1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 SAN JOSE DIVISION 7 8 MICHAEL SCOTT FITZGERALD, et al., Case No. 5:21-cv-08641-EJD
9 Plaintiffs, ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' 10 v. MOTION TO DISMISS
11 GEM FUNDING, LLC, et al., Re: Dkt. Nos. 95, 98, 99, 102, 110, 126, 136 Defendants. 12
13 14 Defendants separately bring seven motions to dismiss Plaintiffs’ First Amended Complaint 15 (“FAC”). See Dkt. Nos. 95, 98, 99, 102, 110, 126, 136. The Court finds the motions appropriate 16 for decision without oral argument pursuant to Civil Local Rule 7-1(b). For the reasons set forth 17 below, the Court GRANTS in part and DENIES in part Defendants’ motions to dismiss. 18 I. BACKGROUND 19 Plaintiff Michael Fitzgerald resides in Santa Clara County and operates his scuba diving 20 business, California Scuba Center, LLC (“California Scuba”), which is headquartered in Fresno, 21 California. FAC, Dkt. No. 88 ¶¶ 5-6. This suit arises from thirteen separate “Merchant Cash 22 Advance” agreements that Fitzgerald allegedly executed with nine financing companies to cover 23 the daily operating expenses of his scuba business (collectively referred to as “Defendants”): GEM 24 Funding, LLC (“GEM”), Alva Advance, LLC (“Alva”), Newco Capital Group (“Newco”) 25 (allegedly doing business as Amsterdam Capital Solutions, LLC (“Amsterdam”)), IBEX Funding 26 Group (“IBEX”), White Road Capital, LLC (“White”), Everest Business Funding Holdings, LLC 27 Case No.: 5:21-cv-08641-EJD 1 (“EBF”), West Coast Business Capital, LLC (“West Coast”), Whetstone Holdings, LLC 2 (“Whetstone”) (owner of EBF Holdings, LLC (“EBF”)), and Fundry, LLC (allegedly doing 3 business as Blue Whale Funding (“Blue Whale”)). Id. ¶¶ 3, 13-14. Fitzgerald also brings suit 4 against individuals Yitzhak Stern, the principal owner of West Coast, and Henry Gross, the 5 principal owner of GEM. Id. ¶¶ 15-16. 6 Before executing the Merchant Cash Advance agreements (collectively, the 7 “Agreements”), Fitzgerald’s business, California Scuba, shut down for seventy-five days in the 8 spring of 2020 when the Covid-19 pandemic first began. Id. ¶ 19. During this time his business 9 required additional capital to remain solvent. Id. ¶ 20. From January 2020 to September 2021, 10 Fitzgerald entered into the Agreements with Defendants in which he sold California Scuba’s 11 future account receivables at a discount in exchange for immediate funds, which would be 12 remitted in weekly or monthly increments. Id. ¶¶ 16, 19, 22-34. He alleges that the Agreements 13 contain a performance guaranty provision that makes him jointly and severally liable for 14 California Scuba’s obligations. Id. ¶¶ 41-42. Pursuant to the Agreements, Plaintiffs received a 15 total of $311,126 up front, selling $548,244 in future receivables. Id. ¶ 36. 16 To date Plaintiffs have paid-in-full four of the Agreements with Defendants GEM, West 17 Coast, White, as well as one of the two Agreements with EBF. FAC ¶ 36. California Scuba had 18 been making payments on its Agreements with IBEX, Newco (d/b/a Amsterdam), Alva, and the 19 second agreement with EBF—each of which Plaintiffs have purportedly paid off approximately 20 50% or more of the purchase price—up until Plaintiffs initiated this suit. Id. Fitzgerald alleges 21 that he unilaterally voided the Agreements upon learning that the Agreements “were usurious and 22 illegal” and California Scuba is no longer remitting payments. Dkt. No. 104 ¶ 48. 23 Fitzgerald alleges that the Agreements are short-term loans disguised as finance 24 agreements which require California Scuba to pay usurious rates of interest in violation of 25 California law. FAC ¶¶ 35, 39. He further alleges that through these Agreements, Defendants 26 conspired and acted together to knowingly, “deceptively and fraudulently” induce Plaintiffs into a 27 Case No.: 5:21-cv-08641-EJD 1 scheme of “criminally usurious loan agreements.” Id. ¶¶ 76, 80-81, 103. He therefore claims that 2 the Agreements are void and unenforceable under California law, challenging the validity of the 3 forum selection and choice-of-law clauses. Id. ¶¶ 48, 53-63. Fitzgerald brings action on behalf of 4 himself and his business (collectively, “Plaintiffs”) alleging violation of 18 U.S.C. § 1961, et seq. 5 (“civil RICO”), fraud, usury, negligence per se for violations of Cal. Fin. Code § 22001, violations 6 of Cal. Bus. & Prof. Code § 17200, and unjust enrichment against all Defendants, seeking 7 restitution, permanent injunction, and declaratory relief. See FAC. 8 Initially, Defendant EBF brought a motion to sever and Defendants EBF, White, IBEX, 9 and GEM brought motions to dismiss Fitzgerald’s complaint—all of which the Court denied as 10 moot after Fitzgerald amended the complaint in lieu of responding under Federal Rules of Civil 11 Procedure 15(a).1 Dkt. Nos. 88, 89. Now, Defendants EBF, White, IBEX, GEM, West Coast, 12 Stern and Fundry, and Newco (d/b/a Amsterdam) bring separate motions to dismiss (collectively, 13 “Motions”) Fitzgerald’s First Amended Complaint, each contending that the Court lacks subject 14 matter jurisdiction over Fitzgerald’s claims and requesting dismissal for failure to state a claim.2 15 See Dkt. Nos. 95, 98, 99, 102, 110, 126, 136. Fitzgerald opposes the motions. See Dkt. Nos. 103, 16 104, 105, 118, 123, 128, 156. In May of this year, the Court stayed discovery pending the 17 resolution of the motions. See Dkt. No. 127. 18 II. LEGAL STANDARDS 19 A. FRCP 12(b)(1) 20 Federal Rule of Procedure 12(b)(1) permits a party to assert a defense of lack of subject 21 matter jurisdiction. Fed. R. Civ. P. 12(b)(1). A jurisdictional attack may be factual or facial. 22 White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000). A facial attack “asserts that the allegations 23
24 1 While Fitzgerald failed to amend the complaint as a matter of course within 21 days of service of 25 a 12(b) motion, the Court nonetheless granted Fitzgerald a one-time extension of the deadline owing to his pro se status. See Dkt. No. 89. Defendants subsequently filed new motions 26 challenging Fitzgerald’s amended complaint.
