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Mueller v. San Diego Entertainment Partners, LLC

United States District Court, S.D. California

May 22, 2017

MATTHIAS MUELLER, Plaintiff,
v.
SAN DIEGO ENTERTAINMENT PARTNERS, LLC, a California Limited Liability Company; DAVE DEAN, an individual and DOES 1 through 25, inclusive, Defendants.

          ORDER GRANTING DEFENDANTS' MOTION TO DISMISS WITH LEAVE TO AMEND [Dkt., 10.]

          HON. GONZALO P. CURIEL United States District Judge

         Before the Court is Defendants' motion to dismiss pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6). (Dkt. No. 10.) An opposition as well as a reply were filed. (Dkt. Nos. 12, 13.) Based on the reasoning below, the Court GRANTS Defendants' motion to dismiss with leave to amend.

         Background

         On December 9, 2016, Plaintiff Matthias Mueller (“Plaintiff”) filed a complaint against Defendants San Diego Entertainment Partners, LLC (“SDEP”) and Dave Dean (“Dean”) (collectively “Defendants”) for violations of § 10b and Rule 10b-5 of the Securities and Exchange Act of 1934, fraudulent inducement, negligent misrepresentation, California securities fraud, rescission pursuant to California Corporations Code section 25501 and violation of California's Business & Professions Code section 17200 et seq. (Dkt. No. 1, Compl.)

         According to the Complaint, Defendant SDEP was organized to acquire, develop and operate a nightclub called “Avalon San Diego”, similar to Avalon Hollywood, at a building located at 4th Avenue and B Street in San Diego, CA. (Id. ¶¶ 6, 10.) Defendant Dean is one of the two managers of SDEP. (Id. ¶ 7.) Around July 2013, Dean approached Plaintiff seeking his investment in “Avalon San Diego.” (Id. ¶ 10.) Dean represented that they had previously developed Avalon Hollywood in 2002 and Avalon San Diego would be a similarly successful project. (Id.) Over the following months, Dean would call and send emails and text messages to Plaintiff about the status of Avalon San Diego. (Id. ¶ 11.) During this time, in order to lure Plaintiff's investment in Avalon San Diego, Dean made the following alleged misrepresentations:

a) that Defendants would immediately embark on renovating and remodeling the venue resulting in a brand new nightclub;
b) that the venue would be open within (sic) few months, accomodating (sic) various activities including live entertainment, international touring DJs, dance club nights, special events and media/film production;
c) that with Plaintiff's investment, the project would be sufficiently funded to move forward;
d) that Defendants would lease the building;
e) that the venue would generate high return for Plaintiff.

(Id. ¶ 12.) Plaintiff said he would only agree to make an investment if SDEP immediately started construction to develop the venue. (Id. ¶ 13.) In an email dated April 20, 2014, Dean stated they were starting on some initial demolition work. (Id. ¶ 14.) In an email dated August 27, 2014, Dean represented that the fund raising for adequate funds for Avalon San Diego would end by early to mid-September and SDEP was ready to initiate construction in September 2014. (Id. ¶ 15.) However, these statements were later discovered to be false. (Id.) Relying on these representations, Plaintiff agreed to acquire Units of membership interest in Avalon, San Diego. (Id. ¶ 16.) Around October 31, 2014, Plaintiff and Defendant entered into a subscription agreement (“Agreement”) where Plaintiff agreed to purchase Units in Avalon San Diego and transferred $200, 000 to Defendants' bank account. (Id. ¶ 17.) Dean reiterated the promises representing that they would move forward with the project immediately and that within a few months the venue would be open to the public. (Id. ¶ 18.)

         Plaintiff was under the reasonable impression that Defendants would immediately start constructing, renovating and remodeling the venue and that the venue would open its doors to the public within a few months and that the project would be sufficiently funded to move forward. (Id. ¶ 21.) He reasonably relied on Defendants' representations because they presented Plaintiff with a monthly beverage credit once Avalon San Diego opened to the public and Dean represented that he had been part of the development team for Avalon Hollywood, a successful project, and he had extensive experience in owning, directing, and operating nightclubs in San Diego, London, San Francisco, and Los Angeles for at least 25 years. (Id. ¶¶ 19, 20.)

         Later, Plaintiff learned Defendants' representations were false as they had no intention to start remodeling, renovating, and opening the venue immediately after Plaintiff bought the Units, that the venue would not be open to the public within a few months, that Defendants contemplated purchasing the building so the project was not sufficiently funded and that the venue would not generate high returns for Plaintiff. (Id. ¶ 22.)

         As a result of the misrepresentations, Plaintiff has incurred damages. (Id. ¶ 23.) More than a year and a half has passed since the Agreement was executed and Defendants have been paying rents on the building without taking a step towards remodeling, renovating and opening the venue. (Id. ¶ 23.) Defendants have failed and refused to return Plaintiff's money. (Id. ¶ 24.)

         Discussion

         A.Legal Standard on Federal Rule of Civil Procedure 12(b)(6)

         Federal Rule of Civil Procedure 12(b)(6) permits dismissal for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). Dismissal under Rule 12(b)(6) is appropriate where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory. See Balistreri v. Pacifica Police Dep't., 901 F.2d 696, 699 (9th Cir. 1990). Under Rule 8(a)(2), the plaintiff is required only to set forth a “short and plain statement of the claim showing that the pleader is entitled to relief, ” and “give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).

