United States District Court, N.D. California
ORDER GRANTING IN PART AND DENYING IN PART MOTION TO
DISMISS RE: DKT. NO. 21
NATHANAEL M. COUSINS, UNITED STATES MAGISTRATE JUDGE.
fraud cause, defendant Kevin Mullenex moves to dismiss all
claims in plaintiff Kenneth Lloyd's complaint. Dkt. No.
21. Mullenex argues that Lloyd's fraud claims are
insufficient under Federal Rule of Civil Procedure 9(b), that
some claims are time-barred by the statute of limitations,
and that other claims fail under Rule 12(b)(6). The Court
FINDS that Lloyd's fraud, fraudulent inducement, and
negligent misrepresentation claims are sufficiently alleged
under Rule 9(b) and are not time-barred. The Court DENIES the
motion to dismiss those claims. The Court further FINDS that
Lloyd's conversion, breach of fiduciary duty, intentional
interference with prospective business relations, negligent
interference with prospective business relations, and unfair
competition claims are insufficiently pled under Rule
12(b)(6). The Court GRANTS the motion to dismiss those claims
and GRANTS Lloyd leave to amend.
case arises out of the creation and later sale of a startup
company by one of its two founders. Dkt. No. 1, Complaint.
The following facts are alleged in the complaint and, for the
purposes of this motion, are taken as true. Cahill v.
Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir.
Kevin Lloyd and defendant Kenneth Mullenex founded a
technology company (called MetaIntell, Inc., then
MetaIntelli, Inc., then Mi3 Security, Inc.) together in March
2013. Compl. ¶ 8. Mullenex promised Lloyd a salary of
$185, 000 per year, so Lloyd quit his job in April 2013 to
work for the company full-time. Id. Lloyd asked for
50% interest in the company, but Mullenex insisted that he
get 85% and Lloyd only 15% because Mullenex said he would
invest $1 million into the company while Lloyd was unable to
make a contribution. Id. ¶ 9. Mullenex held 6.8
million shares and Lloyd 1.2 million shares at the time of
the company's incorporation in March 2013. Id.
¶ 10. They were also the entirety of the company's
board of directors. Id. ¶ 11. Over time, other
shares were sold to other shareholders and other members
joined and left the board of directors. Id. Mullenex
at all times retained a controlling share and he served as
CEO while his wife served as CFO. Id. ¶ 10, 8.
was never paid $185, 000 per year for his full-time work for
the company. Id. ¶ 20. Lloyd was paid nothing
for his first year of work and a fraction of the promised
salary for subsequent work. Id. When Lloyd asked
Mullenex about the promised $185, 000 salary, Mullenex said
that Lloyd would get the money when the company met certain
benchmarks. Id. Lloyd believed that when funding was
obtained or when cash flow improved, he would be made whole.
Id. Lloyd also believed that if he wasn't paid
prior to an equity event, then he would receive proceeds
covering the unpaid salary from an acquisition. Id.
Mullenex never invested $1 million of his own funds into the
company. Id. ¶ 19. What funds Mullenex did
contribute, he repaid himself in full, with interest, out of
company proceeds. Id.
kept Lloyd in the dark about the company's finances.
Id. ¶ 23. He told Lloyd that he had structured
the company's equity such that their respective shares of
ownership would not be diluted until the company received
venture funding. Id. ¶ 21. This was not
actually true. Id. Mullenex also told Lloyd that
eventually Lloyd would receive a greater percentage of
company ownership and a higher salary. Id. ¶
24. Mullenex said he would work with a patent attorney to
file patent applications that Lloyd prepared, but never did
so within the statutory time limit-eventually, a competitor
patented some of Lloyd's inventions instead. Id.
refused to hold board meetings or to provide Lloyd with
financial statements or other documents. Id. ¶
26. Mullenex charged the company for his personal expenses
and hired his friends as overpaid consultants. Id.
¶ 27. Mullenex structured the company as an S
Corporation but risked its S Corporation status by breaching
the terms of convertible notes that provided for issuing of
preferred stock upon maturity. Id. 32.
2017, Mullenex was not seeking new sales for the company and
was not collecting receivables from existing customers.
Id. ¶ 35. Lloyd confronted Mullenex about this
abandonment of responsibilities in December 2017.
Id. ¶ 36. In 2018, Lloyd discovered via
LinkedIn that Mullenex had taken on several board advisory
positions for other companies rather than giving his time and
effort to their company. Id.
and his family were in desperate financial circumstances,
living with in-laws or in a cramped trailer as Lloyd
struggled to provide for his family's basic needs.
Id. ¶ 22. Mullenex took advantage of this
vulnerability to manipulate Lloyd into agreeing to a sale of
the company with terms that disproportionately advantaged
Mullenex and his family and friends. Id.
January 2018, a company called Zimperium, Inc. provided
Mullenex with a letter of intent to acquire Mi3's assets.
Id. ¶ 38. Mullenex concealed this letter from
Lloyd and negotiated an Asset Purchase Agreement with
Zimperium that funneled most of the financial benefits away
from Lloyd and toward Mullenex and his family and friends.
Id. Mullenex's poor negotiating caused
Zimperium's offer price to fall. Id. ¶ 40.
In April 2018, Mullenex pressured Lloyd to falsify records as
part of the sale. Id. ¶ 47. Lloyd refused,
resigned, and reported Mullenex's conduct to Zimperium.
Id. Nonetheless, Mullenex forced Lloyd to accept the
deal with Zimperium even though it benefitted Mullenex and
did not fairly compensate Lloyd. Id. ¶¶
48-51. As of June 2019, Lloyd had not received his fair share
of the initial cash payment from Zimperium, had received no
proceeds from the holdback payment from Zimperium, and had
not been compensated for his work for Mi3. Id. He
believes that Mullenex's continued mismanagement will
continue to result in reductions in Lloyd's payouts from
Zimperium in the future. Id.
filed this case in July 2019 for claims of fraud, fraud in
the inducement, negligent misrepresentation, conversion,
breach of fiduciary duty, intentional interference with
prospective business relations, negligent interference with
prospective business relations, unfair competition, and
accounting. Dkt. No. 1. Mullenex moved to dismiss all claims
in the complaint. Dkt. No. 21. Both parties consented to the
jurisdiction of a magistrate judge under 28 U.S.C. §
636(c). Dkt. Nos. 8, 19.
motion to dismiss for failure to state a claim under Rule
12(b)(6) tests the legal sufficiency of a complaint.
Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001).
On a motion to dismiss, all allegations of material fact are
taken as true and construed in the light most favorable to
the non-movant. Cahill, 80 F.3d at 337-38. The
Court, however, need not accept as true “allegations
that are merely conclusory, unwarranted deductions of fact,
or unreasonable inferences.” In re Gilead Scis.
Secs. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).
Although a complaint need not allege detailed factual
allegations, it must contain sufficient factual matter,
accepted as true, to “state a claim to relief that is
plausible on its face.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 ...