T'Bear v. Forman
This text of 359 F. Supp. 3d 882 (T'Bear v. Forman) is published on Counsel Stack Legal Research, covering District Court, N.D. California primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
JACQUELINE SCOTT CORLEY, United States Magistrate Judge
Plaintiff Caleb Avery t'Bear sued Defendant Barry Forman in California state court for breach of fiduciary duty, declaratory relief, and an accounting arising out of a failed business venture.1 (Dkt. No. 1-1.)2 Defendant removed the action to this Court pursuant to
BACKGROUND
I. Factual Background
A. FairWay
Beginning in 2006, the parties discussed plans for creating "a series of affiliated domestic and foreign companies" referred to by Plaintiff as "The FairWay Group" ("FairWay"), to monetize intellectual property (the "FairWay IP") developed by Plaintiff "for pricing offerings of securities and other assets." (Dkt. Nos. 1-1 at ¶ 6; 29 at ¶ 6; 99-1 at ¶ 3.) The entities involved include, "Urso Ltd (a Belize company) ("Urso"), FairWay IP Holdings, Ltd (a Cayman Island company) ("FairWay IP Holdings"), FairWay Financial U.S., Inc. (a Delaware company), FairWay Pricing Technologies, LLC (a Delaware company) [ ("FairWay Pricing") ], and FairWay International Kft3 (a Hungarian company)." (Dkt. No. 99-1 at ¶ 3.)
In May 2008, Plaintiff "assigned to Urso as corporate assets all personal patents, trademarks, and business plans related to FairWay inventions or businesses." (Dkt. No. 99-4, Ex. 44 at 7.) In December 2011, Plaintiff transferred ownership of the FairWay IP from Urso to FairWay IP Holdings. (Dkt. No. 99-4, Ex. 55 at 165.) Prior to August 2016, Plaintiff held a 100% ownership interest in Urso; Plaintiff currently owns 25% of the company and remains its president.4 (Dkt. No. 99-8, Ex. C at 59:11-22, 60:19-21.) Urso owns 100% of FairWay IP Holdings, which owns 100% of the FairWay IP. (Dkt. No. 99-8, Ex. C at 64:2-23.)
B. The Loans
Between April 2006 and October 2011, Defendant made 33 loans to Plaintiff-in the form of promissory notes-to fund FairWay.5 (Dkt. No. 99-1 at ¶ 5.) The notes list Defendant as the "Purchaser" or "Lender." (Dkt. Nos. 99-1 at ¶ 5; 99-2, Ex. 1-33.) Thirty-one of the notes list Plaintiff as the "Borrower," and the other two list FairWay Pricing Technologies, LLC and FairWay *890International Kft, respectively.6 (Dkt. No. 99-2, Ex. 1-33.) All but one of the notes contain Plaintiff's signature. (Id. ) The notes were secured by the general assets of Plaintiff and the FairWay IP held by Urso, with the principal and interest payable by Plaintiff upon demand. (Dkt. Nos. 1-1 at ¶ 10; 29 at ¶ 10; 99-4, Ex. 44 at 7, Ex. 51 at 56, Ex. 53 at 114.) Two of the notes are governed by Delaware state law, (see Dkt. No. 99-2, Exs. 1-2); the parties do not dispute that all other notes are governed by California state law.
The total outstanding principal of the notes is approximately $ 551,433.7 The annual interest rate on the FairWay Pricing Technologies, LLC note is 8%; the FairWay International Kft note does not provide for interest. (See Dkt. No. 99-2, Ex. 1 at 9; Ex. 25 at 98.) All other notes provide for an annual interest rate of 10%.8
1. "Loan Managers"
Between June 2007 and February 2016, Plaintiff sent Defendant 19 emails attaching spreadsheets from a file entitled "Barry Forman Loan Manager"; the spreadsheets include a summary page entitled "Personal Loans - Forman to Avery," listing "Accumulated Loans with interest." (See Dkt. No. 99-3, Ex. 34-43, 45-53.) The Loan Managers list the dates of the notes, beginning with the August 2006 note,9 the principal loan amount, and the principal plus accrued interest. Beginning with the March 2008 Loan Manager, Plaintiff includes the following:
All principle and interest is due and payable on demand by Nathaniel Caleb Avery
To the extent any collateral is held by Urso Limited [also owned by Avery], that collateral is pledged as well [to the extent necessary to fully repay both principle and interest]
Signed by Nathaniel Caleb Avery both individually
and as Chairman and CEO of Urso Limited.
on behalf of Urso, Ltd.
Marina Towers, Suite 302,
Newtown Barracks,
Belize City, Belize
N. Caleb Avery
[signed under the Electronic Signatures Act of 2000 [Public Law No: 106-229) ] and legally binding upon all his assignees and heirs
(Dkt. No. 99-3, Ex. 40 at 67 (bracketed language in original).) On February 29, 2016, Plaintiff sent Defendant the last Loan Manager; it references all 33 of the *891notes at issue. (Dkt. No. 99-4, Ex. 53 at 113-159.) The February 2016 Loan Manager removes the language above regarding collateral held by Urso, and states, in pertinent part:
All principle and interest is due and payable on demand by Nathaniel Caleb Avery
Signed by Nathaniel Caleb Avery both individually
and as Chairman and CEO of Urso Limited.
on behalf of Urso, Ltd.
35 New Road
Belize City, Belize
Free access — add to your briefcase to read the full text and ask questions with AI
JACQUELINE SCOTT CORLEY, United States Magistrate Judge
Plaintiff Caleb Avery t'Bear sued Defendant Barry Forman in California state court for breach of fiduciary duty, declaratory relief, and an accounting arising out of a failed business venture.1 (Dkt. No. 1-1.)2 Defendant removed the action to this Court pursuant to
BACKGROUND
I. Factual Background
A. FairWay
Beginning in 2006, the parties discussed plans for creating "a series of affiliated domestic and foreign companies" referred to by Plaintiff as "The FairWay Group" ("FairWay"), to monetize intellectual property (the "FairWay IP") developed by Plaintiff "for pricing offerings of securities and other assets." (Dkt. Nos. 1-1 at ¶ 6; 29 at ¶ 6; 99-1 at ¶ 3.) The entities involved include, "Urso Ltd (a Belize company) ("Urso"), FairWay IP Holdings, Ltd (a Cayman Island company) ("FairWay IP Holdings"), FairWay Financial U.S., Inc. (a Delaware company), FairWay Pricing Technologies, LLC (a Delaware company) [ ("FairWay Pricing") ], and FairWay International Kft3 (a Hungarian company)." (Dkt. No. 99-1 at ¶ 3.)
In May 2008, Plaintiff "assigned to Urso as corporate assets all personal patents, trademarks, and business plans related to FairWay inventions or businesses." (Dkt. No. 99-4, Ex. 44 at 7.) In December 2011, Plaintiff transferred ownership of the FairWay IP from Urso to FairWay IP Holdings. (Dkt. No. 99-4, Ex. 55 at 165.) Prior to August 2016, Plaintiff held a 100% ownership interest in Urso; Plaintiff currently owns 25% of the company and remains its president.4 (Dkt. No. 99-8, Ex. C at 59:11-22, 60:19-21.) Urso owns 100% of FairWay IP Holdings, which owns 100% of the FairWay IP. (Dkt. No. 99-8, Ex. C at 64:2-23.)
B. The Loans
Between April 2006 and October 2011, Defendant made 33 loans to Plaintiff-in the form of promissory notes-to fund FairWay.5 (Dkt. No. 99-1 at ¶ 5.) The notes list Defendant as the "Purchaser" or "Lender." (Dkt. Nos. 99-1 at ¶ 5; 99-2, Ex. 1-33.) Thirty-one of the notes list Plaintiff as the "Borrower," and the other two list FairWay Pricing Technologies, LLC and FairWay *890International Kft, respectively.6 (Dkt. No. 99-2, Ex. 1-33.) All but one of the notes contain Plaintiff's signature. (Id. ) The notes were secured by the general assets of Plaintiff and the FairWay IP held by Urso, with the principal and interest payable by Plaintiff upon demand. (Dkt. Nos. 1-1 at ¶ 10; 29 at ¶ 10; 99-4, Ex. 44 at 7, Ex. 51 at 56, Ex. 53 at 114.) Two of the notes are governed by Delaware state law, (see Dkt. No. 99-2, Exs. 1-2); the parties do not dispute that all other notes are governed by California state law.
