Sioux Falls SD II FGF, LLC v. Courthouse Square, LLP et al

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
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SIOUX FALLS SD IIFGF, LLC, * CIV 21-4043
*
Plaintiff, *
*
-vs- * MEMORANDUM OPINION
* AND ORDER
COURTHOUSE SQUARE,LLP,PATRICK*
VESEY and KOREY KALLSTROM, *
*
Defendants. *
*
*
Plaintiff, Sioux Falls SD 11 FGF,LLC("FGF"), brought this diversity action on March 26,
2021,alleging two counts ofbreach ofcontract, declaratoryjudgment,negligent misrepresentation,
fraud, and piercing the corporate veil. (Doc. 1.)
Defendants Courthouse Square, LLP ("Courthouse"), Patrick Vesey("Vesey") and Korey
Kallstrom("Kallstrom")filed a Motion to Dismiss.(Doc.6.) The motion has been fully briefed and
the Court heard argument at a hearing on October 13,2021. For the following reasons. Defendants'
motion to dismiss will be granted in part and denied in part.
BACKGROUND
FGF is a Delaware limited liability company with its principal place ofbusiness in Cleveland,
Ohio. Buyer FGF entered into a Purchase and Sale Agreement with seller Courthouse. Vesey and
Kallstrom are partners of Courthouse. Vesey executed the Purchase Agreement on behalf of
Courthouse.
Under the Purchase Agreement, Courthouse agreed to sell and FGF agreed to purchase, for
the price of$21,625,000.00, a parcel ofland situated at 313/325 S. 1st Avenue, Sioux Falls, South
Dakota 57104,together with all improvements thereon,as identified in the Purchase Agreement(the
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"Premises"). The closing of the sale and purehase ofthe Premises occurred on April 3,2020(the
"Closing").
In connection with the Closing, Courthouse assigned to FGF its interest in five tenant leases
ofspace within the Premises,including four leases ofoffice space to U.S. government agencies(the
"Government Leases"). (Doc. 1-2, Assignment and Assumption of Leases.)
Section 6.0(c) ofthe Purchase Agreement states, in part:
Seller has not received notice from any Tenant that the Property or any portion
thereofis not in full compliance with the terms and provisions ofthe Leases or is not
satisfactory for such Tenant's purposes No Tenant... is entitled to any special
work (not yet performed) or consideration (not yet given) in connection with its
tenancy under its Lease.
(Doc. 1-1, Purchase Agreement, p. 18.) In its Complaint, FGF alleges that the Government Leases
include provisions that require the lessor to maintain and repair the equipment and systems at the
Premises; to provide such equipment and systems in a reliable and safe manner; and to provide
"suitable" elevators at the Premises (the "Elevators") that conform to American Society of
Mechanical Engineers(ASME)A17.1 Safety Code for Elevators and Escalators. According to FGF,
upon information and belief, multiple employees of the tenants under the Government Leases
complained about the performance of the Elevators, and those complaints prompted the federal
General Services Administration ("GSA") to inspect the Elevators on February 26, 2020. FGF
asserts that Vesey and Kallstrom knew about the complaints about the Elevators and the GSA
inspection of the Elevators prior to the Closing Date. On the Closing date of April 3, 2020, GSA
sent an email to the property manager for the Premises, Covis Properties, indicating that the
Elevators did not meet code,the location and configuration ofthe Elevator controls were faulty, and
the Elevator controls were exposed to excessive dust,temperature swings and water intrusion.' FGF
contends that Kallstrom was an employee of Covis Properties at all relevant times.
FGF alleges that Defendants were aware ofbut did not disclose the complaints regarding the
Elevators, GSA's inspection ofthe Elevators, or the results ofthe GSA inspection at any time prior
'At this early stage in the litigation, the record does not reveal whether or not Courthouse
received the GSA's April 3 email before the Closing on the property.
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to Closing on April 3,2020. Defendants first informed FGF ofthe GSA inspection and its findings
three days after Closing, on April 6,2020. Subsequently, FGF received a recommendation that the
Elevators be replaced. FGF replaced the Elevators at an estimated cost of $1,100,294.00.
