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Gray v. Preferred Bank

September 30, 2010


The opinion of the court was delivered by: Hon. Dana M. Sabraw United States District Judge


Pending before the Court is Defendants' motion to dismiss Plaintiffs' Second Amended Complaint ("SAC"). Plaintiffs filed an opposition and Defendants filed a reply. For the reasons set forth below, Defendants' motion is granted.


In October 2006, Tesla Gray and Preferred Bank entered into a Construction Loan Agreement ("Loan Agreement") for a loan of up to $14 million. (SAC ¶ 6.) Ray Gray, Tesla's father, executed a written guaranty of payment and performance of the Loan Agreement. (Id. at ¶ 7.) In October 2008, Tesla Gray went into Chapter 11 bankruptcy. (Id. at ¶ 9.) Approximately two months later, in December 2008, the parties amended the Loan Agreement and added additional properties as collateral on the loan. (Id. at ¶ 9.) Plaintiffs contend that the amended Loan Agreement was gained through extortion. (Id. at ¶¶ 9, 11, 12.) Specifically, Plaintiffs allege that Defendants sought the amendment in order to manipulate Preferred Bank's stock price, that Tesla Gray did not receive additional consideration for the loan amendment, that the amendment violated the automatic stay imposed by Tesla Gray's bankruptcy, and that Defendants promised Ray Gray a $20 million loan for ranch properties in northern California and to remove the cross-collateralization it held on two additional properties owned by Ray Gray to induce him into signing an amended guaranty. (Id. at ¶¶ 9-13, 16.)

Tesla Gray became delinquent in the loan payments. (Id. at ¶ 16.) Ray Gray did not cure the default, and Preferred Bank filed suit against Ray Gray in San Diego Superior Court on July 27, 2009. (Def. Mem. P. & A. at 3; Defendants' Request for Judicial Notice in Support of Their Motion to Dismiss Plaintiffs' First Amended Complaint ("FAC RJN"), Ex. 3.)*fn1 Plaintiffs filed the instant action on September 16, 2009, against Preferred Bank and two of its employees, Theodore Hsu and Brian Jurczak. On December 21, 2009, the Bankruptcy Court converted Tesla Gray's Chapter 11 bankruptcy into a Chapter 7 bankruptcy. (FAC RJN Exs. 5-6.) Plaintiffs filed a First Amended Complaint on December 17, 2009, which Defendants moved to dismiss on April 16, 2010. (Docs. 14, 19.) On June 10, 2010, the Court issued an Order granting Defendants' motion to dismiss Plaintiffs' First Amended Complaint and granting Plaintiffs leave to file a Second Amended Complaint. (Doc. 32.) Plaintiffs filed the SAC on June 24, 2010 and Defendants filed the instant motion to dismiss Plaintiffs' SAC on July 8, 2010. (Docs. 33, 36.)


A party may move to dismiss a claim for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). The burden of establishing subject matter jurisdiction rests upon the party asserting jurisdiction. Tosco Corp. v. Cmtys. for a Better Env't, 236 F.3d 495, 499 (9th Cir. 2001), overruled on other grounds by Hertz Corp. v. Friend, --- U.S. ---, 130 S.Ct. 1181 (2010); Thornhill Publ'g Co. v. Gen. Tel. & Elecs. Corp., 594 F.2d 730, 733 (9th Cir. 1979). If the Court has subject matter jurisdiction over one or more claims, it may exercise supplemental jurisdiction over "all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution." 28 U.S.C. § 1367(a).

A party may move to dismiss a claim under Federal Rule of Civil Procedure 12(b)(6) if the claimant fails to state a claim upon which relief can be granted. The Federal Rules require a pleading to include a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The Supreme Court, however, recently established a more stringent standard of review for pleadings in the context of 12(b)(6) motions to dismiss. See Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007). To survive a motion to dismiss under this new standard, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 570). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556). "Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 1950 (citing Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007)).


Plaintiffs contend they were the victims of extortion and fraud. The SAC states three claims for relief: 1) violation of federal bankruptcy laws, 11 U.S.C. § 362 et seq.; 2) fraud - intentional misrepresentation; and 3) negligent misrepresentation. Defendants moved to dismiss the SAC in its entirety under Rules 12(b)(1) and 12(b)(6). The Court addresses Defendants' arguments and Plaintiffs' claims in turn below.

A. Subject Matter Jurisdiction

As an initial matter, Defendants argue that the Court lacks subject matter jurisdiction over Plaintiffs' bankruptcy stay violation claim under 11 U.S.C. § 362 because such claim must be brought in the bankruptcy court, and move to dismiss pursuant to Rule 12(b)(1). Defendants further argue that, because this is Plaintiffs' only federal law claim, the Court cannot retain supplemental jurisdiction over Plaintiffs' state law claims. Plaintiffs state in their Opposition brief that they are not in fact asserting a bankruptcy stay violation claim, but "rather, a violation of federal law that forbids a creditor from requiring the bankrupt debtor, Tesla, during the pendency of her bankruptcy, to add to the collateral for an existing loan that preceded her bankruptcy." (Opp. at 4.) Plaintiffs' assertion, however, is belied by the face of the SAC, as Plaintiffs' first claim for relief alleges a "violation of 11 U.S.C. 362 et seq of bankruptcy laws." The Court will therefore address the claim as a bankruptcy stay violation claim. (SAC ¶¶ 22-29.)

Defendants are correct that "[b]ankruptcy courts have jurisdiction over 'all civil proceedings arising under title 11, or arising in or related to cases under title 11,'" including bankruptcy stay violation claims. Davis v. Courington, 177 B.R. 907, 912 (9th Cir. 1995) (quoting 28 U.S.C. § 1334(b)). However, whether district courts have concurrent jurisdiction over bankruptcy stay violation claims appears to be a matter of first impression in this Circuit. Defendants rely upon the Second Circuit Court of Appeals' ruling that claims under 11 U.S.C. § 362 "mustbe brought in the bankruptcy court, rather than in the district court, which only has appellate jurisdiction over bankruptcy cases." Eastern Equip. & Servs. Corp. v. Factory Point Nat'l Bank, 236 F.3d 117, 121 (2d Cir. 2001); see also Heghmann v. Town of Rye, 326 F. Supp. 2d 227, 232-33 (D.N.H. 2004). The Eleventh Circuit Court of Appeals, however, came to the opposite conclusion and held that, because 28 U.S.C. § 1334 grants the district courts original jurisdiction over all cases under Title 11, a district court has subject matter jurisdiction over claims for violation of an automatic stay. Justice Cometh, Ltd. v. Lambert, 426 F.3d 1342, 1343 (11th Cir. 2005) (declining to follow the Second Circuit's holding in Eastern Equipment); see also Fant v. Residential Servs. Validated Publ'ns, No. C 06 2206 SI, 2006 WL 1806157, at *4 n.4 (N.D. Cal. June 29, ...

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