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Calderon v. Total Wealth Management, Inc.

United States District Court, S.D. California

January 19, 2017

ALBERT CALDERON, an individual on behalf of himself and all others similarly situated, etal., Plaintiffs,
v.
TOTAL WEALTH MANAGEMENT, INC. et. al, Defendants.

          ORDER GRANTING MOTIONS TO DISMISS [DOCKET NOS. 63, 65]

          HON. ROGER T. BENITEZ JUDGE

         There are two separate motions to dismiss Plaintiffs' Third Amended Complaint (“TAC”) before the Court. (Docket Nos. 63, 65.) The motions are fully briefed. The Court finds the motions suitable for determination on the papers without oral argument, pursuant to Civil Local Rule 7.1 .d. 1. For the reasons set forth below, each motion is GRANTED with prejudice.

         BACKGROUND[1]

         Plaintiffs allege that investors were solicited to invest in Total Wealth Management (“TWM”) and its affiliated companies, Altus Capital Opportunity Fund, LLC (“ACOF”) and Altus Capital Portfolio Series (“ACPS”), primarily through a weekly radio program, financial awareness seminars, and community engagement. Investors were allegedly misled into believing their funds were being safely invested based on investment portfolio risk when in fact, investments were being channeled primarily to Private Placement Capital Notes LLC II (“PPCN”), LJL Secured High Yield Income Fund I, LLC (“LJL”), and Aegis Retail Group LLC (“AEGIS”) in exchange for fees paid by the entities, without disclosure to investors. TWM was allegedly under the control or direction of the following defendants by virtue of their ownership or positions as officers: Jacob Cooper (“Cooper”), co-founder and majority owner of TWM; Nathan McNamee (“McNamee”), TWM's president and chief compliance officer for relevant periods; and David Shoemaker (“Shoemaker”), co-founder and former chief compliance officer.

         PROCEDURAL HISTORY

         Plaintiffs filed their initial Complaint in the Superior Court of California, County of San Diego, Central Division, Case Number 37-2014-00015682-CU-SL-CTL. On July 22, 2015, former Defendant First Trust Company of Onaga, renamed Mainstar Trust (“Mainstar”), removed the action to the United States District Court for the Southern District of California based on jurisdiction under the Class Action Fairness Act (“CAFA”). (Docket No. 1.) On October 15, 2015, the Court denied Plaintiffs' motion to remand the case back to state court due to a lack of evidence establishing the applicability of either the “local controversy” or “home-state controversy” exceptions to CAFA jurisdiction. (Docket No. 42.)

         On March 9, 2016, the Court granted three separate motions to dismiss Plaintiffs' Second Amended Complaint. (Docket No. 50.) On March 16, 2016, Receiver Kristen A. Janulewicz (“Receiver”) filed a Notice of Pending Receivership regarding her appointment as a permanent Receiver for Total Wealth Management Inc., and its subsidiaries and affiliates, in Securities and Exchange Commission v. Total Wealth Management, Case No. 15-CV-226-BAS (DHB) (the “Receivership Case”). (Docket No. 51.) Receiver's Notice included a copy of District Judge Cynthia Bashant's preliminary injunction, issued on February 12, 2015, which provides that:

[E]xcept by leave of this Court, during the pendency of this receivership, all clients, investors, trust beneficiaries, note holders, creditors, claimants, lessors and all other persons or entities seeking relief of any kind, in law or in equity, from Defendant Total Wealth Management, Inc., or its subsidiaries or affiliates ... are hereby restrained and enjoined from, directly or indirectly, with respect to these persons and entities . .. commencing, prosecuting, continuing or enforcing any suit or proceeding (other than the present action by the SEC or any other action by the government) against any of them

(Id. Ex. B.)

         Plaintiffs filed their TAC on April 18, 2016. (Docket No. 54.) On May 2, 2016, Mainstar filed a motion to dismiss the TAC. (Docket No. 60.) On May 5, 2016, Defendants Andesite Finance Company, LLC, Secured High Yield Income Fund I, LLC, and Andesite Mortgage Pool, LLC and Susan Lakosil (collectively, “Andesite Defendants”) filed a motion to dismiss the TAC. (Docket No. 63.) On May 19, 2016, Defendants Mark Dionne and SoCal Accounting, Inc. (collectively, “Dionne”) filed a motion to dismiss the TAC. (Docket No. 65.)

         On November 29, 2016, the Court granted Mainstar's Motion to Dismiss. (Docket No. 75.) On December 2, 2016, the Court issued an order requesting supplemental briefing on: (1) whether the dismissal of Mainstar divested the Court of subject matter jurisdiction over Plaintiffs' claims, and (2) the effect, if any, of Judge Bashant's receivership order on Plaintiffs TAC. (Docket No. 76.) Plaintiffs and Dionne filed supplemental briefs. (Docket Nos. 77, 80.) Andesite Defendants filed a joinder to Dionne's brief. (Docket No. 79.) Receiver did not file a supplemental brief.

