Zachrich Small Business Investments, LLC et al. v. Pallini et al.

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OHIO
EASTERN DIVISION
Zachrich Small Business Investments, LLC, 	)
eta!., 	)
)
Plaintiffs, 	)
)
V. 	)
)
Carl Pallini, et al., 	)
)
Defendants. 	)
)
CASE NO. 	1:25 CV 1228
JUDGE DONALD C. NUGENT
MEMORANDUM OPINION
AND ORDER
This matter comes before the Court upon the Motion of Defendants Carl Pallini and Tri
State Business Authority, LLC to Dismiss Plaintiffs' First Amended Complaint pursuant to
Fed. R. Civ. P. 12(b)(6) for Failure to State a Claim Upon which Relief may be Granted. (ECF
#16) The motion is fully briefed and ready for decision. For the reasons that follow,
Defendants' Motion to Dismiss is granted in part and denied in part.
Factual and Procedural History
Plaintiffs Zachrich Small Business Investments, LLC ("ZSB"), an Ohio limited liability
company and Peyton Zach.rich, the managing member of ZSB bring this action against
Defendants Carl Pallini, a licensed business broker and Tri State Business Authority, LLC
("TSBA") a limited liability company through which Mr. Pallini conducted his business
brokerage activities asserting claims of Professional Negligence/Negligent Misrepresentation
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(Count I), Fraudulent Inducement (Count II) and Civil Conspiracy to Commit Fraudulent
Inducement (Count III) and Unjust Emichment (Count IV). First Amended Complaint
("F AC")(ECF # 11)
Plaintiffs state that "this is an action for professional negligence and related claims
arising from Defendants' continuing breach of professional duties through their transmission of
materially false financial inf01mation and failure to c01Tect known misrepresentations in
connection with Plaintiffs' $1.2 million acquisition of Glass Block Headquarters, Inc. ("GBHI"
or "Seller"), which closed on September 17, 2021." (ECF # 11 if l) Defendants Pallini and
TSBA acted as the business broker, engaged by the sellers for the transaction, marketing GBHI
to potential buyers and facilitating the eventual sale. Mr. Pallini earned a substantial
percentage-based commission from the successful sale of the business. (ECF #11, if18)
Plaintiffs allege that Mr. Pallini transcended the role of mere inf01mation conduit of
seller inf01mation to become the primary gatekeeper and interpreter of GBHI' s financial
information for prospective buyers. He required Plaintiffs to execute a non-disclosure
agreement with him directly to access what he represented as his professional analysis. (ECF
# 11, if22) Plaintiffs further allege that Mr. Pallini authored and transmitted his own work
product which recast and interpreted the sellers raw financial data into profitability metrics
intended to guide Plaintiffs' valuation and induce an offer. These direct dealings and
customized work place Mr. Pallini squarely within if552 of the Restatement (Second) of Torts as
an "information supplier" to a limited foreseen recipient (Plaintiffs). Id. at if24. Specifically,
Plaintiffs allege that Mr. Pallini's financial analysis represented that GBHI generated $650,000
in annual Seller's Discretionary Earnings ("SDE") when in fact the actual SDE was less than
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$400,000. Mr. Pallini used his SDE figures to declare that Plaintiffs' initial offer was "way low
and won't work." Mr. Pallini allegedly told Plaintiffs that details can be verified during due
diligence after an offer has been accepted- structuring the verification to occur only after an
offer was accepted. Id. at ifif37, 33. Mr. Pallini also apparently misrepresented that over
$300,000 in routine business expenses shown on GBHI's tax returns were actually "personal
expenses" that should be "added back" to calculate true profitability. Id. at ,r,r 30, 32, 42. Mr.
Pallini accepted and transmitted these figures without verifying that the "personal expenses"
add-backs actually conesponded to entries in GBHI's books and records consistent with
reasonable care. Id. at ,r,r 32, 42, 80. Mr. Pallini's commission was tied to the purchase price
paid. The inflated valuation, including overstating SDE and understating expenses, did more
than close the deal- it increased his compensation. Id. at ,r,r 19, 55. Plaintiffs also asse1i that they
were unable to independently verify the information because the sellers refused to provide
supp01iing documentation and Plaintiffs lacked the means to compel third-paiiy verification
pre-closing. This non-cooperation combined with Mr. Pallini' s structured verification sequence,
prevented any verification prior to closing. Id. at ,r,r 44, 55).
