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Langille v. Berthel, Fisher & Company Financial Services, Inc.

United States District Court, E.D. California

September 18, 2019

ROBINSON L. LANGILLE, et al., Plaintiffs,


         Plaintiffs allege defendant’s former employee, a financial advisor, steered plaintiffs into high risk, high cost investments ill-suited for their financial needs and goals. Defendant moves to dismiss, or, in the alternative, for summary judgment. As explained below, the court finds summary judgment is not warranted at this juncture but GRANTS the motion to dismiss.

         I. BACKGROUND

         Plaintiffs Robinson Langille and Linda Langille, a married couple, both retired, bring this suit against defendant Berthel, Fisher & Company Financial Services, Inc., an Iowa corporation doing business in California as an independent broker-dealer, subject to all Financial Regulatory Authority (“FINRA”) rules as a FINRA-registered broker-dealer. First Am. Compl. (“FAC”), ECF No. 15, ¶¶ 2-5. Shawn B. Davis acted as Berthel’s agent and FINRA-registered representative in providing investment advice and recommendations to plaintiffs. Id. ¶ 6.

         Plaintiffs allege they “entrusted Mr. Davis with virtually all of the money that they had worked for and saved for over their entire lives, ” that “Davis was very familiar with [their] [] circumstances, and their general desire to protect their savings along with some growth and income. . . . and [aware] that [they] [] would be relying entirely on him to make appropriate investment decisions for the accounts.” Id. ¶¶ 8–9. Nonetheless, according to plaintiffs, Davis recommended plaintiffs invest in “two high-risk illiquid [direct participation programs (“DPPs”)].” Id. ¶ 10. In November 2006, on Davis’s recommendation, plaintiffs invested in two DPPs, investing $278, 000 in United Development Funding III (“UDF”) and $275, 000 in Atel Growth Capital Fund (“Atel”). Id.

         Plaintiffs allege Davis recommended the UDF and Atel investments “solely because these securities were massive commission-generating products” that “resulted in the Langilles paying exorbitant commissions and fees, ” even though neither investment was suitable given plaintiffs’ needs and goals. Id. ¶¶ 11, 19-20. Davis allegedly misrepresented the investments as “a secure way to invest [plaintiffs’] retirement money” and represented that the investments would provide “a full return of [plaintiffs’] principal investment along with income, ” without properly disclosing the risks or characteristics of the investments or the “extremely large commissions he and his brokerage firm generated as a result of these transactions.” Id. ¶¶ 13-17. According to plaintiffs, “[t]he major wirehouses . . . prohibit their brokers from selling these types of products to their customers . . . . because the products are so blatantly against the customers’ interest.” Id. ¶ 12. Plaintiffs contend they relied on Davis’s misrepresentations and omissions to their detriment. Id. ¶ 18. Davis was no longer employed by Berthel as of August 20, 2012 but “continued to serve as the Langilles’ broker from the purchase of these DPPs through May 2017, when he ceased being a registered broker with FINRA.” Id. ¶ 25.

         Because UDF and Atel are private, non-traded products, plaintiffs contend they were unable to determine the true value of their investments for several years. Id. ¶ 21. Plaintiffs’ initial UDF investment was initially priced at $20 per share and continued at that valuation until at least June 30, 2016, according to quarterly statements plaintiffs received. Id. ¶¶ 21, 23. The Federal Bureau of Investigation raided UDF in late 2015 “due to potential fraud and insider activity[, ]” but plaintiffs’ statements continued to indicate a $20 per share price for UDF. Id. ¶¶ 22-23. As of late 2016 or early 2017, however, both plaintiffs and the public learned “the true value of UDF, ” which “is essentially worthless.” Id. ¶ 23. Similarly, plaintiffs were informed every quarter following their investment until June 2018 that their Atel investment was valued at $275, 000, the amount of their initial investment. Id. ¶ 24. In June 2018, Atel informed plaintiffs and other investors that Atel would make its final distribution and plaintiffs “would receive nothing additional from their investment.” Id. Plaintiffs thus contend they discovered Berthel and Davis’s misconduct only in fall 2016 “when the true valuation of the UDF product (essentially worthless) became clearer.” Id. ¶¶ 27, 29-33 (alleging Berthel violated FINRA rules requiring it to supervise brokers, periodically review transactions and take steps to ensure customers not led to unsuitable and fraudulent investments).

