Sutton v. State of Vermont ( 2018 )

Sutton v. State of Vermont, 100-5-17 Lecv (Carlson, J., Apr. 20, 2018)
[The text of this Vermont trial court opinion is unofficial. It has been reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is not guaranteed.]
STATE OF VERMONT
SUPERIOR COURT CIVIL DIVISION
Lamoille Unit Docket No. 100-5-17 Lecv
Antony Sutton,
Wei Wang,
Xiaofeng Feng,
Guangyi Xiong,
Robert Connors,
Plaintiffs
v.
State of Vermont Department of,
James Candido,
William Carrigan, DECISION ON MOTION
Susan Donegan,
Eugene Fullam,
Joan Goldstein,
John W. Kessler,
Lawrence Miller,
Patricia Moulton,
Michael Pieciak,
Brent Raymond,
The Vermont Regional Center,
State of Vermont Agency of,
Defendants
The State has moved to dismiss the Plaintiffs’ entire Third Amended Complaint,
pursuant to V.R.C.P. 12(b)(1) for lack of subject matter jurisdiction and pursuant to V.R.C.P. 12
(b)(6) for failure to state a claim upon which relief can be granted. Both general grounds for
dismissal stand on the law of sovereign immunity and official immunity, absolute and qualified,
as well as specific grounds with respect to certain of the causes of action pled. Plaintiffs have
replied at length, and the State has in turn replied to the Plaintiffs’ reply. In addition, the Court
held oral argument on the motion on March 19, 2018. Plaintiffs are represented by the Barr
Law Group and specifically Russell Barr, Esq., Chandler Matson, Esq. and Benjamin Novogroski,
Esq. The State is represented by the Vermont Attorney General and specifically
__________________.
Given the grounds for dismissal argued by the State, the Court’s analysis must start with
careful sorting of the claims made and the particular State officials against whom they are
made in Plaintiffs’ Third Amended Complaint (“TAC”). In doing so, the Court takes the facts
alleged in the TAC as true, and otherwise its’ inquiry “focuses on the absence of any facts,
reasonable factual inferences, and legal bases for recovery alleged in the complaint,
attachments thereto, or to matters the court may judicially notice.” State v. Sprague, 178 Vt.
222, 224 (2005), quoting Gilman v. Maine Mutual Fire Insurance. Co., 175 Vt. 554 (2003).
The Court has previously laid out the big picture painted by the Plaintiffs in this case in
the Court’s Decision on Motion to Appoint Receiver dated December 5, 2017. The gist begins
with the underlying economic facts. Over a close to ten year period starting in 2006, Jay Peak
developers William Stenger and Ariel Quiros, acting through a variety of entities, persuaded
hundreds of foreign investors to invest $500,000 each, for a total of about $400 million, in
exchange for interests in the developments together with immigrant visas for themselves and
their families. The federal program that authorized these investments-for-visas is known as the
EB-5 program, named after the visa category under federal statute. The State’s role from the
beginning was to join in promotion of the investments in the name of much needed economic
development in the Jay Peak/Newport region. It did so through an office within the State
Agency of Commerce and Community Development (“ACCD”) that received approval of the
United States Customs and Immigration Service (“USCIS”) to act as a Regional Center. Known as
the Vermont Regional Center (“VRC”), the mission of the office was to promote economic
development in Vermont by way of facilitating EB-5 investment here.
VRC and ACCD officials, and then-Governor Peter Shumlin, joined in promotion of the
investments both by way of public appearances, written materials circulated to potential
investors and by joining the Jay Peak principals in traveling to promotional events in the U.S.
and in Asia. Written and spoken statements issued by those officials touted the “legitimacy,
viability and overall accountability” of the Jay Peak projects (“JPPs”), including the benefits of
State oversight that would include quarterly reviews, financial monitoring and audits to ensure
project compliance with all applicable laws and regulations.
The materials prepared and presented to solicit investors included Memorandums of
Understanding (“MOUs”) between the State and the JPPs. Those MOUs are referred to in the
TAC and their existence is undisputed by the State. The first one, signed in 2006, was also
attached to Plaintiffs’ motion for a receiver. It calls for the Jay Peak entity to deliver quarterly
reports on its’ business and financial activity with investor capital and to act “honestly,
consistently and fairly” in order to assist ACCD with ACCD’s “oversight and management of the
Regional Center in connection with the Jay Peak Project.” It does not expressly call for the State
to conduct any audit of the project. The reporting and honesty obligations fell on the Jay Peak
entity.
The investors relied on the State’s promotional statements as well as those of the
private Jay Peak principals, in making their investments and taking the giant steps of seeking to
become lawful residents of the United States.
The VRC collected administrative fees of $1500-3000 from each investor, totaling some
$1.6 million over the entire decade investment period and used to pay the costs of VRC
operations and activity. There is no allegation that the State is currently holding any investor
funds.
Concern over the actual use of investor funds surfaced in early 2012, initiated by
principals of the consulting firm that the State had hired for some time to assist in the VRC
2
effort. That relationship ended in dispute and the consultant warning about a hundred
immigration attorneys involved in EB-5 applications that the consultant had lost confidence in
the financial integrity of the JPPs. The TAC alleges that the VRC response to the concerns was
limited to a site visit to the JPPs by the then VRC Director, James Candido, and an immigration
attorney hired by the State, that found “no issues” and continued to tout the State’s ongoing
oversight and audit functions. The TAC then alleges that Mr. Candido, together with higher-ups
in the ACCD, retaliated against the “whistleblower” consultant by blackballing it from
participating in other EB-5 projects in Vermont. Mr. Candido proceeded to reassure potential
investors that the whistleblower was just a disgruntled businessman and vouched for the
ongoing legitimacy and reliability of the JPPs, particularly given ongoing State oversight.