Defendants have refused FGF's request for inderrmification and have denied any liability for the
Elevator replacement.
The first two causes of action in FGF's Complaint allege claims for breach of contract
(breach of the Purchase Agreement and breach of the Assignment of Leases). In Count III, FGF
seeks a declaratoryjudgment in its favor under the Indemnification Provision ofthe Assignment of
Leases. Count IV asserts a negligent misrepresentation claim. Fraud is alleged in Count V. In
Count VI,FGF seeks an order piercing the corporate veil to find the individual defendants liable for
the damages cause by Courthouse's alleged fraud.
Defendants ask the Court to dismiss all six counts in the Complaint pursuant to Rule 12(b)(6)
ofthe Federal Rules ofCivil Procedure for failing to state claims upon which relief may be granted.
DISCUSSION
A. Legal Standard
"To survive a motion to dismiss,a complaint must contain sufficientfactual matter,accepted
as true, to 'state a claim to reliefthat is plausible on its face.'"Ashcroft v. Iqbal,556 U.S. 662,678
(2009)(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A court assessing such a
motion must accept all factual allegations in the complaint as true and draw all inferences in favor
of the nonmovant. Blankenship v. USA Truck, Inc., 601 F.3d 852, 853 (8th Cir. 2010); Brooks v.
Midwest Heart Group, 655 F.3d 796, 799 (8th Cir. 2011). Courts consider "plausibility" by
"'draw[ing] on [their own]judicial experience and common sense.'" Whitney v. Guys, Inc., 700
F.3d 1118, 1128 (8th Cir. 2012)(quoting/^6a/, 556 U.S. at 679). Also, courts must"'review the
plausibility of the plaintiffs claim as a whole, not the plausibility of each individual allegation.'"
Id. (quoting Zoltek Corp. v. Structural Polymer Grp., 592 F.3d 893,896 n. 4(8th Cir. 2010)).
In considering a motion to dismiss for failure to state a claim under Rule 12(b)(6), courts
primarily look to the complaint and"'matters incorporated by reference or integral to the claim,
items subject to judicial notice, matters ofpublic record, orders,items appearing in the record ofthe
case,and exhibits attached to the complaint whose authenticity is unquestioned;' without converting
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the motion into one for summary judgment." Miller v. Redwood Toxicology Lab., Inc., 688 F.3d
928,931 n. 3(8th Cir. 2012)(quoting 5B Charles Alan Wright & Arthur R. Miller,FederalPractice
and Procedure § 1357(3d ed. 2004)).
"On a motion to dismiss for breach ofcontract,courts look not only at the sufficiency ofthe
complaint but also at the contract itself, which by definition is integral to the complaint."Axiom Inv.
Advisors, LLC by & through Gildor Mgmt., LLC v. Deutsche Bank AG,234 F. Supp. 3d 526, 533
(S.D.N.Y. 2017). See also Stahl v. U.S. Dep't ofAgric., 327 F.3d 697, 700(8th Cir. 2003)("In a
case involving a contract, the court may examine the contract documents in deciding a motion to
dismiss."). Copies ofthe Purchase and Sale Agreement, the Assignment ofLeases and the Seller's
Certificate are attached to the Complaint as Exhibits A,B and C. The Court will consider these
documents in ruling on Defendants' Rule 12(b)(6) motion to dismiss.
B. Contract Language
FGF relies on the following language in the documents attached to its Complaint.
Under Section 6.0(c) ofthe Purchase Agreement, Seller represented and warranted:
The Seller is the "landlord" under the Leases and owns legal and beneficial title, as
lessor, to the Leases, and the rents and other income thereunder. . . Seller has not
received any notice of termination, default, or audit under any of the Leases, nor is
it aware of any default under any of the Leases. There are no existing or uncured
defaults by Seller or by any Tenant under any ofthe Leases. No Tenant has asserted
any defenses, set-offs, or counterclaims with respect to its tenancy or its obligation
to pay rent, additional rent, or other charges pursuant to the Leases Seller has not
received notice fi-om any Tenant that the Property or any portion thereofis not in full
compliance with the terms and provisions ofthe Leases or is not satisfactory for such
Tenant's purposes. . . . No Tenant . . . is entitled to any special work (not yet
performed)or consideration(not yet given) in connection with its tenancy under its
Lease.
