Ludlow v. Flowers Foods, Inc.

• Court: District Court, S.D. California
• Decided: September 29, 2021
• Docket: 3:18-cv-01190-JO-JLB
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 DANIEL LUDLOW, individually and on Case No.: 18-CV-1190 TWR (JLB) behalf of others similarly situated; and 12 WILLIAM LANCASTER, individually ORDER GRANTING DEFENDANTS’ 13 and on behalf of others similarly situated, MOTION FOR JUDGMENT ON THE PLEADINGS 14 Plaintiffs,

15 v. (ECF No. 200) 16 FLOWERS FOODS, INC., a Georgia corporation; FLOWERS BAKERIES, 17 LLC, a Georgie limited liability company; 18 and FLOWERS FINANCE, LLC, a limited liability company, 19 Defendants. 20 21 AND ALL CONSOLIDATED CASES 22

23 Presently before the Court is the Motion for Judgment on the Pleadings filed by 24 Defendants Flowers Foods, Inc. (“Flowers Foods”); Flowers Bakeries, LLC (“Flowers 25 Bakeries”) (together with Flowers Foods, “Flowers”); and Flowers Finance, LLC 26 (“FloFin”) (“Mot.,” ECF No. 200), as well as Plaintiffs Daniel Ludlow and William 27 Lancaster’s Response in Opposition to (“Opp’n,” ECF No. 207) and Defendants’ Reply in 28 Support of (“Reply,” ECF No. 210) the Motion. The Court took the Motion under 1 submission on the papers without oral argument pursuant to Civil Local Rule 7.1(d)(1). 2 Having carefully considered the Pleadings (ECF No. 56 (“FAC”), ECF No. 59 (“Ans.”)), 3 those documents properly incorporated by reference, the Parties’ arguments, and the law, 4 the Court GRANTS Defendants’ Motion and DISMISSES WITHOUT PREJUDICE 5 Plaintiffs’ third cause of action and Mr. Lancaster’s eighth and ninth causes of action. 6 BACKGROUND 7 I. Factual Allegations1 8 A. The Parties 9 Flowers Foods is a Georgia corporation with its principal place of business in 10 Thomasville, Georgia. (See FAC ¶ 16.) It is a leading, national manufacturer and seller of 11 bakery goods, (see id.), including well-known brand names such as “Wonder Bread,” 12 “Nature’s Own,” and “Dave’s Killer Bread.” (See id. ¶ 21.) Flowers Foods does business 13 in the County of San Diego through layers of national and regional subsidiaries, (see id. 14 ¶ 16), such as Flowers Baking Co. of California and Flowers Baking Co. of Modesto.2 (See 15 id. ¶ 18.) Each local subsidiary has branch and/or sales managers to manage relationships 16 with retail customers, carry out sales, and supervise Delivery Employees. (See id. ¶¶ 7, 17 34(g).) 18 Flowers Bakeries is a Georgia Limited Liability Corporation with its principal place 19 of business in Thomasville, Georgia. (See id. ¶ 17.) Flowers Bakeries is a wholly owned 20 subsidiary of Flowers Foods that handles sales-related activities, such as negotiating with 21 retailers on price, shelf space, and service requirements. (See id. ¶¶ 17–18.) 22 23 24 1 For purposes of Defendants’ Motion, the Court accepts as true Plaintiffs’ factual allegations. See, e.g., United States ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1053 (9th Cir. 2011) (“When 25 considering a Rule 12(c) dismissal, [the court] must accept the facts as pled by the nonmovant.”) (citing Jenkins v. McKeithen, 395 U.S. 411, 421 (1969); Fleming v. Pickard, 581 F.3d 922, 925 (9th Cir. 2009)). 26 2 Plaintiffs believe that Flowers Foods initially established a California-wide local subsidiary called 27 “Flowers Baking Co. of California,” which split into Flowers Baking Co. of Modesto (to cover Flowers’ 28 Northern California operations) and Flowers Baking Co. of Henderson (to cover Flowers’ Southern 1 FloFin is a Delaware Limited Liability Corporation with its principal place of 2 business in Thomasville, Georgia. (See id. ¶ 19.) Its sole member is Flowers Foods. (See 3 id.) FloFin finances purchases of delivery routes by Delivery Employees at an interest rate 4 of approximately twelve per cent. (See id.) 5 Beginning in 2013, Plaintiffs worked as Delivery Employees for Flowers in the 6 County of San Diego. (See id. ¶¶ 14–15.) Flowers classifies its Delivery Employees as 7 independent contractors. (See id. ¶ 23.) 8 B. Flowers’ Fraudulent Representations 9 Flowers is a leading manufacturer and seller of bakery goods to retailers throughout 10 the United States, boasting gross profits of $1.9 billion in 2017. (See FAC ¶¶ 2, 16.) To 11 distribute its baked goods, Flowers has both a direct-to-store (“DSD”) delivery segment 12 and a warehouse delivery segment. (See id. ¶ 21.) To power the DSD segment, Flowers 13 Foods’ wholly owned subsidiaries enter into distributor agreements (“DAs”) with Delivery 14 Employees, such as Plaintiffs, to deliver bakery products along particular routes from 15 Flowers’ warehouses to retail locations. (See id. ¶¶ 10, 22.) 16 Flowers advertises these delivery routes to Delivery Employees as “independent 17 business opportunities,” with the Delivery Employees purchasing products from Flowers 18 to resell to retailers at a profit. (See id. ¶¶ 2, 23.) Delivery Employees may pay upwards 19 of $100,000 for the rights to a specific delivery route, which dictates set brands to be sold 20 to Flowers’ retail customers in the area. (See id. ¶¶ 2, 5–6, 34(c).) If Flowers subsequently 21 makes changes to a route, however, it does not revalue the route or re-evaluate the money 22 that a Delivery Employee owes for that route, even if the value of the route is drastically 23 reduced. (See id. ¶¶ 6, 34(e)–(f).) 