Standard of Review
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) allows a defendant
to test the legal sufficiency of a complaint without being subject to discovery. See Yuhasz v.
Brush Wellman, Inc., 341 F.3d 559, 566 (6 th Cir. Ohio 2003). In evaluating a motion to
dismiss, the comi must construe the complaint in the light most favorable to the plaintiff, accept
its factual allegations as true, and draw reasonable inferences in favorable of the plaintiff. See
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Directv, Inc. v. Treesh, 487 F.3d 471,476 (6 th Cir. 2007). The court will not, however, accept
conclusions of law or unwairnnted inferences cast in the form of factual allegations. See
Twombly, 550 US. at 555; Gregory v. Shelby County, 220 F.3d 433,446 (6 th Cir. Tenn. 2000).
In order to survive a motion to dismiss, a complaint must provide the grounds of the entitlement
to relief, which requires more than labels and conclusions, and a formulaic recitation of the
elements of a cause of action. Bell At!. Corp. v. Twombly, 127 S.. Ct. 1955, 1964-65 (2007).
That is,"[f]actual allegations must be enough to raise a right to relief above the speculative
level, on the assumption that all the allegations in the complaint are true (even if doubtful in
'fact)." Id. (internal citation omitted); see Association of Cleveland Fire Fighters v. City of
Cleveland, No. 06-3823, 2007 WL 2768285, at *2 (6 th Cir. Ohio Sept. 25, 2007) (recognizing
that the Supreme Cami "disavowed the oft-quoted Rule 12(b)(6) standard of Conley v. Gibson,
355 U.S. 41, 45 -46, 78 S. Ct. 99, 2 L. Ed.2d 80 (1957)"). Accordingly, the claims set fo1ih in a
complaint must be plausible, rather than conceivable. See Twombly, 127 S. Ct. at 1974.
On a motion brought under Rule 12(b)(6), the comi's inquiry is limited to the content of
the complaint, although matters of public record, orders, items appearing in the record of the
case, and exhibits attached to the complaint may also be taken into account. Amini v. Oberlin
College, 259 F.3d 493, 502 (6 th Cir. Ohio 2001).
Analysis
In their motion to dismiss, Defendants assert that Count I of the FAC fails to state a
claim for negligent misrepresentation because Plaintiffs fail to identify a duty that Defendants
owed to Plaintiffs as a matter oflaw. Next, Defendants assert that Plaintiffs' fraud claim fails
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because it was not pled with the specificity required by Fed. R. Civ. P. 9(b). Count III for civil
conspiracy fails because the alleged predicate act was Plaintiffs' fraud claim. Finally, Count IV
for unjust emichment fails because Plaintiffs did not confer a benefit upon the Defendants.
These arguments will be addressed in order.
A. Count I Negligent Misrepresentation
Defendants assert that Restatement (Second) ofT01is § 552(1), the source of the duty
alleged by Plaintiffs, has not been applied to business brokers by comis in Ohio, thus the FAC
fails to establish that Defendants owed them a cognizable duty and their negligent
misrepresentation claim fails as a matter of law.
The Ohio Supreme Comi has applied the Restatement (Second) ofT01is § 552(1) to
state the elements of a negligent misrepresentation claim as follows :
One who, in th~ course of his business, profession or
employment, or in any other transaction in which he has a
pecuniary interest, 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, ifhe fails to exercise reasonable care or competence
in obtaining or communicating the information.
Delman v. City of Cleveland Heights, 41 Ohio St. 3d 1, 4, 534 N.E.2d 835, 838 (Ohio 1989).