27 2 The Court entered default as to Defendant Alva on May 5, 2022. See Dkt. No. 140. Case No.: 5:21-cv-08641-EJD 1 contained in a complaint are insufficient on their face to invoke federal jurisdiction.” Safe Air for 2 Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004). “The district court resolves a facial 3 attack as it would a motion to dismiss under Rule 12(b)(6): Accepting the plaintiff’s allegations as 4 true and drawing all reasonable inferences in the plaintiff's favor, the court determines whether the 5 allegations are sufficient as a legal matter to invoke the court’s jurisdiction.” Leite v. Crane Co., 6 749 F.3d 1117, 1121 (9th Cir. 2014). 7 For a factual attack, defendant presents extrinsic evidence for the court’s consideration. In 8 this case “the court need not presume the truthfulness of the plaintiff's allegations.” Safe Air for 9 Everyone, 373 F.3d at 1039. “When the defendant raises a factual attack, the plaintiff must 10 support her jurisdictional allegations with ‘competent proof,’ under the same evidentiary standard 11 that governs in the summary judgment context.” Leite, 749 F.3d at 1121 (citations omitted). 12 “[T]he district court is not restricted to the face of the pleadings, but may review any evidence, 13 such as affidavits and testimony, to resolve factual disputes concerning the existence of 14 jurisdiction.” McCarthy v. United States, 850 F.2d 558, 560 (9th Cir. 1988). 15 B. FRCP 12(b)(2) 16 Federal Rule of Procedure 12(b)(2) permits a party to challenge personal jurisdiction. The 17 burden of establishing the existence of personal jurisdiction rests with the party invoking the 18 jurisdiction of the court. Data Disc, Inc. v. Sys. Tech. Assocs., Inc., 557 F.2d 1280, 1285 (9th Cir. 19 1977). On a motion to dismiss for lack of personal jurisdiction, a court may consider affidavits 20 and declarations in support of the motion. In re Cathode Ray Tube (CRT) Antitrust Litig., 27 F. 21 Supp. 3d 1002, 1008 (N.D. Cal. 2014). Furthermore, “[w]here, as here, the motion is based on 22 written materials rather than an evidentiary hearing…. ‘we only inquire into whether [the 23 plaintiff’s] pleadings and affidavits make a prima facie showing of personal jurisdiction.’” 24 Schwarzenegger, 374 F.3d at 800 (quoting Caruth v. Int’l Psychoanalytical Ass’n, 59 F.3d 126, 25 128 (9th Cir. 1995)). 26 27 Case No.: 5:21-cv-08641-EJD C. FRCP 12(b)(5) 1 A motion to dismiss may be brought under Rule 12(b)(5) for insufficient service of 2 process. Fed. R. Civ. P. 12(b)(5). Where a defendant challenges service or process, plaintiff bears 3 the burden of establishing that process was properly served under Federal Rules of Civil 4 Procedure 4. Brockmeyer v. May, 383 F.3d 798, 801 (9th Cir. 2004). “If the plaintiff is unable to 5 satisfy this burden, the Court has the discretion to either dismiss the action or retain the action and 6 quash the service of process.” Stevens v. Sec. Pac. Nat’l Bank, 538 F.2d 1387, 1389 (9th Cir. 7 1976). In deciding whether to dismiss the action, the court may consider evidence outside the 8 pleadings. Life360, Inc. v. Advanced Ground Info. Sys., Inc., No. 15-CV-00151-BLF, 2015 WL 9 5612008, at *8 (N.D. Cal. Sept. 21, 2015). 10 III. DISCUSSION 11 All Defendants move to dismiss Plaintiff California Scuba’s claims because it is appearing 12 pro se in violation of the Local Rules. Defendants also challenge the Court’s jurisdiction under 13 Rule 12(b)(2), asserting that Fitzgerald’s claims are not justiciable because he has not suffered an 14 injury-in-fact and lacks prudential standing. Moreover, Defendant West Coast raises improper 15 service of process, and Defendants Fundry, LLC and Stern challenge the Court’s personal 16 jurisdiction over them. 17 Defendants also challenge the plausibility of Plaintiffs’ claims and move for dismissal 18 under Rule 12(b)(6) for failure to state a claim on the grounds that: Plaintiffs insufficiently plead 19 the civil RICO claim; the fraud claim is not plausible and not pled with particularity; the usury 20 claim is not plausible; the unfair competition claim fails because Cal. Bus. & Prof. Code § 17200 21 is not applicable; there is no cause of action on which to base the unjust enrichment claim; and 22 Plaintiffs’ requests for declaratory relief must be dismissed because they arise under state and not 23 federal law. Defendants GEM, West Coast, Stern and Fundry additionally contend that New York 24 law governs, and that venue is improper pursuant to their agreements’ forum selection clause 25 26 27 Case No.: 5:21-cv-08641-EJD 1 which provides that lawsuits arising from their agreement shall be brought in a New York court.3 2 Dkt. Nos. 102, 110, 126. 3 For the reasons discussed below, the Court addresses only the threshold issues pertaining 4 to Local Rule 3-9(b) and the Court’s jurisdiction. Because the Court’s rulings on those issues are 5 dispositive of Defendants’ motions, the Court need not assess the plausibility or sufficiency of the 6 alleged claims or interpret the parties’ Agreements at this juncture. 7 A. Local Rule 3-9(b) 8 Defendants assert that California Scuba cannot proceed pro se pursuant to the Local Rules 9 and therefore the Court should dismiss its claims. The Court agrees. 