The JPPs continued, both those already in the pipeline in 2012 and more. In May of
2014, approximately two years after the initial red flags raised by the consultant, a group of
investors led by Plaintiff Anthony Sutton confronted the successor VRC Director, Brent
Raymond, with evidence of misuse of investor funds and an apparent effort by the Jay Peak
principals to frustrate investor inquiry by way of converting their equity interests in the projects
to simple debt. Mr. Raymond responded by disclaiming State responsibility for auditing the JPPs
and any responsibility for assisting the investors with their complaints of mistreatment other
than to convey them to the Jay Peak principals. Mr. Sutton et al continued their effort by hiring
their own auditor but his effort was frustrated by delays in response from the Jay Peak
principals, allegedly aided and abetted by Mr. Raymond. No private audit was ever
accomplished. The investors escalated their complaint about VRC inaction to the Secretary of
ACCD, Patricia Moulton, who joined Mr. Raymond in disclaiming State responsibility for any
kind of audit of the JPPs.
The 2014 VRC and ACCD disclaimers of audit responsibility stand in contrast to the
written and spoken assurances given to investors over the several years prior. The State was
not, however, ignoring the situation. In December 2014, ACCD and the State Department of
Financial Regulation (“DFR”) joined forces in the VRC, adding DFR’s securities regulation
resources to the mix. The legislature, meanwhile, passed the first statute specifically
authorizing the VRC and specifically as a joint effort of ACCD and DFR. DFR’s subsequent efforts
culminated in a securities fraud lawsuit against the Jay Peak principals in April of 2016 that
remains pending. Remarkably, the VRC, now a joint effort of ACCD and DFR, continued to
promote more EB-5 fundraising for the JPPs, even as the investigation and audit identified
misappropriation of millions of dollars of investor funds by the Jay Peak principals.
The TAC does not allege any wrongdoing by DFR or DFR officials prior to it joining the
VRC effort in December 2014. Instead, it focuses on allegations that “DFR’s presence further
contributed to the fraud” by failing to act immediately to shut down pending investment
solicitation, joining in the drafting of investment offering documents “to give the false
appearance of state oversight and monitoring,” and joining in approval of the last two JPPs for
further investment in early 2015. The chronology of DFR’s entire effort, including most
importantly its eventual investigation culminating in the April 2016 action against the Jay Peak
principals, is not set forth in the TAC.
The TAC alleges that the various State officials involved were motivated by the notoriety
of bringing hundreds of millions of dollars to Vermont’s most economically depressed region,
3
desire to protect their jobs and obtain future jobs, and the lure of international travel and
hospitality at Jay Peak itself.
Claims Made
Count 1 alleges common law fraud by way of communications to Plaintiffs/investors to
the effect that the Jay Peak Projects (“JPPs”) were legitimate and that they could rely on the
State’s ongoing oversight of the JPPs in making their investment decisions. Those
communications were belied by the fact that actual State oversight was too little and too late
and ignored an extended series of red flags that pointed to the JPPs being as illegitimate and
fraudulent as they turned out to be.
Count 2 of the TAC alleges essentially the same facts and “common plan or
scheme…which operated as a fraud…upon Plaintiffs” in the context of a claim under the
Vermont Securities Act, 9 V.S.A. §5501 et seq.
Counts 3 and 4 allege essentially the same facts in the context of claims for fraud under
the Federal Securities and Exchange Act, 15 U.S.C.§_________.
Count 5 alleges essentially the same facts in the context of a claim of negligent
misrepresentation.
Count 6 alleges essentially the same facts in the context of a claim for gross
negligence/willful misconduct, adding the further characterization of those facts as creating “a
special relationship with Plaintiffs that gave rise to a duty to exercise due care in the oversight
and administration of Plaintiffs’ assets in the JPP…” which Defendants “grossly failed to
exercise…”
Count 7 alleges essentially the same facts in the context of a claim for breach of
fiduciary duty arising from the State’s “superior position” to oversee the JPPs, its offering of
that superior position to the Plaintiffs to rely upon, and then its failure to fulfill that duty.
Count 8 alleges essentially the same facts, adding specific reference to the
Memorandums of Understanding (“MOUs”) between the State and the JPPs, in the context of a
claim that Plaintiffs were the intended third party beneficiaries of those agreements, the State
breached those MOUs by failing to provide promised oversight, and Plaintiffs were damaged
thereby.
Count 9 alleges essentially the same facts, adding specific reference to the relatively
modest administrative fees of $1500-$3000 per investor paid to the Vermont Regional Center
(“VRC”), in the context of a claim for unjust enrichment and a request for relief in the form of
imposition of a constructive trust.
Count 10 alleges essentially the same facts as Count 9, but seeks recovery of the fees on
the basis of mutual mistake as to the reality of State oversight of the JPPs.
4
Counts 11 and 12 allege essentially the same facts in the context of a claim of aiding and
abetting the Jay Peak principals in their breach of fiduciary duty to Plaintiffs by way of
committing fraud.
Count 13 alleges essentially the same facts in the context of a simple negligence claim.
Count 14 appears to be a reiteration of Count 9, for unjust enrichment, but expanding
the scope of the “enrichment” to include any benefit received by way of the alleged breaches of
fiduciary duty.
Count 15 alleges essentially the same facts in the context of a claim for fraud under the
Vermont Consumer Fraud Act, 9 V.S.A. §2451 et. seq.
Count 16 alleges essentially the same facts in the context of a claim for breach of
implied contract arising from the payment of investor fees “and other good and valuable
consideration” to the VRC in exchange for promised oversight.
All counts are expressly made against all Defendants. In its Opposition to the Motion to
Dismiss, Plaintiffs concede that this Court has no jurisdiction over the federal securities law
claims made in Counts 3 and 4. They also concede without explanation Count 9 (“constructive
trust”) and Count 10 (“mutual mistake”). See Plaintiffs’ Reply at page 30. Plaintiffs Reply
elsewhere says that “in light of the Court’s Decision on Appointment of Receiver, it leaves the
viability of the Constructive Trust claim to the discretion of the Court,” which raises some
question as to its’ earlier express concession. Reply at 72. In that Decision, the Court found that
there is no allegation that the State is holding any investor assets that could be administered by
a receiver. For present purposes, the Court likewise sees no allegation that the State is holding
any assets over which a constructive trust could be imposed as a remedy. Counts 3, 4, 9, and 10
are therefore dismissed for failure to state a claim upon which relief can be granted.
