Fortis Advisors LLC v. Fishawack Medical Communications LTD

• Court: District Court, S.D. California
• Decided: January 29, 2021
• Docket: 3:20-cv-00607
• Status: Unknown

Opinion

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6 7 UNITED STATES DISTRICT COURT 8 SOUTHERN DISTRICT OF CALIFORNIA 9 10 FORTIS ADVISORS LLC, et al., Case No.: 20cv607-LAB-AGS

11 Plaintiffs, ORDER: 12 v. 1) GRANTING MOTION FOR 13 FISHAWACK MEDICAL REMAND [Dkt. 12]; AND COMMUNICATIONS LTD, et al., 14 Defendants. 2) DENYING MOTIONS TO 15 16

DISMISS [Dkt. 5, 6] 17 California-citizen Plaintiffs Delisa Discar and Fortis Advisors LLC filed a 18 complaint in California state court asserting California state law claims against 19 four defendants. Three—Fishawack Medical Communications Ltd., Fishawack 20 Creative Ltd., and Oliver Dennis—aren’t California citizens, but the fourth, Carling 21 Communications, Inc., is. With Carling in the case, the Court can’t exercise 22 diversity jurisdiction. Nevertheless, Defendants removed the action to this Court 23 under 28 U.S.C. § 1441, contending that the Court should disregard Carling’s 24 citizenship because Plaintiffs fraudulently joined Carling to destroy diversity. 25 The bar to establish fraudulent joinder is a high one: A removing party must 26 show, under settled state law, that there is “no possibility that [the plaintiffs] could 27 demonstrate a viable claim” against the non-diverse defendant. Grancare, LLC v. 1 viable claim is impossible by arguing that Plaintiffs’ allegations are vague, and 2 they can’t show that a conclusion is obvious under settled state law by relying on 3 tenuous analogies, never adopted by California courts, to inapplicable areas of 4 law. 5 The Court can’t assert diversity jurisdiction over a case that includes a 6 potentially viable claim against a non-diverse defendant. Plaintiffs’ Motion for 7 Remand, (Dkt. 12), is GRANTED and Defendants’ motions to dismiss, (Dkt. 5 8 and 6), are DENIED WITHOUT PREJUDICE for lack of jurisdiction. 9 BACKGROUND 10 The Court accepts the Complaint’s factual allegations as true for the 11 purposes of determining the possibility of a viable claim. Plaintiffs formerly 12 controlled Carling, but agreed to sell it to the Fishawack Defendants, with Discar 13 remaining as Carling’s president after the sale. (Dkt. 1-3 ¶¶ 34-39.) As part of the 14 payment, the Fishawack Defendants agreed to pay Plaintiffs an “Earn-out 15 Payment” based on Carling’s fee revenue during a one-year period beginning on 16 April 1, 2018 (the “Calculation Period”). (Id. ¶¶ 44-46.) Those Defendants further 17 agreed not to “take any actions in bad faith for the purpose of avoiding or reducing 18 the Earn-out Payment.” Id. ¶ 46. Upon acquisition, Carling became a subsidiary 19 of one of the Fishawack entities. (Id. ¶ 17.) 20 In February 2018, shortly before the Calculation Period began, Discar was 21 placed on indefinite leave from her position as Carling’s president. (Id. ¶ 66.) She 22 was terminated in May 2018. (Id. ¶ 70.) During the Calculation Period, Carling’s 23 activities were directed away from revenue-generating activities and the company 24 lost over half its accounts. (Id. ¶¶ 50, 70-75.) The accompanying loss of over 35% 25 of Carling’s revenue substantially reduced the Earn-out Payment to Plaintiffs. (Id. 26 ¶¶ 75-76, 81-87.) 27 Plaintiffs allege that the Fishawack Defendants didn’t intend, at the time of 1 purpose of avoiding or reducing the Earn-out Payment.” (Id. ¶ 46.) On this basis, 2 they assert claims for fraud, conversion, and securities fraud against the 3 Fishawack entities and Dennis. Plaintiffs allege that Carling conspired in and 4 aided and abetted the other Defendants’ torts through its adverse employment 5 actions and its redirection of its efforts away from the revenue generation that 6 determined Plaintiffs’ compensation. (See id. ¶¶ 127-136.) 