         A complaint may survive a motion to dismiss only if, taking all well-pleaded factual allegations as true, it contains enough facts to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. “In sum, for a complaint to survive a motion to dismiss, the non-conclusory factual content, and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) (quotations omitted). In reviewing a Rule 12(b)(6) motion, the Court accepts as true all facts alleged in the complaint, and draws all reasonable inferences in favor of the plaintiff. al-Kidd v. Ashcroft, 580 F.3d 949, 956 (9th Cir. 2009).

         Where a motion to dismiss is granted, “leave to amend should be granted ‘unless the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency.'” DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992) (quoting Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986)). In other words, where leave to amend would be futile, the Court may deny leave to amend. See Desoto, 957 F.2d at 658; Schreiber, 806 F.2d at 1401.

         B. Legal Standard on Federal Rule of Civil Procedure 9(b)

         A cause of action alleging fraud, as in this case, must also comply with Rule 9(b) which requires that the circumstances constituting fraud must be plead with particularity. Fed.R.Civ.P. 9(b). Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally. Id. To satisfy the heightened pleading requirements, the plaintiff must set forth “the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentation.” Odom v. Microsoft Corp., 486 F.3d 541, 553 (9th Cir. 2007) (internal citations omitted). In addition, the complaint must indicate “what is false or misleading about a statement, and why it is false” and “be specific enough to give defendants notice of the particular misconduct that they can defend against the charge and not just deny that they have done anything wrong.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106-07 (9th Cir. 2003) (internal citations omitted) (“[a]verments of fraud must be accompanied by ‘the who, what, when, where, and how' of the misconduct charged.”).

         C. Securities Exchange Act of 1934, § 10(b) and Rule 10b-5

         Defendants argue that the federal securities claim fails because the misrepresentations are not alleged with particularity and because the alleged statements are forward-looking and are protected by the safe-harbor provision. Plaintiff disputes Defendants' position arguing he has sufficiently alleged violations of the federal securities law.

         Section 10(b) of the Securities Exchange Act of 1934 (“Act”) makes it unlawful for “any person . . . [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or . . . for the protection of investors.” 15 U.S.C. § 78j(b). Rule 10b-5 implements this provision by making it unlawful for any person “[t]o employ any device, scheme, or artifice to defraud” or “make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading” or “[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5(a), (b), & (c).

         To state a securities fraud claim under § 10(b) of the Act and Rule 10b-5, a plaintiff must show (1) a material misrepresentation or omission, (2) scienter, (3) in connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation. Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37 (2011) (citation omitted). A complaint alleging claims under section 10(b) and Rule 10b-5 must satisfy the pleading requirements of both the PSLRA and Rule 9(b). In re Verifone Holdings, Inc. Securities Litigation, 704 F.3d 694, 701 (9th Cir. 2012).

         In 1995, Congress enacted the Private Securities Litigation Reform Act (“PSLRA”) to curb abuses of securities fraud litigation. Amgen, Inc. v. Conn. Retirement Plans and Trust Funds, 133 S.Ct. 1184, 1200 (2013). These include “nuisance filings, targeting of deep-pocket defendants, vexatious discovery request and manipulation by class action lawyers.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 320 (2007). In response to these abuses, the PSLRA imposed a heightened pleading requirement under securities fraud actions under § 10(b) and Rule 10b-5 requiring that falsity and scienter be plead with particularity. Amgen, Inc., 133 S.Ct. at 1200; Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009).

         Under the PSLRA's heightened pleading instructions, a complaint alleging that the defendant made a false or misleading statement must: “(1) ‘specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading, ' 15 U.S.C. § 78u-4(b)(1); and (2) ‘state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind, ' § 78u-4(b)(2).” Tellabs, Inc., 551 U.S. at 321. “It does not suffice that a reasonable fact finder plausibly could infer . . . the requisite state of mind.” Id. at 313. Rather, the inference of scienter must be “cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Id.

         To satisfy the requisite state of mind element, “a complaint must ‘allege that the defendant[ ] made false or misleading statements either intentionally or with deliberate recklessness.'” Zucco, 552 F.3d at 991 (citation omitted). Facts showing mere recklessness or a motive to commit fraud and opportunity to do so provide some reasonable inference of intent, but are not sufficient to establish a strong inference of deliberate recklessness. In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d at 701. If allegations of false statements are based on information and belief, the complaint must “provide, in great detail, all the relevant facts forming the basis for that belief.” In re Immune Response Sec. Litig., 375 F.Supp.2d 983, 1017 (S.D. Cal. 2005). The heightened pleading requirements of the PSLRA “are an unusual deviation from the usually lenient requirements of federal rule pleadings.” Ronconi v. Larkin, 253 F.3d 423, 437 (9th Cir. 2001).

         Defendants first argue that the complaint does not specify each statement alleged to have been misleading, the reasons why and the state of mind of Defendants; therefore, the allegations are not sufficient under 15 U.S.C. § 78u-4(b)(1). Plaintiff disagrees.

         The Court disagrees with Defendants' interpretation of the facts. The complaint specifies the alleged misrepresentations made by Defendant Dean. ...


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