Yeung v. Advanced Biologics, LLC ( 2019 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 CHRISTOPHER A. YEUNG, et. al., Case No.: 17-cv-1510-JAH-JMA 12 Plaintiffs, ORDER GRANTING DEFENDANTS’ 13 v. MOTION TO DISMISS PLAINTIFFS’ FIRST AMENDED COMPLAINT 14 ADVANCED BIOLOGICS, LLC, et. al., [Doc. No. 32] 15 Defendants. 16 17 INTRODUCTION 18 Pending before the Court is Defendants’ motion to dismiss Plaintiffs’ First Amended 19 Complaint (“FAC”) pursuant to rules 12(b)(1), 12(b)(6), and 23.1 of the Federal Rules of 20 Civil Procedure. See Doc. No. 36. Plaintiffs filed a response to Defendants’ motion to 21 dismiss and Defendants filed a reply brief. See Doc. No. 38, 39. After careful review of 22 all pleadings filed by the parties, and for the reasons set forth below, the Court GRANTS 23 Defendants’ motion to dismiss Plaintiffs’ FAC. 24 BACKGROUND 25 On July 25, 2017, Plaintiffs Christopher Yeung, CW Investments, LP, and 26 Spinalgenics filed a complaint asserting breach of contract, breach of the implied covenant 27 of good faith and fair dealing, breach of fiduciary duty, accounting, violation of California 28 Business and Professions Code § 17200, unjust enrichment, and interference with contract. 1 See Doc. No. 1. They name Advanced Biologics, LLC, Bologica Technologies, LLC, Amit 2 Govil, Scott Cadotte, and Does 1 through 50, inclusive, as defendants. Id. 3 On October 16, 2017, Defendants filed a motion to dismiss the complaint. See Doc. 4 No. 12. Plaintiffs opposed the motion and also filed a motion for leave to file a First 5 Amended Complaint. See Doc. Nos. 16, 18, 19. Defendants opposed the motion for leave. 6 See Doc. Nos. 26, 27. The Court granted in part and denied in part Plaintiffs’ request for 7 leave to file an amended complaint, allowing the amendment, but denying the proposed 8 amended complaint. See Doc. No. 31. Plaintiffs filed a FAC on August 31, 2018, and in 9 response, the Court denied Defendants’ motion to dismiss the original complaint as moot. 10 See Doc. No. 33. In the FAC, Plaintiffs allege they entered into an operating agreement 11 setting out their capital contributions and membership interest with Defendant Advanced 12 Biologics, which was represented to be a holding company set up to create innovative 13 products and hold interest in sub-entities for the various products developed. FAC ¶¶ 17- 14 9. They further allege Defendant Govil was elected manager, and Govil and Codotte were 15 elected officers of Advanced Biologics, and the company successfully developed several 16 product lines and subsidiary companies. Id. ¶¶ 20-23. Plaintiffs also allege Defendants 17 Govil and Cadotte engaged in improper conduct seeking to eliminate the value of Plaintiffs’ 18 ownership interest in Advanced Biologics. Id. ¶¶ 30-43. Plaintiffs seek an award of 19 damages, an accounting, attorney’s fees, expenses and costs, punitive damages, and pre- 20 judgement and post-judgement interest. In response to the FAC, Defendants filed a motion 21 to dismiss. See Doc. No. 36. Plaintiffs opposed the motion and Defendants filed a reply. 22 See Doc. Nos. 38, 39. The motion was taken under submission without oral argument. 23 DISCUSSION 24 In their motion to dismiss the FAC, Defendants contend that Plaintiffs do not have 25 standing to assert any of their direct claims because the gravamen of Plaintiffs’ complaint 26 is injury to the company, not injury to the individual. See Doc. No. 36 Defendants further 27 contend that Plaintiffs’ derivative claims must be dismissed because Plaintiffs did not plead 28 demand futility in accordance with Federal Rule of Civil Procedure 23.1. See id. Plaintiffs 1 respond by contending that the addition of derivative claims in the FAC may upset diversity 2 jurisdiction. See Doc. No. 38. However, Plaintiffs argue that each of their claims meet the 3 12(b)(6) pleading standards and each of the direct claims allege injury not incidental to the 4 company. See Doc. No. 38. 