1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA
9 Elizabeth Reyes Lytikainen, No. CV-18-04685-PHX-DWL
10 Plaintiff, ORDER
11 v.
12 Schaffer’s Bridal LLC, et al.,
13 Defendants. 14 15 Pending before the Court is a motion to dismiss filed by Defendants Schaffer’s 16 Bridal, LLC, Susan Hagedorn, and Gary M. Kirke (collectively, “Defendants”). (Doc. 17 10.)1 For the following reasons, the motion will be granted in part and denied in part. 18 BACKGROUND 19 The facts pleaded in Plaintiff Elizabeth Reyes Lytikainen’s complaint, which the 20 Court accepts as true for the purpose of this motion to dismiss, are as follows: 21 Defendants Hagedorn and Kirke are members of Schaffer’s Bridal, LLC. (Doc. 1- 22 4 ¶¶ 3, 4.) Schaffer’s Bridal has two locations: one in Scottsdale, Arizona, and another in 23 Des Moines, Iowa. (Id. ¶ 9.) 24 In 2014, Lytikainen began providing services to Schaffer’s Bridal, including 25 performing dress alterations and designing and making bridal veils. (Id. ¶ 10.) 26
27 1 After setting a hearing on Defendants’ motion (Doc. 14), the Court issued a tentative ruling (Doc. 15). After reviewing it, the parties informed the Court that they did not wish 28 to proceed with oral argument and instead stipulated that Lytikainen could file a first amended complaint in conformance with the tentative ruling. 1 In early 2015, “in response to [Lytikainen’s] request for payment of substantial 2 amounts owing to [her],” Hagedorn, on behalf of Defendants, offered to sell Lytikainen a 3 50% interest in Schaffer’s Bridal. (Id. ¶ 11.) The offer provided that Defendants would 4 immediately transfer the 50% interest in Schaffer’s Bridal in exchange for $100,000 in cash 5 and $400,000 worth of veil and gown alteration services. (Id.) The offer also provided 6 that Defendants would compensate Lytikainen $80,000 per year to manage Schaffer’s 7 Bridal’s Scottsdale location. (Id.) 8 After Lytikainen accepted the offer, Hagedorn promised that Defendants would 9 prepare documentation to reflect Lytikainen’s ownership interest in Schaffer’s Bridal. (Id. 10 ¶ 12.) Shortly thereafter, Lytikainen began managing the Scottsdale location and received 11 the promised salary. (Id. ¶ 13.) 12 In September 2015, the Scottsdale location relocated within Scottsdale. (Id. ¶ 14.) 13 Lytikainen continued to manage the Scottsdale location, at Hagedorn’s instruction, but no 14 longer received her promised salary. (Id.) 15 In late 2015, Hagedorn assured Lytikainen that she would receive her management 16 salary, payment owing for alterations and veils, and documentation confirming the transfer 17 of her 50% interest in Schaffer’s Bridal. (Id. ¶ 15.) 18 In or around December 2015, Kirke and Hagedorn flew Lytikainen to Des Moines, 19 Iowa and promised to finalize the transfer of the 50% interest in Schaffer’s Bridal. (Id. 20 ¶ 16.) At that meeting, Kirke introduced Lytikainen to others as his business partner and 21 reiterated that the documentation reflecting her 50% interest in Schaffer’s Bridal would be 22 prepared. (Id. ¶ 17.) 23 Through the first six months of 2017, Lytikainen continued to manage the Scottsdale 24 location and continued to provide alteration services and veils to Schaffer’s Bridal’s 25 Scottsdale and Des Moines locations. (Id. ¶ 19.) However, in or around July 2017, 26 Lytikainen ceased her involvement with Schaffer’s Bridal because Defendants hadn’t paid 27 her the promised management salary, or paid her the amounts owed for alterations and 28 veils, or transferred the 50% interest in Schaffer’s Bridal. (Id. ¶ 20.) 1 “Throughout 2017 and early 2018,” Defendants continued to promise to pay 2 amounts owed to Lytikainen, including unpaid salary. (Id. ¶ 36.) In mid-2018, Defendants 3 offered payment to Lytikainen, but it included “little or none of the past due salary owed 4 to [Lytikainen] for managing the Scottsdale Schaffer’s store.” (Id.) 5 LEGAL STANDARD 6 “[T]o survive a motion to dismiss, a party must allege ‘sufficient factual matter, 7 accepted as true, to state a claim to relief that is plausible on its face.’” In re Fitness 8 Holdings Int’l, Inc., 714 F.3d 1141, 1144 (9th Cir. 2013) (quoting Ashcroft v. Iqbal, 556 9 U.S. 662, 678 (2009)). “A claim has facial plausibility when the plaintiff pleads factual 10 content that allows the court to draw the reasonable inference that the defendant is liable 11 for the misconduct alleged.” Id. (quoting Iqbal, 556 U.S. at 678). “[A]ll well-pleaded 12 allegations of material fact in the complaint are accepted as true and are construed in the 13 light most favorable to the non-moving party.” Id. at 1144-45 (citation omitted). However, 14 the court need not accept legal conclusions couched as factual allegations. Iqbal, 556 U.S. 15 at 679-80. The court also may dismiss due to “a lack of a cognizable legal theory.” Mollett 16 v. Netflix, Inc., 795 F.3d 1062, 1065 (9th Cir. 2015) (citation omitted). 