Plaintiffs also appear to concede that the State agency defendants are immune from
suit for the fraud and misrepresentation claims in Counts 1, 2, 5, 7, 11-12 and 15. Their reply to
Defendant’s Motion to Dismiss argues only that the claims for negligence (Count 13) and breach
of contract (Counts 8, 14 and 16) survive against the State. Counts 1,2, 5-8, and 11-16), for
varieties of fraud and misrepresentation, breach of contract, unjust enrichment and negligence,
remain against the State employees named.
The Defendants
The Defendants fall into four categories: (i) the two State agencies ACCD and DFR; (ii)
VRC Executive Directors James Candido (2004-2012), Brent Raymond (2012-2015), Eugene
Fullam (2015-2016) and Joan Goldstein (2016-); (iii) senior officials in ACCD Lawrence Miller
(Secretary), Patricia Moulton (Secretary), Joan Goldstein (Commissioner of Department of
Economic Development (2015-)) and John Kessler, Esq. (General Counsel 1997-); and (iv) senior
officials in DFR Susan Donegan (Commissioner 2013-2016), William Carrigan (current Deputy
Commissioner of the Securities Division and formerly Director of Examinations and
Enforcement (2007-), and Michael Piecak (formerly Deputy Commissioner and now
Commissioner of the Securities Division).
5
Sovereign Immunity
The State first relies on the doctrine of sovereign immunity, deceptively simply stated as
follows:
Lawsuits against the State are barred unless the State waives its sovereign immunity.
Denis Bail Bonds, Inc. v. State, 159 Vt. 481, 484–85 (1993); see also American Trucking
Ass'ns, Inc. v. Conway, 152 Vt. 363, 376 (1989) (holding that the doctrine of sovereign
immunity precludes the maintenance of actions for the recovery of money against the
State unless the State has consented to be sued).
Lane v. State, 174 Vt. 219, 222–23 (2002). Sovereign immunity is a defense available to the
State itself, not to State employees personally. Levinsky v. Diamond, 151 Vt. 178, 183 (1989).
Therefore, this first discussion relates to the claims against the two State agencies and not to
the claims against the State employees.
Sovereign immunity is an absolute defense, except to the extent the State has waived
sovereign immunity as set forth in 12 V.S.A. §5601, also known as the Vermont Tort Claims Act.
That Act provides as follows:
The State of Vermont shall be liable for injury to persons or property…caused by the
negligent or wrongful act or omission of an employee of the State while acting within
the scope of employment, under the same circumstances, in the same manner, and to
the same extent as a private person would be liable to the claimant…
The first step in the analysis of sovereign immunity is thus to determine whether there
are “private action analogs” for the remaining claims against the State agencies in this case. The
State challenges all of the remaining claims against the State agencies (Counts 8, 13, 14 and 16),
on this basis. The State focuses on the fact that the alleged failure of the State in each of these
claims was in a duty of oversight and regulation, which are exclusively governmental functions
that no private person could fail to fulfill.
“(T)he purpose of the private analog provision ‘is not to bar…suits claiming injuries
based on the breach of duties performed by government employees performing government
services,’ but merely to prevent government from being visited with novel and unprecedented
liabilities untethered from any comparable common law action.” Czechorowski v. State, 178 Vt.
524, 534 (2005), quoting Sabia v. State, 164 Vt. 293, 302 (1995). “Governmental liability may
arise only if a plaintiff’s cause of action is comparable to a cause of action against a private
citizen and his allegations, taken as true, will satisfy the necessary elements of that comparable
state cause of action.” Denis Bail Bonds, Inc. v. State, 159 Vt. 481, 486 (1993).
Plaintiffs’ “Contract claims”, Counts 8, 14 and 16, allege breach of contract by way of a
third party beneficiary theory (Count 8), unjust enrichment (Count 14) and an “express”
contract arising from the payment of fees and other good and valuable consideration in
exchange for State oversight (Count 16).
6
Count 8 stands on the exchange of promises in the MOUs between the State and the
JPPs and common law recognition that a third party may have a claim for breach of a promise
made in a contract between two other parties where it is “appropriate to effectuate the
intention of the parties and…the circumstances indicate that the promise intended to give the
beneficiary the benefit of the promised performance.” Plaintiffs’ Reply at page 44, quoting
Herbert v. Pico Ski Area Management Co., 180 Vt. 141, 149-150 (2006), quoting the
Restatement (Second) of Contracts §302(1). The fatal flaw in Plaintiffs’ theory, by way of a
private analog, is apparent from looking at the very authority primarily relied upon by Plaintiffs,
the case of Bayerische Landesbank v. Aladdin Capital Management, LLC, 692 F.3d 42 (2d Cir.
2012). In that complex case, investors sued a management entity for breach of its contractual
promise to an intermediary entity to properly manage a portfolio of property. There was no
contract between the management entity and the investors, but it was clear that the contract
that did exist-between the management entity and the intermediary-was for the benefit of the
investors. The plaintiffs’ claim in that case was against the promisor, i.e. the management
entity, not the intermediary. By stark contrast, Plaintiffs’ claim in this case is against the State as
promisee. In the MOUs, the State did not promise to do anything by way of oversight and
regulation. It was the JPPs who promised to deliver a variety of reports and information. There
is no allegation of a promise by the State to the JPPs that was breached to the detriment of the
Plaintiffs. Any third party action arising under common law from the MOUs lies against the JPPs,
not the State. Absent a promise by the State in the MOUs, there could be no promissory duty to
enforce for the benefit of the Plaintiffs. Cite to Restatement/caselaw.
