Solarmore Mgt. Services, Inc. v. Bankruptcy Estate of DC Solar Solutions

Opinion

SOLARMORE MANAGEMENT No. 2:19-cv-02544-JAM-DB SERVICES, INC., a California Corporation, Plaintiff, ORDER GRANTING DEFENDANT HERITAGE BANK’S MOTION TO v. DISMISS, GRANTING DEFENDANT DIANA KERSHAW’S MOTION TO JOIN BANKRUPTCY ESTATE OF DC SOLAR AND DENYING DEFENDANT HALO’S SOLUTIONS, et al., MOTION TO JOIN Defendants. I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND1 This action arises from a fraudulent scheme involving the sale of mobile solar generators. From 2011 to 2018, operators of the scheme, built and sold thousands of these generators. First Am. Compl. (“FAC”) at 5, ECF No. 41. Purchasers paid $150,000.00 for each, with a down payment between $35,000.00 and $45,000.00, and a promissory note for the balance payable over twenty years. Id. Purchasers were told the generators would be sublet to end users which would provide a steady flow of revenue to cover any amount owed on the promissory note. Id. The operators also

1 This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was scheduled for June 8, 2021. represented that the generators qualified for certain energy tax credits. Id. In actuality, many of the purchased generators were never built. Those that were built were not worth $150,000.00, as there was never a market for them and thus no prospects for the promised sublease revenues, and they did not qualify for the represented tax credits. Id. Plaintiff Solarmore Management Services, Inc. is a California corporation and part owner of various limited liability companies (“LLCs”) that purchased mobile solar generators. Id. ¶¶ 1-5. Plaintiff brought this action against three groups of Defendants: (1) Defendants who orchestrated and perpetuated the fraudulent enterprise; (2) Defendants who aided and abetted the fraudulent enterprise; and (3) Defendants who facilitated by hiding money and mobile solar generators (or the lack thereof) from purchases and other investigating parties. Id. at 6. Relevant to this motion, Defendant Heritage Bank of Commerce (“Heritage Bank”), is alleged to have aided and abetted the fraudulent enterprise. Id. ¶ 61. Specifically, Plaintiff claims that Diana Kershaw, acting as an officer, agent, or employee of Heritage Bank, cooperated with the operators of the scheme to conceal or restrict information from Plaintiff about its accounts with Heritage Bank. Id. ¶¶ 61-63. Plaintiff asserts three claims against Heritage Bank: (1) count seven for civil conspiracy; (2) count nineteen for negligent misrepresentation; and (3) count twenty for equitable contribution/indemnification. Id. at 69, 76, 77. Heritage Bank moves to dismiss all claims against it. Def. Heritage Bank’s Mot. to Dismiss (“Mot.”), ECF No. 84. Plaintiff opposes this Motion. Pl.’s Opp’n (“Opp’n”), ECF No. 113. Defendants Halo and Diana Kershaw seek to join Heritage Bank’s Motion. See Def. Halo’s Notice of Joinder, ECF No. 86; Def. Kershaw’s Notice of Joinder, ECF No. 96. For the reasons stated below, the Court grants the Motion to Dismiss all claims against Heritage Bank and Diana Kershaw. Halo’s request to join the Motion is denied. A. Judicial Notice Heritage Bank requests the Court take judicial notice of the California Secretary of State Entity Detail page for Solarmore Management Services, Inc. and a copy of a Motion for Order Approving Compromise and Settlement Agreement and Award of Contingency in the In re Double Jump, Inc., bankruptcy action. See Def. Heritage Bank’s Req. for Judicial Notice (“RJN”), ECF No. 84-2. Plaintiff did not oppose this request. The printouts from the California Secretary of State are a matter of public record whose accuracy cannot be reasonably questioned. See Champion Courage Ltd. v. Fighter’s Mkt., Inc., No. 17-01855-AJB- BGS, 2018 WL 1920201, at *2 (S.D. Cal. Apr. 24, 2018). Accordingly, the Court grants Heritage Bank’s request. The Court, however, does not rely on the second exhibit in this opinion. Thus, it is denied as moot. B. Joinder Defendant Halo Management Services LLC and Diana Kershaw seek to join Heritage Bank’s Motion to Dismiss. See Def. Halo’s Notice of Joinder; Def. Kershaw’s Notice of Joinder. A Rule 12(b) motion must be made before filing an answer. Fed. R. Civ. P. 12(b). Here, Halo filed an answer on February 18, 2021, 55 days before the filing of the Motion to