Daniel V. Tierney 2011 Trust LLC v. Sun Hung Kai Strategic Capital Limited

• Court: District Court, N.D. California
• Decided: April 4, 2023
• Docket: 4:22-cv-01623
• Status: Unknown

Opinion

1 2 3 UNITED STATES DISTRICT COURT 4 NORTHERN DISTRICT OF CALIFORNIA 5 EMMA CUADRADO, IN HER 6 CAPACITY AS TRUSTEE OF THE CASE NO. 4:22-cv-01623-YGR DANIEL V. TIERNEY 2011 TRUST, 7 AND SERENITY INVESTMENTS LLC,

ORDER GRANTING MOTION TO DISMISS 8 Plaintiffs, Dkt. No. 42 9 vs.

10 SUN HUNG KAI STRATEGIC CAPITAL LIMITED, 11 Defendant.

12 Plaintiffs Emma Cuadrado, in her capacity as Trustee of Daniel V. Tierney 2011 Trust, and 13 Serenity Investments LLC (collectively, “Tierney”) bring this action against defendant Sun Hung 14 Kai Strategic Capital Limited (“SHK”) in connection with a dispute concerning the transfer from 15 Tierney to SHK of stock in Social Finance, Inc. (“SoFi”). In their First Amended Complaint, 16 Tierney alleges four counts relating to the transfer: (1) conversion; (2) receipt of stolen property; 17 (3) fraud, and (4) negligent misrepresentation. Before the Court is SHK’s motion to dismiss 18 Tierney’s fraud and negligent misrepresentation claims. 19 Having carefully considered the papers submitted and the pleadings in this action and for 20 the reasons below, the Court hereby GRANTS the motion to dismiss WITHOUT FURTHER LEAVE 21 TO AMEND. 22 I. BACKGROUND 23 The following facts are alleged in Tierney’s First Amendment Complaint (“FAC”). 24 A. Initial Negotiations Regarding Stock Transfer 25 On August 21, 2017, the parties executed a Stock Transfer Agreement (“STA”) pursuant to 26 which Tierney agreed to sell 101,640 Series E Preferred Stock shares in SoFi to SHK in exchange 27 1 for approximately $1.6 million. (FAC ¶ 9.)1 Shortly thereafter, on or about September 12, 2017, 2 the parties agreed to put the stock transfer “on hold” after SHK shared misgivings about investing 3 in SoFi considering negative press reports implicating the company.2 (Id. ¶ 10.) The parties 4 continued to discuss the state of the STA over the course of the fall of 2017, and in December, 5 SHK informed Tierney it wished to cancel the STA and any obligations owed Tierney thereunder. 6 (Id. ¶¶ 14-15.) Tierney agreed, and the agreement was voided. (Id. ¶ 15.) 7 However, SHK had in fact come into possession of the SoFi shares in question on or about 8 September 27, 2017, at which point Tierney’s stock certificates3 for the relevant shares were 9 cancelled and new certificates issued by SoFi under SHK’s name. (Id. ¶ 12.) SHK did not 10 immediately inform Tierney of the transfer upon receipt of the certificates, pay Tierney for the 11 shares, or return the stock to Tierney. (Id. ¶¶ 15-17.) Relatedly, Tierney did not insist on payment 12 for the shares as they remained unaware the transfer had been effectuated. (Id. ¶¶ 11, 15.) 13 B. Discovery of Stock Transfer & Subsequent Negotiations 14 Nearly four years elapsed before Tierney learned the shares had long since been transferred 15 to SHK. On May 13, 2021, SoFi sent a message to shareholders regarding a previously announced 16 merger of SoFi with another company in which it instructed shareholders to redeem their physical 17 stock certificates in SoFi for book-entry SoFi shares. (Id. ¶ 18; Dkt. No. 36 at Exhibit B.) SoFi 18 also enabled shareholders who lost their physical stock certificates to submit an affidavit 19 requesting replacements which could be converted into book-entry shares. (FAC ¶ 18.) 20 Following the announcement, SHK submitted such an affidavit so that it could convert the shares 21 it held in SoFi into book-entry shares. (Id. ¶ 21; Dkt. No. 36 at Exhibit C.) When Tierney asked 22

