1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 PARK MILLER, LLC, et al., Case No. 19-cv-04185-WHO
8 Plaintiffs, ORDER GRANTING IN PART AND 9 v. DENYING IN PART MOTION TO DISMISS THE SECOND AMENDED 10 DURHAM GROUP, LTD., et al., COMPLAINT; DENYING MOTION FOR SANCTIONS Defendants. 11 Re: Dkt. Nos. 33, 37
13 Plaintiff Park Miller LLC (“Park Miller”), a wealth advisory firm, advised its clients to 14 invest in defendant Durham Group, Ltd. (“DGL”). Multiple promissory notes were executed 15 between those clients and DGL. DGL defaulted on the promissory notes, for which the plaintiff 16 clients (“the contracting plaintiffs”) bring breach of contract claims.1 Plaintiffs name DGL, Craig 17 McGrain, the president and owner of DGL, and other allegedly related corporations owned by 18 McGrain (Durham Commercial Capital Corp. (“DCC”), First Austin Funding Corp. (“First 19 Austin”), and Maasai Holdings LLC (“Maasai Holdings”)) as defendants that engaged in fraud by 20 misrepresenting and concealing the financial status of DGL. Park Miller contends that these 21 fraudulent actions also interfered with its business relationship with its clients. 22 Before me is a second round of motion to dismiss and a related motion for sanctions for 23 filing the Second Amended Complaint (“SAC”). For the reasons set forth below, and in my prior 24 order, defendants’ motion to dismiss McGrain, First Austin and Maasai Holdings for lack of 25 26 1 The contracting plaintiffs are Henry S. Lawson, Marcia Lawson, Lawson Land, Inc., 27 (collectively the “Lawsons”), Edward Miner, James Combs, Dorothy Combs, Gregory Combs and 1 personal jurisdiction is GRANTED. Their motion to dismiss the breach of contract claims against 2 these three defendants is moot in light of my lack of jurisdiction. Their motion to dismiss the 3 fraud claims against the remaining defendants, DGL and DCC, is DENIED in part and 4 GRANTED in part. Their related motion for sanctions, which largely repeats arguments made in 5 the motion to dismiss, is DENIED. 6 BACKGROUND 7 I. PROCEDURAL BACKGROUND 8 On July 19, 2019, plaintiffs filed a complaint bringing multiple breach of contract claims 9 and several claims based on fraud and misrepresentation. Complaint (“Compl.”) [Dkt. No. 1]. 10 Defendants moved to dismiss the Complaint for lack of personal jurisdiction and for failure to 11 state a claim, to which plaintiffs responded with both an opposition and a First Amended 12 Complaint. First Amended Complaint (“FAC”) [Dkt. No. 19]. 13 Defendants requested that I address their motion to dismiss the Complaint despite the filing 14 of the FAC. I dismissed First Austin, Maasai Holdings and McGrain for lack of personal 15 jurisdiction, and granted defendants’ motion to dismiss the breach of contract claims against all 16 except DGL and DCC and the fraud claims against all defendants. See Order Granting Motion to 17 Dismiss for Lack of Personal Jurisdiction and For Failure to State a Claim (“Order”) [Dkt. No. 18 24]. Plaintiffs were given leave to amend. 19 The SAC brings the same causes of actions against the same defendants and expands on 20 some allegations. Second Amended Complaint (“SAC”) [Dkt. No. 29]. Defendants move to 21 dismiss on the same grounds as before. See Notice of Motion and Motion to Dismiss Second 22 Amended Complaint for Lack of Personal Jurisdiction and for Failure to State a Claim (“MTD”) 23 [Dkt. No. 33]. They also move for sanctions against plaintiffs and their counsel for filing the 24 SAC. See Defendants’ Notice of Motion and Motion for Sanctions Against Plaintiffs and Their 25 Counsel (“Mot. Sanctions”) [Dkt. No. 37]. These matters are appropriate for disposition without 26 oral argument. The April 22, 2020 hearing on the MTD has already been vacated and I VACATE 27 the May 6, 2020 hearing on the sanctions motion as well. 1 II. FACTUAL BACKGROUND 2 A. The Parties 3 Park Miller is incorporated in California and is engaged in comprehensive planning, 4 investment management and other related services. SAC ¶ 1. The contracting plaintiffs reside in 5 California (Lawson Land Inc. is incorporated in California). Id. ¶¶ 2-11. All corporate defendants 6 are incorporated in New York and McGrain is a New York resident. Id. ¶¶ 12-16 7 DCC is a factoring business, which purchases invoices owed to businesses in return for a 8 percentage of the invoiced amounts. SAC ¶ 25. DGL borrows money through promissory notes 9 and raises capital to fund DCC’s factoring business. Id. 10 Maasai Holdings is a debt buyer. SAC ¶ 31. Defendants contend that First Austin sells 11 paper products, but plaintiffs allege that it is also involved in factoring invoices. Plaintiffs allege 12 that McGrain is the president of DGL, the chief executive officer of DCC, and is in control of or 13 owns First Austin and Maasai Holdings. Id. ¶ 16. Their allegations as to these three defendants 14 (McGrain, First Austin and Maasai Holdings) are more thoroughly discussed in Sections IV and V 15 of this Order. 16 B. The Promissory Notes 17 Plaintiffs allege that their relationship with defendants began in 2010 when McGrain 18 reached out to Park Miller to secure funds for DCC’s factoring business. SAC ¶ 37. After Park 19 Miller conducted an extensive analysis of DGL and DCC, it “reached out to [its] clients with this 20 potential investment opportunity.” Id. ¶ 38. 21 Each of the contracting plaintiffs entered into promissory notes with DGL to invest 22 millions of dollars to fund DCC’s factoring business. SAC ¶¶ 46-65; see also id., Exs. A-I (copies 23 of the promissory notes between each contracting plaintiff and DGL). Plaintiffs seek relief on six 24 of the promissory notes that were breached: December 20, 2017 and July 2, 2018 promissory notes 25 with the Lawsons (Exhibits B and C); October 28, 2014 promissory note with Miner (Exhibit E); 26 October 28, 2014 promissory note with James and Dorothy Combs (Exhibit F); November 9, 2016 27 promissory note with Gregory and Suzanne Combs (Exhibit G); October 28, 2016 promissory note 1 Each contracting plaintiff brings breach of contract claims against all defendants for 2 defaulting on the promissory notes and failing to take action in order to cure the default. SAC ¶¶ 3 93-132 (causes of action (“COAs”) 1-5). As to these breach of contract claims, defendants move 4 to dismiss the claims against all defendants except DGL/DCC, arguing that the other defendants 5 are not parties to the underlying promissory notes. MTD 1-2.2 6 C. Defendants’ Fraudulent Acts and Misrepresentation 7 1. The 1-800 Solar Receivables 8 Plaintiffs allege that “[b]eginning no later than when Defendants commenced dealing with 9 1-800 Solar on or about 2016, they knew that the ‘factored receivables’ were not of value and 10 worth what they claimed.” SAC ¶ 66. They contend that defendants “learned soon thereafter that 11 there were issues with 1-800 Solar’s financial condition and the collectability of the receivables.” 12 Id. In particular, they claim that “[p]rior to but certainly not later than April 2018, Defendants 13 knew or should have known 1-800 Solar was in financial distress” because it filed for bankruptcy. 14 Id. 15 Despite this knowledge, the financial statements of DGL/DCC continued to reflect the 1- 16 800 Solar receivables as active full value assets, and these allegedly incorrect financial statements 17 were provided to John Miller (“Miller”), and thus the firm Park Miller, during his visit to the 18 DGL/DCC office in early November 2018. SAC ¶¶ 67-68. Plaintiffs assert that this false 19 reporting prevented Park Miller from realizing the true financial condition of DGL and DCC 20 “when their status began to deteriorate no later than the first quarter of 2018.” Id. ¶ 69. 21 2. Inaccurate Financial Information Regarding 1-800 Solar 22 Plaintiffs contend that since the beginning of the business relationship between Park 23 Miller, McGrain and DGL/DCC in 2010, “McGrain would customarily notify Park Miller of any 24 and all changes to the Durham Entities’ financial condition,” and on “at least three prior occasions, 25
