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World Surveillance Group Inc. v. La Jolla Cove Investors, Inc.

United States District Court, N.D. California

September 2, 2014


For World Surveillance Group Inc, a Delaware Corporation, Plaintiff: Craig Sheridan Miller, LEAD ATTORNEY, William S. Weisberg, William Steven Weisberg, Weisberg & Miller, San Francisco, CA.

For La Jolla Cove Investors, Inc., a California corporation, Defendant: William J. Frimel, LEAD ATTORNEY, Seubert French Frimel & Warner LLP, Menlo Park, CA; Margaret Anne Crawford, Law Offices of Margaret A. Crawford, San Mateo, CA.

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JAMES DONATO, United States District Judge.


This case arises out of alleged breaches of investment agreements between plaintiff World Surveillance Group Inc. (" WSGI" ) and defendant La Jolla Cove Investors, Inc. (" La Jolla" ). In a prior round of pleadings challenges, the Court dismissed without prejudice WSGI's claims for intentional misrepresentation, fraud in the inducement, and securities fraud for failure to satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b), and also dismissed without prejudice WSGI's claim for breach of fiduciary duty. Dkt. No. 36. WSGI amended its complaint to try to save these claims but the amendments are not enough. They are now dismissed with prejudice. WSGI's claims for breach of contract, breach of the covenant of good faith and fair dealing, and under the California Unfair Competition Law will go forward.


I. Breach of Fiduciary Duty

The Court's prior dismissal order outlines the factual background and the pertinent legal standard, which will not be repeated here. See Dkt. No. 36.

Page 1235

The Court's prior order dismissed WSGI's breach of fiduciary duty claim because it failed to allege facts sufficient to show that, in this arms-length business deal, La Jolla assumed the mantle of a fiduciary for WSGI and intended to act primarily for WSGI's benefit. Dkt. No. 36 at 4. The amended complaint again fails to plead facts indicating that the relationship between WSGI and La Jolla was anything other than a garden-variety contract with no special duties or obligations attendant to it.

The governing California state law on this issue is straightforward. A fiduciary relationship is a special circumstance in which the fiduciary " assumes duties beyond those of mere fairness and honesty" and " must undertake to act on behalf of the beneficiary, giving priority to the best interest of the beneficiary." Comm. On Children's Television, Inc. v. Gen. Foods Corp., 35 Cal.3d 197, 222, 197 Cal.Rptr. 783, 673 P.2d 660 (1983). " A fiduciary's power to transact business with his beneficiary is severely limited; he must use the utmost good faith and, if he profits from the transaction, the law presumes the agreement was entered into by the beneficiary without sufficient consideration and under undue influence." Id. (internal quotations omitted). The obligation to put the interests of the other party first is why a fiduciary relationship generally does not arise out of ordinary arms-length business dealings. In a typical business contract or relationship, one party does not commit to act in the other party's best interest rather than in its own. See, e.g., Scognamillo v. Credit Suisse First Boston LLC, No. C-03-2061 TEH, 2005 WL 2045807, at *4 (N.D. Cal. Aug. 25, 2005) (finding no fiduciary relationship because it was " highly unlikely that the CEO and CFO of a company on the other side of a merger deal would seek to act in the target company's best interests" ). This is why a fiduciary relationship will be found only when an individual or entity has knowingly undertaken that high duty or when the law imposes the duty in special relationships such as agency, partnership or joint venture. City of Hope Nat. Med. Center v. Genentech, Inc., 43 Cal.4th 375, 386, 75 Cal.Rptr.3d 333, 181 P.3d 142 (2008); Comm. On Children's Television, 35 Cal.3d at 222. Consequently, to state a claim for breach of fiduciary duty, WSGI must allege that La Jolla either knowingly agreed to act on behalf and for the benefit of WSGI, or that it entered into a relationship with WSGI that imposed that undertaking as a matter of law. See City of Hope, 43 Cal.4th at 386.

WSGI did not meet this requirement. In the wake of the prior dismissal, the amended complaint added three allegations intended to show a fiduciary relationship: (1) " it was WSGI's understanding that La Jolla would, in addition to, and separate from, any financial agreement between the parties, use its expertise as investors as well as its business knowledge to take the role of fiduciaries in advising and supporting WSGI during the growth of its business, acting primarily in and for WSGI's benefit" (Dkt. No. 38 at 5); (2) La Jolla " made specific statements about how La Jolla was acting, and would continue to act, in the best interest of WSGI and its shareholders" ( id. at 11); and (3) " [p]ursuant to the statements and assurances made by La Jolla . . . and WSGI's understanding of its relationship with La Jolla, La Jolla established, either through their ...

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