The total outstanding principal of the notes is approximately $ 551,433.7 The annual interest rate on the FairWay Pricing Technologies, LLC note is 8%; the FairWay International Kft note does not provide for interest. (See Dkt. No. 99-2, Ex. 1 at 9; Ex. 25 at 98.) All other notes provide for an annual interest rate of 10%.8
1. "Loan Managers"
Between June 2007 and February 2016, Plaintiff sent Defendant 19 emails attaching spreadsheets from a file entitled "Barry Forman Loan Manager"; the spreadsheets include a summary page entitled "Personal Loans - Forman to Avery," listing "Accumulated Loans with interest." (See Dkt. No. 99-3, Ex. 34-43, 45-53.) The Loan Managers list the dates of the notes, beginning with the August 2006 note,9 the principal loan amount, and the principal plus accrued interest. Beginning with the March 2008 Loan Manager, Plaintiff includes the following:
All principle and interest is due and payable on demand by Nathaniel Caleb Avery
To the extent any collateral is held by Urso Limited [also owned by Avery], that collateral is pledged as well [to the extent necessary to fully repay both principle and interest]
Signed by Nathaniel Caleb Avery both individually
and as Chairman and CEO of Urso Limited.
on behalf of Urso, Ltd.
Marina Towers, Suite 302,
Newtown Barracks,
Belize City, Belize
N. Caleb Avery
[signed under the Electronic Signatures Act of 2000 [Public Law No: 106-229) ] and legally binding upon all his assignees and heirs
(Dkt. No. 99-3, Ex. 40 at 67 (bracketed language in original).) On February 29, 2016, Plaintiff sent Defendant the last Loan Manager; it references all 33 of the *891notes at issue. (Dkt. No. 99-4, Ex. 53 at 113-159.) The February 2016 Loan Manager removes the language above regarding collateral held by Urso, and states, in pertinent part:
All principle and interest is due and payable on demand by Nathaniel Caleb Avery
Signed by Nathaniel Caleb Avery both individually
and as Chairman and CEO of Urso Limited.
on behalf of Urso, Ltd.
35 New Road
Belize City, Belize
**Also includes $ 100K Convertible Debt Note with FairWay Pricing Technologies which Nathaniel Caleb Avery and Urso Ltd will take personal and corporate responsibility to the extent that Note is not repaid by FairWay Pricing Technologies according to its terms.
(Id. at 114.)
2. Memorandum of Understanding
In December 7, 2011, Plaintiff emailed Defendant10 a "Memorandum of Understanding" ("MOU") reflecting a discussion between the parties to reconfigure the "payout plan" for the notes at issue so that Plaintiff could obtain $ 6 million in funding for FairWay through the sale of notes secured by the FairWay IP. (Dkt. No. 99-4, Ex. 51 at 39-56.) In the cover email, Plaintiff states, in pertinent part: "As you, [Defendant], and I, discussed, as part of the paperwork Urso Ltd. is assigning the FairWay IP portfolio to an IP Holding company, FairWay IP Holdings Ltd. to securitize the $ 6M in Notes being offered." (Id. at 39.) The attached MOU states, in pertinent part:
Some of the individual Notes in the series have pledged my general and entire asset base [including patents assigned to Urso Ltd.] as collateral. As we discussed, as part of our current fundraising, the FairWay Intellectual Property (patents, trademarks, etc.) is being assigned from Urso Ltd. to FairWay IP Holdings Ltd. [Cayman Islands]. To complete that assignment, I would ask you to accept and confirm your understanding that Urso Ltd. would not have direct control over these Intellectual Property assets but continue to have indirect rights to them through its 100% sole ownership of FairWay IP Holdings. Specifically, while Urso would no longer have direct title to these assets, it would have rights to the cash flow from the licensing of those assets [net of FairWay IP Holdings obligations to maintain them (legal costs, filing fees, annuities, etc.) ], such cash to be received as expense reimbursements or dividends from FairWay IP Holding to Urso. In summary, your lien interest [per the Notes] would continue on my general assets including: 1) my 100% ownership of Urso Ltd.; 2) by proxy, Urso Ltd.'s majority ownership of FairWay International; 3) my shares in FairWay Financial U.S., Inc.; and 4) general assets. But it would specifically no longer include *892direct lien on FairWay Intellectual Property, but rather depend on Urso's sole ownership of FairWay IP Holdings for repayment of the Notes. The Notes (2006-2011), as a series, are amended to that understanding.
(Id. at 56 (bracketed language in original) (emphasis added).) Defendant attests that:
[Plaintiff] told me that in order to consummate the transaction [for the $ 6 million in new funding], he needed a "carve out" of my direct security interest in the FairWay IP. In return, my loans would be repaid by the end of 2012, and I would retain my security interest in all of his other general assets, including, but not limited to, his 100% ownership in Urso.
(Dkt. No. 99-1 at ¶ 64.) Indeed, Plaintiff's cover email states, in pertinent part: "For clarity sake, I am attaching the current Loan Manager summarizing all personal Notes outstanding from me to you and a Memorandum of Understanding outlining the carve out of the IP in the general liens on my property to now accommodate the indirect control of the IP." (Dkt. No. 99-4, Ex. 51 at 39.) Plaintiff's cover email also states that pursuant to "[t]he payout plan," Plaintiff would pay Defendant his balance within six months, "with a small balance by year-end 2012." (Id. ) Defendant signed and returned the MOU to Plaintiff on December 12, 2011. (Dkt. No. 99-4, Ex. 55 at 164-65.)
3. Demand Notice
On May 17, 2017, Defendant sent Plaintiff a demand letter, calling for the immediate payment of principal and interest on all outstanding loans; "specifically, those loans listed in [Plaintiff's] document entitled "Loan Manager - Barry Forman - 31 Dec 2016"...as well as any and all other loans or advances from [Defendant] to [Plaintiff] or to any of [Plaintiff's] affiliate companies." (Dkt. No. 99-2, Ex. B at 5.) The letter demanded payment by May 31, 2017. (Id. ) Plaintiff did not respond to Defendant's demand, and on June 12, 2017, Defendant sent Plaintiff written notice via email and certified mail that "Plaintiff failed to make any payment of principal and interest as demanded by [Defendant's]" May 2017 letter. (Dkt. No. 99-2, Ex. C at 7.)
C. The "Partnership"
1. Preliminary Collaboration Agreement
On January 25, 2010, Defendant proposed terms for a potential partnership to Plaintiff by sending Plaintiff a "[f]irst draft of a partnership term sheet." (Dkt. No. 103-2, Ex. K. at 176.) The term sheet includes several questions related to tax issues. (Dkt. No. 103-2, Ex. K at 177-78.) On March 9, 2010, Plaintiff responded to Defendant's proposal by emailing Defendant a "[f]irst draft" of a document entitled "Preliminary Collaboration Agreement." (Dkt. No. 103-2, Ex. E at 146.) Plaintiff's cover email noted that the draft "needs a bit of work." (Id. ) The attached document states, in part:
This Preliminary Collaboration Agreement is intended to set forth the basic terms of agreement by which Barry Forman ("Forman") is partnering with Caleb Avery t'Bear ("t'Bear") in implementing the FairWay business model, as described in the Executive Summary for FairWay Financial U.S. and including the establishment of FairWay International and its operating companies.
(Id. at 147.) The draft "acknowledge[s] the preliminary nature of the agreement," and states that "as soon as practicable," the parties would "engage legal counsel experienced in the preparation and counseling regarding business partnership agreements to prepare a complete agreement *893covering, among other things, the terms and conditions set forth [t]herein."11 (Id. ) The Preliminary Collaboration Agreement includes the heading "Rough Draft for Caleb's Review," a bracketed question regarding "repurchase rights upon [Defendant's] death," brackets indicating forthcoming "[t]ext" regarding compensation, and a blank space regarding the percentage of equity participation in FairWay operating companies that Defendant would receive "[a]s consideration for [the] performance of his duties." (Id. at 147-49.) The draft is not signed by either party and does not include a date.
In addition to the Preliminary Collaboration Agreement, on March 9, 2010 Plaintiff forwarded to Defendant an email to Plaintiff from his then-attorney, Tim Covington.12 (Id. at 146.) Upon reviewing Defendant's partnership term sheet, Mr. Covington wrote, in pertinent part:
"Partnership" conveys possibly unknown rights and liabilities, as there is an entire body of partner law. Also you do not want to give Barry all of the rights you currently hold as Fairway's founder. My recommendation is to call this a collaboration agreement and then to make clear that Barry is, to an extent, an at will employee and doesn't have rights to control the formation of the various FairWay affiliates (he talks about ownership structure of UMS, etc. as if he would have some say in control of UMS, which I don't think is your intent).