26 2 Defendants previously did not seek to dismiss claims against DCC given that they did not seek to parse out DGL and DCC as separate entities. Order at 3 n.2. They now ask to dismiss claims 27 against DCC, but both parties repeatedly use the term “DGL/DCC” and conflate the two entities. 1 McGrain timely notified Park Miller of events that compromised the Durham Entities’ financial 2 security and periodically advised regarding changing practices.” Id. ¶ 70; see also id. ¶ 41 (listing 3 three times in 2011, 2014 and 2017 when McGrain informed Park Miller about potential issues 4 that could impact DGL/DCC’s finances). 5 They contend that contrary to this “longstanding and expected practice of transparency and 6 full disclosure, sometime prior to October 2016, McGrain and [DGL]/DCC changed their practice 7 in the factoring business without advising Park Miller or other [contracting plaintiffs].” SAC ¶ 44. 8 They claim that DGL acquired account receivables from 1-800 Solar, but the receivables were 9 different and far less valuable than normal receivables because they were receivables for work that 10 had not been performed and as such, the receivables were not owned until the work was 11 performed. Id. Plaintiffs add that if this had been disclosed, Park Miller would never have 12 approved of it and would have taken steps to extract its clients from DGL/DCC investments. Id. ¶ 13 45. 14 Despite knowing that 1-800 Solar’s assets were not worth what they were represented as, 15 and ultimately that there was no chance of recovery on the 1-800 Solar assets, DGL/DCC’s 16 financial statements continued to reflect the receivables as active full value assets. SAC ¶ 67. 17 Instead of disclosing the compromised financial situation, McGrain continued to reach out to Park 18 Miller through 2016, 2017, and 2018 to seek additional investments for DCC’s factoring 19 business.” Id. ¶ 72. In particular, the SAC adds that in reliance on these 20 misrepresentations/nondisclosures, Park Miller facilitated additional investments between its 21 clients and DGL, including investments with the Lawsons, Gregory and Suzanne Combs, and 22 Choplin and Mone (hereinafter referred to as “LCCM plaintiffs”). Id. ¶ 84. They claim that the 23 misrepresentations caused contracting plaintiffs to delay efforts to collect from DGL earlier, 24 causing them financial harm. Id. ¶ 86. 25 Park Miller lost six (6) clients and suffered monetary and reputational harm as a result of 26 defendants’ misrepresentation. SAC ¶¶ 88-92. It is facing several “threatened lawsuits from 27 former clients,” one of whom has filed a petition before the American Arbitration Association and 3. Park Miller’s Discovery of the Inaccurate Financial Information 1 The SAC now explains how Park Miller came to discover the inaccurate financial 2 representations in November 2018 and the “evasive and deceptive” answers McGrain gave about 3 DGL/DCC’s financial situation. In 2014, McGrain informed Park Miller that one of DCC’s 4 clients, Connolly Geaney Ablitt & Wilard, P.C. (“Ablitt”), diverted several million dollars’ worth 5 of payments over notice, and due to DCC, from various loan servicers making the receivables 6 essentially worthless. SAC ¶ 41. In October 2018, Miller learned that Ablitt filed for summary 7 judgment against DCC and Maasai Holdings in its bankruptcy proceedings. Id. ¶ 75. As a result, 8 Miller wanted to fully vet DGL/DCC’s financial statements in order to ensure it would remain in a 9 strong enough financial condition to continue to pay its clients according to the terms of the 10 promissory notes. Id. 11 Upon his review, Miller noticed that the gross profitability of DGL/DCC had deteriorated 12 and that the gross profit was abnormally low given the represented assets of the companies. Id. ¶ 13 76. He asked McGrain about this, who insisted that the change was due to “increased legal 14 expenses.” Id. ¶ 77. When Miller responded that legal expenses should not affect gross 15 profitability, McGrain replied that the change was “due to reduced holdbacks on initial purchase 16 payments driven by market forces.” Id. Miller thought that this was plausible, but still did some 17 additional research to confirm. Id. 18 He asked McGrain for the “granular, customer by customer, factoring data.” Upon review 19 of this data on or about November 2018, he discovered that the 1-800 Solar receivables on the 20 financial statements reflected as “active assets” worth over $1,797,000 were, in fact, long overdue, 21 and should not have been included as “active assets.” SAC ¶ 79. After this discovery, he asked 22 McGrain on the telephone whether the 1-800 Solar receivables were any good. McGrain “finally 23 admitted that there as a problem with the 1-800 Solar receivables, that 1-800 Solar has declared 24 bankruptcy and that the receivables were not recoverable.” Id. ¶ 80. Plaintiffs claim that this was 25 the “first time McGrain disclosed to Park Miller the long concealed fact that the Durham Entities 26 were involved with factoring with business for work that was not yet completed” and that this 27 information was material because it increased the risk of Park Miller’s clients investments. Id. ¶ 1 82. 2 Based on these allegations, all plaintiffs bring fraud claims against all defendants. SAC ¶¶ 3 133-169 (COA 6 for fraud/intentional misrepresentation in under Civ. Code § 1572; COA 7 for 4 fraudulent deceit under Cal. Civ. Code §§ 1709-1710; COA 8-9 for negligence and negligent 5 misrepresentation). Park Miller also brings two claims against all defendants based on the clients 6 and money it lost due to defendants’ fraud. SAC ¶¶ 170-191 (COA 10 for intentional interference 7 with contractual relations; COA 11 for negligent interference with prospective economic 8 relations). 9 LEGAL STANDARD 10 I. RULE 12(B)(6): MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM 11 Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss if a claim 12 fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to 13 dismiss, the claimant must allege “enough facts to state a claim to relief that is plausible on its 14 face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible when 15 the plaintiff pleads facts that “allow the court to draw the reasonable inference that the defendant 16 is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation 17 omitted). There must be “more than a sheer possibility that a defendant has acted unlawfully.” Id. 18 While courts do not require “heightened fact pleading of specifics,” a claim must be supported by 19 facts sufficient to “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555, 20 570. 