1 2 3 4 5 6 7 8 9 10 11 12 UNITED STATES DISTRICT COURT 13 SOUTHERN DISTRICT OF CALIFORNIA 14 15 A-TEK MECHANICAL, INC., CURLY Case No.: 3:21-cv-01974-H-WVG PHOM, 16 ORDER DENYING DEFENDANTS’ Plaintiffs, 17 MOTION TO DISMISS v. 18 [Doc. No. 8.] KHW SERVICES, INC., JEFF 19 NEWTON, SARAH NETWON, 20 Defendants. 21 On November 22, 2021, Plaintiffs A-Tek Mechanical (“A-Tek”) and Curly Phom 22 (collectively, “Plaintiffs”) filed a complaint against Defendants KHW Services, Inc. 23 (“KHW”), Jeff Newton, and Sarah Newton (collectively, “Defendants”). (Doc. No. 1, 24 Compl.) On January 19, 2022, Defendants filed a motion to dismiss Plaintiffs’ complaint 25 for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). (Doc. No. 26 8-1.) On February 16, 2022, Plaintiffs filed an opposition to Defendants’ motion. (Doc. 27 No. 13.) On February 18, 2022, Defendants filed a reply. (Doc. No. 15). On April 8, 2022, 28 1 the Court took the matter under submission pursuant to Local Rule 7.1(d)(1). (Doc. No. 2 17.) For the reasons that follow, the Court denies Defendants’ motion to dismiss. 3 BACKGROUND1 4 Plaintiff A-Tek is a California corporation that specializes in the design, installation, 5 and maintenance of heating, ventilation, and air conditioning (“HVAC”). (Compl. ¶¶ 10, 6 17.) Plaintiff Phom is a California resident and the owner and founder of A-Tek. (Id. ¶¶ 10, 7 19.) Defendants Jeff and Sarah Newton are Colorado residents and the founders of 8 Defendant KHW, a Colorado corporation and consulting firm. (Id. ¶¶ 10, 35.) 9 The relationship between Plaintiffs and Defendants began in 2013, when A-Tek 10 hired Jeff and Sarah Newton. (Id. ¶¶ 23, 25–27.) Jeff Newton was hired to work on A- 11 Tek’s management and estimating projects while Sarah Newton was to assist with A-Tek’s 12 accounting. (Id.) During the first year at A-Tek, Jeff and Sarah Newton were allegedly 13 employees of A-Tek and were compensated directly from A-Tek’s payroll. (Id. ¶ 33.) In 14 2014, Jeff and Sarah Newton founded KHW and began working for A-Tek as consultants 15 rather than employees. (Id.) In April 2017, Jeff Newton, Sarah Newton, and KHW 16 relocated from California to Colorado. (Id. ¶ 43.) On July 24, 2017, Jeff and Sarah Newton 17 each signed a Confidentiality Agreement with A-Tek. (Id. ¶ 97.) The Confidentiality 18 Agreement allegedly prohibited Jeff and Sarah Newton from disclosing “confidential, 19 propriety, and trade secret information belonging to [A-Tek].” (Id. ¶¶ 97–98.) 20 During this time, Plaintiffs allege Defendants began working with other companies 21 in A-Tek’s industry. In 2016, Plaintiffs allege Jeff Newton began working with 22 Prodecomm Engineering (“Prodecomm”), a design engineering firm, as Prodecomm’ pre- 23 construction mechanical engineering support consultant. (Id. ¶ 49.) Plaintiffs allege Jeff 24 Newton worked full-time for both A-Tek and Prodecomm, but A-Tek continued to 25 compensate Jeff Newton for a forty-hour work week. (Id. ¶¶ 52, 55.) Plaintiffs allege that 26 due his split time between A-Tek and Prodecomm, Jeff Newton became less involved in 27 28 1 the day-to-day affairs of A-Tek. (Id. ¶¶ 52–54.) Plaintiffs allege Jeff Newton began making 2 “several large errors on bids” for A-Tek, including failing to confirm quotes, 3 underbudgeting bids, and not accounting for certain material and labor costs on several 4 projects. (Id. ¶¶ 52–54, 56, 82, 84–94.) Plaintiffs allege that one of A-Tek’s client, Harper 5 Construction, refused to compensate A-Tek for $250,000 worth of work performed on an 6 Edwards Air Force Base project after learning Jeff Newton was working for both A-Tek 7 and Prodecomm on the project. (Id. ¶ 54.) 8 In 2019, Plaintiffs allege Jeff Newton began working with Sphere Mechanical, a 9 direct competitor of A-Tek, and Thomas Pozananski, Sphere Mechanical’s owner. (Id. ¶ 10 57.) Between 2019 and 2021, Jeff Newton was allegedly responsible for submitting all of 11 A-Tek’s contract bids. (Id. ¶ 77.) Plaintiffs allege that while Jeff Newton was working with 12 A-Tek, Jeff Newton blind copied Pozananski on A-Tek’s bid proposals and equipment and 13 supplier quotes to help Sphere Mechanical out-bid A-Tek. (Id. ¶¶ 59, 60, 62–63.) Jeff 14 Newton allegedly notified some of the general contractors A-Tek worked with that A-Tek 15 would not be submitting bids on projects that A-Tek did intend to bid for in order to help 16 Sphere Mechanical. (Id. ¶ 62.) Jeff Newton allegedly also used A-Tek’s client base and 17 network to market Sphere Mechanical’s services. (Id.) Sphere Mechanical allegedly 18 offered Jeff Newton the position of Vice President of Sphere Mechanical while Jeff 19 Newton was still working with A-Tek. (Id. ¶ 58.) Plaintiffs allege they were unaware of 20 Jeff Newton’s relationship with Sphere Mechanical and actions on behalf of Sphere 21 Mechanical until after Jeff Newton was fired from A-Tek. (Id. ¶¶ 57, 73–75, 79.) 22 Around 2017, Plaintiffs allege A-Tek’s business began to suffer due to Jeff 23 Newton’s financial advice, mistakes on bids, and split involvement with Prodecomm. (Id. 24 ¶ 44.) A-Tek was allegedly not awarded any contracts between 2019 and 2021, when Jeff 25 Newton was responsible for submitting A-Tek’s bids. (Id. ¶¶ 75–77.) Plaintiffs allege they 26 originally believed A-Tek’s lack of contracts was due to the COVID-19 pandemic. (Id. ¶ 27 75.) However, after learning of Jeff Newton’s relationship with Sphere Mechanical, 28 Plaintiffs allege Jeff Newton worked to divert bids from A-Tek to Sphere Mechanical, 1 causing A-Tek’s financial distress. (Id. ¶ 75.) 