         DISCUSSION

         I. The Court's Request for Supplemental Briefing

         A) Subject Matter Jurisdiction

         If “at any time” the Court lacks subject matter jurisdiction, “the case shall be remanded.” 28 U.S.C. § 1447(c). As mentioned above, this case was removed by Mainstar based on jurisdiction under CAFA. (Docket No. 1.) “CAFA gives federal courts jurisdiction over certain class actions, defined in § 1332(d)(1), if the class has more than 100 members, the parties are minimally diverse, and the amount in controversy exceeds $ 5 million.” Dart Cherokee Basin Operating Co., LLC v. Owens, 135 S.Ct. 547, 552 (2014) (citing 28 U.S.C. § 1332(d)(2), (5)(B) and Standard Fire Ins. Co. v. Knowles, 133 S.Ct. 1345, 1348 (2013)).

         None of the parties argue that any of these requirements are not met, or that Mainstar's dismissal divested the Court of its subject matter jurisdiction. Instead, Plaintiffs re-assert their contention that the “local controversy” exception to CAFA jurisdiction applies and requires remand. (Docket No. 80.) All responding Defendants oppose remand. (Docket Nos. 77, 79.)

         When the requirements of the local controversy exception are met, a district court is required to remand the class action back to the originating state court. Serrano v. 180 Connect, Inc., 478 F.3d 1018, 1022-1023 (9th Cir. 2007). The local controversy exception requires that more than two-thirds of the proposed class are citizens of the state in which the action was originally filed. §§ 1332(d)(4)(A)(i)(I). In addition, “there must ordinarily be at least some facts in evidence from which the district court may make findings regarding class members' citizenship for purposes of CAFA's local controversy exception.” Mondragon v. Capital One Auto Finance, 736 F.3d 880, 884 (9th Cir. 2013). “A district court makes factual findings regarding jurisdiction under a preponderance of the evidence standard.” Id. (citing Valdez v. All State Ins. Co., 372 F.3d 1115, 1117 (9th Cir. 2004)).

         Plaintiffs' prior motion for remand was denied for a complete lack of evidence as to the citizenship of the class. (Docket No. 42 at 4-5.) As “the party seeking remand, ” Plaintiffs “bear[] the burden to prove an exception to CAFA's jurisdiction.” Serrano, supra, 478 F.3d at 1022 (discussing local controversy exception, § 1332(d)(4)(A); see also Benko v. Quality Loan Serv. Corp., 789 F.3d 1111, 1116 (9th Cir. 2015) (“plaintiff bears burden of showing that this provision, known as the ‘local controversy exception, ' applies to the facts of a given case.”). Plaintiffs were granted leave to conduct jurisdictional discovery and file a renewed motion for remand by January 6, 2016. (Docket No. 42 at 7.) The deadline to file a renewed motion for remand elapsed without the filing of a renewed motion for remand, and Plaintiffs admit in their supplemental briefing that “jurisdictional discovery was not taken.” (Docket No. 80 at 2.)

         As alleged in the TAC, the proposed class is “TWM's investment advisory clients whose funds were placed in or passed through TWM, ACOF or the series of unregistered fund of funds referred to as the ‘Altus Portfolio Series' who suffered damages.” (TAC f 149.) To establish the requisite citizenship of the class, Plaintiffs rely on the SEC Initial Decision and factual findings in the SEC case against TWM et al., and copies of emails from Mainstar's counsel. (Docket No. 80 at 3, Exs. 3, 5.) Plaintiffs cite to the SEC findings that “Cooper and Shoemaker identified potential investors by hosting workshops and dinner seminars in ... San Diego, California” and that Cooper “obtained clients form hosting a radio show in San Diego” as evidence that TWM “marketed only to investors in San Diego.” (Docket 80 at 3, Ex. 3 at 3.) Plaintiffs also represent that a number of emails from Mainstar's counsel “demonstrate that the majority of investors were from California.” (Docket No. 80 at 3.) Finally, Plaintiffs reiterate that all named plaintiffs are alleged to be “residents of San Diego County.” (Id.)

         “[jurisdictional findings of fact should be based on more than guesswork.” Mondragon, 736 F.3d at 884. Plaintiffs have not cured their failure to provide any evidence as to the citizenship of the proposed class. The evidence submitted suggests at most that some of the potential class members were contacted in California or are “from” California, but does not identify the citizenship of any of the class members. Mainstar's Notice of Removal provides evidence that Defendants had between 400 and 800 clients when they were engaging in this scheme. (Docket No. 1.) Although the TAC alleges the 27 named plaintiffs are “residents of the State of California, County of San Diego, ” it is silent as to each of their citizenships. While the Court may make reasonable inferences from facts in evidence when evaluating the applicability of the local controversy exception, concluding that more than two-thirds of a class of hundreds are California citizens based on allegations that: (1) plaintiffs were contacted by some of the defendants in California, (2) plaintiffs are “from” California, and (3) the 27 named plaintiffs are residents of the State of California, is not a reasonable inference. Therefore, the Court finds Plaintiffs have failed to meet their burden to demonstrate that the local controversy exception applies and DENIES their request for remand.