(Id. ) Indeed, the Preliminary Collaboration Agreement designates Defendant's "Executive Role" as "CEO of FairWay Financial US and other FairWay operating companies," and states that Defendant "will be employed at will and may be terminated at any time upon notice with or without cause." (Id. at 148.)
The next day, Plaintiff sent Defendant an email with the subject line "Merged draft agreements," with "[d]raft 3" of the Preliminary Collaboration Agreement attached. (Dkt. No. 103-2, Ex. M at 186.) The email states, in pertinent part:
I merged both drafts. We still need to compare against [Defendant's] draft term sheet and also need a section as to the formula(s) applied to calculate the initial founder's calculation of each [operating company]. I will also go back and look at [Defendant's] draft to see if we have missed anything else.
But this is a good initial start.
(Id. ) The third draft includes the heading "Rough Draft for Caleb's Review," and contains the same bracketed question regarding repurchase rights, bracket denoting forthcoming text regarding compensation, and blank space regarding equity participation as the initial version. The draft also inserts a new non-compete clause stating:
*894[Defendant] agrees not to compete with t'Bear, Urso or FairWay in any manner central to their business plans for a period of 5 years after leaving the employment of FairWay Financial US, FairWay International and/or other Fairway operating companies, as the case may be[.]
(Id. at 188.) The draft includes another new clause stating, pertinent part:
Complete Agreement. Forman and t'Bear agree to cooperate to ensure that this Agreement is superseded by a complete form of agreement ("Complete Agreement") covering its subject matter within six (6) months of the effective date set forth below.
(Id. at 189.) The draft also includes a clause regarding liability under the agreement, stating, in pertinent part:
IN NO EVENT SHALL EITHER PARTY BE LIABLE, UNDER ANY LEGAL OR EQUITABLE THEORY, TO THE OTHER PARTY FOR ANY INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES OF ANY KIND AS A RESULT OF OR ARISING FROM THIS AGREEMENT AND WHETHER [sic] OR NOT ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
(Id. at 190.) As with the initial version, the third draft is not signed by either party and does not include a date.
On March 27, 2010, Plaintiff sent Defendant an email with the subject line "updated partner draft." (Dkt. No. 103-2, Ex. O at 203.) The "Compensation" section of the attached draft includes for the first time a formula for determining the parties' "share equity set forth in each major operating company set aside for founders at the time the company is established." (Id. at 205.) The section includes bracketed questions regarding the formula, including one stating:
How would the [partnership pool] be split up as a practical matter? Not equally, as per [Defendant's] draft term sheet, I think; since, different "Partners" would be bringing different things to the table and awarded shares in differing amounts accordingly. We need to discuss.
(Id. at 206.) The version again includes the heading "Rough Draft for Caleb's Review" and contains the same bracketed question regarding repurchase rights found in the previous drafts. (Id. at 204, 207.) Also like the previous versions, the March 27 draft is not signed by either party and does not include a date.
On June 5, 2011, Plaintiff emailed Defendant stating that Plaintiff was "looking for the most current draft of the partnership proposal." (Dkt. No. 103-2, Ex. P at 217.) Minutes later, Plaintiff sent Defendant an email with the subject line "Partner Agmt" that included the "last draft [Plaintiff] had from Tim [Covington]." (Dkt. No. 103-2, Ex. Q at 221.) Plaintiff's email notes that the draft "seems incomplete to sign and the partnership formula is not really spelled out as we have in excel spreadsheets." (Id. ) Further, the email states:
Can you work with Tim and I to get this in better form and then we can give the legal/tax advisors something better to work with[?] Just to document our most recent discussion/agreement about the formula (and the attached draft), we are making the following structural change (with your approval) [to the repurchase period and the "FairWay Group compensation pool set-aside].
(Id. ) The attached Preliminary Collaboration Agreement does not contain the "partnership formula" contained in the March 27 draft's "Compensation" section but does include the heading "Rough Draft for Caleb's *895Review" and the previous versions' bracketed question regarding repurchase rights. (Id. at 222, 224.) Once again, the draft is not signed by either party and it does not include a date.
2. Defendant's Exit from FairWay
On September 21, 2015, Defendant sent an email to Plaintiff with the subject line "Transition." (Id. at 9.) The email states, in pertinent part:
Last March, you asked that I level with you regarding our partnership in FairWay .
...Consequently, Caleb, I am no longer able to proceed as your partner . Serving in a lesser capacity may be possible, perhaps, as, say, strategic advisor on the group level or some such that would entail a minor time commitment.
...Obviously there are issues that need addressing, such as timing, debt repayment, informing the team, documentation and the like. We can begin dealing with those. I intend to transition honorably and professionally.
(Id. (emphasis added).) In January 2016, Plaintiff and Mr. Covington collaborated on a draft letter to "memorialize [Defendant's] withdrawal from the FairWay Group." (Dkt. No. 103-2, Ex. C at 115.) The letter states, in part:
It is with both sadness and understanding that I read the letter by which you stepped down as Chairman of the FairWay Group. They say that no one is irreplaceable. But I know this does not apply to you in this case. I cannot think of anyone who can provide the resources and loyalty you have provided and which have been critical in keeping FairWay and our dream for it alive.
(Dkt. No. 103-2, Ex. R at 233.) The draft letter includes sections entitled: "Terminating Prior Equity Arrangements"; "Loan Obligations Unaffected"; "Retroactive Compensation"; "Expense Reimbursement"; "Ongoing Consultation"; and "Miscellaneous." (Id. at 233-236.) The parties continued to negotiate regarding Defendant's exit and the repayment of his loans, and at some point in February or March 2016, Defendant informed Plaintiff "that if [Defendant] were not repaid by the end of 2016, [Defendant would need to have [his] original security interest in the FairWay IP restored." (Dkt. No. 99-1 at ¶ 72.) Negotiations broke down, as reflected in an email from Plaintiff to Defendant on March 7, 2016, wherein Plaintiff states that Defendant "bargained hard" for a "full partnership," and "with those rewards come obligations, particularly to lead the charge for funding so all the pieces could be put in place and creditors (including the Forman loans) could be paid." (Dkt. No. 103-2, Ex. S at 238.)
On April 10, 2016, Mr. Covington emailed Plaintiff a proposal detailing an "alternative" loan repayment structure that included granting Defendant a "security interest...under an omnibus collateral agreement." (Dkt. No. 103-2, Ex. T at 247.) Plaintiff refused, stating: "I am still open to this [creative]; but not with security interest - non-starter [he can fuck us at the finish line]." (Id. (bracketed language in original).) Mr. Covington responded by email the next day, stating, in pertinent part:
As for the security interest, it seems you and [Defendant] will never see eye to eye. I have to confess, though, that if there is subordination to future investors, why a security interest is a "non-starter" as you put it. If you don't move on this, then the odds of reaching an agreement are slim to none. Tell me this: When [Defendant] gave you 45 loans, why were you willing to let each and all of them be subject to security interest but not now?
*896(Id. at 246.) Negotiations between the parties continued, with Defendant seeking restoration of his security interest in the FairWay IP. On August 7, 2016, Mr. Covington emailed Plaintiff, suggesting that the "4 Urso shareholder scenario at 25%...could be a key to thwarting [Defendant's] attachment of the assets." (Dkt. No. 103-2, Ex. Y at 270.) On or about that date, Plaintiff sold or transferred 75% of his ownership interest in Urso to unnamed parties. (Dkt. No. 99-8, Ex. C at 59:11-22.) Plaintiff did not notify Defendant of this transfer. The parties continued discussions regarding a forbearance agreement throughout 2016 and up until January 2017, when Defendant was served with Plaintiff's state court complaint. (Dkt. No. 99-1 at ¶ 72.)
II. Procedural History
Plaintiff filed this action in Superior Court of the State of California, County of Alameda, on January 17, 2017. (Dkt. No. 1-1 at 2.) Defendant removed the action to this Court on February 17, 2017, based on diversity jurisdiction. (Dkt. No. 1.) Thereafter, Defendant moved to dismiss the complaint, (Dkt. No. 5), and Plaintiff moved to remand the action to state court, (Dkt. No. 12). The Court denied both motions on April 28, 2017. (Dkt. No. 22.) With the Court's permission, Defendant filed an amended answer and second amended counterclaim on July 19, 2018. (Dkt. No. 84.)