21 Under Federal Rule of Civil Procedure 9(b), a party must “state with particularity the 22 circumstances constituting fraud or mistake,” including “the who, what, when, where, and how of 23 the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) 24 (internal quotation marks omitted). However, “Rule 9(b) requires only that the circumstances of 25 fraud be stated with particularity; other facts may be pleaded generally, or in accordance with Rule 26 8.” United States ex rel. Lee v. Corinthian Colls., 655 F.3d 984, 992 (9th Cir. 2011). In deciding 27 a motion to dismiss for failure to state a claim, the court accepts all of the factual allegations as 1 828 F.2d 556, 561 (9th Cir. 1987). But the court is not required to accept as true “allegations that 2 are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead 3 Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). 4 II. RULE 12(B)(2): MOTION TO DISMISS FOR LACK OF PERSONAL 5 JURISDICTION 6 Under Rule 12(b)(2) of the Federal Rules of Civil Procedure, a defendant may move to 7 dismiss for lack of personal jurisdiction. The plaintiff then bears the burden of demonstrating that 8 jurisdiction exists. Schwarzenegger v. Fred Martin Motor Co., 374 F.3d 797, 800 (9th Cir. 2004). 9 The plaintiff “need only demonstrate facts that if true would support jurisdiction over the 10 defendant.” Ballard v. Savage, 65 F.3d 1495, 1498 (9th Cir. 1995); Fields v. Sedgwick Assoc. 11 Risks, Ltd., 796 F.2d 299, 301 (9th Cir. 1986). “Although the plaintiff cannot simply rest on the 12 bare allegations of its complaint, uncontroverted allegations in the complaint must be taken as 13 true.” Schwarzenegger, 374 F.3d at 800 (citations omitted). Conflicts in the evidence must be 14 resolved in the plaintiff’s favor. Id. “Where, as here, the motion is based on written materials 15 rather than an evidentiary hearing, the plaintiff need only make a prima facie showing of 16 jurisdictional facts. In such cases, we only inquire into whether [the plaintiff’s] pleadings and 17 affidavits make a prima facie showing of personal jurisdiction.” Caruth v. International 18 Psychoanalytical Ass’n, 59 F.3d 126, 128 (9th Cir. 1995) (internal punctuation and citation 19 omitted). 20 Where, as here, there is no applicable federal statute governing personal jurisdiction, the 21 law of the state in which the district court sits applies.” Core-Vent Corp. v. Novel Indus. AB, 11 22 F.3d 1482, 1484 (9th Cir. 1993) (citation omitted). “California’s long-arm statute allows courts to 23 exercise personal jurisdiction over defendants to the extent permitted by the Due Process Clause of 24 the United States Constitution.” Id.; Cal. Civ. Proc. Code. § 410.10. “Because California’s long- 25 arm jurisdictional statute is coextensive with federal due process requirements, the jurisdictional 26 analyses under state law and federal due process are the same.” Schwarzenegger, 374 F.3d at 800- 27 01. 1 Associated Risks, Ltd., 796 F.2d 299, 301 (9th Cir. 1986). “[G]eneral jurisdiction permits a 2 defendant to be haled into court in the forum state to answer for any of its activities anywhere in 3 the word.” Schwarzenegger, 374 F.3d at 801. It exists where a nonresident defendant’s activities 4 within a state are “substantial” or “continuous and systematic.” Data Disc., Inc. v. Sys. Tech. 5 Assocs., Inc., 557 F.2d 1280, 1287 (9th Cir. 1977). Such contracts must “be of the sort that 6 approximate physical presence.” Bancroft & Masters, Inc. v. Augusta Nat’l Inc., 223 F.3d 1082, 7 1086 (9th Cir. 2000). 8 Specific jurisdiction arises when a defendant’s specific contacts with the forum give rise to 9 the claim in question. Helicoptoros Nacionales de Columbia S.A. v. Hall, 466 U.S. 408, 414-16 10 (1984). “A court exercises specific jurisdiction where the cause of action arises out of or has a 11 substantial connection to the defendant’s conduct with the forum.” Glencore Grain Rotterdam BV 12 v. Shivnath Rai Harnarain Co., 284 F.3d 1114, 1123 (9th Cir. 2002). The Ninth Circuit employs a 13 three-part test to determine whether there is specific jurisdiction over a defendant: (1) the non-resident defendant must purposefully direct his activities or 14 consummate some transaction with the forum or resident thereof; or perform some act by which he purposefully avails himself of the privilege of conducting activities 15 in the forum, thereby invoking the benefits and protections of its laws; 16 (2) the claim must be one which arises out of or relates to the defendant’s forum- 17 related activities; and
18 (3) the exercise of jurisdiction must comport with fair play and substantial justice, 19 i.e., it must be reasonable. Williams v. Yamaha Motor Co. Ltd., 851 F.3d 1015, 1023 (9th Cir. 2017). 20 The first prong may be satisfied by “purposeful availment of the privilege of doing 21 business in the forum; by purposeful direction of activities at the forum; or by some combination 22 thereof.” Yahoo! Inc. v. La Ligue Contre Le Racisme Et L’Antisemitisme, 433 F.3d 1199, 1206 23 (9th Cir. 2006). In tort cases, courts typically inquire whether a defendant “purposefully directs 24 his activities at the forum state, applying an ‘effects’ test that focuses on the forum in which the 25 defendant’s actions were felt, whether or not the actions themselves occurred within the forum.” 26 27 1 Id.3 In contrast, in contract cases, courts typically inquire whether a defendant “purposefully 2 avails itself of the privilege of conducting activities or consummates a transaction in the forum, 3 focusing on activities such as delivering goods or executing a contract.” Id. (citation and internal 4 punctuation omitted). 5 With regard to the second prong, courts “measure this requirement in terms of ‘but for’ 6 causation.” Bancroft & Masters, 223 F.3d at 1088. The plaintiff bears the burden of satisfying the 7 first two prongs of the test. Schwarzenegger, 374 F.3d at 802. If the plaintiff succeeds in 8 satisfying both of the first two prongs, the burden then shifts to the defendant to “present a 9 compelling case” that the exercise of jurisdiction would not be reasonable.” Id. If the plaintiff 10 cannot satisfy either of the first two prongs, personal jurisdiction is not established in the forum 11 state. Id. 12 DISCUSSION 13 I. REQUEST FOR JUDICIAL NOTICE 14 Plaintiffs seek judicial notice of the summary judgment briefing, discovery responses, and 15 summary judgment decision made in the bankruptcy proceeding that initially prompted Miller to 16 inquire into DGL/DCC’s financial status. See Request for Judicial Notice in Support of Plaintiffs’ 17 Opposition to Motion to Dismiss Second Amended Complaint for Lack of Personal Jurisdiction 18 and for Failure to State a Claim (“Miller RJN”) [Dkt. No. 35] (seeking judicial notice of 19 documents in bankruptcy case filed before the United States Bankruptcy Court for the District of 20 Massachusetts, Stewart F. Grossman, Chapter 7 Trustee of The Estate of Connolly Geaney Ablitt 21 & Willard, P.C., v. Durham Commercial Capital Corp. and Maasai Holdings, LLC, Adv. Proc. 22 No. 16-01163-JNF (hereinafter “Ablitt Bankruptcy Case”)). They do so to show that there was a 23 bankruptcy case involving one of DCC’s clients, DCC and Maasai Holdings, and that there was a 24 motion for summary judgment filed against DCC and Maasai in that case, which was ultimately 25 granted by the court. See Reply in Support of Plaintiffs’ Request for Judicial Notice RE: Motion 26
