Solarmore Mgt. Services, Inc. v. Bankruptcy Estate of DC Solar Solutions ( 2022 )

1 2 3 4 5 6 UNITED STATES DISTRICT COURT 7 EASTERN DISTRICT OF CALIFORNIA 8 9 SOLARMORE MANAGEMENT SERVICES No. 2:19-cv-02544-JAM-DB INC., a California 10 Corporation, 11 Plaintiff, ORDER DENYING DEFENDANTS HERITAGE BANK, DIANA KERSHAW, 12 v. AND ARI LAUER’S MOTION TO DISMISS 13 BANKRUPTCY ESTATE OF DC SOLAR SOLUTIONS, INC., et al., 14 Defendants. 15 16 I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND1 17 This action arises from a fraudulent scheme involving the 18 sale of mobile solar generators (“MSGs”). From 2011 to 2018, 19 operators of the scheme, sold thousands of these generators. 20 Second Am. Compl. (“SAC”) at 6, ECF No. 144. Purchasers paid 21 $150,000.00 for each, with a down payment of around $37,500 and a 22 promissory note for the balance payable over twenty years. Id. 23 Purchasers were told the generators would be sublet to end users 24 which would provide a steady flow of revenue to cover any amount 25 owed on the promissory note. Id. The operators also represented 26 27 1 This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was scheduled 28 for November 2, 2021. 1 that the generators qualified for certain energy tax credits. 2 Id. In actuality, many of the purchased generators were never 3 built. Id. Those that were built were not worth $150,000.00, as 4 there was never a market for them and thus no prospects for the 5 promised sublease revenues. Id. They also did not qualify for 6 the represented tax credits. Id. 7 Plaintiff Solarmore Management Services, Inc. is a 8 California corporation, part owner, and managing member of 9 various limited liability companies (“LLCs”) that purchased 10 mobile solar generators (“the Funds”). Id. ¶¶ 1-2, 159. 11 Plaintiff brought this action against three groups of Defendants: 12 (1) Defendants who orchestrated and perpetuated the fraudulent 13 enterprise; (2) Defendants who aided and abetted the fraudulent 14 enterprise; and (3) Defendants who facilitated the fraudulent 15 enterprise by hiding money and mobile solar generators (or the 16 lack thereof) from purchasers and other investigating parties. 17 Id. at 6. Relevant to this motion, Defendant Heritage Bank of 18 Commerce (“Heritage”) is alleged to have aided and abetted the 19 fraud. Id. ¶¶ 61-62. Specifically, Plaintiff claims that Diana 20 Kershaw, acting as an officer, agent, or employee of Heritage, 21 cooperated with the operators of the scheme to conceal or 22 restrict information from Plaintiff about its accounts with 23 Heritage and allowed for misappropriation of its finds. Id. 24 ¶¶ 61-65, 262-266. 25 Plaintiff asserts five claims against Heritage Bank: 26 (1) count twenty one for aiding and abetting fraud; (2) count 27 twenty two for aiding and abetting conversion; (3) count twenty 28 three for negligence; (4) count twenty four for violation of 1 California’s business and professions code; and (5) count twenty 2 eight for equitable contribution. Id. at 85-97. Heritage 3 previously brought a Motion to Dismiss all claims against it, see 4 Heritage Bank’s First Mot. to Dismiss, ECF No. 84, which the 5 Court granted. Order, ECF No. 138. Plaintiff subsequently 6 amended its complaint. See generally SAC. Heritage again moves 7 for dismissal, which Diana Kershaw and Ari Lauer join.2 8 Heritage’s Second Mot. to Dismiss (“Mot.”), ECF No. 156; Kershaw 9 Joinder, ECF No. 157; Lauer Joinder, ECF No. 161. Plaintiff 10 opposed this Motion. Opp’n, ECF No. 169. Defendant replied. 11 Reply, ECF No. 177. For the reasons set forth below this Motion 12 is denied. 