         B) Judge Bashant's Receivership Order

         All of the responding parties agree that the moving Defendants are not subject to the receivership order and are not subject to Judge Bashant's preliminary injunction. (Docket Nos. 77 at 5-6, 79 at 2, 80 at 4.) Receiver did not file a supplemental brief. Additionally, the Declaration that Receiver filed with her Notice of Pending Receivership omits any identification of Dionne or Andesite Defendants as affiliates of Total Wealth Management. (Docket No 51-2, Exhibit 1.) The Court concludes that the prosecution of this action as to Dionne and the Andesite Defendants does not violate the injunction issued by the Honorable Cynthia Bashant in Case No. 15-cv-226-BAS (DHB).

         II. The Motions to Dismiss

         “[A] complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 677-78 (2009). “A claim is facially plausible ‘when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'" ZixiangLi v. Kerry, 710 F.3d 995, 999 (9th Cir. 2013) (quoting Iqbal, 556 U.S. at 678).

         When considering a Rule 12(b)(6) motion the court must “accept as true facts alleged and draw inferences from them in the light most favorable to the plaintiff.” Stacy v. Rederite Otto Danielsen, 609 F.3d 1033, 1035 (9th Cir. 2010) (citing Barker v. Riverside Cnty. Office of Educ, 584 F.3d 821, 824 (9th Cir. 2009)). On the other hand, bare, conclusory allegations, including legal allegations couched as factual, are not entitled to be assumed to be true. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). “[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” Iqbal, 556 U.S. at 678. “While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.” Mat664.

         Allegations of fraud must be stated with particularity. Fed.R.Civ.P. 9(b). “In order to plead fraud with particularity, the complaint must allege the time, place, and content of the fraudulent representation; conclusory allegations, do not suffice.” Shroyer v. New Cingular Wireless Serv., Inc., 622 F.3d 1035, 1042 (9th Cir. 2010) (citing Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989)); Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009) (requiring plaintiffs plead who, what, when, where, and how). “Rule 9(b) does not allow a complaint to merely lump multiple defendants together, but ‘requires plaintiffs to differentiate their allegations when suing more than one defendant... and to inform each defendant separately of the allegations surrounding his alleged participation in the fraud.” Swartz v. KPMG LLP, 476 F.3d 759, 765 (9th Cir. 2007) (quoting Haskin v. R.J. Reynolds Tobacco Co., 995 F.Supp. 1437, 1439 (M.D. Fla. 1998)). “[G]eneral allegations that the ‘defendants' engaged in fraudulent conduct” with only specific allegations as to some, “patently fail[s] to comply with Rule 9(b).” Mat 765.

         As pointed out by Dionne, Plaintiffs failed to provide a copy of the TAC that shows “through redlining, underlining, strikeouts, or other similarly effective typographic methods” how the TAC differs from the Second Amended Complaint (“SAC”) as required by CivLR 15.1(c). Although the Court has discretion to dismiss the TAC on this basis, in the interests of judicial economy, the Court has reviewed Plaintiffs' TAC[2] and makes its findings after careful consideration of the parties' briefings.

         The Court finds the TAC fails to remedy the deficiencies the Court identified in the SAC as to the moving defendants.[3] Plaintiffs' TAC provides more legal conclusions and general allegations that the moving “defendants” knew about or were involved in a fraudulent scheme involving more than 30 named defendants, but did not plead specific factual allegations as to what Plaintiffs allege the moving defendants actually did to engage in the alleged wrongful conduct.

         1) Mark Dionne and SoCal Accounting

         A. Background[4]

         The TAC alleges that “Cooper hired Dionne in and around May 2009 to work as the accountant and financial administrator” for TWM. (TAC 1179.) Mr. Dionne is also alleged to have acted as the financial administrator and accountant for, ACOF, ACPS, and other entities associated with Defendants Cooper, Shoemaker, and McNamcc -Financial Council Inc. (Shoemaker), Capita Advisors Inc. (McNamee), and Pinnacle Wealth Group Inc. (Cooper).

         Once again, Plaintiffs allege Mr. Dionne was an insider, but do not allege he was an officer, director, or shareholder of TWM or any specific facts from which the Court can infer he controlled any of these entities. Instead, the TAC alleges Cooper “explained [to Mr. Dionne] that TWM would be inducing investors to transfer their rands to TWM's control and how the scheme, described above, worked.” (TAC f 180.) Mr. Dionne allegedly had “control over TWM's financial books and records” and “managed the financial records for the spoke entities that too [sic] investor money and used it to pay for the unlawful revenue sharing, bogus fees and receive the kickbacks.” (TAC ¶¶ 180, 181.) Further, Mr. Dionne is ...


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