5 I. DIVERSITY JURISDICTION 6 A. Legal Standard – 28 U.S.C. § 1332 7 A federal court is one of limited jurisdiction. See Gould v. Mutual Life Ins. Co. of 8 New York, 790 F.2d 769, 774 (9th Cir. 1986). As such, it cannot reach the merits of any 9 dispute until it confirms its own subject matter jurisdiction. See Steel Co. v. Citizens for a 10 Better Environ., 523 U.S. 83, 93-4 (1998). A court may also dismiss an action sua sponte 11 at any time for lack of subject matter jurisdiction. See California Diversified Promotions, 12 Inc. v. Musick, 505 F.2d 278, 280 (9th Cir. 1974). In contrast to dismissals for failure to 13 state a claim, if the court lacks subject matter jurisdiction, it is not required to issue a 14 summons or follow other procedural requirements. See Loux v. Rhay, 375 F.2d 55, 58 (9th 15 Cir. 1967). To establish subject matter jurisdiction under 28 U.S.C. § 1332, a party must 16 show: (1) complete diversity among opposing parties; and (2) an amount in controversy 17 exceeding $75,000. 28 U.S.C. § 1332(a). Diversity jurisdiction is assessed at the time the 18 action is filed and is not generally upset by the addition of nondiverse parties to the action 19 unless the original party was indispensable. See Freeport-McMoRan, Inc. v. KN Energy, 20 Inc., 498 U.S. 426, 428 (1991) (per curiam). Plaintiff has the burden of demonstrating 21 jurisdiction by showing “in his pleading, affirmatively and distinctly, the existence of 22 whatever is essential to federal jurisdiction.” Smith v. McCullough, 270 U.S. 456, 459 23 (1926). 24 To be considered diverse, the “citizenship” of each plaintiff must be different from 25 the citizenship of each defendant. See Caterpillar Inc. v. Lewis, 519 U.S. 61, 68 (1996). 26 An individual is a citizen of the state in which the individual is “domiciled,” i.e. where the 27 individual has a true, fixed home and permanent establishment, and where he or she 28 intends to return whenever absent therefrom. See Kanter v. Warner-Lambert Co., 265 F.3d 1 853, 857 (9th Cir. 2001). A corporation is “domiciled” in the state in which it is 2 incorporated and/or, the state in which it has its principal place of business. See Fifty 3 Associates v. Prudential Ins. Co. of America, 446 F.2d 1187, 1190 (9th Cir. 1970). A 4 corporation’s principal place of business “refers to the place where a corporation’s officers 5 direct, control, and coordinate the corporation’s activities, in other words the corporation’s 6 ‘nerve center’.” Hertz Corp. v. Friend, 559 U.S. 77, 92-3 (2010). Limited partnerships and 7 limited liability companies on the other hand, are treated as citizens of every state in which 8 their members are citizens. See Johnson v. Columbia Properties Anchorage, LP, 437 F.3d 9 894, 899 (9th Cir. 2006). 10 B. Analysis 11 Plaintiffs maintain their FAC added derivative claims which changes the real party 12 in interest from the individual Plaintiffs to Advanced Biologics LLC. They contend 13 Advanced Biologics shares the same residency as the Defendants, who are members of the 14 LLC, because an LLC is considered a resident of every state where it has members. See 15 Johnson, 437 F.3d at 899. As a result, they argue that diversity jurisdiction may be 16 destroyed. Plaintiffs ask the court to rule on this issue. Defendants do not respond to this 17 argument. 18 When derivative claims are brought by individual shareholders, the company on 19 behalf of whom the action is being brought is the “real party in interest”, in this case, 20 Advanced Biologics, LLC. See Ross v. Bernhard, 396 U.S. 531, 538 (1970) (“Although 21 named a defendant, [the company] is the real party in interest, the stockholder being at best 22 the nominal plaintiff”). As a limited liability company, Advanced Biologics is a citizen of 23 every state in which is members are citizens. Johnson, 437 F.3d at 899. To the extent the 24 FAC asserts derivative claims, they are asserted against Scott Cadotte