7 ANALYSIS 8 I. Legal Standard 9 “When a plaintiff files in state court a civil action over which the federal 10 district courts would have original jurisdiction based on diversity of citizenship, the 11 . . . defendants may remove the action to federal court.” Caterpillar Inc. v. Lewis, 12 519 U.S. 61, 68 (1996); see 28 U.S.C. § 1441. Because the exercise of diversity 13 jurisdiction necessarily involves addressing matters that “intrinsically belong[] to 14 the state courts,” the party invoking federal jurisdiction bears the burden of 15 demonstrating that removal was proper. Indianapolis v. Chase Nat’l Bank, 314 16 U.S. 63, 76 (1941); Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992). The 17 removal statutes are strictly construed, with doubts about the propriety of removal 18 resolved in favor of remand. Id. 19 Federal courts can’t exercise diversity jurisdiction where “a single plaintiff 20 [is] from the same State as a single defendant.” Exxon Mobil Corp. v. Allapattah 21 Servs., Inc., 545 U.S. 546, 553 (2005). But a plaintiff can’t destroy diversity by 22 fraudulently joining a “sham” defendant. McCabe v. Gen'l Foods Corp., 811 F.2d 23 1336, 1339 (9th Cir. 1987). The burden of overcoming both the “strong 24 presumption against removal jurisdiction” and the “general presumption against 25 fraudulent joinder” is a heavy one. Hunter v. Philip Morris USA, 582 F.3d 1039, 26 1046 (9th Cir. 2009). 27 The Court can find fraudulent joinder here only upon the removing party’s 1 claim” against the non-diverse defendant. Grancare, 889 F.3d at 548-49 (9th Cir. 2 2018).1 That impossibility must be “obvious according to the settled rules of the 3 state.” Id. at 549 (quoting McCabe, 811 F.2d at 1339 (9th Cir. 1987)). If the 4 removing party’s argument relies on ambiguous or unsettled questions of law, the 5 claim’s non-viability isn’t obvious, so any such questions must be resolved against 6 the removing party. See id.; see also Macey v. Allstate Property and Cas. Ins. Co., 7 220 F. Supp. 2d 1116, 1117-18 (N.D. Cal. Sept. 11, 2002) (citing Good v. 8 Prudential, 5 F. Supp. 2d 804, 807 (N.D. Cal. 1998)). 9 Demonstrating “no possibility that the plaintiff could demonstrate a viable 10 claim” is a higher bar than showing that the complaint fails to state a claim under 11 Fed. R. Civ. P. 12(b)(6). “Arguments [that] go to the sufficiency of the complaint 12 . . . do not establish fraudulent joinder.” Grancare, 889 F.3d at 549, 552. Nor does 13 the plaintiff need to respond to such arguments by proposing specific 14 amendments—the burden remains on the removing party to demonstrate that the 15 plaintiff couldn’t cure the deficiency by amendment. See id. at 550 (“[T]he district 16 court must consider . . . whether a deficiency in the complaint can possibly be 17 cured by granting the plaintiff leave to amend.”) (emphasis added), 552 (setting 18 aside arguments that plaintiff did not plead claims with sufficient particularity 19 because they “go to the sufficiency of the complaint, rather than to the possible 20 viability” of the claims); see also Padilla v. AT&T Corp., 697 F.Supp.2d 1156 (C.D. 21 Cal. 2009). 22 II. Application 23 Defendants, as the removing parties, bear the burden here. 24 They attack Carling’s joinder on three bases: 25 1) The Complaint’s factual allegations against Carling are vague, failing to 26

27 1 A defendant may be fraudulently joined if the jurisdictional facts alleged against 1 identify specific individuals and acts, (see Dkt. 16 at 14-19); 2 2) The torts underlying the conspiracy and aiding and abetting claims 3 against Carling aren’t viable, (see id. at 25-29); and 4 3) Carling couldn’t have conspired with or aided and abetted the other 5 Defendants, because: 6 a) Carling is a subsidiary of one of the Defendants that allegedly 7 committed the fraud; and 8 b) Carling was under Plaintiffs’ control at the time Plaintiffs relied on 9 the alleged misrepresentations. (See id. at 19-24.) 10 Allegations that would fail to state a claim only because they aren’t 11 sufficiently specific can be addressed by amendment, so the first of these three 12 arguments can’t establish the impossibility of a viable claim against Carling. See 13 Grancare, 889 F.3d at 552; see also United States v. Corinthian Colleges, 655 14 F.3d 984, 995 (2011) (amendment should be permitted where pleading’s vague 15 allegations could support a claim if made more specific). 16 Because Plaintiffs need only one potentially viable claim against Carling, the 17 Court analyzes the claim for conspiracy to commit fraud. Neither of Defendants’ 18 remaining two arguments establish the non-viability of that claim, so Carling is a 19 properly joined defendant whose California citizenship destroys diversity. The 20 Court lacks jurisdiction, so it must remand the case to state court. 