Logtale, Ltd. v. Canton

• Court: District Court, N.D. California
• Decided: May 13, 2021
• Docket: 4:20-cv-01207
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 LOGTALE, LTD., Case No. 20-cv-01207-DMR

8 Plaintiff, ORDER ON DEFENDANT INSTITUTE 9 v. FOR GLOBAL FUTURE’S MOTION TO DISMISS 10 JAMES CANTON, et al., Re: Dkt. No. 62 11 Defendants.

12 On February 18, 2020, Plaintiff Logtale, Ltd. (“Logtale”) filed this action against James 13 Canton, Gayle Canton, and the Institute for Global Futures (“IGF”). [Docket No. 1.] On October 14 1, 2020, the court granted IGF’s first motion to dismiss. [Docket No. 56.] Logtale filed an amended 15 complaint on October 30, 2020. [Docket No. 58 (“FAC”).] IGF now moves to dismiss the FAC. 16 [Docket Nos. 62 (“Mot.”), 69 (“Reply”).] Logtale opposes. [Docket No. 67 (“Opp.”).] The court 17 held a hearing on January 14, 2021. In addition to pursuing an alter ego theory of liability against 18 IGF, Logtale also asserts that IGF is directly liable to Logtale through the actions of its agent, James 19 Canton. Following the hearing, the court ordered supplemental briefing on the issue of whether 20 Logtale adequately alleged a theory of direct liability against IGF. [Docket No. 71.] The parties 21 filed supplemental briefing consistent with the court’s order. [Docket Nos. 72 (“Def. Supp. Br.”), 22 73 (“Pltf. Supp. Br.”), 74 (“Def. Supp. Reply”).] For the reasons stated below, IGF’s motion is granted in part and denied in part. 23 I. BACKGROUND 24 The primary allegations in this case are outlined in the court’s order denying Gayle Canton’s 25 motion to dismiss and are not repeated in full here. See Docket No. 43. In brief, Logtale obtained 26 a $2,083,334 judgment against James Canton in a breach of contract action. FAC ¶ 2; see Logtale, 27 1 months after the court in the Underlying Action entered the judgment, James and Gayle Canton 2 began divorce proceedings. Id. As part of the divorce case, they executed a Marital Settlement 3 Agreement (“MSA”) that divided their assets and debts. FAC, Ex. B. Logtale alleges that the MSA 4 “purposefully awarded James Canton only minimal assets . . . with the intent and purpose to shield 5 the vast bulk of the Cantons’ assets from payment of the judgment owed to Logtale in the Underlying 6 Action.” FAC ¶ 30. According to Logtale, the MSA constituted a fraudulent transfer with the intent 7 to deprive Logtale of the money James Canton owes on the judgment. 8 The FAC adds more allegations specific to IGF, which Logtale alleges is a “necessary, 9 willing, and active participant” in the Cantons’ fraudulent scheme. FAC ¶¶ 7, 37. James Canton 10 owns IGF and serves as its Chief Executive Officer, Secretary, Director, President, and Treasurer. Id. ¶¶ 7, 16-17. He also determines “how IGF operates,” including who it employs and how much 11 it pays those employees. Id. ¶ 7. According to Logtale, IGF is “knowingly employing Gayle Canton 12 and paying her wages specifically and intentionally to enable the defendants to evade the judgment 13 pending against James Canton.” Id. ¶ 7. James Canton testified in the Underlying Action that, 14 although Gayle Canton had worked for IGF before their divorce, she “only started drawing a salary 15 from the company after the divorce.” Id. ¶ 37. Allegedly, Gayle Canton’s work for IGF does not 16 warrant the compensation she receives and IGF pays her wages so that those funds cannot be used 17 to satisfy the judgment against James Canton. Id. ¶¶ 7, 9, 37. As part of its claim for relief against 18 IGF, Logtale asks the court to void the spousal support1 and wage payments that IGF has paid to 19 Gayle Canton. Id. ¶ 39. 20 Against all Defendants, Logtale brings claims for intentional and constructive fraudulent 21 transfer under California’s Uniform Voidable Transactions Act (“UVTA”),2 Cal. Civil Code § 3439 22 et seq., common law fraudulent conveyance, and conspiracy. Logtale also brings a restitution claim 23 against James and Gayle Canton. 