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Sutton v. Vermont Regional Center

Supreme Court of Vermont

October 4, 2019

Antony Sutton, et al.
Vermont Regional Center, et al.

          On Appeal from Superior Court, Lamoille Unit, Civil Division Thomas Carlson, J.

          Russell D. Barr, Chandler W. Matson and Benjamin E. Novogroski of Barr Law Group, Stowe, for Plaintiffs-Appellants.

          Thomas J. Donovan, Jr., Attorney General, and Benjamin D. Battles, Solicitor General, Montpelier, for Defendants-Appellees.

          PRESENT: Reiber, C.J., Skoglund, Robinson, Eaton and Carroll, JJ.

          ROBINSON, J.

         ¶ 1. Plaintiff investors appeal the dismissal of their claims against the Vermont Agency of Commerce and Community Development (ACCD) and current and former state employees arising from the operation of a federally licensed regional center in the United States Customs and Immigration Services (USCIS) EB-5 program. We reverse the dismissal of plaintiffs' claims of negligence and negligent misrepresentation against ACCD, gross negligence against defendants Brent Raymond and James Candido, and breach of contract and the implied covenant of good faith and fair dealing against ACCD. We affirm the dismissal of plaintiffs' remaining claims.

         ¶ 2. At this stage in the litigation, we assume for the purpose of evaluating defendants' motion to dismiss that the allegations in plaintiffs' complaint are true.[1] Plaintiffs have alleged as follows. The employment-based fifth preference visa, or EB-5, program, which is run by USCIS, is intended to stimulate the U.S. economy and create jobs through capital investment from foreign investors. Through this program, foreign investors and their spouses and children can become eligible for green cards if they make the required investment in a commercial enterprise in the United States and plan to create at least ten permanent full-time jobs for U.S. workers. Under the Immigrant Investor Program, a certain number of EB-5 visas are designated for foreign nationals who invest $500, 000 in commercial enterprises associated with regional centers approved by USCIS based on proposals promoting economic growth. There are hundreds if not thousands of regional centers throughout the United States, and virtually all of them are private ventures. Some regional centers provide little more than administrative services such as submitting information to USCIS for a project and its investors. Others take a more active role in administration, oversight, auditing, and consultation to ensure investment projects comply with USCIS EB-5 regulations, immigration law, and securities laws.

         ¶ 3. USCIS designated ACCD as a regional center in 1997, and ACCD began operating the Vermont Regional Center (VRC).[2] The VRC held itself out as a regional center that took a more active role in administration, oversight, auditing, and consultation. It was not the only state-affiliated regional center, but it was the only one that represented that it was a "state-run agency." The VRC billed itself as an attractive option for development and foreign investment due to its superlative "oversight powers," the overwhelming investor confidence that came from its "stamp of approval," and the State of Vermont's backing that would result in a "faster path to approval."

         ¶ 4. In 2006, the VRC partnered with a series of projects led by Ariel Quiros and William Stenger (referred to as the "Jay Peak Projects"). The phased series of eight proposed projects included building a hotel, indoor water park, ice rink, golf club house, medical center, and other facilities in Jay, Vermont; a biomedical research facility in Newport, Vermont; and a hotel, conference center, aquatic center, tennis center, and mountain bike facility in Burke, Vermont.

         ¶ 5. ACCD entered into a memorandum of understanding (MOU) with the Jay Peak Projects for each project. Each recited that "ACCD desires to obtain assistance in the planning and management of the Jay Peak EB-5" project "to assure the project's compliance with U.S. immigration law and regulations . . . and, thereby, to have greater assurance of its compliance with regional center requirements." Accordingly, the parties agreed that the Jay Peak Projects would, among other things, "support ACCD's compliance with regional center requirements by providing on a quarterly basis formal written progress reports" which would "set forth for the preceding quarter and year-to-date the number of investors, the status of alien investor capital (in escrow, transfers from escrow to the limited partnership) and activity of the limited partnership in furtherance of the project."[3] These MOUs were included in the offering documents for the Jay Peak Projects. Offering documents were issued to each investor.

         ¶ 6. Employees of ACCD-including James Candido and Brent Raymond, both former executive directors of the VRC, and John Kessler, general counsel for ACCD-traveled with Jay Peak representatives to EB-5 tradeshows, at which they would share a table and jointly solicit investors and promote the Jay Peak Projects.

         ¶ 7. ACCD employees represented to prospective investors, including plaintiffs, that the added protections of state approval and oversight made the Jay Peak Projects a particularly sound investment. They told prospective investors that the VRC conducted quarterly reviews to ensure that projects complied with all applicable laws and regulations and "engag[ed] in the financial monitoring and auditing of projects to ensure legitimacy," and they represented that the MOUs imposed "strict covenants and obligations on the project to ensure compliance with all applicable laws and regulations."