27 3 However, as the Supreme Court reemphasized in Walden v. Fiore, 571 U.S. 277, 285 (2014) the 1 to Dismiss Second Amended Complaint (“Miller Reply RJN”) [Dkt. No. 41] 4. They claim that 2 these documents are relevant to their fraud allegations in the SAC; in particular, that in October 3 2018, Miller learned that the opposing party in this bankruptcy case filed a summary judgment 4 motion against DCC and Maasai Holdings and that as a result Miller “wanted to fully vet [DGL]’s 5 and DCC’s financial statements in order to ensure [that] they would remain in strong enough 6 financial standing to continue to pay Park Miller’s clients according to the terms of the Promissory 7 Notes.” Id. at 3 (quoting SAC ¶ 75). They insist that they “do not rely on the truth of the matters 8 asserted in these documents; rather, they demonstrate that the documents exist and contain the 9 referenced statements.” Miller Reply RJN at 6. 10 Plaintiffs also request judicial notice of the Ablitt Bankruptcy Case documents because 11 they contain statements that contradict statements made by McGrain in his declaration 12 accompanying defendants’ motion to dismiss. Miller Reply RJN at 6; see Declaration of Craig 13 McGrain in Support of Defendants’ Second Motion to Dismiss (“McGrain Decl.”) [Dkt. No. 33- 14 1]. I am not considering McGrain’s declaration to the extent that it attempts to introduce extrinsic 15 evidence to a motion to dismiss for failure to state a claim; I must take the factual allegations in 16 the SAC as true. Although declarations may be considered in a motion to dismiss for lack of 17 personal jurisdiction, “[c]onflicts between facts contained within declarations or affidavits are 18 resolved in the Plaintiff’s favor.” Michael v. New Century Fin. Servs., 65 F. Supp. 3d 797, 803 19 (N.D. Cal. 2014) (citing Mattel, Inc. v. Greiner & Hausser GmbH, 354 F.3d 857, 861-62 (9th Cir. 20 2003)). Here, plaintiffs seek to use these documents to contradict statements made by McGrain in 21 his declaration and reinforce their allegation that (i) First Austin is not simply a paper product 22 company but has some involvement in the factoring business and (ii) Maasai Holdings is under the 23 same management and control of DGL/DCC. As discussed in Section V of this Order, these 24 allegations, taken as true, are still not enough to impose alter ego liability over First Austin and 25 Maasai Holdings. 26 As a result, plaintiffs” request for judicial notice of these documents is GRANTED only 27 for their existence and the existence of their contents, not for the truth of their contents. See Lee v. 1 omitted) (“On a Rule 12(b)(6) motion to dismiss, when a court takes judicial notice of another 2 court’s opinion, it may do so not for the truth of the facts recited therein, but for the existence of 3 the opinion, which is not subject to reasonable dispute over its authenticity.”); Wyatt v. Terhune, 4 315 F.3d 1108, 1114 n. 5 (9th Cir. 2003), overruled on other grounds by Albino v. Baca, 747 F.3d 5 1162, 1168-71 (9th Cir. 2014) (“Factual findings in one case ordinarily are not admissible for their 6 truth in another case through judicial notice.”). 7 II. FAILURE TO STATE FRAUD CLAIMS 8 Plaintiffs’ fraud claims are denominated as fraud (COA 6), fraudulent deceit (COA 7), 9 negligence (COA 8), negligent misrepresentation (COA 9), intentional interference with 10 contractual relations (COA 10) and negligent interference with prospective economic relations 11 (COA 11). COAs 6 and 7 relate to alleged promissory fraud that occurred on the promissory notes 12 between contracting plaintiffs and DGL. To sufficiently allege COAs 6 through 9, plaintiffs must 13 meet the heightened pleading standard under Rule 9(b) and state with particularity the 14 circumstances constituting fraud. 15 COAs 10 and 11 relate to the business relationships that were allegedly severed between 16 Park Miller and its clients due to defendants’ interfering actions. Park Miller’s interference claims 17 rely on more than defendant’s fraudulent acts, and therefore must be sufficiently pleaded under 18 Rule 8, not the heightened pleading standard under Rule 9(b). 19 A. Specificity of Fraud Claims 20 The SAC identifies with sufficient particularity the who, what, when, where and how of 21 the misconduct. Plaintiffs allege that defendants knew of DGL/DCC’s compromised financial 22 status beginning in 2016 when they provided at least $1,797,000 to 1-800 Solar for work that had 23 not yet been completed and “learned soon after that there were issues with 1-800 Solar’s financial 24 condition and collectability of the receivables.” SAC ¶ 66. They claim that defendants knew or 25 should have known that 1-800 Solar was “in financial distress, many of the receivables would not 26 become due as 1-800 Solar could not perform the required work, and it would have to file for 27 bankruptcy,” which it eventually did in April 2018. Id. But despite this knowledge, defendants 1 statements provided to Park Miller such that it appeared that DGL could continue paying interest 2 on the promissory notes with contracting plaintiffs. Id. ¶¶ 67, 73. They claim that in accordance 3 with standard financial practice, these receivables should not have been reflected as good assets 4 and should have been reflected their discounted value, if any, due to the fact that they were 5 contingent on future performance. Id. ¶ 69. Park Miller and its clients relied on full and accurate 6 disclosure and this false reporting prevented them from realizing the true financial condition of 7 DGL/DCC. Id. ¶¶ 69, 71. 8 Plaintiffs also allege that McGrain himself knew that the financial statements sent to 9 plaintiffs were inaccurate but “permitted” them to be sent anyway. SAC ¶ 71. Despite the 10 compromised financial situation, he continued to reach out to Park Miller through 2016, 2017 and 11 2018 to seek additional investments for DCC’s factoring business. Id. ¶ 72; see also id. ¶ 85 12 (alleging that the LCCM plaintiffs would not have invested if the true financial status of 13 DGL/DCC and the nature of their business practices were known to them). The SAC now 14 explains in more detail how Miller discovered the alleged fraud and how McGrain provided 15 evasive and deceptive answers about DCC/DGL’s financial situation in conversations with Miller. 16 Id. ¶¶ 74-82. 17 Defendants argue that they provided documents with the alleged omitted information that 18 made Park Miller aware of 1-800 Solar’s financial status. This argument directly contradicts the 19 facts alleged in the SAC.4 In considering a motion to dismiss for failure to state a claim, I must 20 accept the factual allegations in the SAC as true. Defendants’ argument is not a challenge to the 21 sufficiency of the allegations in the SAC; it is an attempt to argue the merits of the claims. 22 Because the SAC sufficiently links how the circumstances surrounding 1-800 Solar 23 constitute fraud, defendants’ motion to dismiss the fraud claims is DENIED. However, plaintiffs 24 have only sufficiently alleged their fraud claims against DGL/DCC, not the other three defendants 25 who are dismissed for lack of personal jurisdiction. See infra Sections IV and V (discussing 26 4 The allegation that “the receivables continued to be reflected on the Durham financial statements 27 as active full value assets” is disputed by defendants, who argue that “the collectability and status 1 McGrain, First Austin and Maasai Holdings). 2 1. Promissory Fraud 3 Two of plaintiffs’ claims, COAs 6 and 7, relate to the promissory fraud that occurred 4 pertaining to the promissory notes between contracting plaintiffs and DGL. For a promissory 5 fraud cause of action, a plaintiff must plead facts—other than mere nonperformance— 6 demonstrating that the promises were knowingly false when made; in other words, that they were 7 made without any intention of performance. See Lazar v. Superior Court, 12 Cal. 4th 631, 638 8 (1996).) There must be other factual allegations – other than simple nonperformance – to 9 adequately allege that a defendant made knowingly false promises without an intent to perform. 