On October 4, 2018, Defendant filed motions for summary judgment on his counterclaims, (Dkt. No. 99), and Plaintiff's complaint, (Dkt. No. 103). Plaintiff filed his motion for summary judgment on Defendant's counterclaims that same day, (Dkt. No. 101). The motions for summary judgment are fully briefed.
Defendant filed the instant motion for sanctions on October 12, 2018. (Dkt. No. 111.) Plaintiff did not file an opposition. On January 7, 2019, Plaintiff moved, purportedly under Federal Rule of Civil Procedure 36, to "allow motion for leave to amend filing of amended affirmative defenses by Plaintiff." (Dkt. No. 134.) Defendant opposes Plaintiff's motion. (Dkt. No. 135.) The Court heard oral argument on all motions on January 31, 2019.
PRELIMINARY ISSUES
I. Evidentiary Objections
Both parties submit evidentiary objections outside of their opposition or reply briefing regarding evidence proffered by the opposing party in support of, or opposition to their respective motions for summary judgment. (See Dkt. Nos. 121 & 124.) Defendant's objections span 32 pages. (See Dkt. No. 124.) These separate filings violate Civil Local Rules 7-3(a),(c), which require that "[a]ny evidentiary and procedural objections to the [motion or opposition] must be contained within the [opposition or reply] brief or memorandum."13 The Court will thus "only address the evidentiary arguments to the extent they are raised" in the parties' opposition or reply briefs. See Beauperthuy v. 24 Hour Fitness USA, Inc. ,
Defendant also submitted evidentiary objections, (Dkt. No. 126), to evidence Plaintiff submitted with his reply in support of Plaintiff's cross-motion for summary judgment on Defendant's counterclaims, (Dkt. No. 120). Under the Local Rules:
If new evidence has been submitted in the reply, the opposing party may file within 7 days after the reply is filed, and serve an Objection to Reply Evidence, which may not exceed 5 pages of text , stating its objections to the new evidence, which may not include further argument on the motion .
Civil L.R. 7-3(d) (emphasis added). Again, Defendant's submission fails to comply with the Local Rules. First, it contains over two pages of argument regarding how certain of Plaintiff's positions are unsupported by evidence or contradicted by other testimony. Such argument is not an objection to evidence. Second, it exceeds the 5-page limit by 5 pages. Based on Defendant's failure to comply with the Local Rules, the Court will not consider this filing.
II. Requests for Judicial Notice
A. Defendant's Request
Defendant asks the Court to take judicial notice of an adjudicative fact pursuant to Federal Rule of Evidence 201(b)(2). (Dkt. No. 100.) Under Rule 201(b)(2), a judicially noticed adjudicative fact must be one "that is not subject to reasonable dispute because it...can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201. Here, Defendant seeks "judicial notice of the fact that the Federal Reserve Discount Rate on April 28, 2006, was 5.75%." (Dkt. No. 100 at 2.) In support of this fact, Defendant submits two printouts from the "website of the Board of Governors of the Federal Reserve System"14 demonstrating that the discount rate was set at 5.75% on April 10, 2006. (Dkt. No. 100 at 2.) Plaintiff has not opposed judicial notice of these documents or otherwise disputed their authenticity. Accordingly, the Court grants judicial notice of the fact that the Federal Reserve discount rate was 5.75% on April 28, 2006 because it is an undisputed "matter of public record." See Lee v. City of Los Angeles ,
B. Plaintiff's Request
Plaintiff requests judicial notice of the following facts in support of his cross-motion for summary judgment on Defendant's counterclaims: (1) "Federal Reserve discount rates during the period of March 2006 through October 2011"; and (2) "that over sixty (60) days have elapsed since May 22, 2018 and [Defendant] continues to seek principal and interest on the promissory notes referenced in the Second Amended Complaint." (Dkt. No. 101-14 at 1.) Plaintiff provides no documents in support of his request, however, to the extent relevant, the Court grants judicial notice of the requested facts.
DISCUSSION
I. Defendant's Motion for Summary Judgment on Plaintiff's Complaint
On summary judgment, the movant must demonstrate "that there is no genuine *898dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). Where the movant does not bear the burden of proof at trial for the underlying claims, it satisfies its burden if it can show that there is an absence of evidence to support "an element essential to [the nonmovant's] case, and on which [the nonmovant] will bear the burden of proof at trial." Celotex Corp. v. Catrett ,
A. Breach of Fiduciary Duty
"The elements of a claim for breach of fiduciary duty are the existence of a fiduciary relationship, its breach, and damage proximately caused by that breach." City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. ,
1. Existence of a Partnership
Plaintiff alleges that Defendant owed him a fiduciary duty based on the formation of a partnership between the two to operate FairWay. Under California law, a partnership is defined as "the association of two or more persons to carry on as co-owners a business for profit...whether or not the persons intend to form a partnership."
There is no dispute that Defendant proposed terms of a partnership to Plaintiff in January 2010, that Plaintiff responded with the Preliminary Collaboration Agreement on March 9, 2010, and that Plaintiff sent another draft the following day that purportedly "merged both drafts," (see Dkt. No. 103-2, Ex. M at 186). There is a dispute, however, as to the effect of the March 10th draft of the Preliminary Collaboration Agreement. Plaintiff testified that the parties "agreed on March 10th...that we were partners," based on the terms of the March 10th draft. (Dkt. No. 103-2, Ex. A at 27.) Plaintiff further testified that the parties then "proceeded through a course of conduct as partners." (Id. ) The draft partnership agreement, together with Plaintiff's testimony and the parties' course of conduct gives rise to a genuine dispute of fact regarding the formation of a partnership.
On January 12, 2012, Defendant forwarded to Plaintiff an email from a potential investor in FairWay, asking: "What's your take, partner?" (Dkt. No. 115-2 at 6.) On December 2, 2012, Plaintiff emailed Defendant regarding FairWay, stating in pertinent part:
You are doing the right things and let's hit this on all cylinder[s], real emphasis now. This is what I expected of you when you became my partner ....I am *899glad in this case that you are rising to the occasion and being a true partner . My faith in you is realized and renewed. You are someone I am proud to be partnered with .
(Dkt. No. 115-2 at 4 (emphasis added).) Defendant responded on December 3, 2012, stating, in pertinent part: "We're a team, partners you and I . I have every intention of living up to the confidence you place in me." (Id. (emphasis added).)
As previously discussed, Defendant sent an email to Plaintiff in September 2015 with the subject line "Transition." (Id. at 9.) The email states, in pertinent part:
Last March, you asked that I level with you regarding our partnership in FairWay .
...Consequently, Caleb, I am no longer able to proceed as your partner . Serving in a lesser capacity may be possible, perhaps, as, say, strategic advisor on the group level or some such that would entail a minor time commitment.
...Obviously there are issues that need addressing, such as timing, debt repayment, informing the team, documentation and the like. We can begin dealing with those. I intend to transition honorably and professionally.
(Id. (emphasis added).) Finally, in December 2015, Defendant sent Plaintiff an email discussing compensation and stating: "I, too, would have devoted less time had I known in advance that the economics of our partnership would never materialize." (Dkt. No. 115-2 at 8 (emphasis added).)
Based on the parties' repeated references to their "partnership" in the correspondence above, as well as Plaintiff's testimony that the parties agreed to the terms set forth in the draft March 10 partnership agreement, the record reflects a genuine dispute as to whether the parties indeed carried on as partners.
2. Breach
Under California law, "a partner owes to the partnership and the other partners...the duty of loyalty and the duty of care."
a. Duty of Loyalty
The duty of loyalty requires a partner:
(1) To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property or information, including the appropriation of a partnership opportunity.
(2) To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership.
(3) To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.
"A partner does not violate a duty or obligation under this chapter or under the partnership agreement merely because the partner's conduct furthers the partner's own interest."
A partner may lend money to and transact other business with the partnership, and as to each loan or transaction, the rights and obligations of the partner regarding performance or enforcement are the same as those of a person who is not a partner, subject to other applicable law.
b. Duty of Care
A partner's duty of care "is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law."
Plaintiff argues that Defendant breached his fiduciary duty of care by failing to diligently recruit executives and solicit investments for FairWay. (Dkt. No. 119-1 at ¶ 19.) Even taking Plaintiff's allegation as true, Plaintiff cites no authority indicating that a lack of "diligence" rises to the level of "grossly negligent or reckless conduct,15 intentional misconduct, or a *901knowing violation of the law" sufficient to show a breach of the duty of care under Section 16404. Further, the only evidence Plaintiff points to in support of this claim does not give rise to a genuine issue of material fact regarding any such conduct.
