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Vigdor v. Super Lucky Casino, Inc.

United States District Court, N.D. California

June 23, 2017

DAN VIGDOR, et al., Plaintiffs,
v.
SUPER LUCKY CASINO, INC., et al., Defendants.

          ORDER GRANTING IN PART MOTION TO DISMISS RE: DKT. NO. 29

          HAYWOOD S. GILLIAM, JR. UNITED STATES DISTRICT JUDGE

         Pending before the Court is the motion to dismiss the First Amended Complaint filed by Defendants Super Lucky Casinos, Inc. and its President and Founder, Nicholas Talarico (“Defendants”). Dkt. No. 29 (“FAC”). For the reasons detailed below, the Court GRANTS the motion in part and DENIES the motion in part.

         I. BACKGROUND

         Plaintiffs were early investors in Defendants' start-up company. FAC at ¶ 10. They decided to invest at the urging of Defendant Talarico, who stated that the investment could be converted - at Plaintiffs' discretion - into equity shares in the company. Id. ¶¶ 10-11, 28, 34- 36. Accordingly, on January 25, 2012, Plaintiffs each invested $100, 000 into the company and in exchange received a Convertible Promissory Note (“CPN”), with a principal amount of $100, 000 and a 6% interest rate. Id. ¶¶ 10-12, 40; see also id., Exs. B-C (CPN for each Plaintiff). The CPN could be converted to equity shares in the company under certain, limited circumstances. See CPN. The CPN and this conversion process were governed by a Note Purchase Agreement (“NPA”). Id., Ex. A (NPA). Under the NPA, two circumstances warranted conversion: conversion would occur automatically if the company sold equity shares that grossed at least $750, 000, and conversion could occur at Plaintiffs' option in the event of a corporate transaction, such as a merger or sale of assets. See NPA at §§ 1(e), (i), 2.2(a)-(b).

         In October and November 2015, Defendant Talarico repeatedly tried to persuade Plaintiffs to convert their CPNs because the company “wanted to clear debt off the books.” FAC ¶¶ 63-64, 68. Plaintiffs refused, however, because Defendant Talarico offered a lower conversion rate than the rate to which Plaintiffs believed they were contractually entitled. Id. ¶¶ 64, 66, 68. According to Plaintiffs, when they refused, Defendant Talarico threatened to repay them the CPN principal and accrued interest. Id. Plaintiffs allege that the company then ceased all communication with them. Id. ¶ 18. The company even stopped sending monthly financial statements, despite having done so since Plaintiffs' initial investment in January 2012. Id.

         Then on July 29, 2016, and again on September 15, 2016, Defendants attempted to repay Plaintiffs the CPN principal and accrued interest. Id. ¶ 19. The company sent letters stating that it “ha[d] exercised its right to repay the principal and accrued interest under that [CPN] dated January 25, 2012 . . . .” Id. Plaintiffs filed this action in response, claiming Defendants erroneously attempted to eliminate their conversion rights because the company had subsequently “exploded in value” and their $100, 000 investments were now “worth a combined $10 million or more . . . .” Id. ¶¶ 13-14.

         II. LEGAL STANDARD

         Under Federal Rule of Civil Procedure 12(b)(6), the Court must dismiss a complaint if it fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). The Court may dismiss a complaint when it does not contain sufficient facts to state a plausible claim on its face. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). “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.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). This plausibility standard “asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. The Court must accept all the plaintiff's allegations as true and construe them in the light most favorable to the plaintiff. Twombly, 550 U.S. at 556; Erickson v. Pardus, 551 U.S. 89, 93-94 (2007). However, the Court is not required to accept as true “allegations that contradict matters properly subject to judicial notice or by exhibit.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008); Fed.R.Civ.P. 10(c) (“A copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes”). Nor is it required to accept as true “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” Id.

