Opinion
2:19-cv-02544-JAM-DB
02-04-2022
SOLARMORE MANAGEMENT SERVICES INC., a California Corporation, Plaintiff, v. BANKRUPTCY ESTATE OF DC SOLAR SOLUTIONS, INC., et al., Defendants.
ORDER DENYING DEFENDANTS HERITAGE BANK, DIANA KERSHAW, AND ARI LAUER'S MOTION TO DISMISS
JOHN A. MENDEZ, UNITED STATES DISTRICT JUDGE
I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND
This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was scheduled for November 2, 2021.
This action arises from a fraudulent scheme involving the sale of mobile solar generators (“MSGs”). From 2011 to 2018, operators of the scheme, sold thousands of these generators. Second Am. Compl. (“SAC”) at 6, ECF No. 144. Purchasers paid $150,000.00 for each, with a down payment of around $37,500 and a promissory note for the balance payable over twenty years. Id. Purchasers were told the generators would be sublet to end users which would provide a steady flow of revenue to cover any amount owed on the promissory note. Id. The operators also represented that the generators qualified for certain energy tax credits. Id. In actuality, many of the purchased generators were never built. Id. Those that were built were not worth $150,000.00, as there was never a market for them and thus no prospects for the promised sublease revenues. Id. They also did not qualify for the represented tax credits. Id.
Plaintiff Solarmore Management Services, Inc. is a California corporation, part owner, and managing member of various limited liability companies (“LLCs”) that purchased mobile solar generators (“the Funds”). Id. ¶¶ 1-2, 159. Plaintiff brought this action against three groups of Defendants: (1) Defendants who orchestrated and perpetuated the fraudulent enterprise; (2) Defendants who aided and abetted the fraudulent enterprise; and (3) Defendants who facilitated the fraudulent enterprise by hiding money and mobile solar generators (or the lack thereof) from purchasers and other investigating parties. Id. at 6. Relevant to this motion, Defendant Heritage Bank of Commerce (“Heritage”) is alleged to have aided and abetted the fraud. Id. ¶¶ 61-62. Specifically, Plaintiff claims that Diana Kershaw, acting as an officer, agent, or employee of Heritage, cooperated with the operators of the scheme to conceal or restrict information from Plaintiff about its accounts with Heritage and allowed for misappropriation of its finds. Id. ¶¶ 61-65, 262-266.
Plaintiff asserts five claims against Heritage Bank: (1) count twenty one for aiding and abetting fraud; (2) count twenty two for aiding and abetting conversion; (3) count twenty three for negligence; (4) count twenty four for violation of California's business and professions code; and (5) count twenty eight for equitable contribution. Id. at 85-97. Heritage previously brought a Motion to Dismiss all claims against it, see Heritage Bank's First Mot. to Dismiss, ECF No. 84, which the Court granted. Order, ECF No. 138. Plaintiff subsequently amended its complaint. See generally SAC. Heritage again moves for dismissal, which Diana Kershaw and Ari Lauer join. Heritage's Second Mot. to Dismiss (“Mot.”), ECF No. 156; Kershaw Joinder, ECF No. 157; Lauer Joinder, ECF No. 161. Plaintiff opposed this Motion. Opp'n, ECF No. 169. Defendant replied. Reply, ECF No. 177. For the reasons set forth below this Motion is denied.
Halo Management Services also sought to join but the parties subsequently stipulated to the dismissal of all claims against it thereby mooting that motion. See Halo and Solarmore's Stip. and Order, ECF No. 176.