and Amit Govil, both 25 citizens of California. Because Advanced Biologics is a California citizen, by virtue of 26 Cadotte and Govil’s membership in the LLC, complete diversity of citizenship does not 27 exist over the FAC. 28 1 Although Freeport stands for the proposition that the subsequent addition of 2 nondiverse parties does not generally divest diversity jurisdiction, the Ninth Circuit 3 interprets the holding narrowly. See, e.g., Hill v. Blind Industries and Services of 4 Maryland, 179 F.3d 754, 757 (9th Cir. 1999) (limiting the applicability of the Freeport 5 rule to cases in which a party subsequently moves to another state); Mattel, Inc. v. Bryant, 6 446 F.3d 1011, 1013 (9th Cir. 2006) (limiting the applicability of the Freeport rule to cases 7 in which a nondiverse and not indispensable defendant intervenes) 8 As discussed below, based on the Ninth Circuit’s narrow reading of Freeport, and 9 the fact that Plaintiffs assert derivative claims in the FAC making Advanced Biologics the 10 real party in interest, diversity does not exist. As such, this Court lacks jurisdiction over 11 the action. 12 II. STANDING 13 A. Legal Standard 14 Under Rule 12(b)(1) of the Federal Rules of Civil Procedure, a defendant may seek 15 to dismiss a complaint for lack of jurisdiction over the subject matter. Fed. R. Civ. Pro. 16 12(b)(1). When considering a Rule 12(b)(1) motion to dismiss, the district court is free to 17 hear evidence regarding jurisdiction and to rule on that issue prior to trial, resolving factual 18 disputes where necessary. See Augustine v. United States, 704 F.2d 1074, 1077 (9th Cir. 19 1983). In such circumstances, “[n]o presumptive truthfulness attaches to plaintiff’s 20 allegations, and the existence of disputed facts will not preclude the trial court from 21 evaluating for itself the merits of jurisdictional claims.” Id. (quoting Thornhill Publishing 22 Co. v. Gen. Tel. & Elec. Corp., 594 F.2d 730, 733 (9th Cir. 1979)). As the party seeking to 23 invoke jurisdiction, the plaintiff has the burden of establishing that jurisdiction exists. See 24 Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). 25 B. Analysis 26 Defendants argue that Plaintiffs failed to remedy their allegations of harm in of the 27 FAC and thus do not have Article III standing. See Doc. No. 36. Defendants contend that 28 even where stockholders are alleging incidental personal injury based on the diminished 1 value of their own investment in the Company, they cannot maintain direct claims based 2 on the same core allegations as the derivative claims. See Doc. No. 36. Plaintiffs’ generally 3 allege that the wrongful transfer of assets without proper consent diminished the value of 4 the Company’s stock, but the direct claims include allegations of harm sufficient to 5 differentiate them from the derivative claims. See Doc. No. 32 ¶ 30-40. 6 A shareholder derivative suit “permits an individual shareholder to bring a suit ‘to 7 enforce a corporate cause of action against officers, directors, and third parties.’” Kamen 8 v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991) (quoting Ross v. Bernhard, 396 U.S. 9 531, 534 (1970)). The propriety of bringing a direct versus derivative claim is governed by 10 the law of the state of incorporation. Lapidus v. Hecht, 232 F.3d 679, 682 (9th Cir. 2000). 11 “An action is derivative, i.e. in the corporate right, if the gravamen of the complaint is 12 injury to the corporation, or to the whole body of its stock or property, without any 13 severance or distribution among individual holders, or if it seeks to recover assets for the 14 corporation or to prevent the dissipation of its assets.” PacLink Commc’ns Int’l, Inc., v. 15 Superior Court, 90 Cal.App.4th 958, 964 (2001). A direct action brought by a corporate 16 shareholder is maintainable only if the damages are not incidental to an injury to the 17 corporation. See Bader v. Anderson, 179 Cal.App.4th 775, 793 (2009). 