17 ANALYSIS 18 I. Securities Claims (Counts I and II)2 19 Defendants move to dismiss Lytikainen’s securities claims because: (1) the interest 20 in Schaffer’s Bridal on which her securities claims is premised isn’t a “security” within the 21 meaning of the Rule 10b-5; (2) Lytikainen doesn’t plead a sufficient nexus between the 22 alleged fraud and the sale of a security; and (3) Lytikainen doesn’t plead her securities 23 claims with adequate particularity as required by Rule 9(b). (Doc. 10 at 4-10.) The Court 24 agrees with Defendants’ first argument and will therefore dismiss Counts I and II. 25
26 2 Lytikainen brought securities claims under both federal law (Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5) and state law (A.R.S. § 44-1991). The 27 Court addresses these claims simultaneously under federal law because “the near-identical language of the two statutes is strong support for applying existing federal precedent on 28 Rule 10b-5 to § 44-1991(A).” In re Allstate Life Ins. Co. Litig., 2013 WL 5161688, *13 (D. Ariz. 2013). 1 Lytikainen alleges the “security” at issue is a 50% stake in Schaffer’s Bridal. (Doc. 2 1-4 ¶¶ 22, 31.) Because Schaffer’s Bridal is a limited liability company, Defendants argue, 3 Lytikainen’s interest can only be a “security” if it constitutes an “investment contract” 4 under the Securities Exchange Act. (Doc. 10 at 5.) Defendants contend Lytikainen’s 5 interest doesn’t qualify because an investment contract is an “investment of money in a 6 common scheme or enterprise with the expectation of profits to come solely from the 7 efforts of others.” (Id. at 5-6, emphasis added.) Defendants assert the profits from 8 Schaffer’s Bridal don’t come solely from the efforts of others—the complaint alleges 9 Lytikainen managed a Schaffer’s Bridal location and provided alteration services. (Id. at 10 5.) Defendants thus conclude that, because Lytikainen is an active participant in Schaffer’s 11 Bridal, her interest can’t constitute an investment contract and isn’t a “security.” (Id.) 12 “[C]ourts tasked with deciding whether LLC membership interests constitute a 13 security under the Exchange Act generally evaluate whether such interests are ‘investment 14 contracts . . . .’” D.R. Mason Constr. Co. v. GBOD, LLC, 2018 WL 1306425, *5 (S.D. Cal. 15 2018). The three requirements for establishing an investment contract are: (1) an 16 investment of money; (2) in a common enterprise; (3) with an expectation of profits to be 17 derived solely from the efforts of others. Secs. & Exch. Comm’n v. W.J. Howey Co., 328 18 U.S. 293, 298 (1946). Here, the third prong is at issue—whether the expected profits would 19 be derived “solely” from others’ efforts. 20 The Ninth Circuit’s seminal case on the meaning of “solely” in this context is 21 Securities & Exchange Commission v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 22 (9th Cir. 1973). There, the court clarified that “the word ‘solely’ should not be read as a 23 strict or literal limitation” but must be “construed realistically, so as to include within the 24 definition those schemes which involve in substance, if not form, securities.” Id. at 482. 25 Based on this clarification, the court held that an investment may qualify as an “investment 26 contract” within the Securities Exchange Act if “the efforts made by those other than the 27 investor are the undeniably significant ones, those essential managerial efforts which affect 28 the failure or success of the enterprise.” Id. 1 Applying this standard, the Turner court determined that a pyramid scheme, which 2 required “some effort” from investors, still constituted a security. There, investors 3 purchased the opportunity to help sell self-motivation and sales-ability courses to others. 