24 Jurisdiction is based on diversity. 25 26 27 1 The FAC alleges that James Canton voluntarily agreed to an “exorbitant” monthly spousal support to Gayle Canton and that these payments come from the wages he receives from IGF. FAC ¶ 5. 1 II. LEGAL STANDARDS FOR RULE 12(B)(6) MOTIONS 2 A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in 3 the complaint. See Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). When 4 reviewing a motion to dismiss for failure to state a claim, the court must “accept as true all of the 5 factual allegations contained in the complaint,” Erickson v. Pardus, 551 U.S. 89, 94 (2007) (per 6 curiam) (citation omitted), and may dismiss a claim “only where there is no cognizable legal theory” 7 or there is an absence of “sufficient factual matter to state a facially plausible claim to relief.” 8 Shroyer v. New Cingular Wireless Servs., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010) (citing Ashcroft 9 v. Iqbal, 556 U.S. 662, 677-78 (2009); Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)) 10 (quotation marks omitted). A claim has facial plausibility when a plaintiff “pleads factual content 11 that allows the court to draw the reasonable inference that the defendant is liable for the misconduct 12 alleged.” Iqbal, 556 U.S. at 678 (citation omitted). In other words, the facts alleged must 13 demonstrate “more than labels and conclusions, and a formulaic recitation of the elements of a cause 14 of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 554, 555 (2007) (citing Papasan v. 15 Allain, 478 U.S. 265, 286 (1986)); see Lee v. City of L.A., 250 F.3d 668, 679 (9th Cir. 2001), 16 overruled on other grounds by Galbraith v. Cty. of Santa Clara, 307 F.3d 1119 (9th Cir. 2002). 17 As a general rule, a court may not consider “any material beyond the pleadings” when ruling 18 on a Rule 12(b)(6) motion. Lee, 250 F.3d at 688 (citation and quotation marks omitted). However, 19 “a court may take judicial notice of ‘matters of public record,’” id. at 689 (citing Mack v. S. Bay 20 Beer Distrib., 798 F.2d 1279, 1282 (9th Cir. 1986)), and may also consider “documents whose 21 contents are alleged in a complaint and whose authenticity no party questions, but which are not 22 physically attached to the pleading,” without converting a motion to dismiss under Rule 12(b)(6) 23 into a motion for summary judgment. Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994), overruled 24 on other grounds by Galbraith, 307 F.3d at 1125-26. The court need not accept as true allegations 25 that contradict facts which may be judicially noticed. See Mullis v. U.S. Bankr. Court, 828 F.2d 26 1385, 1388 (9th Cir. 1987). 27 III. DISCUSSION 1 pleaded.3 All of Logtale’s claims against IGF arise out of its allegations against James Canton. 2 Accordingly, whether the claims are adequately pleaded against IGF depends on whether Logtale 3 has articulated a viable theory of how IGF is liable for James Canton’s actions. In the hearing on 4 IGF’s first motion to dismiss, Logtale clarified that its claims against IGF are based on both an alter 5 ego and a direct theory of liability. Accordingly, the court will evaluate the claims under both 6 theories. 7 A. Alter Ego Theory 8 District courts look to state law to evaluate alter ego claims. Hambleton Bros. Lumber Co. 9 v. Balkin Enterprises, Inc., 397 F.3d 1217, 1227 (9th Cir. 2005). “Ordinarily, a corporation is 10 regarded as a legal entity, separate and distinct from its stockholders, officers and directors, with separate and distinct liabilities and obligations.” Sonora Diamond Corp. v. Superior Court, 83 Cal. 11 App. 4th 523, 538 (2000). However, “when the corporate form is used to perpetrate a fraud, 12 circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts will 13 ignore the corporate entity and deem the corporation’s acts to be those of the persons or 14 organizations actually controlling the corporation.” Id. Alter ego liability works in both directions, 15 such that “the corporation and the person who dominates it are treated as one person, so that any act 16 committed by one is attributed to both, and if either is bound, by contract, judgment, or otherwise, 17 both are equally bound.” Grayson Serv., Inc. v. Crimson Res. Mgmt. Corp., 2015 WL 6689261, at 18 *7 (E.D. Cal. Oct. 28, 2015) (quotation marks and citation omitted). 