The elements of a negligent misrepresentation claim in Ohio have been fmiher defined in
subsequent cases to limit liability to loss suffered:
"( a) by the person or one of a limited group of persons for
whose benefit and guidance he intends to supply the information or
knows that the recipient intends to supply it; and (b) through
reliance upon it in a transaction that he intends the information to
influence or knows that the recipient so intends or in a substantially
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similar transaction." Gutter v. Dow Jones, Inc., 22 Ohio St.3d 286,
288- 89, 490 N.E.2d 898, 900 (Ohio 1986) (quoting Restatement of
the Law 2d, To1is (1977), Section 552(2)). Thus, "[t]he
Restatement clearly indicates that liability may be imposed for
negligent misrepresentation only if the disseminator of the
information intends to supply it to a specific person or to a limited
group of people." Amann v. Clear Channel Communications, 165
Ohio App.3d 291,297, 846 N.E.2d 95, 100 (Ohio Ct.App.2006)
In re Nat'! Century Fin. Enters., Inc ., Inv. Litig., 580 F. Supp. 2d 630, 647-48 (S.D. Ohio 2008)
Defendants try to limit the application of §522(1) by stating that no Ohio court has
applied it to brokers. Plaintiffs contend that the duty analysis under §552 is a functional test, not
governed by titles such as broker or accountant, and turns on whether the defendant supplied
false information for the guidance of a specifically identified recipient and had a pecuniaiy
interest in the transaction-elements that Plaintiffs have pled in their FAC. Review of the FAC
shows that Plaintiffs have sufficiently pled the elements of a negligent misrepresentation claim.
B. Count II Fraudulent lnducerent
Plaintiffs aver that their fraudulent inducement claim is an alternative to Count I made
to preserve potential theories of recove1y should discovery reveal additional facts. "Plaintiffs
plead that Defendants' conduct may have involved knowing or reckless disregard of the truth."
ECF # 11 if87. Defendants point to the conditional language used in parts of Count II- "may
have involved knowing or reckless disregard of the truth," "potentially fraudulently" ratified
financial statements, "possibly actively concealing" to assert that plaintiffs' fraudulent
inducement claim is speculative and does not survive the paiiicularity requirement of Fed. R.
Civ. P. 9(b) when pleading allegations of fraud.
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Rule 9(b) states that "[i]n alleging fraud or mistake, a patty must state with paiiicularity
the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other
conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b). To satisfy the
paiiicularity requirement when bringing a fraudulent inducement claim, a plaintiff must
generally "allege the time, place, and content of the alleged misrepresentations on which [the
plaintiff] relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injmy
resulting from the fraud." US. ex rel. Marlar v. BWXT Y-12, LLC, 525 F.3d 439,444 (6th Cir.
2008). The additional pleading requirements, however, "should not be read to defeat the general
policy of 'simplicity and flexibility' in pleadings contemplated by the Federal Rules." US. ex
rel. SNAPP, Inc. v. Ford Motor Co ., 532 F.3d 496, 503 (6th Cir. 2008). Rather, when a plaintiff
"pleads in sufficient detail ... to allow the defendant to prepai·e a responsive pleading, the
requirements of Rule 9(b) will generally be met." Id. at 504.
Here, the FAC pleads time, place and content of the alleged misrepresentations on
which Plaintiffs relied to their detriment. Specifically, the emails and spreadsheet sent by Mr.
Pallini, with dates and content were set out:
• April 3, 2021: Pallini emailed Plaintiffs claiming that business expenses
shown on tax returns included personal expenses that could be "added
back." (F AC ,r,r 30, 42);
• April 13, 2021: Pallini transmitted "Glass Block HQ Info.xlsx" showing
SDE of$650,675 (2020) and $631,356 (2019) when actual SDE was
substantially less than $400,000. (FAC ,r,r 34, 37);
• April 13, 2021: Pallini used these figures to declare Plaintiffs' offer "way
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low and won't work." (FAC ,r 33);
• April 23, 2021: Pallini represented to Plaintiffs that GBHI's owners
worked "approximately 20 hours per week" when in fact they worked full-
time. (FAC ,r 39); and
• May 10-11, 2021: The sellers provided vendor reports that omitted
suppliers exceeding $10,000/year, which served to c01rnborate Pallini's
earlier misrepresentations about add-backs and GBHI's financial condition,
as part of the broader fraudulent scheme. (FAC ,r 46).
The conditional statements noted by Defendant relate to the Defendants' intent,
knowledge, and scienter which may be alleged generally under Rule 9(b ). The FAC pleads facts
which permit a plausible inference of intent, knowledge or recklessness:
-Financial incentive as a result of Pallini's commission calculated as a percentage of the
purchase price (FAC ,r 19) created an incentive to promote the falsely represented profitability.