The Assignment of Leases contains an Indemnification Provision:
Assignor hereby agrees to indemnify, hold harmless and defend Assignee from and
against any and all obligations, liabilities, costs and claims (including reasonable
attorney's fees) arising as a result of or with respect to any of the Leases that are
attributable to the period of time prior to the date of this Assignment. Assignee
hereby agrees to indemnify,hold harmless and defend Assignor from and against any
and all obligations,liabilities, costs and claims(includingreasonable attorney's fees)
arising as a result of or with respect to any ofthe Leases that are attributable to the
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period of time from and after the date of this Assignment. This paragraph shall
survivie the closing ofthe contemplated transaction and the assignment ofthe Leases.
Finally,in the Seller's Certificate executed and delivered to FGF at Closing on April 3,2020,
Courthouse certified that the representations and warranties contained in Section 6.0 ofthe Purchase
Agreement were true and correct as of the Closing Date.
C. ANALYSIS
1. Count I; Breach of Contract - Purchase Agreement
Section 11.12 ofthe Purchase Agreement provides that it is "governed by, and construed in
accordance with,the substantive federal laws ofthe United States and the laws ofthe state in which
the property is located," and the parties appear to agree that South Dakota law applies to FGF's
claims in this case.
In South Dakota,"[t]he elements of a breach ofcontract are(1)an enforceable promise;(2)
a breach ofthe promise; and(3)resulting damages." Bowes Constr., Inc. v. S.D. Dept. ofTransp.,
793 N.W.2d 36, 43 (S.D. 2010). Contract interpretation is a question of law which is to be
determined by the Court. Yarcheski v. Reiner, 669 N.W.2d 487, 495 (S.D. 2003). Whether the
language ofa contract is ambiguous is therefore a question oflaw for the Court. Ziegler Furniture
AndFuneralHome,Inc. v. Cicmanec,709 N.W.2d 350,355(S.D.2006). "A contract is ambiguous
only when it is capable of more than one meaning when viewed objectively by a reasonably
intelligent person who has examined the context of the entire integrated agreement." Pauley v.
Simonson, 720 N.W.2d 665, 668 (S.D. 2006)(citation omitted). Furthermore "a contract is not
rendered ambiguous simply because the parties do not agree on its proper construction or their intent
upon executing the contract." Ziegler, 709 N.W.2d at 355. When a contract is clear and
unambiguous, a court cannot go beyond the provisions ofthe contract. Gettysburg School District
53-1 V. Larson, 631 N.W.2d 196, 200(S.D. 2001).
Section 6.0(c) of the Purchase Agreement states that "Courthouse has not received notice
from any Tenant that the Property or any portion thereofis not in full compliance with the terms and
provisions of the Leases or is not satisfactory for such Tenant's purposes." FGF alleges that
Courthouse breached the Purchase Agreement because this specific warranty or guarantee by
Courthouse was not true. FGF interprets the Purchase Agreement as requiring Courthouse to
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disclose to FGF prior to the Closing that its tenants eomplained about the performance of the
Elevators, that the GSA inspected the Elevators on February 26, 2020, and that the GSA sent an
email on April 3, 2020 to Covis Properties indicating that the Elevators do not meet code (if
discovery reveals that the email was received before the Closing on April 3.)
According to Courthouse, even if it knew about the tenants' complaints and the GSA
inspection of the Elevators prior to the Closing, the language of the Purchase Agreement did not
require it to disclose this information to FGF. Courthouse cites to language in Sections IV and X
ofthe Purchase Agreement. Under Section 10.1,FGF agreed that it was buying the Premises "as is
... with all faults" and with no warranties regarding the physical condition ofthe Premises." Section
4.0 ofthe Purchase Agreement sets forth the Due Diligence items requested by FGF. Aeeording to
Courthouse, had FGF desired information on maintenance complaints or tenant inspections "they
easily could have added such items to Schedule 4.0. Their failure to do so is evidence that
Courthouse was under no obligation to make such disclosures to FGF." (Doc. 7, p. 8.) FGF
counters that Courthouse made clear representations and warranties in Seetion 6.0(c)that it was not
aware of any tenant complaints and therefore no additional due diligence was required by FGF in
regard to the Elevators.