Plaintiff's opposition16 states that Defendant's "lack of diligent activity to solicit investors, one of the two primary duties of Defendant Forman in the partnership[,] is demonstrated on the face of Exhibit S." (Dkt. No. 119 at 24.) Exhibit S includes the names and titles of individuals, the firms they worked for, and the year Defendant made "Direct and Indirect" introductions of those individuals to Plaintiff for purposes of obtaining funding for FairWay. (Dkt. No. 115-6 at 26-29.) The list indicates that between 2010 and 2015-the time period during which the partnership allegedly began and ended-Defendant made 111 such introductions. (Id. ) The list also includes 28 "Additional Third Party Meetings and Interactions" Defendant participated in to solicit funding during that time. (Id. at 29-30.)
Plaintiff testified that the list indicates that Defendant made "a decent effort" during the "first nine months of the partnership," but after that, Defendant's "diligent efforts went down to less than one per month and then they fell down to four per year and then they fell down to two per year." (Dkt. No. 103-2, Ex. A at 30.) Plaintiff further testified, "I do not consider that diligent, and that is a breach." (Id. ) However, "to avoid summary judgment, a non-movant must show a genuine issue of material fact by presenting affirmative evidence from which a jury could find in his favor." FTC v. Stefanchik ,
Plaintiff's opposition cites no other evidence17 in support of Defendant's alleged *902breach, other than the aforementioned exhibit,18 and the Court is not required to scour the voluminous record in this case searching for such evidence. See Carmen v. San Francisco Unified School Dist. ,
Drawing all reasonable inferences from the record in Plaintiff's favor, no reasonable trier of fact could find that Defendant engaged in "grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law"; thus, summary judgment is warranted.
* * *
As no reasonable trier of fact could find that Defendant breached the duties of loyalty or due care, the Court grants Defendant's motion for summary judgment on Plaintiff's claim for breach of fiduciary duty. The Court need not address Defendant's arguments regarding lack of evidence of damages, although the Court agrees that Plaintiff's claim is also deficient in that regard.
B. Declaratory Relief
Plaintiff's complaint seeks declaratory relief regarding "the parties' rights, duties and obligations to each other" stemming from the alleged partnership and the December 2011 MOU. (Dkt. No. 1-1 at ¶ 29.) Defendant insists that summary judgment is warranted on this claim as to the alleged partnership because Defendant owed no fiduciary duties to Plaintiff. As to the MOU, Defendant's counterclaim insists that he is entitled to "declaratory relief rescinding" the MOU "for failure of consideration." (See Dkt. Nos. 99 at 14; 103 at 30.)
"The Declaratory Judgment Act does not grant litigants an absolute right to a legal determination." United States v. State of Washington ,
Here, although there is a genuine dispute of fact regarding the existence of a partnership, that dispute is not material to Plaintiff's breach of fiduciary claim in the absence of evidence in support of such a breach. Thus, affording Plaintiff declaratory relief will serve no useful purpose in settling the claims at issue, nor will it "terminate the proceedings." See State of Washington ,
C. Accounting
Plaintiff's cause of action for an accounting alleges that "there was a contractual relationship between the [p]arties and a balance is due and owing between them in an amount which is disputed and which cannot be ascertained without an accounting." (Dkt. No. 1-1 at ¶ 31.) Defendant provides no substantive argument regarding this claim, but instead insists that summary judgment "results from [his motion] and the companion [motion for summary judgment on Defendant's counterclaims], because [Defendant's] motions resolve any issues of the amounts due and owing between the parties." (Dkt. No. 103 at 30) (citing St. James Church of Christ Holiness v. Superior Court ,
Accordingly, the Court grants Defendant's motion for summary judgment on Plaintiff's claim for an accounting because it is derivative of his breach of fiduciary claim.
II. Cross Motions for Summary Judgment on Defendant's Counterclaims
The burdens faced by opposing parties on cross motions for summary judgment "vary with the burden of proof they will face at trial." First Pac. Networks, Inc. v. Atl. Mut. Ins. Co. ,
Defendant moves for summary judgment on his counterclaims for: (1) breach of promissory notes and loan agreements; and (2) declaratory relief (rescission).19 Defendant also seeks injunctive relief prohibiting Plaintiff from conveying his interest in any FairWay-related entity, the FairWay IP, and his general assets until Plaintiff "has satisfied in full the judgment entered against him" on these claims. (Dkt. No. 99 at 31-32.) Further, Defendant seeks "an award of reasonable attorney's fees and costs based on the attorney's fees provisions in the [notes]." (Id. at 32.)
Plaintiff likewise moves for summary judgment on Defendant's counterclaims, arguing that: (1) the notes at issue are usurious; and (2) Defendant failed to register as a licensed finance lender as required under the California Financial Code, § 22000 et seq. The Court addresses Defendant's counterclaims in turn.
A. Breach of Promissory Notes
To establish a breach of contract under California law, a claimant must show: "(1) the contract, (2) the [claimant's] performance or excuse for nonperformance, (3) [the opposing party's] breach, and (4) the resulting damages to [the claimant]." Rutherford Holdings, LLC v. Plaza Del Rey ,
The record shows that the parties entered into 33 loan agreements between 2006 and 2011 reflected in promissory notes that were payable by Plaintiff upon Defendant's demand. Plaintiff does not dispute the existence or facial validity of the notes at issue; indeed, Plaintiff includes them (and several other promissory notes between the parties) as exhibits to his cross motion for summary judgment. (See Dkt. No. 101-4, Ex. A at 2-177.) Further, the Loan Managers clearly reflect Plaintiff's express recognition that he is individually liable for payment of the notes on demand. Plaintiff's February 29, 2016 email to Defendant includes a Loan Manager with a summary entitled "Personal Loans - Forman to Avery" that lists "Accumulated Loans with interest" dating from August 2006 to October 2011. (Dkt. No. 99-4, Ex. 53 at 114.) The list includes the 33 notes at issue. The summary states, in pertinent part:
*905All principle [sic] and interest is due and payable on demand by Nathaniel Caleb Avery
Signed by Nathaniel Caleb Avery both individually
and as Chairman and CEO of Urso Limited,
on behalf of Urso, Ltd.
35 New Road
Belize City, Belize
** Also includes $ 100K Convertible Debt Note with FairWay Pricing Technologies which Nathaniel Caleb Avery and Urso Ltd. will take personal and corporate responsibility to the extent that Note is not repaid by FairWay Pricing Technologies according to its terms.
(Id. ) It is undisputed that Plaintiff failed to comply with Defendant's demand for payment in May 2017. Finally, Plaintiff's breach resulted in damages to Defendant reflected in the unpaid amounts owed under the notes.
Based on the record before the Court, Defendant has satisfied his burden of demonstrating the absence of a genuine dispute of material fact on the essential elements of his breach of contract claim. See Anderson v. Liberty Lobby, Inc. ,
1. Statute of Limitations
Plaintiff argues that Defendant's breach of contract claim is barred by the applicable statute of limitations because "[t]he statute of limitations on Demand Notes begins to run when Demand Notes are signed, not upon their demand." (Dkt. No. 118 at 12.) Plaintiff cites no authority for this argument; however, he is correct that the statute of limitations begins to run upon execution of a demand note. There is a four-year statute of limitations under California law for breach of contract claims, see
Defendant first filed his counterclaim for breach of contract on May 17, 2017. (Dkt. No. 29.) Thus, based solely on the date of the notes at issue, which were executed between 2006 and 2011, and the date of Defendant's first counterclaim, the statutes of limitations under California and Delaware law appear to bar his claim. However, the Loan Managers effectively restarted the statute of limitations under both California and Delaware law. See e.g. ,
In his cover email for the December 2007 Loan Manager, Plaintiff notes that the Loan Managers were "valid & binding - signed under the Electronic Signature Act." (See Dkt. No. 99-3, Ex. 38 at 56; see also
All principle and interest is due and payable on demand by Nathaniel Caleb Avery
To the extent any collateral is held by Urso Limited (also owned by Avery),
that collateral is pledged as well [to the extent necessary to fully repay both principle and interest]
Signed by Nathaniel Caleb Avery both individually
and as Chairman and CEO of Urso Limited.
on behalf of Urso, Ltd.