2 In August 2021, A-Tek terminated its relationship with Defendants. (Id. ¶ 64.) On 3 August 27, 2021, A-Tek restricted Jeff Newton’s access to his email account and A-Tek’s 4 company server files. (Id. ¶ 72.) Plaintiffs allege they reviewed Jeff Newton’s emails and 5 discovered Jeff Newton’s relationship with Sphere Mechanical and Pozananski. (Id. ¶¶ 72– 6 73, 79.) Plaintiffs also allege Jeff Newton “had been engaging in communications with 7 several potential investors regarding plans for [Jeff Newton] to take over [A-Tek].” (Id. ¶ 8 95.) Plaintiffs allege Jeff Newton’s actions were intended to “create[] the appearance that 9 [A-Tek] was unprofitable” so Jeff Newton could “intentionally sabotaged [A-Tek’s] 10 operations to buy out the company at a cheaper price.” (Id.) Plaintiffs also allege Jeff 11 Newton attempted to recruit some of A-Tek’s employees. (Id. ¶ 96.) 12 After A-Tek terminated Defendants in August 2021, A-Tek sent KHW an End-of- 13 Service notice. (Id. ¶¶ 65–66.) The End-of-Service notice requested KHW send A-Tek a 14 final invoice, return A-Tek’s computers and accessories A-Tek had provided Defendants, 15 and delete A-Tek’s intellectual property and discontinue accessing A-Tek’s company files 16 and software. (Id.) In response, Defendants allegedly sent A-Tek an non-itemized final 17 invoice for $20,500, which was significantly higher than the $1,090.36 final invoice A-Tek 18 projected it owed KHW. (Id. ¶¶ 67, 70.) Defendants allegedly also filed a preliminary 19 mechanic’s lien on one of A-Tek’s current projects. (Id. ¶ 67.) Defendants allegedly have 20 not return any of A-Tek’s equipment and notified Plaintiffs that they will retain A-Tek’s 21 property as collateral until A-Tek pays the invoice. (Id. ¶¶ 67–69.) 22 On January 29, 2022, Plaintiff filed a complaint in federal court under diversity 23 jurisdiction alleging twelve state law causes of action against Defendants: (1) alter ego; (2) 24 breach of contract; (3) breach of the covenant of good faith and fair dealing; (4) breach of 25 fiduciary duty; (5) trespass to chattels; (6) fraud; (7) violation of California’s Unfair 26 Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200, et seq.; (8) intentional 27 interference with existing contract; (9) intentional interference with prospective economic 28 advantage; (10) unjust enrichment and constructive trust; (11) declaratory relief; and (12) 1 injunctive relief. (Doc. No. 1.) On February 14, 2022, Plaintiffs filed the present motion to 2 dismiss. (Doc. No. 8.) On February 16, 2022, Plaintiffs filed an opposition, (Doc. No. 13), 3 and on February 18, 2022, Defendants filed a reply. (Doc. No. 15) 4 DISCUSSION 5 I. Legal Standards 6 A. Federal Rule of Civil Procedure 12(b) 7 A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal 8 sufficiency of the pleadings and allows a court to dismiss a complaint if the plaintiff has 9 failed to state a claim upon which relief can be granted. See Conservation Force v. Salazar, 10 646 F.3d 1240, 1241–42 (9th Cir. 2011). In reviewing a Rule 12(b)(6) motion to dismiss, 11 “[a] claim has facial plausibility when the plaintiff pleads factual content that allows the 12 court to draw the reasonable inference that the defendant is liable for the misconduct 13 alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “Factual allegations must be enough 14 to raise a right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 15 U.S. 544, 545 (2007). However, “[d]ismissal under Rule 12(b)(6) is appropriate only where 16 the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable 17 legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 18 2008) (citation omitted). 19 In reviewing the plausibility of a complaint on a motion to dismiss, courts “accept 20 factual allegations in the complaint as true and construe the pleadings in the light most 21 favorable to the nonmoving party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 22 1025, 1031 (9th Cir. 2008). Courts are not “required to accept as true allegations that are 23 merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re 24 Gilead Scis. Secs. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). 25 B. Federal Rule of Civil Procedure 9(b) 26 Claims sounding in fraud are subject to the heightened pleading requirements 27 of Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) provides that “[i]n alleging 28 fraud or mistake, a party must state with particularity the circumstances constituting fraud 1 or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be 2 alleged generally.” Fed. R. Civ. P. 9(b). “Rule 9(b) demands that the circumstances 3 constituting the alleged fraud ‘be specific enough to give defendants notice of the particular 4 misconduct…so that they can defend against the charge and not just deny that they have 5 done anything wrong.’” Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009) 6 (citation omitted). “Averments of fraud must be accompanied by ‘the who, what, when, 7 where, and how’ of the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 8 1097, 1106 (9th Cir. 2003) (citation omitted). “The plaintiff must set forth what is false or 9 misleading about a statement, and why it is false.” Id. 10 II. Analysis 11 A. Claims Brought by Plaintiff Phom 12 Defendants argue that Plaintiff Phom should be dismissed because the causes of 13 action alleged in the complaint belong exclusively to A-Tek as a corporation, not Plaintiff 14 Phom individually. (Doc. No. 8-1 at 10–11.) Under federal permissive joinder rules, 15 “[p]ersons may join in one action as plaintiffs if: (A) they assert any right to relief jointly, 16 severally, or in the alternative with respect to or arising out of the same transaction, 17 occurrence, or series of transaction or occurrences; and (B) any question of law or fact 18 common to all plaintiffs will arise in the action.” Fed. R. Civ. P. 20(a)(1). Rule 20(a) “is 19 to be construed liberally in order to promote trial convenience and to expedite the final 20 determination of disputes, thereby preventing multiple lawsuits.” League to Save Lake 21 Tahoe v. Tahoe Reg’l Planning Agency, 559 F.2d 914, 917 (9th Cir. 1977). “[T]he impulse 22 is towards entertaining the broadest possible scope of action consistent with fairness to the 23 parties; joinder of claims, parties and remedies is strongly encouraged.” Id. (quoting United 24 Mine Workers of Am. v. Gibbs, 383 U.S. 716, 724 (1966)). 