13 14 II. OPINION 15 A. Judicial Notice 16 Heritage requests the Court take judicial notice of seven 17 exhibits: (1) a copy of the Motion for Order Approving 18 Compromise and Settlement Agreement and Award of Contingency Fee 19 in the related bankruptcy case In re Double Jump, Inc.; (2) the 20 Trustee’s Declaration in Support of the Motion for Order 21 Approving Compromise and Settlement Agreement and Award of 22 Contingency Fee filed in that bankruptcy case; (3) the Order 23 Granting the Motion to Approve Compromise and Settlement 24 agreement in that case; (4) the Articles of Incorporation of DC 25 Solar Distribution; (5) the Articles of Incorporation for 26 2 Halo Management Services also sought to join but the parties 27 subsequently stipulated to the dismissal of all claims against it thereby mooting that motion. See Halo and Solarmore’s Stip. and 28 Order, ECF No. 176. 1 Solarmore Management Services, Inc. which was filed with the 2 California Secretary of State; (6) a Detail report for JG Energy 3 Solutions, LLC from the Illinois Secretary of State’s official 4 website; and (7) the California Secretary of State Entity Detail 5 page for JG Energy printed from the California Secretary of 6 State’s website. Heritage’s Req. for Judicial Notice (“RJN”), 7 ECF No. 156-4. Plaintiff requests the Court take judicial 8 notice of three exhibits: (1) a declaration of the Trustee filed 9 in the bankruptcy action; (2) an Order granting the Motion for 10 Approving Compromise and Settlement Agreement with Heritage Bank 11 in the Bankruptcy action; and (3) a printout from the California 12 Secretary of State’s website showing that Solarmore Management 13 Services, Inc. is an active California Corporation. Pl.’s Req. 14 for Judicial Notice (“RJN”), ECF No. 170. 15 After reviewing each exhibit, the Court finds all exhibits 16 to be matters of public record and therefore proper subjects of 17 judicial notice. Accordingly, the Court GRANTS Heritage and 18 Plaintiff’s Requests for Judicial Notice. However, the Court 19 takes judicial notice only of the existence of these documents, 20 not any disputed or irrelevant facts within them. See Lee v. 21 City of Los Angeles, 250 F.3d 668, 690 (9th Cir. 2001). 22 B. Legal Standard 23 Dismissal is appropriate under Rule 12(b)(6) of the Federal 24 Rules of Civil Procedure when a plaintiff’s allegations fail “to 25 state a claim upon which relief can be granted.” Fed. R. Civ. 26 P. 12(b)(6). “To survive a motion to dismiss a complaint must 27 contain sufficient factual matter, accepted as true, to state a 28 claim for relief that is plausible on its face.” Ashcroft v. 1 Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and 2 citation omitted). While “detailed factual allegations” are 3 unnecessary, the complaint must allege more than “[t]hreadbare 4 recitals of the elements of a cause of action, supported by mere 5 conclusory statements.” Id. “In sum, for a complaint to 6 survive a motion to dismiss, the non-conclusory ‘factual 7 content,’ and reasonable inferences from that content, must be 8 plausibly suggestive of a claim entitling the plaintiff to 9 relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 10 2009). 11 C. Analysis 12 1. Prudential Standing 13 A direct action by a shareholder or member is a suit to 14 enforce a right which the shareholder or member possesses as an 15 individual. See PacLink Commc’ns Int’l v. Superior Court, 90 16 Cal.App.4th 958, 964 (2001). In general, shareholders of a 17 corporation or members of an LLC lack prudential standing to 18 assert individual claims based on harm to the corporation or LLC 19 in which they own shares. Erlich v. Glasner, 418 F.2d 226, 228 20 (9th Cir. 1969); PacLink, 90 Cal.App.4th at 965-66. A 21 derivative suit on the other hand, “seeks to recover for the 22 benefit of the corporation and its whole body of shareholders 23 when [the] injury is caused to the corporation.” Jones v. H.F. 24 Ahmanson & Co., 460 P.2d 464, 470 (Cal. 1969). A shareholder or 25 member bringing a derivative action must meet certain procedural 26 requirements. Fed. R. Civ. P. 23.1; Sax v. World Wide Press, 27 Inc., 809 F.2d 610, 613 (9th Cir. 1987). 