United States District Court, E.D. California
Decided: August 14, 2013
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For Sacramento E.D.M., Inc., Plaintiff: Sean Gavin, LEAD ATTORNEY, Robert C. Bowman, Jr., Law Office of Bowman & Associates, Sacramento, CA.
For Hynes Aviation Industries, Inc., Doing business as Hynes Aviation Services, Hynes Children TF Limited, Michael K Hynes, Defendants: Paul W. Tozer, LEAD ATTORNEY, Barth Tozer & Daly LLP, Sacramento, CA.
MEMORANDUM AND ORDER
MORRISON C. ENGLAND, JR., CHIEF UNITED STATES DISTRICT JUDGE.
This case arises out of a decade-long business relationship in which Defendant Michael Hynes (" Hynes" ) provided business consulting services to Plaintiffs Sacramento E.D.M., Inc. (" SAC EDM" ) and SAC EDM's President, Dan Folk (" Folk" ) (collectively, " Plaintiffs" ). Plaintiffs filed the instant lawsuit in the Superior Court of California, County of Sacramento, against Hynes and two corporate Defendants, Hynes Aviation Industries, Inc. (" HAI" ) and Hynes Children TF Limited (" HCTF" ). Subsequently, Defendants removed the action to this Court on the basis of diversity jurisdiction. Presently before the Court is Defendants' Motion to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(6). (ECF No. 19.) Plaintiffs oppose Defendants' Motion. (ECF No. 24.) For the reasons set forth below, Defendants' Motion will be granted in part and denied in part. 
SAC EDM is a California corporation engaged in the business of electrical discharge machining and waterjet technology. Plaintiff Folk is SAC EDM's president. Defendant Hynes is a professional consultant, among other things, in the fields of aviation safety and business and finance. Hynes is also a paid professional mediator and arbitrator for the State of Oklahoma Supreme Court, the U.S. Department of Agriculture and the U.S. Postal Service.
In 2001, Folk retained Hynes as an expert witness in an unrelated litigation involving aviation safety. Following the completion of that litigation, Hynes contacted Folk and offered his services in the operation and development of SAC EDM. As a result of that solicitation, in the
spring of 2003, Hynes, through and on behalf of HAI, began providing business and financial consulting services to SAC EDM. In December 2003, Hynes lent $10,000 to SAC EDM. In January 2004, HAI and SAC EDM entered into a business agreement whereby Hynes and HAI would provide consulting services to SAC EDM and also provide operating capital as necessary. According to the agreement, Folk would be entitled to 52.2% of SAC EDM's net profits after tax, and Hynes would be entitled to 47.5% of SAC EDM's net profits after tax. That agreement allegedly created a " business partnership" between the parties and provided Hynes with the full financial control over SAC EDM. (Compl. ¶ ¶ 17-18.)
According to the Complaint, in 2003, Defendants advised Folk that SAC EDM was paying too much on its leases for the operating equipment and convinced Folk to stop making payments on those leases. Defendants proposed a plan under which SAC EDM would cease making its lease payments and would renegotiate the lease terms with its lender U.S. Bancorp Equipment Finance, Inc. (" U.S. Bancorp" ). As alleged, Hynes promised to Plaintiffs that, if the lender refuses to renegotiate the terms of the lease and gets a judgment against SAC EDM, Defendants would purchase the judgment from the lender for a reduced rate and would allow SAC EDM to repay this reduced debt instead of the amount of the original judgment.
SAC EDM allegedly followed Hynes's advice and stopped making payments to U.S. Bancorp, which led to a judgment being entered against SAC EDM for more than $280,000. Subsequently, Hynes, acting through HCTF, purchased the judgment from U.S. Bancorp for a reduced amount of $50,000. However, contrary to their prior promise, Defendants demanded that SAC EDM pay the full amount of the judgment and are now trying to enforce the judgment in its entirety and with interest.
According to the Complaint, Defendants also took control of many of the expenses of SAC EDM and unilaterally determined that the company had insufficient capital to service its debts and expenses. Plaintiffs allege that Defendants subsequently engaged in self-dealing by making " clandestine loans" to SAC EDM and then charging it interest on those loaned amounts. (Id. ¶ 22.) Further, according to Plaintiffs, Defendants " routinely arranged for the 'sale' of SAC EDM's equipment to themselves," which led to Defendants taking ownership of most of SAC EDM's equipment. (Id. ¶ 27.) Then, Defendants leased the equipment back to SAC EDM at high rates. When SAC EDM could not pay those rates, Defendants made additional loans to SAC EDM and charged additional interest. Thus, as alleged, Defendants created a situation in which SAC EDM could never repay them for the debts that Defendants themselves created by their own unilateral actions. Further, each time Defendants bought equipment from SAC EDM, they treated the sale proceeds as " profit" for SAC EDM, which entitled them to 47.5 percent according to the parties' agreement. (Id. ¶ 30.) Overall, Defendants purchased at least 17 individual pieces of equipment from SAC EDM, yielding a " profit" for Defendants of over $118,750. (Id.)
Finally, as alleged, Hynes insisted that he and Folk take out life insurance policies and name each other as a beneficiary. According to Hynes's explanation, the life insurance policies would be useful to ensure that (1) SAC EDM would have access to capital in case of Hynes's death, and (2) SAC EDM would be able to repay its loans to Defendants in case of Folk's death. Folk agreed with Hynes's suggestion and,
in October 2007, obtained a term life insurance policy for himself, naming Hynes as the beneficiary, at a cost of approximately $63 per month. Hynes also took out a life insurance policy; however, the cost of that policy constituted $1,560 per month. Moreover, as alleged, HAI actually held the policies, and invoiced SAC EDM for approximately $1,600 every month despite knowing that SAC EDM could not afford this additional expense. Since SAC EDM could not make the requisite payments, HAI treated the unpaid amounts as loans and charged 10 percent on them. Subsequently, Hynes proposed that he would not call the loans due immediately if Folk agreed to Hynes " owning" Folk's policy, and Folk accepted Hynes's proposal. (Id. ¶ 25.) Thereafter, Hynes converted Folk's policy from a " term life" policy to a " whole life" policy which raised the cost of the policy to approximately $350 per month and also created an ongoing value for Hynes, who was now the policyholder. (Id.) As alleged, Defendants' " life insurance scheme" yielded a result wherein SAC EDM paid for a life insurance policy that accrued value for Hynes, and Hynes, through HAI, also made a ten percent return on the " investment" of the premium amounts that HAI charged back to SAC EDM. (Id. ¶ 26.)
On October 4, 2012, Plaintiffs filed the instant lawsuit in the Superior Court of California, County of Sacramento, against Hynes, HAI and HCTF, asserting the following causes of action: (1) Breach of Fiduciary Duty; (2) Fraud; (3) Constructive Fraud; (4) Intentional Interference with Prospective Business Advantage; (5) Negligent Interference with Prospective Business Advantage; (6) Tortious Interference with Contract; (7) Unjust Enrichment; (8) Unfair Business Practices in Violation of California Business and Professions Code § 17200; and (9) Declaratory Relief. (ECF No. 2-1.) On February 14, 2013, Defendants removed the action to this Court on the basis of diversity jurisdiction. (ECF No. 2.) Subsequently, Defendants filed a motion to dismiss for ...