The Court coneludes that the Purchase Agreement is not ambiguous. Though the "as is"
clause states that FGF accepts the property "as is, where is, with all faults," it also begins with the
statement"[ejxcept as expressly set forth in this agreement" and ends with the statement"except to
the extent expressly provided otherwise in this agreement." (Doc. 1-1, Section 10.1.) The warranty
in Section 6.0(c) of the Purchase Agreement, providing that Courthouse "has not received notice
&om any Tenant that the Property or any portion thereofis not in full compliance with the terms and
provision ofthe Leases or is not satisfactory for such Tenant's purposes" should be given meaning.
The only reasonable interpretation is that the Premises was sold "as is," with the exception ofthe
specific warranties made in Section VIofthe Purchase Agreement,including Courthouse's warranty
in Section 6.0(c).
Regarding Courthouse's argument that FGF could have demanded the tenants' complaints
or inspected the Elevators under the "due diligenee" section ofthe Purchase Agreement,the Court
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concludes that Courthouse's alleged notice oftenant complaints ahout the Elevators and the GSA's
inspection are excluded from FGF's due diligence by the warranty language in Section 6.0(c).
Assuming the factual allegations ofFGF's eomplaint to be true and eonstruing the same in
favor of FGF,FGF has plausibly stated a claim that Courthouse breached the warranty in Seetion
6.0(c) of the Purchase Agreement by alleging that Courthouse had notice from tenants that the
Elevators were not satisfactory, was aware ofthe GSA inspection, and possibly was aware of the
GSA report prior to the Closing. Accordingly, the motion to dismiss Count I is denied.
2. Count II: Breach of Contract- Assignment of Leases
As set forth above, the parties executed an Assignment and Assumption of Leases (the
"Assignment of Leases") in conjunction with the Purchase Agreement.(Doc. 1-2.) The relevant
language from the Assignment of Leases reads as follows:
[Courthouse] hereby agrees to indemnify, hold harmless and defend [FGF]
from and against any and all obligations, liabilities, costs and claims (including
reasonable attorney's fees) arising as a result of or with respect to any ofthe Leases
that are attributable to the period oftime prior to the date of this Assignment.
The Assignment of Leases also imposes the same obligation on FGF, as follows:
[FGF] hereby agrees to indemnify, hold harmless and defend [Courthouse]
from and against any and all obligations, liabilities, eosts and claims (including
reasonable attorney's fees) arising as a result of or with respect to any of the Leases
that are attributable to the period oftime from and after the date ofthis Assignment.
FGF alleges that the Indemnification Provision requires Courthouse to indemnify FGF for
the cost ofreplacing the Elevators. Courthouse argues that, unless the contract states otherwise,the
duty to indemnify applies only if a third party asserts a claim against FGF,and it does not apply to
FGF as one of the contracting parties.
Under South Dakota law, indemnity "provisions are generally recognized to provide
indemnity when third parties bring an aetion against the indemnitee, but not, as here, when the
dispute is between the two contracting parties." Icehouse, Inc. v. Geissler, 636 N.W.2d 459, 466
(S.D. 2001). South Dakota recognizes an exception to this general rule when "the clear language
ofthe parties' agreement controls and may indicate an intent to the contrary."BlackHills Excavating
Servs. V. Retail Constr. Servs.,877 N.W.2d 318,324(S.D.2016). An indemnity agreement,like any
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other contract, is to be construed according to the principles applied in the construction or
interpretation of contracts. See, e.g.. Black Hills Excavating, 877 N.W.2d at 324—25. Therefore it
must be clear that FGF and Courthouse intended the indemnification provision to apply to the
litigation between them.
