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Rackwise, Inc. v. Archbold

United States District Court, E.D. California

June 13, 2017

RACKWISE, INC., a Nevada Corporation, Plaintiff,
v.
GUY ARCHBOLD, an individual, Defendant.

          MEMORANDUM AND ORDER RE: MOTION FOR PRELIMINARY PROHIBITORY AND MANDATORY INJUNCTION

          WILLIAM B. SHUBB UNITED STATES DISTRICT JUDGE.

         Plaintiff Rackwise, Inc. brought this action against defendant Guy A. Archbold for conversion, fraud, breach of the duty of good faith and fair dealing, tortious interference with prospective economic advantage, and declaratory relief arising from defendant's actions before and after his purported termination as plaintiff's President, CEO, and Chairman of the Board of Directors. Before the court is plaintiff's Motion for preliminary prohibitory and mandatory injunctive relief. (Docket No. 6.)

         I. Factual and Procedural History

         In 2011, defendant became President, CEO, and Chairman of the Board of Rackwise.[1] (First Am. Compl. (“FAC”) ¶ 9 (Docket No. 4).) On May 7, 2014, Rackwise Funding II, LLC (“RFII”) allegedly entered into a Subscription Agreement that entitled it to appoint two members to Rackwise's board of directors and created warrants that permitted RFII to purchase shares of Rackwise upon notice and payment. (Id. ¶¶ 10-11; id., Ex. B (“Subscription Agreement”) (Docket No. 7-3).) Defendant, as Rackwise CEO, also allegedly granted another company, Triple R-F, LLC, warrants to purchase shares of Rackwise stock. (Richert Suppl. Decl. ¶¶ 4-5, Exs. 2-3 (Docket Nos. 10-1, 10-3 to -4).)

         On February 2, 2017, plaintiff alleges its board of directors consisted of Archbold, John Kyees, and Michael Feinberg. (Imeson Decl. ¶ 9 (Docket No. 6-3).) That day, Patrick Imeson, as RFII's Managing Member, allegedly appointed himself and Bart Richert to Rackwise's Board of Directors pursuant to RFII's Subscription Agreement. (FAC ¶ 13; Imeson Decl. ¶¶ 10-12.) On February 3, 2017, Feinberg, Kyees, Imeson, and Richert allegedly held a special board meeting and terminated Archbold as President, CEO, and chairman of the board. (FAC ¶ 14.) Archbold disputed the validity of this action.

         On March 22, 2017, RFII and Triple R-F exercised their warrants to purchase shares of plaintiff's stock. (Imeson Decl. ¶¶ 14, 16; Richert Supp. Decl. ¶¶ 9-10.) The next day, shareholders possessing over 79% of Rackwise's outstanding stock voted by written consent to terminate Archbold as President, CEO, and chairman of the board.[2] (Imeson Decl. ¶¶ 20-23; FAC Ex. E (“Written Consent of Shareholders”) (Docket No. 7-6); Richert Suppl. Decl. ¶¶ 13-15.)

         After his alleged termination, defendant continued to act as CEO, President, and chairman of Rackwise. He allegedly held himself out as the CEO to Rackwise constituents and employees, held a meeting with other former Rackwise board members purporting to act on Rackwise's behalf, filed documents with the SEC on Rackwise's behalf, [3] communicated with potential Rackwise investors using confidential and proprietary Rackwise information, and terminated a contract with a current client. (FAC ¶¶ 28-36; Imeson Decl. ¶¶ 26-28, 34-40, 44.)

         Plaintiff initiated this action against defendant, alleging conversion, fraud, breach of the duty of good faith and fair dealing, and tortious interference with prospective economic advantage. Plaintiff now moves for a preliminary prohibitory injunction preventing defendant from (1) accessing or logging into Rackwise's account in the SEC's online EDGAR filing system; (2) representing himself to anyone as being an officer, director, or employee of, or otherwise affiliated with, Rackwise; and (3) acting, attempting to act, or purporting to act on behalf of Rackwise. Plaintiff also moves for a mandatory injunction requiring defendant to submit a declaration attesting to (1) the identities of all Rackwise customers he has contacted since March 22, 2017, purportedly on behalf of Rackwise with true and correct copies of all communications with those customers and (2) the identifies of all potential investors that Archbold has solicited or attempted to solicit investments or financial on behalf of Rackwise, including copies of all communications.

         II. Discussion

         State law “controls the issue of whether a plaintiff is entitled to seek injunctive relief on the claim.” Anselmo v. Mull, Civ. No. 2:12-1422 WBS EFB, 2012 WL 5304799, at *6 (E.D. Cal. Oct. 25, 2012). The parties do not dispute that state law permits plaintiff to seek a preliminary injunction. However, “federal, not state, standards govern issuance of a preliminary injunction when a federal court is sitting in diversity or exercising supplemental jurisdiction over state law claims.” Id. at *5; see, e.g., Certified Restoration Dry Cleaning Network, L.L.C. v. Tenke Corp., 511 F.3d 535, 541 (6th Cir. 2007) (“[W]e apply our own procedural jurisprudence regarding the factors to consider in granting a preliminary injunction . . . .”); Equifax Servs., Inc. v. Hitz, 905 F.2d 1355, 1361 (10th Cir. 1990) (“[T]he doctrine of Erie . . . does not apply to preliminary injunction standards . . . .”); Kane v. Chobani, Inc., Case No.: 12-CV-2425-LHK, 2013 WL 3776172, at *3 (N.D. Cal. July 15, 2013) (“[A]pplying federal standards to determine whether a preliminary injunction should be issued will not alter the final outcome of the litigation.”).

         In order to obtain a preliminary injunction, the moving party must establish (1) it is likely to succeed on the merits, (2) it is likely to suffer irreparable harm in the absence of preliminary relief, (3) the balance of equities tips in its favor, and (4) an injunction is in the public interest. Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20-21 (2008); Humane Soc. of the U.S. v. Gutierrez, 558 F.3d 896, 896 (9th Cir. 2009). Injunctive relief is “an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion.” Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (per curiam).

         To determine likelihood of success on the merits, the court must first determine whether Rackwise will be likely to establish that plaintiff's shareholders validly removed defendant from his positions as CEO, President, and chairman of the board.

         A federal court sitting in diversity applies the choice of law rules of the forum state. Mazza v. Am. Honda Motor Co., 666 F.3d 581, 589 (9th Cir. 2012). Under California's internal affairs doctrine, “a court must look to the law of the state of incorporation with respect to matters involving the regulation of [a corporation's] ‘internal affairs.'” Patriot Scientific Corp. v. Korodi, 504 F.Supp.2d 952, 956 (S.D. Cal. 2007) (citing State Farm Mut. Auto. Ins. Co. v. Superior Court, 114 Cal.App.4th 434, 442 (2d Dist. 2003)). Because plaintiff Rackwise is incorporated in Nevada, Nevada law governs its internal affairs.

         Plaintiff argues that shareholders possessing over 75% of Rackwise's outstanding stock removed defendant as CEO, President, and chairman of the board by written consent.[4] The Rackwise bylaws permit the removal of a director by “at least seventy-five percent (75%) of the ...


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