25 Plaintiffs allege that Plaintiff Phom was the owner of A-Tek at the relevant time 26 period, that Plaintiff Phom was “personally liable for all of [A-Tek’s] debts and financial 27 liabilities,” and that Plaintiff Phom’s personal credit score was affected by A-Tek financial 28 distress resulting from Defendants’ actions. (Compl. ¶ 46.) Accordingly, the Court declines 1 to dismiss Plaintiff Phom from this action at this time. Defendants’ arguments are more 2 appropriate for a motion for summary judgment when the record is more fully developed. 3 B. Plaintiffs’ Pre-August 2017 Claims Against Defendant KHW 4 Defendants also challenge all claims against Defendant KHW that predate August 5 2017. (Doc. No. 8-1 at 45.) Specifically, Defendants allege that between July 2014 and 6 July 2017 a separate KHW entity was incorporated in California under the KHW name. 7 (Id. at 4.) Defendants argue the California KHW was dissolved in July 2017, and Defendant 8 KHW was incorporated in Colorado in August 2017. (Id.) Defendants argue Plaintiffs 9 errored in not distinguishing between the two separate KHW entities in the complaint and 10 improperly alleged operative facts against the Colorado KHW that pre-date its 11 incorporation in August 2017. (Id.) Defendants allege that Plaintiff cannot join the 12 dissolved California KHW without destroying diversity jurisdiction and so any claims 13 based on acts by the Colorado KHW before August 2017 should be dismissed. (Id. at 5.) 14 Successor liability is an equitable doctrine that allows liability to “flow[] from one 15 corporation to another corporation.” Cleveland v. Johnson, 147 Cal. Rptr. 3d 772, 782 (Ct. 16 App. 2012). In California, a purchasing corporation assumes the seller’s liabilities if “the 17 purchasing corporation is a mere continuation of the selling corporation.” Brown Bark III, 18 L.P. v. Haver, 162 Cal. Rptr. 3d 9, 20 (Ct. App. 2013). Under the “continuation theory” of 19 successor liability, “corporations cannot escape liability by mere change of name or a shift 20 in assets when and where it is shown that the new corporation is, in reality, but a 21 continuation of the old.” Cleveland, 147 Cal. Rptr. 3d at 781–82. Successor liability based 22 on “mere continuation” requires “a showing of one or both of the following factual 23 elements: (1) no adequate consideration was given for the predecessor corporation’s assets 24 and made available for meeting the claims of its unsecured creditor; (2) one or more 25 persons were officers, directors, or stockholder of both corporations.” Id. at 782 (quoting 26 Ray v. Alad Corp., 560 P.3d 3, 7 (Cal. 1977)). 27 Plaintiffs did not address successor liability in their complaint or opposition. 28 However, at the motion to dismiss stage, Plaintiffs have adequately plead that the Colorado 1 KHW is a successor-in-interest to the dissolved California KHW. Plaintiffs allege Jeff and 2 Sarah Newton founded KHW in 2014. (Compl. ¶ 35.) Plaintiffs allege that in April 2017, 3 Jeff and Sarah Newton relocated to Yuma, Colorado and so “consequently, Defendant 4 KHW…relocated to Yuma, Colorado.” (Id. ¶ 43.) Plaintiffs allege, and Defendants do not 5 dispute, that the dissolved California KHW and Colorado KHW were run solely by Jeff 6 and Sarah Newton and KHW maintained A-Tek as a client through the dissolution and 7 reincorporation. (Id. ¶ 43.) Public filings indicate that Sarah Newton was the director of 8 the California KHW and is the registered agent and incorporator of the Colorado KHW.2 9 Public filings also indicate that the California KHW was dissolved on July 25, 2017, a few 10 days before the Colorado KHW was incorporated on August 1, 2017.3 As a result, the Court 11 declines to dismiss claims against KHW that predate its incorporation in Colorado in 2017. 12 C. Plaintiffs’ Covenant of Good Faith and Fair Dealing Claim 13 In the complaint, Plaintiffs assert a breach of the covenant of good faith and fair 14 dealing claim based on the Confidentiality Agreements allegedly executed between Jeff 15 and Sarah Newton and A-Tek on July 24, 2017. (Compl. ¶¶ 118–25.) Defendants argue 16 that Plaintiffs’ breach of the covenant of good faith and fair dealing claim should be 17 dismissed because it duplicates its breach of contract claim. (Doc. No. 8-1 at 14–15.) 18 “Every contract imposes upon each party a duty of good faith and fair dealing in its 19 performance and its enforcement.” Foley v. Interactive Data Corp., 765 P.2d 373, 389 (Cal. 20 1988). The implied covenant of good faith and fair dealing in every contract obligates “that 21 neither party will do anything which will injure the right of the other to receive the benefits 22 of the agreement.” Comunale v. Traders & Gen. Ins. Co., 328 P.2d 198, 200 (Cal. 1958); 23 24 2 Defendants request the Court take judicial notice of public records available on the California and 25 Colorado Secretary of State website. (Doc. No. 8-2.) “Under Fed. R. Evid. 201, a court may take judicial notice of ‘matters of public record.’” Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001). The 26 Court takes judicial notice of (1) the Articles of Incorporation for KHW Service, Inc. accessed from the Colorado Secretary of State website and (2) the Services Certificate of Dissolution for KHW Service, 27 Inc. accessed from the California Secretary of State website. See, e.g., eBay Inc. v. Digital Point 28 Solutions, Inc., 608 F.Supp.2d 1156, 1164 n.6 (N.D. Cal. 2009). 1 see also Thrifty Payless, Inc. v. The Americana at Brand, LLC, 160 Cal. Rptr. 3d 718, 729– 2 30 (Ct. App. 2013) (“The covenant is read into contract and functions ‘as a supplement to 3 the express contractual covenants, to prevent a contracting party from engaging in conduct 4 which (while not technically transgressing the express covenants) frustrates the other 5 party’s rights to the benefits of the contract.’” (citation omitted)). 