10 Fitzgerald is the sole owner of California Scuba, a California limited liability company. Id. 11 ¶¶ 5-6. He is not a lawyer and brings this action pro se on behalf of himself and the company. 12 The District’s Local Rules require that “[a] corporation, unincorporated association, partnership or 13 other such entity may appear only through a member of the bar of this Court.” L. R. 3-9(b). 14 Licht v. Am. W. Airlines (In re Am. W. Airlines), 40 F.3d 1058, 1059 (9th Cir. 1994) (per curiam) 15 (“Corporations and other unincorporated associations must appear in court through an attorney.”); 16 U.S. Commodity Futures Trading Comm’n v. Castillo, No. C06-2540-TEH, 2007 WL 2088372, at 17 *1 (N.D. Cal. July 19, 2007) (“Non-attorneys, including a corporation’s president and sole 18 shareholder, are barred from representing a corporation.”). 19 Fitzgerald acknowledges that California Scuba cannot self-represent and urges the Court to 20 give Plaintiff a reasonable amount of time to secure counsel. Dkt. Nos. 103 ¶ 37; 104 ¶ 47; 105 ¶ 21 47. He asks the Court to take into consideration his pro se status and the company’s dire financial 22 situation allegedly caused by Defendants’ predatory lending Agreements. Dkt. Nos. 103 ¶¶ 38-40; 23 104 ¶¶ 48-50; 105 ¶¶ 48-50. He requests 60 days to retain counsel. Id. Defendant EBF requests 24 that, should this Court allow Plaintiff California Scuba time to secure counsel, the case should be 25
26 3 Plaintiffs allege that the forum selection and choice-of-law clauses in each agreement are 27 unenforceable because they “contain a pre-dispute jury waiver.” FAC ¶ 48. Case No.: 5:21-cv-08641-EJD 1 stayed to avoid undue prejudice to Defendants. Dkt. No. 114 at 2. 2 In the interest of justice and good cause appearing, the Court GRANTS California Scuba’s 3 request for 60 days to retain counsel and STAYS the case in the interim. 4 B. Personal Jurisdiction 5 1. Service of Process 6 Defendant West Coast moves for dismissal pursuant to Federal Rule of Civil Procedure 7 12(b)(5), contending that Plaintiffs did not properly effect service of process. Dkt. No. 110; see 8 Fed. R. Civ. P. 12(b)(5). “A federal court does not have jurisdiction over a defendant unless the 9 defendant has been properly served under Fed. R. Civ. P. 4.” Direct Mail Specialists, Inc. v. Eclat 10 Computerized Techs., Inc., 840 F.2d 685, 688 (9th Cir. 1988). 11 Federal Rule of Civil Procedure 4(h) provides the manners for effecting service of process 12 on business entities. Rule 4(h)(1)(A) allows service of process to corporations and business 13 entities by the methods identified in Rule 4(e) for serving an individual, including the methods 14 authorized by state law. See Cal. Civ. Proc. Code § 415.10. In addition, Rule 4(h)(1)(B) provides 15 that “valid service of process on a corporation, partnership, or association may be effected by 16 ‘delivering a copy of the summons and of the complaint to an officer, a managing or general 17 agent, or any other agent authorized by appointment or by law to receive service of process.’” 18 Life360, Inc., 2015 WL 5612008, at *8 (citing Fed. R. Civ. P. 4(h)(1)(B)). Similarly, California 19 Code of Civil Procedure § 416.10 permits service to an authorized agent for service of process or 20 to the company’s chief executive officers, and § 1701 permits hand-delivery of process to agent 21 for service of process. 22 West Coast contends that it was never properly served.4 See Dkt. No. 59. Plaintiffs served 23 process on an authorized agent for the California Secretary of State in Sacramento, Ariel Lee, who 24
25 4 West Coast asserts that despite improper service of process, Plaintiffs sought entry of default 26 against West Coast, which was granted. Dkt. No. 110 at 5. However, the Court later granted West Coast’s motion to set aside the entry of default based on Fitzgerald’s notice of non- 27 opposition. See Dkt. No. 85. Case No.: 5:21-cv-08641-EJD 1 accepted service. Dkt. No. 110 at 5. West Coast asserts that its authorized agents in California or 2 New York—which is where the company is registered to do business—were never served. Id. It 3 further contends that Fitzgerald submitted an affidavit averring that the attempts to effectuate 4 service were unsuccessful but provided “no explanation as to it attempt or lack of success.” Id.; 5 see Dkt. No. 50. 6 Plaintiffs respond that West Coast was indeed properly served. Dkt. No. 123 at 7. Here, 7 as noted by Defendant, Fitzgerald’s affidavit for the original complaint (Dkt. No. 1) provides only 8 that process was served on the California Secretary of State in Sacramento and does not specify 9 whether Plaintiffs first attempted to serve process on West Coast’s authorized agent or corporate 10 officer. In contrast, Fitzgerald’s affidavit with respect to the First Amended Complaint indicates 11 that he attempted to serve process at an address in Albany, New York. Dkt. No. 50. This address 12 is listed under the company’s name on the New York Secretary of State’s website for entity 13 information, which specifically provides the New York address for service of process. Id. 14 Fitzgerald includes a notarized Affidavit of Due Diligence that he unsuccessfully attempted to 15 serve process on West Coast at the listed New York address. Id. In addition, Fitzgerald provides 16 an affidavit that he also attempted to serve process on Yitzhak Stern, a co-defendant and the 17 principal owner of West Coast, at his business address in New Jersey.5 Id. However, this attempt 18 was also unsuccessful because the building security explained that “all employees were currently 19 working from home.” Id. Plaintiffs subsequently served process on the Secretary of State in 20 California. Id. 21 “When a plaintiff cannot with “reasonable diligence” locate a defendant's designated agent 22 or any other person authorized to receive service, Fed.R.Civ.P. 4(e)(1) and California 23 Corporations Code § 1702(a) permit an application for a court order that service be made by hand 24
