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PrivacyWear, Inc. v. QTS & CTFC

August 20, 2009


The opinion of the court was delivered by: VIRGINIA A. Phillips United States District Judge

[Motion filed on July 24, 2009]


Plaintiffs' Motion to Dismiss Counterclaims came before the Court for hearing on August 17, 2009. After reviewing and considering all papers filed in support of, and in opposition to, the Motion, as well as the arguments advanced by counsel at the hearing, the Court GRANTS IN PART and DENIES IN PART the Motion.


A. Procedural Background

Plaintiffs PrivacyWear and Carolyn M. Jones ("Jones" or "Plaintiff Jones") filed their Complaint on November 20, 2007, and their First Amended Complaint ("FAC") on March 18, 2008. The FAC alleges the following claims against Defendants QTS & CTFC, LLC ("QTS" or "Defendant QTS") and Jonathan Nash ("Nash" or "Defendant Nash"):

(1) breach of contract, (2) breach of implied covenant of good faith and fair dealing, (3) failure to acknowledge satisfaction of judgment, (4) unjust enrichment, (5) fraud in the inducement, and (6) for declaratory relief.

The procedural background of this case is set forth at length in the Court's September 24, 2008 Order. See Docket No. 24. In that Order, the Court invoked the Colorado River doctrine and stayed this case in favor of the California state court proceedings seeking to enforce the Nebraska judgment. In status reports filed on April 1 and April 2, 2009, the parties informed the Court that those state proceedings are substantially concluded, as follows.

In an order dated November 10, 2008, the California Court of Appeals vacated the judgments entered in favor of QTS against PrivacyWear and Jones, finding that the Nebraska judgment upon which the Superior Court's judgment for QTS was based had been rendered in excess of the Nebraska court's jurisdiction. Specifically, the Court of Appeals found QTS failed to demonstrate that Nebraska had personal jurisdiction over PrivacyWear and Jones when it entered its default judgment against them. After the Court of Appeals denied QTS's Petition for a Rehearing, the Superior Court vacated the sister-state judgments.

On April 16, 2009, this Court lifted its stay, reset Defendants' Motion to Dismiss, and allowed the parties to file supplemental briefs relating to the Motion. On May 21, 2009, the Court denied the Motion to Dismiss.

On June 5, 2009, Defendants filed an Answer to the Amended Complaint and Counterclaims against Plaintiffs. Defendants filed Amended Counterclaims ("AC") against Plaintiffs on July 7, 2009, alleging the following: (1) Breach of Investment Contract; (2) Breach of Oral Contract; (3) Request for Accounting Prior to Nebraska Default Judgments; (4) Fraudulent Concealment; (5) Fraudulent Conversion of QTS's 2.5% PrivacyWear Stock; (6) Embezzlement; (7) Forgery; (8) Theft by Deception; (9) Breach of Investment Contract Based on Dilution; (10) Breach of Fiduciary Duty; (11) Breach of Covenant of Good Faith and Fair Dealing; (12) Breach of Oral Contract Based on Non-Performance; (13) Breach of Oral Contract Based on Non-Performance; and (14) Fraudulent Misrepresentation.

On July 24, 2009, Plaintiffs/Counter-Defendants ("Plaintiffs") filed a Motion to Dismiss ("Motion") Defendants/Counter-Claimants' ("Defendants") First through Eleventh and Fourteenth Counterclaims and a Request for Judicial Notice ("Defs. RJN").*fn1 Defendants filed Opposition on August 3, 2009. Plaintiffs filed a Reply on August 7, 2009 and a Request for Judicial Notice ("Pls. RJN").*fn2

B. Counterclaimants' Allegations

For the purposes of this Motion, the Court accepts the following allegations in the Amended Counterclaims ("Counterclaims" or "AC") as true.

Plaintiff PrivacyWear, Inc. ("PrivacyWear" or "Plaintiff PrivacyWear") is a Nevada corporation. (AC ¶¶ 2, 3.) Plaintiff Carolyn M. Jones ("Jones" or "Plaintiff Jones") is the president and CEO of PrivacyWear. (Id. at ¶ 5) In 2004, Plaintiff PrivacyWear and Defendant Jonathan Nash ("Nash" or "Defendant Nash") entered into an agreement whereby Nash invested $50,000 in PrivacyWear and obtained a 2.5% interest in the company. (Id. at ¶¶ 9, 10.)

Nash is the sole member and manager of Defendant QTS & CTFC, LLC ("QTS"), a Nebraska limited liability corporation. (Id. at ¶ 2.) In 2005, QTS sued Plaintiffs in Nebraska state court for breach of contract and related claims arising out of the parties' investment agreement. (Id. at ¶ 23.) In 2006, the Nebraska court entered default judgment in favor of QTS and against Plaintiffs. (Id. at ¶ 24.) After the Nebraska judgment was entered, the parties entered into an oral agreement under which QTS would accept $1,400,000 from Jones and PrivacyWear in full satisfaction of the entire judgment, in addition to certain agreed upon terms. (Id. at ¶ 28.)

In September 2006, Plaintiffs paid $400,000 to satisfy the judgment, but Defendant Nash continued to demand payment of additional money. (Id. at ¶ 30.) On October 6, 2006, Defendant Jones sent Defendant Nash the following electronic mail message ("email"):

"... (2) When the documents [private placement memorandum and related documents] reference current owners/shareholders, I did not reference your name or your 2.5% ownership because at that time you had already filed legal documents against me and the company, so I didn't think it was wise to reference your name in any manner. I did however keep note of your ownership, but placed under my name for the purposes of this document." (Id. at ¶ 36.)

Based on that communication, Defendants allege Jones fraudulently converted their 2.5% ownership interest in PrivacyWear. (Id. at ¶¶ 25-37.) Defendants also learned Jones diluted their 2.5% ownership interest in connection with PrivacyWear's reverse merger with SP Holdings, Inc., without their permission or knowledge. (Id. at ¶ 38.) In November 2007, Defendants learned PrivacyWear was involved in another stock purchase agreement with another apparel company, without their permission or knowledge. (Id. at ¶ 41.) Finally, in April 2007, Defendants learned Jones breached their settlement agreement and represented PrivacyWear would be unable to pay the full $1,400,000 settlement. (Id. at ¶ 43.) On multiple occasions, Plaintiffs refused to provide Defendants with an accounting. (Id. at ¶¶ 45, 46.)

QTS then filed suit in the California Superior Court for Riverside County to enforce the default judgment it obtained in Nebraska, and ...

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