         Plaintiffs sued Berthel in state court on February 15, 2019, and Berthel removed the case to this court on March 11, 2019. ECF Nos. 1, 1-1 (notice of removal and complaint). Berthel moved to dismiss plaintiffs’ complaint but withdrew that motion upon agreeing to allow plaintiffs to file a first amended complaint. ECF Nos. 4-7, 9, 12. Plaintiffs then filed their first amended complaint, alleging: (1) breach of fiduciary duty; (2) fraud in the inducement; (3) negligence; and (4) negligent supervision. See generally FAC. Berthel filed a motion titled “motion to dismiss” but clarified it moves under “Rules 9(b), 12(b)(6), and 56, ” providing a statement of undisputed facts and evidence beyond the complaint, typically reserved to motions for summary judgment; Berthel argues “[w]hichever course the Court chooses, each of Plaintiffs’ claims fails as a matter of law.” Mot., ECF No. 16, at 2[1]; Statement of Undisputed Facts (“SUF”), ECF No. 17, at 2 (providing undisputed facts “in support of [Berthel’s] motion to dismiss/motion for summary judgment”). Plaintiffs have opposed without directly acknowledging or responding to Berthel’s statement of undisputed facts or supporting exhibits, though they respond to the substance of Berthel’s summary judgment arguments based on those facts and exhibits. Opp’n, ECF No. 22. Berthel filed a reply. Reply, ECF No. 23. As explained further below, the court allowed the parties to file supplemental briefing as to the propriety of summary judgment on this record and then submitted the motion, which it resolves here.


         A. Motion to Dismiss

         Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a party may move to dismiss a complaint for “failure to state a claim upon which relief can be granted.” A court may dismiss “based on the lack of cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990).

         Although a complaint need contain only “a short and plain statement of the claim showing that the pleader is entitled to relief, ” Fed.R.Civ.P. 8(a)(2), in order to survive a motion to dismiss this short and plain statement “must contain sufficient factual matter . . . to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A complaint must include something more than “an unadorned, the-defendant-unlawfully-harmed-me accusation” or “‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action.’” Id. (quoting Twombly, 550 U.S. at 555). Determining whether a complaint will survive a motion to dismiss for failure to state a claim is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679. Ultimately, the inquiry focuses on the interplay between the factual allegations of the complaint and the dispositive issues of law in the action. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984).

         In making this context-specific evaluation, this court must construe the complaint in the light most favorable to the plaintiff and accept as true the factual allegations of the complaint. Erickson v. Pardus, 551 U.S. 89, 93-94 (2007). This rule does not apply to “a legal conclusion couched as a factual allegation, ” Papasan v. Allain, 478 U.S. 265, 286 (1986) quoted in Twombly, 550 U.S. at 555, nor to “allegations that contradict matters properly subject to judicial notice” or to material attached to or incorporated by reference into the complaint. Sprewell v. Golden State Warriors, 266 F.3d 979, 988-89 (9th Cir. 2001). A court’s consideration of documents attached to a complaint or incorporated by reference or matter of judicial notice will not convert a motion to dismiss into a motion for summary judgment. United States v. Ritchie, 342 F.3d 903, 907-08 (9th Cir. 2003); Parks Sch. of Bus. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995); compare Van Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir. 2002) (noting that even though court may look beyond pleadings on motion to dismiss, generally court is limited to face of the complaint on 12(b)(6) motion).

         B. Rule 9(b): Fraud Allegations

         “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). To satisfy Rule 9(b), a plaintiff must include “the who, what, when, where, and how” of the fraud. Vess v. Ciba–Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (internal quotation marks and citations omitted). Ultimately, a plaintiff’s fraud allegations “must be specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they ...

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