24 To become a Delivery Employee, a prospective distributor must sign Flowers’ DA, 25 (see id. ¶ 24), which has no set end date. (See id. ¶ 34(k).) Flowers requires its Delivery 26 Employees to incorporate before entering into DAs with local Flowers business entities, 27 (see id. ¶ 34(a)), although each Delivery Employee must personally guarantee his or her 28 contract. (See id. ¶ 34(b).) Both Flowers’ disclosure documents and the DA represent to 1 prospective Delivery Employees that: (1) Flowers will sell its bakery products to the 2 Delivery Employee, (2) the Delivery Employee will take title to the bakery products, and 3 (3) the Delivery Employee will resell the bakery products to retailers at a profit. (See id. 4 ¶¶ 23–26; see also id. ¶ 2.) Under this model, Flowers would make a profit when it sells 5 its products to the Delivery Employee, who in turn would make a profit when they sell 6 their products to the retailers. (See id. ¶ 26.) 7 Delivery Employees’ reality, however, differs greatly from Flowers’ 8 representations. (See id. ¶¶ 28–34; see also id. ¶ 3.) Rather than taking title to Flowers’ 9 products and reselling them to retailers, Delivery Employees merely deliver Flowers’ 10 products for a commission based on the wholesale price for sales that Flowers itself 11 negotiates, makes, and controls. (See id. ¶¶ 29–31; see also id. ¶ 4.) For example, Flowers 12 negotiates contracts with large retailers, such as Wal-Mart and Costco, at the national or 13 regional level, meaning that Delivery Employees do not have a contract with their local 14 Wal-Mart or have any control over the price that Wal-Mart agrees to pay Flowers. (See id. 15 ¶¶ 29–30; see also id. ¶¶ 34(d)–(e).) That title to Defendants’ products never actually 16 passes to Delivery Employees is reflected in Flowers’ accounting documents and filings 17 with the Securities and Exchange Commission, which reveal that Flowers recognizes 18 revenue for the retail sales price when its products are delivered to the retailer, not for the 19 “wholesale price” Flowers charges Delivery Employees at the time of the purported “sale” 20 to them. (See id. ¶¶ 31–33.) 21 Flowers exercises control over its Delivery Employees in a variety of ways. (See 22 generally id. ¶ 34.) For example, Flowers requires its Delivery Employees to maintain a 23 certain physical appearance for both themselves and their vehicles, (see id. ¶¶ 8, 34(i)), and 24 to abide by “Good Industry Standards,” as defined by Flowers. (See id. ¶¶ 9, 34(j).) Failure 25 to abide by these standards may result in Flowers sending a “breach notice” and risk 26 termination. (See id. ¶ 9.) Flowers also dictates when unsold bakery products must be 27 reclaimed from retail locations, which Delivery Employees—despite purportedly taking 28 title to these products—must then return to Flowers and, if above the “stales” threshold 1 established by Flowers, pay the retail price for. (See id. ¶¶ 5, 34(h).) Flowers sets 2 schedules for its Delivery Employees, indicating for them what tasks must be completed 3 on particular days. (See id. ¶ 34(l).) 4 Although Flowers and other companies routinely treat individuals performing the 5 same work as Flowers’ Delivery Employees as employees, (see id. ¶ 34(m)), Flowers 6 classifies its Delivery Employees as individual contractors to save money on wages and 7 employment taxes, among other benefits. (See id. ¶¶ 1, 11–12, 20, 25, 27–28, 33, 34(m).) 8 As a result of the misclassification of its employees as independent contractors, Flowers 9 does not reimburse its Delivery Employees for ordinary business expenses, such as 10 expenses related to the use of their personal vehicles, business licenses, insurance, or taxes. 11 (See id. ¶ 35.) Rather, Flowers charges its Delivery Employees recurring and non- 12 negotiable fees, such as warehouse, administrative, and/or technology fees. (See id. ¶ 36.) 13 In short, by misrepresenting the nature of their work, Flowers denies its Delivery 14 Employees access to critical benefits and protections to which they are entitled by law as 15 employees. (See id. ¶¶ 1, 12.) 16 C. Flowers’ Usurious Loan Practices 17 Because Delivery Employees must purchase the rights to specific routes from 18 Flowers, they may “finance” these purchases through Flowers Foods’ wholly owned 19 subsidiary, FloFin, pursuant to a purported promissory note. (See FAC ¶¶ 34(c), 39, 118.) 20 Over 85 percent of Delivery Employees nationally and in California use FloFin to finance 21 their route purchases, and FloFin currently has over $200,000,000 in notes receivable as 22 reflected in Flowers Foods’ financial statements. (See id. ¶ 118.) 