II. OPINION
A. Judicial Notice
Heritage requests the Court take judicial notice of seven exhibits: (1) a copy of the Motion for Order Approving Compromise and Settlement Agreement and Award of Contingency Fee in the related bankruptcy case In re Double Jump, Inc.; (2) the Trustee's Declaration in Support of the Motion for Order Approving Compromise and Settlement Agreement and Award of Contingency Fee filed in that bankruptcy case; (3) the Order Granting the Motion to Approve Compromise and Settlement agreement in that case; (4) the Articles of Incorporation of DC Solar Distribution; (5) the Articles of Incorporation for Solarmore Management Services, Inc. which was filed with the California Secretary of State; (6) a Detail report for JG Energy Solutions, LLC from the Illinois Secretary of State's official website; and (7) the California Secretary of State Entity Detail page for JG Energy printed from the California Secretary of State's website. Heritage's Req. for Judicial Notice (“RJN”), ECF No. 156-4. Plaintiff requests the Court take judicial notice of three exhibits: (1) a declaration of the Trustee filed in the bankruptcy action; (2) an Order granting the Motion for Approving Compromise and Settlement Agreement with Heritage Bank in the Bankruptcy action; and (3) a printout from the California Secretary of State's website showing that Solarmore Management Services, Inc. is an active California Corporation. Pl.'s Req. for Judicial Notice (“RJN”), ECF No. 170.
After reviewing each exhibit, the Court finds all exhibits to be matters of public record and therefore proper subjects of judicial notice. Accordingly, the Court GRANTS Heritage and Plaintiff's Requests for Judicial Notice. However, the Court takes judicial notice only of the existence of these documents, not any disputed or irrelevant facts within them. See Lee v. City of Los Angeles, 250 F.3d 668, 690 (9th Cir. 2001).
B. Legal Standard
Dismissal is appropriate under Rule 12(b)(6) of the Federal Rules of Civil Procedure when a plaintiff's allegations fail “to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). “To survive a motion to dismiss a complaint must contain sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and citation omitted). While “detailed factual allegations” are unnecessary, the complaint must allege more than “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements.” Id. “In sum, for a complaint to survive a motion to dismiss, the non-conclusory ‘factual content,' and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009).
C. Analysis
1. Prudential Standing
A direct action by a shareholder or member is a suit to enforce a right which the shareholder or member possesses as an individual. See PacLink Commc'ns Int'l v. Superior Court, 90 Cal.App.4th 958, 964 (2001). In general, shareholders of a corporation or members of an LLC lack prudential standing to assert individual claims based on harm to the corporation or LLC in which they own shares. Erlich v. Glasner, 418 F.2d 226, 228 (9th Cir. 1969); PacLink, 90 Cal.App.4th at 965-66. A derivative suit on the other hand, “seeks to recover for the benefit of the corporation and its whole body of shareholders when [the] injury is caused to the corporation.” Jones v. H.F. Ahmanson & Co., 460 P.2d 464, 470 (Cal. 1969). A shareholder or member bringing a derivative action must meet certain procedural requirements. Fed.R.Civ.P. 23.1; Sax v. World Wide Press, Inc., 809 F.2d 610, 613 (9th Cir. 1987).
This Court previously dismissed Plaintiff's claims on prudential standing grounds. Order at 8. The Court found that any injury of Solarmore's alleged was merely incidental to that of the Funds and thus, Plaintiff could not bring a direct action. Id. Plaintiff subsequently amended its complaint specifying damages including: (1) costs and expenses incurred to locate and store the solar generators and hire related professionals to protect its interest in the DC Solar Enterprises' bankruptcies; (2) potential liability for claimed tax credits; (3) seizure of money from its bank account due to the fraud; (4) failure to receive contracted for management fees; and (5) the costs of counsel it has been required to obtain. Opp'n at 3 (citing to SAC ¶¶ 516-521). Plaintiff argues that these allegations state a claim for direct harm to Plaintiff, not to the Funds or any other party, and thus it has standing. Id. at 3-4. Defendant, however, counters that these injuries are merely incidental to the injury suffered by the Funds. Mot. at 4.
“In determining whether an individual action as opposed to a derivative action lies, a court looks at the gravamen of the wrong alleged in the pleadings.” PacLink, 90 Cal.App.4th at 965 (internal quotation marks and citation omitted). A “cause of action is individual, not derivative, only where it appears that the injury resulted from the violation of some special duty owed the stockholder by the wrongdoer and having its origin in circumstances independent of the plaintiff's status as a shareholder.” Nelson v. Anderson, 72 Cal.App.4th 111, 124 (1999), as modified on denial of reh'g (June 14, 1999).
