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Park Miller, LLC v. Durham Group, Ltd.

United States District Court, N.D. California

December 16, 2019

PARK MILLER, LLC, et al., Plaintiffs,
v.
DURHAM GROUP, LTD., et al., Defendants.

          ORDER GRANTING MOTION TO DISMISS FOR LACK OF PERSONAL JURISDICTION AND FOR FAILURE TO STATE A CLAIM RE: DKT. NO. 13

          William H. Orrick, United States District Judge

         INTRODUCTION

         Plaintiff Park Miller LLC (“Miller”), a wealth advisory firm, advised its clients to invest in defendant Durham Group, Ltd. (“DGL”). Multiple promissory notes were executed between those clients and DGL. In November 2018, DGL defaulted on the promissory notes, for which the plaintiff clients (“the contracting plaintiffs”) bring breach of contract claims.[1] The plaintiffs name DGL, Craig McGrain, the President and owner of DGL, and other allegedly related corporations owned by McGrain (Durham Commercial Capital Corp. (“DCC”), First Austin Funding Corp. (“First Austin”), and Maasai Holdings LLC (“Maasai Holdings”)) as defendants that engaged in fraud by misrepresenting and concealing the financial status of DGL. Miller contends that these fraudulent actions also interfered with its business relationship with its clients.

         Defendants concede that the breach of contract claims against DGL and DCC state plausible causes of actions. The remaining defendants seek dismissal for lack of personal jurisdiction and, failing that, dismissal of the breach of contract claims as to them. All defendants move to dismiss the fraud claims. I agree that plaintiffs have not sufficiently alleged personal jurisdiction over McGrain, First Austin and Maasai Holdings and have not met Federal Rule of Civil Procedure 9(b)'s requirement to state fraud claims with particularity. I GRANT defendants' motion with leave to amend.

         BACKGROUND

         I. PROCEDURAL BACKGROUND

         On July 19, 2019, plaintiffs filed a complaint bringing multiple breach of contract claims and several claims based on fraud and misrepresentation. Complaint (“Compl.”) [Dkt. No. 1]. On September 25, 2019, defendants moved to dismiss the Complaint for lack of personal jurisdiction and for failure to state a claim, to which plaintiffs responded with both an opposition and a First Amended Complaint (“FAC”). Plaintiffs argue that the FAC adds more allegations about personal jurisdiction, particularly regarding the alter ego theory, and contend that the FAC moots defendants' arguments on failure to state a claim. Oppo. 1.

         In their reply, defendants request that I address their motion to dismiss despite the filing of the FAC, arguing that the FAC does not address the arguments made in the motion, and that the arguments continue to apply to the two additional plaintiffs added in the FAC. Reply [Dkt. No. 20] 3 n.2. I heard argument on November 13, 2019.

         II. FACTUAL BACKGROUND

         A. The Parties

         Miller is incorporated in California and is engaged in comprehensive planning, investment management and other related services. Complaint (“Compl.”) [Dkt. No. 1] ¶ 1. The contracting plaintiffs reside in California or, in Lawson Land Inc.'s case, is incorporated in California. Id. ¶¶ 2-9; see also First Amended Complaint (“FAC”) [Dkt. No. 19] ¶ 10-11 (adding two more clients of Park Miller LLC as plaintiffs). All corporate defendants are incorporated in New York and McGrain is a New York resident. Id. ¶¶ 12-16

         DCC is a factoring business, which purchases invoices owed to businesses in return for a percentage of the invoiced amounts. Declaration of Craig McGrain (“McGrain Decl.”) [Dkt. No. 13-1] ¶ 2. DGL borrows money through promissory notes and raises capital to fund DCC's factoring business. Id. First Austin sells paper products. Maasai Holdings is a debt buyer. Id. ¶¶ 5-6. Plaintiffs allege that McGrain is the President of DGL, the Chief Executive Officer of DCC, and is in control of or owns First Austin and Maasai Holdings. Id. ¶¶ 12-16.