23 FloFin, however, is merely a “shell” that has no assets or a bank account. (See id. 24 ¶ 119.) It has one employee, who is responsible for maintaining a spreadsheet or digital 25 accounting ledger. (See id.) Although the promissory notes indicate that FloFin will 26 “disburse” funds to Flowers’ regional subsidiaries, no such disbursement occurs. (See id. 27 ¶¶ 39–40, 120.) Rather, Flowers records the principal and interest due on the promissory 28 notes in its accounts receivable and recognizes the payments each week as payments are 1 collected by Flowers Bakeries. (See id. ¶ 120.) Ultimately, it is Flowers Foods that 2 receives these funds. (See id.) Consequently, Flowers Foods and Flowers Bakeries are 3 merely “alter egos” of FloFin, which also acts as Flowers’ agent in issuing loans to Delivery 4 Employees. (See id. ¶ 121.) 5 FloFin—and therefore Flowers—charges usurious interest rates in excess of 6 California’s ten percent maximum. (See id. ¶¶ 2, 19, 34(c), 40, 122–23.) Mr. Lancaster, 7 for example, is currently repaying a promissory note (the “Promissory Note”) with an 8 interest rate of 12.1677 percent. (See id. ¶ 122.) 9 II. Relevant Procedural Background 10 Mr. Ludlow initiated this action on June 6, 2018, by filing a putative class and 11 collective action complaint against Flowers for (1) failure to pay overtime under the Fair 12 Labor Standards Act of 1938 (“FLSA”), 29 U.S.C. §§ 201–219; (2) injunctive relief and 13 restitution under California’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code 14 §§ 17200 et seq.; (3) fraud; (4) failure to pay overtime under California law; (5) unlawful 15 deductions from wages; (6) failure to indemnify for necessary expenditures; and (7) failure 16 to provide proper wage statements. (See generally ECF No. 1.) 17 On December 28, 2018, Mr. Ludlow sought to file an amended complaint adding 18 Mr. Lancaster as a Plaintiff; FloFin as a Defendant; and causes of action related to usury. 19 (See generally ECF No. 48.) The Honorable Janis L. Sammartino granted the motion on 20 February 15, 2019, (see generally ECF No. 55), following which Plaintiffs filed the 21 operative First Amended Complaint. (See generally ECF No. 56.) Defendants answered 22 on March 7, 2019. (See generally ECF No. 59.) 23 On August 13, 2019, Defendants moved to stay this action pending the California 24 Supreme Court’s decision in Vazquez v. Jan-Pro Franchising International, Inc., No. 25 S258191 (Cal. filed Nov. 20, 2019) (“Vazquez”). (See generally ECF No. 116; see also 26 ECF Nos. 121, 122, 126, 128, 131, 138, 144, 151, 166–168, 172.) While that motion was 27 pending, Defendants moved for judgment on the pleadings. (See generally ECF No. 123.) 28 On February 18, 2020, Judge Sammartino granted Defendants’ request for a stay and 1 deferred ruling on Defendants’ motion for judgment on the pleadings. (See generally ECF 2 No. 174.) 3 This action was transferred to the undersigned on September 25, 2020, (see generally 4 ECF No. 193), following which the Court denied without prejudice Defendants’ motion 5 for judgment on the pleadings. (See generally ECF No. 194.) After Plaintiffs informed 6 the Court that the California Supreme Court had issued a decision in Vazquez, (see 7 generally ECF No. 196), the Court lifted the stay and set a hearing and briefing schedule 8 on Defendants’ Motion. (See generally ECF No. 197.) Defendants filed the instant Motion 9 on February 24, 2021. (See generally ECF No. 200.) 10 LEGAL STANDARD 11 A party may file a motion for judgment on the pleadings after that party files an 12 answer. Fed. R. Civ. P. 12(c). A motion for judgment on the pleadings pursuant to Rule 13 12(c) is functionally identical to a Rule 12(b)(6) motion and “the same standard of review 14 applies to motions brought under either rule.” Gregg v. Haw. Dep’t of Pub. Safety, 870 15 F.3d 883, 887 (9th Cir. 2017) (quotation omitted). The Court must accept all factual 16 allegations as true, draw reasonable inferences in favor of the non-moving party, and decide 17 whether the allegations “plausibly suggest an entitlement to relief.” Id. (quoting Ashcroft 18 v. Iqbal, 556 U.S. 662, 681 (2009)). The Court may disregard, however, all factually 19 unsupported claims framed as legal conclusions and recitations of the legal elements of a 20 claim. See Iqbal, 556 U.S. at 681. 21 “Rule 9(b) requires that, when fraud is alleged, ‘a party must state with particularity 22 the circumstances constituting fraud.’” Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 23 (9th Cir. 2009) (quoting Fed. R. Civ. P. 9(b)). “Rule 9(b) demands that the circumstances 24 constituting the alleged fraud be specific enough to give defendants notice of the particular 25 misconduct . . . so that they can defend against the charge and not just deny that they have 26 done anything wrong.” Id. (alteration in original) (internal quotation mark omitted) 27 (quoting Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001)). “Averments of 28 fraud must be accompanied by the who, what, when, where, and how of the misconduct 1 charged.” Id. (internal quotation marks omitted) (quoting Vess v. Ciba-Geigy Corp. USA, 2 317 F.3d 1097, 1106 (9th Cir. 2003)). 