23 1 These shares were converted into 177,138 book-entry SoFi shares in connection with SoFi’s merger. FAC ¶ 1. 24

25 2 SHK provides an example of such reports in their Motion to Dismiss. See Dkt. No. 42 at 3, n.1 (“See, e.g., Nathaniel Popper & Katie Benner, ‘It Was a Frat House’: Inside the Sex Scandal 26 That Toppled SoFi’s C.E.O., N.Y. TIMES (Sept. 12, 2017), available at https://www.nytimes.com/ 2017/09/12/technology/sofi-chief-executive-toxic-workplace.html.”). 27 1 SoFi why they had not received book-entry SoFi shares in exchange for their physical stock 2 certificates, they were informed the shares in question had been transferred to SHK in 2017. (FAC 3 ¶ 22.) 4 Tierney immediately contacted SHK to demand return of the stock. (Id. ¶ 23.) SHK 5 responded that Tierney’s “broker, SoFi and SoFi’s outside legal counsel . . . were responsible for 6 making the unauthorized transfer” and suggested the parties discuss potential remedies with 7 SoFi’s legal counsel. (Id.) As discussions with SoFi progressed, SHK offered to pay Tierney the 8 value of the stock as stipulated in the STA. (Id. ¶ 24.) Tierney rejected this offer, however, as the 9 value of the shares had increased in the years since the STA was negotiated to over $4 million. 10 (Id.) Tierney commenced this action shortly thereafter when it had not received payment or return 11 of the shares from SHK. (Id. ¶¶ 25-26.) SHK did, however, eventually return the converted, book- 12 entry SoFi shares to Tierney, although the stock had by that point “dropped over 40 [percent] in 13 value.” (Id. ¶ 26.) 14 C. First Motion to Dismiss 15 Shortly after Tierney commenced this action, SHK filed a motion to dismiss each of 16 plaintiffs’ causes of action for failure to state a claim under Rule 12(b)(6). (Dkt. No. 10.) The 17 Court considered that motion at a hearing held on September 28, 2022, at which the Court denied 18 defendant’s motion to dismiss as to Tierney’s fraud and negligent misrepresentation claims and 19 granted Tierney leave to amend. (Dkt. No. 33 at 1:21-22; accord Dkt. No. 35 at 18:18-20.) In 20 doing so, the Court admonished plaintiffs to include sufficient factual allegations in their amended 21 complaint to substantiate any such claims, which included reminding plaintiff’s counsel of his 22 Rule 11 obligations to submit only well-founded arguments for the Court’s consideration. The 23 motion to dismiss before the Court in this proceeding was filed by SHK in response to Tierney’s 24 FAC. (Dkt No. 42.) 25 II. LEGAL FRAMEWORK 26 The standards under Federal Rule of Civil Procedure 12(b)(6) are well-known and not in 27 dispute. 1 circumstances constituting [such] fraud . . . .” Fed. R. Civ. P. 9(b). Further, “[i]n California, fraud 2 must be pled specifically; general and conclusory allegations do not suffice.”4 Lazar v. Super. Ct., 3 909 P.2d 981, 989 (Cal. 1996). This heightened pleading standard therefore “necessitates pleading 4 facts which show how, when, where, to whom, and by what means [the alleged fraudulent] 5 representations were tendered.” Id. (emphasis in original). 6 III. ANALYSIS 7 Tierney advances claims for fraud and negligent misrepresentation under California law. The 8 Court considers each in turn. 9 A. Fraud 10 Tierney alleges SHK engaged in fraud by (i) making a series of misrepresentations to 11 Tierney concerning the status of the SoFi stock transfer and (ii) concealing their possession of the 12 SoFi stock certificates from September 2017 through the fall of 2021. (FAC ¶¶ 45-61.) The same 13 elements of fraud apply in both the false representation and fraudulent concealment contexts. 14 “Under California law, ‘[t]he elements of fraud . . . are (a) misrepresentation (false representation, 15 concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., 16 to induce reliance; (d) justifiable reliance; and (e) resulting damage.’” Golden Gate Way, LLC v. 17 Enercon Servs., Inc., 572 F.Supp.3d 797, 821 (N.D. Cal. 2021) (citations omitted). 18 i. Alleged False Representations Concerning the Stock Transfer 19 Tierney identifies four alleged fraudulent misrepresentations. The Court examines each. 20 First, Tierney alleges that, during negotiations between the parties in the fall of 2017, SHK 21 misrepresented that the STA was “on hold” in order to “surreptitiously transfer [Tierney’s] shares 22 without having to pay for them . . . . ” (FAC ¶ 48.) Tierney does not contend this representation by 23 SHK was necessarily false. Indeed, they make no allegations, for example, that SHK wished for 24 the agreement to remain in effect. Instead, Tierney argues this communication by SHK constitutes 25 a misrepresentation because, when making the statement, SHK intended to, at some future date, 26 4 Note, however, that Rule 9(b) permits fraudulent intent to be alleged generally, although 27 such allegations must still comply with the pleading standards set forth in Twombly/Iqbal. See 1 defraud Tierney. (Dkt. No. 50 at 8:9-12.) Despite the Court’s admonitions to plead 2 misrepresentation claims with specificity, Tierney does not plead any additional facts to support 3 the allegation. The Court therefore cannot credit Tierney’s bald assertions and finds this statement 4 does not constitute an actionable misrepresentation. 