4 Id. at 478. After purchasing the right to help sell these courses, the investor’s role was to 5 find other prospective purchasers, “create an illusion of his own affluence,” and induce the 6 prospective purchasers to attend a meeting at which there would be a sales pitch by Dare 7 To Be Great (“Dare”)—the company that sold the investments. Id. at 480. The meetings, 8 which were presented by Dare, focused on convincing prospective purchasers of the wealth 9 that awaited if they purchased the courses. Id. at 479. After the meeting, Dare pressured 10 the attendees to make a purchase. Id. If a sale was made, an investor would receive a 11 portion of the amount paid by the purchaser(s) he had steered to the meeting. Id. at 478. 12 The court reasoned that an investor merely contributed “some effort” toward the ultimate 13 success of this scheme. Id. at 482. In contrast, Dare contributed the critical “selling 14 efforts.” Id. Thus, the court concluded that the essential efforts of Dare, not the investor, 15 “affect[ed] the failure or success of the enterprise.” Id. at 483. Based on this conclusion, 16 the court held that the pyramid scheme qualified as an “investment contract.” Id. 17 The next year, in Bitter v. Hoby’s International, Inc., 498 F.2d 183 (9th Cir. 1974), 18 the Ninth Circuit again analyzed whether an investment constituted an “investment 19 contract.” There, franchisees purchased restaurant franchises, and each would profit based 20 on the success of his individual franchise. Id. at 184-85. The franchisees argued the 21 franchise agreements were investment contracts because they didn’t have any practical 22 profit-influencing control due to the imposition of “strict standards for operation, including 23 standards for materials, merchandise, supplies, financial reporting, advertising and 24 employee service, demeanor and appearance, as well as controls over hours of operation, 25 advertisements, the painting of the building and installation of vending machines.” Id. at 26 184. The Ninth Circuit rejected this argument, holding that the franchisees’ efforts entailed 27 “continuous operation of the restaurant,” which included production and sale of food and 28 employment of personnel, among other things. Id. at 185. The court concluded such efforts 1 by the franchisees were “qualitatively more substantial” than those by the investors in 2 Turner, and “[i]n spite of regulation, each franchisee’s active management was essential to 3 the success of his retail restaurant.” Id. 4 Here, the activities performed by Lytikainen more closely resemble the 5 “substantial” activities performed by the franchisees in Bitter than the “some effort” 6 performed by the investors in Turner. The complaint alleges there are only two Schaffer’s 7 Bridal stores—one in Arizona, the other in Iowa. (Id. ¶ 9.) Lytikainen alleges she managed 8 one of those stores and provided veil and gown alterations at both stores. (Id. ¶ 20.) This 9 profit-generating conduct is like the production and sale of food as in Bitter and unlike 10 merely inducing a prospective buyer to attend a sales meeting as in Turner. Although 11 Lytikainen’s 50% interest would entitle her to share in profits from both the Scottsdale 12 location (which she managed) and the Des Moines location (which she didn’t manage)— 13 which is unlike the franchisees in Bitter, who derived profit only from their specific 14 restaurant franchises—Lytikainen’s management of the Scottsdale location was still 15 critical to the success of the overall enterprise. As the manager of one half of Schaffer’s 16 Bridal’s locations and the key provider of both locations’ alterations, the failure or success 17 of the entire enterprise depended in large part on Lytikainen’s efforts. Thus, under the facts 18 alleged in the complaint, she was providing “substantial” and “essential” efforts—efforts 19 that are inconsistent with an “investment contract.” 20 Lytikainen cites an Arizona Court of Appeals case, Nutek Information Systems, Inc. 21 v. Arizona Corporation Commission, 977 P.2d 826 (Ariz. Ct. App. 1998), for the 22 proposition that her interest in Schaffer’s Bridal constitutes a security because, despite her 23 efforts managing the Scottsdale location and providing veil and gown alterations, she 24 hasn’t alleged she actually “had . . . control over the LLC itself.” (Doc. 12 at 8-9.) This 25 misconstrues Nutek’s holding. The investors in Nutek invested in “units” of LLCs that 26 were managed by others. Id. at 828. The investors didn’t personally operate the LLCs. Id. 27 at 828-29. Although the investors had the ability to “approve the management