis to determine whether the law of California, Utah, or
another state should be applied to Paskenta's claims.
Moreover, it is difficult for the court to conduct a choice
of law analysis on its own because the complaint does not
reveal the location where the representations in May 23
letter were made or received or where actions in reliance
upon these representations occurred. See Restatement
(Second) of Conflict of Laws § 148 (1971). Because the
parties consistently cite Utah law in their briefing on the
motion to dismiss, they appear to concede that Utah law
controls. The court, therefore, applies Utah's
substantive law for the purposes of this motion.
this court applies federal law when determining whether
dismissal of a cause of action is appropriate under Rule
12(b)(6) of the Federal Rules of Civil Procedure. See
Stickley v. State Farm Mut. Auto. Ins. Co., 505 F.3d
1070, 1076 (10th Cir. 2007). Under Rule 12(b)(6), a court may
dismiss a complaint if it fails “to state a claim upon
which relief can be granted.” When considering a motion
to dismiss for failure to state a claim, a court
“accept[s] as true all well-pleaded factual allegations
in the complaint and view[s] them in the light most favorable
to the plaintiff.” Burnett v. Mortg. Elec.
Registration Sys., Inc., 706 F.3d 1231, 1235 (10th Cir.
2013). “To survive a motion to dismiss, a complaint
must contain sufficient factual matter, accepted as true, to
‘state a claim to relief that is plausible on its
face.'” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009) (citation omitted).
FRAUDULENT INDUCEMENT AND NEGLIGENT