United States District Court, E.D. California
MEMORANDUM DECISION AND ORDER RE DEFENDANTS' MOTIONS TO DISMISS Docs. 89, 91
LAWRENCE J. O'NEILL, District Judge.
This case concerns disputes that arose over a large-scale broadband infrastructure construction project ("the Project") throughout California's Central Valley. See Plaintiff's Second Amended Complaint ("SAC"), Doc. 84 at ¶ 1. The goal of the Project is to create an approximately 1, 371-mile broadband fiber network through 18 Central Valley counties. Id. at ¶ 22.
Because of various ongoing disputes that arose during the construction of the Project, Plaintiff MP Nexlevel ("MP") brought this suit against Defendant CVIN, LLC ("CVIN") d/b/a Vast Networks, and Defendant Corporation for Education Network Initiatives in California ("CENIC"), a non-profit corporation. MP alleges CVIN is composed of the following ten separate telecommunications companies: Calaveras Communications Company; Sebastian Enterprises, Inc.; Volcano Communications Company; Stageline Communications, Inc.; The Ponderosa Telephone Company; Sierra Tel Communications Group; Varnet, Inc.; Cal-Ore Telephone Company; Ducor Telephone Company; and Consolidated Communications Holdings, Inc. (collectively, "the Member Defendants"). SAC at ¶ 10.
MP brings 47 claims against CVIN based on disputes concerning the construction of the Project. MP asserts its claims against the Member Defendants on the ground they are CVIN's alter egos and against CENIC on the ground it is CVIN's partner under California Corporations Code § 16308(a) ("§ 16308(a)").
CENIC and Member Defendants have moved to dismiss under Fed.R.Civ.P. 12(b)(6). Docs. 89, 91. Pursuant to Local Rule 230(g), the Court rules on the papers without oral argument. For the reasons discussed below, the Court GRANTS WITHOUT LEAVE TO AMEND CENIC's motion to dismiss and DENIES Member Defendants' motion to dismiss.
II. FACTUAL AND PROCEDURAL BACKGROUND
MP filed suit against Defendants on February 28, 2014. Doc. 2. On April 22, 2014, MP filed a first amended complaint. Doc. 44. On May 27, 2014, Defendants filed motions to dismiss, which the Court granted with leave to amend on July 7, 2014. See Doc. 83. On July 25, 2014, MP filed the SAC, currently the operative complaint. Doc. 84.
MP asserts 47 causes of action against Defendants and seeks approximately $18 million in damages that it alleges it is owed from Defendants. SAC at ¶ 1. MP alleges that CENIC is liable to MP as CVIN's partner and that the Member Defendants are liable to MP as CVIN's alter egos.
CENIC and the Member Defendants have moved to dismiss the SAC in its entirety on the ground that it fails to allege facts that would support MP's theories as to their respective liability. Docs. 89, 91. Accordingly, CENIC's and the Member Defendants' respective motions to dismiss only address those theories of liability; they do not discuss in any detail MP's individual causes of action. The Court therefore need not discuss MP's claims in extensive detail.
A. MP's Allegations as to CENIC's liability as CVIN's Partner.
"Construction of the Project was broken down and bid out and/or negotiated by CVIN in 30 segments" ("the segments"). SAC at ¶ 28. In November 2011, MP "was awarded a bid to work as one of CVIN's direct contractors on the Project." Id. at ¶ 30. Between November 2011 and the present, MP entered into 14 contracts ("the contracts") with CVIN to participate in the construction of the Project. See SAC at ¶¶ 1, 30-35. When "CVIN awarded the contracts to [MP], CVIN assured [MP] both orally and in writing that CVIN would promptly pay all progress payments and promptly approve and pay all change order requests." Id. at ¶ 34. CVIN made a number of other assurances "[i]n the bidding instructions incorporated into each of the Contracts." See id. at ¶ 35(A)-(F).
"CVIN, along with CENIC as joint applicant, pursued federal and state funding to develop" the Project ("the grant funding"). Id. at ¶ 8. MP alleges that CVIN and CENIC "rushed through the process of applying for" the grant funding and, as a result, the "design and engineering of the Project was incomplete, inadequate and materially deficient." Id. at ¶ 38. These deficiencies caused disagreements between the parties that, according to MP, ultimately resulted in CVIN wrongfully terminating MP from work on certain of the segments. Id. at ¶ 43. MP claims that "CVIN's overall mismanagement of the Project" prevented MP's "timely and efficient completion of the Project segments." Id. at ¶ 46.