3 “If a complaint is dismissed for failure to state a claim, leave to amend should be 4 granted ‘unless the court determines that the allegation of other facts consistent with the 5 challenged pleading could not possibly cure the deficiency.’” DeSoto v. Yellow Freight 6 Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992) (quoting Schreiber Distrib. Co. v. Serv-Well 7 Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986)); see also Cafasso, 637 F.3d at 1058 8 (“Normally, when a viable case may be pled [under Rule 12(c)], a district court should 9 freely grant leave to amend.” (citing Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1039 10 (9th Cir. 2002))). “A district court does not err in denying leave to amend where the 11 amendment would be futile.” Id. (citing Reddy v. Litton Indus., 912 F.2d 291, 296 (9th Cir. 12 1990), cert. denied, 502 U.S. 921 (1991)). 13 ANALYSIS 14 Defendants seek judgment on the pleadings in their favor on Plaintiffs’ third cause 15 of action for fraud and Mr. Lancaster’s eighth and ninth causes of action related to usury. 16 (See generally Mot.; ECF No. 200-1 (“Mem.”).) 17 I. Third Cause of Action: Fraud 18 In their third cause of action for fraud, Plaintiffs allege that Flowers induced 19 Delivery Employees to sign DAs by intentionally failing to disclose that its actual business 20 model differed from that represented to obtain the DAs. (See FAC ¶¶ 83–92.) Defendants 21 argue that dismissal is required because Plaintiffs impermissibly rely on misrepresentations 22 appearing in the DA, (see Mem. at 6), and because the three-year statute of limitations has 23 run. (See id. at 6–7 Cal. Civ. Proc. Code § 338(d)).) Because the Court concludes that 24 Plaintiffs’ fraud claim is time-barred, the Court declines to reach Defendants’ argument 25 concerning the economic loss doctrine. 26 Plaintiffs respond to Defendants’ statute of limitations argument by invoking the 27 continuous accrual theory. (See Opp’n at 6–7.) Under California’s theory of continuous 28 accrual, “separate, recurring invasions of the same right can each trigger their own statute 1 of limitations.” Aryeh v. Canon Bus. Sols., Inc., 55 Cal. 4th 1185, 1198 (2013). “Generally 2 speaking, continuous accrual applies whenever there is a continuing or recurring 3 obligation.” Id. at 1199 (citing Hogar Dulce Hogar v. Cmty. Dev. Comm’n, 110 Cal. App. 4 4th 1288, 1296 (2003)). “Because each new breach of such an obligation provides all the 5 elements of a claim—wrongdoing, harm, and causation . . . —each may be treated as an 6 independently actionable wrong with its own time limit for recovery.” Id. (citing Pooshs 7 v. Philip Morris USA, Inc., 51 Cal. 4th 788, 797 (2011)). But “[i]t is not enough that the 8 plaintiff merely suffers ongoing injury.” Rattagan v. Uber Techs., Inc., No. 19-CV-01988- 9 EMC, 2020 WL 4818612, at *6 (N.D. Cal. Aug. 19, 2020) (emphasis in original). “As 10 California courts have explained, ‘if continuing injury from a completed act generally 11 extended the limitations periods, those periods would lack meaning. Parties could file suit 12 at any time, as long as their injuries persisted. This is not the law.’” Id. (quoting Vaca v. 13 Wachovia Mortg. Corp., 198 Cal. App. 4th 737, 745 (2011)). 14 The Court concludes that Plaintiffs fail to allege that the continuous accrual doctrine 15 applies here. Ultimately, Plaintiffs’ fraud claim is premised on “Flowers[’] omi[ssion] and 16 intentional[] fail[ure] to disclose the true nature of its operation to Delivery Employees 17 when entering into the DA contract.” (See FAC ¶ 87.) According to Plaintiffs, “[i]f 18 Flowers had disclosed the true nature of the relationship between the parties[,] . . . Plaintiffs 19 and the California Class would not have executed the DA presented by Flowers or would 20 have insisted on materially different terms.” (See id. ¶ 91.) While Plaintiffs may suffer 21 recurring injury as a result of signing DAs based on Flowers’ omissions, (cf. Opp’n at 7), 22 that does not suffice to state a claim absent the recurrence of the other elements of 23 Plaintiffs’ claim, including wrongdoing. See Aryeh, 55 Cal. 4th at 1198; Rattagan, 2020 24 WL 4818612, at *6. Unlike in Aryeh, in which each of the alleged unfair and excessive 25 monthly charges billed to the plaintiff constituted a new unfair act, Plaintiffs here “allege[] 26 a single fraud committed at contract formation,” see 55 Cal. 4th at 1201, i.e., Flowers’ 27 omission of material facts inducing Plaintiffs to enter into DAs. (See FAC ¶ 87; see also 28 generally id. ¶¶ 83–92.) 1 Because both Mr. Ludlow and Mr. Lancaster signed their DAs in reliance on 2 Flowers’ material omissions in 2013, (see id. ¶¶ 14–15), the three-year statute of limitations 3 ran in 2016. See Cal. Civ. Proc. Code § 338(d). Consequently, the Court GRANTS 4 Defendants’ Motion and DISMISSES Plaintiffs’ second cause of action for fraud. See, 5 e.g., Asare-Antwi v. Wells Fargo Bank, N.A., No. 19-56383, 2021 WL 1944382, at *1 (9th 6 Cir. May 14, 2021) (concluding that the district court did not err in dismissing claims based 7 on fraudulent inducement on statute of limitations grounds because the plaintiff’s injury 8 was not continuing (citing Aryeh, 55 Cal. 4th at 1201)); Sherwin-Williams Co. v. JB 9 Collision Servs., Inc., No. 13-CV-1946-LAB-WVG, 2014 WL 5112057, at *5 (S.D. Cal. 10 Oct. 10, 2014) (dismissing fraud counterclaims on statute of limitations grounds because 11 the continuing violations doctrine did not apply where “all of the elements of a fraud claim 12 occurred . . . with [the plaintiff’s salesperson]’s false assurances . . . to induce Defendants 13 into signing and not terminating the original contract”). Because Plaintiffs request leave 14 to amend to plead facts alleging delayed discovery under the discovery rule, (see Opp’n at 15 7 n.4), the Court GRANTS Plaintiffs leave to amend. 