Marina Towers, Suite 302,
Newtown Barracks,
Belize City, Belize
N. Caleb Avery
[signed under the Electronic Signatures Act of 2000 [Public Law No: 106-229) ] and legally binding upon all his assignees and heirs
(Dkt. No. 99-3, Ex. 40 at 67.) Plaintiff then sent Defendant updated Loan Managers in April 2008, May 2008, August 2008, September 2008, October 2009, April 2010, February 2011, and October 2011. Each of the Loan Managers included Plaintiff's electronic signature and his acknowledgement of his obligation to pay the notes on Defendant's demand. The Loan Managers also included all of the notes at issue that are governed by California law. Such written acknowledgement is sufficient to renew the statute of limitations. See Western Coal & Mining Co. v. Jones ,
The December 2011 Loan Manager adds an additional line to the above, stating:
**Also includes $ 100K Convertible Debt Note with FairWay Pricing Technologies which Nathaniel Caleb Avery and Urso Ltd will take personal and corporate responsibility to the extent that Note is not repaid by FairWay Pricing Technologies according to its terms.
(Dkt. No. 99-4, Ex. 51 at 53.) The parties executed the FairWay Pricing Technologies note in April 2006, and it is governed by Delaware law, which provides for a six-year statute of limitations.20 Plaintiff's acknowledgement of the FairWay Pricing Technologies note in the December 2011 *907Loan Manager and his representation that he would take "personal" responsibility for the note, was sufficient to restart the six-year statute of limitations under Delaware law. See Mykulak ,
Plaintiff next sent Defendant Loan Managers in March 2015 and February 2016 that likewise reference all 33 of the notes at issue. (See Dkt. No. 99-4, Ex. 52 at 111, Ex. 53 at 114.) Thus, the Loan Managers indicate that Plaintiff renewed the applicable statutes of limitations prior to their expiration, and Defendant's breach of contract claim-first filed in May 2017-falls within the limitations period.
Plaintiff insists that "the intent underlying the Loan Managers was not to serve as an acknowledgement of the debt but rather in compliance with his obligation as a partner to provide information about the partnership." (Dkt. No. 118 at 12-13.) Plaintiff characterizes the question regarding his "intent" in drafting the Loan Managers as a "factual dispute" sufficient to defeat summary judgment. (See
To give rise to a genuine dispute of material fact, Plaintiff must provide evidence -not unsupported assertions. See Liberty Lobby, Inc. , 477 U.S. at 250,
At oral argument Plaintiff insisted that the Loan Managers did not acknowledge Plaintiff's debt because the December 2011 MOU relinquished Plaintiff's obligation to pay the notes, or at least required Defendant to first seek payment from Urso before making demand upon Plaintiff. Putting aside that this argument is not really about the statute of limitations, it nonetheless fails because the MOU cannot reasonably be read to support Plaintiff's interpretation. And Plaintiff points to no other evidence in the record to support his argument: no testimony as to conversations with Defendant, no emails or other correspondence, and no other documentary evidence that even hints that Defendant had agreed to give up his right to repayment from Plaintiff. Instead, the record includes Loan Managers issued by Plaintiff subsequent to the MOU that expressly acknowledge his debt and make no mention of the debt being relinquished. Simply put, no reasonable trier of fact could find the facts as urged by Plaintiff in this respect.
2. Loans Intertwined with Partnership
Plaintiff further argues that summary judgment is inappropriate because there is "a factual dispute over the [existence] of the partnership that is intertwined with any status of the Demand Notes of 2006-2011." (Dkt. No. 118 at 18.) Again, however, Plaintiff points to no evidence in support of that assertion, and his argument is belied by the terms of the notes themselves-none of which mention a partnership-and the Loan Managers, which clearly show that Plaintiff understood that the notes at issue were personal loans *908from Defendant to Plaintiff. Plaintiff's argument is also undercut by the timeframe of the loans-31 of the 33 notes at issue were executed before Defendant proposed terms of a partnership to Plaintiff in January 2010 and before Plaintiff responded to those proposed terms with the draft Preliminary Collaboration Agreement in March 2010. The two loans that came after, in May 2011 and October 2011, contain identical terms and formatting (though different loan amounts) to the notes that preceded them in September 2006, November 2006, December 2006 (2), January 2007 (2), February 2007, March 2007 (3), April 2007, May 2007, June 2007, July 2007 (2), August 2007, September 2007, October 2007 (2), November 2007 (2), December 2007 (2), January 2008, February 2008, April 2008, and May 2008. Again, none of the 33 notes at issue reference a partnership or any other type of business relationship.
The December 2011 MOU from Plaintiff to Defendant detailing a restructured "payout plan to [Defendant] that would retire the series of Promissory Notes dated from 2006-2011" likewise does not contain any reference to the purported partnership. (See Dkt. No. 99-4, Ex. 55 at 165.) Further, to the extent that the Court recognizes a genuine dispute of fact as to the existence of a partnership, that dispute is not material to the breach of contract counterclaim based on the record before the Court. See Liberty Lobby, Inc. , 477 U.S. at 248,
3. Failure to register under the California Financing Law and violation of California Financial Code § 22750
Plaintiff moves for summary judgment and opposes Defendant's motion on the grounds that the notes at issue are void because Defendant failed to register as a financial lender as required under the California Financing Law ("CFL"), California Financial Code § 22000 et seq. Plaintiff contends that by failing to register, Defendant violated California Financial Code §§ 22750 and 22752(a) and thus Defendant is prohibited from collecting on the loans, or at least collecting any interest on the loans. Defendant counters that this argument fails because the notes at issue are "commercial loans," and Sections 22750 and 22752(a) of the CFL apply only to "consumer loans." He further argues that Plaintiff has not shown that the CFL otherwise applies to all of the loans at issue.
a. Sections 22750 and 22752 Apply Only to Consumer Loans
The CFL provides that consumer loans "are subject to," among other chapters, "Article 2 (commencing with Section 22750 ) of Chapter 4."
b. Whether the Loans Qualify as Consumer Loans
As defined by the CFL, a "consumer loan" is a loan "intended by the borrower for use primarily for personal, family, or household purposes."
Plaintiff's complaint alleges that the loans were commercial in nature: "Defendant, as part of his agreed upon support for the partnership/joint venture, provided funding for the partnership/joint venture which funds were characterized as Promissory Notes." (Dkt. No. 1-1 at ¶ 9.) This allegation is consistent with the terms of the first two promissory notes which themselves recite that the primary, or even exclusive, purpose of the loans was to fund FairWay. (See Dkt. No. 99-2, Ex. 1 at 12 ("Proceeds of Note (a) Use the proceeds of the Note for working capital, legal fees, and other [short-term] general corporate purposes."); Ex. 2 at 28 ("Proceeds of Note (a) Use the proceeds of the Note exclusively for patent-related expenses (e.g., legal fees and the related general costs) related to a contemplated international business."). The parties subsequently used a "Secured Promissory Note" form for the loans at issue on Defendant's motion (except the loan to FairWay International Kft) that does not specify what the proceeds of the loans could be used for. (See Dkt. No. 99-2, Exs. 3-24; 26-33.) However, based on the parties' past conduct, which shows that Defendant made the loans to further a commercial purpose-the development of FairWay-that omission does not give rise to a reasonable inference that the loans at issue were consumer loans. (See Dkt. No. 99-2, Exs. 3-24; 26-33.)
Plaintiff's cross motion for summary judgment and his opposition to Defendant's motion fail to identify any evidence upon which a reasonable trier of fact could find that Plaintiff intended to use the loans "primarily for personal, family, or household purposes." See
*910The Court, however, "need not consider arguments raised for the first time in a reply brief." See Zamani v. Carnes ,
At oral argument Plaintiff referred to deposition testimony from Defendant in which Defendant acknowledged that some of the loans' proceeds were used by Plaintiff for his living expenses. Specifically, with regard to Defendant's percentage of "equity participation" in FairWay companies, Defendant testified:
[The equity] was tied to a single operating company[,] namely Fairway Financial US and I grew increasingly uncomfortable that I'd advanced a tremendous amount of money. That money was being used in part to going [sic] to provide [Plaintiff's] living expenses, housing, food, health needs, and the balance to develop and evolve[ ] his international patent portfolio and since these patents were international, and since it was anticipated that there were operating companies to be set up in jurisdictions around the world, I grew increasingly concerned about having all my eggs in one basket.
