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Vestin Realty Mortgage Ii, Inc., For v. Kenneth D. Klaas

March 27, 2012


The opinion of the court was delivered by: Hon. Anthony J. Battaglia U.S. District Judge


Defendant Kenneth Klaas seeks summary judgment on each of Plaintiffs' claims.*fn1

Having reviewed the briefs and exhibits, the Court GRANTS his motion.


In December 2000, Plaintiff Vestin Mortgage, Inc. formed a limited-liability company ("LLC") pursuant to Nevada law. Def.'s Ex. 2 § 1.1. The LLC was named Vestin Fund II, LLC. Id. § 1.2. The company invested in mortgages and distributed profits to the Members in proportion to the number of units owned. Id. § 1.4. The LLC registered its investments with the Securities and Exchange Commission, but the units were not publicly traded. Compl. ¶ 8; Shustek Decl. ¶ 2. Plaintiff Michael Shustek is the Chief Executive Officer of each Vestin corporation. Shustek Decl. ¶ 1; Def.'s Ex. 9. Defendant Klaas was "one of many individuals ("Members") who invested retirement savings" in the LLC. Klaas Decl. ¶ 7; Def.'s Ex. 4 ¶ 2. Plaintiff Vestin Mortgage, Inc. was the Manager of the LLC. Def.'s Ex. 2 § 2.21. The Manager's duties were set forth in the Operating Agreement, id. Art. 3, which was filed with the Nevada Secretary of State as the Articles of Organization. Id. § 1.5. The Manager has "exclusive control over the business of the Company . . . including the power . . . to determine how to invest the Company's assets." Id. § 3.1. "The Manager has fiduciary responsibility for the safekeeping and use of all funds and assets of the Company." Id. § 3.4.

One of the rights enjoyed by Members was access to books and records. Id. § 6.5. "The Members and their designated representatives shall have access to books and records" of the LLC during regular business hours. One such record was "[a]n alphabetical list of the names, addresses and business phone numbers, to the extent such are available, of all Members together with the number of units held by each of them." Id. (hereinafter "Members List"). The Operating Agreement further specifies that "[t]he Company shall make the [Members] list available on request to any Member or his representative for a stated purpose including, without limitation, matters relating to Members' voting rights, tender offers, and the exercise of Members' rights under federal proxy law." Id. If the Manager fails to provide the requested list in ten days, the Member can obtain a court order to compel its production and recover attorney's fees. Id. The Operating Agreement imposed one restriction: "the Company need not exhibit, produce or mail a copy of the Member list if the actual purpose and reason for the request therefor is to secure the list or other information for the purpose of selling the list or copies thereof, or of using for a commercial purpose other than in interest of the Person as a Member in the Company." Id. The Manager has the right to ask the Member "to represent that the list is not requested for any commercial purpose." Id.

These provisions mirror the rights of members in an LLC found in the Nevada statutes that govern limited liability companies. By law, every LLC "shall" keep a "current list of the full name and last known business address of each member." Nev. Rev. Stat. § 86.241(1)(a). "Each member of a limited-liability company is entitled to obtain [the Members List] from the company, from time to time upon reasonable demand, for any purpose reasonably related to the interest of the member as a member of the company." Id. § 86.241(3). The statute requires the member to demand access in writing and to "state the purpose of such demand." Id. § 86.241(6). These rights "may be restricted or denied entirely in the articles of organization or in an operating agreement adopted by all members . . . or in any subsequent amendment adopted by all of the members at the time of the amendment." Id. § 86.241(8).

In 2005, the Vestin LLC decided to convert the business into a real estate investment trust ("REIT") in order to make the units easier to sell. Shustek Decl. ¶ 2; Def.'s Ex. 4 ¶ 3 (proxy statement recommended conversion). Klaas opposed the plan and discussed his concerns with Shustek. Klaas Decl. ¶ 10; see Def.'s Ex. 5 ¶ 6 (describing Klaas as "a very outspoken activist investor" who "operated a popular blog and website describing Vestin wrongdoing"). During a May 20 telephone conversation, Klaas requested a copy of the Members List. Def.'s Ex. 4 ¶ 4. Shustek required Klaas to submit a sworn affidavit that he would not use the "list to solicit investors in any venture and that the list will only be used to conduct the business of Vestin Fund II, LLC." Compl. Ex. A. Klaas submitted a notarized letter, dated May 21, 2005, that further stated "[t]he purpose of this request is to provide members with additional information" about the REIT conversion, a petition to dissolve the LLC, and/or to replace the Manager. Id. (hereinafter "May 21 Letter/Affidavit"). Shustek sent the Members List to Klaas. Shustek Decl. ¶ 5. In June 2005, Klaas used the list to contact other Members in an attempt to persuade them to vote against the REIT conversion. Klaas Decl. ¶ 14. His campaign failed, and in early 2006, the LLC converted into Plaintiff Vestin Realty Mortgage II, Inc., a publicly traded investment company. Shustek Decl. ¶ 2.