10 See Sunnyside Development Co., LLC v. Opsys Ltd., No. C 05-0553 MHP, 2005 WL 1876106, *6 11 (N.D. Cal. Aug. 8, 2005). 12 I previously dismissed plaintiffs’ promissory fraud claims because the FAC alleged that 13 the fraud occurred at the time of the alleged April 2018 bankruptcy of 1-800 Solar and only one 14 contracting plaintiff, Lawson Land, Inc., executed a promissory note after that date (in July 2018). 15 See Order at 11. The SAC now alleges that the fraud occurred sometime in 2016, when 16 DGL/DCC first commenced dealing with 1-800 Solar, because they allegedly “knew or should 17 have known that their financial status had detrimentally changed because they [sic] provided at 18 least $1,797,000 to 1-800 Solar for receivables that were not yet due and payable” and “learned 19 soon thereafter that there were issues with 1-800 Solar’s financial condition and the collectability 20 of the receivables.” SAC ¶ 66. As a result, it is not only the July 2018 promissory note with the 21 Lawsons (Exhibit C) that is implicated, but three additional promissory notes as well: (i) 22 December 2017 promissory note with the Lawsons (Exhibit B); (ii) November 2016 promissory 23 note with Gregory and Suzanne Combs (Exhibit G); (iii) and October 2016 promissory note with 24 Choplin and Mone (Exhibit I). These together are the LCCM plaintiffs. Compare SAC ¶¶84-85 25 with FAC ¶¶ 58-59 26 Plaintiffs allege that defendants knew at the time of the LCCM plaintiffs’ investments that 27 they were not able to pay the principal back because of their poor financial condition and instead 1 not intend to repay the principal or the interest accrued. See SAC ¶¶ 140, 151. Defendants do not 2 respond to this new allegation from the LCCM plaintiffs and instead argue as if the alleged fraud 3 occurred in 2018, as it was initially alleged in the FAC. 4 Plaintiffs have adequately alleged promissory fraud on behalf of the LCCM plaintiffs 5 because they allege that defendants entered promissory notes with the LCCM plaintiffs with no 6 intention to perform or entered them knowing that they could not perform. Defendants’ motion to 7 dismiss the promissory fraud claims brought by the LCCM plaintiffs is DENIED but is 8 GRANTED with respect to the other plaintiffs; although the SAC states that these claims are 9 brought on behalf of all plaintiffs, in fact the promissory fraud claims are only alleged on behalf of 10 the LCCM plaintiffs. 11 B. Interference Claims 12 Park Miller brings two interference claims – intentional interference with contractual 13 relations (COA 10) and negligent interference with prospective business relations (COA 11). 14 Plaintiffs argue that they are not required to plead these claims with Rule 9(b) specificity because 15 the interference claims rely on more than defendant’s fraudulent acts; they rely on both 16 defendants’ misrepresentations and DGL/DCC’s failure to perform. Plaintiffs’ Opposition to 17 Motion to Dismiss for Lack of Personal Jurisdiction and for Failure to State a Claim (“Oppo.”) 18 [Dkt. No. 34] 16. This characterization was not clearly reflected in the FAC, but it is now in the 19 SAC. See SAC ¶¶ 170-192; Order at 12. Rule 9(b) does not apply to these interference claims. 20 See Oracle Am., Inc. v. TERiX Computer Co., Inc., No. 5:13-CV-03385-PSG, 2014 WL 31344, at 21 *11 (N.D. Cal. Jan. 3, 2014) (citation omitted). (Rule 9(b) did not apply to the interference claim 22 because the plaintiff’s interference claim “reli[ed] on several instances of misconduct, including 23 violations of the [Computer Fraud and Abuse Act] and [] unfair competition”); see also id. (a 24 plaintiff alleges a claim sounding in fraud when it “allege[s] a unified course of fraudulent conduct 25 and conduct[s] and rel[ies] entirely on that court of conduct as the basis of its interference claims”) 26 (emphasis added). 27 Unhelpfully, the parties do not differentiate between the two interference causes of actions 1. Intentional Interference with Contractual Relations 1 In my previous order, I dismissed Park Miller’s interference claims because it failed to 2 “specifically allege[] that any of its contracts have been breached or any prospective economic 3 relations that have been lost.” Order at 12 (relying on Heartland Payment Sys., Inc. v. Mercury 4 Payment Sys., LLC, No. C 14-0437 CW, 2014 WL 5812294, at *8 (N.D. Cal. Nov. 7, 2014)). 5 Park Miller now argues that it “need not allege an actual or inevitable breach of contract in order 6 to state a claim for disruption of contractual relations” because California courts have “recognized 7 that interference with the plaintiff’s performance may give rise to a claim for interference with 8 contractual relations if plaintiff’s performance is made more costly or more burdensome.” Oppo. 9 17 (quoting Pac. Gas & Elec. Co. v. Bear Stearns & Co., 50 Cal. 3d 1118, 1129 (1990)). 10 In Pac. Gas & Elec. Co. v. Bear Stearns & Co., the California Supreme Court stated the 11 elements of intentional breach of contractual relations as: “(1) a valid contract between plaintiff 12 and a third party; (2) defendant’s knowledge of this contract; (3) defendant’s intentional acts 13 designed to induce a breach or disruption of the contractual relationship; (4) actual breach or 14 disruption of the contractual relationship; and (5) resulting damage.” 50. Cal. 3d at 1126 15 (emphasis added). Some courts have worded the standard like this, holding that actual breach is 16 not required to state a claim for this tort. See, e.g., RealPage, Inc. v. Yardi Sys., Inc., 852 F. Supp. 17 2d 1215, 1230 (C.D. Cal. 2012); Integrated Storage Consulting Servs., Inc. v. NetApp, Inc., No. 18 5:12-CV-6209-EJD, 2014 WL 3372583, at *12 (N.D. Cal. July 9, 2014) (finding actual breach is 19 not a required element because “[w]hile the tort of inducing breach of contract requires proof of a 20 breach, the cause of action for interference with contractual relations is distinct and requires only 21 proof of interference”). 22 But other courts in this District have dismissed claims that fail to allege actual breach, 23 including the one I relied on in my previous order. See, e.g., Heartland, 2014 WL 5812294, at *8 24 (“Heartland does not allege that any of its contracts with any former merchant have actually been 25 breached, much less breached because of interference by Mercury.”); Orchard Supply Hardware 26 LLC v. Home Depot USA, Inc., 967 F. Supp. 2d 1347, 1365 (N.D. Cal. 2013) (requiring actual 27 breach as an element). I follow the line of cases that requires “actual breach or disruption of the 1 contractual relationship” because that is how the California Supreme Court has stated the element. 2 With that clarification, I find that Park Miller plausibly alleges all elements of this tort. It 3 alleges that (i) there were valid contracts between it and contracting plaintiffs (SAC ¶ 171); (ii) 4 defendants had knowledge of these contracts given their intentional acts of reaching out to Park 5 Miller to solicit investments from its clients (SAC ¶¶ 172, 174) 5; (iii) defendants’ “conduct of 6 failing to perform on the promissory notes and their deliberate misrepresentations” led to this 7 interference (SAC ¶ 173); and (iv) these acts “made performance of Park Miller more expensive 8 and difficult,” led to at least six (6) lost clients (SAC ¶¶ 173, 176) and (v) caused Park Miller to 9 lose revenue, face several threatened lawsuits from its clients, and suffer reputational harm as a 10 wealth advisory firm (SAC ¶¶ 177-179). 