Count 14 is marginally if at all a contract claim. The express theory of the claim is unjust
enrichment, which is a common law claim in equity that rests upon the principle that no one
should be allowed to enrich themselves unjustly at the expense of another. “Unjust
enrichment…only exists when a party improves his or her own position at the expense of
someone else.” Weed v. Weed, 185 Vt. 83, 90 (2008). In this case, the alleged unjust
enrichment claim against the State can only arise from the fees paid by investors to the VRC in
connection with their EB-5 applications. But there is no allegation that the State profited, i.e.
improved its’ position, in any way from those fees. Nor is there allegation that they were
assessed by mistake or in excess of statutory authority. Cf. Restatement (Third) of Restitution
and Unjust Enrichment, §19 (2011). The essence of Plaintiffs’ claim is that the State employee
efforts funded with those fees were deficient, but the essential element of the State having
improved its position by collecting the fees remains lacking. In this totality of circumstances, the
Court cannot see how the State was “enriched” at Plaintiffs’ expense.
The remaining Counts 6 and 13 are for gross negligence and negligence. Both require a
common law duty of care to begin with, and then vary as to the degree of culpability in its
breach. Count 6 alleges that the State’s various representations to investors created “a special
relationship with Plaintiffs that gave rise to a duty to exercise due care…” Count 13 makes no
specific additional allegation as to the source of a duty. ?????
Plaintiffs seek to avoid sovereign immunity on their negligence claims by way of
reference to a line of Vermont Supreme Court cases that recognize a State duty by way of a
private analog that satisfies that that threshold requirement under §5601. See, e.g. Kennery v.
State, 191 Vt. 44 (2011). Plaintiffs allege throughout the TAC a negligent and grossly negligent
7
failure to perform oversight of the JPPs. They seek to avoid another line of Vermont Supreme
Court cases that find no private analog in claims that the State failed in its’ performance of
“uniquely governmental functions.” See, e.g. Lafond v. Vt. Dept of Soc. & Rehab. Servs., 167
(1998)(licensing and inspection of private service providers). Conceptually, the course that
Plaintiffs are trying to steer is to cross the threshold private analog requirement with claims of
negligence and gross negligence and then steer clear of the waiver and discretionary act
exceptions by way of the particular duty alleged to underlie the negligence claims.
The ship Plaintiffs are trying to sail is what might be called the Good Samaritan theory. It
stands on the seminal case of Indian Towing Co. v. United States, 350 U.S. 61 (1955), in which
the U.S. Coast Guard was held liable for negligent operation of a lighthouse causing wreck of a
barge, absent an obligation to operate the lighthouse to begin with, on the fundamental tort
principle “that one who undertakes to warn the public of danger and thereby induces reliance
must perform his…task in a careful manner.” Id., at 64-65. The Vermont Supreme Court
followed this analysis in Kennery, finding that the State could be liable for police officers’
negligence in conducting a welfare check, despite no governmental obligation to conduct it,
where they agreed to do it. Their duty arose not by statute or general duty of care but by way
of the clear undertaking, citing Restatement (Second) of Torts §324A (1965) and Indian Towing.
The officers were obligated to use the same care a private person would be obligated to use if
the private person had agreed to do the welfare check. See also McMurphy v. State, 171 Vt. 9(2000)(allowing an injured motorist to proceed on a negligence claim based on alleged failure
to comply with design standards that the State clearly intended to comply with).
By analogy in this case, the Plaintiffs’ argument is that by choosing to operate a regional
center, the State accepted a duty to oversee the JPPs in a careful manner and failed to do so.
”The VRC was unequivocally duty bound to comply with the standards set by USCIS regulations
(and) by the standards established by its own creation.” Reply at 35. In order to respect the
exception of section 5601(e)(6) (discussed below), the Court believes this argument requires
putting a hand over our eyes with respect to all of Plaintiffs’ claims for fraud and
misrepresentation, and looking instead only at the State’s failure to sufficiently oversee and
audit the JPPs until it was too late, having allegedly undertaken to do so from the beginning by
way of creating the VRC, not because of VRC communications to investors.
Plaintiffs stand on the analysis set forth in Denis Bail Bonds, Inc. v. State, 159 Vt. 481(1993), to establish the duty upon which any negligence claim would be based in this case. In
that case, the Vermont Supreme Court recognized a list of “indicia in determining whether a
governmental body has undertaken a duty of care toward certain persons” as follows:
(1) Whether an ordinance or statute sets forth mandatory acts clearly for the protection
of a particular class of persons, rather than the public as a whole;
(2) Whether the government has actual knowledge of a condition dangerous to those
persons;
(3) Whether there has been reliance by those persons on the government’s
representations and conduct; and
(4) Whether failure by the government to use due care would increase the risk of harm
beyond its current potential.
8
Id. at 487.
It is important to keep in mind that Denis did not reach the sovereign immunity
exceptions discussed below and was decided instead on whether there was any duty on the
State that could have been breached in that case. The Court in Denis decided that there was no
such duty in that case, so that there was a failure to state a claim to begin with and the waiver
analysis did not need to be done. Id. at 489. But it did recognize a structure for analyzing the
threshold duty question. Based on the relevant allegations in the TAC, together with
“attachments thereto, or…matters the court may judicially notice,” Sprague, supra, we consider
those indicia.
Taking judicial notice of the relevant statutes and regulations, the VRC was created in
1997, within ACCD, pursuant to its’ responsibility “…for the promotion of Vermont as great
place to live, work, and do business in order to increase the benefits of economic development
marketing, including: (1) attracting additional private investment in Vermont businesses;…(5)
promoting and supporting Vermont businesses, goods, and services. 3 V.S.A.§2476(c) (added
1995).
Under federal law, as an approved EB-5 program regional center, VRC was obligated to
do the following:
(6) Continued participation requirements for regional centers.
(i) Regional centers approved for participation in the program must:
(A) Continue to meet the requirements of section 610(a) of the
Appropriations Act.