         ¶ 8. Plaintiffs reasonably relied on these statements by ACCD employees in investing in the Jay Peak Projects.

         ¶ 9. Unbeknownst to the investors, but known to the VRC officials, no such state oversight by the VRC existed. The VRC never issued any of the quarterly reports contemplated in the MOU. Brent Raymond, in fact, eventually confirmed that the VRC "does not prepare quarterly reports on projects."

         ¶ 10. Defendants and the Jay Peak Projects worked with a consulting firm that helped solicit potential investors. In early 2012, the firm's owner raised concerns with the VRC that the Jay Peak Projects were illegally misappropriating funds. His attorney requested financial documents for the Jay Peak Projects. The firm's owner held a conference call with VRC employees to discuss potential fraud in the Jay Peak Projects. That February, the firm ended its business dealings with the Jay Peak Projects and announced it had lost confidence in the finances and representations of the Jay Peak Projects and ACCD. The VRC effectively prevented the consulting firm from doing further work in Vermont.

         ¶ 11. James Candido then conducted an "audit-visit" to the Jay Peak Projects. He reported finding "no issues" with the Projects' financials, but made no record of his findings. He also coordinated with an immigration attorney-who plaintiffs allege had a long-standing referral relationship with the Jay Peak Projects and thus a financial stake in them-to inspect the Projects and issue a report responding to the consulting firm's claims. Plaintiffs allege that the attorney spent "an extravagant weekend" at the Jay Peak Projects, after which he issued a report "painting a glowing picture of a successful EB-5 project" that "highlight[ed] the first-class amenities at the Jay Peak Projects, its high sale figures, and the 'particularly careful' oversight" by the VRC. That report also said that James Candido inspected the Jay Peak Projects' financial records quarterly and that the Projects' records would also be audited by an independent accounting firm.

         ¶ 12. The VRC, and in particular James Candido, used this report to assure prospective and existing immigrant investors that the consulting firm's concerns about misappropriation of funds within the Jay Peak Projects were unfounded. They said the consulting firm made the allegations because of a "business dispute." James Candido reassured investors that he had investigated the Jay Peak Projects and it was safe to invest in them, and investors accordingly relied on these statements in investing in the Projects. Plaintiffs allege this was an intentional misrepresentation.

         ¶ 13. At least one other individual also contacted John Kessler and James Candido in 2012 to inform them that the Jay Peak Projects might be committing securities violations and misusing investor funds.

         ¶ 14. Plaintiffs allege that "the VRC responded not by engaging in . . . audit and oversight" but rather "by stepping up promotion of the Jay Peak Projects," and that Brent Raymond and James Candido "deflected investor complaints."

         ¶ 15. In 2014, about twenty investors, including plaintiff Antony Sutton, sent complaints to Brent Raymond alleging that the Jay Peak Projects was misappropriating investor funds. They specifically alleged that the Jay Peak Projects had conducted fraudulent sales of penthouse suites, converted their equity interests into an unsecured promissory note, and had not made available any financials showing the source and use of investor funds.

         ¶ 16. In response, Brent Raymond told the investors that the VRC had no legal authority to conduct financial reviews. In an email to Antony Sutton, he chastised "Mr. Sutton and the Jay Peak Investors for 'how farfetched' their expectations were for the VRC to monitor, oversee, or otherwise review financial documents relating to the Jay Peak Projects." He said the VRC had "not been auditing [the Jay Peak Projects'] financials-nor are we required to, or ever represented that we were." (alteration in plaintiffs' complaint.)

         ¶ 17. In early 2015, Brent Raymond and the VRC approved the Jay Peak Projects to solicit investors for additional projects. Plaintiffs allege that one of those projects, a proposed biomedical research facility, was a "total fraud."

         ¶ 18. In April 2016, the U.S. Securities and Exchange Commission filed a lawsuit alleging securities fraud, wire fraud, and mail fraud against the Jay Peak Projects developers, Ariel Quiros and William Stenger. The Vermont Department of Financial Regulation also filed suit against Quiros and Stenger, alleging similar claims.[4]

         ¶ 19. On the basis of these and other allegations, plaintiffs, all foreign nationals who invested in the Jay Peak Projects, filed a multi-count claim against ACCD and several individual defendants. The trial court granted plaintiffs' motion to amend their complaint for a third time to a Fourth Amended Complaint, and then dismissed all thirteen counts on various grounds. Plaintiffs appealed.

