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Lloyd v. Mullenex

United States District Court, N.D. California

November 6, 2019

KENNETH LLOYD, Plaintiff,
v.
KEVIN MULLENEX, Defendant.

          ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS RE: DKT. NO. 21

          NATHANAEL M. COUSINS, UNITED STATES MAGISTRATE JUDGE.

         In this 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.

         I. Background

         This 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. 1996).

         Plaintiff 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.

         Lloyd 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.

         Mullenex 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. ¶ 29.

         Mullenex 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.

         By 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.

         Lloyd 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.

         In 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.

         Lloyd 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.

         II. Legal Standard

         A 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 ...


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