Under South Dakota law,the intent ofthe parties is presumed to reside in the language they
choose to use in their agreement. Pesicka v. Pesicka, 618 N.W.2d 725, 727(S.D. 2000). "If that
intention is clearly manifested by the language of the [Agreement], it is the duty of this court to
enforce it." M {c^oimgln Re Estate ofStevenson,605N.W.2d 818,821 (S.D. 2000)). In the instant
case, there is no language in the Assignment of Leases that indicates the parties intended the
indemnification provision to apply to litigation between the parties. The Assignment ofLeases does
not include indemnification for a breach ofthe contract. Rather,there is an obligation to defend third
party claims. Thus, FGF is not entitled to indemnification from Courthouse under the Assignment
of Leases. See, e.g., Bonnie &. Co. Fashions, Inc. v. Bankers Trust Co., 955 F.Supp. 203, 218-19
(S.D.N.Y. 1997)(indemnification clause does not cover costs oflitigation between parties because
it is not"unmistakably clear"that they are covered, and the provision "may easily be read to protect
[party] fi-om claims to its rights and interests by third parties")(quoting Bridgestone/Firestone,Inc.
V. Recovery Credit Services, Inc., 98 F.3d 13,21 (2d Cir. 1996)). For this reason, FGF's claim for
contractual indemnification from Courthouse in Count n ofthe Complaint is dismissed.
3. Count III: Declaratory Judgment- Assignment of Leases
FGF asks the Court to declare the rights ofthe parties under the indemnification provision
of the Assignment of Leases. As the Court explained above, the indemnification clause does not
apply to this litigation between the parties, and thus FGF's claim for declaratory reliefin Count III
is also dismissed.
4. Count IV: Negligent Misrepresentation
The South Dakota Supreme Court has identified five elements of the tort of negligent
misrepresentation:
[N]egligent misrepresentation occurs whenever one party makes (1) a
misrepresentation,(2) without reasonable grounds for believing the statement to be
true,(3) with the intent to induce a particular action by another party, and the other
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party(4)changes position with actual and justifiable reliance on the statement, and
(5) suffers damage as a result.
Fisher v. Kahler, 641 N.W.2d 122, 126-27 (S.D. 2002). The court further explained that "the
relationship ofthe parties,arising out ofcontract or otherwise, must be such that in morals and good
conscience the one has the right to rely upon the other for information and the other giving the
information owes a duty to give it with care." Meyer v. Santema,559 N.W.2d 251,254(S.D. 1997)
(emphasis added){quoting Rumpza v. Larsen, 551 N.W.2d 810, 814(S.D. 1996)).
Courthouse argues that the negligent misrepresentation claim should be dismissed for two
reasons. First, Courthouse contends that it owed no duty ofcare to FGF. Courthouse cites an Eighth
Circuit case applying Minnesota law to dismiss a negligent misrepresentation claim because itfound
"no duty 'for purposes of a negligent misrepresentation tort threshold' between parties to a
commercial transaction negotiation at arms length." Kellogg Square P'ship v. PrudentialIns. Co.
of Am., 63 F.3d 699, 703 (8th Cir. 1995)(quoting Safeco Ins. Co. v. Dain Bosworth Inc., 531
N.W.2d 867,872(Minn. Ct. App. 1995)). However,it does not appear that the Mirmesota Supreme
Court has decided "whether a negligent misrepresentation claim can be brought when the alleged
misrepresentation was made by one party to an arm's-length commercial transaction." Valspar
Refinish, Inc. v. Gaylord's, Inc., 764 N.W.2d 359, 370 n.7(Minn. 2009). Neither party in this case
has cited a South Dakota Supreme Court decision regarding whether a negligent misrepresentation
claim can be brought between parties to an arm's-length commercial transaction. The Court finds
that, at the motion to dismiss stage,FGF has stated a plausible claim for negligent misrepresentation
by alleging throughout its Complaint that Courthouse had a duty to disclose the notices ofthe poor
condition of the Elevators that it allegedly received fi-om its tenants, the GSA inspection of the
Elevators,and possibly the GSA's email about the condition ofthe Elevators ifit was received prior
to the Closing.