In Nelson, a minority shareholder argued she could bring an individual cause of action because she suffered direct, individual damages such as “injury to her reputation and emotional distress, and lost her out of pocket expenses, as well as other employment opportunities.” Id. The Court disagreed noting that the test is not whether the plaintiff's damages are unique. Id. Rather, “an individual cause of action exists only if the damages were not incidental to an injury to the corporation.” Id. Because the acts alleged to have caused Nelson's injuries amounted to misfeasance or negligence in managing the corporation's business, any obligations so violated were duties owed to the corporation. Id. at 125. Accordingly, the gravamen of the complaint was injury to the corporation and any injury to Nelson was merely incidental. Id. at 125-26. Thus, Nelson could not sustain a direct cause of action. Id.
Here the gravamen of Plaintiff's complaint is that the Funds were fraudulently induced to purchase the MSGs and that Heritage, among others, assisted in this fraud. However, Plaintiff does allege an injury resulted from the violation of some special duty owed to it by Heritage, “having its origin in circumstances independent of the plaintiff's status as a shareholder.” Nelson, 72 Cal.App.4th at 124. (internal quotation marks and citation omitted). Specifically, Plaintiff had an account with Heritage, who allegedly allowed the Carpoffs to misappropriate the funds in this account. SAC ¶¶ 703-705. However, the Court agrees with Heritage that Plaintiff does not have standing to pursue the losses it obtained from the Funds' investment in the MSGs, aside from JG Energy's, of which it has been assigned. Nor does it have standing to pursue those damages that are merely incidental to that injury, such as the cost of locating the MSGs or resulting tax losses, as those it only obtained as a result of its status as a shareholder.
Heritage requests the Court strike various excerpts from the complaint referencing the Funds. Ex. A. to Mot., ECF No. 156-1. The Court agrees with Plaintiff that these allegations provide necessary context and denies Heritage's request. See In re New Century, 588 F.Supp.2d 1206, 1220 (C.D. Cal. 2008) (“Motions to strike are not favored and should not be granted unless it is clear that the matter to be stricken could have no possible bearing on the subject matter of the litigation.”).
Finally, as to JG Energy, Heritage argues Plaintiff cannot pursue a claim on its behalf, as JG Energy was engaged in intrastate business but never registered in California. Mot. at 6 (citing Cal. Corp. Code §§ 2203(c), 2015(a)). The Court agrees with Plaintiff that Heritage has not demonstrated JG Energy engaged in intrastate business. Opp'n at 4 (noting Cal. Corp. Code § 191(a) defines intrastate business as entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.). It's not clear from the complaint that JG's conduct meets the “repeated and successive transactions” standard. See Cal. Corp. Code § 191(a); see also YYGM S.A. v. Hanger 221 Santa Monic Inc., No. CV 14-34637 PA (VBKc), 2015 WL 12819169, at *3 (C.D. Cal. Apr. 20, 2015) (rejecting a motion to dismiss based on section 2203(c) because the burden is on defendants to prove the corporation engaged in intrastate business).
2. Commercial Code's Statute of Repose
Division 11 of the Commercial Code governs “funds transfers, ” meaning “the series of transactions, beginning with the originator's payment order, made for the purpose of making payment to the beneficiary of the order.” Cal. Com. Code §§ 11102, 11104(a). This division displaces common law claims where the common law claims would create, rights, duties, or liabilities inconsistent with the division and where the circumstances giving rise to the common law claims are specifically covered by the division's provisions. Zengen, Inc. v. Comerica Bank, 41 Cal.4th 239, 253 (2007).