         ¶ 20. We review a trial court's decision on a motion to dismiss without deference, using the same standard as the trial court. In determining whether a complaint can survive a motion to dismiss under Vermont Rule of Civil Procedure 12(b)(6), we bear in mind that Vermont Rule of Civil Procedure 8(a) simply requires that a complaint present "a short and plain statement of the claim showing that the pleader is entitled to relief." We assume that the facts pleaded in the complaint are true and make all reasonable inferences in the plaintiffs' favor and will only dismiss a claim if "it is beyond doubt that there exist no facts or circumstances that would entitle the plaintiff to relief." Montague v. Hundred Acre Homestead, LLC, 2019 VT 16, ¶ 10, __Vt.__, 208 A.3d 609 (quotation and alteration omitted). The rule that a complaint need only "provide[] the defendant with notice of the claims against it" is an attempt to strike a balance between "encouraging valid, but as yet underdeveloped, causes of action and discouraging baseless or legally insufficient ones," mindful that the complaint's "purpose is to initiate the cause of action, not prove the merits of the plaintiff's case." Colby v. Umbrella, Inc., 2008 VT 20, ¶ 13, 184 Vt. 1, 955 A.2d 1082.

         ¶ 21. We conclude that plaintiffs have stated claims of negligence by the State; gross negligence by Brent Raymond and James Candido; and breach of contract and of the covenant of good faith and fair dealing by the State. We affirm the dismissal of plaintiffs' remaining claims.

         I. Negligence (Count 11) and Negligent Misrepresentation (Count 5)[5]

         ¶ 22. Plaintiffs allege that ACCD and the individual defendants had a special relationship with them that gave rise to a duty to exercise due care in the performance of its duties. In particular, they contend that ACCD undertook a duty to them to oversee and monitor the Jay Peak Projects to ensure compliance with all applicable laws, and that defendants breached this agreement to plaintiffs' detriment by failing to conduct any such oversight and monitoring. Plaintiffs also allege that they relied on numerous misrepresentations made by ACCD and the individual defendants concerning the projects and ACCD's oversight practices with respect to the projects. We affirm the dismissal of the negligence claims against the individually named defendants. However, we conclude that plaintiffs have stated claims for negligence and negligent misrepresentation against ACCD and that the Vermont Tort Claims Act waives the State's sovereign immunity with respect to these claims.

         A. Negligence Claim Against Individual Defendants

         ¶ 23. The negligence claims against the individually named defendants, all current or former employees of the State, were properly dismissed. Under 12 V.S.A. § 5602(a), in suits alleging injury caused by the acts or omissions of a state employee acting within the scope of their employment, "the exclusive right of action shall lie against the State of Vermont; and no such action may be maintained against the employee or the estate of the employee." Plaintiffs do not appear to contend for the purposes of 12 V.S.A. § 5602(a) that the individually named defendants were acting outside the scope of their employment. Accordingly, their claims for negligence lie solely against the State.

         B. Negligence Claims Against ACCD

         ¶ 24. The State contends that plaintiffs have failed to assert viable negligence claims and that plaintiffs' claim against the State is barred by sovereign immunity. We reject both positions.

         1. Viability of Plaintiffs' Negligence Claims

         a. Negligence

         ¶ 25. We conclude that plaintiffs have stated a claim for negligence based on ACCD's undertaking, and that the economic nature of their losses is not an impediment to such a claim. We reject plaintiffs' alternate theory of negligence predicated on federal law.

         ¶ 26. Common-law negligence has four elements: a legal duty owed by the defendant to the plaintiff, a breach of that duty, injury to the plaintiff, and a causal link between the breach and the injury. Montague, 2019 VT 16, ¶ 14. Existence of a duty is primarily a legal question. LeClair v. LeClair, 2017 VT 34, ¶ 10, 204 Vt. 422, 169 A.3d 743. In determining whether a duty exists, we consider "a variety of public policy considerations and relevant factors. It is a question of fairness that depends on, among other factors, the relationship of the parties, the nature of the risk, the public interest at stake, and the foreseeability of the harm." Deveneau v. Wielt, 2016 VT 21, ¶ 8, 201 Vt. 396, 144 A.3d 324 (quotation and alteration omitted). Underlying "these considerations is the basic tort rule that duty is measured by undertaking." Id. (quotation omitted).

         ¶ 27. This Court has recognized that a legal duty may arise when a person "undertakes, gratuitously or for consideration, to render to another services that the person should recognize as necessary to protect the other." Sabia v. State, 164 Vt. 293, 302-03, 669 A.2d 1187, 1194 (1995) (quoting Restatement (Second) of Torts § 323 (1965)). Little more than a gratuitous promise is necessary to find an undertaking. Id. at 303, 669 A.2d at 1194. We have recognized before that a person "is subject to liability for physical harm resulting from negligent performance of the undertaking if (1) the negligence increases the risk of harm, or (2) the harm results from the other's reliance upon the undertaking." Id. (citing Restatement (Second) of Torts § 323 cmt. a). This "applies whether the harm results from the defendant's negligent performance of the undertaking, or from the defendant's failure to exercise reasonable care to complete the undertaking or to protect the other person when the undertaking is discontinued." Id. "[T]he undertaking may not be discontinued when the danger of harm to the other person increased as a result of the undertaking, or because the other person, in reliance upon the undertaking, was induced to forego other opportunities of obtaining assistance." Id.