6 To assert a claim for the breach of the covenant of good faith and fair dealing, 7 plaintiffs “must show that the conduct of the defendant, whether or not it also constitutes a 8 breach of a consensual contract term, demonstrates a failure or refusal to discharge 9 contractual responsibilities, prompted not by an honest mistake, bad judgement or 10 negligence but rather by a conscious and deliberate act.” Careau & Co. v. Sec. Pac. Bus. 11 Credit, Inc., 222 Cal. App. 3d 1371, 1395 (1990). Such conduct must “unfairly frustrate[] 12 the agreed common purposes and disappoint[] the reasonable expectations of the other 13 party thereby depriving that party of the benefits of the agreement.” Id. But “[i]f the 14 allegations do not go beyond the statement of a mere contract and, relying on the same 15 alleged acts, simply seek the same damages or other relief already claimed in a companion 16 contract cause of action, they may be disregarded as superfluous as no additional claim is 17 actually stated.” Id. 18 Plaintiffs have sufficiently alleged a breach of the covenant of good faith and fair 19 dealing claim against Defendants. Plaintiffs allege Jeff and Sarah Newton each executed a 20 Confidentiality Agreement with A-Tek on July 24, 2017. (Compl. ¶¶ 118–25.) As a result, 21 Plaintiffs have sufficiently alleged that contracts existed between Defendants and A-Tek, 22 and Defendants each had “a duty of good faith and fair dealing in its performance and its 23 enforcement.” Foley, 765 P.2d at 390. Plaintiffs have sufficiently alleged Defendants 24 violated this duty through “(1) knowingly and willfully competing with Plaintiffs, (2) 25 sending Plaintiffs’ bid proposals to direct competitors, (3) directing Plaintiffs’ clients to 26 competitors; (4) colluding with Plaintiffs’ competitors with the intent of directing business 27 opportunities away from Plaintiffs, (5) working for and/or accepting employment with a 28 direct competitor of Plaintiffs while bound by the terms of the Confidentiality Agreement, 1 [and] (6) misappropriating Plaintiff’s proprietary and confidential information for the 2 benefit of Plaintiffs’ competitors.” (Compl. ¶ 131.) 3 Further, taking the allegations in the light most favorable to Plaintiffs, Plaintiffs’ 4 breach of the covenant of good faith and fair dealings claim is not “duplicative” or 5 “superfluous” of Plaintiffs’ breach of contract claim because Plaintiffs have sufficiently 6 alleged Defendants acted knowingly and “in bad faith to frustrate the [Confidentiality 7 Agreements’] benefits.” Celador Intern. Ltd. v. Walt Disney Co., 347 F. Supp. 2d 846, 8 852–53 (C.D. Cal. 2014) (citations omitted) (“Even if Plaintiffs are not ultimately 9 successful on their breach of contract claim, they may still be able to prevail on their breach 10 of the covenant of good faith and fair dealing claim….because the fact finder could 11 conclude that the actions of Defendants frustrated a benefit of the contract.”). The Court 12 therefore declines to dismiss Plaintiffs’ breach of the covenant of good faith and fair 13 dealing claim. Defendants’ arguments are more appropriate on a motion for summary 14 judgment when the record is more fully developed. 15 D. Plaintiffs’ Fiduciary Duty Claim 16 In the complaint, Plaintiffs allege a breach of fiduciary duty claim against 17 Defendants. (Compl. ¶¶ 134–45.) Defendants argue Plaintiffs have not alleged sufficient 18 facts to support that a fiduciary relationship existed between Plaintiffs and Defendants and 19 so Plaintiffs’ breach of fiduciary duty claims should be dismissed. (Doc. No. 8-1 at 15– 20 17.) 21 “The elements of cause of action for breach of fiduciary duty are the existence of a 22 fiduciary relationship, its breach, and damage proximately caused by that breach.” Knox 23 v. Dean, 140 Cal. Rptr. 3d 569, 582–83 (Ct. App. 2012). “Traditional examples of fiduciary 24 relationships in the commercial context include trustee/beneficiary, directors and majority 25 shareholders of a corporation, business partners, joint adventurers, and agent/principal.” 26 Wolf v. Super. Ct., 107 Cal. App. 4th 25, 29 (2003). “Inherent in each of these relationships 27 is the duty of undivided loyalty the fiduciary owes to its beneficiary, imposing on the 28 fiduciary obligations far more stringent than those required of ordinary contractors.” Id. 1 “An agent is one who represents another, called the principal, in dealings with third 2 persons…Whether a person performing work for another is an agent…depends primarily 3 upon whether the one for whom the work is done has the legal right to control the activities 4 of the alleged agent.” Michelson v. Hamada, 29 Cal. App. 4th 1566, 1579 (1994) (internal 5 citations and quotations omitted). Whether an individual is an agent is a factual question. 6 See Rookard v. Mexicoach, 680 F.2d 1257, 1261 (9th Cir. 1982). 7 Plaintiffs have sufficiently alleged a breach of fiduciary duty claim against 8 Defendants. First, Plaintiffs have sufficiently alleged Defendants were in a fiduciary 9 relationship with Plaintiffs. In the complaint, Plaintiffs reference the agent/principal 10 relationship as the basis of Defendants’ fiduciary relationship. (Compl. ¶¶ 137–39.) 11 Plaintiffs allege Jeff Newton was given an A-Tek email address, (id. ¶¶ 72–73), Jeff 12 Newton was responsible for submitting contract bids on behalf of A-Tek, (id. ¶ 77), and 13 Jeff Newton communicated with general contractors on behalf of A-Tek and held himself 14 out as speaking on behalf of A-Tek. (Id. ¶ 62.) Plaintiffs also allege Sarah Newton worked 15 as A-Tek’s accountant. (Id. ¶¶ 26–27.) Viewed in the light most favorable to Plaintiffs, 16 these allegations could give rise to a reasonable inference that an agent-principal 17 relationship was created between Defendants and A-Tek. Second, Plaintiffs sufficiently 18 alleged this fiduciary relationship was breached when Defendants forwarded A-Tek’s bid 19 proposals to A-Tek’s competitor, Sphere Mechanical, and used A-Tek’s confidential 20 information to aid Sphere Mechanical. (Id. ¶ 142.) Third, Plaintiffs allege Defendants’ 21 actions caused A-Tek mechanical to lose contract bids. (Id. ¶ 77.) Accordingly, the Court 22 declines to dismiss Plaintiffs’ breach of fiduciary duty claims. Defendants’ arguments are 23 more appropriate for a motion for summary judgment when the record is more fully 24 developed. 