The opinion of the court was delivered by: M. James Lorenz United States District Court Judge
ORDER (1) GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS FILED BY DEFENDANTS TRAKLOC NORTH AMERICA AND DAVID JABLOW; (2) GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS FILED BY DEFENDANTS RONI DERSOVITZ AND FLOATING ASSETS, LTD.; (3) AND RELATED COUNTERCLAIMS. GRANTING IN PART AND DENYING IN PART MOTION TO STRIKE FILED BY DEFENDANTS RONI DERSOVITZ AND FLOATING ASSETS, LTD; (4) DENYING MOTIONS TO DISMISS AND TO STRIKE FILED BY DEFENDANT TIN PLATE PURCHASING CORPORATION; AND (5) GRANTING LEAVE TO AMEND
In this action arising out of multiple business transactions, Plaintiffs Pacific Rollforming, LLC dba Trackloc Pacific ("Pacific"), Todd Beasley, Curt Kinney and Architectural Metal Products, Inc. ("AMP") filed a third amended complaint alleging twelve causes of action, primarily for breach of contract, fraud and other business torts, against nine Defendants. Defendants Roni Dersovitz, Floating Assets, Ltd. ("Floating Assets"), Trakloc North America, LLC ("TLNA"), David Jablow, and Tin Plate Purchasing Corporation ("Tin Plate") filed motions to dismiss various causes of action and strike portions of the operative complaint. For the reasons stated below, the motion to dismiss filed by TLNA and Jablow is GRANTED IN PART AND DENIED IN PART, motion to dismiss filed by Dersovitz and Floating Assets is GRANTED IN PART AND DENIED IN PART, their motion to strike is GRANTED IN PART AND DENIED IN PART, and Tin Plate's motions to dismiss and to strike are DENIED. Plaintiffs are granted LEAVE TO AMEND.
This action arises primarily out of a Master Area License Agreement ("License Agreement") whereby in 2005 Trakloc International, LLC ("TLI") granted Pacific a license to manufacture and market a certain proprietary drywall and stud framing system ("Trakloc"). In 2006, after TLI failed to perform on a loan guarantee to Pandora Select Partners, LP ("Pandora"), Pandora acquired TLI's intellectual property rights referenced in the License Agreement, which had been pledged as security for the guarantee, and became TLI's successor-in-interest. (Third Am. Compl. ("Compl.") at 3, 7.) In 2007 Defendants TLNA and Tin Plate jointly acquired the intellectual property rights and became successors-in-interest to TLI and Pandora. (Compl. at 4.) Based on the premise that TLNA and Tin Plate as TLI's successors-in-interest undertook TLI's obligations toward Pacific under the License Agreement (id.), Pacific seeks a declaration of rights and duties under the License Agreement, and alleges claims for breach of contract and fraud against both of them and breach of the implied covenant of good faith and fair dealing against TLNA. (Compl. at 5-9, 15-16 (first, second, third, and seventh causes of action).) Essentially, Pacific claims it entered into the License Agreement because TLI failed to disclose material facts and that TLNA and Tin Plate failed to provide marketing support, technical information, equipment and product certification, and failed to protect Pacific's exclusive geographical territory as required by the Licence Agreement, causing Pacific to incur damages. (Compl. at 5-6.)
In addition, Pacific alleges that in the fall and winter of 2007 Defendants TLNA, David Jablow, Southeastern Metals, Inc. and Thomas Horst defamed Pacific and interfered with its contractual and other business relationships, when they contacted Pacific's distributor, primary end user, potential customers and potential investors. (Compl. at 9-15 (fourth, fifth and sixth causes of action).) Pacific alleges that they did so with the intent of driving it out of business, in which they succeeded.