(See Dkt. No. 115-5 at 91 (211:16-212:2).) Plaintiff did not cite to this testimony in any of his pleadings in connection with the summary judgment motions; thus, the Court need not consider it. See Fed. R. Civ. P. 56(c)(3). However, because Plaintiff is unrepresented, and he seeks to have the testimony considered in defense to Defendant's counterclaims rather than on his affirmative claims, the Court will consider the late-identified deposition testimony. See
c. Whether the CFL Applies to the Loans
Defendant also insists that Plaintiff's CFL defense fails because Plaintiff was never a resident of California. Defendant's sole legal authority, however, is a decision of the Commissioner of the California Department of Corporations that states on its face that the decision "is applicable to the specific factual decision identified in the request for ruling, and may not be relied upon in connection with any other factual situation ." California Department of Corporations, Howard, Rice, Nemerovski, Canady, Falk & Rabkin ,
d. Plaintiff's Motion for Summary Judgment
Plaintiff's motion for summary judgment on his CFL affirmative defense is DENIED. Drawing all inferences in Defendant's favor, Plaintiff has not shown that every reasonable trier of fact would have to find that Plaintiff intended the loans to be used primarily for personal, family, or household purposes.
While Defendant's breach of contract counterclaim includes loans for less than $ 5000, Plaintiff has also not established that if the $ 5000 threshold for a commercial loan is not met that means the loan is considered a consumer loan for purposes of the CFL penalty provisions even if the loan is not made primarily for personal, family, or household purposes. See
4. Usurious Loans
Plaintiff's cross motion for summary judgment on Defendant's counterclaims asserts a usury defense, arguing that Defendant is barred under California law from collecting interest on the notes at issue.21 Such a defense, if successful, does not preclude Plaintiff's liability for the principal on the notes. See In re Dominelli ,
Under California law, "[n]o person, association, copartnership or corporation shall by charging any fee bonus, commission, discount or other compensation receive from a borrower more than the interest authorized by this section upon any loan or forbearance of any money, goods or things in action.". Cal. Const. Article XV, § 1 (2). The interest rate on the type of loans at issue may not exceed 10% per year.
*912There is no dispute as to the first and third elements-the notes at issue are loans, and the loan and interest are repayable by Plaintiff. Plaintiff also does not dispute that the notes governed by California law bear interest at the legal limit of 10% per year. Plaintiff attests, however, that the loans exceed the statutory maximum interest rate because the parties agreed to "Equity Override Agreements" in September 2006, February 2011, and June 2011 that provided Defendant additional compensation in the form of the right to purchase as much as 2% equity in FairWay operating companies. (Dkt. No. 101-12 at ¶¶ 6-7.) Plaintiff argues that these equity rights were tied to Defendant's loans and thus constitute an impermissible "bonus" on top of the legal limit of 10% interest on the face of the notes. As to the element of intent, Plaintiff provides no argument in his motion, (see Dkt. No. 101-13 at 5-6), and asserts in his reply that "[t]he only time intent is relevant is if the transaction does not appear on its face to be usurious," which "is not needed here because the face of the note[s]" indicate they are usurious, (see Dkt. No. 120 at 15 (citing Ghirardo ,
Defendant counters that that Plaintiff's usury defense fails because: (1) Plaintiff "has presented no evidence that the interest paid on the loans exceeds the statutory maximum or that Avery's offers to Forman had any demonstrable value"; (2) Plaintiff "has presented no evidence that his offers to Forman were made with the intent of the parties to evade the usury laws"; and (3) the "defense is barred by the doctrines of estoppel, in pari delicto, unclean hands, laches and/or waiver. (Dkt. No. 117 at 10, 17.) The Court finds Defendant's first and second arguments dispositive and agrees that the record is insufficient to grant summary judgment in Plaintiff's favor on his usury defense because Plaintiff fails to (1) provide sufficient evidence that the equity rights had demonstrable value at the time the loans were made and (2) demonstrate the requisite intent. For the same reasons, Plaintiff's evidence is insufficient to raise a genuine dispute of material fact as to whether the equity rights constituted impermissible compensation for the loans in addition to the 10% interest rate.
Under California law additional compensation received by the lender must be considered as interest in determining whether a loan is usurious. See Bayne v. Jolley ,
Plaintiff asserts that Defendant's deposition testimony supports Plaintiff's assertion that the equity rights were related to the loans and acted as additional compensation. Defendant's testimony references a conversation wherein the parties discussed "how much equity [Defendant] was receiving by virtue of sustaining loans to [Plaintiff]." (Dkt. No. 101-6, Ex. C at 3.)
Q: [The conversation] was something to the effect of Mr. t'Bear saying you were already getting equity as part of the loans?
A: I wouldn't say that. What I would say is yes, I was purchasing equity at a very low price at a co-founder's price in Fairway Financial US. But you know, that equity right was extended to me early on in the initial loans that I made Mr. t'Bear....So I looked at the equity I *913was receiving as an enticement to make the early loans and while the loans had multiplied in aggregate amount, the equity had not changed and I was becoming concerned with that.
(Id. at 3:7-23 (emphasis added).) Defendant testified that at one time "the only equity [he] owned was in a single [FairWay] operating company," and he "grew increasingly concerned about having all my eggs in one basket." (Id. at 4:1-4.) Further:
Q: At some point, was there an agreement to extend this, I've seen the term equity kicker to all [FairWay operating companies]?
A: Yes.
(Id. at 4:11-14.) The February 2011 letter sent by Plaintiff to Defendant, which Plaintiff characterizes as an "Equity Override Agreement," states, in pertinent part:
I would like to update my September 10, 2006 letter with regards to your initial founding position on any Operating Company being created by The FairWay Group (and Urso Ltd. in particular). First I would like to thank you for your ongoing support for, and counsel to all aspects of the FairWay Group. In recognition of this, I would like to amend the previous standing offer of 0.5% (1/2 of 1 percent) of any company founded related to the manufacture and implementation of the FairWay Marketplace Platform. Let's triple that to 1.5% (1.5 percent) of any and all companies founded within The FairWay Group of companies-this includes FairWay International and any and all FairWay Operating Companies. As before there are no strings attached to this offer and it is separate and above any offers for your participation for an advisory, oversight, or operating partner role.
(Dkt. 101-7, Ex. D at 2.) The June 2011 "Equity Override Agreement" increased the offer to 2%. (Id. at 4.) In response to questioning regarding the February 2011 letter, Defendant testified: "I don't know that I formally agreed [to its terms]." (Dkt. No. 101-6, Ex. C at 6:23.) Defendant continued, however:
If I was offered additional equity, which I believe I deserved and I'm sure that this was offered to me in some measure because I'm probably looking for it whenever I felt uncomfortable that I was not being adequately rewarded for the loans that I was advancing , I would allude to that from time to time and I think this is a response to [Plaintiff] appreciating my concern.
(Dkt. No. 116-5, Ex. O at 92 (emphasis added).)
Further, Defendant testified:
So I don't remember specifically what I thought about reading this. I read this letter to mean that [Plaintiff] was finally bumping the equity related to the debts he owed to me, because he knew that I was uncomfortable with what I was receiving . And he was showing me how he was calculating it. And I took it that far.
(Dkt. No. 101-6, Ex. C at 7:11-17 (emphasis added).) Defendant also testified:
[T]he amount of equity I was getting related to the loans I'd extended to him did not move unless he made it move, but nevertheless, he was soliciting money from me again and again and again....And yet the participation in one or more companies did not scale with those debts and I became uncomfortable from time to time and he knew that and this, my understanding of this is that it was an adjustment to make me feel perhaps better about it and continue to lend him money.
(Dkt. No. 116-5, Ex. O at 93 (emphasis added).) Further, the January 2016 draft *914letter memorializing Defendant's exit from FairWay includes terms stating that Defendant would "continue in a more limited advisory role and receive compensation for past advisory services and loans to the FairWay Group ." (Dkt. No. 103-2, Ex. R at 233 (emphasis added).) Thus, the record supports an inference that Plaintiff's offers of equity rights in FairWay companies were related to Defendant's loans. The record fails to support a finding, however, that such offers constitute a "bonus" sufficient to render the loans usurious because there is no evidence that the equity rights had demonstrable value at the time the loans were made.