efforts of a 28 third party,” the court observed that “the large number (920) of geographically dispersed 1 investors . . . prevented the members from exercising effective control of the business.” Id. 2 at 832. Thus, the Nutek court concluded the investors were “no different than 3 shareholders.” Id. Lytikainen stands in far different shoes here.3 4 II. Statute of Limitations (Counts III-XII) 5 A. The Parties’ Arguments 6 Defendants move to dismiss Counts III-XII because (1) each is premised on the 7 breach of an employment contract, and thus subject to a one-year statute of limitations 8 under Arizona law, and (2) Lytikainen’s complaint demonstrates her claims accrued no 9 later than July 2017, so the filing of her complaint in November 2018 was untimely. (Doc. 10 10 at 10-11.) 11 In response, Lytikainen contends that only Count III is premised on an employment 12 contract and the remaining counts “would not be materially affected if the employment 13 agreement were eliminated.” (Doc. 12 at 12-13.) And as to Count III, Lytikainen disputes 14 it accrued in July 2017—she contends the complaint shows she “reasonably believed until 15 early 2018 that Defendants would honor the employment agreement.” (Id. at 13-14.) 16 B. Which Counts Arise From The Breach Of An “Employment Contract”? 17 A.R.S. § 12-541(3) provides a one-year statute of limitations for “breach of an oral 18 3 Although the Court agrees with Defendants that Counts I and II must be dismissed 19 because there is no underlying security on which to premise a securities fraud claim, the Court disagrees with Defendants’ alternative dismissal theory (i.e., there is an insufficient 20 nexus between the alleged fraud and the sale of a security). In support of this argument, Defendants cite Hunt v. Robinson, 852 F.2d 786, 787 (4th Cir. 1988), which rejected the 21 plaintiff’s claim “that the defendants fraudulently refused to convey or tender the stock to him . . . as required by the terms of [a] contract” because the plaintiff didn’t point to 22 “misrepresentations concerning the financial resources or assets of the . . . company” and, thus, the misrepresentation wasn’t about “the value of the stock.” Defendants’ reliance on 23 Hunt is misplaced because the Supreme Court, in Securities & Exchange Commission v. Zandford, 535 U.S. 813 (2002), subsequently rejected the notion that a misrepresentation 24 must relate to the value of a security to fall within the ambit of the Securities Exchange Act: “[T]his Court has [n]ever held that there must be a misrepresentation about the value 25 of a particular security in order to run afoul of the Act.” Id. at 820. The Zandford Court also approvingly cited (1) a prior SEC decision holding “that a broker who accepts payment 26 for securities that he never intends to deliver . . . violates § 10(b) and Rule 10b-5” and (2) a prior Supreme Court decision holding that a defendant violated the Securities Exchange 27 Act by selling “a security (the option) while secretly intending from the very beginning not to honor the option.” Id. at 819-20, 823-24 (citations omitted). That is what Lytikainen 28 alleges here—Defendants promised to transfer a 50% interest in Schaffer’s Bridal to her but never intended to honor that promise. 1 or written employment contract including contract actions based on employee handbooks 2 or policy manuals that do not specify a time period in which to bring an action.” A.R.S. 3 § 12-541(3). Although the statute doesn’t provide a definition of the term “employment 4 contract,” the Arizona Court of Appeals has instructed courts to give that term its ordinary 5 meaning: a “contract between an employer and employee in which the terms and conditions 6 of employment are stated.” Redhair v. Kinerk, Beal, Schmidt, Dyer & Sethi, P.C., 183 P.3d 7 544, 546 (Ariz. Ct. App. 2008) (citation omitted). Additionally, the Redhair court 8 explained that employment contracts include “all contracts defining specific 9 responsibilities of the employer to the employee,” meaning any agreement related to “the 10 nature, conditions, or duration” of employment. Id. at 548-49. 11 Given this backdrop, it is necessary to begin by identifying which counts in the 12 complaint can be said to arise from an “employment contract.” As for Count III, Lytikainen 13 concedes it involves an alleged breach of an employment contract. (Doc. 12 at 13 [agreeing 14 that one-year statute of limitations applies to Count III, which refers to Defendants’ failure 15 to pay “past due salary owed to Plaintiff for managing the Scottsdale Schaffer’s store”].) 