25 E. Plaintiffs’ Trespass to Chattels Claim 26 In the complaint, Plaintiffs allege trespass to chattels claims against Defendants. 27 (Compl. ¶¶ 146–58.) Defendants argue Plaintiffs’ trespass to chattels claims does not meet 28 the pleading standard of Federal Rule of Civil Procedure 8(a) because Plaintiffs did not 1 indicate which items of Defendants’ property were subject to trespassed. (Doc. No. 8-1 at 2 9–10.) 3 “Under California law, trespass to chattels ‘lies where an intentional interference 4 with the possession of personal property has proximately caused injury.’” Intel Corp. v. 5 Hamidi, 71 P.3d 296, 302 (Cal. 2003) (citation omitted). “[S]ome actual injury must have 6 occurred in order for a trespass to chattels to be actionable” and a plaintiff “may recover 7 only the actual damages suffered by reason of the impairment of the property or the loss of 8 its use.” Id. 9 Plaintiffs have sufficiently alleged a trespass to chattels claim against Defendants. 10 Plaintiffs allege that when Plaintiffs terminated their business relationship with 11 Defendants, Defendants informed Plaintiffs they were retaining A-Tek’s property as 12 collateral until they were paid the final invoice. (Compl. ¶¶ 67–68, 151.) Plaintiffs allege 13 this property included Plaintiffs’ computers, computer software and programs, equipment, 14 and tools. (Id. ¶¶ 151–53, 155.) Plaintiffs allege that Defendants retained Plaintiffs’ 15 property without consent and refused to return Plaintiffs’ property when Plaintiffs’ sent 16 Defendants an End-of-Service notice. (Id. ¶ 154.) Plaintiffs allege Defendants’ conduct has 17 prevented Plaintiffs from using their property in their business, causing Plaintiffs to lose 18 profits they would have realized through the use of their property. (Id. ¶ 155.) Taking the 19 allegations in the light most favorable to Plaintiffs, Plaintiffs have alleged sufficient facts 20 to support their trespass to chattels claim. As a result, the Court denies Defendants’ motion 21 to dismiss Plaintiffs’ trespass to chattels claim. 22 F. Plaintiffs’ Fraud Claim 23 In the complaint, Plaintiffs allege a fraud claim against Defendants. (Compl. ¶¶ 159– 24 74.) Defendants argue Plaintiffs have not met the heightened pleading standard for fraud 25 claims under Federal Rule of Civil Procedures 9(b) and so Plaintiffs’ fraud claim should 26 be dismissed. (Doc. No. 8-1 at 5–9.) 27 The elements of fraud are: “(a) misrepresentation (false representation, concealment, 28 or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to 1 induce reliance; (d) justifiable reliance; and (e) resulting damage.” Engalla v. Permanente 2 Med. Grp., Inc., 938 P.2d 903, 974 (Cal. 1997) (citation omitted). “A fraud claim based 3 upon the suppression or concealment of a material fact must involve a defendant who had 4 a legal duty to disclose the fact.” Hoffman v. 162 N. Wolfe LLC, 175 Cal. Rptr. 3d 820, 5 826 (Ct. App. 2014). “There are ‘four circumstances in which nondisclosure or 6 concealment may constitute actionable fraud: (1) when the defendant is in a fiduciary 7 relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material 8 facts not know to the plaintiff; (3) when the defendant actively conceals a material fact 9 from the plaintiff; and (4) when the defendant makes partial representations but also 10 suppresses some material facts.’” LiMandri v. Judkins, 60 Cal. Rptr. 2d 539, 543 (Ct. App. 11 1997) (citation omitted). Other than when there is “a fiduciary relationship between the 12 parties, ‘the other three circumstances in which nondisclosure may be actionable 13 presuppose[] the existence of a relationship between the plaintiff and defendant in which a 14 duty to disclose can arise.” Hoffman, 175 Cal. Rptr. 3d at 827 (citation omitted). In the 15 later three circumstances, “a duty to disclose may arise from the relationship between seller 16 and buyer, employer and prospective employee, doctor and patient, or parties entering into 17 any kind of contractual agreement.” Id. (citation omitted). 18 Plaintiffs’ fraud claim is subject to the heightened pleading standard requirements 19 of Federal Rule of Civil Procedure 9(b). See Kearns, 567 F.3d at 1125. However, “because 20 a plaintiff brings fraud by omission claims ‘will not be able to specify the time, place, and 21 specific content of an omission as precisely as would a plaintiff in a false representation 22 claim,’ plaintiffs may plead fraud by omission by alternative means.” Mui Ho v. Toyota 23 Motor Corp., 931 F. Supp. 2d 987, 999 (N.D. Cal. 2013) (citation omitted). 24 Taking the allegations in the light most favorable to Plaintiffs, Plaintiffs have alleged 25 sufficient facts to support their fraud claim. Plaintiffs have alleged that at the time of the 26 alleged nondisclosure, Plaintiffs and Defendants had been in a multi-year business 27 relationship and had entered into contractual agreements that plausibly could give rise to a 28 duty to disclose. (Compl. ¶¶ 14, 27–28, 97–98.) Plaintiffs alleged Defendants failed to 1 disclose their relationship with Sphere Mechanical when Defendants were working on 2 behalf of A-Tek. (Id. ¶¶ 164–66.) Plaintiffs alleged Defendants’ nondisclosure was 3 intended to induce Plaintiffs to continue to hire and compensate KHW for Jeff and Sarah 4 Newton’s services; to allow KHW to act on behalf of A-Tek in negotiating bid proposals, 5 projects, and contracts; and to ensure KHW maintained access to A-Tek’s computers, 6 software, and consumer lists. (Id. ¶¶ 172–73.) Plaintiffs alleged they relied on Defendants’ 7 nondisclosure of their relationship with Sphere Mechanical in “not terminating the business 8 relationship with Defendants far sooner” and allowing Defendants to have “continued 9 access to [A-Tek’s] computers, software, and consumer lists.” (Id. ¶ 172.) Plaintiffs allege 10 they suffered damages resulting from diverted business opportunities and profits, the denial 11 of the opportunity to conduct business with current clients, the loss of bid awards, and the 12 loss of contracts. (Id. ¶¶ 165–68.) Accordingly, Defendants’ motion to dismiss Plaintiffs’ 13 fraud claim is denied. Defendants’ arguments are more appropriate for a motion for 14 summary judgment when the record is more fully developed. 