Opinion
Case No. 05CV1119 JM (AJB).
October 28, 2005
Introduction
On December 30, 2004, Plaintiff, John Clark, filed a complaint in San Diego County Superior Court, alleging numerous contract and tort claims arising out of a contested business venture previously resolved by a settlement agreement. After Defendants filed demurrers, Plaintiff submitted a first amended complaint ("Complaint") on April 28, 2005. In the amended Complaint, Plaintiff alleged, among a host of state law claims, a violation of a federal statute: 26 U.S.C. § 7434. On the basis of this federal claim, Defendants removed the Complaint to federal court on May 27, 2005. Defendant Hemolife filed a motion to dismiss counts eleven and fourteen from the Complaint, pursuant to Federal Rule of Civil Procedure 12(b)(6). Defendants Roberts, Shepard and Stone ("Individual Defendants") filed a motion to dismiss counts one through eleven and fourteen.
Background
In May 2002, Defendant Craig Roberts approached Plaintiff and proposed a joint business venture to develop and market Roberts' new medical technology. This technology is aimed at treating abnormalities of the liver and blood. After agreeing to form the venture (known as "Vivosys"), Plaintiff contacted corporate attorney Defendant Rudolph Shepard, who became the third founding member. Defendant Lon Stone joined the venture in August of 2002. Shortly thereafter, Defendants Roberts, Shepard and Stone began indicating to Plaintiff that they were no longer interested in pursuing the venture. On September 16, 2002, however, Defendant Shepard amended the Articles of Incorporation of Vivosys to rename it Hemolife Medical, Inc. ("Hemolife"). In January 2003, Plaintiff confronted the Individual Defendants about the ongoing existence of the venture and they admitted that Hemolife existed. Plaintiff had not been compensated for his founder's interest as he was entitled to be under early agreements between the founders.
Plaintiff and all Defendants entered into a settlement agreement on February 1, 2003, which specifically stated that Plaintiff "hereby releases, relieves and forever discharges . . . Hemolife, Shepard, Stone, Roberts . . . from and against any and all claims . . . which he . . . might have . . . against [Defendants] . . . arising out of or in any way connected with this dispute. . . ." Paragraph 7 of the settlement agreement provided that Plaintiff would pay Defendants $.0005 per share for one million shares of Hemolife common stock for a total of $500. In the settlement negotiation process, Plaintiff was represented by his own counsel.
On May 15, 2003, Hemolife notified Plaintiff that it would prepare an Internal Revenue Service ("IRS") 1099 Form reporting that Plaintiff had received miscellaneous income in the amount of $999,500 pursuant to the settlement agreement. Plaintiff was told that this income represented the difference between the $.0005 per share that Plaintiff paid for one million shares of stock and the actual value of that stock at $1.00 per share. According to Plaintiff, this assertion was false because the parties had agreed during negotiations of the settlement agreement that the shares were worth $.0005 per share. Over the next several months the parties negotiated the issue, and, according to Plaintiff, Defendants agreed to restate the settlement agreement if Plaintiff agreed to terms that were more favorable to Defendants, otherwise Hemolife would report the $999,500 in miscellaneous income to the IRS. Plaintiff attempted to rescind the settlement agreement by sending a letter to Defendants on December 30, 2003. Defendants rejected the offer of rescission.
At the end of January 2004, Hemolife sent Plaintiff an IRS Form 1099 purporting to report that Plaintiff received $450,000 of miscellaneous income. Plaintiff alleges that Hemolife has advised the IRS to this effect as well.
Legal Standard for Motion to Dismiss Pursuant to Rule 12(b)(6)
Federal Rule of Civil Procedure 12(b)(6) allows a court to dismiss a complaint for failure to state a claim upon which relief can be granted. Such a dismissal can be based on either the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. See Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). In applying this standard, the court must treat all of the plaintiff's factual allegations as true. See Experimental Eng'g, Inc. v. United Technologies Corp., 614 F.2d 1244, 1245 (9th Cir. 1980). However, the court does not have to accept as true conclusory allegations that contradict facts which may be judicially noticed or which are contradicted by documents referred to in the complaint. See, e.g., Steckman v. Hart Brewing Inc., 143 F.3d 1293, 1295-1296 (9th Cir. 1998). To dismiss with prejudice, it must appear to a certainty that the plaintiff would not be entitled to relief under any set of facts that could be proven. See Reddy v. Litton Indus., 912 F.2d 291, 293 (9th Cir. 1990), cert. denied, 502 U.S. 921 (1991). The court does not consider the likelihood that the plaintiff can prevail, just whether the allegations, if proven, would be sufficient. See Jacobson v. Hughes Aircraft Co., 105 F.3d 1288, 1292 (9th Cir. 1997).