11 2. Negligent Interference with Prospective Economic Advantage 12 In order to state a claim for negligent interference with prospective economic advantage, a 13 plaintiff must allege “(1) an economic relationship between plaintiff and a third party or parties; 14 (2) defendants’ knowledge of that relationship; (3) negligent acts to disrupt that relationship; (4) 15 wrongfulness of the interference by some legal measure other than the fact of the interference 16 itself”; (5) actual disruption of the relationship; and (6) economic harm proximately caused by the 17 acts of defendants.” Cellars v. Pac. Coast Packaging, Inc., 189 F.R.D. 575, 581 (N.D. Cal. 1999) 18 (citing Della Penna v. Toyota Motor Sales, U.S.A., Inc., 11 Cal.4th 376, 393 (1995)) (internal 19 quotation marks omitted). This tort is different from interference with contractual relations, which 20 “does not require wrongful conduct by the defendant apart from the interference.” 625 3rd St. 21 Assocs., L.P. v. Alliant Credit Union, 633 F. Supp. 2d 1040, 1048 (N.D. Cal. 2009) (citation 22
23 5 Defendants argue that this claim is based on the premise that they knew of the contract terms between contracting plaintiffs and Park Miller and would have known that if the promissory notes 24 were not paid, this would somehow impact the contracts between contracting plaintiffs and Park Miller. Reply Brief in Support of Motion to Dismiss (“Reply”) [Dkt. No. 38]13-14. But they do 25 not point to any authority that suggests that second element requires defendants to know the exact terms of the contract between contracting plaintiffs and Park Miller. Park Miller alleges that 26 “[d]efendants knew of the contractual relationship between Park Miller and their clients, as evidenced by their intentional actions of reaching out to Park Miller to solicit investments from 27 Park Miller’s clients.” SAC ¶ 172. Viewing the SAC in light most favorable to plaintiffs, they 1 omitted). 2 Park Miller alleges that it was in an economic relationship with its clients, which would 3 have resulted in a future economic benefit to Park Miller, and that defendants knew or should have 4 known of this relationship. SAC ¶¶ 181-82. Park Miller also contends that defendants failed to 5 fulfill their obligations and “engaged in wrongful conduct in misrepresenting [DGL’s] financial 6 status and suppressing crucial financial information that would have illuminated the truth about its 7 financial status to Plaintiffs with the intent to mislead Plaintiff.” SAC ¶¶ 184-85. Therefore, it 8 has sufficiently alleged negligent acts that disrupted the relationship and identified the 9 wrongfulness of the interference by some legal measure other than the fact of the interference. 10 Park Miller also specifically alleges that it not only lost six (6) clients and suffered 11 reputational harm due to defendants’ actions, but also that the “annual reoccurring revenue loss 12 due to lost clients is approximately $120,858.52.” SAC ¶ 187. “Additionally, as soon as Park 13 Miller discovered Defendants’ fraud and misrepresentation, Park Miller stopped charging fees 14 related to all the Durham investment accounts,” which means “[t]he annual reoccurring revenue 15 loss from Durham investment accounts is approximately $61,425 per year.” Id. ¶ 188. Park 16 Miller also contends that it is “facing several threatened lawsuits from former clients,” one of 17 which “has filed a lawsuit before the American Arbitration Association seeking damages in excess 18 of $4,000,000” and “[a]nother [who] has filed a complaint with the SEC.” Id. ¶¶ 189, 190. 19 Park Miller has plausibly alleged both of its interference claims. Defendants’ motion to 20 dismiss these claims against DGL and DCC is DENIED. Defendants’ motion to dismiss the 21 interference claims as to McGrain, First Austin and Maasai Holdings is moot in light of my lack of 22 jurisdiction. 23 III. FAILURE TO STATE BREACH OF CONTRACT CLAIMS 24 Defendants seek to dismiss the breach of contract claims against McGrain, First Austin and 25 Maasai Holdings because they were not parties to the underlying promissory notes at issue. Mot. 26 9. Contracting plaintiffs bring these claims against them on the allegation that they are alter egos 27 1 of DGL. Oppo. 8.6 As discussed in the next section, this court lacks personal jurisdiction over 2 these three defendants. Defendants’ motion to dismiss the breach of contract claims against 3 McGrain, First Austin and Maasai Holdings is moot in light of my lack of jurisdiction. 4 IV. LACK OF PERSONAL JURISDICTION OVER MCGRAIN 5 Plaintiffs argue that this court has personal jurisdiction over McGrain as an individual and 6 as an alter ego of DGL/DCC. They have not provided sufficient allegations in their SAC to 7 support either argument. 8 A. Specific Personal Jurisdiction 9 Plaintiffs argue that the SAC sufficiently alleges that McGrain purposefully directed his 10 business activities at California because: (i) McGrain signed at least three promissory notes 11 between DGL and contracting plaintiffs that specified performance in California (SAC ¶¶ 43, 47, 12 49, 51, 59, 61); (ii) McGrain permitted inaccurate financial statements to be sent to Park Miller 13 (SAC ¶ 71); (iii) McGrain directly solicited the investment from Park Miller’s clients with full 14 knowledge that its clients largely resided in California (SAC ¶¶ 43, 37, 69); (iv) McGrain 15 continued to solicit additional investment instead of disclosing defendants’ compromised financial 16 situation (SAC ¶¶ 70-72); and (v) McGrain provided evasive and deceptive answers about 17 DGL/DCC’s financial situation to Miller and only admitted that there was a problem with the 1- 18 800 Solar once Miller investigated and confronted him about it. (SAC ¶74-80). 19 I already rejected plaintiffs’ first argument. Order at 13-14. The promissory notes that 20 McGrain signed are not the subject of the breach of contract claims. See SAC, Exs. A, D, and H 21 (October 1, 2010 promissory note with the Lawsons, March 28, 2011 promissory note with Miller 22 and October 13, 2010 promissory note with Choplin and Mone). 23 Plaintiffs allege that McGrain knew the financial statements of DGL/DCC were inaccurate 24 yet “permitted them to be circulated to plaintiffs anyway.” SAC ¶ 71. Even accepting as true the 25 contested factual allegation that the reports sent to Park Miller inaccurately displayed 1-800 26 6 Parties agree that the contracting plaintiffs bring individual claims for breach of contract on their 27 promissory notes. The claim is not brought on behalf of Park Miller. See Oppo. 8 (“[Park Miller] 1 Solar’s assets, plaintiffs have not clearly alleged how McGrain was involved in that activity. 2 Simply alleging that he permitted these reports to be sent is not enough to say he purposefully 3 directed those activities. 