In April 2006, Klaas used the Members List to invite other investors to join him in suing the Vestin entities for breach of contract, fraud, and breach of fiduciary duty in connection with the REIT conversion. Def.'s Ex. 4 ¶ 13; Pls.' Ex. C (sample letter). In the letter, Klaas explained that he had hired an experienced law firm. Klaas acted as the representative for the plaintiffs, for example, he sent email updates and collected checks for the client trust fund. Def.'s Ex. 8 ¶¶ 3-4; Pls.' Exs. Q & R (describing "Klaas as unpaid staff assistant" to collect fees and costs from co-plaintiffs for the law firm). In the letter, he described the factual and legal basis for the suit, expected remedy, and settlement strategy. Pls.' Ex. C. Klaas stated that only a limited number of plaintiffs would be allowed to join the suit. Id. If a Member wanted to join the litigation, he would pay an administrative fee (in proportion to the number of shares owned) to cover initial litigation expenses and as well as his "fair share" of the attorney's fees. Id.; Pls.' Ex. M (Depo. at 46). A few months later, in September 2006, Klaas and nearly 130 other Members sued Vestin in Nevada State Court. Def.'s Ex. 4 ¶¶ 14-15. The investors sought damages for the loss of value in their Vestin investments. Id.

In the interim, another Member, Charles Felton, hired Thomas Frost, an attorney in San Diego, to sue Vestin for using deceptive sales practices.*fn2 Id. ¶ 16; Def.'s Ex. 6 (Depo. at 36). In May 2006, Frost contacted Klaas to ask if he would testify against Vestin, and they discussed their prospective cases. Def.'s Ex.4 ¶ 16; Def.'s Ex. 5 ¶ 6; Def.'s Ex. 6 (Depo. at 26-27 & Ex. 20) (May 17 email). When Frost stated he would be taking Shustek's deposition soon, Klaas asked for a copy of the transcript. Def.'s Ex. 4 ¶ 16; cf. Def.'s Ex. 6 (Depo. at 38-39) (Frost volunteered to give the deposition to Klaas). Soon thereafter, Frost asked Klaas for a copy of the Members List. Def.'s Ex. 4 ¶ 18; Def.'s Ex. 5 ¶ 8; Def.'s Ex. 6 (Depo. at 39). Frost explained that Shustek had been slow to produce it, even though Shustek had promised to send the information during his deposition on May 18. Def.'s Ex. 4 ¶ 18; Def.'s Ex. 6 (Depo. at 47 & Ex. 20) (May 25 email) ("time is of the essence"). Frost further stated that his client was "entitled" to the Members List. Def.'s Ex. 6 (Depo. at 44-45 & Ex. 20) (May 25 email cites Operating Agreement); Pls.' Ex. K (Depo. at 113). During his deposition for the current case, in 2008, Klaas was asked if Frost paid for the Members List, and Klaas testified "[i]t was some barter." Pls.' Ex. I (Depo. at 174); cf. Def.'s Ex. 6 (Depo. at 59-60) (Frost testified there was no agreement to pay for either document); Def.'s Ex. 7 (Depo. at 47) (Klaas testified he was not paid for the list). Ultimately, Klaas sent a copy of the Members List to Frost, and Frost sent Klaas a copy of Shustek's deposition transcript. Def.s' Ex. 5 ¶¶ 8, 10; Def.'s Ex. 6. Frost's law firm used the list to "reach out" to other investors who might want to join the class action lawsuit against Vestin. Def.'s Ex. 6 (Depo. at 52, 55); Pls.' Ex. H. In October 2006, Frost filed a lawsuit on behalf of his clients in California Superior Court. Def.'s Ex. 4 ¶ 20; see Pls.' Exs. P & U.

In October 2008, Plaintiffs filed this diversity complaint seeking relief on seven state law theories: breach of contract, breach of the covenant of good faith and fair dealing, intentional misrepresentation, negligent misrepresentation, conversion, misappropriation of trade secrets, and interference with business interests. Doc. No. 1. Each theory arises out of Klaas' alleged misuse of the Members List by contacting other Members to join his Nevada lawsuit and giving it to the lawyer who was pursuing a similar lawsuit in California.

Klaas moves for summary judgment on all claims because "Klaas' sharing of the Members List was perfectly within his rights under both the Operating Agreement and the Nevada LLC Act. Further, the only people whom Mr. Klaas shared the Members List were all independently entitled to receive the Members Lists themselves, either by virtue of their status as fellow Members or the legal representative thereof." Def.'s Br. at 7.


Summary judgment is appropriate when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). "Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322. "By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties ...

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