19 To invoke the alter ego doctrine, a plaintiff must allege: “(1) that there is such a unity of 20 interest and ownership that the separate personalities of the two [entities] no longer exist; and (2) 21 that if the acts are treated as those of only one of the [entities], an inequitable result will follow.” 22 Walsh v. Kindred Healthcare, 798 F. Supp. 2d 1073, 1082 (N.D. Cal. 2011). The conditions under 23 24 25 3 IGF also argues that, under the principle of collateral estoppel, Logtale is barred from arguing that the parties’ spousal support order was obtained through fraud. Mot. at 2-3. IGF did not brief the 26 legal standards for a finding of collateral estoppel. Further, “[t]he availability of collateral estoppel is a mixed question of law and fact,” which makes it unsuitable for determination without a factual 27 record. See Eilrich v. Remas, 839 F.2d 630, 632 (9th Cir. 1988). Accordingly, IGF’s motion to dismiss is denied on this point without prejudice to raising the argument at a later stage. As 1 which the doctrine may be applied “necessarily vary according to the circumstances in each case 2 inasmuch as the doctrine is essentially an equitable one and for that reason is particularly within the 3 province of the trial court.” Associated Vendors, Inc. v. Oakland Meat Co., 210 Cal. App. 2d 825, 4 837 (Ct. App. 1962). Courts have examined a host of non-exclusive factors in deciding whether to 5 apply the doctrine, including “commingling of funds and other assets, failure to segregate funds of 6 the separate entities, and the unauthorized diversion of corporate funds or assets to other than 7 corporate uses,” “the treatment by an individual of the assets of the corporation as his own,” “the 8 holding out by an individual that he is personally liable for the debts of the corporation,” “the failure 9 to adequately capitalize a corporation; the total absence of corporate assets, and 10 undercapitalization,” “the disregard of legal formalities and the failure to maintain arm’s length relationships among related entities,” “the diversion of assets from a corporation by or to a 11 stockholder or other person or entity, to the detriment of creditors, or the manipulation of assets and 12 liabilities between entities so as to concentrate the assets in one and the liabilities in another,” and 13 “the formation and use of a corporation to transfer to it the existing liability of another person or 14 entity,” among others. Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft, 69 Cal. App. 4th 15 223, 249–50 (1999). Because the alter ego doctrine is “founded on equitable principles,” its 16 application is “not made to depend upon prior decisions involving factual situations which appear 17 to be similar.” Vista v. USPlabs, LLC, No. 14-cv-00378-BLF, 2014 WL 5507648, at *2 (N.D. Cal. 18 Oct. 30, 2014) (quoting Toho-Towa Co. v. Morgan Creek Prods., Inc., 217 Cal. App. 4th 1096, 1108 19 (2013)). Instead, “the conditions under which the corporate entity may be disregarded, or the 20 corporation be regarded as the alter ego of the stockholders, necessarily vary according to the 21 circumstances in each case . . . .” Morrison Knudsen Corp., 69 Cal. App. 4th at 250 (cleaned up). 