25 5 Plaintiffs allege that Yitzhak Stern is the “principal owner” of West Coast Funding, LLC. FAC ¶ 26 15. In his motion, Stern does not deny this allegation, noting only that he “allegedly owns WCB” and that he is “alleged to be the majority shareholder pf WCB.” Dkt. No. 126 at 3. Nor does he 27 deny or otherwise respond to this allegation in his declaration. Dkt. No. 126, Ex. 1. Case No.: 5:21-cv-08641-EJD 1 delivery of the summons and complaint to the California Secretary of State.” Verizon California 2 Inc. v. OnlineNIC Inc., No. C 08-2832 JF (RS), 2008 WL 4279709, at *1 (N.D. Cal. Sept. 16, 3 2008). After making reasonably diligent efforts to serve process to Defendant’s authorized agent, 4 under § 1702(a), Plaintiffs are required to seek an order for service upon the Secretary of State. 5 See Cal. Corp. Code § 1702(a) (court order appropriate if “it is shown by affidavit to the 6 satisfaction of the court that process against a domestic corporation cannot be served with 7 reasonable diligence upon the designated agent by hand”); see Gambord v. Westside Gas, Inc., 8 2017 WL 2774408, at *3 (N.D. Cal. June 26, 2017) (granting ex parte application for service upon 9 the California Secretary of State where plaintiff unsuccessfully attempted to serve defendant’s 10 CFO and agent). In the present case, Plaintiffs did not seek a court order for service upon the 11 Secretary of State before effecting process. 12 Where service of process is insufficient, the court has the option of dismissing the action or 13 quashing the service and retaining the case. O’Haire v. Napa State Hosp., No. 09-CV-2508- 14 RMW, 2010 WL 1223197, at *3 (N.D. Cal. Mar. 25, 2010). “Generally service will be quashed in 15 those cases in which there is a reasonable prospect that the plaintiff will be able to serve the 16 defendant properly.” Wishart v. Agents for Int’l Monetary Fund I.R.S., No. 95-CV-20178, 1995 17 WL 494586, at *2 (N.D. Cal. Aug.14, 1995); see id. (finding insufficient service of process but 18 quashing the service and retaining the case due to “reasonable prospect” that plaintiff will serve 19 defendant properly). Here, although Plaintiffs did not properly serve his complaint and summons 20 pursuant to federal or California law, there appears to be a “reasonable prospect” that Plaintiffs 21 will serve Defendants properly since Plaintiffs have effectively served multiple other New York 22 business entities in this action. 23 Rule 4(m) provides a time limit for service, stating that “[i]f a defendant is not served 24 within 90 days after the complaint is filed, the court—on motion or on its own after notice to the 25 plaintiff—must dismiss the action without prejudice against that defendant or order that service be 26 made within a specified time.” Fed. R. Civ. P. 4. Thus, the Court QUAHSES service of process 27 Case No.: 5:21-cv-08641-EJD 1 on defendants and GRANTS Plaintiffs one more opportunity to properly serve Defendants. 2 Accordingly, Plaintiffs must provide the Court with proof of service of the summons and 3 complaint on Defendant West Coast within sixty (60) days of this Order or show good cause why 4 the unserved Defendant should not be dismissed. 5 2. General & Specific Jurisdiction 6 Individual Defendant Stern and Defendant Fundry, LLC (“Fundry”), also known as Blue 7 Whale Funding, challenge the Court’s personal jurisdiction and move for dismissal pursuant to 8 Federal Rule of Civil Procedure 12(b)(2). They specifically argue that Plaintiffs have not 9 established they have minimum contacts to subject them to the state’s jurisdiction. Dkt. No. 126 10 at 5. 11 Courts may exercise personal jurisdiction over a defendant where a statute confers 12 jurisdiction, or where the exercise of such jurisdiction comports with constitutional due process. 13 See Action Embroidery Corp. v. Atl. Embroidery, Inc., 368 F.3d 1174, 1177 (9th Cir. 2004). 14 “Where, as here, there is no applicable federal statute governing personal jurisdiction, the district 15 court applies the law of the state in which the district court sits. Because California’s long-arm 16 jurisdictional statute is coextensive with federal due process requirements, the jurisdictional 17 analyses under state law and federal due process are the same.” Schwarzenegger, 374 F.3d at 18 800–01 (internal citations omitted). A nonresident defendant must have “‘minimum contacts’ 19 with the relevant forum such that the exercise of personal jurisdiction ‘does not offend traditional 20 notions of fair play and substantial justice’” for a court to exercise personal jurisdiction. Id. 21 (quoting Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)). 