16 As for Count IV (“Breach of Contract”) and Count V (“Breach of Covenant of Good 17 Faith and Fair Dealing”), the complaint asserts that each arises from the breach of an oral 18 contract that is characterized in the complaint as “the Agreement.” The Agreement 19 provided that, in exchange for a 50% interest in Schaffer’s Bridal, Lytikainen would pay 20 $100,000 in cash and provide $400,000 in veil and gown alteration services. (Doc. 1-4 ¶ 21 11.) Additionally, in exchange for $80,000 per year, Lytikainen would manage the 22 Scottsdale location. (Id.) 23 Although Defendants argue the Agreement must be characterized as an 24 “employment contract” for purposes of A.R.S. § 12-541(3) because one of its terms related 25 to Lytikainen’s annual salary for managing the Scottsdale location, the Court does not share 26 this view. Instead, the Court interprets the Agreement as having two distinct components. 27 The first, the purchase of a 50% interest in Schaffer’s Bridal in exchange for $100,000 in 28 cash and $400,000 of alteration services, shouldn’t be construed as an “employment 1 contract.” Although a large part of Lytikainen’s obligation involved her labor, an exchange 2 of labor for consideration doesn’t necessarily mean there is an “employment contract”— 3 depending on the circumstances, such an arrangement can give rise to an independent 4 contractor relationship. A.R.S. § 23-902(C). That is exactly what Lytikainen contends 5 was present here: “[T]he vast majority of [her] business relationship with Schaffer’s was 6 as an independent contractor doing dress alteration and providing bridal veils.” (Doc. 12 7 at 2.) (See also Doc. 1-4 ¶ 11 [“Plaintiff continued to provide veils and gown alterations 8 to Schaffer’s Scottsdale and Des Moines stores as an independent contractor.”).4 9 Common sense supports the application of this bifurcated approach. If, for example, 10 Lytikainen and Defendants signed a single piece of paper under which (1) Lytikainen 11 agreed to manage the Scottsdale location for $80,000 per year and (2) Defendants agreed 12 to trade a particular vehicle to Lytikainen in return for a valuable heirloom, it wouldn’t 13 make sense to apply the one-year statute of limitations for employment contracts to the 14 unrelated vehicle-for-heirloom swap. Thus, the Court won’t apply a one-year statute of 15 limitations to Counts IV and V to the extent those counts seek recovery related to 16 Lytikainen’s purchase of the 50% interest in Schaffer’s Bridal and/or related to 17 Defendants’ alleged failure to pay Lytikainen for the alteration services she was providing 18 on an independent contractor basis.5 19 The next group of counts that Defendants seek to dismiss on statute-of-limitations 20 grounds are Count VI (“Fraud”), Count VII (“Conspiracy to Defraud”), and Count VIII 21 4 Although Defendants cite a case in which a court applied A.R.S. § 12-541(3)’s one- 22 year statute of limitations to an employee stock agreement, that case is inapposite. In Day v. LSI Corporation, 174 F. Supp. 3d 1130 (D. Ariz. 2016), the stock agreement was part of 23 a specific “plan” adopted by the employer to compensate its employees. Id. at 1142. Here, Lytikainen alleges she entered into a contract to purchase a stock interest in return for cash 24 and certain independent-contractor services. 25 5 Counts IV and V each seek recovery based upon Defendants (1) “[n]ot transferring the 50% interest in Shaffer’s,” (2) “[n]ot paying all of the management salary due 26 Plaintiff,” and (3) “[n]ot paying for all of the veils and gown alterations that Plaintiff provided to Shaffer’s Scottsdale and Des Moines stores.” (Doc. 1-4 at 8.) In the Court’s 27 view, the second of these claims is subject to a one-year statute of limitations, because it is premised upon a breach of the portion of the “Agreement” that can be characterized as an 28 employment contract, but the first and third are not subject to a one-year statute of limitations because they aren’t premised on the breach of an employment contract. 