18 1. First Cause of Action – Breach of Contract 19 Plaintiffs allege a breach of Articles 5.1, 5.2, 6.1, 7.2, and 10.5, which govern 20 maintenance of and member access to accounts and records, member and voting rights, 21 restrictions on transfer, and third-party beneficiaries. Defendants generally argue that 22 Plaintiffs failed to correct the allegations of harm in their first amended complaint, so they 23 could maintain direct and derivative actions. Plaintiffs contend Defendants make no 24 argument regarding claim one, and that because Advanced Biologics in not a party to the 25 Agreement, Plaintiffs have no avenue to assert their breach of contract claim other than to 26 assert a direct claim. Although Plaintiffs allege they have suffered damages as a result of 27 the breaches, they do so in conclusory terms. As pled, Plaintiffs do not have Article III 28 standing. 1 2. Second Cause of Action – Breach of the Implied Covenant of 2 Good Faith and Fair Dealing 3 In their motion to dismiss Defendants argue that the crux of Plaintiffs’ alleged injury 4 in claim two is fundamentally an injury to the company, whereby any damages suffered by 5 the individual members were incidental to injury suffered by the Company. Plaintiffs argue 6 that California case law indicates opposed managers of an LLC owe a duty of good faith 7 and fair dealing to both the Company, as well as its individual members. 8 Plaintiffs’ distinct duties argument implies that the derivative claim arises from a 9 duty owed to the company, while a direct claim arises from a duty owed to the individual. 10 However, whether a claim must be brought derivatively depends on the injury suffered, not 11 the duty breached. See e.g., Bader, 179 Cal.App.4th at 793 (“A corporate shareholder’s 12 direct action, as opposed to a derivative action, is maintainable only if the damages are not 13 incidental to an injury to the corporation.”) (internal citation omitted) (emphasis added). 14 For the individual Plaintiffs to have standing against Defendants in this direct cause of 15 action, the harm suffered by Plaintiffs must not be incidental to the harm suffered by the 16 Company. See PacLink Commc’ns Int’l, Inc., 90 Cal.App.4th at 964 (“the action is 17 derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the 18 corporation”). That is, the damages allegedly arising from Defendants breach must result 19 in injury to the Plaintiffs that is not incidental to any injury resulting to the Company. Here, 20 the harm alleged is a diminution in the value of the company’s stock. 21 Plaintiffs fail to allege how breaches of duties allegedly owed to them individually 22 resulted in injury to the individual shareholders that is not incidental to injury to the 23 Company. Plaintiffs’ direct claim for breach of good faith and fair dealing is subject to 24 dismissal for lack of standing. 25 // 26 // 27 // 28 // 1 3. Fourth Cause of Action – Breach of Fiduciary Duty 2 Defendants argue that claim four should be dismissed because “Plaintiffs simply 3 lack any factual basis to assert unique direct harm sufficient to support the purported direct 4 claims.” See Doc. No. 36 at 7. Plaintiffs maintain that Cadotte and Govil, as managers of 5 Advanced Biologics owe independent fiduciary duties to both the Company and the 6 Company’s members. As such, Plaintiffs argue that the injuries accruing to the Company 7 and the individual members stem from independent bases and can be maintained together. 8 See Doc. No. 38. As discussed above, whether or not a direct and derivative claim may be 9 maintained together depends on the injury suffered, not the duty breached. The alleged 10 breaches of the fiduciary duty do not correspond to an injury to the individuals not 11 incidental to an injury to the company. 12 Plaintiffs also argue that the appropriate remedies for the direct claims may differ 13 from the remedies appropriate for the derivative claims, and these different forms of relief 14 justify maintaining both direct and derivative claims. Plaintiffs’ argument is misplaced. 