United States District Court, N.D. California, San Jose Division
ORDER DENYING DEFENDANT'S MOTION TO DISMISS RE:
DKT. NO. 22
J. DAVILA United States District Judge
Matthew D. Scarlett moves to dismiss Plaintiffs' claim
for fraud in the inducement. Scarlett's motion will be
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.
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.
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.
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.
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.
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.
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.
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)).
Fraud Claims ...