5 Second, Tierney alleges SHK misrepresented its desire to “cancel the [STA]” because 6 SHK had no intention at the time of returning the SoFi shares in its possession to Tierney. (FAC 7 ¶ 10.)5 Yet, even were the Court to accept Tierney’s argument that this statement was false, 8 Tierney has not sufficiently pled the scienter and intent elements of fraud to make this alleged 9 misrepresentation actionable. Tierney asks the Court to infer SHK’s scienter and intent to defraud 10 Tierney from SHK’s possession of the SoFi shares at the time the STA was voided. (Dkt. No. 50 11 at 8:28-9:9.) The Court declines to do so in the absence of more detailed pleadings as to SHK’s 12 state of mind at the time the contract was rescinded. Contrary to the Court’s instructions at the 13 September 28, 2022 hearing for Tierney to plead its fraud claims with particularity, Tierney has 14 alleged no facts which tend to support such a sweeping inference aside from conclusory statements 15 that amount to repackaging their underlying claims (e.g., “[W]hen it induced [Tierney] to cancel 16 the [STA], [SHK] had no intention of returning the shares it had taken under the agreement and 17 did not have any intention of paying for the shares”). (Id. at 8:28-9:2.)6 Rather than alleging facts 18 to substantiate its assertions, Tierney points to authorities suggesting that fraudulent intent can be 19 5 Tierney takes the view that repudiation of the STA would require making Tierney whole. 20 See Dkt. No. 50 at 8:26-28 (“By promising to repudiate that the [sic] contract, [SHK] agreed that 21 the parties should be put in the same positions they would have been in had the contract never existed and, thus, it was obligated to return [Tierney’s] shares.”). 22 6 In reaching this conclusion the Court also refuses to assume, as an underlying matter, that 23 SHK must have had knowledge of its possession of the SoFi shares at the time the STA was rescinded. The Court’s rationale is two-fold. First, as Tierney well knows, the STA provided for the 24 “[t]he transfer and sale of the Transferred Shares” to “occur simultaneously with the execution of 25 this Agreement by the parties,” and did not require SHK to take any further affirmative steps to effectuate the transfer. See Dkt. No. 36 at Exhibit A, § 2. It is therefore perfectly plausible SHK 26 obtained the at-issue shares without taking additional malicious steps, as the plaintiffs suggest. Second, Tierney does not allege any facts which support the inference that SHK must have known 27 that it received the shares from SoFi at the time it negotiated for the STA’s recession. As the Court 1 inferred from circumstantial evidence that a party had no intention of performing a promise made 2 to another party. (See, e.g., Dkt. 50 at 13:8-11 (citing In re Estate of Barrow, 27 Cal.App.2d 402, 3 405 (1938) for the proposition.) These authorities do little to support Tierney’s claims, however, 4 as again, Tierney has not sufficiently pled such circumstantial evidence. As the Court therefore 5 finds the elements of fraud are not sufficiently pled with respect to this alleged misrepresentation, 6 it is not actionable. 7 Third, Tierney alleges SHK engaged in misrepresentation when, “without notifying 8 [Tierney], [SHK] submitted an affidavit to SoFi . . . falsely representing itself to be the owner of 9 the stock certificates . . . .” (FAC ¶ 56.) It appears plaintiffs may have conceded that this 10 communication does not rise to the level of an actionable misrepresentation as they no longer 11 defend it in their Opposition, which the Court interprets as a concession that this alleged 12 misrepresentation is not adequately pled. (Compare FAC ¶¶ 18-21 with Dkt. No. 50 at 9:24 – 13 10:8.) Plaintiffs would be correct to do so, as communications made by a defendant to a third party 14 cannot generally form the basis of a claim for fraud by misrepresentation.7 This communication to 15 SoFi is therefore not actionable as a misrepresentation against Tierney. 16 Fourth, Tierney alleges SHK misrepresented to Tierney “that SoFi was responsible for the 17 unauthorized share transfer” and that SHK “would return the converted shares.” (FAC ¶ 57.) To 18 support this assertion, Tierney relies on a conclusory statement that SHK “knew at the time it 19 made these representations that they were false and that it had no intention of returning the 20 shares.” (Id.) Such a statement falls well short of the heightened pleading standard for fraud claims 21 and, without more, is insufficient to constitute actionable misrepresentation. 8 Canatella v. 22 Reverse Mortg. Sols. Inc., 2014 WL 7205146 at *9 (N.D. Cal. Dec. 17, 2014) (“[T]he Court will 23 not credit that bare and conclusory allegation—particularly in light of Rule 9(b) pleading 24 requirements.”); Tortilla Factory, LLC v. Rowdy Mermaid Kombucha LLC, 2018 WL 9802099, at 25 7 The Court reminded plaintiffs of this at the September 28, 2022 hearing, although they do 26 not appear to have taken it under consideration.