         B. The Promissory Notes

         Miller alleges that defendants induced it to advise its clients, the contracting plaintiffs, to invest in DGL by intentionally misrepresenting DGL's financial status and concealing crucial information. FAC ¶ 104. Each of the contracting plaintiffs entered into promissory notes with DGL to invest millions of dollars to fund DCC's factoring business. FAC ¶¶ 30-50; see also Id. FAC, Exs. A-I (copies of the promissory notes between each contracting plaintiff and DGL). Each contracting plaintiff brings breach of contract claims against all defendants for defaulting on the promissory notes and failing to take action in order to cure the default. FAC ¶¶ 62-101 (causes of action (“COAs”) 1-5). As to these breach of contract claims, defendants move to dismiss the claims against all defendants except DGL/DCC, arguing that the other defendants are not parties to the underlying promissory notes. Mot. 1.[2]

         C. Defendants' Fraudulent Acts and Misrepresentation

         Beginning no later than the first quarter of 2018, plaintiffs allege that defendants knew or should have known that their financial status had detrimentally changed because one of the entities to which they provided $1, 797, 000 was in default. FAC ¶ 51. Defendants identify this entity as 1-800 Solar in their reply. See Reply in Support of Motion to Dismiss (“Reply”) [Dkt. No. 20] 7. Plaintiffs contend that in April 2018, defendants knew or should have known that 1-800 Solar also filed for bankruptcy. FAC ¶ 51. Despite this knowledge, the financial statements of DGL and DCC emailed to Miller between January 2018 and November 2018 continued to reflect that the receivables of this bankrupt entity were active assets. Id. ¶ 52.

         Plaintiffs assert that this false reporting prevented Miller from realizing the true financial condition of DGL and DCC. FAC ¶ 53. They contend that since the beginning of the business relationship between Miller, McGrain and DGL/DCC in 2010, “McGrain would customarily notify Park Miller of any and all changes to the Durham Entities' financial condition, ” and on “two prior occasions, McGrain timely notified Park Miller of events that compromised the Durham Entities' financial security.” Id. ¶ 54.

         Plaintiffs assert that this “customary business practice” caused Miller and its clients to rely on “full and accurate disclosure” of DGL/DCC's financial status. FAC ¶ 55. Yet they claim that McGrain “failed to disclose” DGL/DCC's true financial status, ” “despite the knowledge that the [DGL/DCC] financial status had materially changed.” Id. McGrain allegedly knew that the financial statements of DGL/DCC did not accurately depict its true financial status and still permitted them to be circulated to plaintiffs. Id. Until plaintiffs discovered the inaccurate representations in November 2018, they assert that McGrain had provided evasive and deceptive answers about DGL's and DCC's financial situation during telephone calls with John Miller. Id. ¶ 56. They allege that in reliance on these misrepresentations and nondisclosures, Miller facilitated at least two additional promissory notes between its clients and DGL. See Id. ¶ 58 (identifying contracting plaintiff Lawson Land, Inc. and another client who is not named as a plaintiff).

         Plaintiffs claim that the misrepresentations caused contracting plaintiffs to delay efforts to collect from DGL earlier, causing them financial harm. Id. ¶ 60. They also contend that the misrepresentation and nondisclosures caused Miller to delay looking into the financial status of the entities beyond the allegedly false financial records provided to them. Id. ¶ 61. As a result, Miller allegedly lost clients and fees and suffered severe harm to its reputation as a wealth advisory firm. Id.

         Based on these allegations, all plaintiffs bring fraud claims against all defendants. FAC ¶¶ 102-138 (Cause of Action [“COA”] 6 for fraud/intentional misrepresentation in under Civ. Code § 1572; COA 7 for fraudulent deceit under Cal. Civ. Code §§ 1709-1710; COA 8-9 for negligence and negligent misrepresentation). Miller also brings two claims against all defendants based on the clients and money it lost due to defendants' fraud. FAC ¶¶ 139-154 (COA 10 for intentional interference with contractual relations; COA 11 for negligent interference with prospective economic relations).