16 II. Eighth Cause of Action: Usury 17 Plaintiffs’ eighth cause of action, which is asserted only by Mr. Lancaster and the 18 putative class, generally alleges that FloFin charges interest rates that are usurious under 19 California law. (See generally FAC ¶¶ 115–25.) Defendants advocate for dismissal of 20 Mr. Lancaster’s usury claim on the grounds that the rates are not usurious under Georgia 21 law, which they contend applies because of the promissory notes’ choice-of-law provision. 22 (See Mem. at 7–10.) Alternatively, Defendants argue that dismissal is warranted under 23 California law because Mr. Lancaster (1) does not have standing, and (2) pleads a credit 24 sale rather than a loan. (See id. at 11–14.) 25 A. Choice of Law 26 Before addressing Defendants’ arguments on the merits, the Court first must 27 determine whether Georgia or California law applies. It is undisputed that the Promissory 28 Note contains the following choice-of-law provision: “THIS NOTE SHALL BE 1 GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE 2 STATE OF GEORGIA.” (ECF No. 200-4 (“Promissory Note”) at 5.3) Defendants ask the 3 Court to honor this choice-of-law provision, (see Mem. at 7–10; Reply at 3–7), while 4 Mr. Lancaster urges that it is unenforceable. (See Opp’n at 7–15.) 5 The Parties agree that California’s choice-of-law rules apply. (See Mem. at 8; Opp’n 6 at 8.) Under those rules, “[w]hen an agreement contains a choice of law provision, 7 California courts apply the parties’ choice of law unless the analytical approach articulated 8 in § 187(2) of the Restatement (Second) of Conflict of Laws . . . dictates a different result.” 9 Bridge Fund Cap. Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1002 (9th Cir. 2010) 10 (quoting Hoffman v. Citibank (S.D.), N.A., 546 F.3d 1078, 1082 (9th Cir. 2008) (per 11 curiam)). “Under the Restatement approach, the court must first determine ‘whether the 12 chosen state has a substantial relationship to the parties or their transaction, . . . or whether 13 there is any other reasonable basis for the parties’ choice of law.’” Id. (quoting Nedlloyd 14 Lines B.V. v. Super. Ct., 3 Cal. 4th 459, 466 (1992) (in bank)). “If . . . either test is met, 15 the court must next determine whether the chosen state’s law is contrary to 16 a fundamental policy of California.” Id. (emphasis in original) (quoting Nedlloyd, 3 Cal. 17 4th at 466). “If the court finds such a conflict, it must then determine whether California 18 has a materially greater interest than the chosen state in the determination of the particular 19 issue.” Id. at 1002–03 (quoting Nedlloyd, 3 Cal. 4th at 466 (quoting Restatement (Second) 20 of Conflict of Laws § 187(2))). “If California possesses the materially greater interest, the 21 court applies California law despite the choice of law clause.” Id. at 1003. 22 Consequently, if Defendants can demonstrate that Georgia has a substantial 23 relationship to Defendants or the Promissory Note, Georgia law will apply unless 24

25 3 Although not attached to Plaintiffs’ First Amended Complaint, the Court may incorporate the Promissory 26 Note by reference because it forms the basis of Mr. Lancaster’s eighth cause of action for usury and Mr. Lancaster does not contest its authenticity. See Koja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 27 1002 (9th Cir. 2018); see also, e.g., Pajarillo v. Bank of Am., No. 10CV937 DMS JMA, 2010 WL 28 4392551, at *1 n.1 (S.D. Cal. Oct. 28, 2010) (incorporating by reference promissory note in case 1 Mr. Lancaster can demonstrate that Georgia law conflicts with a fundamental California 2 policy and that California possesses a materially greater interest in applying its usury laws. 3 See, e.g., Wash. Mut. Bank, FA v. Super. Ct., 24 Cal. 4th 906, 917 (2001) (citing Nedlloyd, 4 3 Cal. 4th at 468, 471). 5 1. Defendants’ Burden: Prong One 6 Defendants bear the burden of demonstrating either that a substantial relationship 7 exists between Georgia and Defendants and/or the Promissory Note or that any other 8 reasonable basis exists to apply Georgia law. See Wash. Mut., 24 Cal. 4th at 917; see also 9 1-800-Got Junk? LLC v. Super. Ct., 189 Cal. App. 4th 500, 514 (2010), as 10 modified (Nov. 19, 2010) (“[E]ven if the chosen state has no substantial relationship to the 11 parties or the transaction, the choice of law provision is enforceable if a reasonable basis 12 exists for the parties' choice.”). Here, the Parties focus solely on whether FloFin has a 13 substantial relationship to Georgia. (See Mem. at 9; Opp’n at 9–12; Reply at 3–4.) “A 14 substantial relationship exists in a