27 8 Moreover, as Tierney acknowledges SHK did transfer the shares in question back to 1 *3 (C.D. Cal. Sept. 11, 2018) (“Plaintiff cannot meet the pleading standards of either Rule 9(b) or 2 Twombly/Iqbal since it has failed to plead any facts beyond mere speculation to indicate that 3 Defendants had any knowledge of or involvement in the alleged wrongdoings.”). 4 ii. Alleged Fraudulent Concealment 5 Tierney separately alleges SHK’s failure to disclose its possession of the stock to Tierney 6 constitutes fraud by nondisclosure. (FAC ¶¶ 12-17; Dkt. No. 50 at 10:10-12:28.) Under California 7 law, fraud by nondisclosure can exist “in four circumstances: (1) when the defendant is the 8 plaintiff’s fiduciary; (2) when the defendant has exclusive knowledge of material facts not known 9 or reasonably accessible to the plaintiff; (3) when the defendant actively conceals a material fact 10 from the plaintiff; and (4) when the defendant makes partial representations that are misleading 11 because some other material fact has not been disclosed.” Hodson v. Mars, Inc., 891 F.3d 857, 862 12 (9th Cir. 2018) (citation omitted). 13 Tierney asserts the latter three of these circumstances apply to SHK’s conduct. First, 14 Tierney alleges SHK had exclusive knowledge of their possession of the SoFi shares and as such 15 their failure to disclose that information to Tierney is actionable as fraudulent nondisclosure. (Dkt. 16 No. 50 at 11:5-14; FAC ¶¶ 12-17.) Tierney’s claim is essentially that they “could not have 17 reasonably known that their shares had been taken because [the SoFi] stock certificates [were] 18 electronically issued [to SHK] . . . without [Tierney’s] knowledge.” (Dkt. No. 50 at 11:14-17; see 19 also FAC ¶ 51.) However, Tierney misunderstands the legal trigger for this duty to attach. As 20 SHK correctly notes, “a duty of disclosure . . . exist[s] when one party to a transaction has sole 21 knowledge or access to material facts and knows that such facts are not known or reasonably 22 discoverable by the other party.” Goodman v. Kennedy, 556 P.2d 737, 745 (Cal. 1976) (citation 23 omitted) (emphasis supplied).9 The Court is particularly skeptical that Tierney would be incapable 24 of discovering the stock transfer had occurred given the STA provides that “[t]he transfer and sale 25

