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Melcher v. Fried

United States District Court, S.D. California

May 29, 2018

LANCE FRIED, Defendant.


          Hon. Cynthia Bash ant United States District Judge

         Plaintiffs Carl Melcher and Melcher Family Limited Partnership (“MFLP”) bring this action against Defendant Lance Fried. In their First Amended Complaint, Plaintiffs allege counts for federal and state securities fraud, breach of fiduciary duty, common law fraud, elder abuse, and rescission of contract. (First Am. Compl. (“FAC”), ECF No. 18.) Defendant moves to dismiss all of Plaintiff Melcher's individual claims pursuant to Federal Rule of Civil Procedure 12(b)(1) and (6). (Motion to Dismiss (“Mot.”), ECF No. 24.) Plaintiffs oppose. (ECF No. 25.)

         The Court finds this motion suitable for determination on the papers submitted and without oral argument. See Fed. R. Civ. P. 78(b); Civ. L.R. 7.1(d)(1). For the following reasons, the Court GRANTS Defendant's motion to dismiss.

         I. BACKGROUND[1]

         Plaintiff Carl Melcher is approximately eighty years old. (FAC ¶ 12.) He is the founder and one of the limited partners of Plaintiff MFLP. (Id.) MFLP is a California limited partnership that Melcher formed in 1989, and it “is used by [him] for investments in companies.” (Id. ¶ 11.)

         This dispute arises from MFLP's investment in Face It Corp. (See FAC ¶ 1.) At the time, Face It “was a privately held social engagement and mobile customer care solution provider.” (Id.) On October 18, 2011, MFLP purchased 30.875% of Face It's stock for $3 million, and Melcher became a board member of the company. (Id. ¶ 15.) Defendant Fried was at all relevant times the Chief Executive Officer and Chairman of the Board of Face It. (Id. ¶ 1.) MFLP was the sole outside investor in the company; all of the remaining shareholders were founders of Face It. (Id. ¶ 16.)

         In 2013, Face It began having financial difficulties and was failing to meet its revenue projections. (FAC ¶ 18.) In an attempt to rectify Face It's financial status, Defendant asked Melcher for additional capital investments to keep the company afloat. (Id.) Melcher refused to do so until there was evidence that Face It was making greater sales or income. (Id.)

         Around September 2013, Face It was still struggling financially, and Defendant reached out to Five9, a corporation interested in utilizing Face It's technology. (FAC ¶ 19.) The two companies discussed a potential sale of Face It to Five9 for an estimated value of $10 million. (Id. ¶ 21.) Then, without disclosing these negotiations, Defendant allegedly proposed to Melcher that Face It repurchase all of the shares in the company held by MFLP. (Id. ¶¶ 19, 22-23.) On September 12, 2013, MFLP did so for $1.5 million, half of the amount it originally paid for these shares. (Id. ¶ 24.)

         The parties effectuated this transaction through a Redemption Agreement executed between MFLP and Face It. (Redemption Agreement, Carlson Decl. ¶ 2, Ex. A, ECF No. 24-2.)[2] Melcher signed the Redemption Agreement as the President of the “Melcher Family Corporation, ” which is identified as the “General Partner of Melcher Family Limited Partnership.” (Id.) The day after MFLP and Face It executed the Redemption Agreement, Five9 allegedly signed a term sheet for the acquisition of Face It, and on October 18, 2013, the sale was finalized. (FAC ¶¶ 25-26.)

         A few years later in 2016, Melcher became aware of this acquisition timeline and brought suit against Defendant.[3] (ECF No. 1.) On July 10, 2017, Melcher and MFLP filed the First Amended Complaint alleging the following counts against Defendant: (1) & (2) violations of Federal securities laws; (3) violations of California securities laws; (4) fraud; (5) breach of fiduciary duty; (6) elder abuse; and (7) rescission. (Id.) Defendant now moves to dismiss only Melcher's individual causes of action.[4]


         A motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure “tests the legal sufficiency” of the claims asserted in the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The court must accept all factual allegations pleaded in the complaint as true and must construe them and draw all reasonable inferences from them in favor of the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). To avoid a Rule 12(b)(6) dismissal, a complaint need not contain detailed factual allegations; rather, it must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. 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) (citing Twombly, 550 U.S. at 556). “Where a complaint pleads facts that are ‘merely consistent with' a defendant's liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.'” Id. (quoting Twombly, 550 U.S. at 557).

         “[A] plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (alteration in original) (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)). A court need not accept “legal conclusions” as true. Iqbal, 556 U.S. at 678. Despite the deference the court must pay to the plaintiff's allegations, it is not proper for the court to assume that “the [plaintiff] can prove facts that it has not alleged or that the defendants have violated the . . . law[] in ways that have not been alleged.” Assoc. Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983).

         As a general rule, a court freely grants leave to amend a complaint that has been dismissed. Fed.R.Civ.P. 15(a); Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986). However, leave to amend may be denied when “the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency.Schreiber Distrib. Co., 806 F.2d at 1401 (citing Bonanno v. Thomas, 309 F.2d 320, 322 (9th Cir. 1962)).


         Defendant challenges Melcher's ability to bring individual claims for violations of federal securities laws, violations of California securities laws, fraud, breach of fiduciary duty, financial elder ...

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