1 (“Aiding and Abetting Fraud”). Even though one of the categories of damages sought in 2 those counts is the annual salary that Lytikainen should have been paid for managing the 3 Scottsdale location—a theory of recovery that seems like a breach-of-an-employment- 4 contract theory—the Court will decline to apply a one-year statute of limitations to them 5 because the complaint characterizes them as fraud claims, which have a three-year statute 6 of limitations under Arizona law. Woodward v. Chirco Constr. Co., 687 P.2d 1275, 1279 7 (Ariz. Ct. App. 1984) (“The defense of the statute of limitations is not favored by the courts, 8 and where two constructions are possible, the longer period of limitations is preferred.”) 9 (citations omitted). 10 As for the three counts in the complaint that are premised on the breach of an alleged 11 fiduciary duty—Count IX (“Breach of Fiduciary Duty”), Count X (“Aiding and Abetting 12 Breach of Fiduciary Duty”), and Count XII (“Accounting”)—the Court need not decide 13 what statute of limitations applies because those counts will be dismissed for other reasons. 14 See Part IV infra. 15 Finally, as for Count XI (“Unjust Enrichment”), the Court declines to dismiss this 16 claim on statute-of-limitations grounds because it is not an independent theory of liability 17 and simply represents an alternative remedy. 18 C. Are The Claims Premised On An Employment Contract Time-Barred? 19 For the reasons stated above, the Court construes Count III, as well as portions of 20 Counts IV and V, as subject to a one-year statute of limitations under A.R.S. § 12-541(3). 21 The remaining question is when that one-year statute of limitations began running. In 22 Arizona, courts apply the “discovery rule” to determine when a breach-of-contract claim 23 accrues, Gust, Rosenfeld & Henderson v. Prudential Ins. Co. of Am., 898 P.2d 964, 967- 24 68 (Ariz. 1995), so “a cause of action does not accrue until the plaintiff knows or with 25 reasonable diligence should know the facts underlying the cause,” Doe v. Roe, 955 P.2d 26 951, 960 (Ariz. 1998). 27 The facts as pleaded demonstrate that Lytikainen knew the breach occurred by no 28 later than July 2017. Lytikainen alleges that, despite repeated requests by her, “no 1 management salary was paid, only a small portion of the amounts owing for alterations and 2 veils, [and] no transfer of any ownership interest to Plaintiff occurred. Therefore, in or 3 about July 2017, Plaintiff stopped managing Schaffer’s Scottsdale store and stopped 4 providing gown services and veils to Schaffer’s Scottsdale and Des Moines store.” (Doc. 5 1-4 ¶ 20.) In other words, Lytikainen severed her professional relationship with Defendants 6 in July 2017 because they had breached her employment contract by not paying her salary. 7 Lytikainen argues she “reasonably believed until early 2018 that Defendants would 8 honor the employment agreement.” (Doc. 12 at 14.) In support of this argument, 9 Lytikainen cites paragraph 36 of the complaint, which states: 10 Throughout 2017 and early 2018, Hagedorn, on behalf of herself, Kirke and Schaffer’s, promised to make arrangements to reconcile and pay amounts 11 owed to Plaintiff including the unpaid salary. However, in mid-2018, a few 12 months before the this Complaint, Defendants provided the promised reconciliation and offer of payment, but such reconciliation and offered 13 payment included little or none of the past due salary owed to Plaintiff for 14 managing the Scottsdale Schaffer’s store. 15 (Doc. 1-4 ¶ 36.) 16 This allegation doesn’t alter whether Lytikainen knew, or should have known, “the 17 facts underlying the cause” in July 2017. Doe, 955 P.2d at 960. After all, Lytikainen 18 acknowledges Defendants didn’t perform their obligations under the employment contract 19 and that she terminated her relationship with them in July 2017 based on that non- 20 performance. (Doc. 1-4 ¶ 20.) Whether Defendants subsequently promised to remedy their 21 breach has no bearing on whether Lytikainen knew that facts giving rise to her claim. Cf. 22 Hall v. Romero, 685 P.2d 757, 763 (Ariz. Ct. App. 1984) (holding that claim accrued by 23 November 1974, even though the breaching party had “promised to perform in the future,” 24 because such future promises “did not eradicate the fact that . . . [the breaching party] had 25 already broken its promise to perform”). Thus, the Court dismisses Count III in its entirety 26 and Counts IV and V to the extent those claims seek to recover past-due wages.6