4 Plaintiffs’ added allegations that McGrain “directly solicited investments” from California 5 investors and continued to solicit additional investments after the compromised financial situation 6 are also unsupported by factual allegations. They have not alleged which investments were 7 directly solicited by McGrain and how that connects to the alleged misrepresentation of 1-800 8 Solar that eventually caused Park Miller and contracting plaintiffs harm. 9 The only allegation with any plausible weight is the description of the evasive and 10 deceptive answers that McGrain provided to Miller when asked about DGL/DCC’s financial 11 situation. SAC ¶¶ 74-80. But these allegations alone are not enough to plead that McGrain 12 purposefully availed himself to the extent that it would be fair to exercise personal jurisdiction 13 over him. 14 Plaintiffs have not adequately explained how McGrain’s activities arose out of or relate to 15 the particular fraud and misrepresentations claims in this case. Accordingly, they have not 16 demonstrated that exercise of specific jurisdiction over McGrain is proper. 17 B. Fiduciary Shield Doctrine 18 Even if minimum contacts were established, defendants argue that the fiduciary shield 19 doctrine insulates McGrain from personal jurisdiction. Mot. 19. Under the fiduciary shield 20 doctrine, “a person’s mere association with a corporation that causes injury in the forum state is 21 not sufficient in itself to permit that forum to assert jurisdiction over the person.” Davis v. Metro 22 Prods., Inc., 885 F. 2d 515, 520 (9th Cir. 1989). California state law, which governs all the causes 23 of action in this case, explicitly recognizes the fiduciary shield doctrine. See Shearer v. Superior 24 Court, 70 Cal. App. 3d 424, 430 (1977). Thus, defendants argue, the court cannot impute personal 25 jurisdiction over McGrain simply because he is an officer or agent of DGL or DCC. Mot. 19. 26 There are exceptions to the fiduciary shield doctrine. One of them is for intentional 27 tortious acts committed by an officer or owner. See Seagate v. A.J. Kogyo Co., 219 Cal.App.3d 1 doctrine applies because “McGrain directly and affirmatively committed tortious actions directed 2 at California.” Oppo. 24. 3 I previously found that plaintiffs’ support for this allegation was insufficient, and the SAC 4 does not fix the deficiencies. An allegation that McGrain “permitted” inaccurate financial 5 statements to be sent to Park Miller is not enough. See Order at 15 (“Even if the financial 6 information was inaccurate, simply being copied on an email does not show that McGrain himself 7 took part in the tortious acts of the company.”). Plaintiffs also conclusorily allege that McGrain 8 failed to disclose DGL/DCC’s “financial status and method of doing business” in accordance with 9 “customary business practice” and instead “continued to reach out to Park Miller through 2016, 10 2017 and 2018 to seek additional investments for DCC’s factoring business.” SAC ¶¶ 71-72. 11 This bare allegation is not sufficient to trigger the tortious activity exception of the fiduciary shield 12 doctrine. Plaintiffs fail to explain why the fiduciary shield doctrine does not insulate McGrain 13 from the acts of DGL or DCC. 14 C. Alter Ego Theory 15 Alternatively, plaintiffs argue that there is personal jurisdiction over McGrain because he 16 is the alter ego of DGL or DCC. Oppo. 21. To survive a motion to dismiss, a plaintiff asserting 17 application of the alter ego doctrine to extend personal jurisdiction must “allege specifically both 18 the elements of alter ego liability, as well as facts supporting each.” MH Pillars Ltd. v. Realini, 19 No. 15-CV-1383-PJH, 2017 WL 916414, at *12 (N.D. Cal. Mar. 8, 2017) (internal citation 20 omitted). The plaintiff must show “(1) that there is such unity of interest and ownership that the 21 separate personalities or the two entities no longer exists, and [that] (2) that failure to disregard 22 their separate identities would result in fraud or injustice.” Williams v. Yamaha Motor Co. Ltd., 23 851 F.3d 1015, 1021 (9th Cir. 2017) (citing Ranza v. Nike, Inc., 793 F.3d 1059, 1073 (9th Cir. 24 2015)). 25 The “unity of interest” prong requires “a showing that the parent controls the subsidiary to 26 such a degree as to render the latter the mere instrumentality of the former.” Ranza, 793 F.3d at 27 1073. (internal quotation marks and citations omitted). Courts generally consider nine factors in (1) the commingling of funds and other assets of the entities, (2) the 1 holding out by one entity that it is liable for the debts of the other, (3) identical equitable ownership of the entities, (4) use of the same 2 offices and employees, (5) use of one as a mere shell or conduit for the affairs of the other, (6) inadequate capitalization, (7) disregard of 3 corporate formalities, (8) lack of segregation of corporate records, and (9) identical directors and officers. 4 Sandoval v. Ali, 34 F. Supp. 3d 1031, 1040 (N.D. Cal. 2014) (citation omitted). While a court 5 need not find that every factor is present, Updateme Inc. v. Axel Springer SE, No. 17-CV-05054- 6 SI, 2018 WL 1184797, at *10 (N.D. Cal. Mar. 7, 2018), the Ninth Circuit has specifically found 7 that “[t]otal ownership and shared management personnel are alone insufficient to establish the 8 requisite level of control.” Ranza, 793 F.3d at 1073. A parent’s involvement in “macro- 9 management issues” does not satisfy this element; the plaintiff must show that the parent directs 10 the subsidiary’s “day-to-day operations” and that the “entities failed to observe their separate 11 corporate formalities.” Id. at 1074-1075. 12 Plaintiffs reiterate allegations that I have already found insufficient. Order at 13, 17. They 13 argue that McGrain is the alter ego of DGL/DCC because he has an ownership interest in both 14 entities, uses the same email addresses from both entities, and treats the assets of DGL and DCC 15 as interchangeable. Oppo. 21; SAC ¶¶ 25-26. But McGrain’s ownership interest in both entities is 16 not enough to allege unity of interest. See Ranza, 793 F.3d at 1073. The intermingling of assets 17 between DGL and DCC might support an alter ego theory between DGL and DCC but does not 18 necessarily implicate McGrain himself. 19 Plaintiffs again allege that McGrain personally signed three of the promissory notes, but 20 the allegations in the SAC point to promissory notes that were not signed by McGrain. Oppo. 22; 21 SAC ¶ 43, 49, 59; see also SAC, Exs. C, G (July 2, 2018 promissory note with the Lawsons and 22 November 9, 2016 promissory note with Gregory and Suzanne Combs). The promissory notes 23 that McGrain did sign are not the subject of the breach of contract claims. See SAC, Exs. A, D, H 24 (October 1, 2010 promissory note with the Lawsons, March 28, 11 promissory note with Miller 25 and October 13, 2010 promissory note with Choplin and Mone). The promissory notes that are 26 the subject of the breach of contract claims were not signed by McGrain. See SAC ¶¶ 93-132 & 27 Exs. B-C, E-G, I. 1 The minimal additions plaintiffs made to their allegations in the SAC are also insufficient. 2 For example, they allege that “[f]rom the beginning of the relationship, up to and including the last 3 investment in 2018, McGrain was directly involved with every investment made between Park 4 Miller’s clients and [DGL] or DCC” and “in all cases he either directly solicited the investment or 5 approved the investment prior to the client entering any agreement with either [DGL] or DCC.” 6 SAC ¶ 37. They do not explain how this allegation goes towards any of the nine factors courts 7 evaluate in looking for unity of interest. Even if unity of interest was met, plaintiffs again fail to 8 address the second element of alter ego liability, i.e., that failure to disregard their separate 9 identities would result in fraud or injustice. 