Defendant argues that all of Plaintiff's claims based upon unauthorized transfers of funds from its account are displaced by Division 11 of the California Commercial Code. Mot. at 8-9. Plaintiff counters that Division 11 does not apply here where the person sending the transfer request is the same person receiving payment from the account. Opp'n at 8. Rather, Plaintiff contends this is an exempted debit transfer. Id.
However, as Heritage points out, a debit transfer is one in which “a creditor, pursuant to authority from the debtor is enabled to draw on the debtor's bank account by issuing an instruction to pay to the debtor's bank. If the debtor's bank pays, it will be reimbursed by the debtor rather than by the person giving the instruction.” Cal. Com. Code § 11104 comment 4. An example of such a debit is where an insured authorizes its insurer to order the insured's bank to pay the insurance company the policy premium. Id. That is not what is alleged here. Rather, Plaintiff alleges the Carpoffs directed money be transferred from Solarmore to themselves. This is governed by Division 11. Cal. Com. Code § 11104 comment 4. (“If the beneficiary of a funds transfer is the originator of the transfer, the transfer is governed by Article 4A if it is a credit transfer in form [. . .] For example, Corporation has accounts in Bank A and Bank B. Corporation instructs Bank A to pay to Corporation's account in Bank B. The funds transfer is governed by Article 4A.”) However, this would only displace claims to the extent they are based on unauthorized transfers of funds. See Venture Gen. Agency, LLC v. Wells Fargo Bank, N.A., 19-cv-02778-TSH, 2019 WL 3503109, at *4 (N.D. Cal. Aug. 1, 2019) (noting that because plaintiff claims were not based solely on wire transfers but also on the bank's subsequent actions they were not preempted).
The Commercial Code imposes a one-year statute of repose within which a customer must notify its bank of its objection to an allegedly improper funds transfer, so long as the customer received notification reasonably identifying the order. Cal. Com. Code § 11505. Under the Commercial Code one receives notice when “it is delivered in a form reasonable under the circumstances at the place of business through which the contract was made or at another location held out by that person as the place for receipt of such communications.” Id. § 1202(e)(2).
Plaintiff argues that its claims are not barred by the statute of repose as it never received notice. Opp'n at 9. Plaintiff alleges its bank statements were sent to DC Solar and Jeff Carpoff, rather than Plaintiff. SAC ¶¶ 276, 277.
Heritage, however, argues that Solarmore had the same address as DC Solar. Mot. at 9 (citing RJN Ex. 4 and 5). The Court cannot at this early stage conclude Plaintiff received notice. While the complaint states that the bank statements were sent to DC Solar and Jeff Carpoff, it does not specify to what address. SAC ¶ 276. Taking the allegations in the complaint as true and viewing them in the light most favorable to Plaintiff, as the Court must at this stage, its plausible that the statements were sent to an address not shared with Plaintiff. On the face of the complaint, it is not apparent that Plaintiff received notice. Accordingly, Plaintiff's claims based on unauthorized transfer of funds may not be subject to the statute of repose.
Heritage also contends that Plaintiff's claims are barred by the applicable statutes of limitations for each claim. Mot. at 6-7 (noting statute of limitations for aiding and abetting, civil conspiracy and negligence is three years and for unfair competition is four years). It contends that Plaintiff cannot rely on the delayed discovery doctrine because it did not plead facts showing its inability to have discovered the fraud earlier despite reasonable diligence. Mot. at 7; Reply at 3. However, as Plaintiff points out, federal pleading requirements apply in federal court. Beavery v. Tarsadia Hotels, No. 11cv1842 DMS (CAB), 2011 WL 6098165, at * 8 (S.D. Cal. Dec. 6, 2011) (rejecting defendants' argument that plaintiff must plead delayed discovery with specificity as required by California law as this is precluded by the Erie doctrine in which federal procedural rules control). Accordingly, its general allegations of delayed discovery are sufficient at this stage.