28 This Court previously dismissed Plaintiff’s claims on 1 prudential standing grounds. Order at 8. The Court found that 2 any injury of Solarmore’s alleged was merely incidental to that 3 of the Funds and thus, Plaintiff could not bring a direct 4 action. Id. Plaintiff subsequently amended its complaint 5 specifying damages including: (1) costs and expenses incurred to 6 locate and store the solar generators and hire related 7 professionals to protect its interest in the DC Solar 8 Enterprises’ bankruptcies; (2) potential liability for claimed 9 tax credits; (3) seizure of money from its bank account due to 10 the fraud; (4) failure to receive contracted for management 11 fees; and (5) the costs of counsel it has been required to 12 obtain. Opp’n at 3 (citing to SAC ¶¶ 516-521). Plaintiff 13 argues that these allegations state a claim for direct harm to 14 Plaintiff, not to the Funds or any other party, and thus it has 15 standing. Id. at 3-4. Defendant, however, counters that these 16 injuries are merely incidental to the injury suffered by the 17 Funds. Mot. at 4. 18 “In determining whether an individual action as opposed to 19 a derivative action lies, a court looks at the gravamen of the 20 wrong alleged in the pleadings.” PacLink, 90 Cal.App.4th at 965 21 (internal quotation marks and citation omitted). A “cause of 22 action is individual, not derivative, only where it appears that 23 the injury resulted from the violation of some special duty owed 24 the stockholder by the wrongdoer and having its origin in 25 circumstances independent of the plaintiff’s status as a 26 shareholder.” Nelson v. Anderson, 72 Cal.App.4th 111, 124 27 (1999), as modified on denial of reh’g (June 14, 1999). 28 In Nelson, a minority shareholder argued she could bring an 1 individual cause of action because she suffered direct, 2 individual damages such as “injury to her reputation and 3 emotional distress, and lost her out of pocket expenses, as well 4 as other employment opportunities.” Id. The Court disagreed 5 noting that the test is not whether the plaintiff’s damages are 6 unique. Id. Rather, “an individual cause of action exists only 7 if the damages were not incidental to an injury to the 8 corporation.” Id. Because the acts alleged to have caused 9 Nelson’s injuries amounted to misfeasance or negligence in 10 managing the corporation’s business, any obligations so violated 11 were duties owed to the corporation. Id. at 125. Accordingly, 12 the gravamen of the complaint was injury to the corporation and 13 any injury to Nelson was merely incidental. Id. at 125-26. 14 Thus, Nelson could not sustain a direct cause of action. Id. 15 Here the gravamen of Plaintiff’s complaint is that the 16 Funds were fraudulently induced to purchase the MSGs and that 17 Heritage, among others, assisted in this fraud. However, 18 Plaintiff does allege an injury resulted from the violation of 19 some special duty owed to it by Heritage, “having its origin in 20 circumstances independent of the plaintiff’s status as a 21 shareholder.” Nelson, 72 Cal.App.4th at 124. (internal 22 quotation marks and citation omitted). Specifically, Plaintiff 23 had an account with Heritage, who allegedly allowed the Carpoffs 24 to misappropriate the funds in this account. SAC ¶¶ 703-705. 