MP alleges numerous ways in which CVIN mismanaged the Project and failed to abide by the contracts' terms. Id. at ¶ 47(A)-(N). Simply stated, MP alleges that CVIN's conduct materially breached the contracts and violated various statutes. See id. at 1-2.
MP asserts that CVIN and CENIC were in a legal partnership such that CENIC should be liable for CVIN's alleged conduct as CVIN's partner. As proof of their purported partnership, MP points to, among other things, the joint application by CVIN and CENIC for the grant funding and various representations they made. See id. at ¶¶ 79-94, 132-38. "CVIN, along with its partner CENIC" submitted an application for the grant funding ("the grant application"). Id. at ¶ 79. On the grant application, "CENIC was named as a proposed sub-recipient of the grant" by CVIN, id. at ¶ 80, and represented that CVIN and CENIC were in a "public-private partnership." Id. at ¶ 82. In the grant application, the CVIN and CENIC represented that "CVIN/CENIC will build [the Project], " and that "in a public-private partnership, [CVIN] and [CENIC] will build, operate and maintain [the Project]." Id. at ¶ 83.
MP alleges that CVIN and CENIC made "representations in the [grant application], websites, and elsewhere" that demonstrate they were in a legal partnership. Id. at ¶ 93. CVIN represented to "various institutions" that "CVIN and CENIC had submitted an application" for the grant funding. Id. at ¶ 85. "CENIC announced on its website that the CVIN/CENIC Central Valley Broadband Project Receives [the grant funding].'" Id. at ¶ 87. The announcement also stated that "the Project was designed and developed by the public-private partnership of [CVIN] and [CENIC]... a non-profit corporation." Id. CVIN's website also stated that "CENIC... together with its private sector partner CVIN... have put together a project plan designed to improve the availability of broadband networking infrastructure for 18 counties within the California Central Valley area." Id. at ¶ 88. "In the specifications for the Project, signage that included CENIC's logo among the other funding agencies for the Project was required to be placed." Id. at ¶ 92.
"The 2014 First Quarter Statement, " which was submitted after MP's first amended complaint, id. at ¶ 136, stated that "[o]nce the Project is complete, the services provided to Anchor Institutions will be managed by our partner, [CENIC] who is a sub-recipient." Id. at ¶ 91. "[T]he services provided to Anchor Institutions will be managed by CENIC while CVIN will manage all commercial services to third-party providers, business and residential customers." Id. at ¶ 90.
"Both CVIN and CENIC, by words on grant applications, in websites and elsewhere, and by their conduct in jointly applying for grants, held themselves out as partners or in a partnership." Id. at ¶ 132. "Neither CENIC nor CVIN disclaimed... their representations of being in a partnership." Id. at ¶ 134. "Neither CVIN nor CENIC took any steps to publicly deny the many statements of their partnership or clarify the true nature of their relationship." Id. at ¶ 89. MP therefore claims that "[b]ecause CENIC and CVIN presented themselves to the outside world as a partnership, CENIC has liability... even if CENIC is not an actual partner to CVIN in the Project." Id. at ¶ 133. MP alleges that "CENIC and CVIN's representations, and course of conduct indicating that they were partners, along with MP's reasonable reliance on the same adequately supports liability of CENIC." Id. at ¶ 138.
B. MP's Allegations as to the Member Defendants' Liability as CVIN's Alter Egos.
MP asserts that the Member Defendants are liable for CVIN's conduct because they are CVIN's alter egos. MP alleges that the Member Defendants are separate entities that collectively make up CVIN, see id. at ¶¶ 10, and that "CVIN is a shell company which its LLC members formed and capitalized as needed for the purpose of developing telecommunications capabilities generally and, more recently, to serve as the developer for [the Project]." Id. at ¶ 9. CVIN was, however, "grossly undercapitalized in relation to the costs and risk presented by the Project." Id. at ¶ 101. "[A]s the sole shareholders of CVIN, [the Member Defendants] knew that, at the time the Project began, CVIN was undercapitalized and would be unable to pay for the actual costs of the Project." Id. at ¶ 102. MP alleges that the Member Defendants intentionally kept CVIN undercapitalized, id. at ¶ 112, though they "had the opportunity, right, and ability to properly capitalize CVIN." Id. at ¶ 103.