21 A. The existence of a contract doesn’t obviously bar a claim for fraud 22 under California law. 23 A claim for conspiracy to commit fraud requires, first, an underlying fraud, 24 and second, a conspiracy. Defendants argue that a breach of duties memorialized 25 in contract can’t constitute fraud. They acknowledge an exception, though: 26 Conduct that breaches the contract but “is also a [breach] of a legal duty” can 27 establish a fraud claim. Id. (quoting Applied Equipment Corp. v. Litton Saudi 1 exception doesn’t apply here, so the contract doesn’t obviously bar Plaintiffs’ fraud 2 claim against Carling. 3 California law requires a contracting party to refrain from misrepresenting, 4 at the time the contract is formed, its intention to perform the duties imposed by 5 that contract. Cal. Civ. Code § 1572(4) (imposing statutory duty on contracting 6 parties to refrain from making “promise without any intention of performing it”). 7 This duty is statutory and independent of the contract, so it can support a claim 8 for fraud despite the general rule that conduct that breaches a contract can’t 9 constitute fraud. See, e.g., Lazar v. Sup. Ct., 12 Cal. 4th 631, 638-39 (1996) 10 (intentional misrepresentations can establish claim for fraud regardless of whether 11 those misrepresentations are part of contract). 12 Plaintiffs allege that Defendants breached this duty by promising not to “take 13 any actions in bad faith for the purpose of avoiding or reducing the [revenue- 14 based] Earn-Out Payment” while intending to do just that. (See Dkt. 1-3 ¶¶ 82, 15 41-42, 47-70, 107.) Regardless of whether these allegations suffice to meet the 16 applicable pleading standard, Plaintiffs allege that Defendants breached a legal 17 duty independent of the parties’ contract. Defendants fail to show that a fraud 18 claim based on such a breach is obviously barred by California law. 19 B. Plaintiffs have a potentially viable claim that Carling joined a 20 conspiracy to commit fraud. 21 Even if Plaintiffs’ fraud claims are viable, Defendants argue, Carling can’t 22 be liable for conspiracy to commit fraud. First, they contend that a subsidiary can’t 23 be liable for conspiring with its parent. Second, they assert that an entity that 24 Plaintiffs controlled at the time of alleged misrepresentations couldn’t have joined 25 a conspiracy to engage in the fraud based on those misrepresentations. These 26 conclusions aren’t obvious under settled California law. 27 / / / 1 a. California law doesn’t obviously foreclose liability for a parent- 2 subsidiary conspiracy. 3 Defendants argue that Carling can’t conspire with the Fishawack entities as 4 a matter of law, but they don’t offer any direct authority for this proposition. 5 Instead, they resort to analogy, first between the parent-subsidiary relationship 6 and a corporate principal’s relationship with his agents, and second between civil 7 conspiracy and antitrust conspiracy. Neither analogy is apt. 8 In California, as “agents and employees of a corporation cannot conspire 9 with their corporate principal or employer where they act in their official capacities 10 on behalf of the corporation and not as individuals for their individual advantage.” 11 Black v. Bank of America, 30 Cal. App. 4th 1, 2 (1994). Courts’ refusal to permit 12 the corporate principal’s relationship with its employees rests on two propositions. 13 First, conspiracy takes two: a person can’t conspire with himself. Id. at 6. And 14 second, “a corporation is . . . a legal fiction that cannot act at all except through 15 its employees and agents.” Id. The corporation and its employee together make 16 one, then, not enough to form a conspiracy. Id. 17 Parents and their subsidiaries, on the other hand, are separate entities 18 absent an abuse of the corporate form. See Turman v. Superior Court of Orange 19 County, 17 Cal, App. 5th, 969, 981 (2017); see also United States v. Bestfoods, 20 524 U.S. 51, 61 (1998) (“It is a general principle of corporate law deeply ‘ingrained 21 in our economic and legal systems’ that a parent corporation . . . is not liable for 22 the acts of its subsidiaries”). The rule that a conspiracy requires two conspirators 23 can’t establish that a presumptively separate parent and subsidiary are incapable 24 of conspiracy. 25 Defendants’ appeal to antitrust law, specifically Copperweld Corp. v. Indep. 