United States District Court, D. South Dakota, Southern Division
MEMORANDUM OPINION AND ORDER DENYING MOTION TO
DISMISS
Lawrence L. Piersol United States District Judge
Pending
before the Court is Defendants Jeff Shotkoski and Heritage
Builders, Inc. ("Heritage") Motion to Dismiss, Doc.
10. In their motion, Defendants ask that the claims in the
Amended Complaint be dismissed for several reasons: 1)
Heritage is the real party in interest as a plaintiff in a
derivative action and inclusion of Heritage as a plaintiff
destroys diversity and divests this Court of jurisdiction,
requiring dismissal under Rules 12(b)(1) and (b)(7) of the
Federal Rules of Civil Procedure; and 2) dismissal of any
direct action by Plaintiffs is appropriate under Rule
12(b)(6) for failure to state a claim upon which relief can
be granted based upon their lack of standing to bring a
direct suit. For the following reasons, Defendants'
motion is denied.
BACKGROUND
Accepting
Plaintiffs' allegations as true and giving Plaintiffs the
benefit of all reasonable inferences, the Court lays out the
following facts in accordance with the pleadings. See
Frey v. City of Herculaneum, 44 F.3d 667, 671 (8th Cir.
1995) (providing the standard for granting a motion to
dismiss under Rule 12(b)(6)). In August 2011, Plaintiffs and
Shotkoski formed Heritage for the primary purpose of
residential real estate development and construction (¶
7). Specifically, Heritage would buy residential lots,
construct homes on those lots, and sell them for a profit
(¶ 8). Shotkoski owns 50% of the shares of Heritage and
Norman and Wayne Hansmeyer each own 25% of the shares of
Heritage (¶ 10). Shotkoski has served as President of
Heritage which, pursuant to its bylaws, made him responsible
to "supervise and control all of the business and
affairs of the corporation." (¶ 11). As part of
those responsibilities, Shotkoski was and currently is
responsible for maintaining all financial documents and
information relative to Heritage (¶ 12). Shotkoski is
also President and owner of both Sundance Group, Inc.,
("Sundance") and CCI, Inc. ("CCI"), two
other South Dakota corporations involved in residential real
estate development and construction (¶¶ 13, 15).
In
2011, at Shotkoski's insistence, Heritage established a
$750, 000 line of credit, which was eventually converted to a
term loan, with Cattle Bank in Lincoln, Nebraska
(¶¶ 17, 19). At that time, Shotkoski represented to
Plaintiffs that Heritage owned a number of properties (¶
78). In reliance on this representation, Plaintiffs
personally guaranteed the line of credit/loan and pledged
their personal assets as the exclusive collateral for the
line of credit/loan (¶¶ 76-81). Plaintiffs later
learned that these representations were false, when made, as
Shotkoski had apparently already transferred such properties
to one or more third parties without the consent of the
Plaintiffs (¶¶ 24, 35-40, 43, 44-45, 76-81).
Over
the last several years, Shotkoski, acting on behalf of
Heritage, purchased numerous residential real estate lots for
purposes of development using, in part, the funds available
through the Cattle Bank line of credit/loan (¶ 20).
Shotkoski has, on behalf of Heritage, also contracted for the
construction of homes on many of those lots and, in turn,
sold such homes (¶ 21). Inexplicably, such operations
have resulted in a balance on the Cattle Bank line of
credit/loan in excess of $ 1, 100, 000 with virtually no
return to Plaintiffs (¶ 22). In August 2017, Plaintiffs
learned that properties that at one time were owned by
Heritage had been transferred to Sundance, CCI, and/or
Shotkoski's family members without Plaintiffs'
consent (¶¶ 24, 26). Plaintiffs have not been
provided sufficient information from Shotkoski or Heritage
regarding the financial dealings of Heritage to determine
whether sufficient consideration was provided for such
transactions (¶ 25).
As
shareholders and directors of Heritage, Plaintiffs have, on
several occasions, made demand to inspect the corporate
accounting and financial records of Heritage including
Heritage's most recent financial statements showing in
reasonable detail its assets, liabilities, and the results of
its operations (¶ 26). Plaintiffs' efforts, to date,
have been blocked by Heritage and Shotkoski (¶27).
Beginning
in April of 2017, Plaintiffs, through counsel, began
demanding formal accountings from Shotkoski and Heritage
regarding the company's operations (¶ 28). The
demands were made in good faith and with the proper purpose
of determining why there seems to be insufficient funds in
Heritage to make payments on the Cattle Bank loan (¶
30). Shotkoski and Heritage authorized the accountant for
Heritage to allow inspection of all records relating to
Heritage in the possession of Heritage's current
accountant (¶ 31). However, the accountant indicated
that the information provided to him by Shotkoski and
Heritage was incomplete and that he made requests to
Shotkoski and Heritage for the missing financial information
and documents but they failed to comply (¶¶ 32,
33).
On
August 21, 2017, Shotkoski, through counsel, indicated that
he "sold" or otherwise transferred numerous
properties from Heritage to Sundance (¶ 35). In the
August21 letter, Shotkoski represented that he had issued
unsecured promissory notes for the transfer of Heritage's
property to Sundance. That was the first time Plaintiffs had
ever seen the alleged promissory notes (¶ 36).
Plaintiffs did not authorize the sale or transfer of any
property from Heritage to Sundance (¶ 37). Still,
Shotkoski signed each promissory note for both Heritage and
Sundance even though he lacked the authority and right to
transfer or sell properties owned by Heritage to Sundance
(¶¶ 38, 39). No payment for any of the eight
promissory notes has ever been paid to Heritage, even though
some of the promissory notes were purportedly executed in
2015 (¶ 42).
Plaintiffs' Amended Complaint contains the following
counts:
• Accounting
• Breach of Fiduciary Duties
• Negligence
• Fraudulent ...