Second, Courthouse argues that the negligent misrepresentation claim should be dismissed
because it is barred by the economic loss doctrine. The economic loss doctrine preserves the line
between tort and contract, providing that:
If tort claims are based on duties that are imposed by contract, then under the
economic-loss rule, contract law provides the remedies for economic losses. The
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economic-loss doctrine forbids a party from suing or recovering in tort for economic
or pecuniary losses that arise only from breach ofcontract or are associated with the
contract relationship. In other words, tort damages are generally not recoverable
unless the plaintiff suffers an injury that is independent and separate from the
economic losses recoverable under a breach-of-contract claim.
74 Am. Jur. 2d Torts § 24(2015). The Supreme Court ofSouth Dakota has explained the rationale
for the economic loss doctrine:
The prohibition against tort actions to recover solely economic damages for those in
contractual privity is designed to prevent parties to a contractfrom circumventing the
allocation oflosses set forth in the contract by bringing an action for economic loss
in tort. The doctrine draws a legal line between contract and tort liability that forbids
tort compensation for certain types of foreseeable, negligently caused, financial
injury. The economic loss doctrine, therefore, sets forth that regardless of whether a
tort duty may exist between contracting parties, the actual duty one party owes to
another for purely economic loss should be based exclusively on the contract to
which they agreed and assigned their various risks.
Kreisers Inc. v. First Dakota Title Ltd. Partnership, 852 N.W.2d 413, 421 (S.D. 2014)(internal
citations omitted).
It appears that the South Dakota Supreme Court has not decided whether the economic loss
doctrine bars a negligent misrepresentation claim. Courthouse points out that"courts injurisdictions
which have adopted the economic loss doctrine routinely have declined to carve out an exception
for claims of negligent misrepresentation." Duquesne Light Co. v. Westinghouse Elec. Corp., 66
F.3d 604,620(3d Cir. 1995)(collecting cases). Courthouse says this Court should also decline to
entertain such an exception. However, other courts have recognized negligent or fraudulent
inducement as an exception to the economic loss doctrine. See, e.g.,McKesson Med.-Surgical, Inc.
V. Kearney,271 F. Supp. 2d 827, 829(E.D. Va. 2003)(holding economic loss doctrine did not bar
"negligent fraud in the inducement, a subset of constructive fraud," noting that the representations
that formed the basis ofthe claim were made prior to the formation ofthe contract). Here, too, at
least some of the alleged representations or omissions that form the basis of FGF's negligent
misrepresentation claim occurred prior to the formation ofthe contract.
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FGF urges this Court to find that the South Dakota Supreme Court would not bar negligent
misrepresentation claims under the economic loss doctrine. In support ofthis argument,FGF cites
this Court's opinion in Northwestern Public Service v. Union Carbide Corp., 115 F.Supp.2d 1164
(D.S.D. 2000). There, this Court addressed whether the plaintiffs fraud claims against a
manufacturer of an allegedly defective pipe used by the plaintiffin its gas distribution system were
barred by the economic loss doctrine. After an in-depth analysis ofthe law,this Court predicted that,
the economic loss doctrine notwithstanding, the South Dakota Supreme Court would afford a tort
remedy for "fraud claims which concern the quality or characteristics of goods sold under a
contract." Id. at 1170. A negligent misrepresentation claim was not alleged so the Court did not
need to address whether the South Dakota Supreme Court would bar such a claim under the
economic loss doctrine.
In South Dakota Wheat Growers Ass'n v. ChiefIndus., Inc., 337 F. Supp. 3d 891 (D.S.D.
2018), the district court held that negligent misrepresentation claims should not be barred by the
economic loss rule. Id. at 904-05.
In the present case, discovery may show that the only basis for FGF's claims is in contract,
but the Courtfinds the economic loss doctrine does not bar FGF's negligent misrepresentation claim
at this stage in the litigation. Depending on discovery. Courthouse could revisit this issue in
summary judgment.
Taking FGF's allegations in support ofits negligent misrepresentation claim in the light most
favorable to FGF, it has pled a plausible cause of action for negligent misrepresentation, and
Courthouse's motion to dismiss Count IV is denied.