state where a party is domiciled, resides, or is 15 incorporated.” Simulados Software, Ltd. v. Photon Infotech Priv., Ltd., 40 F. Supp. 3d 16 1191, 1197 (N.D. Cal. 2014) (citing Nedlloyd, 3 Cal. 4th at 467; Cardonet, Inc. v. IBM 17 Corp., No. 06-cv-6637-RMW, 2007 WL 518909 (N.D. Cal. Feb 14, 2007); Hatfield v. 18 Halifax PLC, 564 F.3d 1177 (9th Cir. 2009); Trust One v. Invest Am., 134 Cal. App. 4th 19 1302 (2005)). “In situations where a company is incorporated and headquartered in two 20 different states, either incorporation or principal place of business in a particular state has 21 been deemed a substantial relationship.” Id. at 1197–98 (citing Hambrecht & Quist 22 Venture Partners v. Am. Med. Int’l, Inc., 38 Cal. App. 4th 1532, 1546 (1995); ABF Capital 23 Corp. v. Grove Props. Co., 126 Cal. App. 4th 204, 217 (2005)). 24 Defendants introduce the Promissory Note to establish FloFin’s substantial 25 relationship to Georgia. (See Mem. at 9.) Specifically, Defendants contend, the 26 Promissory Note indicates that Thomasville, Georgia, is both the location of FloFin’s office 27 and the presumptive place of repayment. (See id.; see also Promissory Note at 2.) Despite 28 acknowledging that FloFin’s principal place of business is Thomasville, Georgia, (see FAC 1 ¶ 19), Mr. Lancaster responds that FloFin “is a mere shell or sham and, therefore, so is the 2 purported Georgia connection.” (Opp’n at 10 (citing FAC ¶ 119).) But Mr. Lancaster 3 asserts his eighth cause of action against all Defendants, (see FAC ¶¶ 115–25), and the 4 Flowers entities are also formed under and have principal places of business in Georgia. 5 (See id. ¶¶ 16–17.) These facts—which are alleged in Plaintiffs’ First Amended 6 Complaint—are uncontested. The additional evidence Mr. Lancaster identifies 7 concerning, for example, where the Promissory Note was negotiated and/or signed, where 8 payments on the Promissory Note were made, and who receives the loan payments, (see 9 Opp’n at 9–11), is immaterial because the fact that FloFin’s (and Flowers’) principal place 10 of business is in Georgia suffices to establish the requisite substantial relationship. See, 11 e.g., Simulados, 40 F. Supp. 3d at 1197 (concluding on motion to dismiss that a company’s 12 principal place of business in North America in the chosen state “establishe[d] a sufficient 13 relationship with the state to uphold the choice-of-law provision in the contract”); Gamer 14 v. duPont Glore Forgan, Inc., 65 Cal. App. 3d 280, 288–89 (1976) (concluding that the 15 plaintiff’s evidence that “the ‘customer agreement was signed in California[;] all plaintiff’s 16 payments were to California offices[;] and all plaintiff’s orders, requests for loans of money 17 or extensions of credit were made through California offices . . . d[id] not create an issue 18 of fact as to the substantial relationship between the contract and the State of New York” 19 given that the defendant’s principal place of business was in New York). 20 To the extent Mr. Lancaster contends that Defendants are using FloFin merely as an 21 “artifice” merely to avoid the application of California law, (see, e.g., Opp’n at 10 (citing 22 Commonwealth Mortg. Assurance Co. v. Superior Court, 211 Cal. App. 3d 508, 515 23 (1989)), the First Amended Complaint does not support this conclusion. While it may 24 prove true that FloFin is a “sham” and plays a prominent role in Flowers’ alleged 25 wrongdoing, Plaintiffs do not allege that the Flowers entities are not genuine (if purportedly 26 corrupt), Georgian business entities. (See, e.g., FAC ¶¶ 16–17.) Plaintiffs also allege that 27 both Flowers, (see, e.g., id. ¶¶ 2, 16, 44), and FloFin, (see, e.g., id. ¶¶ 118–20), operate 28 nationally. The choice of Georgia law in the Promissory Note is natural and reasonable 1 given Plaintiffs’ allegations that the Flowers enterprise operates from Georgia with 2 Delivery Employees across the county. On the other hand, the inference that FloFin chose 3 Georgia law specifically to avoid application of California law, particularly given the 4 existence of more favorable usury laws in other states, (see Mem. at 9 (citing Palm Ridge, 5 LLC v. Ahlers, No. 08-cv-00652-SGL (OPx), 2008 WL 11339594, at *3 (C.D. Cal. June 23, 6 2008) (addressing the absence of usury laws in Nevada))), is implausible. The Court 7 therefore concludes that Defendants have met their burden of establishing that a substantial 8 relationship exists between Defendants and the Promissory Note and the State of Georgia. 9 2. Plaintiffs’ Burden: Prongs Two and Three 10 The burden now shifts to Mr. Lancaster to “establish both that the chosen law is 11 contrary to a fundamental policy of California and that California has a materially greater 12 interest in the determination of the particular issue.” Wash. Mut., 24 Cal. 4th at 917. 