         III. ANALYSIS

         Plaintiffs' claims are based on Defendants' alleged breach of two documents: the NPA and the CPN. The parties agree that California law governs the interpretation of the NPA and CPN. See FAC, Ex. A (NPA) ¶ 7.2 & B-C (CPNs) at ¶ 8. When interpreting contracts, the overarching goal is to effectuate the parties' intent. Cal. Civ. Code § 1636 (“A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting.”). “[I]t is the objective intent, as evidenced by the words of the contract, rather than the subjective intent of the parties, that controls interpretation.” Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., 109 Cal.App.4th 944, 956 (Cal.Ct.App. 2003). In short, the plain language governs. Cal. Civ. Code § 1638 (“The language of a contract is to govern its interpretation, if the language is clear and explicit.”); see also Cal. Civ. Code § 1639 (“When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible.”). But where a contract is “capable of two or more constructions, both of which are reasonable, ” it is considered ambiguous. TRB Invs., Inc. v. Fireman's Fund Ins. Co., 40 Cal.4th 19, 27 (Cal. 2006). When a contract is ambiguous, dismissal at the pleading stage is inappropriate. See Diversified Capital Investments, Inc. v. Sprint Commc'ns, Inc., No. 15-CV-03796-HSG, 2016 WL 2988864, at *6 (N.D. Cal. May 24, 2016).

         A. Contract Claims

         i. Breach of Contract

         To state a claim for breach of contract, Plaintiffs must plead (1) the existence of the contract; (2) Plaintiffs' performance or excuse for nonperformance; (3) Defendants' breach; and (4) the resulting damages to Plaintiffs. Oasis W. Realty, LLC v. Goldman, 51 Cal.4th 811, 821 (Cal. 2011). Plaintiffs must also identify which provision of the contract Defendants allegedly breached. See Frances T. v. Vill. Green Owners Ass'n, 42 Cal.3d 490, 512 (Cal. 1986) (en banc).

         The only element at issue here is whether the company breached the terms of the CPN and NPA. Plaintiffs allege that the company did so in three specific ways: (1) exercising its claimed right to repay Plaintiffs' investment and accrued interest without adequate notice or consent; (2) failing to provide Plaintiffs with the company's monthly financial statements; and (3) failing to convert Plaintiffs' notes to shares at the proper valuation price. The Court will address each of these alleged violations in turn.

         a. Repayment

         Plaintiffs first argue that the company breached its contract by attempting to repay Plaintiffs their principal and accrued interest rather than converting the CPN to equity shares in the company. The CPN contains two provisions regarding the payment of principal and accrued interest. The company must repay investors when the Majority Note Holders demand it:

Unless earlier converted in Conversion Shares pursuant to Section 2.2 of that certain Note Purchase Agreement dated September 26, 2011 among the Company, Lender and certain other investors (the “Purchase Agreement”), the principal and accrued interest shall be due and payable by the Company on demand by the Majority Note Holders at any time after the Maturity Date.

FAC, Ex. B (CPN) at 1 (emphasis added). The company also may “prepay” investors if it first obtains the written consent of the Majority Note Holders:

Prepayment of principal, together with accrued interest, may not be made without the written consent of the Majority Note Holders.

Id. at § 1. Defendants rely on this second provision in asserting that they had the right to repay Plaintiffs. They state that they obtained consent from the Majority Note Holders.[1] Dkt. No. 29 at 8-9; see also FAC ¶¶ 74, 78. Plaintiffs respond that this second payment provision may only be invoked before the CPN maturity. Dkt. No. 33 at 7-8. The first repayment provision cited above refers to payment after the maturity date, FAC, Ex. B (CPN) at 1, and Plaintiffs argue that the second provision correspondingly refers to payment before the maturity date. Id.

         Neither the CPN nor the NPA define “prepayment.” The Court finds that, making all inferences in Plaintiff's favor as required at this stage, Plaintiffs' interpretation is as plausible as Defendants' competing interpretation that “prepayment” refers to payment before conversion. Given this ambiguity, the Court cannot conclude that Defendants' interpretation is correct as a matter of law on a motion to dismiss. Because Defendants attempted to repay Plaintiffs over a year after the January 25, 2015, maturity date, FAC ¶ 19, this theory of breach of contract survives the motion to ...


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