22 In the hearing on IGF’s first motion, the court found that the initial complaint did not 23 adequately plead an alter ego theory because it relied solely on James Canton’s status as the owner 24 and controlling member of IGF, which is insufficient to apply the alter ego doctrine. See Katzir’s 25 Floor & Home Design, Inc. v. M-MLS.com, 394 F.3d 1143, 1149 (9th Cir. 2004) (“The mere fact of 26 sole ownership and control does not eviscerate the separate corporate identity that is the foundation 27 of corporate law.”). The FAC adds additional details about IGF. First, it alleges that James Canton 1 makes the hiring and salary determinations for the company. See FAC ¶ 7. Logtale further alleges 2 that James Canton works with IGF to set his own salary at an amount insufficient to satisfy the 3 judgment against him while at the same time paying Gayle Canton a salary to which she is not 4 entitled.4 Id. ¶¶ 8-9. Essentially, Logtale’s theory is that James Canton uses IGF to transfer his 5 assets to Gayle Canton in the form of wages. Because he allegedly has access to her assets, the 6 money that IGF pays to her also goes to him. This arrangement allows James Canton to use IGF as 7 the vehicle through which he can transfer his own assets back to himself and avoid subjecting those 8 funds to garnishment by Logtale. 9 Logtale’s allegations about the fraudulent payment scheme between IGF, James Canton, and 10 Gayle Canton are sufficient to plead an alter ego theory of liability. Taken as true, the allegations invoke some alter ego factors recognized by other courts, including diverting or manipulating assets 11 between himself and IGF to the detriment of a creditor and using IGF as a subterfuge of illegal 12 transactions. Morrison Knudsen Corp., 69 Cal. App. 4th at 249-50. Moreover, the allegation that 13 James Canton is using IGF to shield his assets from debtors is exactly the kind of inequity the alter 14 ego doctrine is intended to prevent. See Toho-Towa Co., 217 Cal. App. 4th at 1109 (finding an 15 inequitable result where a defendant shifted liability to its alter ego “after ensuring that [the alter 16 ego] would have no funds to pay its debts”); Pac. Mar. Freight, Inc. v. Foster, 2010 WL 3339432, 17 at *7 (S.D. Cal. Aug. 24, 2010) (“Inequitable results flowing from the recognition of the corporate 18 form include the frustration of a meritorious claim, perpetuation of a fraud, and the fraudulent 19 avoidance of personal liability.”). 20 Application of the alter ego doctrine is primarily a question of fact and whether or not 21 Logtale’s claims against IGF are meritorious remain to be seen. See Toho-Towa Co., Ltd., 217 Cal. 22 App. at 1108. However, at the pleadings stage, the allegations in the FAC are sufficient to state a 23

24 4 As part of the first motion to dismiss, Logtale argued that IGF’s wrongdoing is also evidenced by 25 James Canton’s spousal support obligation, which is paid by IGF from his wages. See Docket No. 51 at 7. In the hearing on the motion, the court noted that IGF is legally obligated to deduct the 26 spousal support amount from James Canton’s wages, pursuant to an Earnings Assignment Order entered by the state court judge in the Cantons’ divorce case. See Docket No. 67-1, Logtale’s 27 Request for Judicial Notice, Ex. 1, Attachment B. Barring further development or explanation of this theory, the court does not see how IGF could legally refuse to make the payments, even if the 1 claim against IGF as an alter ego of James Canton. 2 B. Direct Liability 3 Under the UVTA, “a transfer is fraudulent, both as to present and future creditors, if it is 4 made ‘[w]ith actual intent to hinder, delay, or defraud any creditor of the debtor.’” Mejia v. Reed, 5 31 Cal. 4th 657, 664 (2003) (quoting Cal. Civ. Code § 3439.04(a)). “Fraudulent intent may be 6 proven on the basis of circumstantial evidence,” considering any or all of the eleven factors listed 7 in Cal. Civ. Code § 3439.04(b).5 Kelleher v. Kelleher, Case No. 13-cv-05450-MEJ, 2014 WL 8 1117805, at *4 (N.D. Cal. Mar. 19, 2014). 9 Logtale alleges that IGF is a “necessary, willing, and active participant” in the Canton’s 10 fraudulent scheme to shield assets from Logtale. FAC ¶ 7. Logtale points out that James Canton makes the hiring and salary decisions for IGF. Id. ¶ 7. According to Logtale, IGF (through its 11 controlling agent James Canton) pays Gayle Canton wages that it knows she has not actually earned. 12 Id. ¶ 9. At the same time, James Canton allegedly worked with IGF to set his own salary at an 13 amount insufficient to satisfy Logtale’s judgment. Id. ¶ 8. As explained above, IGF’s employment 14 of Gayle Canton is allegedly a sham intended to fraudulently transfer James Canton’s assets to Gayle 15 Canton. See id. ¶¶ 7, 9, 37. Since James Canton allegedly has access to those funds after they are 16 17 18 5 The eleven factors include:

(1) Whether the transfer or obligation was to an insider. 19 (2) Whether the debtor retained possession or control of the property transferred after the 20 transfer. (3) Whether the transfer or obligation was disclosed or concealed. 21 (4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit. 22 (5) Whether the transfer was of substantially all the debtor’s assets. (6) Whether the debtor absconded. 23 (7) Whether the debtor removed or concealed assets. (8) Whether the value of the consideration received by the debtor was reasonably 24 equivalent to the value of the asset transferred or the amount of the obligation incurred. (9) Whether the debtor was insolvent or became insolvent shortly after the transfer was 25 made or the obligation was incurred. (10) Whether the transfer occurred shortly before or shortly after a substantial debt was 26 incurred. (11) Whether the debtor transferred the essential assets of the business to a lienor that 27 transferred the assets to an insider of the debtor. 1 transferred, this scheme would permit him to retain assets without subjecting them to garnishment 2 by Logtale. 3 “A corporation can act only through its agents.” United States v. Trans Cont’l Affiliates, No. 4 C-95-1627-JLQ, 1997 WL 26297, at *5 (N.D. Cal. Jan. 8, 1997). Thus, any theory of direct liability 5 against IGF necessarily must involve an agency relationship. At the hearing, the court noted that 6 neither party briefed the issue of agency.6 It accordingly ordered the parties to file supplemental 7 briefing regarding IGF’s liability for the actions of its agent James Canton. See Docket No. 71 8 (“IGF shall explain how Plaintiff’s amended complaint is not sufficient to allege direct liability 9 against IGF under the theory that IGF was acting through its agent and/or officer James Canton.”). 10 In its supplemental brief, IGF argues that corporations are only liable for the tortious acts of its employees and/or agents when those actions were taken within the “scope and course” of the 11 agency relationship. Def. Supp. Br. at 2. According to IGF, there must be a “causal nexus” between 12 the alleged wrongdoing and the agent’s corporate duties. Id. It asserts that Logtale has not 13 sufficiently alleged the existence of such a nexus because the nature of IGF’s business as a “think 14 tank that offers business strategy and forecasts about leading-edge innovations and trends” has 15 nothing to do with the alleged fraudulent transfer of money between James and Gayle Canton. See 16 id. at 2-3. Logtale responds that IGF inappropriately focuses on its business purpose when the issue 17 is instead whether James Canton had apparent authority to act on behalf of IGF in committing the 18 alleged wrongdoing. Pltf. Supp. Br. at 4. Logtale argues that James Canton’s fraudulent 19 manipulation of his own salary and Gayle Canton’s salary must be imputed to IGF because James 20 Canton directed those payments within his authority as IGF’s sole officer and director. Id. at 3. 21 The Third Restatement of Agency distinguishes between a principal’s direct and vicarious 22 liability.7 See Rest. 3d Agency § 7.03. A principal is directly liable to a third party harmed by its 23

24 6 Logtale asserts that the court’s concern was whether corporations can be held liable for fraud. Pltf. 25 Supp. Br. at 1. This is patently incorrect. The issue is not whether a corporation can be liable for fraud in general but rather whether Logtale has sufficiently alleged that IGF is liable for fraud 26 through an agency relationship.