25 However, the Court agrees with Heritage that Plaintiff does not 26 have standing to pursue the losses it obtained from the Funds’ 27 investment in the MSGs, aside from JG Energy’s, of which it has 28 been assigned. Nor does it have standing to pursue those 1 damages that are merely incidental to that injury, such as the 2 cost of locating the MSGs or resulting tax losses, as those it 3 only obtained as a result of its status as a shareholder.3 4 Finally, as to JG Energy, Heritage argues Plaintiff cannot 5 pursue a claim on its behalf, as JG Energy was engaged in 6 intrastate business but never registered in California. Mot. at 7 6 (citing Cal. Corp. Code §§ 2203(c), 2015(a)). The Court 8 agrees with Plaintiff that Heritage has not demonstrated JG 9 Energy engaged in intrastate business. Opp’n at 4 (noting Cal. 10 Corp. Code § 191(a) defines intrastate business as entering into 11 repeated and successive transactions of its business in this 12 state, other than interstate or foreign commerce.). It’s not 13 clear from the complaint that JG’s conduct meets the “repeated 14 and successive transactions” standard. See Cal. Corp. Code 15 § 191(a); see also YYGM S.A. v. Hanger 221 Santa Monic Inc., No. 16 CV 14-34637 PA (VBKc), 2015 WL 12819169, at *3 (C.D. Cal. Apr. 17 20, 2015) (rejecting a motion to dismiss based on section 18 2203(c) because the burden is on defendants to prove the 19 corporation engaged in intrastate business). 20 2. Commercial Code’s Statute of Repose 21 Division 11 of the Commercial Code governs “funds 22 transfers,” meaning “the series of transactions, beginning with 23 24 3 Heritage requests the Court strike various excerpts from the complaint referencing the Funds. Ex. A. to Mot., ECF No. 156-1. 25 The Court agrees with Plaintiff that these allegations provide necessary context and denies Heritage’s request. See In re New 26 Century, 588 F.Supp.2d 1206, 1220 (C.D. Cal. 2008) (“Motions to 27 strike are not favored and should not be granted unless it is clear that the matter to be stricken could have no possible 28 bearing on the subject matter of the litigation.”). 1 the originator’s payment order, made for the purpose of making 2 payment to the beneficiary of the order.” Cal. Com. Code §§ 3 11102, 11104(a). This division displaces common law claims 4 where the common law claims would create, rights, duties, or 5 liabilities inconsistent with the division and where the 6 circumstances giving rise to the common law claims are 7 specifically covered by the division’s provisions. Zengen, Inc. 8 v. Comerica Bank, 41 Cal.4th 239, 253 (2007). 9 Defendant argues that all of Plaintiff’s claims based upon 10 unauthorized transfers of funds from its account are displaced 11 by Division 11 of the California Commercial Code. Mot. at 8-9. 12 Plaintiff counters that Division 11 does not apply here where 13 the person sending the transfer request is the same person 14 receiving payment from the account. Opp’n at 8. Rather, 15 Plaintiff contends this is an exempted debit transfer. Id. 16 However, as Heritage points out, a debit transfer is one in 17 which “a creditor, pursuant to authority from the debtor is 18 enabled to draw on the debtor’s bank account by issuing an 19 instruction to pay to the debtor’s bank. If the debtor’s bank 20 pays, it will be reimbursed by the debtor rather than by the 21 person giving the instruction.” Cal. Com. Code § 11104 comment 22 4. An example of such a debit is where an insured authorizes 23 its insurer to order the insured’s bank to pay the insurance 24 company the policy premium. Id. That is not what is alleged 25 here. Rather, Plaintiff alleges the Carpoffs directed money be 26 transferred from Solarmore to themselves. This is governed by 27 Division 11. Cal. Com. Code § 11104 comment 4. (“If the 28 beneficiary of a funds transfer is the originator of the 1 transfer, the transfer is governed by Article 4A if it is a 2 credit transfer in form [. . .] For example, Corporation has 3 accounts in Bank A and Bank B. Corporation instructs Bank A to 4 pay to Corporation’s account in Bank B. The funds transfer is 5 governed by Article 4A.”) However, this would only displace 6 claims to the extent they are based on unauthorized transfers of 7 funds. See Venture Gen. Agency, LLC v. Wells Fargo Bank, N.A., 8 19-cv-02778-TSH, 2019 WL 3503109, at *4 (N.D. Cal. Aug. 1, 2019) 9 (noting that because plaintiff claims were not based solely on 10 wire transfers but also on the bank’s subsequent actions they 11 were not preempted). 