In opposition to Plaintiff's cross motion for summary judgment and his usury defense, Defendant submits the September 2006 letter as evidence that the equity rights were valueless. (See Dkt. No. 117-3, Ex. B at 2-3.) Defendant asserts that the September 2006 letter "merely offers [Defendant] the right to purchase, for a small price, a percentage of shares in non-existent FairWay entities that might never be formed." (Dkt. No. 117 at 12.) Defendant also submits the declaration of Greg Regan, "an experienced valuation expert," who reviewed "the materials [Plaintiff] submitted to the Court" and "concluded that [Plaintiff] has not provided any information upon which one could determine the value of rights offered to [Defendant] in the September 10, 2006 letter." (See Dkt. No. 117-6 at ¶¶ 2, 6.) Further, Mr. Regan opines: "The information cited by [Plaintiff] does not provide a basis under acceptable and widely-used valuation methods to determine the value of the rights offered in the February 4, 2011 and June 5, 2011 letters, as of those dates (or any dates)." (Id. at ¶ 8.)
Plaintiff offers no evidence to rebut Mr. Regan's declaration, and instead merely argues that Mr. Regan's declaration and methodology is faulty. (See Dkt. No. 120 at 12-13.) Such assertions do not give rise to a genuine dispute of material fact; Plaintiff must instead identify evidence to rebut Defendant's evidence. See Galen ,
In the absence of any evidence that the equity rights had demonstrable value at the time of the loans, Plaintiff's motion for summary judgment fails because he has not proved the second element of usury-that the interest on the loans in question exceeded the statutory maximum. See Darden Rests., Inc. ,
The Court denies Plaintiff's cross motion for summary judgment on Defendant's counterclaims because Plaintiff fails to establish as a matter of undisputed fact that the loans were usurious or barred by the CFL. The Court defers ruling on Defendant's motion for summary judgment on his breach of contract counterclaim pending his submission of a supplemental brief regarding the loans not qualifying as consumer loans as a matter of law.
Defendant's motion also seeks declaratory relief; specifically, rescission of the December 2011 MOU for failure of consideration. Defendant argues that rescission is warranted because Plaintiff's promised consideration has failed in two ways: (1) Plaintiff failed to repay Defendant's loans by the end of 2012; and (2) Plaintiff no longer holds a 100% ownership interest in Urso, which he pledged in the MOU as the "main collateral" for the notes at issue. (Dkt. No. 99 at 23-25.) Defendant further insists that rescission is necessary to restore his security interest in the FairWay IP because Plaintiff is otherwise "judgment proof" and cannot satisfy any monetary award ordered by this Court.
Defendant's declaratory relief claim is in effect a claim that Plaintiff breached the MOU. Thus, to prevail, Defendant must establish that drawing all reasonable inferences in Plaintiff's favor, every reasonable factfinder would have to find that Plaintiff breached the MOU. Then, based on that breach, Defendant seeks a declaration that the MOU is rescinded and thus his loans are again secured directly by the Fairway IP. As previously noted, a court's decision whether to grant declaratory relief is "a matter of discretion," and "the court may, after a full consideration on the merits, exercise its discretion to refuse to grant declaratory relief because the state of the record is inadequate to support the extent of the relief sought." State of Washington ,
The Court is not comfortable ordering the relief sought based on the record before it for two reasons. First, Defendant's motion relies heavily on Plaintiff's failure answer the declaratory relief counterclaim. (Dkt. No. 99 at 23.) However, Plaintiff did answer the counterclaim, just not in a timely manner. (See Dkt. No. 112.) Defendant offers no legal authority for the proposition that an untimely answer, filed before the defendant is held in default, admits the well-pleaded allegations of the complaint. Second, Defendant has not addressed why Urso-the purported 100% owner of the Fairway IP-does not need to be made a party to these proceedings if what Defendant seeks is a declaration that Defendant has a priority lien to the Fairway IP-an asset held by Urso.
The Court in its discretion therefore denies Defendant's motion for summary judgment on its declaratory judgment claim without prejudice to renewal.
C. Injunctive Relief
Defendant insists that injunctive relief is necessary to ensure Plaintiff's satisfaction of any monetary judgment against him. At the outset, however, strictly monetary harm "will not usually support injunctive relief." Am. Trucking Ass'n, Inc. v. City of Los Angeles ,
III. Defendant's Motion for Sanctions
Defendant moves for sanctions against Plaintiff pursuant to Federal Rules of Civil Procedure 37(b) and 41(b) because: (1) Plaintiff "violated the Court's May 17 and June 6 Orders by failing to complete his document production by June 21"; (2) Plaintiff "violated the Court's July 18 Order concerning production of assertedly privileged documents"; (3) Plaintiff "walked out of his Court-ordered deposition before questioning was completed"; (4) Plaintiff "has ignored the Court's August 6 Order to pay monetary sanctions to [Defendant]"; and (5) Plaintiff "improperly interfered with document production and testimony from Timothy Covington." (Dkt. No. 111 at 2.) Defendant requests that the Court grant his motion and dismiss Plaintiff's complaint with prejudice, "impose a sanction prohibiting [Plaintiff] from opposing [Defendant's] second counterclaim [seeking rescission of the December 2011 MOU]." (Id. at 22.) Plaintiff has not opposed or otherwise responded to Defendant's motion.
The Court has granted Defendant's motion for summary judgment on Plaintiff's complaint; thus, terminating sanctions are not necessary. It is always preferable to decide a case on its merits. While Defendant also seeks an order that Plaintiff cannot oppose Defendant's claim for declaratory relief, most of the misconduct is not tethered to that counterclaim, which was not even added to this lawsuit until July 2018. Defendant does contend that Plaintiff testified at his deposition in July 2018 that he is withholding documents created after October 2016, including documents relevant to the ownership of Urso. Defendant, however, never moved to compel such testimony or documents. He cites no legal authority that would allow what is in effect a default judgment for failing to produce evidence absent a court order.
On August 6, 2018, the Court did order Plaintiff to pay $ 3360 in sanctions for discovery violations as of May 2018. (Dkt. No. 86.) According to Defendant, Plaintiff has yet to pay those sanctions despite four separate inquiries from Defendant's counsel. (Dkt. No. 111 at 14.) Plaintiff shall pay the monetary sanction, as previously ordered, on or before February 21, 2019 and shall file a written submission with the Court by the same date confirming that he has complied with the Court's order and paid the sanction.
IV. Plaintiff's Motion for Leave to Amend
On October 15, 2018, after submitting his motion for summary judgment on Defendant's counterclaims, Plaintiff filed an answer to Defendant's second amended counterclaim asserting 16 affirmative defenses.
On January 7, 2019, Plaintiff purportedly moved under Federal Rule of Civil Procedure 36 to "allow motion for leave to amend filing of amended affirmative defenses by Plaintiff." (Dkt. No. 134.) Specifically, Plaintiff states that he "move[s] under Rules [sic] 36, to amend its responses to the Defendant's Motion for Summary Judgment to Defendant's Counterclaims filed October 4, 2018." (Id. at 2.) Plaintiff asserts that "[t]he Motion is ready to file," and "[t]he Court has only to allow." (Id. ) Plaintiff clarified at oral argument that he is seeking leave to amend based on "additional claims" brought by Defendant in his motion for summary judgment on his counterclaims. Notwithstanding that Plaintiff's motion fails to *917comply with the requirements of Civil Local Rule 7-2, the motion is moot. As the Court explained to Plaintiff at oral argument, it is only adjudicating the counterclaims asserted in Defendant's July 19, 2018 second amended counterclaim, (see Dkt. No. 84). Plaintiff indicated that he understood. And, in any event, his motion is untimely. The time for Plaintiff to raise any issues in opposition to Defendant's motions for summary judgment was in his opposition briefing. (See Dkt. Nos. 113, 114.)
Accordingly, the Court denies Plaintiff's motion for leave to amend.
CONCLUSION
The Court grants summary judgment in favor of Defendant on Plaintiff's claims for breach of fiduciary duty, declaratory relief, and an accounting, that is, on Plaintiff's entire complaint.
The Court denies Plaintiff's motion for summary judgment on Defendant's counterclaims and denies without prejudice Defendant's motion for summary judgment on his declaratory judgment claim.
The Court defers ruling on Defendant's motion for partial summary judgment on his breach of contract counterclaim pending his submission of a supplemental brief regarding the loans not qualifying as consumer loans as a matter of law. Defendant's brief shall be submitted on or before February 21, 2019.
The Court refers the parties to a randomly assigned magistrate judge for a settlement conference to occur as soon as is convenient to the magistrate judge.
This Order disposes of Docket Nos. 101, 103, 111, and 134.
IT IS SO ORDERED.
Related
Cite This Page — Counsel Stack
359 F. Supp. 3d 882, Counsel Stack Legal Research, https://law.counselstack.com/opinion/tbear-v-forman-cand-2019.