15 G. California Unfair Competition Law (“UCL”) Claim 16 In the complaint, Plaintiffs allege a claim under California’s Unfair Competition 17 Law (“UCL”), Cal. Bus. & Prof. Code § 17200, et seq., against Defendants. (Id. ¶¶ 175– 18 80.) Defendants argue Plaintiffs’ UCL claim should be dismissed because Plaintiffs have 19 failed to allege a violation of a statute to constitutes an “unlawful” practice, that Plaintiffs 20 have failed to allege a covered “unfair” practice, and Plaintiffs’ have failed to sufficiently 21 alleged a “fraudulent” practice under the heightened pleading standard of Rule 9. (Doc. 22 No. 8-1 at 17–18.) 23 To bring a claim for a violation of California’s UCL, “a plaintiff must show either 24 an (1) ‘unlawful, unfair, or fraudulent business act or practice,’ or (2) ‘unfair, deceptive, 25 untrue or misleading advertising.’” Lippitt v. Raymond James Fin. Servs., 340 F.3d 1033, 26 1043 (9th Cir. 2003) (quoting Cal. Bus. & Prof. Code § 17200). The UCL’s coverage is 27 “sweeping,” and its standard for wrongful business conduct is “intentionally broad.” In re 28 First Alliance Mortg. Co., 471 F.3d 977, 995 (9th Cir. 2006) (citation omitted). An 1 “unlawful” practice under the UCL is a business practice that “is forbidden by law.” Cel- 2 Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 973 P.2d 527, 560 (Cal. 1999). 3 An “unfair” practice is a business practice that “offends an established public policy 4 or…is immoral, unethical, oppressive, unscrupulous or substantially injurious to 5 consumers.” Id.; see also Day v. AT&T Corp., 74 Cal. Rptr. 2d 55, 59 (App. Ct. 1998) 6 (“An ‘unfair’ practice under section 17200 is one ‘whose harm to the victim outweighs it 7 benefits.’”). “A fraudulent business practice is one that is likely to deceive members of the 8 public.” Boschma v. Home Loan Ctr., Inc., 129 Cal. Rptr. 3d 874, 893 (App. Ct. 2011) 9 (citation omitted). “The challenged conduct ‘is judged by the effect it would have on a 10 reasonable consumer.’” Davis v. HSBC Bank Nev., N.A., 691 F.3d 1152, 1169 (9th Cir. 11 2012). But “[u]nlike common law fraud, a [UCL] violation can be shown even without 12 allegations of actual deception, reasonable reliance and damage.” Daugherty v. Am. Honda 13 Motor Co., Inc., 51 Cal. Rptr. 3d 118, 128 (App. Ct. 2006). “Absent a duty to disclose, the 14 failure to do so does not support a claim under the fraudulent prong of the UCL.” Berryman 15 v. Merit Prop. Mgmt., Inc., 62 Cal. Rptr. 3d 177, 188 (App. Ct. 2007). The heightened 16 pleading standard of Fed. R. Civ. P. 9(b) applies to UCL claims brought under a fraud 17 theory. Kearns, 567 F.3d at 1125. 18 Taking the allegations in the light most favorable to Plaintiffs, Plaintiffs have alleged 19 sufficient facts to support an UCL claim under the “fraudulent” business practices prong. 20 Because Plaintiffs have sufficiently alleged facts to support its common law fraud claim, 21 Plaintiffs have also sufficient plead its UCL claim under the fraudulent prong. See 22 Bouchma, 129 Cal. Rptr. 3d at 874 n.12 (holding that because the defendant adequately 23 plead a common law fraud claim, the defendant also adequately pled a UCL claim under 24 the fraudulent prong because the fraudulent prong claim “is easier to prove in the section 25 17200 context”). As a result, the Court denies Defendants’ motion to dismiss Plaintiffs’ 26 UCL claim. Defendants’ arguments are more appropriate on a motion for summary 27 judgment when the record is more fully developed. 28 //// 1 H. Plaintiffs’ Intentional Interference with Existing Contract Claim 2 In the complaint, Plaintiffs allege an intentional interference with existing contract 3 claim against Defendants. (Compl. ¶¶ 191–200.) Defendants argue that Plaintiffs have not 4 alleged any intentional acts committed by Defendants designed to induce a breach of a 5 third-party contract and so Plaintiffs’ intentional interference with an existing contract 6 claim should be dismissed. (Doc. No. 8-1 at 19.) 7 “Tortious interference with contractual relations requires ‘(1) the existence of a valid 8 contract between the plaintiff and a third party; (2) the defendant’s knowledge of that 9 contract; (3) the defendant’s intentional acts designed to induce a breach of disruption of 10 the contractual relationship; (4) actual breach or disruption of the contractual relationship; 11 and (5) resulting damages.” Ixchel Pharma, LLC v. Biogen, Inc., 471 P.3d 571, 575 (Cal. 12 2020). “An actionable claim for interference with contractual relationships does not require 13 that the defendant have the specific intent to interference with a contract. A plaintiff states 14 a claim so long as it alleges that the defendant knew interference was ‘certain or 15 substantially certain to occur as a result of [defendant’s] action.’” Id. at 675–76 (citation 16 omitted). 