United States District Court, S.D. California
ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY
JUDGMENT IN ITS ENTIRETY [DOC. NO. 31]
A. HOUSTON United States District Judge
matter comes before the Court on motion for summary judgment,
or, in the alternative, for partial summary judgment, filed
by Defendant Quarles & Brady, LLP (“Quarles &
Brady” or “Defendant”), [doc. no. 31],
following this Court's order dismissing three of
Plaintiff How Investments LTD.'s (“Howe” or
“Plaintiff”) original causes of action, [doc. no.
7]. Only Howe's fraud and negligence causes of action
remain. Defendant's motion has been fully briefed by the
parties. See Doc. Nos. 36, 40. After careful
consideration of the record, including the pleadings and
exhibits submitted by the parties, oral argument from
counsel, and for the reasons set forth below, the Court
GRANTS Quarles & Brady's motion for summary judgment,
in its entirety.
Howe's Removal from CRM Membership
CRM Co. LLC was formed in 1998, its four original members
executed an operating agreement. See Doc. No. 36,
Exh. 4. Tim Tuttle was CRM's initial CPA and attorney,
and formed CRM Co. and CRM Holdings, LLC (collectively
“CRM”). See Doc. No. 36-20 at 16. At
formation, CRM included four members (Barry Takallou, Hamid
Malakooti, Shepard B. Ansley, and Robert Jull). See
Doc. No. 36, Exh. 4 at 1171. Since inception, Ansley held his
original shares in an entity referred to as “The
SodaMaster Corporation.” Id. at 1173. On May
5, 2000, Tuttle wrote a memo to the members of CRM opining on
the propriety of Jull's transferring his membership
interest to Howe, a limited liability company formed in the
British Virgin Islands. See Doc. No. 36, Exh. 6.
Tuttle expressly limited his opinion to Jull's ability to
make such a transfer, and did not address the ramifications
the transfer may have on CRM in the future. Id.
2003, Quarles and Brady, a law firm, was retained as counsel
to represent CRM, and Robert Bornhoft took over Tuttle's
legal responsibilities with respect to CRM. See
Complaint ¶ 5. Between 2003 and 2010, Quarles &
Brady formed four additional companies under the CRM
umbrella. See Complaint ¶ 7. On November 8,
2004, Robert Jull transferred his interest to Howe, a
decision made on the advice of his accounting firm, KPMG
Dublin, and his Canadian attorney. Howe is owned by nominee
banks who have agreed that Jull is the sole financial
beneficiary of the company, which makes Jull the
“beneficial owner” of Howe. See Doc. No.
36, Exh. 5. Howe, CRM's largest shareholder, owned a
32.31% interest in each of the CRM entities, located in
California and Arizona. See Amended Complaint ¶
9. In November 2004, Quarles & Brady advised CRM that, in
the interest of prudent business, any CRM entity, should have
a U.S. taxpayer ID number, because Quarles & Brady
couldn't tell whether Howe had one. See Doc. No.
36 Exh. 26 at 303.
December 29, 2011, at the annual CRM member meeting, the CRM
member representatives discussed the need for transparency
with respect to all of the ownership interests in CRM.
See Doc. No. 36, Exh. 19 at 224. At that meeting,
Jull agreed to promptly provide to CRM documentation
evidencing his ownership of Howe Investments Limited.
Id. On January 31, 2012, Howe's senior trust
officer, Andrew Briddon, submitted a letter which failed to
include documentation verifying Jull's ownership of Howe.
See Doc. No. 36, Exh. 24 at 295-96. Accordingly, on
February 3, 2012, Quarles & Brady requested ownership
verification documents such as (1) the formation,
organization, and existence of Howe; (2) the binding and
enforceable transfer by Jull of his rights in CRM to Howe;
(3) the decision-making authority of Jull in transactions at
the member level on behalf of Howe; and (4) whether the sole
ownership interest and title in Howe is held by Jull.
Id. Howe's response to the letter was to give
notice that its attorney, Patrick W. Martin, was tasked to
“deal with it.” See Doc. No. 31, Exh. B
September 2011, CRM's primary source of bank financing
was M&I Bank. See Doc. No. 31, Exh. II at 8.
M&I extended a $5, 000, 000 line of credit to CRM.