22 First, for a court to have general jurisdiction over a non-resident defendant, “the defendant 23 must engage in ‘continuous and systematic general business contacts.’” Schwarzenegger, 374 24 F.3d at 801 (quoting Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 416 25 (1984). Stern and Fundry deny having any contacts with California. Stern resides in New Jersey 26 and is the CEO of Fundry, a New York limited liability company with its principal place of 27 Case No.: 5:21-cv-08641-EJD 1 business in New Jersey. Dkt. No. 126 at 6. In his declaration, Stern avers that he has never 2 “personally done business in California” with any person or entity to the best of his knowledge. 3 Dkt. No. 126, Ex. 1 ¶ 2. He also denies owning any real or personal property in California or 4 having a business office in California. Id. Furthermore, he represents that he has not personally 5 transacted any business with Plaintiffs.6 Id. ¶ 3. Likewise, Fundry does not do business, enter into 6 any agreements, or otherwise advertise in California. Id. ¶ 4. Nor does it have an office, 7 employees, property in the state. Id. 8 Based upon Stern’s undisputed declaration, the Court finds that Sterns and Fundry lack 9 “continuous and systematic” contacts with the forum to warrant the exercise of general 10 jurisdiction. 11 Turning to specific jurisdiction, the Ninth Circuit applies a three-pronged test:
12 (1) The non-resident defendant must purposefully direct his activities or consummate some transaction with the forum or resident thereof; 13 or perform some act by which he purposefully avails himself of the privilege of conducting activities in the forum, thereby invoking the 14 benefits and protections of its laws;
15 (2) the claim must be one which arises out of or relates to the defendant’s forum-related activities; and 16 (3) the exercise of jurisdiction must comport with fair play and 17 substantial justice, i.e. it must be reasonable. 18 Schwarzenegger, 374 F.3d at 802 (citing Lake v. Lake, 817 F.2d 1416, 1421 (9th Cir. 1987). The 19 plaintiff bears the burden of establishing that the first two prongs are met. Id. at 802. 20 In response, Plaintiffs assert that “Stern has provided no evidence that he is not personally 21 responsible for the conduct of his legal entities, or that he is not personally involved in this action 22 in said capacity” and further emphasizes that he “has provided no documentation or evidence… 23
24 6 Plaintiffs allege that Stern owns West Coast, which executed a Merchant Cash advance agreement with Plaintiffs. The parties’ agreement provides that Fitzgerald “acknowledge[s] and 25 agree[s] that the Purchase Price is being paid and received by Seller in New York, that the Specified Percentage of the Future Receipts are being delivered to WCB in New York, and that 26 the transaction contemplated in this Agreement was negotiated, and is being carried out, in New York. Seller and its Guarantor(s) acknowledge and agree that New York has a reasonable 27 relationship to this transaction.” Dkt. No. 88, Ex. 5 at 12. Case No.: 5:21-cv-08641-EJD 1 that he should not be subject to personal jurisdiction of this Court.” Dkt. No. 128 ¶¶ 5-6. In 2 support, Plaintiffs reference an exhibited complaint (“Exhibit 1”) brought by the Federal Trade 3 Commission (“FTC”) in the District Court for the Southern District of New York against Stern 4 and Fundry, which alleges that defendants transact and advertise across the United States and 5 engage in deceptive and unfair business practices through their “Merchant Cash Advance” 6 agreements marketed to small businesses. Id. ¶ 7; see Dkt. No. 88. Plaintiffs also refer to the 7 corresponding Court Order (“Exhibit 2”) granting a permanent injunction and monetary judgment 8 against defendants. Id. 9 Plaintiffs ask the Court to take judicial notice of the FTC complaint and Court Order. 10 FAC, Ex. 1, 2; Dkt. No. 103-2. The court may take judicial notice of a fact that is “not subject to 11 reasonable dispute” because it is either “generally known within the trial court’s territorial 12 jurisdiction” or “can be accurately and readily determined from sources whose accuracy cannot 13 reasonably be questioned.” Fed. R. Evid. 201(b). Because the FTC complaint and Court Order 14 satisfy the latter, the Court grants Plaintiffs’ request and “take[s] judicial notice of them solely as 15 an indication of what information was in the public realm at the time.” Von Saher v. Norton 16 Simon Museum of Art at Pasadena, 592 F.3d 954, 960 (9th Cir. 2010). However, these documents 17 are not relevant for purposes of personal jurisdiction; they do not establish Stern and Fundry’s 18 business activities (if any) in California. Nor do Plaintiffs make any specific allegations in the 19 complaint with respect to Stern and Fundry’s business activities in California. Fitzgerald alleges 20 only that “Defendants unlawfully transacted business in the State of California by making usurious 21 loans to Plaintiff” over the phone, by email, and through the internet. FAC ¶¶ 50, 56. Plaintiffs 22 do not specifically allege that California Scuba entered into a Merchant Cash Advance agreement 23 with Fundry or that Plaintiffs had any contact with Stern. 