27 6 To the extent Lytikainen argues Defendants’ promise to remedy the breach tolls the statute of limitations, this argument fails, too. When an action is barred by the statute of 28 limitations, an “acknowledgment of the justness of the claim” is only valid if “the acknowledgment is in writing and signed by the party to be charged thereby.” A.R.S. § 1 III. Fraud-Based Claims (Counts VI-VIII) 2 Defendants argue Lytikainen doesn’t satisfy Rule 9(b)’s standards for alleging fraud 3 in Counts VI, VII, and VIII. Specifically, Defendants contend Lytikainen doesn’t: (1) 4 delineate each alleged false statement; (2) plead why each statement was false; (3) plead 5 how they allegedly communicated the false statements; and (4) plead facts supporting her 6 conclusory statement that Defendants engaged in a conspiratorial scheme and aided and 7 abetted each other’s fraud. (Doc. 10 at 14.) 8 Claims that are “grounded in fraud” or “sound in fraud” are subject to Rule 9(b)’s 9 heightened pleading standards. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-04 10 (9th Cir. 2003). “Rule 9(b) demands that, when averments of fraud are made, the 11 circumstances constituting the alleged fraud [must] be specific enough to give defendants 12 notice of the particular misconduct . . . so that they can defend against the charge and not 13 just deny that they have done anything wrong.” Id. at 1106 (internal quotation marks and 14 citation omitted). This requires a plaintiff to plead “the who, what, when, where, and how 15 of the misconduct charged,” and “set forth what is false or misleading about a statement, 16 and why it is false.” Id. (internal quotation marks and citation omitted). 17 Whether Lytikainen satisfies 9(b)’s heightened pleading standard is a close call. On 18 the one hand, the complaint alleges with particularity at least three instances in which 19 allegedly fraudulent representations were made to Lytikainen. First, the complaint alleges 20 Hagedorn (who) agreed to pay her $80,000 per year to manage the Scottsdale location and 21 to transfer a 50% interest to her in exchange for $500,0000 (what). (Doc. 1-4 ¶ 11.) 22 Hagedorn made this representation in “early 2015” (when) in Scottsdale, Arizona (where). 23 (Id. ¶¶ 11, 48.) Second, the complaint alleges Hagedorn (who) “confirm[ed] the 24 agreement” and “assur[ed] [Lytikainen] that the transfer would soon be finalized” (what). 25 (Id. ¶ 15.) This occurred in “late 2015” (when) in Scottsdale, Arizona (where). (Id. ¶¶ 15, 26 48.) Third, the complaint alleges Kirke (who) “assured [Lytikainen] that the necessary 27 documentation would be prepared and the promised 50% interest in Schaffer’s would be 28 12-508. Lytikainen makes no allegations to this effect. 1 transferred to [her]” (what). (Id. ¶ 17.) Kirke made this representation in December 2015 2 (when) at a meeting in Des Moines, Iowa (where). (Id. ¶¶ 16, 17.) The complaint alleges 3 each representation was false because Defendants never paid her management salary or 4 transferred the interest in Schaffer’s Bridal. (Id. ¶ 20.) 5 On the other hand, the complaint doesn’t expressly allege how these representations 6 were made. Although Rule 9(b) requires particular allegations concerning the “how” of 7 the fraud, the contextual details supplied by the complaint make clear that the 8 representations were made orally. Furthermore, in her opposition to Defendants’ motion 9 to dismiss, Lytikainen confirmed that “[t]he misrepresentations were made orally directly 10 to Plaintiff.” (Doc. 12 at 11.) Although Defendants are, of course, correct in their assertion 11 that whether Lytikainen “has stated a claim depends only on what is in her complaint” 12 (Doc. 13 at 10), it would elevate form over substance to require Lytikainen to file an 13 amended complaint for the sole purpose of making explicit what is already clear from 14 context. It would, for example, be implausible to read the complaint as alleging that, after 15 Defendants flew Lytikainen to Iowa in December 2015 so she could attend a meeting (Doc. 16 1-4 ¶¶ 16-17), the false representations that Kirke allegedly made to her during that meeting 17 were delivered in inscribed written tablets rather than orally. 18 IV. Fiduciary Duty Claims (Counts IX, X, And XII) 19 Defendants argue that Counts IX, X, and XII, all of which are premised on the 20 breach of a fiduciary duty, must be dismissed because the alleged bases for that duty 21 specified in the complaint—“a trusting long-term business relationship” and 22 “friendship”—don’t establish a fiduciary relationship. (Doc. 10 at 16-17.) 