15 The issue is not what type of relief the individual plaintiff is entitled to but whether the 16 damages suffered is incidental to that suffered by the company. See Bader, 179 Cal.App.4th 17 at 793. As such, Plaintiffs fourth cause of action is subject to dismissal. 18 4. Sixth Cause of Action – Accounting 19 Plaintiffs argue that accounting claims cannot be brought derivatively. Similar to an 20 accounting, a derivative suit is equitable in nature and the right to an accounting often arises 21 from the defendant’s abuse of a partnership, special relationship, or fiduciary relationship. 22 See Civic Western Corp. v. Zila Industries, Inc., 66 Cal.App.3d 1 (1977); Union Bank v. 23 24 25 1 The face of the FAC lists breach of fiduciary duty (derivative claim) as claim 4, and breach of fiduciary duty (direct claim) as claim 5. However, within the FAC, claim 4 (¶¶ 65-71) is listed as the 26 direct claim, and claim 5 (¶¶ 72-81) is listed as the derivative claim. For the purposes of discussion, the direct claim for breach of fiduciary duty will be referred to as claim 4, and the derivative claim for 27 breach of fiduciary duty will be referred to as claim 5. Plaintiffs’ direct claim of action for breach of fiduciary duty is referred to as Roman Numeral V in Defendants’ motion to dismiss. See Doc. Nos. 32, 28 1 Superior Court, 31 Cal.App.4th 653 (1995). However, Plaintiff’s sixth cause of action is 2 again predicated on injury to the individual that is incidental to injury to the company. 3 Plaintiff’s direct action for an accounting is dismissed. 4 5. Seventh Cause of Action – Violation of California Business 5 & Professions Code Section 17200 6 Plaintiffs did not address Defendants’ motion to dismiss the direct claims for 7 violation of California Business and Professional Code § 17200. Plaintiffs allege reduction 8 of distributions and misappropriated assets. Because these injuries are incidental to injury 9 to the company, the direct claim must be dismissed. 10 6. Ninth Cause of Action – Intentional Interference with 11 Contract 12 Defendants argue that Plaintiffs ninth cause of action should be dismissed because 13 it does not allege harm to the individual plaintiffs that is not incidental to the harm suffered 14 by the Company. See Doc. No. 36, 39. They maintain that Plaintiffs’ direct claim for 15 intentional interference with contract is predicated on “the reduction in value of their 16 membership interests resulting from the alleged misappropriation of Company assets.” 17 Doc. No. 39 at 6. Plaintiffs contend that the claim for Intentional Interference with Contract 18 could not be brought derivatively as it is an individual right of action arising from the 19 agreement. 20 In their ninth cause of action, Plaintiffs fail to allege that they suffered harm not 21 incidental to the harm suffered by the Company. Plaintiffs allege that the “cruel and unjust 22 hardship” they were subject to and Cadotte and Govil’s “concealment of material 23 facts…deprive[d] Plaintiffs of property and/or legal rights.” FAC ¶ 103. However, the 24 “property” that Plaintiffs are alleged to have been deprived of is the reduction in value of 25 their stock, which is an incidental harm suffered by the Company and is thus subject to 26 dismissal. 27 // 28 // | FAILURE TO STATE A CLAIM — DEMAND FUTILITY 2 Because the Court finds it lacks jurisdiction to hear the derivative claims, it will not 3 address Defendants’ argument that the derivative claims should be dismissed for failure to 4 || allege demand refusal or demand futility. 5 CONCLUSION AND ORDER 6 Based on the foregoing, Defendants’ motion to dismiss is GRANTED. The First 7 || Amended Complaint is DISMISSED without prejudice. 8 DATED: August 20, 2019 9 10 JOHN A. HOUSTON 1 United States District Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28