(B) Provide USCIS with updated information annually, and/or as
otherwise requested by USCIS, to demonstrate that the regional center is
continuing to promote economic growth, including increased export sales,
improved regional productivity, job creation, and increased domestic capital
investment in the approved geographic area, using a form designated for this
purpose;
8 C.F.R. § 204.6.
The reference to section 610(a) is to the following:
SEC. 610. PILOT IMMIGRATION PROGRAM.—(a) Of the visas otherwise available under
section 203(b)(5) of the Immigration and Nationality Act (8 U.S.C. 1153(b)(5)), the
Secretary of State, together with the Attorney General, shall set aside visas for a pilot
program to implement the provisions of such section. Such pilot program shall involve a
regional center in the United States for the promotion of economic growth, including
increased export sales, improved regional productivity, job creation, and increased
domestic capital investment.
DEPARTMENTS OF COMMERCE, JUSTICE, AND STATE, THE JUDICIARY, AND RELATED AGENCIES
APPROPRIATIONS ACT, 1993., PL 102–395, October 6, 1992, 106 Stat 1828.
9
The Court is aware from prior pleading in connection with the Plaintiffs’ Motion for a
Receiver that USCIS has taken the position, in its Notice to Terminate the VRC as an approved
regional center, that:
…a regional center that takes actions that undermine investors’ ability to comply with
EB-5 statutory and regulatory requirements such that investors cannot obtain EB-5
classification through investment in the regional center…(and/or) fails to engage in proper
monitoring and oversight of the capital investment activities…may no longer serve the purpose
of promoting economic growth in compliance with the Program and its authorities.
Notice of Intent to Terminate dated August 14, 2017, at page 16, attached to Plaintiffs’
Emergency Motion to Appoint Receiver (italics added).
However, as best the Court can tell, neither the state or federal laws quoted above
obligated the State to audit or oversee the inner workings of an EB-5 funded project. The fact
that the USCIS has expressed its view that the listed failures may indicate that the VRC is failing
in its required mission of promoting economic growth does not translate into an established
audit requirement. In short, the Court cannot identify any statute or regulation that sets forth
any specific mandatory acts of a regional center during the relevant time period in this case
that are directed at protection of the commercial interests of investor immigrants. Both the
state and federal authorizing legislation are all about promoting economic growth and perhaps
immigration law, not securities regulation.
It was not until 2015 that any statute or regulation the Court can find imposed any
express obligation of ACCD and DFR to conduct audits and/or use other means to actively
regulate EB-5 projects that ACCD had been promoting. In 2015, immediately after the
December 2014 MOU between ACCD and DFR, a specific statute was enacted for the “EB-5
Program; regulation; oversight.” 10 V.S.A. §20. That appears to be the first clear expression of
obligations for “ongoing oversight and compliance of approved projects, including annual
audits,” “the establishment of escrow accounts for capital investments and third-party
oversight of requisitions,” and “investor relations and a formal complaint protocol.” That new
law, together with the December 2014 MOU that added DFR to the mix, were clearly responses
to the last eight years of Jay Peak activities. An evidently good idea, however, based on
hindsight and experience, does not translate into a pre-existing legal obligation and
undertaking.
Another potential source of undertaking was in the MOUs referred to above. As
discussed above, however, the MOUs did not set forth a duty of the State to audit the JPPs but
rather imposed a set of obligations on the JPPs.
Whether, or more aptly when, the government had actual knowledge of a dangerous
condition appears to be a question of disputed fact, but taking the Plaintiffs’ allegations in their
best light, the earliest that knowledge allegedly existed appears to be 2012 when the dispute
arose with the VRC consulting firm and the firm disclaimed confidence in the JPPs. The TAC
alleges that “Beginning in 2012, if not earlier, additional individuals (besides the consultant) put
the VRC…on notice of the Jay Peak Projects’ fraud.” Para. 139. That was six years into the
situation, although four years from the State filing suit against the Jay Peak principals.
10
The final indicia of reliance on government representations and conduct is of course
highlighted through Plaintiffs’ complaint, as is the allegation that State investigation at an
earlier state would have reduced the ongoing risk of harm.
A close look at Denis tells this Court that the absence of any statutory basis for a duty to
protect a particular class of persons was a determining factor. It clearly was “the heart of” the
matter. Denis, 159 Vt. at 487. In that case, the State had a clear statutory duty to regulate
insurance agents in the State, and even to report to their “appointing insurers” (which the
plaintiff was in that instance) if an agent’s license was suspended or revoked. But there was no
specific statutory duty to report to those appointing insurers prior to suspension or revocation.
Nor could the Court find a duty in the State’s obligations to the general public to protect them
from untrustworthy agents. The Supreme Court’s conclusion that there was no duty in that case
was bolstered by the fact that there were no allegations that the State knew of the plaintiff’s
existence as the bondsman’s principal or that the principal had relied on the State to supervise
its’ bondsman agent. Perhaps the crux was “it would be a great expansion of the concept of
duty to allow the principal to pass the obligation to supervise an insurance agent on to the
state...” 159 Vt. at 489.
By contrast, the Vermont Supreme Court in Sabia v. State, 164 Vt. 293 (1995), found
that a private analog for negligence existed for a claim against the State Department of Socal
and Rehabilitative Services for failure to protect two sisters from reported sexual abuse. In that
case, the Court recognized that the State had a clear statutory duty to protect children from
abuse, and that there is a “very special” relationship between a specifically identified abused
child and the agency such that “social policy considerations warrant the imposition of liability”
on the State. Those considerations included both compensation to the abused children and
encouragement of the agency to perform it duty diligently in the future. 164 Vt. at 306.
In this case, we cannot find a statutory or regulatory duty to regulate the JPPs, at least
until Section 20 was adopted, much less to do so for the benefit of the investors. We can see
the other indicia set forth in Denis, but we also see a similar crux. It would be a great expansion
of the concept of the State’s statutory duty to promote economic development to make it
effectively an insurer of private economic investment in private economic development.