12 The Commercial Code imposes a one-year statute of repose 13 within which a customer must notify its bank of its objection to 14 an allegedly improper funds transfer, so long as the customer 15 received notification reasonably identifying the order. Cal. 16 Com. Code § 11505. Under the Commercial Code one receives 17 notice when “it is delivered in a form reasonable under the 18 circumstances at the place of business through which the 19 contract was made or at another location held out by that person 20 as the place for receipt of such communications.” Id. 21 § 1202(e)(2). 22 Plaintiff argues that its claims are not barred by the 23 statute of repose as it never received notice. Opp’n at 9. 24 Plaintiff alleges its bank statements were sent to DC Solar and 25 Jeff Carpoff, rather than Plaintiff. SAC ¶¶ 276, 277. 26 Heritage, however, argues that Solarmore had the same address as 27 DC Solar. Mot. at 9 (citing RJN Ex. 4 and 5). The Court cannot 28 at this early stage conclude Plaintiff received notice. While 1 the complaint states that the bank statements were sent to DC 2 Solar and Jeff Carpoff, it does not specify to what address. 3 SAC ¶ 276. Taking the allegations in the complaint as true and 4 viewing them in the light most favorable to Plaintiff, as the 5 Court must at this stage, its plausible that the statements were 6 sent to an address not shared with Plaintiff. On the face of 7 the complaint, it is not apparent that Plaintiff received 8 notice. Accordingly, Plaintiff’s claims based on unauthorized 9 transfer of funds may not be subject to the statute of repose. 10 Heritage also contends that Plaintiff’s claims are barred 11 by the applicable statutes of limitations for each claim. Mot. 12 at 6-7 (noting statute of limitations for aiding and abetting, 13 civil conspiracy and negligence is three years and for unfair 14 competition is four years). It contends that Plaintiff cannot 15 rely on the delayed discovery doctrine because it did not plead 16 facts showing its inability to have discovered the fraud earlier 17 despite reasonable diligence. Mot. at 7; Reply at 3. However, 18 as Plaintiff points out, federal pleading requirements apply in 19 federal court. Beavery v. Tarsadia Hotels, No. 11cv1842 DMS 20 (CAB), 2011 WL 6098165, at * 8 (S.D. Cal. Dec. 6, 2011) 21 (rejecting defendants’ argument that plaintiff must plead 22 delayed discovery with specificity as required by California law 23 as this is precluded by the Erie doctrine in which federal 24 procedural rules control). Accordingly, its general allegations 25 of delayed discovery are sufficient at this stage. 26 3. Civil Conspiracy and Aiding and Abetting Claims 27 In California, the elements of a civil conspiracy are: 28 “(1) the formation of a group of two or more persons who agreed 1 to a common plan or design to commit a tortious act; (2) a 2 wrongful act committed pursuant to the agreement; and 3 (3) resulting damages.” Rockridge Trust v. Wells Fargo, N.A., 4 985 F.Supp.2d 1110, 1157 (N.D. Cal. 2013). A California civil 5 conspiracy claim must be plead with particularity where the 6 object of the agreement is fraudulent. See Wasco Prods., Inc. 7 v. Southwall Tech., Inc., 435 F.3d 989, 990-92 (9th Cir. 2006). 