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Ahn v. Scarlett

United States District Court, N.D. California, San Jose Division

March 31, 2017

GREGORY AHN, et al., Plaintiffs,
v.
MATTHEW D. SCARLETT, et al., Defendants.

          ORDER DENYING DEFENDANT'S MOTION TO DISMISS RE: DKT. NO. 22

          EDWARD J. DAVILA United States District Judge

         Defendant Matthew D. Scarlett moves to dismiss Plaintiffs' claim for fraud in the inducement. Scarlett's motion will be DENIED.

         I. BACKGROUND

         The Plaintiffs are Gregory Ahn, Jonathan White, and Cult of 8, Inc. (“CO8”), and the Defendants are Matthew D. Scarlett and Alcohol by Volume, Inc. (“ABV”). First Amended Compl. (“FAC”) ¶¶ 2-6, Dkt. No. 11.

         According to the FAC, Ahn founded CO8 in 2010 to sell and distribute wine. Id. ¶ 9. In 2012, Ahn invited Scarlett and White to join him in creating “an enterprise which could create, produce, sell, and distribute various brands of wine.” Id. ¶ 10. The three of them met in February 2012 and agreed to the terms of an “Equal Interest Agreement” (the “EIA”). Id. Under the EIA, they would each be equal co-owners of the enterprise as a whole, including CO8 and ABV, with equal decision-making authority. Id. ¶¶ 10, 46. The EIA was not written down, but “they each agreed to sign paperwork reflecting this structure once it was drafted.” Id. ¶ 10.

         ABV was incorporated in early 2012. Id. ¶ 11. Ahn, White, and Scarlett decided that CO8 would carry the debt for the enterprise. Id. at ¶ 13. Over an unspecified period, the enterprise accrued more than $10 million in debt, including millions spent “building and protecting” the ABV trademarks. Id. In 2013, “it was agreed” that three trademarks “would be assigned” (apparently by CO8 and Ahn) to ABV. Id. As a result, ABV now owns the trademarks and has “only nominal debt, ” while CO8 is “saturated with debt.” Id. ABV and CO8 continue to operate “as though they are part of one enterprise, with Cult of 8 performing obligations of ABV and paying debts of ABV, consistent with the Equal Interest Agreement.” Id. ¶ 15.

         Nonetheless, the EIA has never been executed in writing. Id. ¶ 14. Instead, under the operative written agreements, Scarlett and White each own half of the shares of ABV (which owns the trademarks), and Ahn is the sole shareholder CO8 (which carries more than $10 million in debt). Id. The allegations do not explain when this written documentation was executed. A written version of the EIA was drafted (at an unspecified time), but it has not been executed. Pls.' Opp'n to Def.'s Mot. to Dismiss (“Opp'n”), Dkt. No. 31 at 3.

         In 2013, Scarlett started to behave erratically, he showed signs of alcohol abuse, and on several occasions he interfered with Ahn's and CO8's business relationships. Id. ¶¶ 17-24. In particular, Scarlett represented to investors and distributors that he and White were equal owners of ABV, and that Ahn lacked authority to act on ABV's behalf. Id. ¶ 24. In December 2015, Ahn and White terminated Scarlett's employment. Id. ¶ 25.

         Ahn, White, and CO8 brought this action in November 2016. They allege four causes of action. First, Ahn and White seek declaratory judgment that Ahn, White, and Scarlett own equal shares in CO8 and ABV under the EIA. Id. ¶¶ 26-32. Second, CO8 alleges breach of fiduciary duty against Scarlett. Id. ¶¶ 33-37. Third, White and Ahn allege breach of oral contract against Scarlett. Id. ¶¶ 38-43. And fourth, CO8 and Ahn allege fraud in the inducement against Scarlett and ABV. Id. ¶¶ 44-53.

         Scarlett moved to dismiss Plaintiffs' cause of action for fraud in the inducement (Dkt. No. 13) and Plaintiffs filed an amended complaint (Dkt. No. 18). Scarlett now moves again to dismiss Plaintiffs' fraud claim. Def.'s Mot. to Dismiss (“MTD”), Dkt. No. 22.

         II. LEGAL STANDARD

         A. Rule 12(b)(6)

         A motion to dismiss under Fed.R.Civ.P. 12(b)(6) tests the legal sufficiency of claims alleged in the complaint. Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). Dismissal “is proper only where there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory.” Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The 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, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

         B. Fraud Claims ...


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