26 9 Plaintiffs incompletely incorporated this citation into their Opposition to Defendant’s Motion to Dismiss. See Dkt. No. 50 at 11:19-21 (“The duty to disclose exists where, as here, ‘one 27 party to a transaction has sole knowledge or access to material facts and knows that such facts are 1 of [stock] . . . shall occur simultaneously with the execution of [the] [a]greement . . . .” (See Dkt. 2 No. 36 at Exhibit A, § 2.) Understanding that the STA set the transfer in motion, even if the 3 transaction was later paused, it would seem prudent for a sophisticated investor like Tierney to at 4 some point confirm whether the shares had in fact been transferred upon execution of the 5 agreement. The Court therefore finds Tierney has not adequately pled why it could not have 6 reasonably discovered that SoFi cancelled and reissued the stock certificates in question under 7 SHK’s name.10 As such, SHK had no affirmative duty to disclose its possession of the shares to 8 Tierney, and its failure to do so does not constitute actionable fraud by nondisclosure. 9 Second, Tierney asserts SHK actively concealed its possession of the SoFi shares from 10 Tierney. (FAC ¶ 51; Dkt. No. 50 at 12:1-12.) Tierney’s argument is unpersuasive. As opposed to 11 “affirmative acts of concealment,” Tierney alleges actions by SHK which can more accurately be 12 characterized as failures to disclose, rendering their argument circular. As this court has previously 13 held, allegations of active concealment must consist of more than simple nondisclosure, and 14 therefore Tierney’s active concealment claim is not actionable. Duttweiler v. Triumph Motorcycles 15 (Am.) Ltd., 2015 WL 4941780, at *5 (N.D. Cal. Aug. 19, 2015) (“An allegation of active 16 concealment must plead more than omission; rather, a plaintiff must assert affirmative acts of 17 concealment . . . .”). 18 Third, Tierney alleges “[SHK] made partial representations when it told Plaintiffs it 19 wanted to rescind the [STA] and cancel the transaction, all the while suppressing the material fact 20 that it had already taken the shares that were subject to the agreement.” (FAC ¶ 51; Dkt. No. 50 at 21 12:13-15.) Tierney seeks to support this allegation in two ways. First, plaintiffs assert, without 22 citation to any authority, that, a “party negotiating in a contract—or in this case, the recission of a 23 contract—cannot disclose information in a selective, self-serving manner and must disclose 24 enough information so that its representations are accurate and not misleading.” (Id. at 12:17-20.) 25 Second, Tierney suggests, without alleging supporting details, that SHK’s representation that it 26