Pacific also alleges that in the fall of 2007, upon urging by Defendants Marc Bernstein and Roni Dersovitz and based on Dersovitz' representations, it entered into an agreement with Defendant Part 47, whereby Part 47 acquired a membership interest in Pacific. (Id. at 16.) The ultimate goal was to combine all of the Trackloc technical rights under common ownership. This would be accomplished by the new entity obtaining Trakloc patent rights and other related intellectual property from Will Andrews and Wiltin Pty Ltd. ("Patent Owners") and bringing a lawsuit against Pandora and Jablow to terminate TLNA's rights as licensor. (Compl. at 16.) As an inducement to entering into the agreement with Part 47, Dersovitz promised to fund Part 47's capital contribution to Pacific, which would enable Pacific to meet its obligations and stay in business. (Compl. at 16-17.) Pursuant to the agreement, Dersovitz was allowed to take over the financial management of Pacific. (Id. at 17.)
In early 2008 Part 47 entered into an agreement with TLNA and formed a new entity, Trakloc America, LLC ("Trakloc America"). Trakloc America attempted to acquire Trakloc patent and related intellectual property rights from the Patent Owners but failed. Subsequently, Dersovitz informed Pacific he would not perform his promise of funding Part 47's capital contribution, but proposed that Pacific, a new entity to be created by Dersovitz (Defendant Floating Assets) and TLNA form a new business entity which would hold all of Trakloc patent and license rights. Dersovitz promised to contribute $750,000 to the combined entity. In addition, Dersovitz or Floating Assets would acquire the patent and other intellectual property rights from Patent Owners for $1.25 million. As a part of this proposal, Dersovitz asked Pacific's President Plaintiff Todd Beasley to negotiate with the Patent Owners for the patent and other intellectual property rights. Pacific and TLNA agreed to this proposal. (Compl. at 18.) With Beasley's assistance, Floating Assets was successful in acquiring the patent and intellectual property rights. When the purchase was consummated, Dersovitz refused to perform his promise to roll Floating Assets, TLNA and Pacific into one business entity and make a capital contribution, but instead joined Jablow and TLNA in their scheme to force Pacific out of business. (Id.)
Plaintiffs Pacific, Beasley, Kinney and AMP allege a fraud claim against Dersovitz, Berenstein, Part 47, Jablow and TLNA claiming that Dersovitz never intended to perform his promises, but made them only to induce their reliance, including assistance in obtaining the patent and other intellectual property rights form the Patent Owners. (Compl. at 14-19 (eighth cause of action).) Plaintiffs further allege Berenstein, Dersovitz and Part 47 breached the agreement to make a capital contribution to Pacific. (Compl. at 19-20 (ninth cause of action).) Separately, Pacific alleges breach of oral contract against Dersovitz and Floating Assets for failing to perform the oral agreement to roll Pacific, TLNA and Floating Assets into a new business entity and conversion against Dersovitz for stealing money from Pacific while acting as Pacific's financial manager. (Compl. at 20-22 (tenth and eleventh causes of action).
Last, Pacific alleges interference with prospective economic advantage against Dersovitz and Jablow. After Pacific was forced out of business, it entered into negotiations with its largest creditor Oxbow Steel International, LLC ("Oxbow") to form a partnership and resume the steel manufacturing business to produce Trakloc and standard parts for steel framing. In furtherance of forming the partnership, Pacific attempted to renew equipment leases; however, Jablow and Dersovitz contacted the lessors with offers to purchase the equipment, although they had no use for it. Pacific alleges that Jablow and Dersovitz contacted the lessors with the intent to disrupt Pacific's negotiations with Oxbow and ensure that Pacific could not restart its business, in which they were successful. (Compl. at 22-23 (twelfth cause of action).)
Jablow and TLNA filed a motion pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(6) to dismiss the third cause of action for breach of the covenant of good faith and fair dealing for failure to state a claim; dismiss the eighth cause of action for fraud as barred by the litigation privilege; and dismiss the twelfth cause of action for interference with prospective economic advantage for failure to state a claim. In addition, they moved to dismiss the eighth cause of action for fraud and ninth cause of action for breach of contract arguing that Beasley, Kinney and AMP lack standing. For the reasons stated below, the motion is granted with respect to the twelfth cause of action only and denied in all other respects.