         ¶ 28. For example, in Langlois v. Town of Proctor, we held that a factfinder could find the Town of Proctor liable for negligent undertaking where a Town employee promised the plaintiff he would shut off water service to her building; Town workers were aware that harm to the building could result if the water was not disconnected; the plaintiff relied on the employee's promise to disconnect the water when she turned off the heat in the building; and the Town failed to shut off the water, causing damage to the building when the pipes froze and split, flooding the first floor and basement. 2014 VT 130, ¶¶ 1, 14-15, 198 Vt. 137, 113 A.3d 44.

         ¶ 29. Plaintiffs' allegations, if true, would likewise establish liability for negligent undertaking. When ACCD employees induced prospective investors, including plaintiffs, to invest in the Jay Peak Projects by representing that ACCD would provide an unusually high level of oversight over those projects, including quarterly reviews to ensure that projects complied with all applicable laws and regulations, ACCD knew that harm could come to plaintiffs if it failed to follow through on its promises. Plaintiffs reasonably relied on these representations in investing in the Jay Peak Projects. After inducing plaintiffs to invest in the Jay Peak Projects by promising to provide the "extra safeguard of state oversight," ACCD had a duty to provide that promised oversight. By allegedly failing to provide the promised oversight or compliance monitoring, ACCD increased the risk of harm to plaintiffs. Plaintiffs allege that this failure harmed them by leading them to "turn[] over their life savings to the fraud at the Jay Peak Projects," which they allege they lost as a result, and by causing them to be "displace[d] from their home countries by false promises of permanent residency in the United States." Accordingly, plaintiffs have made out a facial claim of negligence by ACCD.

         ¶ 30. The "economic-loss rule" is not a bar to plaintiffs' claim in this case. In its most general sense, with certain exceptions, the economic-loss rule prohibits recovery in tort for purely economic losses. See Long Trail House Condo. Ass'n v. Engelberth Constr., Inc., 2012 VT 80, ¶ 10, 192 Vt. 322, 59 A.3d 752; see also Gus' Catering, Inc.v. Menusoft Sys., 171 Vt. 556, 558, 762 A.2d 804, 807 (2000) (mem.) ("Negligence law does not generally recognize a duty to exercise reasonable care to avoid intangible economic loss to another unless one's conduct has inflicted some accompanying physical harm, which does not include economic loss." (quotation omitted)).

         ¶ 31. But courts have recognized a host of exceptions to this general principle.[6] See, e.g., Long Trail House Condo. Ass'n, 2012 VT 80, ¶ 13 (recognizing that there "might be recovery for purely economic losses in a limited class of cases" involving parties who have "a special relationship, which creates a duty of care independent of contract obligations," such as the obligation to avoid violating a "professional duty" (quotations omitted)); Springfield Hydroelectric Co. v. Copp, 172 Vt. 311, 316, 779 A.2d 67, 71 (2001) ("[C]ourts have permitted recovery for economic loss [where there is] a special relationship between the alleged tortfeasor and the individual who sustains purely economic damages sufficient to compel the conclusion that the tortfeasor had a duty to the particular plaintiff and that the injury complained of was clearly foreseeable to the tortfeasor." (quotation omitted)); cf. Limoge v. People's Tr. Co., 168 Vt. 265, 268-69, 719 A.2d 888, 890 (1998) (quoting Restatement (Second) of Torts § 552(1) (1977) and recognizing that one who, in the course of business, fails to exercise reasonable care and "supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information").

         ¶ 32. The rationale underlying the economic-loss rule, which shapes the scope of and exceptions to that rule, rests on two main considerations. First, "[e]conomic losses proliferate more easily than losses of other kinds," leading to indeterminate and disproportionate liability. Restatement (Third) of Torts: Liab. for Econ. Harm § 1 cmt. (c)(1) (contrasting impact of badly driven car, causing physical harm only to others nearby, with potential impact of single negligent utterance, causing economic loss to thousands of people who rely on it, in addition to those who relied on first round of victims). Second, "[r]isks of economic loss tend to be especially well suited to allocation by contract." Id. cmt. (c)(2) (explaining that "[a] contract that settles responsibility for such a risk [is] preferable in most cases to a judicial assignment of liability after harm is done)."[7] Courts have recognized duties to prevent economic loss when these rationales are weak or absent. Id. cmt. d. So, for example, those who, in the course of their business, ...

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