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Seaman v. California Business Bank

United States District Court, N.D. California

April 2, 2014

THOMAS A. SEAMAN, Plaintiff,


JON S. TIGAR, District Judge.


Defendants California Business Bank ("CBB") and individual officers and directors Raffi D. Krikorian, Michael Maluccio, Cole W. Minnick, Jr., Jane Auserwald, Peggy Hansen, Mladen Buntich, Steven Hong, Biff Naylor, Kenneth Thomas, Gary Cross, Ellwood Johnson, and N. Aaron Yashouafar ("Individual Defendants")[1] (collectively with CBB, "Defendants") have moved to dismiss the First Amended Complaint ("FAC") in this action with prejudice ("Motion"). The matter came for hearing on February 16, 2014.


A. Factual Background

The facts most pertinent to this dispute are statements contained in CBB's Private Placement Memorandum ("PPM"), on which Investors Prime Fund, LLC and IPF Banc Servicing, LLC (collectively, "IPF") allegedly relied in purchasing CBB's shares of stock. Exh. 1 to FAC. The Court considers it, as well as the exhibits to the FAC and to the Motion other than the CBB's year-end audited financial report, [2] because the complaint refers to and necessarily relies on those documents, they are central to Plaintiff's claim, and no party questions their authenticity. See Daniels-Hall v. Nat'l Educ. Ass'n , 629 F.3d 992, 998 (9th Cir. 2010) (citing Marder v. Lopez , 450 F.3d 445, 448 (9th Cir. 2006)). As for the additional facts, the Court "construe[s] the complaint in the light most favorable to the plaintiff, taking all [his] allegations as true and drawing all reasonable inferences from the complaint in [his] favor." Doe v. United States , 419 F.3d 1058, 1062 (9th Cir. 2005). Although a Rule 12(b)(6) motion requires that the "court must accept as true all of the allegations contained in a complaint, " that standard "is inapplicable to legal conclusions" and "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009).

CBB is a banking corporation headquartered in Los Angeles, California and incorporated under the laws of the state of California. FAC ¶ 8.[3] In March 2010, CBB entered into a consent order with the Commissioner of Federal Deposit Insurance Corporation ("FDIC"). ¶ 19. As part of the consent order, CBB was required to (1) increase its Tier 1 capital by $5 million and develop and implement a capital plan; (2) adopt a revised policy for determining the adequacy of its Allowances for Loan and Lease Losses ("ALLL"), a measure of the reserve for bad debts; (3) provide periodic reports to the regulatory agencies; and (4) provide CBB's shareholders with a description of the Consent Order. ¶ 19. The Consent Order also required CBB to "fully and fairly disclose every material change or development regarding the Bank and its operations, " and to provide a notice that subscribers may rescind their subscriptions. ¶ 20.

As required by the Consent Order, CBB offered for sale a minimum of 1, 666, 667 shares of its common stock, at a price of $3.00 per share, beginning on September 28, 2010. ¶ 23. In connection with the offering, CBB issued a Private Placement Memorandum ("PPM") on September 28 to inform potential investors of the financial state of CBB as well as the risks entailed in purchasing CBB's stock. ¶¶ 23-24. In the PPM, Defendants represented "that CBB had $8, 300, 000 in Tier-l capital, " and did not disclose any information about the status of "approximately $5, 000, 000 in loans" whose collectability Plaintiff charges was at that time "highly questionable." In November 2010 and March 2011, CBB issued letters to its subcribers, which made no reference to loan defaults or required loan loss reserves, but stated that "[t]he Bank feels confident that the current level of reserves are sufficient to cover potential identified losses in the portfolio." ¶ 43.

On June 28, 2011, IPF purchased 330, 000 shares of CBB common stock at $3.00 per share for a total purchase price of $990, 000, before CBB was forced to recognize $3 million in losses. ¶¶ 7, 24. Sometime after June 2011, after a regulatory examination of its financial records, CBB was forced to recognize approximately $3 million in losses that reduced the value of CBB's stock. ¶ 47.

B. Procedural History

Plaintiff Thomas Seaman ("Plaintiff"), in his capacity as court-appointed receiver of IPF, brought a securities fraud complaint against Defendants. ECF No. 1. The initial complaint brought causes of action for (1) securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"); (2) material misrepresentation under California Corporations Code Section 25401; (3) joint and several liability of management principals under California Corporations Code Sections 25401, 25501, and 25504; (4) fraud and deceit, and negligent misrepresentation; (5) violation of California's Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 et seq., and (6) relief by imposition of constructive trust. Id.

In October 2013, the Court dismissed Plaintiff's Exchange Act claim without prejudice, after concluding that the complaint failed to plead falsity and scienter with the specificity required by the PSLRA. Order Granting Defendants' Motions to Dismiss ("October 2013 Order"), 2013 WL 5890726, ECF No. 32. The Court declined to exercise supplemental jurisdiction over the state-law claims in this non-diverse action in the absence of a viable federal claim. With the Court's leave, Plaintiff filed the amended complaint which re-asserted all claims after adding additional factual allegations. This motion followed.

C. Legal Standards

"Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory." Mendiondo v. Centinela Hosp. Med. Ctr. , 521 F.3d 1097, 1104 (9th Cir. 2008). Dismissal is also proper where the complaint alleges facts that demonstrate that the complaint is barred as a matter of law. See Balistreri v. Pacifica Police Dept. , 901 F.2d 696, 699 (9th Cir. 1990); Jablon v. Dean Witter & Co. , 614 F.2d 677, 682 (9th Cir. 1980). For purposes of a motion to dismiss, "all allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party." Cahill v. Liberty Mut. Ins. Co. , 80 F.3d 336, 337-38 (9th Cir. 1996).

Rule 9(b)'s heightened pleading standard under applies to securities fraud actions. Semegen v. Weidner , 780 F.2d 727, 730-31 (9th Cir. 1985). Rule 9 requires the complaint to "state with particularity the circumstances constituting fraud." Fed. R. Civ. Proc. 9(b). The complaint must state the "time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations." Edward v. Marin Park, Inc. , 356 F.3d 1058, 1066 (9th Cir. 2004).

Private securities fraud plaintiffs must also satisfy the pleading requirements of the Private Securities Litigation Reform Act ("PSLRA"). In re VeriFone Holdings, Inc. Sec. Litig. , 704 F.3d 694, 701 (9th Cir. 2012). Under the PSLRA, a securities fraud plaintiff must plead both falsity and scienter with ...

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