Dersovitz and Floating Assets moved under Rule 12(b)(6) to dismiss the eighth cause of action for fraud, ninth cause of action for breach of contract and eleventh cause of action for conversion based on the doctrine of election of remedies; dismiss the tenth cause of action for breach of oral contract for failure to state a claim and as barred by the statute of frauds; and dismiss the twelfth cause of action for interference with prospective economic advantage for failure to state a claim. They moved to dismiss the eighth and ninth causes of action on the alternative ground that Beasley, Kinney and AMP lack standing.*fn1 For the reasons stated below, the motion is granted with respect to the ninth and twelfth causes of action only and denied in all other respects.
In addition, Dersovitz and Floating Assets filed a motion pursuant to Rule 2(f) to strike from the operative complaint multiple references to Dersovitz based on the argument that contrary to the allegations in the complaint, Part 47 was not Dersovitz' alter ego; and strike the eighth cause of action for fraud based in the parol evidence rule. For the reasons stated below, the motion is granted with respect to the alter ego allegations only and denied in all other respects.
Last, Tin Plate filed a motion to dismiss under Rule 12(b)(6) all claims asserted against it and to strike under Rule 12(f) multiple references to it in the operative complaint based on the argument that all claims against it are based on the erroneous premise that it was a successor-in-interest to TLI and Pandora.*fn2 For the reasons stated below, Tin Plate's motions are denied.
Pacific's Third Cause of Action for Breach of the Implied Covenant of Good Faith and Fair Dealing Against TLNA
TLNA and Jablow moved under Rule 12(b)(6) to dismiss the third cause of action for failure to state a claim. A Rule 12(b)(6) motion tests the sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotation marks, brackets and citations omitted). In reviewing a motion to dismiss under Rule 12(b)(6), the court must assume the truth of all factual allegations and must construe them in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Legal conclusions need not be taken as true merely because they are cast in the form of factual allegations. Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987); W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981). Similarly, "conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss." Pareto v. Fed. Deposit Ins. Corp., 139 F.3d 696, 699 (9th Cir. 1998).
Defendants argue that Pacific failed to state a claim for breach of the implied covenant of good faith and fair dealing. Pacific alleges that TLNA breached the covenant implied in the Licence Agreement, when it used the negotiations to resolve the parties' differences under the License Agreement merely to obtain confidential information from Pacific and then use it to approach Pacific's suppliers and customers to drive Pacific out of business, thus depriving it of the benefits of the License Agreement. (Compl. at 8-9; Opp'n at 2.)
In every contract or agreement there is an implied promise of good faith and fair dealing. This means that each party will not do anything to unfairly interfere with the rights of any other party to receive the benefits of the contract; however, the implied promise of good faith and fair dealing cannot create obligations that are inconsistent with the terms of the contract.
Jud. Council of Cal., Civ. Jury Instruction 325 (2010).
In the context of Pacific's application for a temporary restraining order, the Court found that there was a strong likelihood Pacific would prevail on the merits because it appeared that TLNA acted wrongfully under the terms of the License Agreement. (Order Granting Pl.'s Ex Parte App. for a TRO at 3-5.) Defendants argue that the claim is simply duplicative of the first cause of action for breach of contract. This, however, is not a sufficient reason for dismissal.
Pursuant to Federal Rule of Civil Procedure 8(d), a plaintiff may allege alternative and inconsistent claims for relief. To the extent the allegations are sufficient for relief under the breach of contract claim, Pacific may be able to recover under that theory. To the extent they do not amount to breach of contract, Pacific may be able to show, for example, that although TLNA's conduct was not prohibited by the agreement, it was "nevertheless contrary to the contract's purposes and the parties' legitimate expectations." Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc., 2 Cal.4th 342, 373 (1992).