In summary, the Court cannot find any source, other than the alleged
misrepresentations made in communications to investors by the VRC, that established a duty of
care to investors with respect to how their investment funds were actually used by the Jay Peak
principals. The State did not build and operate a lighthouse to warn shipping, cf. Indian Towing,
or an air traffic control system, cf. Ingham v. Eastern Air Lines, Inc., 373 f.2d 227 (2d Cir.
1967)(also cited by Plaintiffs). Nor did the State take over the JPPs and assume responsibility for
their operation as the FDIC did with the bank at issue in the other authority relied upon by
Plaintiffs. Cf. In Re Franklin National Bank Securities Litigation, 445 F.Supp. 574 (E.D.N.Y. 1978).
The State built a promotional agency in order to bring investment and economic development
to the State. Nor did the State undertake the act of a Good Samaritan by way of telling the
investors it would confirm or eliminate their concerns, other than by the alleged
misrepresentations, until the 2015 adoption of Section 20. In fact, the Plaintiffs’ complaint is
that when concerns arose, the State refused to do just that and disclaimed the responsibility.
11
To be sure, the Court sees that the alleged representations made to investors by VRC
officials in the process of doing their promotional work set out a State undertaking to oversee
and even audit the JPPs, but this analysis has to be about the duty, if any, that the State
undertook other than by those representations. Again, the Court reaches that conclusion on the
ground that the fraud and misrepresentation exception discussed below bars any claim that
depends on misrepresentation.
In that light, the facts alleged here appear to fall into the category of cases in which the
injuries arose “from the plaintiffs’ commercial decisions based on the government’s
misrepresentations” rather than the cases that recognize a duty independent of a duty of
truthful communication. See Zelaya v. United States, 781 F.3d 1315, 1337 (11th Cir. 2015). The
Eleventh Circuit in Zelaya, in its survey of caselaw, recognized a series of cases in which courts
chose not to apply the misrepresentation exception even where a governmental
misrepresentation was alleged, where the courts found an independent duty had been
breached. “It is true that misrepresentation exception ‘does not bar negligence actions which
focus not on the Government’s failure to use due care in communicating information, but
rather on the Government’s breach of a different duty.’” 781 F.3d at 1335, quoting Block v.
Neal, 460 U.S. 289, 297 (1983). In this case, the Court can find no such independent duty.
Therefore, the Court concludes that the Plaintiffs have failed to state a claim for
negligence or gross negligence against the State, absent a duty of care independent of the
alleged misrepresentations.
Analysis of the Exceptions to the Exception of the Vermont Tort Claims Act
In case the Court has been mistaken in its analysis of duties set forth above, and since
the parties have thoroughly briefed them, the Court also addresses two exceptions to the
State’s waiver of sovereign immunity that would bar Plaintiffs’ claims even if there are private
analogs for them.
Following the language of Section 5601 quoted above, the statute proceeds to list
various exceptions, as follows:
This section shall not apply to:
(1) Any claim based upon an act or omission of an employee of the State…based upon
the exercise or performance or failure to exercise or perform a discretionary
function or duty on the part of a State agency or an employee of the State, whether
or not the discretion involved is abused…
(6) Any claim arising out of alleged…misrepresentation, deceit, fraud, or interference
with contractual rights.
The Court concludes that all of Plaintiffs’ claims are barred by these “exceptions to the
exception” under Section 5601.
12
Fraud and Misrepresentation Exception
The State stands first on the misrepresentation and fraud exception set forth above in
§5601(e)(6) with respect to Counts 1, 2, 5, 6, 7, 11, 12 and 15. The State argues that all of those
counts are essentially for fraud or misrepresentation and therefore no waiver of immunity
exists. Plaintiffs do not expressly concede that argument, but do not contest it in their
opposition to the motion to dismiss except for Count 6. Given the express titles of the counts
and the facts alleged in support of them, the Court agrees with the State, and also includes
Counts 8 (third party beneficiary), Count 13 (negligence) and Count 14 (unjust enrichment).
Counts 1, 2, 5, 11, 12 and 15 are expressly for fraud or misrepresentation. Count 6 for gross
negligence or willful misconduct is clearly also based on the alleged fraud or misrepresentation,
in that it stands on the concept of a duty the State allegedly undertook by way of its continuing
representations to investors, breached by its gross failure to follow through on its assurances.
The same holds for Count 7 for breach of fiduciary duty where the alleged duty arose from the
alleged fraud or misrepresentation. Counts 11 and 12 for aiding and abetting fraud stand on the
concept of holding the State liable for the fraud committed by the Jay Peak principals, but the
underlying claim is still for fraud. Count 13 for negligence stands largely on the State having
“built a lighthouse” by way of its representations to investors. Count 14 for unjust enrichment
stands largely on the inequity of the State avoiding the consequences of its representations.
And Count 16 for breach of contract also stands on a misrepresented “promise” of oversight
and regulation.
The Court looks to federal caselaw to find comparable circumstances and claims. The
Vermont Supreme Court has recognized that such caselaw interpreting the Federal Tort Claims
Act is particularly useful as it so close parallels the language and intent of the Vermont Tort
Claims Act. See Kennery, supra at 44 (“the relevant analytical approaches of the FTCA and VTCA
are the same”); Lane v. State, supra at fn. 2 (“This Court therefore looks to case law interpreting
the federal provision to guide us in analyzing 12 V.S.A.§5601(e).”)
In Zelaya v. United States, 781 F.3d 1315 (11th Cir. 2015), the plaintiffs brought a claim
for negligence against the Securities and Exchange Commission (“SEC”) for failing to tell
investors that a certain investment fund was actually a PONZI scheme. That Court began by
noting the long standing interpretation of “arising out of” in both federal and state waiver
exemptions for misrepresentation claims.