         LEGAL STANDARD

         I. RULE 12(B)(6): MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

         Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss if a claim fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to dismiss, the claimant must allege “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 is facially plausible when the plaintiff pleads facts that “allow 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) (citation omitted). There must be “more than a sheer possibility that a defendant has acted unlawfully.” Id. While courts do not require “heightened fact pleading of specifics, ” a claim must be supported by facts sufficient to “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555, 570.

         Under Federal Rule of Civil Procedure 9(b), a party must “state with particularity the circumstances constituting fraud or mistake, ” including “the who, what, when, where, and how of the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (internal quotation marks omitted). However, “Rule 9(b) requires only that the circumstances of fraud be stated with particularity; other facts may be pleaded generally, or in accordance with Rule 8.” United States ex rel. Lee v. Corinthian Colls., 655 F.3d 984, 992 (9th Cir. 2011). In deciding a motion to dismiss for failure to state a claim, the court accepts all of the factual allegations as true and draws all reasonable inferences in favor of the plaintiff. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). But the court is not required to accept as true “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).

         II. RULE 12(B)(2): MOTION TO DISMISS FOR LACK OF PERSONAL JURISDICTION

         Under Rule 12(b)(2) of the Federal Rules of Civil Procedure, a defendant may move to dismiss for lack of personal jurisdiction. The plaintiff then bears the burden of demonstrating that jurisdiction exists. Schwarzenegger v. Fred Martin Motor Co., 374 F.3d 797, 800 (9th Cir. 2004). The plaintiff “need only demonstrate facts that if true would support jurisdiction over the defendant.” Ballard v. Savage, 65 F.3d 1495, 1498 (9th Cir. 1995); Fields v. Sedgwick Assoc. Risks, Ltd., 796 F.2d 299, 301 (9th Cir. 1986). “Although the plaintiff cannot simply rest on the bare allegations of its complaint, uncontroverted allegations in the complaint must be taken as true.” Schwarzenegger, 374 F.3d at 800 (citations omitted). Conflicts in the evidence must be resolved in the plaintiff's favor. Id. “Where, as here, the motion is based on written materials rather than an evidentiary hearing, the plaintiff need only make a prima facie showing of jurisdictional facts. In such cases, we only inquire into whether [the plaintiff's] pleadings and affidavits make a prima facie showing of personal jurisdiction.” Caruth v. International Psychoanalytical Ass'n, 59 F.3d 126, 128 (9th Cir. 1995) (internal punctuation and citation omitted).

         Where, as here, there is no applicable federal statute governing personal jurisdiction, the law of the state in which the district court sits applies.” Core-Vent Corp. v. Novel Indus. AB, 11 F.3d 1482, 1484 (9th Cir. 1993) (citation omitted). “California's long-arm statute allows courts to exercise personal jurisdiction over defendants to the extent permitted by the Due Process Clause of the United States Constitution.” Id.; Cal. Civ. Proc. Code. § 410.10. “Because California's long-arm jurisdictional statute is coextensive with federal due process requirements, the jurisdictional analyses under state law and federal due process are the same.” Schwarzenegger, 374 F.3d at 800-01.

         “There are two types of personal jurisdiction: general and specific.” Fields v. Sedgwick Associated Risks, Ltd., 796 F.2d 299, 301 (9th Cir. 1986). “[G]eneral jurisdiction permits a defendant to be haled into court in the forum state to answer for any of its activities anywhere in the word.” Schwarzenegger, 374 F.3d at 801. It exists where a nonresident defendant's activities within a state are “substantial” or “continuous and systematic.” Data Disc., Inc. v. Sys. Tech. Assocs., Inc., 557 F.2d 1280, 1287 (9th Cir. 1977). Such contracts ...


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