23 In response, Lytikainen contends dismissal based on the lack of a fiduciary 24 relationship is premature because the Court must first engage in a factual inquiry to 25 determine whether such a relationship existed. (Doc. 12 at 14-15.) 26 The Court disagrees that it must engage in a factual inquiry before determining 27 whether a fiduciary duty exists. Although, under Arizona law, “[w]hether a fiduciary 28 relationship exists is generally a question of fact,” Cook v. Orkin Exterminating Co., 258 1 P.3d 149, 151-52 (Ariz. Ct. App. 2011), a plaintiff still must satisfy federal pleading 2 standards, Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009) (“It is well- 3 settled that the Federal Rules of Civil Procedure apply in federal court, . . . ‘irrespective of 4 whether the substantive law at issue is state or federal.’”) (citation omitted). That is, a 5 plaintiff must plead “factual content that allows the court to draw the reasonable inference 6 that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. And 7 conclusory allegations—such as “a fiduciary duty exists”— are “not entitled to be assumed 8 true.” Id. at 681. See also Cruz v. United States, 219 F. Supp. 2d 1027, 1039 (N.D. Cal. 9 2002) (“[P]laintiffs have not pled facts that would give rise to a fiduciary relationship, and 10 the Court need not accept their conclusory allegation that such a relationship existed.”) . 11 Lytikainen’s allegation that she had a “trusting long-term business relationship” and 12 “friendship” with Defendants isn’t enough to plausibly state that Defendants owed her a 13 fiduciary duty. “A fiduciary relationship is a confidential relationship whose attributes 14 include ‘great intimacy, disclosure of secrets, [or] intrusting of power.’” Standard 15 Chartered PLC v. Price Waterhouse, 945 P.2d 317, 335 (Ariz. Ct. App. 1996). A fiduciary 16 relationship arises when one places “peculiar reliance in the trustworthiness of another.” 17 Stewart v. Phoenix Nat’l Bank, 64 P.2d 101, 106 (Ariz. 1937). “Mere trust in another’s 18 competence or integrity” isn’t enough. Standard Chartered, 945 P.2d at 335. Lytikainen 19 doesn’t allege any facts from which the Court can infer that her relationship with 20 Defendants is anything other than an “arm’s length relationship,” id., albeit a long-term 21 relationship in which there was trust between friends. For this reason, the Court dismisses 22 Counts IX, X, and XII—those premised on the existence of a fiduciary duty. 23 V. Leave To Amend 24 In their motion, Defendants asked the Court to deny Lytikainen leave to amend her 25 complaint. (Doc. 10 at 17-18.) In her response, Lytikainen stated that “[i]n the event that 26 this Court finds that any allegation of the Complaint is improperly ple[d], . . . Plaintiff 27 respectfully requests leave to further amend the Complaint.” (Doc. 12 at 15-16.) 28 “Rule 15 advises the court that ‘leave [to amend] shall be freely given when justice sorequires.’” Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003). “This policy is ‘to be applied with extreme liberality.’” Jd. Thus, the Court shouldn’t deny || leave to amend unless “the amendment: (1) prejudices the opposing party; (2) is sought in 4|| bad faith; (3) produces an undue delay in litigation; or (4) is futile.” AmerisourceBergen □□ Corp. v. Dialysist W., Inc., 465 F.3d 946, 951 (9th Cir. 2006). 6 Defendants do not argue that any of those circumstances are present here. Thus, to 7\|| the extent Lytikainen wishes to attempt to revive some or all of the claims being dismissed 8 || in this order—Counts I and II (the securities fraud counts), Count III (the employment 9|| contract count), Counts IX, X, and XII (the fiduciary duty counts), or the portions of Counts || IV and V premised on the employment contract—she is granted leave to attempt to do so. 11 || (Furthermore, during the hearing on August 19, 2019, the parties confirmed that they have stipulated that Lytikainen may file a first amended complaint (“FAC”).) 13 2 8 oR 14 Accordingly, IT IS ORDERED that: 15 (1) Defendants’ motion to dismiss (Doc. 10) is granted in part and denied in part; and 17 (2) □□□ the parties’ stipulation, Lytikainen may file a FAC in conformance with 18 || this ruling and making no further additions. Any such FAC must be filed by September 2, 2019. 20 Dated this 19th day of August, 2019. 21 22 _
94 United States District Judge 25 26 27 28
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