10 Altogether, the SAC fails to: (i) sufficiently plead specific personal jurisdiction over 11 McGrain because it does not allege how any of his contacts with California arise out of or relate to 12 the underlying claims; (ii) allege why the fiduciary shield doctrine should not insulate McGrain 13 from personal jurisdiction, even if minimum contacts were established; and (iii) allege that 14 McGrain is the alter ego of DGL or DCC. I GRANT defendants’ motion to dismiss McGrain for 15 lack of personal jurisdiction. 16 V. LACK OF PERSONAL JURISDICTION OVER FIRST AUSTIN AND MAASAI HOLDINGS 17 Plaintiffs allege that alter ego permits personal jurisdiction over First Austin and Maasai 18 Holdings. Their allegations in the SAC are still insufficient. 19 A. First Austin 20 The SAC realleges that McGrain has an ownership interest in both First Austin and 21 DGL/DCC and that First Austin shares a website, phone number and office with DGL/DCC. SAC 22 ¶¶ 20, 29-30. In my previous order, I found that it was “not clear how the allegation that First 23 Austin bought a line of credit debt owed by DCC demonstrates that DCC and DGL fraudulently 24 transferred its assets to First Austin to wrongfully underfund the company.” Order 19. Instead of 25 providing an explanation, plaintiffs simply reiterate that allegation in their SAC. SAC ¶ 28. The 26 only allegation the SAC adds is that DCC pays First Austin for renting the shared office space. 27 SAC ¶ 30. 1 As I said before, the Ninth Circuit has found that “[t]otal ownership and shared 2 management personnel are alone insufficient to establish the requisite level of control.” Order at 3 19 (quoting Ranza v. Nike, Inc., 793 F.3d 1059, 1073 (9th Cir. 2015)); see also Corcoran v. CVS 4 Health Corp., 169 F. Supp. 3d 970, 984 (N.D. Cal. 2016) (finding plaintiffs only alleged facts as 5 to identical ownership, same offices, and identical directors, and failure to address other factors 6 weighed against finding alter ego status); Stewart v. Screen Gems-EMI Music, Inc., 81 F.Supp.3d 7 938, 955 (N.D. Cal. 2015) (unaddressed factors weigh against finding of alter ego status). Even if 8 these allegations were somehow enough to establish a unity of interest, plaintiffs are required to 9 “allege specifically both of the elements of alter ego liability, as well as facts supporting each;” the 10 SAC does not state any inequitable result that would result from respecting the corporate form of 11 these separate entities. Sandoval, 34 F. Supp. 3d at 1040 (citation omitted). Plaintiffs have not 12 sufficiently alleged that this court can exercise personal jurisdiction over First Austin based on an 13 alter ego theory. 14 B. Maasai Holdings 15 While I do take judicial notice of the Ablitt Bankruptcy Case documents, see supra Section 16 I, plaintiffs still fail to plausibly allege that Maasai Holdings is an alter ego of DCC and DGL. As 17 stated above with respect to First Austin, total ownership, shared office space and/or shared 18 management personnel is not enough to show unity of interest. Ranza, 793 F.3d at 1073. 19 I previously found that a conclusory allegation that plaintiffs are “informed and believe” 20 that Maasai Holdings “was created in order to hold the inactive assets of DGL and DCC is 21 insufficient without supporting factual allegations.” Order at 19. Plaintiffs now add that “Maasai 22 was created for this purpose when one of DCC’s Factoring Clients, [Ablitt] . . . diverted several 23 million dollars’ worth of payments over notice, and due to DCC, from various loan servicers 24 making the receivables essentially worthless . . .” SAC ¶ 32. But it is unclear how this allegation 25 from an act that occurred in 2014 is relevant to how Maasai Holdings and DGL/DCC function 26 during the 2016-2018 period relevant in this suit. Even if I take this factual allegation as true and 27 assume Maasai Holdings meets the unity of interest prong, plaintiffs still do not clearly allege the 1 these separate entities. 2 Deviating from the rule of corporate separateness is an extreme remedy, sparingly 3 used. Sonora Diamond Corp. v. Superior Court, 83 Cal. App. 4th 523, 539 (2000) (citation 4 omitted). The facts here do not rise to such an extreme level. Accordingly, I find that plaintiffs 5 fail to demonstrate that DGL/DCC’s contacts impute general personal jurisdiction to McGrain, 6 First Austin or Maasai Holdings under a theory of alter ego liability. Plaintiffs also fail to show 7 specific personal jurisdiction over McGrain, or that his actions fall under the tortious activity 8 exception of the fiduciary shield doctrine. McGrain, First Austin, and Maasai Holdings are 9 DISMISSED for lack of personal jurisdiction. 10 VI. MOTION FOR SANCTIONS 11 Federal Rule of Civil Procedure 11 “authorizes a court to impose a sanction on any 12 attorney, law firm, or party that brings a claim for an improper purpose or without support in law 13 or evidence.” Sneller v. City of Bainbridge Island, 606 F.3d 636 (9th Cir. 2010). Where “the 14 complaint is the primary focus of Rule 11 proceedings, a district court must conduct a two-prong 15 inquiry to determine (1) whether the complaint is legally or factually ‘baseless’ from an objective 16 perspective, and (2) if the attorney has conducted ‘a reasonable and competent inquiry’ before 17 signing and filing it.” Christian v. Mattel, Inc., 286 F.3d 1118, 1127 (9th Cir. 2002) 18 (quoting Buster v. Greisen, 104 F.3d 1186, 1190 (9th Cir. 1997)). A claim that has “some 19 plausible basis” even “quite a weak one,” is not sanctionable under Rule 11. United Nat. Ins. Co. 20 v. R&D Latex Corp., 242 F.3d 1102, 1117 (9th Cir. 2001). “As long as the critical information is 21 not absent altogether, lawyers may not be sanctioned for such misjudgments.” Id. “An attorney 22 may not be sanctioned for a complaint that is not well-founded, so long as she conducted a 23 reasonable inquiry.” In re Keegan Mgm’t Co., Securities Litig., 78 F.3d 431, 434 (9th Cir. 1996). 24 Defendants largely reiterate their dismissal arguments in their motion for sanctions. They 25 request sanctions because they argue that plaintiffs bring “baseless” claims for fraud, breach of 26 contract and personal jurisdiction over McGrain, First Austin, and Maasai Holdings when I have 27 already dismissed the FAC. Mot. Sanctions 2. While the amendments plaintiffs made in their 1 these reasons, defendants’ motion for sanctions is DENIED. 2 CONCLUSION 3 For the reasons set forth above, defendants’ motion to dismiss McGrain, First Austin and 4 || Maasai Holdings for lack of personal jurisdiction is GRANTED. Defendants only sought 5 dismissal of breach of contract claims brought by each contracting plaintiff (COAs 1 through 5) as 6 || to McGrain, First Austin and Maasai Holdings. That motion is moot in light of my lack of 7 || jurisdiction. 8 My ruling on the motion to dismiss against the remaining defendants, DGL and DCC, is as 9 follows: (i) dismissal of the promissory fraud claims brought by the LCCM plaintiffs (COAs 6 and 10 || 7) is DENIED, but it is GRANTED as brought by the other plaintiffs; (1i) dismissal of the 11 negligence and negligent misrepresentation claims brought by all plaintiffs (COAs 8 and 9) is 12 || DENIED; (iii) dismissal of the interference claims brought by Park Miller (COAs 10 and 11) is 13 || DENIED. 14 Defendants’ related motion for sanctions is also DENIED. 3 15 IT IS SO ORDERED. A 16 || Dated: April 23, 2020
18 ® W1Miam H. Orrick 19 United States District Judge 20 21 22 23 24 25 26 27 28