3. Civil Conspiracy and Aiding and Abetting Claims
In California, the elements of a civil conspiracy are: “(1) the formation of a group of two or more persons who agreed to a common plan or design to commit a tortious act; (2) a wrongful act committed pursuant to the agreement; and (3) resulting damages.” Rockridge Trust v. Wells Fargo, N.A., 985 F.Supp.2d 1110, 1157 (N.D. Cal. 2013). A California civil conspiracy claim must be plead with particularity where the object of the agreement is fraudulent. See Wasco Prods., Inc. v. Southwall Tech., Inc., 435 F.3d 989, 990-92 (9th Cir. 2006). California also “has adopted the common law rule” that “[l]iability may [. . .] be imposed on one who aids and abets the commission of an intentional tort if the person [. . .] knows the other's conduct constitutes a breach of a duty and gives substantial assistance or encouragement to the other to so act.” Casey v. U.S. Bank Nat'l Assn., 127 Cal.App.4th 1138, 1144 (2005). To satisfy the knowledge prong, the defendant must have “actual knowledge of the specific primary wrong the defendant substantially assisted.” Id. at 1145.
Heritage argues Plaintiff has not sufficiently alleged its knowledge to support either the conspiracy or aiding and abetting claim. Mot. at 11-12. The Court disagrees. The operative complaint specifically alleges that Kershaw, an employee of Heritage, cooperated with the Carpoffs to conceal and restrict relevant information from Plaintiff about their account. SAC ¶¶ 259-293. Plaintiff also alleges that Kershaw knew the Carpoffs were defrauding Plaintiff by diverting and misappropriating its funds. Id. ¶ 262. While Plaintiff alleges Kershaw knew as early as March 2015 that the Carpoffs were defrauding Plaintiff on information and belief, this is corroborated by specific factual allegations. Id. ¶¶ 261, 263-266, 269, 272-274. This is sufficient to overcome a motion to dismiss. See Fed.R.Civ.P. 9(b) (“In alleging fraud or mistake, a party must state with particularly the circumstances constituting fraud or mistake. Malice, intent, knowledge, and conditions of a person's mind may be alleged generally.”); see also Benson v. JPMorgan Chase Bank, N.A., Nos. C- 09-5272 EMC, 2010 WL 1526394, at *3-5 (N.D. Cal. April 15, 2010) (noting that “Plaintiff supported these allegations of knowledge with more detailed factual allegations” and taken together these allegations satisfied the Twombly/Iqbal plausibility requirement).
4. Negligence Claim
In order to plead a claim for negligence, a plaintiff must establish: (1) the existence of a legal duty of care; (2) a breach of that duty; and (3) proximate cause resulting in injury. Castellon v. U.S. Bancorp, 220 Cal.App.4th 994, 998 (2013).
Heritage argues Plaintiff's negligence claim fails as it owed no duty to Solarmore. Mot. at 13. But the cases it relies upon do not support this. Id. (citing Chazen v. Centennial Bank, 61 Ca. App. 4th 532, 537 (1998) and Copesky v. Superior Court, 229 Cal.App.3d 678, 693-94 (1991)). While Chazen holds banks do not have a duty to proactively police accounts, it also acknowledges that banks have a duty to act with reasonable care in its transactions with its depositors. Chazen, 61 Cal.App.4th at 538, 543. The latter is what Plaintiff relies upon here. Opp'n at 12-13. Plaintiff does not contend that Defendant breached its duty by failing to monitor and report suspicious activity. Rather, Plaintiff's claim is that Heritage breached its duty of care by permitting numerous improper fund transfers and commingling of funds, which assisted the Carpoffs' conversion. Id.; SAC ¶¶ 710-714. Accordingly, Defendants' motion to dismiss Plaintiff's negligence claim is denied.
Heritage also argues that the Unfair Competition Law and contribution claims fail as they are dependent on the other causes of action. Mot. at 14-15. Because the Court declines to dismiss the other causes of action, these claims survive as well.
III. ORDER
For the reasons set forth above, the Court DENIES Defendants Heritage, Kershaw, and Lauer's Motion to Dismiss.
IT IS SO ORDERED.