17 Construing the allegations in the light most favorable to Plaintiffs, Plaintiffs have 18 sufficiently alleged an intentional interference with existing contract claim against 19 Defendants. Plaintiffs allege Defendants interfered with the existing contract between A- 20 Tek and Harper Construction for a project on the Edwards Air Force Base and that 21 Defendants knew of the Harper Construction contract through working on it on behalf of 22 A-Tek. (Compl. ¶¶ 50–51, 54, 188.) Plaintiffs allege Jeff Newton also worked on behalf of 23 Prodecomm on the Edwards Air Force Base project. (Id. ¶¶ 50–51.) Plaintiffs allege Harper 24 Construction refused to compensate A-Tek $250,000 for the project after learning that Jeff 25 Newton was working for both A-Tek and Prodecomm on the Edwards Air Force Based 26 project. (Id. ¶ 54.) To state a claim for intentional interference with existing contract, “it is 27 not necessary that the defendant’s conduct be wrongful apart from the interference with the 28 contract itself.” Quelimane Co.v. Stewart Title Guar. Co., 960 P.2d 513, 530 (Cal. 1998). 1 As a result, Defendants’ motion to dismiss Plaintiffs’ intentional interference with existing 2 contract claim against Jeff Newton and HKW is denied. Defendants’ arguments are more 3 appropriate on a motion for summary judgment when the record is more fully developed. 4 I. Intentional Interference with Prospective Economic Advantage Claim 5 In the complaint, Plaintiffs allege an intentional interference with prospective 6 economic advantage against Defendants. (Compl. ¶¶ 181–90.) Defendants argue that 7 Plaintiffs have not alleged any intentional acts committed by Defendants designed to 8 disrupt an existing relationship or any economic harm suffered by Plaintiffs as a result of 9 Defendants’ actions, and so Plaintiffs’ intentional interference with an existing contract 10 claim should be dismissed. (Doc. No. 8-1 at 19–20.) 11 “The tort of interference with prospective economic advantage protects the same 12 interest in stable economic relationships as does the tort of interference with contract, 13 though interference with prospective advantage does not require proof of a legally binding 14 contract.” Pacific Gas & Elec. Co. v. Bear Stearns & Co., 791 P.2d 587, 590 (Cal. 1990). 15 “The chief practical distinction between interference with contract and interference with 16 prospective economic advantage is that a broader range of privilege to interfere is 17 recognized when the relationship or economic advantage interfered with is only 18 prospective.” Id. “Intentional interference with prospective economic advantage has five 19 elements: (1) the existence, between the plaintiff and some third party, of an economic 20 relationship that contains the probability of future economic benefit to the plaintiff; (2) the 21 defendant’s knowledge of the relationship; (3) intentionally wrongful acts designed to 22 disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm 23 proximately caused by the defendant’s action.” Roy Allan Slurry Seal, Inc. v. Am. Asphalt 24 S., Inc., 388 P.3d 800, 803 (Cal. 2017). “The tort’s requirements ‘presuppose the 25 relationship existed at the time of the defendant’s alleged tortious acts lest liability be 26 imposed for actually and intentionally disrupting a relationship which has yet to arise.” Id. 27 at 807–08. “Specific intent is not a required element of the tort of interference with 28 prospective economic advantage.” Korea Supply Co. v. Lockheed Martin Corp., 63 P.3d 1 937, 951 (Cal. 2003). Unlike with an intentional interference with existing contract claim, 2 “a plaintiff seeking to recover damages for interference with prospective economic 3 advantage must plead as an element of the claim that the defendant’s conduct was 4 ‘wrongful by some legal measure other than the fact of the interference itself.’” Ixchel, 470 5 P.3d at 576. “[I]t must be reasonably probable that the prospective economic advantage 6 would have been realized but for defendant’s interference.” Youst v. Longo, 729 P.2d 728, 7 733 (Cal. 1987) (citation omitted). 8 Plaintiffs have sufficiently alleged an intentional interference with prospective 9 economic advantage claim against Defendants. Plaintiffs allege A-Tek had an economic 10 relationship with Webcor, an alleged existing client of A-Tek. (Compl. ¶ 79.) Plaintiffs 11 allege Jeff Newton forwarded A-Tek’s bid proposals and blind copied Sphere Mechanical 12 on emails containing A-Tek’s bid information while he was responsible for submitting bids 13 on behalf of A-Tek during the time period A-Tek bid on the Webcor project. (Id. ¶¶ 73– 14 74, 77, 79.) Plaintiffs allege Jeff Newton provided A-Tek’s bid information to Sphere 15 Mechanical so Sphere Mechancial could submit more competitive bids on the same 16 projects as A-Tek. (Id. ¶ 77.) Plaintiffs allege A-Tek submitted a bid on a project with 17 Webcor in April 2021 but was not awarded the Webcor contract. (Id. ¶ 79.) Plaintiffs allege 18 they discovered an email sent by Jeff Newton on October 8, 2021 confirming Sphere 19 Mechanical received the Webcor contract. (Id.) Construing the allegations in the light most 20 favorable to Plaintiffs, a reasonable inference can be drawn that Defendants intentionally 21 and wrongfully interfered with A-Tek’s business relationship with Webcor by forwarding 22 A-Tek’s bids to Sphere Mechanical, resulting in A-Tek losing the Webcor project award 23 to Sphere Mechanical. As a result, the Court denies Defendants’ motion to dismiss 24 Plaintiffs’ intentional interference with prospective economic advantage. Defendants’ 25 arguments are more appropriate for a motion for summary judgment when the record is 26 more fully developed. 27 J. Plaintiffs’ Alter Ego Claim 28 In the complaint, Plaintiffs assert an alter ego claim against all Defendants. (Compl. 1 ¶¶ 103–17.) Specifically, Plaintiffs argue that the Court should pierce the corporate veil 2 and disregard the corporate form to hold Defendants Jeff and Sarah Newton liable for A- 3 Tek’s conduct. (Id. ¶ 117.) Plaintiffs argue that without piercing the corporate veil, Plaintiff 4 will be unable to recover damages owed by Defendants. (Id.) Defendants argue Plaintiffs’ 5 alter ego claim should be dismissed because alter ego is not an independent claim for relief 6 and Plaintiffs have not alleged sufficient facts to support imposing the alter ego doctrine in 7 this case. (Doc. No. 8-1 at 12–14.) 