Dismiss. See Halo’s Answer, ECF No. 52. Thus, Halo’s joinder request is untimely. However, the defense of a failure to state a claim upon which relief can be granted may also be made in a motion for judgment on the pleadings but only after the pleadings have closed. Fed R. Civ. P. 12(h)(2)(B); id. 12(c). Because the pleadings have not closed, a judgment on the pleadings is premature. Accordingly, Halo’s request to join Heritage Bank’s Motion to Dismiss is denied. Plaintiff, however, does not advance any arguments as to why Defendant Kershaw should not be permitted to join Heritage Bank’s Motion. See generally Opp’n. Thus, Defendant Kershaw’s request to join the Motion to Dismiss is granted. C. Legal Standard As an initial matter, the parties frame the issue of whether Plaintiff can bring suit for an injury to the LLC as a Constitutional standing issue appropriate for resolution under Rule 12(b)(1) of the Federal Rules of Civil Procedure. See Mot. at 1, 4-7; Opp’n 3-7. However, this is really a prudential standing issue appropriate for resolution under 12(b)(6). See Johnson v. Myers, CV-11-00092 JF (PSG), 2011 WL 4533198, at *4 (N.D. Cal. Sept. 30, 2011). Dismissal is appropriate under Rule 12(b)(6) of the Federal Rules of Civil Procedure when a plaintiff’s allegations fail “to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). “To survive a motion to dismiss a complaint must contain sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and citation omitted). While “detailed factual allegations” are unnecessary, the complaint must allege more than “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements.” Id. “In sum, for a complaint to survive a motion to dismiss, the non-conclusory ‘factual content,’ and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009). D. Analysis 1. Suspension of the Corporate Entity “The capacity of a corporate litigant to sue or be sued in a federal case is directly controlled by Fed. R. Civ. P. 17(b) which provides, in pertinent part, ‘[t]he capacity of a corporation to sue or be sued shall be determined by the law under which it is organized.’” Matter of Christian & Porter Aluminum Co., 584 F.2d 326, 331 (9th Cir. 1978) (quoting Fed. R. Civ. P. 17(b)). California Revenue and Taxation Code Section 23301 provides that “[e]xcept for the purposes of filing an application for exempt status or amending the articles of incorporation as necessary either to perfect that application or to set forth a new name, the corporate powers, rights and privileges of a domestic taxpayer may be suspended [. . .] if a taxpayer fails to file a tax return required by this part.” Cal. Rev. & Tax. Code § 23301.5. “This means that a suspended corporation may not prosecute or defend an action.” Timberline Inc. v. Jaisinghani, 54 Cal.App.4th 1361, 1365 (1997). When a corporation’s suspended status “comes to light during litigation, the normal practice is for the trial court to permit a short continuance to enable the suspended corporation to effect reinstatement.” Id. at 1366. Heritage Bank first argues that this action should be dismissed as Solarmore is a suspended corporation and thus cannot prosecute this action. Mot. at 4. Solarmore concedes that it is a suspended corporate entity. Opp’n at 5. However, it requests a short continuance as it has already cured the deficiencies that caused its suspension and is awaiting reinstatement. Id. While the normal practice is to grant a short continuance to enable the suspended corporation to obtain reinstatement, see Timberline, 54 Cal.App.4th at 1365, the Court declines to do so here, as dismissal is warranted on other grounds for the reasons set forth below. 2. LLC Member Prudential Standing A direct action by a shareholder or member is a suit to enforce a right which the shareholder or member possesses as an individual. See PacLink Commc’ns Int’l v. Superior Court, 90 Cal.App.4th 958, 964 (2001). In general, shareholders of a corporation or members of an LLC lack prudential standing to assert individual claims based on harm to the corporation or LLC in which they own shares. Erlich v. Glasner, 418 F.2d 226, 227 (9th Cir. 1969); PacLink, 90 Cal.App.4th at 965-66. A derivative suit on the other hand, “seeks to recover for the benefit of the corporation and its whole body of shareholders when [the] injury is caused to the corporation.” Jones