13 As for the first part of the test, Mr. Lancaster contends that “the application of 14 Georgia law would violate California’s fundamental public policy . . . against usury,” (see 15 Opp’n at 12 (citing Cal. Civ. Code § 3294(a); Stock v. Meek, 35 Cal. 2d 809, 816 (1950); 16 Mencor Enters. v. Hets Equities Corp., 190 Cal. App. 3d 432, 440 (1987))), which is 17 “written into its Constitution,” (see id. (citing Cal. Const. art. XV, § 1)), “[b]ecause Georgia 18 has much higher usury limits, or in some instances, no limits at all.” (See id. at 13 (citing 19 Ga. Code Ann. §§ 7-4-2, 7-4-18 (West)).) According to Mr. Lancaster, “[c]ourts routinely 20 acknowledge California has a strong public policy against usurious loan practices,” (see id. 21 at 12 (citing Captain Bounce, Inc. v. Bus. Fin. Servs., Inc., No. 11-CV-858 JLS WMC, 22 2012 WL 928412, at *5 (S.D. Cal. Mar. 19, 2012))), while Defendants argue that 23 “California state courts have uniformly enforced contracts allowing interest rates above the 24 limit under California law where there is shown a substantial relationship between the 25 contract and the state which is referenced in the choice-of-law provision.” (See Mot. at 9 26 (quoting Palm Ridge, 2008 WL 11339594, at *2); Reply at 5 (quoting Palm Ridge, 2008 27 WL 11339594, at *2); see also Mot. at 10 (quoting Petters Co. v. BLS Sales Inc., No. 04- 28 cv-02160-CRB, 2005 WL 2072109, at *5 (N.D. Cal. Aug. 26, 2005)).) Defendants’ cited 1 cases, Palm Ridge and Petters, survey several California state court cases that honored 2 choice-of-law provisions even though the interest rates in the underlying contracts would 3 have been usurious under California law.4 See Palm Ridge, 2008 WL 11339594, at *2 4 (citing Sarlot-Kantarjian v. First Penn. Mortg. Tr., 599 F.2d 915 (9th Cir. 1979); Mencor, 5 190 Cal. App. 3d 432; Gamer, 65 Cal. App. 3d 280; Ury v. Jewelers Acceptance Corp., 6 227 Cal. App. 2d 11 (1964)); Petters, 2005 WL 2072109, at *5 (same). These cases all 7 addressed the Restatement (Second) of Conflict of Laws § 203 (“Section 203”), see 8 Mencor, 190 Cal. App. 3d at 436; Gamer, 65 Cal. App. 3d at 288; Ury, 227 Cal. App. 2d 9 at 20), which provides that “[t]he validity of a contract will be sustained against the charge 10 of usury if it provides for a rate of interest that is permissible in a state to which the contract 11 has a substantial relationship and is not greatly in excess of the rate permitted by the general 12 usury law of the state of the otherwise applicable law.” 13 Applying Section 203, the Court determines that Georgia law does not conflict with 14 a fundamental California policy. Regarding the first requirement, the Court already has 15 concluded that Defendants have demonstrated a substantial relationship between 16 Defendants, the Promissory Note, and the State of Georgia. See supra Section II.A.1. The 17 Court next evaluates whether the Promissory Note’s interest rate is permissible under 18 Georgia law. See Restatement (Second) of Conflict of Laws § 203 (1971). The Parties 19 agree that, under Georgia law, contracting parties may agree to an interest rate up to five 20 percent per month (or sixty percent per year) so long as the interest rate is “expressed in 21 simple interest terms.” (See Mem. at 10; Opp’n at 13; see also Ga. Code Ann. §§ 7-4- 22 2(a)(1)(A), 7-4-18(a); In re Hughes, 230 B.R. 213, 227 (Bankr. M.D. Ga. 1998) (“[T]he 23 parties can agree to an interest rate as long as it does not exceed 5 percent per month and 24 is expressed in simple interest terms.”). Here, the Promissory Note signed by 25 Mr. Lancaster provides that “[i]nterest shall accrue on the outstanding principal balance at 26

27 4 Mr. Lancaster’s case, Captain Bounce, is inapplicable because the defendants in that case “did not object 28 to the application of California law and . . . cited to California law themselves” despite the contract 1 a fixed rate per annum equal to 12.1677% per annum (computed for the actual number of 2 days elapsed over a 365-day year).” (Promissory Note at 2; see also FAC ¶¶ 19, 122.) 3 Mr. Lancaster appears to concede that this interest rate would be permissible under Georgia 4 law, (see Opp’n at 13), and the Court agrees. Finally, the Court must decide whether the 5 interest rate in the Promissory Note is “greatly in excess of the rate permitted by the general 6 usury law of” California. See Restatement (Second) of Conflict of Laws § 203 (1971). 7 The Court concludes that an interest rate of 12.1677 percent per year is not “greatly in 8 excess” of ten percent, (compare Promissory Note at 2; and FAC ¶ 122, with Cal. Const. 9 art. XV, § 1(2)), particularly given rates approved by California state courts and federal 10 courts applying California choice-of-law rules. See, e.g., Sarlot-Kantarjian, 599 F.2d at 11 918 (13.47% to 18%); Palm Ridge, 2008 WL 11339594, at *1 (12% or 21%); Petters, 2005 12 WL 2072109, at *5 (36%); Mencor, 190 Cal. App. 3d 432 (44%); Gamer, 65 Cal. App. 3d 13 at 290 (12.25%); Ury, 227 Cal. App. 2d at 21 (20.3%). 14 The Court therefore concludes that Mr. Lancaster has failed to demonstrate that 15 Georgia’s usury law is contrary to a fundamental California policy. Accordingly, the Court 16 need not address the third prong of the choice-of-law analysis, see, e.g., Nedlloyd, 3 Cal. 17 4th at 468 (“Because [the plaintiff] has identified no fundamental policy of our state at 18 issue . . . , the second exception to the rule of section 187 of the Restatement does not 19 apply.”), and concludes that Georgia law applies to Mr. Lancaster’s usury cause of action. 