Id. However, CRM's $5, 000, 000 line of credit
expired on September 5, 2011. Id. Barry Takallou
continued his efforts to obtain a new line of credit from
other banks while Quarles & Brady was attempting to
obtain more information from Howe. See Doc. No. 31,
Exh. A at 137. When Takallou was unsuccessful in obtaining a
new line of credit, as of February 20, 2012, he made a
personal loan of $500, 000 to CRM, then issued a $2, 000, 000
capital call. Id. The capital call caused a rift
between Jull and other CRM members. See Doc. No. 31,
Exh. D at 50. Due to the inability to obtain a line of credit
while ambiguity swirled around Howe's ownership interest,
in April 2012, the CRM members voted to amend their operating
agreement to further transparency among members and preclude
ownership that inhibited financing. See Doc. No. 31,
14, 2012, President and CEO of CRM, Barry Takallou, received
a response from Union Bank regarding a “Credit request
for CRM Co., LLC, ” indicating that the bank was at an
impasse due to the inability to identify the
ownership-particularly who or what entity held a controlling
interest of Howe and its 31% ownership stake of CRM.
See Doc. No. 36, Exh. 15 at 204. Additionally, on
May 15, 2012, Takallou received another denial letter
declining to extend a line of credit to CRM. See
Doc. No. 31, Exh. J at 3. Specifically, the letter stated
that M&I Bank was apprehensive because identification of
Howe's ownership interest was not clear, and did not
comply with the Patriot Act. Id. In June of 2012,
CRM amended its operating agreement by approval from its
members. See Doc. No. 31, Exh. A at 186; Exh. D at
78; Exh. E at 107. Jull initially considered changing
Howe's ownership interest to comply with the amendments,
but decided against it. See Doc. No. 31, Exh. B at
181. Quarles & Brady communicated to Howe, its attorney,
and to Jull, that, as of June 29, 2012, (1) CRM had not yet
received the requested documentation from Howe or Jull to
verify that Howe met the United States Ownership and the
Patriot Act compliance sections of the amended operating
agreement; and, therefore, (2) Howe was disqualified as a
member of CRM. See Doc. No. 36, Exh. 30 at 382.
being removed as a CRM member, Howe promptly exercised its
arbitration rights under the operating agreement, seeking to
determine the fair market value for Jull's shares.
See Doc. No. 31, Exh. B at 16-17. CRM hired two
appraisers to evaluate Howe's ownership, but Jull
believed the values calculated were not adequate or complete.
Id. at 17. One appraiser valued Howe's interest
at $3.5 million, and another experienced appraiser determined
Howe's shares to be worth $3.62 million. See
Doc. Nos. 31, Exh. W; Exh. T. As of November 16, 2013,
Vantage Point Advisors determined the fair market value for
Howe's interest, as of December 31, 2011, to be $3.63
million. See Doc. No. 36, Exh. 11 at 21. Although
Jull knew he could proceed and have an arbitrator rule on the
value of Howe's shares, CRM and Howe reached a voluntary
settlement with respect to Jull's belief, due to the
condition allowing Howe to sue Quarles & Brady.
See Doc. No. 31 Exh. B at 18-19, 26.
9, 2014, Howe filed a complaint against Quarles & Brady
in the Superior Court of California, County of San Diego,
asserting claims for fraud, intentional interference with
contractual relationship, defamation, negligence, and
unlawful discrimination. See Doc. No. 1-2.
13, 2014, Quarles & Brady removed the action to this
Court, asserting diversity jurisdiction. See Doc.
No. 1. On June 20, 2014, Quarles & Brady filed a motion
to dismiss Howe's complaint pursuant to Federal Rule of
Civil Procedure 12(b)(6). See Doc. No. 3. After the
motion was fully briefed by the parties, on March 25, 2015,
this Court granted in part and denied in part Quarles &
Brady's motion without prejudice. See Doc. No.
7. On March 29, 2016, Howe filed its first amended complaint,
asserting claims for fraud and negligence. See Doc.
No. 24. Quarles & Brady filed its answer to Howe's
amended complaint on April 15, 2016. See Doc. No.
23, 2016, Quarles & Brady filed the instant motion for
summary judgment. See Doc. No. 31. Howe filed its
response in opposition on July 1, 2016, including objections
to evidence used to support the summary judgment motion.
See Doc. Nos. 36, 37. Quarles & Brady filed its
reply on July 11, 2016. See Doc. No. 40. On July 18,
2016, this Court held a hearing and entertained oral argument
on Quarles & Brady's motion for summary judgment.
See Doc. Nos. 41, 42. Both parties appeared at the
hearing, and, ultimately, the matter was taken under
submission. See Doc. No. 42 at 48.