United States District Court, S.D. California
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS WITH
LEAVE TO AMEND [Dkt., 10.]
GONZALO P. CURIEL United States District Judge
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
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.)
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.
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.)
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.)
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. ¶
Standard on Federal Rule of Civil Procedure 12(b)(6)
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).
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).
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.
Legal Standard on Federal Rule of Civil Procedure
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.”).
Securities Exchange Act of 1934, § 10(b) and Rule
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.
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).
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).
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).
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.”
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).
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.
Court disagrees with Defendants' interpretation of the
facts. The complaint specifies the alleged misrepresentations
made by Defendant Dean. ...