8 California also “has adopted the common law rule” that 9 “[l]iability may [. . .] be imposed on one who aids and abets 10 the commission of an intentional tort if the person [. . .] 11 knows the other’s conduct constitutes a breach of a duty and 12 gives substantial assistance or encouragement to the other to so 13 act.” Casey v. U.S. Bank Nat’l Assn., 127 Cal.App.4th 1138, 14 1144 (2005). To satisfy the knowledge prong, the defendant must 15 have “actual knowledge of the specific primary wrong the 16 defendant substantially assisted.” Id. at 1145. 17 Heritage argues Plaintiff has not sufficiently alleged its 18 knowledge to support either the conspiracy or aiding and 19 abetting claim. Mot. at 11-12. The Court disagrees. The 20 operative complaint specifically alleges that Kershaw, an 21 employee of Heritage, cooperated with the Carpoffs to conceal 22 and restrict relevant information from Plaintiff about their 23 account. SAC ¶¶ 259-293. Plaintiff also alleges that Kershaw 24 knew the Carpoffs were defrauding Plaintiff by diverting and 25 misappropriating its funds. Id. ¶ 262. While Plaintiff alleges 26 Kershaw knew as early as March 2015 that the Carpoffs were 27 defrauding Plaintiff on information and belief, this is 28 corroborated by specific factual allegations. Id. ¶¶ 261, 263- 1 266, 269, 272-274. This is sufficient to overcome a motion to 2 dismiss. See Fed. R. Civ. P. 9(b) (“In alleging fraud or 3 mistake, a party must state with particularly the circumstances 4 constituting fraud or mistake. Malice, intent, knowledge, and 5 conditions of a person’s mind may be alleged generally.”); see 6 also Benson v. JPMorgan Chase Bank, N.A., Nos. C-09-5272 EMC, 7 2010 WL 1526394, at *3-5 (N.D. Cal. April 15, 2010) (noting that 8 “Plaintiff supported these allegations of knowledge with more 9 detailed factual allegations” and taken together these 10 allegations satisfied the Twombly/Iqbal plausibility 11 requirement). 12 4. Negligence Claim 13 In order to plead a claim for negligence, a plaintiff must 14 establish: (1) the existence of a legal duty of care; (2) a 15 breach of that duty; and (3) proximate cause resulting in 16 injury. Castellon v. U.S. Bancorp, 220 Cal.App.4th 994, 998 17 (2013). 18 Heritage argues Plaintiff’s negligence claim fails as it 19 owed no duty to Solarmore. Mot. at 13. But the cases it relies 20 upon do not support this. Id. (citing Chazen v. Centennial 21 Bank, 61 Ca. App. 4th 532, 537 (1998) and Copesky v. Superior 22 Court, 229 Cal. App. 3d 678, 693-94 (1991)). While Chazen holds 23 banks do not have a duty to proactively police accounts, it also 24 acknowledges that banks have a duty to act with reasonable care 25 in its transactions with its depositors. Chazen, 61 Cal.App.4th 26 at 538, 543. The latter is what Plaintiff relies upon here. 27 Opp’n at 12-13. Plaintiff does not contend that Defendant 28 breached its duty by failing to monitor and report suspicious nee nen en OE OE I IN 1 activity. Rather, Plaintiff's claim is that Heritage breached 2 its duty of care by permitting numerous improper fund transfers 3 and commingling of funds, which assisted the Carpoffs’ 4 conversion. Id.; SAC 710-714. Accordingly, Defendants’ 5 | motion to dismiss Plaintiff’s negligence claim is denied.’ 6 7 IIl. ORDER 8 For the reasons set forth above, the Court DENIES Defendants 9 Heritage, Kershaw, and Lauer’s Motion to Dismiss. 10 IT IS SO ORDERED. 11 Dated: February 4, 2022 12 Me 13 HN A. MENDEZ, ag UNITED STATES DISTRICT 14 15 16 17 18 19 20 21 22 23 24 25 26 4 Heritage also argues that the Unfair Competition Law and 27 contribution claims fail as they are dependent on the other causes of action. Mot. at 14-15. Because the Court declines to 28 dismiss the other causes of action, these claims survive as well. 14