-The magnitude of the discrepancy between the represented SDE ($650,000) and the
actual SDE (substantially less than $400,000) (FAC ,r,r 34, 37). This material difference would
wanant verification by a competent professional with 35 years of experience like Mr.
Pallini-leading to an inference of intent, knowledge or reckless indifference.
- Professional experience and alleged absence of verification-despite his representations
of 35 years of business broker experience and knowledge, the FAC alleges that Mr. Pallini
accepted and transmitted claimed "add-backs" exceeding $300,000, which he endorsed,
apparently without verifying whether they c01Tesponded to actual expenses in GBHI's books
and records. (F AC ,r,r 30, 32, 42) This may lead to a plausible inference of reckless disregard
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for the truth or knowledge.
-The FAC alleges that Mr. Pallini told Plaintiffs that verification could occur "after an
offer has been accepted." (FAC ,r 33). This structure-conditioning verification on prior
commitment- supports inference of knowledge in that a defendant who knows that figures may
not withstand scrutiny has an incentive to structure verification to occur after commitment to
price.
These allegations, if taken as true, based on specific facts, dates, documents and
amounts permit a plausible inference of scienter as permitted by Rule 9(b ). The FAC here
pleads fraudulent inducement in sufficient detail to allow the defendant to prepare a responsive
pleading thereby satisfying the requirements of Rule 9(b). US. ex rel. SNAPP, Inc., supra, 532
F.3d. at 504.
C. Count III Civil Conspiracy
Defendants move to dismiss Plaintiffs' civil conspiracy claim because the underlying
unlawful act of the civil conspiracy is Defendants' fraudulent inducement and since the
fraudulent inducement claim fails, there is no underlying tort that could possibly serve as the
civil conspiracy predicate. However, as the Comi has determined that Plaintiffs have adequately
pled a claim of fraudulent inducement, Defendants' basis for dismissing Plaintiffs' civil
conspiracy claim fails and the civil conspiracy claim will remain.
D. Count IV Unjust Enrichment
Defendants argue that Plaintiffs' unjust enrichment claim fails because the alleged
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benefit confeITed on Defendants was not confeITed by Plaintiffs and because there are no
circumstances rendering the retention of the benefit unjust.
In Ohio, in order to state a claim for unjust enrichment, the plaintiff must show that:
"(1) a benefit was confe1Ted by the plaintiff on the defendant, (2) the defendant had knowledge
of the benefit, and (3) the defendant retained the benefit under circumstances in which it was
unjust to do so without payment." Bunta v. Superior VacuPress, LLC, 171 Ohio St. 3d 464,474
(2022) Plaintiffs admit that they did not pay the Defendants' commission here-it was paid by
the sellers. Rather, they contend that since Defendants' commission was paid from the sale
proceeds funded by Plaintiffs' purchase price, the commission is traceable to Plaintiffs' funds
and it would be unjust to pe1mit the Defendants' to retain a commission that was calculated on
an allegedly inflated purchase price that was caused by Defendants' conduct.
The Supreme Court of Ohio, however, has established that "an indirect purchaser cannot
assert a common-law claim for restitution and unjust enrichment against a defendant without
establishing that a benefit had been confe1Ted upon that defendant by the purchaser." Johnson v.
Microsoft Corp., 2005-Ohio-4985, 122, 106 Ohio St. 3d 278,286, 834 N.E.2d 791, 799. The
purpose of the doctrine "is not to compensate the plaintiff for any loss or damage suffered by
him but to compensate him for the benefit he has confe1Ted on the defendant." Id. at 121.
Plaintiffs have not alleged that an economic transaction occurred between Plaintiffs and
Defendants, and therefore, as was the case in Johnson, Plaintiffs cannot establish that
Defendants retained any benefit to which they were not entitled. Accordingly, Plaintiffs' claim
for unjust enrichment (Count IV) is dismissed.
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CONCLUSION
For the reasons set forth above, the Defendants' Motion to Dismiss the First Amended
Complaint is granted as to Count IV for unjust emichment and denied as to Counts I, II, and III.
IT IS SO ORDERED.
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