Rescission
Plaintiff has asked for rescission of the settlement agreement pursuant to California Civil Code Section 1688 on the grounds that (1) Defendants induced him to consent by fraudulently suppressing their intent to seek to renegotiate the agreement by threatening to report income (falsely) to the IRS, (2) his consent was given by mistake because he was unaware of the value Defendants had placed on the shares, and/or (3) the consideration failed because Defendants breached their contractual and fiduciary duties to Plaintiff by fraudulently undervaluing the shares during negotiations and then overvaluing the shares afterwards.
Defendants maintain that Plaintiff has failed to state a claim for rescission, that the settlement agreement is valid, and that claims two through ten and fourteen, therefore, should be dismissed on the grounds that they are covered by the release given in the settlement agreement. Specifically, Defendants argue that Plaintiff's claim for rescission should be dismissed for failure to plead fraud with sufficient particularity.
A contract may be rescinded in the event that consent was obtained through, among other means, mistake or fraud, or for failure of consideration. Cal. Civ. Code § 1689(b)(1), (2). It is well-established that opinions of value cannot form the basis of a fraud claim. See Alberda v. Smith, 2 Cal. App. 2d 74, 79 (Cal.Ct.App. 1934). However, "when a statement as to value is made as a positive affirmation of fact, and is intended as such by the person making it, and such statement is false and is known to be false by the person making it, and such statement is relied upon by the person to whom it is made, then such false statement is actionable . . ." Friedberg v. Weissbuch, 135 Cal. App. 2d 750, 755 (Cal.Ct.App. 1955). Where the basis of the claim for rescission is fraud or mistake, the plaintiff is subject to Rule 9(b) of the Federal Rules of Civil Procedure, which requires the circumstances of the fraud or the basis of the mistake to be plead with particularity. Fed.R.Civ.P. 9(b); Miscellaneous Service Workers, Drivers Helpers v. Philco-Ford Corp., 661 F.2d 776, 782 (9th Cir. 1981) (requiring allegations of fraud to include the time, place, and specific content of the false representation).
A. Fraud/Deceit
Plaintiff argues that he has pled rescission based on fraud by breach of fiduciary duty, fraud by material misrepresentation, and fraud by concealment of material fact. Plaintiff also argues that he has sufficiently plead the elements of deceit under 1710. Under California law, the elements of fraud are (1) a false representation of fact, (2) made with knowledge of its falsity, or recklessly, (3) with intent to induce reliance, (4) on which the plaintiff justifiably relies, and (5) the plaintiff is injured. See Gonsalves v. Hodgson, 38 Cal.2d 91 (1951); Stone v. Foster, 106 Cal. App. 3d 334 (Cal.Ct.App. 1980); Cohen v. Citizens National Trust Savings Bank, 143 Cal. App. 2d 480 (Cal.Ct.App. 1956).
Plaintiff does not offer any authority for what might comprise the elements of a "fraud by breach of fiduciary duty." Under California law, breach of fiduciary duty is not grounds for rescission. See Cal. Civ. Code § 1689.
As an initial matter, Plaintiff incorrectly identifies the statutory basis for the tort of fraud or deceit. Section 1709, titled "Fraudulent Deceit," provides that "[o]ne who willfully deceives another, with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers." Cal. Civ. Code § 1709. Section 1710 simply defines "deceit" for purposes of Section 1709.
The complaint includes allegations of specific instances before the settlement agreement was signed when Defendants claimed the Hemolife shares were worth $.0005 per share (the price the Hemolife founders paid) and instances after the settlement agreement was executed when Defendants claimed the shares each had a value of $1.00. The complaint does not address the element of reliance; however, pleading fraud with particularity does not require pleading every element. See Union Mut. Life Ins. Co. v. Simon, 22 F.R.D. 186, 187 (E.D.Pa 1958) ("[I]t should be pointed out that the requirement of Rule 9(b) . . . does not mean that a textbook pleading of all the elements of fraud are required but requires that the complaint set forth the facts with sufficient particularity to apprise the defendant fairly of the charges made against him."). Reliance can also be inferred from the fact that Plaintiff did not have access to the financial information of Hemolife and had to rely on the representations of Defendants as to the shares' worth.