24 “If the plaintiff fails to satisfy either of these [first two] prongs, personal jurisdiction is not 25 established in the forum state.” Schwarzenegger, 374 F.3d at 802. Because Plaintiffs have failed 26 to make any specific allegations with respect to Stern and Fundry that could satisfy the first two 27 Case No.: 5:21-cv-08641-EJD 1 prongs, the Court need not analyze the third prong. 2 Accordingly, the Court GRANTS Defendants’ Stern and Fundry’s motion to dismiss for 3 lack of personal jurisdiction. 4 C. Subject Matter Jurisdiction 5 1. Plaintiff Fitzgerald’s Claims 6 a. Ripeness 7 Next, Defendant EBF challenges whether Fitzgerald has alleged an injury-on-fact that is 8 ripe for adjudication. Dkt. No. 95 at 6–8. “Before a case is justiciable in federal court, it must be 9 alleged that the plaintiff is threatened by injury that is ‘both real and immediate,’ (and) not 10 ‘conjectural’ or ‘hypothetical.’” Portland Police Ass’n v. City of Portland ex rel. Bureau of 11 Police, 658 F.2d 1272, 1273 (9th Cir. 1981) (internal quotation marks omitted) (quoting O’Shea v. 12 Littleton, 414 U.S. 488, 494 (1974)). 13 Fitzgerald alleges that the Agreements contain a performance guaranty provision that make 14 him jointly and severally liable for California Scuba’s obligations under the Agreements. EBF 15 contends, however, that Fitzgerald fails to allege any “concrete injury” because he pleads that the 16 Agreements have a performance guaranty but does not allege that he has defaulted or that 17 Defendants have tried to enforce the guaranty. FAC ¶ 42. EBF argues that, should the company 18 default on the payments, Defendants may enforce their security in his collateral at some future 19 time. Dkt. No. 95 at 7. Therefore, EBF contends that Fitzgerald’s injury is not ripe because he 20 does not allege that EBF has attempted to enforce—or that Defendants surely will enforce—the 21 performance guarantees against him, and hence, his claims “hang[] on future contingencies that 22 may or may not occur.”7 Dkt. No. 95 at 7 (quoting Clinton v. Acequia, Inc., 94 F.3d 568, 572 (9th 23 Cir. 1996)). 24 Plaintiffs do not specifically respond to this argument. However, in opposition Fitzgerald 25
26 7 Plaintiff has alleged that he has paid off all but four of his Cash Advance Agreements. See FAC ¶ 36. Accordingly, only the remaining Defendants EBF, IBEX, Amsterdam, and Alva could 27 enforce the guaranty provisions upon California Scuba’s default. Case No.: 5:21-cv-08641-EJD 1 indicates that the company filing for bankruptcy “was a very real possibility’ and “would have 2 been necessary” had Plaintiffs not voided the Agreements and stopped remitting payments from 3 the company’s receivables. Dkt. No. 104 ¶ 48. He further explains that California Scuba is 4 financially compromised, and that bankruptcy is an “existential threat,” particularly if Defendants 5 win this suit. Id. ¶¶ 48-49. 6 The general rule is that “[a] claim is not ripe for adjudication if it rests upon contingent 7 future events that may not occur as anticipated, or indeed may not occur at all.” Texas v. United 8 States, 523 U.S. 296, 300 (1998) (internal quotations omitted). While the Ninth Circuit has not 9 addressed Fitzgerald’s specific issue, it previously vacated a court’s order and found as premature 10 the request for attorney’s fees pursuant to a guaranty agreement where the guaranty had not yet 11 been enforced. Star Phoenix Min. Co. v. W. Bank One, 147 F.3d 1145, 1148 (9th Cir. 1998). EBF 12 notes that other circuits and courts have specifically dismissed claims by guarantors as unripe 13 where the guaranties have not yet been enforced. See, e.g., Winget v. JP Morgan Chase Bank, 14 N.A., 537 F.3d 565, 574 (6th Cir. 2008) (affirming the dismissal of claims, concluding that they 15 are not ripe because the “present harm does not become justiciable until the Defendants attempt to 16 collect the collateral” pursuant to the guaranty); Pelletier v. Estes Groves, Inc., No. 16-CV-14499, 17 2018 WL 4208328, at *5 (S.D. Fla. Mar. 28, 2018). 18 The Court agrees that, while defaulting on remittance payments may well have been 19 imminent, Defendants may not choose to enforce the performance guarantees against Fitzgerald. 20 Accordingly, Fitzgerald’s injury with respect to the guaranty is not ripe for adjudication. 21 b. Standing 22 Defendants in all seven motions facially challenge Fitzgerald’s Article III and prudential 23 standing to assert claims against them in his individual capacity because he has not alleged a 24 sufficient injury-in-fact that is separate and distinct from the harm suffered by the company. See 25 Dkt. Nos. 95 at 7–9; 98 at 7–8; 99 at 7–8; 102 at 6–7; 110 at 6–7; 126 at 7; 136 at 9–11. 26 Defendants assert that Fitzgerald cannot allege an injury-in-fact because it is California Scuba, not 27 Case No.: 5:21-cv-08641-EJD 1 Fitzgerald, that remits a portion of its future sales to Defendants under the Agreements, and 2 Fitzgerald fails to allege that he suffered any injury independent of the alleged injury to the 3 company. 