MP claims that the Member Defendants, not CVIN, are the true beneficiaries of the Project. Id. at 18; id. at ¶¶ 123, 125. "[T]he Member Defendants plan to service some or all of the broadband service contracts entered into by CVIN." Id. at ¶ 113. Consolidated Communications, one of the Member Defendants, "has reported in its quarterly report" that it has "a 12.86% interest in [CVIN], a joint enterprise comprised of affiliates of several independent telephone companies." Id. at ¶ 115. Consolidated Communications further reported that "[b]ecause [it has] significant influence over the operating and financial policies of this entity [i.e., CVIN], [it] account[s] for this investment using the equity method." Id. "In its other quarterly reports in 2013, Consolidated Communications affirmed its partnership with CVIN and its ownership interest and significant influence over the operating and financial policies' of CVIN." Id. at ¶ 116. "In its 2014 quarterly report, Consolidated [Communications] reported a 13.455% interest in [CVIN], and repeated its previous statements that it has significant influence over the operating and financial policies of CVIN." Id. at ¶ 117.
MP alleges that "CVIN and CENIC rushed through the process of applying for [the grant]... without sufficient inquiry to ensure that their projected Project cost calculations and engineering studies were accurate and/or had a basis in fact." Id. at ¶ 37. MP further alleges that CVIN and CENIC "intentionally concealed the fact that they had rushed through [the grant application] process." Id. at ¶ 40. As a result, "the design and engineering of the Project was incomplete, inadequate and materially deficient, " id. at ¶ 38, which "led to Project delays, impacts, and cost overruns." Id. at ¶ 39. "CVIN's latest statement for the first quarter of 2014... shows that the Project is substantially over budget and behind schedule." Id. at ¶ 76.
The Project's total cost was projected to be approximately $66.6 million, 20% of which "was to come from in kind' contributions from CVIN and its members." Id. at ¶ 96. CVIN's assets at the time the Project began were approximately $1.3 million. Id. at ¶ 97. CVIN thus began the Project with total assets that were less than 10% of the total estimated cost of the Project.
The Member Defendants knew of the Project's cost overruns as its construction progressed "and knew that CVIN was not properly acknowledging the construction cost overruns that it was actually experiencing." Id. at ¶ 110. The Member Defendants "knew, during the execution of the Project, that CVIN lacked, and without action on their part would continue to lack, funds to pay for the Project." Id. at ¶ 111. Due to the "intentional actions and inactions of [the Member Defendants], CVIN is substantially undercapitalized and without assets sufficient to meet its debts." Id. at ¶ 124. The Project's cost overruns are projected to exceed $12 million. Id. at ¶ 107; see also id. at ¶¶ 106-07. "CVIN's 2013 Third Quarter Statement also shows that CVIN has exhausted the NTIA Grant funds, the primary source of funds to pay for the Project." Id. at ¶ 109. Thus, MP alleges that the Member Defendants began the Project knowing that CVIN was undercapitalized, that they intentionally kept CVIN undercapitalized, and that CVIN's undercapitalization worsened as the Project progressed, yet the Member Defendants intentionally failed to capitalize CVIN. Id. at 15, ¶¶ 101, 110, 112, 122-23.
MP asserts that the Member Defendants "used the corporate entity of CVIN to contract with [MP] with intent to avoid performance and attempt to use CVIN as a shield against Member Defendants' liability." Id. at ¶ 119. MP maintains that the "Member Defendants control all of the shares of CVIN, " id. at ¶ 121, and "as the sole shareholders in CVIN, " the Member Defendants used CVIN "to shield themselves from the risks inherent [in the Project]." Id. at ¶ 123.
MP asserts that "[b]ecause the Member Defendants have used CVIN as a mere shell, instrumentality, and conduit [for the Project] whose sole real beneficiary was the Member Defendants, there is such a unity of interest and ownership between CVIN and the Member Defendants that no separation actually exists." Id. at ¶ 127. Likewise, MP alleges that no separation actually exists between CVIN and the Member Defendants "[b]ecause the Member Defendants have used CVIN to conduct the business of another corporation-the Member Defendants'-by virtue of using CVIN to construct a project whose true users and beneficiaries are the Member Defendants." Id. at ¶ 128.
III. STANDARD OF DECISION
A motion to dismiss pursuant to Fed R. Civ. P. 12(b)(6) is a challenge to the sufficiency of the allegations set forth in the complaint. A 12(b)(6) dismissal is proper where there is either a "lack of a cognizable legal theory" or "the absence of sufficient facts alleged under a cognizable legal theory." Balisteri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1990). In considering a motion to dismiss for failure to state a claim, the court generally accepts as true the allegations in the complaint, construes the pleading in the light most favorable to ...