26 Tube Corp., 467 U.S. 752 (1984), is similarly misguided. Divorced from its context, 27 the Copperweld Court’s statement that a parent company “and its wholly owned 1 their position. Id. at 777. But the Court in the same sentence limited that rule’s 2 application to claims for antitrust conspiracy under § 1 of the Sherman Act, a 3 statute that forbids agreements “in restraint of trade.” Id. (“[The defendant] and its 4 wholly owned subsidiary . . . are incapable of conspiring with each other for 5 purposes of § 1 of the Sherman Act.”); see also id. at 771 (parents and 6 subsidiaries “must be viewed as . . . a single enterprise for purposes of § 1 of the 7 Sherman Act”); 15 U.S.C. § 1. No California court appears to have applied 8 Copperweld outside the antitrust context, and other courts have declined the 9 invitation to do so. See, e.g., Shared Communications Svcs. of 1800-80 KFL 10 Blvd., Inc. v. Bell Atlantic Props. Inc., 692 A.2d 570, 572-74 (Pa. 1997) (declining 11 to extend Copperweld to cover civil conspiracy between parent and subsidiary 12 under Pennsylvania law); Borden, Inc. v. Spoor Behrins Campbell & Young, Inc., 13 828 F. Supp. 216, 223-24 (S.D.N.Y. 1993) (Copperweld doesn’t apply to non- 14 antitrust conspiracies under federal or New York law). 15 Neither Copperweld nor agency law make it obvious as a matter of settled 16 California law that a subsidiary can’t be liable for conspiring in its parent’s tort, so 17 neither justifies a conclusion that Plaintiffs fraudulently joined Carling via a non- 18 viable conspiracy claim. 19 b. California law may permit claims for conspiracy against parties who 20 joined a fraud after a plaintiff relied on a misrepresentation but 21 before it suffered harm. 22 Defendants next argue that Carling couldn’t have conspired in fraud 23 because the alleged fraudulent misrepresentations and Plaintiffs’ reliance on them 24 occurred while Plaintiffs themselves controlled Carling. The crux of the argument 25 is that a party can’t join a completed fraud, and Carling couldn’t have joined a 26 conspiracy against Plaintiffs while Plaintiffs controlled Carling. But neither the 27 fraud nor the conspiracy was “complete with the sale of Carling” or at the time of 1 Conspiracy liability lies for “acts in furtherance of the [conspirators’] common 2 design.” Doctors’ Co. v. Superior Court, 49 Cal.3d 39, 44 (1989). A conspiracy is 3 complete, and thus closed to new conspirators, “when [that] common design . . . 4 is fully accomplished,” timing which “depends on the facts and circumstances of 5 each case, and on the nature and purpose of the conspiracy.” de Vries v. 6 Brumback, 53 Cal.2d 643, 647 (1960). Defendants’ alleged common design here 7 wasn’t simply to induce the sale of Carling, but to secure an artificially low price 8 by reducing the Earn-out Payment. That payment was based on Carling’s 9 revenues over the post-sale Calculation Period, revenues that Carling allegedly 10 reduced in furtherance of the scheme. The common design wasn’t complete until 11 the Earn-out Payment was reduced, and the Earn-out Payment wasn’t reduced 12 until Carling acted. 13 Discar’s position as Carling’s president for a period post-closing doesn’t 14 mean that Carling’s actions were attributable to her. Plaintiffs allege that Discar 15 departed involuntarily in February 2018, before the Calculation Period began and 16 before several Carling acts that allegedly reduced its revenue. (See Dkt. 1-3 17 ¶¶ 66-73, 75.) Moreover, Plaintiffs allege that Defendants undermined Discar’s 18 ability to steer Carling prior to placing her on leave. (See id. ¶¶ 49-54.) Defendants 19 don’t provide any basis in California law for attributing Carling’s acts to Discar 20 under these circumstances. 21 Defendants fail to demonstrate either that Carling is incapable of conspiring 22 with its parent or that Carling’s alleged acts came after the conspiracy’s common 23 design was fully accomplished. Plaintiffs’ claim against Carling for conspiracy to 24 commit promissory fraud isn’t obviously foreclosed by settled California law. 25 CONCLUSION 26 The Court can assert jurisdiction over this case only if Defendants show that 27 there is no possibility that Plaintiffs could demonstrate a viable claim against the 1 ||jurisdiction is lacking. The Motion for Remand, (Dkt. 12), is GRANTED and the 2 matter is REMANDED to the Superior Court of the State of California, County of 3 Diego. 4 The pending motions to dismiss, (Dkt. 5 and 6), are DENIED WITHOUT 5 |{PREJUDICE for lack of jurisdiction. The Clerk is directed to close the docket. 6 7 IT IS SO ORDERED. 8 9 || Dated: January 29, 2021 l, wut A: ‘gy 10 Hon. of A ZW 11 United States District Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28