4 “[T]o satisfy Article III’s standing requirements, a plaintiff must show (1) it has suffered 5 an ‘injury in fact’ that is (a) concrete and particularized and (b) actual or imminent, not conjectural 6 or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) 7 it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable 8 decision.” Friends of the Earth, Inc. v. Laidlaw Env’t Servs. (TOC), Inc., 528 U.S. 167, 180–81 9 (2000). A plaintiff must demonstrate “‘an invasion of a legally protected interest’ that is ‘concrete 10 and particularized’ and ‘actual or imminent, not conjectural or hypothetical’” to establish an 11 injury-in-fact. Spokeo, Inc. v. Robins, 578 U.S. 330, 339 (2016) (quoting Lujan v. Defs. of 12 Wildlife, 504 U.S. 555, 560 (1992)). 13 Here, the complaint alleges that Plaintiffs California Scuba and Fitzgerald were harmed 14 because of entering into the Agreements with Defendants. Fitzgerald, however, was not a party to 15 the Agreements; as the sole owner, he signed the Agreements on behalf of the company and 16 personally guaranteed payment through the Agreements’ performance guaranty provisions. FAC 17 ¶¶ 41-42. Corporations and limited liability companies are distinct legal entities, and shareholders 18 and members generally lack prudential standing to pursue claims on a corporation’s behalf even 19 where the individual provides a personal guaranty. Sherman v. Brit. Leyland Motors, Ltd., 601 20 F.2d 429, 439 (9th Cir. 1979).8 To establish an injury-in-fact, a shareholder or member must be 21 injured “directly and independently” of the corporation or company. Shell Petrol., N.V. v. Graves, 22
23 8 The Ninth Circuit noted that, in addition to lacking standing to bring claims under the Dealer’s 24 Act or antitrust laws, “Sherman lacks standing in his individual capacity to bring any of the pendent claims. Where there is an injury to the corporation, the cause of action should be brought 25 by the corporation, or by the shareholders derivatively if the corporation fails to act; only for separate individual damage does an individual cause of action lie.” Sherman, 601 F.2d at 440 n.13 26 (citing Jones v. H. F. Ahmanson & Co., 460 P.2d 464 (Cal. 1969); Sutter v. General Petroleum Corp., 170 P.2d 898, 901 (Cal. 1946)). 27 Case No.: 5:21-cv-08641-EJD 1 709 F.2d 593, 595 (9th Cir. 1983). 2 Here, the harm Fitzgerald alleges arises from his status as a personal guarantor to the 3 Agreements. Because these alleged harms arise from the Agreements executed with the 4 corporation, they “reflect the injury to the corporation,” not a distinct and independent injury 5 suffered by Fitzgerald. The Ninth Circuit and a California district courts—typically in the context 6 of RICO claims—have found that guarantors of a company or corporation’s debt lack standing to 7 sue for injury suffered by the company or corporation.9 See Stein v. United Artists Corp., 691 8 F.2d 885, 896 (9th Cir. 1982) (concluding in an antitrust case that a corporation’s guarantors did 9 not suffer a distinct injury and therefore lack standing where their alleged injuries “reflect the 10 injury to the corporation, which forced it to default on the loans.”); Sherman, 601 F.2d at 439 11 (finding that that the franchise dealership’s president, Mr. Sherman, did not have standing to sue 12 on behalf of the dealership, despite his guarantee of the corporation’s obligations and repayment 13 of loans on behalf of the corporation); Sparling v. Hoffman Const. Co., 864 F.2d 635, 641 (9th Cir. 14 1988) (finding harm to the plaintiffs insufficient to establish standing where the harm was “due to 15 their status as guarantors of the bonds given by the corporation is also derivative of the harm to the 16 corporation”); Mocha Mill, Inc. v. Port of Mokha, Inc., No. 18-CV-02539-HSG, 2019 WL 17 1048252, at *2 (N.D. Cal. Mar. 5, 2019); Balboa Cap. Corp. v. Innovix Med. PLLC, No. 19-CV- 18 01145-JLS-DFM, 2020 WL 1969763, at *4 (C.D. Cal. Jan. 2, 2020) (“It is [ ] generally accepted 19 that guarantors of a corporation’s debt, even if those guarantors are also stockholders, do not have 20 standing to bring an action if the only harm suffered is derivative of the harm the corporation 21 22
23 9 Outside of suits involving RICO claims, other circuits have found that “[s]hareholders, creditors or guarantors of corporations generally may not bring individual actions to recover what they 24 consider their share of the damages suffered by the corporation” in absence of a special duty or a separate and distinct injury. Taha v. Engstrand, 987 F.2d 505, 507 (8th Cir. 1993); see also 25 Guides, Ltd. v. Yarmouth Grp. Prop. Mgmt., Inc., 295 F.3d 1065, 1073 (10th Cir. 2002) (affirming Foote’s dismissal as an individual plaintiff and “reject[ing] the premise that a stockholder’s status 26 as a guarantor gives the stockholder status to assert an individual claim against a third party where that harm is derivative of that suffered by the corporation.”). 27 Case No.: 5:21-cv-08641-EJD 1 suffered.”).10 Likewise, Plaintiffs’ complaint fails to sufficiently allege how Fitzgerald was 2 directly and independently harmed. 3 In opposition, Fitzgerald also contends that he was personally and directly harmed by 4 Defendants’ in the following two ways: (1) Defendants deceived him in misrepresenting the nature 5 of the Agreements, which induced him to sign on behalf of the Corporation and prevented him 6 from making “prudent decisions” in the best interest of the company and in fulfillment of his 7 fiduciary duties; and (2) by using $10,000 of his personal finances to sustain the corporation 8 during performance of the Agreements.11 Dkt. No. 103 ¶¶ 41, 44, 47-48. 