Plaintiff also argues that his consent was obtained by fraudulent suppression of intent on the part of Defendants to seek to renegotiate the terms of the settlement agreement, using threats to report income to the IRS as leverage. On this point Plaintiff provides no particulars to support his theory that Defendants harbored this intent at the time the settlement agreement was signed. Plaintiff only offers that Defendant Stone "implied" sometime between May and December 2003, that Defendants secretly intended all along to report miscellaneous income. There is no indication of any particular misconduct and, therefore, is too vague to give Defendants sufficient notice of which conversations or communications were allegedly fraudulent.
B. Mistake
Plaintiff alleges that he was ignorant of the fact that Defendants were not valuing the shares, as he was, at $.0005 per share, and that the transaction contemplated by the settlement agreement would involve substantial tax consequences. Allegations of mistake must be pled with particularity. Fed.R.Civ.P. 9(b). Plaintiff references a telephone conversation on January 18, 2003, a confirmatory letter on January 21, 2003, and communications up until February 11, 2003, in which Defendants allegedly asserted that the shares were actually worth $.0005 each. This is sufficiently particular to put Defendants on notice as to which statements form the basis of the alleged mistake.
C. Failure of Consideration
Plaintiff claims the consideration supporting the agreement failed because he did not receive shares worth $500 as contemplated in the settlement agreement. Unlike with fraud or mistake, Plaintiff is not required to plead allegations of failure of consideration with particularity. Accordingly, it is sufficient for Plaintiff to make a short, plain statement, which he has done.
Because Plaintiff's first cause of action for rescission states a claim upon which relief may be granted, Defendants' motion to dismiss counts two through ten and fourteen on the grounds that they are subject to the release is denied.
Intentional Infliction of Emotional Distress (Cause of Action 11)
Plaintiff alleges that Defendants' threats to report that Plaintiff received approximately $1,000,000 of "miscellaneous income" to the IRS and then their actual filing of a Form 1099 indicating that Plaintiff had received $450,000 in "miscellaneous income" constitutes intentional infliction of emotional distress. Such actions allegedly caused Plaintiff undue stress, increased blood pressure, sleeplessness, postponement of marriage plans, anxiety over possible financial ruin, and other mental and emotional damage. Defendants have moved to dismiss the cause of action on the grounds that, as a matter of law, Plaintiff's allegations do not state a claim for intentional infliction of emotional distress.
A. Extreme and Outrageous Conduct
To state a claim for intentional infliction of emotional distress, Plaintiff must allege "extreme and outrageous conduct" that actually and proximately caused him "severe" emotional distress. Cervantez v. J.C. Penney Co., 24 Cal.3d 579, 593 (1979). For conduct to be outrageous it must be "so extreme as to exceed all bounds of that usually tolerated in a civilized community." Potter v. Firestone Tire Rubber Co., 6 Cal. 4th 965, 1001 (1993); see Cochran v. Cochran, 65 Cal. App. 4th 488, 496 (Cal.Ct.App. 1998) ("Liability has been found only where the conduct has been so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community."). Even if the conduct would warrant punitive damages or is criminal, the conduct may not necessarily be enough to sustain a claim. Cantu v. Resolution Trust Corp., 4 Cal. App. 4th 857, 888 n. 14 (Cal.Ct.App. 1992) (citing Restatement 2d of Torts § 46).
Neither California courts nor the Ninth Circuit has addressed whether falsely reporting a person to the IRS is extreme and outrageous conduct as a matter of law. Plaintiff alleges that Defendants deliberately meant to use the threat of the IRS as a lever to extort better settlement terms and then actually carried out the threat. Courts have found an abuse of a position of power to be outrageous. See, e.g., Bogard v. Employers Casualty Co., 164 Cal.App.3d 602, 616-17 (Cal.Ct.App. 1985); Kiseskey v. Carpenters' Trust for Southern Cal., 144 Cal.App.3d 222, 229-30 (Cal.Ct.App. 1983). A threat that is actually carried out can also be a factor that contributes to a finding of outrageous conduct. See, e.g., Cochran, 65 Cal.App.4th at 498 (noting the fact that threats against the daughter were not carried out as a factor in finding a lack of extreme and outrageous conduct). Therefore, Plaintiff has alleged sufficient facts to state a claim.