27 7 Vicarious liability may apply to a principal when its agent is “an employee who commits a tort while acting within the scope of employment; or . . . commits a tort when acting with apparent 1 agent’s conduct when the agent “acts with actual authority or the principal ratifies the agent’s 2 conduct.” Id. § 7.03. An agent acts with actual authority when he “reasonably believes, in 3 accordance with manifestations of the principal, that the principal wishes the agent so to act.” Id. § 4 7.04. In this case, the FAC alleges that “James Canton and IGF intentionally have paid and continue 5 to pay Gayle Canton a salary that she would not otherwise be paid and to which she is not entitled 6 for the sole purpose of moving those funds so they cannot be used to satisfy the judgment awarded 7 to Logtale.” FAC ¶ 9. Logtale also alleges that James Canton deliberately set his own salary at an 8 amount insufficient to satisfy the judgment. Id. ¶ 8. Absent from the FAC, however, are any 9 allegations about whether James Canton reasonably believed that IGF wanted him to manipulate his 10 and Gayle Canton’s salary. There are also no allegations that IGF ratified James Canton’s conduct. Thus, while Logtale’s allegations are consistent with James Canton using IGF to forward his own 11 fraudulent ends, they do not explain how IGF acted fraudulently through James Canton as its agent. 12 Logtale therefore has not sufficiently alleged that IGF is directly liable for the harm it suffered as a 13 result of James Canton’s conduct. 14 None of the cases cited by Logtale support its position. In Abdo v. Fitzsimmons, the court 15 determined that the plaintiff adequately alleged that the agent acted “within the scope of his 16 employment and in furtherance of [the principal’s] interests.” No. 17-cv-00851-EDL, 2018 WL 17 11220494, at *21 (N.D. Cal. May 22, 2018). As explained above, the FAC does not suggest that 18 James Canton’s alleged fraud in any way furthered IGF’s interests. Logtale also cites In re 19 McKesson HBOC, Inc. Sec. Litig. for the proposition that a corporation “is vicariously liable for the 20 fraud of its own officers.” See 126 F. Supp. 2d 1248, 1277 (N.D. Cal. 2000). However, that case 21 involved a corporate officer who allegedly made false representations about the company’s 22 revenues. See id. The alleged wrongdoing in that case was closely connected with the company’s 23 interests; here, by contrast, Logtale does not explain why James Canton’s alleged fraud in the 24 context of his divorce benefits or concerns IGF at all. 25

26 and “apparent authority.” See Def. Supp. Br. at 1-2; Pltf. Supp. Br. at 3. However, Logtale has 27 never asserted a theory of vicarious liability against IGF. Given that there have now been three rounds of briefing on IGF’s potential liability, the court declines to consider whether there is a viable 1 As Logtale points out, a corporation may sometimes be liable for actions that its agent took 2 solely for personal reasons and against the interests of the company. Pltf. Supp. Br. at 4. In general, 3 “a rogue agent’s actions or knowledge are not imputed to the principal if the agent acts adversely to 4 the principal in a transaction or matter, intending to act solely for the agent’s own purposes or those 5 of another person.” See In re ChinaCast Educ. Corp. Sec. Litig., 809 F.3d 471, 476 (9th Cir. 2015) 6 (cleaned up). However, an exception to the so-called “adverse interests” rule holds that a principal 7 may be liable for a faithless agent’s conduct when an innocent third party relies on representations 8 that the agent made with apparent authority. Id. at 476-77. This exception does not appear to apply 9 in this case. Logtale does not identify any representations by James Canton that it relied on; indeed, 10 it is unclear how the exception would apply in a case like the present one that alleges fraudulent conveyance rather than fraudulent misrepresentation. 11 In sum, the FAC at most suggests that James Canton used IGF to complete fraudulent 12 transfers to Gayle Canton to forward his own personal interests. There are no non-conclusory 13 allegations that James Canton acted with actual authority as the agent of IGF when he engaged in 14 the allegedly fraudulent conduct. Accordingly, Logtale’s allegations are not sufficient to plead that 15 IGF is liable under a direct theory of liability. However, it is not clear that amendment on this issue 16 would be futile. For example, Logtale may be able to add non-conclusory allegations that IGF 17 ratified the conduct of its agent, James Canton. Accordingly, the court will allow Logtale one final 18 opportunity to allege a direct theory of liability against IGF. 19 IV. CONCLUSION 20 For the reasons stated above, IGF’s motion is granted in part and denied in part. The motion 21 is granted insofar as it alleges claims against IGF under a direct theory of liability. It is denied 22 insofar as IGF’s liability relies on an alter ego determination. Logtale is granted leave to amend the 23 complaint to add allegations supporting a direct theory of liability against IGF. Any amended 24 complaint shall be filed no later than June 3, 2021. Logtale must plead its best case. 25

27 As saat net, A” aD £0 Oy x0) &) □□□ &y DY □□ 1 IT IS SO ORDERED. =F 1s sO ORDERE 2 || Dated: May 13, 2021 < 3 7: < a \ creme 4 JUS ee □□□ cn pastes Magistrate Judg □□ 5 Lay oS 6 DIsTRICS 7 8 9 10 11 12

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