For the first time in the reply brief, Defendants raise the issue that the claim may be precluded by the litigation privilege. Parties should not raise new issues for the first time in their reply briefs. Eberle v. City of Anaheim, 901 F.2d 814, 818 (9th Cir, 1990). Although the litigation privilege was raised in the same motion in the context of the eighth cause of action for fraud (Mem. of P.&A. at 7-9), the fraud claim is based on different factual allegations and Pacific did not have an opportunity to address litigation privilege in the context of breach of the implied covenant of good faith and fair dealing. The Court therefore declines to address this issue at this time. Defendants may raise it in an appropriate motion and give Pacific an opportunity to respond. Without deciding, the Court also notes that the negotiations alleged in the operative complaint in support of the breach of the implied covenant occurred prior to the filing of the instant action (see Compl. at 8-9) and therefore cannot be said as a matter of law to be barred by the litigation privilege. See Action Apartment Ass'n, Inc. v. City of Santa Monica, 41 Cal.4th 1232, 1251-52 (2007). For all of the foregoing reasons, Jablow and TLNA's motion to dismiss the third cause of action for breach of the implied covenant of good faith and fair dealing is DENIED.
Motion by Dersovitz and Floating Assets to Strike References to Part 47 as Dersovitz' Alter Ego Dersovitz and Part 47 moved to strike pursuant to Rule 12(f) the allegations that Part 47 was Dersovitz' alter ego and related references to Dersovitz. (See, e.g., Compl. at 2.) Under Rule 12(f), "the court may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter."
Dersovitz and Floating Assets argue that the Pre-Incorporation Agreement, which is expressly referenced in the operative complaint (Compl. at 16)*fn3 contains a provision which negates this allegation. According to Defendants, Section 3.2 of the Pre-Incorporation Agreement provides in pertinent part:
Should Dersovitz fail to make either of the two (2) investment payments in the time prescribed, he will be given five (5) days written notice to cure. If his default is not cured in that time frame he shall forfeit his entire interest in the company and his shares shall revert to the remaining shareholders on a 50-50 basis. No amount of funds paid by Dersovitz to the company prior to such default shall be returned to him.
(P.&A. at 5.)*fn4 Defendants argue that because the complaint alleges that Dersovitz failed to perform the promise to make the payments, he lost his shares in Part 47 and therefore Part 47 cannot be his alter ego. (Id.) Because these allegations in the operative complaint appear to contradict a provision of the agreement which is expressly referenced therein, Defendants' motion to strike is GRANTED.
Pacific has requested leave to amend the alter ego and other related allegations which Defendants have moved to strike. Rule 15 advises the court that leave to amend shall be freely given when justice so requires. Fed. R. Civ. P. 15(a). "This policy is to be applied with extreme liberality." Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003) (internal quotation marks and citation omitted). Because Pacific contends that it can show that despite the Pre-Incorporation Agreement's provision Dersovitz continued to act on behalf of Part 47 and use it as his alter ego, its request for leave to amend is GRANTED.
Beasley, Kinney and AMP's Standing to Assert the Eighth Cause of Action for Fraud Against Part 47, Bernstein, Dersovitz, Jablow and TLNA and the Ninth Cause of Action for Breach of Contract Against Bernstein, Dersovitz and Part 47
Dersovitz, Floating Assets, Jablow and TLNA challenge Beasley, Kinney and AMP's standing. The only claims asserted by Beasley, Kinney and AMP are the eighth cause of action for fraud and the ninth cause of action for breach of contract. Defendants argue that Beasley, Kinney and AMP, who hold membership interests in Pacific (Compl. at 2), lack standing to assert these claims.
The test for standing appears in the familiar language of Lujan v. Defenders of Wildlife, requiring a party to show three things: "First, [it] must have suffered an injury in fact -- an invasion of a legally protected interest which is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical.
Second, there must be a causal connection between the injury and the conduct complained of . . .. Third, it must be likely, as opposed to merely speculative, that the ...