20 B. Analysis Under Georgia Law 21 Defendants argue that Mr. Lancaster’s usury claim must be dismissed because the 22 Promissory Note’s interest rate is not usurious under Georgia law. (See Mem. at 7, 10.) 23 Mr. Lancaster does not address this argument, arguing instead only that California law 24 applies. (See Opp’n at 7–15.) The Court may infer from Mr. Lancaster’s silence that he 25 concedes that the interest rate to which he agreed in the Promissory Note is not usurious 26 under Georgia law. See, e.g., Moore v. Apple, Inc., 73 F. Supp. 3d 1191, 1205 (N.D. Cal. 27 2014). In any event, the Court already has determined on the merits that the Promissory 28 Note’s annual interest rate of 12.1667 percent is permissible under Georgia law, which 1 authorizes rates of up to sixty percent so long as the interest rate is “expressed in simple 2 interest terms.” See supra pages 15–16; see also Ga. Code Ann. §§ 7-4-2(a)(1)(A), 7-4- 3 18(a); see also In re Hughes, 230 B.R. at 227. 4 The Court therefore GRANTS Defendants’ Motion and DISMISSES 5 Mr. Lancaster’s eighth cause of action for usury. Although Defendants ask the Court to 6 dismiss Mr. Lancaster’s usury claim with prejudice, (see Mem. at 7), Mr. Lancaster argues 7 that additional facts have been discovered since the filing of the First Amended Complaint 8 that may be “helpful” to the choice-of-law analysis on amendment. (See Opp’n at 10 n.6.) 9 Because the Court cannot conclude that “the allegation of other facts consistent with the 10 challenged pleading could not possibly cure the deficiency,” DeSoto, 957 F.2d at 658 11 (quoting Schreiber, 806 F.2d at 1401), the Court DISMISSES WITHOUT PREJUDICE 12 Mr. Lancaster’s usury claim. 13 III. Ninth Cause of Action: Violation of UCL 14 Finally, Mr. Lancaster asserts a ninth cause of action for violation of California’s 15 UCL, contending that the interest rates charged in Defendants’ Promissory Notes are 16 unlawful under California’s usury laws, (see FAC ¶ 129); unfair for violating California’s 17 policy of capping applicable interest rates at ten percent, (see id. ¶ 130); and fraudulent 18 because “Flowers simply establishes for itself a right to deferred payment for the territory 19 while charging exorbitant interest under the guise of a ‘disbursed loan.’” (See id. ¶ 131.) 20 Defendants argue that this claim must be dismissed with prejudice because Georgia law 21 applies and Mr. Lancaster cannot state a claim under the Georgia Fair Business Practices 22 Act (“GFBPA”), Ga. Code §§ 10-1-390 et seq. (See Mem. at 14–16.) 23 Because Mr. Lancaster concedes that his UCL claim is derivative of his usury claim, 24 (see Opp’n at 20), Georgia law applies for the same reasons the Court has already 25 addressed. See supra Section II.A.2. Accordingly, “the Court [need] not address the purely 26 hypothetical question of whether plaintiffs have alleged sufficient facts to meet the 27 pleading standard for the UCL.” See Medimatch, Inc. v. Lucent Techs. Inc., 120 F. Supp. 28 2d 842, 862 (N.D. Cal. 2000). Defendants also ask the Court to dismiss Mr. Lancaster’s 1 ninth cause of action with prejudice on the grounds that he cannot state a claim under the 2 ||GFBPA. (See Mem. at 16.) Although Mr. Lancaster had the opportunity to address this 3 issue in his Opposition, the Court concludes that it is premature to determine the merits of 4 ||any hypothetical claim Mr. Lancaster could assert upon amendment under the GFBPA. 5 ||Further, the Court has granted Mr. Lancaster leave to amend his usury claim to plead 6 ||additional facts demonstrating that Defendants and/or the Promissory Note lack a 7 || substantial connection to the State of Georgia. See supra page 17. The Court therefore 8 ||GRANTS- Defendants’ Motion and DISMISSES WITHOUT PREJUDICE 9 Lancaster’s ninth cause of action for violation of California’s UCL. 10 CONCLUSION 11 In light of the foregoing, the Court GRANTS Defendants’ Motion for Judgment on 12 || the Pleadings and DISMISSES WITHOUT PREJUDICE Plaintiffs’ third cause of action 13 || for fraud and Mr. Lancaster’s eighth cause of action for usury and ninth cause of action for 14 || violation of California’s UCL.° Plaintiffs MAY FILE an amended complaint curing the 15 || deficiencies identified in this Order within fourteen (14) days of its electronic docketing. 16 || Should Plaintiffs elect not to file an amended complaint by the ordered deadline, this case 17 || shall proceed as to Plaintiffs’ surviving causes of action. 18 IT IS SO ORDERED. 19 20 ||Dated: September 29, 2021 (2 " [od l@ re Honorable Todd W. Robinson 22 United States District Court 23 24 25 26 > As indicated previously, see supra note 3, the Court GRANTS Defendant’s request to incorporate by 27 reference Mr. Lancaster’s Promissory Note. Because they were not necessary to the Court’s analysis, the 22 Court DENIES WITHOUT PREJUDICE Plaintiffs’ Request for Judicial Notice (ECF No. 207-6) and Defendants’ request to incorporate by reference Mr. Lancaster’s DA (ECF No. 200-2).