5. Count V: Fraud
The essential elements of common law fraud are:
[T]hat a representation was made as a statement offact, which was untrue and known
to be untrue by the party making it, or else recklessly made ; that it was made with
intent to deceive and for the purpose ofinducing the other party to act upon it; and
that he [or she] did in fact rely on it and was induced thereby to act to his [or her]
injury or damage.
Paint Brush Corp., Parts Brush Div. v. Neu, 599 N.W.2d 384, 391 (S.D. 1999)(quoting Stene v.
State Farm Mut. Auto. Ins. Co., 583 N.W.2d at 404(S.D. 1998)).
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Federal Rule ofCivil Procedure 9(b)states,"[i]n alleging fraud or mistake,a party must state
with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and
other conditions of a person's mind may be alleged generally." See Fed. R. Civ. P. 9(b). Rule 9(b)
must be applied in conjunction with the general pleading requirements of the Federal Rules. See
Abels V. Farmers Commodities Co.,259 F.3d 910,920(8th Cir. 2001). Furthermore,this Court has
said that "[a] plaintiff'need not plead fraud with complete insight before discovery is complete.'"
Northwestern Pub. Serv., 115 F.Supp.2d at 1171 (quoting Gunderson v. ADM Investorerv., Inc.,
2000 WL 1154423 at *3(8th Cir. Aug.16, 2000)(unpublished opinion)). This Court has also said
that when deciding whether a pleading is sufficient a court must determine whether there was
adequate notice to the adverse party in order to enable the adverse party to respond. Id.
Courthouse argues that the fraud claim should be dismissed due to FGF's alleged failure to
comply with the particularity requirement of Rule 9(b). Courthouse asserts that the allegations
pleaded by FGF "on information and belief have not been pleaded with the required particularity.
"Allegations pleaded on information and belief usually do not meet Rule 9(b)'s particularity
requirement. When the facts constituting the fraud are peculiarly within the opposing party's
knowledge, however, such allegations may be pleaded on information and belief." Drobnak v.
Andersen Corp., 561 F.3d 778, 783-84 (8th Cir. 2009)(citations omitted). Claims pleaded "on
information and belief are sufficient under Rule 9(b)ifthey are accompanied by a statement ofthe
facts on which the belief is based. Id.
In this case, FGF's allegations made on "information and belief are based on facts either
uniquely within Defendants'knowledge or based on communications to which FGF was not a party.
FGF alleges that tenants in the building complained about the Elevators,that the GSA inspected the
Elevators, and that the individual defendants who are partners of Courthouse were aware of these
facts prior to the Closing. FGF contends that an inspection revealed that the Elevators did not meet
code and needed to be replaced. It is unknown whether Courthouse received the GSA's report that
the Elevators did not meet code before the Closing. FGF asserts that Courthouse's fraudulent
misrepresentations or omissions required FGF to incur the cost of replacing the Elevators. The
Complaintincludes facts that support the allegations and alert Defendants to the nature ofthe alleged
fraud and the basis ofFGF's claims. The Court finds that the Complaint adequately pleads the fraud
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cause of action as stated on "information and belief." See Drobnak, 561 F.3d at 783-84; see also
Abels,259 F.3d at 920(noting that where "plaintiff is not a party to a communication, particularity
in pleading may become impracticable").
Rule 9(b)does require more specificity when pleading fraud than for pleading other causes
ofaction. Abels,259 F.3d at 920. When alleging a claim offraud a plaintiffmust specify"the time,
place and contents of false representations, as well as the identity of the person making the
misrepresentation and what was obtained or given up thereby." Id. (quoting Bennett v. Berg, 685
F.2d 1053, 1062 (8th Cir. 1982)). Because FGF's allegations of fraud do include the details
required by Rule 9(b) and the Eighth Circuit, namely the time, place, identity of the persons
committing the fraud, what was misrepresented, and how FGF was harmed. Count V of the
Complaint is not dismissed.