B. Emotional Distress
Severe emotional distress has been defined as "emotional distress of such substantial quantity or enduring quality that no reasonable man in a civilized society should be expected to endure it." Fletcher v. Western National Life Ins. Co., 10 Cal. App. 3d 376, 397 (Cal.Ct.App. 1970). Plaintiff has alleged "undue stress, increased blood pressure, inability to sleep at night, postponement of marriage plans, and other mental and emotional damages." Defendants argue that this does not amount to severe emotional distress as a matter of law under Girard v. Ball, 125 Cal. App. 3d 772, 787-88 (Cal.Ct.App. 1981).
Defendants' interpretation of Girard goes too far. InGirard, the plaintiff claimed that he could not sleep and suffered from anxiety and nervousness as a result of defendant's collection efforts. The court noted that the symptoms described in plaintiff's interrogatory responses were not as extensive as the plaintiff later claimed in his declaration after the motion for summary judgment. In the end, the court rejected the plaintiff's declaration as "not believable." Id. at 788. The court found it "absurd" to think that "an attorney, banker, builder, investor and businessman" would suffer extreme emotional distress from "two letters and some phone calls." Id. Thus, the court only concluded that the plaintiff did not actually suffer extreme emotional distress. It did not, as Defendants argue, declare that symptoms of sleeplessness, anxiety, and nervousness — if actually endured — were insufficient as a matter of law. Moreover, in Fletcher, the court stated that the "requisite emotional distress may consist of any highly unpleasant mental reaction such as fright, grief, shame, humiliation, embarassment, anger, chagrin, disappointment, or worry" and did not necessarily have to involve "shock, horror or nausea." Fletcher, 10 Cal. App. 3d at 397.
On a motion to dismiss, the Court does not consider the likelihood that a plaintiff will prevail on his claims. Accordingly, the Court denies Defendants' motion to dismiss the claim for intentional infliction of emotional distress.
The Court observes, however, that Plaintiff, a self-described "seasoned executive" is not likely to be as susceptible to emotional distress as the plaintiff in Fletcher, who was a disabled father of eight with a fourth-grade education.
Civil Conspiracy (Cause of Action 14)
Plaintiff alleges that all Defendants entered into a civil conspiracy to commit the other acts alleged in the complaint, including fraud and the breach of their fiduciary duties. Defendant Hemolife moved to dismiss the claim on the grounds that California law does not recognize an independent tort of civil conspiracy.
The individual Defendants did not argue that civil conspiracy was not a cognizable claim under California law. Rather, they argue that the claim should be dismissed pursuant to the release in the settlement agreement. The individual Defendants did, however join in Defendant Hemolife's reply brief. While the reply brief did not contain arguments specific to the issue of civil conspiracy, the Court will construe this as the individual Defendants joining in Defendant Hemolife's motion and the disposition of this claim will apply to all Defendants.
Under California law, "[c]onspiracy is not a cause of action, but a legal doctrine that imposes liability on persons who, although not actually committing a tort themselves, share with the immediate tortfeasors a common plan or design in its perpetration." Applied Equipment Corp. v. Litton Saudi Arabia Limited, 7 Cal.4th 503, 510-11 (1994). A conspiracy must be alleged as part of the underlying tort. Id. at 513; see also Kidron v. Movie Acquisition Corp., 40 Cal.App.4th 1571, 1581 (Cal.Ct.App. 1995) ("To prove a claim for civil conspiracy, [plaintiff] was required to provide substantial evidence of three elements: (1) the formation and operation of the conspiracy, (2) wrongful conduct in furtherance of the conspiracy, and (3) damages arising from the wrongful conduct.").
Plaintiff has alleged civil conspiracy as a separate cause of action. Plaintiff attempts to attach the conspiracy to an underlying tort by incorporating by reference the thirteen preceeding causes of action, but this is unavailing. Civil conspiracy cannot stand as a separate cause of action. The Court, therefore, dismisses the cause of action for civil conspiracy, but grants Plaintiff leave to amend the complaint to include allegations of conspiracy where appropriate.
Conclusion
The Court hereby DENIES Defendants' motion to dismiss causes of action one through eleven and GRANTS Defendants' motion to dismiss cause of action fourteen without prejudice.
IT IS SO ORDERED.