v. H.F. Ahmanson & Co., 460 P.2d 464, 470 (Cal. 1969). A shareholder or member bringing a derivative action must meet certain procedural requirements. Fed. R. Civ. P. 23.1; Sax v. World Wide Press, Inc., 809 F.2d 610, 613 (9th Cir. 1987). “[T]he characterization of an action as derivative or direct is a question of state law.” Sax, 809 F.2d at 613. Here, The LLCs are California companies, see FAC ¶ 2, accordingly, California law applies. See Lapidus v. Hecht, 232 F.3d 679, 682 (9th Cir. 2000). PacLink Communications International Inc. v. Superior Court is instructive here. In that case PacLink Communications, an LLC, transferred its assets to a new company. PacLink, 90 Cal.App.4th at 962. Plaintiffs, members of PacLink, sued alleging this transfer of assets was done without their knowledge or consent. Id. The plaintiffs claimed that the transfer rendered PacLink insolvent, defrauding plaintiffs by preventing them from being paid their ownership interest. Id. at 962-63. Defendants filed a demurrer arguing that plaintiffs lacked standing as the real party in interest was the LLC and plaintiffs had failed to comply with the procedural requirements of initiating a derivative action. Id. at 963. The court agreed, finding the claims belonged to the LLC and were improperly pled as a personal cause of action. Id. at 965. In so holding, the court explained that the “essence of the plaintiff’s claims [were] that the assets of [PacLink] were fraudulently transferred without any compensation being paid to the LLC.” Id. at 964. It noted that “because members of the LLC hold no direct ownership interest in the company’s assets the members cannot be directly injured when the company is improperly deprived of those assets.” Id. (citing Cal. Corp. Code § 17300). Rather plaintiffs’ “injury was essentially a diminution in the value of their membership interest in the LLC occasioned by the loss of the company’s assets” which was merely incidental to the injury suffered by the LLC. Id. “Because the gravamen of the complaint [was] injury to the whole body of the LLC’s members, it was for the LLC to institute and maintain a remedial action. A derivative action would have been appropriate if its responsible officials had refused or failed to act.” Id. at 966 (quoting Nelson v. Anderson, 72 Cal.App.4th 111, 125-26 (1999)). Here, the Complaint alleges that Plaintiff was the managing member and part owner of various LLC’s that purchased mobile solar generators. FAC ¶¶ 2, 5, 114, 115, 122, 131, 134, 139, 149, 154, 482. All the claims against Heritage Bank seek redress from being fraudulently induced to make those purchases. See generally FAC. Thus, similar to the plaintiffs in PacLink, the harm suffered by Plaintiff was a diminution in the value of its membership interest in the LLCs due to their purchase of generators. PacLink, 90 Cal.App.4th at 964. This injury is merely incidental to the injury suffered by the LLC. Id. “Because the gravamen of the complaint is injury to the whole body of the LLC’s members, it [is] for the LLC to institute and maintain a remedial action.” Id. at 966 (quoting Nelson v. Anderson, 72 Cal.App.4th at 125-26). Accordingly, Plaintiff lacks prudential standing to bring a direct cause of action and has not purported nor gone through the required steps of bringing a derivative action. See Opp’n nee enn ene en nnn non nnn en nn I OE NO

1] at 6.2 IIl. ORDER For the reasons set forth above, the Court GRANTS Defendant Heritage Bank and Diana Kershaw’s Motion to Dismiss all claims against them: count seven for civil conspiracy, count nineteen for negligent misrepresentation, and count twenty for equitable contribution/ indemnification. These claims are DISMISSED WITHOUT PREJUDICE. See Fleck & Assocs., Inc. v. City of Phoenix, 471 F.3d 1100, 1106-07 (9th Cir. 2006) (dismissal for lack of standing should be without prejudice). Defendant Halo’s request to join the Motion to Dismiss is DENIED. If Plaintiff elects to amend its complaint, it shall file an Amended Complaint within twenty (20) days of this Order. Defendants’ Heritage Bank and Kershaw’s responsive pleadings are due twenty (20) days thereafter. Dated: July 20, 2021 kA teiren staves odermacr 7008 2 Because dismissal is warranted for this reason, the Court does not address the parties remaining arguments as to whether Plaintiff has stated a claim.