6. Count VI: To Pierce the Corporate Veil as to Defendants Vesey and Kallstrom
In Count VI, FGF alleges that Vesey and Kallstrom used Courthouse to perpetrate a fraud
on FGF and then divested the business entity of all assets by distributing the proceeds of the fraud
to its partners. Specifically, FGF alleges that Vesey and Kallstrom are partners of Courthouse,
whose sole asset was the Premises; that Courthouse distributed the proceeds of the sale to its
partners, including Vesey and Kallstrom; that Courthouse was insufficiently capitalized for its
representations and warranties under the Purchase Agreement; that Courthouse distributed the
proceeds of the sale to its partners and became insolvent after the sale of the Premises without
discharging its obligations to FGF under the Purchase Agreement; that Vesey and Kallstrom had
knowledge ofand directed Courthouse's misrepresentations and omissions to induce FGF's reliance
and ultimately profit from the Closing; and that Courthouse was a facade for the individual dealings
of Vesey and Kallstrom.
FGF seeks an order piercing the corporate veil to find Vesey and Kallstrom liable for the
damages caused by Courthouse's fraud.
In South Dakota,corporations and their shareholders are generally deemed to be distinctlegal
entities "imtil there is sufficient reason to the contrary." Gas &Elec. Co. v. Ross, 521 N.W.2d
107, 111 (S.D. 1994)(citations omitted). The doctrine ofpiercing the corporate veil is an equitable
doctrine used by courts to disregard the distinction between a corporation and its shareholders in
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order to prevent fraud or injustice. Id. at 112. The South Dakota Supreme Court considers six
factors to determine if equity demands piercing the corporate veil: "(1) undercapitalization; (2)
failure to observe corporate formalities; (3) absence of corporate records; (4) payment by the
corporation ofindividual obligations;(5)fraudulent misrepresentation by corporate directors; and
(6)use ofthe corporation to promote fraud,injustice or illegality." Brevetlnt'l, Inc. v. GreatPlains
Luggage Co., 604 N.W.2d 268, 274(S.D. 2000).
Defendants point out that veil-piercing is not a separate cause of action. However, at this
motion to dismiss stage, the Court will examine whether the facts pleaded by FGF state a cause of
action against the individually-named defendants on a theory of piercing the corporate veil.
FGF alleges fraudulent misrepresentation by corporate directors, use ofthe corporation to
promote fraud,and undercapitalization. In its briefopposing the motion to dismiss,FGF points out
that Courthouse's capitalization prior to the sale ofthe Property is currently unknown. FGF cites
Cup O'Dirt, LLC v. Badlands Airtime, LLC, for the proposition that "questions concerning
insolvency and undercapitalization are not normally reached until the summaryjudgment stage, if
then." 2020 WL 475606,at *8(D.S.D. Jan.29,2020){dAmgBaatz v. Arrow Bar,452 N.W.2d 138,
142(S.D. 1990)).
When deciding a motion to dismiss,the Court must construe the Complaint in the light most
favorable to the plaintiff, accept its allegations as true, and draw all reasonable inferences in favor
of the plaintiff. It is a close call, but at the Rule 12(b)(6) stage, accepting the allegations in the
Complaint as true, with all reasonable inferences drawn in FGF's favor,the allegations are sufficient
to support a plausible claim for veil piercing. The motion to dismiss Count VI is denied. What
discovery may or may not reveal remains to be seen. Accordingly,
IT IS ORDERED:
1. That Defendants Courthouse Square, LLP, Patrick Vesey and Korey
Kallstrom's Motion to Dismiss(Doc.6)is granted as to Plaintiffs claims for
Breach ofContract-Assignment ofLeases in Count11 ofthe Complaint,and
Declaratory Judgment in Count 111 ofthe Complaint. The motion to dismiss
is denied as to Counts 1, IV, V and VI.
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2. Defendants shall file an Answer within twenty-one(21)days ofreceipt ofthis
Order.
Dated this 14tb day of December, 2021.
BY THE COURT:
IdUVAXUJUL
LMrence L. Piersol
ATTEST; United States District Judge
MATTHEW W.THELEN,CLERK
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