27 10 Further, any argument Tiernery might make that it could not reasonably discover the 1 wished to rescind the STA constituted a “half-truth calculated to deceive” Tierney about SHK’s 2 true intent of retaining the shares without paying for them. (Id. at 12:20.) The Court takes issue 3 with these arguments because they essentially parrot the active concealment and failure to disclose 4 arguments discussed above. At no point in the FAC does Tierney make allegations concerning the 5 nature of the “suppression” SHK supposedly engaged in alongside its “partial representation” that 6 it wished to cancel the STA. Instead, Tierney casts aspersions on SHK’s motivations in seeking 7 recission of the STA without pleading facts to support such an inference. The Court therefore 8 declines to find Tierney’s “partial representations” claim actionable. 9 * * * 10 As Tierney’s false representation and fraudulent nondisclosure claims are supported by 11 speculative and conclusory statements rather than well-pled supporting facts, the Court finds they 12 cannot withstand defendant’s motion. Fortaleza v. PNC Fin. Servs. Grp., 642 F.Supp.2d 1016, 13 1020 (N.D. Cal. 2009) ( “Vague allegations and mere labels and conclusions are insufficient to 14 withstand a motion to dismiss.”). SHK’s motion to dismiss as to Tierney’s fraud claim is therefore 15 granted. 16 Should discovery reveal facts that would actually support these claims, the federal rules 17 provide procedures to seek leave to amend. 18 B. Negligent Misrepresentation 19 In addition to its fraud claim, Tierney asserts SHK made negligent misrepresentations to 20 plaintiffs concerning the stock transfer. The elements of negligent misrepresentation are: “(1) a 21 false representation about a past or existing material fact, (2) made without any reasonable ground 22 for believing it to be true, (3) with the intent to induce the plaintiff to rely upon it, (4) the 23 plaintiff's reasonable and justified reliance on the false representation, and (5) resulting damages.” 24 Miller v. Security Life of Denver Ins. Co., 2012 WL 5392275, at *1 (N.D. Cal. Nov. 2, 2012). 25 This claim rests on two alleged false representations by SHK, which mirror those advanced 26 under Tierney’s fraud theory. First, Tierney alleges SHK misrepresented its desire to “cancel its 27 agreement to purchase [Tierney’s] SoFi shares.” (FAC ¶ 64.) Tierney argues this statement was ] induce [Tierney] to discharge [SHK’s] obligation to pay for the [SoFi stock], as required by the 2 || contract.” (FAC § 15.) As developed, supra, the Court declines to infer that SHK possessed the 3 || requisite fraudulent intent to render this representation actionable as a false representation. 4 Second, Tierney alleges SHK misrepresented to SoFi “that it was the owner” of the shares 5 in question when it submitted an affidavit to SoFi so that it could convert the stock to book-entry 6 || shares. Ud. § 65.) As addressed, supra, this representation was not made to Tierney but to SoF1, 7 || and Tierney has not addressed in its pleadings why such a representation may serve as the basis 8 for a negligent misrepresentation claim. 9 As the Court declines to find either of these two alleged negligent misrepresentations 10 || actionable, SHK’s motion to dismiss as to Tierney’s negligent misrepresentation claim is also 11 granted. IV. CONCLUSION 13 For the foregoing reasons, the Court GRANTS defendant’s motion to dismiss as to 14 || Tierney’s fraud and negligent misrepresentation claims WITHOUT FURTHER LEAVE TO AMEND. 3 15 || Defendant shall file an answer to the first and second claims within fourteen (14) days of this a 16 || Order.

17 This Order terminates Docket Number 42. 18 IT IS SO ORDERED. 19 20 || Dated: 4/4/2023 hese lel Cees VONNE GON¥ALEZ‘ROGERS UNITED STATES DISTRICT COURT JUDGE 22 23 24 25 26 27 28