The phrase ‘arising out of’ is interpreted broadly to include all injuries that are
dependent upon on of the listed torts having been committed. United States v. Shearer,
473 U.S. 52,55 (1985)…So, a claim will be deemed to have arisen from (an) excepted tort
if the governmental conduct that is essential to the plaintiff’s cause of action is
encompassed by that tort. And this is so even if the plaintiff has denominated, as the
basis for the cause of action, a tort not found within…the list of excepted torts.
Id. at 1333, relied upon in Alvarez v. United States, 862 F.3d 1297 (11 Cir. 2017)(where plaintiffs
brought a claim against the government for negligence and aiding and abetting a private
retirement fund advisor in promoting another PONZI scheme).
13
In both Zelaya and Alvarez, the plaintiffs tried to avoid the misrepresentation exception
by way of pleading negligence. The Federal Tort Claims Act does not expressly mention fraud
like the Vermont Act does, but the caselaw on misrepresentation under the FTCA clearly speaks
to both misrepresentation and fraud as those terms are used in the Vermont Act. In both of
those cases, the allegations were that the government had fallen down by both failing to stop a
private actor in committing fraud and in endorsing a private actor in committing fraud. The
plaintiffs’ claims sounded not only in negligence but also in “aiding and abetting” a fraud and
breach of a fiduciary duty. On each of those counts, the Court turned again and again to the
principle set out in Zelaya, namely that where the basis for each of the allegedly breached
duties was conduct fundamentally known as misrepresentation under the common law-“the
communication of misinformation on which the recipient relies,” Alvarez at 1305, the waiver
exception applies.
This Court concludes that the “arising out of” language of the intentional tort exception
thus extends to Counts 6 (gross negligence), 7 (breach of fiduciary duty arising from State
promoting reliability and integrity of investment), 8 (third party beneficiary theory based on
inclusion of MOUs in offering materials), 11 and 12 (aiding and abetting fraud), 13 (negligence),
14 (unjust enrichment) and 16 (breach of contract) as well as the Counts that sound expressly in
fraud or misrepresentation. All stand on the same allegations that the State took on a duty by
way of its’ representations to the Plaintiffs.
Discretionary Acts Exception
The State also argues that Counts 6-16 are also barred by way of the exception set forth
in §5601(e)(1) quoted above, also known as the “discretionary acts” exception. “The purpose of
this exception is to ensure that the courts do not ‘pass judgment on legislative or administrative
policy decisions through tort law.” Kennery v. State, 191 Vt. at 60, quoting Sabia v. State, 164
Vt. 293, 307 (1995). The Vermont Supreme Court has adopted a two step test from United
States v. Gaubert, 499 U.S. 315 (1991).
First, “a court must determine whether a statute, regulation, or policy mandates certain
acts, or whether performance of a duty involved an element of judgment or choice.” Kennery,
191 Vt. at 60, citing Searles v. Agency of Transportation, 171 Vt. 562, 563-4 (2000). Based on the
analysis above as to the statutory and regulatory requirements for the VRC, the Court does not
see a clear mandate to the VRC to perform oversight and regulation of EB-5 projects until the
enactment of 10 V.S.A. §20 in 2015. To the contrary, its mandate was the broad strokes of 3
V.S.A. §2476(c) that were all about economic development and promotion and not about
regulation.
Second, the court must determine “whether that judgment is of the kind that the
discretionary function exception was designed to shield.” Id. “The exception protects only
governmental actions and decisions based on considerations of public policy.” Kennery, 191 Vt.
at 60, citing Gaubert. “However, ‘when a statute, regulation or policy vests discretion in the
(government) employee, it is presumed that the employee’s acts are grounded in (public) policy
when exercising that discretion.’” Id., quoting Johnson v. Agency of Transportation, 180 Vt. 493(2006).
14
It is hard to imagine a scenario in which State employees have ever been vested with
more discretion than in this instance. Wise or unwise, the authorizing legislation for the ACCD
was a virtual carte blanche to promote investment in Vermont, with no corresponding
obligation to regulate it. ACCD employees were guided only by the broad declarations of public
policy in favor of fostering economic growth. How they went about it necessarily involved
establishing priorities, allocation of resources and determination of strategies for private/public
partnerships that involved balancing a variety of concerns. This was not how to safely conduct a
police welfare check (Kennery) or determining the speed and plow angle of snowplow
operation. See Morway v. Trombley, 173 Vt. 266, 273 (2001). The fact that the Legislature
found it necessary to adopt Section 20 in 2015 only confirms how much of an open range ACCD
had had with the VRC until that point.
Based on that analysis, the Court further concludes that Counts 6-16 are all barred by
the discretionary acts exception and thereby the doctrine of sovereign immunity, as pled
against the State agencies.
Official Immunity
Turning to the Plaintiffs’ claims against the various State officials, we turn to a different
kind of common law immunity. Sovereign immunity applies only to the State itself and not to
claims against State employees. Levinsky v. Diamond, 151 Vt. 178, 183 (1989). Official immunity
provides two levels of protection to State officials. Judges, legislators and the highest executive
officers have absolute immunity for acts performed within their respective authorities. Lower-
level officers and employees are immune to the extent their actions alleged: (1) were
performed within their scope of authority; (2) performed in good faith; and (3) were
discretionary versus ministerial acts. Id., citing Libercent v. Aldrich, 149 Vt. 76, 81 (1987). As to
the higher level of absolute immunity, the doctrine recognizes the potential that the covered
officials could be dishonest and otherwise guilty of bad motive and intention such that on the
one hand “it would be monstrous to deny recovery.” Id., quoting Judge Learned Hand in
Gregoire v. Biddle, 177 F.2d 579, 581 (2d. Cir 1949). On the other hand, however, it is “better to
leave unrepressed the wrongs done by dishonest officers than to subject those to try to do
their duty to the constant dread of retaliation,” particularly where it is generally impossible to
know whether the claim is well founded until the case has been tried. Id.Applying that doctrine, the Vermont Supreme Court has found the Attorney General,
the Commissioner of the Department of Social Welfare, the Commissioner of the Department
of Liquor Control and State’s Attorneys protected by absolute immunity. Levinsky, supra; Amy’s
Enterprises v. Sorrell, 174 Vt. 623 (2002); O’Connor v. Donovan, 191 Vt. 412 (2012). By contrast,
general counsel to a Department, assistant and deputy attorneys general, and state troopers
were entitled only to the lesser protection of qualified immunity. Czechorowski v. State, 178 Vt.