9 With respect to the former, Fitzgerald again fails to allege an injury that is independent and 10 distinct from that of California Scuba. He alleges misrepresentation in the complaint, arguing that 11 he has a right to be free from predatory conduct seeking to take advantage of him and his company 12 and contending that “[b]ut for the deception in the nature of the transactions, including the high 13 amount of interest he was paying, Fitzgerald would not have bound the Corporation by signing the 14 finance Agreements.” Dkt. No. 118 ¶ 44. However, Fitzgerald is not party to these Agreements; 15 California Scuba is. Therefore, the injury arising from Defendants’ misrepresentation is 16 attributable to California Scuba. 17 In Balboa, the District Court for the Central District of California considered a case with 18 similar facts—where the claims dealt with the underlying contract executed between a company 19 and defendants—and found that a third-party plaintiff did not allege an independent harm. Balboa 20 Cap. Corp., 2020 WL 1969763, at *4. The court found that a guarantor, who held themself out as 21
22 10 Alternatively, shareholders or members can establish standing to sue based on an injury to the corporation or company where they can show that a special duty exists between and themselves 23 and defendants. Sparling, 864 F.2d at 640. However, Fitzgerald does not allege any special relationship between himself and defendants that would give rise to “the kind of duty required.” 24 Id. 11 In Fitzgerald’s declaration filed with Plaintiffs’ opposition briefs, he also excerpts text 25 conversations with a gentleman, Mr. Alan Levine, who is allegedly the CEO of Defendant Alva. See Fitzgerald Decl., Dkt. No. 103-1. In this conversation Levine appears to threaten Fitzgerald in 26 response to California Scuba’s payment bouncing, stating “you & your business will get shred up into pieces by my attorneys.” Id. However, Fitzgerald does not provide any more detail or allege 27 any harm from these interactions in the First Amended Complaint. Case No.: 5:21-cv-08641-EJD 1 the sole owner authorized to legally bind the company, lacked standing to sue as a “third party 2 plaintiff” where the guarantor alleged that it was “fraudulently induced to sign the agreements” 3 that bound the company and “‘to sign personal guaranties’ related to those agreements.” Id. Here, 4 where all the claims likewise arise from California Scuba’s underlying Agreements with 5 Defendants, Fitzgerald must allege harm independent from the corporation to establish standing. 6 See Sherman, 601 F.2d at 439. 7 With respect to Fitzgerald’s second point, he fails to make this allegation in the complaint 8 and asserts it for the first time in opposition. Regardless, to satisfy the injury-in-fact requirement 9 Fitzgerald must allege a harm that does not “reflect the injury” to California Scuba. Sherman, 601 10 F.2d at 439; see also Von Brimer v. Whirlpool Corp., 536 F.2d 838, 846 (9th Cir. 1976) (majority 11 shareholder may not assert state law claims despite economic injury to him). 12 Accordingly, the Court finds that Fitzgerald has failed to allege non-derivative harms 13 sufficient to establish an injury-in-fact and confer standing. Fitzgerald’s claims are therefore 14 DISMISSED with leave to amend. 15 IV. CONCLUSION 16 1. Plaintiff California Scuba’s request for sixty (60) days to retain counsel pursuant to 17 Local Rule 3-9(b) is GRANTED. In the interim the case is STAYED. 18 2. Defendant West Coast’s motion to dismiss for insufficient service of process is 19 GRANTED and service of process is QUASHED with respect to this Defendant. The Court 20 GRANTS Plaintiffs one more opportunity to properly serve Defendants within sixty (60) days of 21 this Order. Plaintiffs must provide the Court with proof of service of the summons and complaint 22 on Defendant West Coast or show good cause why the unserved Defendant should not be 23 dismissed. Failure to comply in a timely manner will result in the dismissal of the unserved 24 Defendant. The Court reminds Defendant West Coast that it has a duty to avoid unnecessary 25 expenses of serving the summons. Fed. R. Civ. P. 4(d). 26 3. Defendants Stern and Fundry, LLC’s motion to dismiss for lack of personal jurisdiction 27 Case No.: 5:21-cv-08641-EJD 1 is GRANTED with leave to amend. 2 4. Defendants’ motions to dismiss for lack of subject matter jurisdiction with respect to 3 || Plaintiff Fitzgerald is GRANTED and Plaintiff Fitzgerald’s claims are DISMISSED with leave to 4 || amend. 5 Plaintiffs may file an amended complaint within ninety (90) days, no later than December 6 || 27,2022. Plaintiff may not add new claims or parties without leave of the Court or stipulation by 7 || the parties pursuant to Federal Rule of Civil Procedure 15. 8 IT IS SO ORDERED. 9 Dated: September 27, 2022 10 11 EDWARD J. DAVILA 12 United States District Judge
Z 18 19 20 21 22 23 24 25 26 27 Case No.: 5:21-cv-08641-EJD 28 || ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION TO DISMISS