8 Under the alter ego doctrine, a court “will disregard the corporate entity and will hold 9 the individual shareholders liable for the actions of the corporation.” Mesler v. Bragg 10 Mgmt. Co., 702 P.3d 601, 606 (Cal. 1985). “The alter ego doctrine arises when a plaintiff 11 comes into court claiming that an opposing party is using the corporate form unjustly and 12 in derogation of the plaintiff’s interest.” Id. “A claim against a defendant, based on the alter 13 ego theory, is not itself a claim for substantive relief, e.g., breach of contract or to set aside 14 a fraudulent conveyance, but rather, procedural…” Ahcom, Ltd. v. Smeding, 623 F.3d 15 1248, 1251 (9th Cir. 2010) (citation omitted). “Instead of creating, enforcing, or 16 expounding on substantive duties, California’s alter ego doctrine merely acts as a 17 procedural mechanism by which an individual can be held jointly liable for the wrongdoing 18 of his or her corporate alter ego.” Double Bogey, L.P. v. Enea, 794 F.3d 1047, 1051–52 19 (9th Cir. 2015) (citation omitted). 20 For the alter ego doctrine to apply, a plaintiff must allege (1) that there is “such unity 21 of interest and ownership that the separate personalities of the corporation and the 22 individual no longer exist” and (2) that “if the acts are treated as those of the corporation 23 alone, an inequitable result will follow.” Mesler, 702 P.3d at 606 (citation omitted). To 24 plead inequity under the second prong, “a plaintiff must plead facts sufficient to 25 demonstrate that ‘conduct amounting to bad faith makes it inequitable for the corporate 26 owner to hide behind the corporate form.’” Stewart v. Screen Gems-EMI Music, Inc., 81 27 F. Supp. 3d 938, 963 (N.D. Cal. 2015) (citation omitted). “California courts have rejected 28 the view that the potential difficulty a plaintiff faces collecting a judgment is an inequitable 1 result that warrants application of the alter ego doctrine.” Neilson v. Union Bank of Cal., 2 N.A., 290 F. Supp. 2d 1101, 1117 (C.D. Cal. 2003). 3 First, Plaintiffs have improperly attempted to assert the alter ego doctrine as a 4 substantive claim for relief in their complaint. See Ahcom, 623 F.3d at 1251. Second, 5 Plaintiffs have not sufficiently alleged that there is any inequitable result from recognizing 6 KHW’s separate corporate form necessitating the application of the alter ego doctrine in 7 this case. Plaintiffs’ breach of contract and breach of the covenant of good faith and fair 8 dealing claims are based on contracts directly between A-Tek and Jeff and Sarah Newton 9 in their individual capacity. (Compl. ¶¶ 120, 130.) Second, the remainder of Plaintiffs’ 10 claims are tort claims brought against Defendants for alleged actions specifically taken by 11 Jeff and Sarah Newton. (Id. ¶¶ 134–209.) “A corporate ‘officer or director is, in general, 12 personally liable for all torts which he authorizes or directs or in which he participates, 13 notwithstanding that he acted as an agent of the corporation and not on his own behalf.” 14 Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1021 (9th Cir. 1985). As a 15 result, Jeff and Sarah Newton will not be able to “hide behind [KHW’s] corporate form” 16 for their own alleged tortious actions. See, e.g., Hawes v. Kabani & Co., Inc., 182 F. Supp. 17 3d 1134, 1144 (W.D. Wash. 2016). Accordingly, Defendants have not sufficiently alleged 18 that the alter ego doctrine is applicable or necessary in the present case. 19 K. Declaratory Relief 20 In the complaint, Plaintiffs request declaratory relief of “a judicial determination of 21 the respective rights and duties of the parties” so that “Plaintiffs may ascertain their rights 22 under the Confidentiality Agreement and the true identities, rights, and responsibilities of 23 the individual defendants and the entity defendant.” (Compl. ¶¶ 103–17.) Defendants argue 24 Plaintiffs have not alleged a controversy exists between the parties regarding the rights of 25 the parties under the Confidentiality Agreement and so Plaintiffs declaratory judgment 26 claim should be dismissed. (Doc. No. 8-1 at 20–21.) 27 Under the Declaratory Judgment Act, “[a]ny court of the United States, upon the 28 filing of the appropriate pleading, may declare the rights and other legal relations of any ] |/interested party seeking such declaration, whether or not further relief is or could be 2 ||sought.” 28 U.S.C § 2201. “The Declaratory Judgment Act does not create any new 3 || substantive rights in federal courts, but instead creates a procedure for adjudicating existing 4 ||rights.” People of California v. Kinder Morgan Energy Partners, L.P., 569 F. Supp. 2d 5 || 1703, 1091 (S.D. Cal. 2008). “For a district court, the appropriate inquiry is to determine 6 whether there are claims in the case that exist independent of any request for purely 7 || declaratory relief; that is claims that would continue to exist if the request for a declaration 8 ||simply dropped from the case.” Id. (citation omitted); see_also Cultiv8 Interest LLC v. 9 ||Rezai, 2:20-cv-05290-AB, 2020 WL 12893817, *9-10 (C.D. Cal. Oct. 15, 2020). 10 || Plaintiffs’ declaratory relief claim is premised on Plaintiffs’ contract-based claims, and 11 |/Plaintiffs have sufficiently alleged their contract-based claims to survive a motion to 12 dismiss. As a result, Defendants’ motion to dismiss Plaintiffs’ claim for declaratory relief 13 denied. While declaratory relief may ultimately be inappropriate in the present case, 14 || Defendants’ arguments are more appropriate on a motion for summary judgment when the 15 ||record is more fully developed. 16 CONCLUSION 17 For the foregoing reasons, the Court denies Defendants’ motion to dismiss. 18 IT IS SO ORDERED. 19 || DATED: August 1, 2022 | -
MARILYN LAHUFF, District Udg} 21 UNITED STATES DISTRICT COURT 22 23 24 25 26 27 28