524 (2005); Levinsky, supra; Kennery v. State, 191 Vt. 44 (2011).
Applying that doctrine in the instant case, we look first at the executive officer
defendants here. As the Secretaries of the Agency of Commerce and Development, Defendants
Miller and Moulton were protected by absolute immunity so long as their acts alleged were
performed within their authority. Secretary Miller is alleged to have joined in the promotion of
15
the JPPs by attending trade shows soliciting investors. Secretary Moulton is alleged to have
stonewalled investor concerns by disclaiming all responsibility to the investors when their
concerns were brought to her in 2014. Plaintiffs argue that both Secretaries were acting outside
their authority because there was no statutory authority for the VRC activity until Section 20
was enacted in 2015 (“In this instance, Plaintiffs agree that she (Moulton) did not have the
statutory authority to vet the Jay Peak Projects.” Reply at 67). To the contrary, however, the
Court sees the broad authority to promote Vermont business opportunities and support
Vermont business set forth in 3 V.S.A. 2476(c) quoted above. Both were clearly acting within
their authority in doing so and are therefore immune from suit in this case.
Likewise, the Commissioner of the Department of Economic Development within ACCD,
Joan Goldstein, and the Commissioner of the Department of Financial Regulation Susan
Donegan are also absolutely immune to the extent they were acting within their authority.
Commissioners are the “chief executive officer…and head of the department” who “determine
the policies of the department,” administer the laws assigned to the department, coordinate
and integrate the work of all divisions in the department and supervise and control all staff
functions.” 3 V.S.A. 2451-2; cite as to DFR. Commissioner Goldstein is not alleged to have
engaged in any particular act other than to also serve as the acting Executive Director of the
VRC starting in June 2016, long after the alleged culpable acts occurred, and there is no
allegation that she acted outside her authority in that role. Commissioner Donegan is not
alleged to have engaged in any particular act other than to have served as the Commissioner of
DFR from 2013-16 and to have overseen to some degree the initial phase of DFR oversight of
the VRC in early 2015 and review of proposed securities offering documents submitted to the
Department for review in connection with the last two JPPs in 2015. There is no specific
allegation in the TAC that she acted outside her authority in those roles. Plaintiffs attempt to
argue that Commissioner Donegan acted outside her authority by engaging in “the most
unusual of circumstances” once DFR became a principal administrator of the VRC along with
ACCD in 2015. The Court cannot see how she was acting outside her authority where statute
(10 V.S.A. 20) directed her to do just that, including establishing “required provisions pertaining
to private placement memoranda.” 10 V.S.A. 20(d)(3). That authority was anticipated by a
matter of a month or months by the MOU between ACCD and DFR, but was clearly part of the
same State effort to increase its regulatory role with respect to EB-5 projects.
Both Commissioners are therefore immune from suit in this case.
Defendants Carrigan and Piecak served as Deputy Commissioners of the Securities
Division in the DFR. Pieciak also came to serve as the Commissioner, although the date of that
promotion is not in the pleadings. In that role, they had broad authority over securities
regulation that included investigation of possible securities law violations and pursuit of civil
enforcement actions. 9 V.S.A. 5602-03. There is no specific allegation that Deputy
Commissioner Carrigan did or failed to do anything in particular in connection with the JPPs.
The most Plaintiffs argue in their Reply is to suggest that he acquired a kind of vicarious liability
for whatever ACCD and the VRC had done before the ACCD/DFR MOU was signed and Section
20 was enacted to formally authorize that collaboration. Reply at 68-69. Defendant Pieciak,
meanwhile, is argued to have no absolute immunity for reasons “the same as for Defendant
Donegan.” Both Carrigan and Pieciak are lumped in as having engaged in conduct in the “most
unusual of circumstances,” “specifically, with Jay Peak investor complaints and media coverage
16
building, on December 12, 2014, or thereabouts, the DFR and ACCD signed a memorandum of
understanding…whereby DFR became a principal administrator and partner of the VRC…” Reply
at 68. Thus, the only specific allegation referenced is the signing of the DFR/ACCD MOU that
was clearly intended to bolster the State’s oversight of EB-5 projects, not to engage in any
wrongdoing. Other than a vague suggestion of acquiring vicarious liability for whatever had
gone before, there is nothing here that suggests “the most unusual of circumstances.” Even in
the only case cited by Plaintiffs for this proposition, the court there refused to recognize such
circumstances even where the conduct alleged was that officials of the New York Stock
Exchange, a quasi-governmental entity, had allegedly encouraged fraudulent regulatory reports
by securities marketers and alerted the marketers to the prospect of investigation in order to
give them the opportunity to conceal their wrongdoing. In Re New York Stock Exchange
Specialists Securities Litigation, 503 F.3d 89 (2d. Cir. 2007). By contrast, Plaintiffs’ complaint
against Defendants Carrigan and Pieciak alleges only a kind of guilt by association, and perhaps
a failure to adequately enforce Vermont securities laws.
As to their duties to enforce Vermont securities laws, these appear to be essential
prosecutorial duties. Statute Although Vermont Supreme Court cases addressing this question
all appear to have involved lawyers engaged in civil or criminal enforcement actions, see
Czechorowski v. State, supra, and O’Connor, supra, it is clear that the role of the Securities
Division includes investigation and civil enforcement actions for securities law violations.
Indeed, that is the very responsibility Plaintiffs suggest it failed to fulfill. This Court does not see
any significant distinction for this purpose, based on whether or not the “prosecutorial” official
is a lawyer.
17